Corpo-Baby Notes - Reviewer PDF

Note: There is no shortcut to studying, it is always a process, this is only a reviewer, don’t A joint venture partakes of the nature
takes of the nature of partnership contract and it is created for the purpose of prosecuting
depend on it, read the book and the cases in the book, makinig sa mga lectures of atty Ladia, dun a particular business transaction. It is a one time grouping of two or more person, natural or juridical, in a
nanggagaling ang mga tanong sa exams. GOD BLESS and GOOD LUCK. I shared these notes, I specified undertaking and does not entail a continuing relationship among the parties.
hope you’ll share it too.
4. CORPORATION
BUSSINESS ORGANIZATION II
Is an artificial being created by operation of law, having the right of succession and the powers, attributes
RA 11232 (REVISED CORPORATIN CODE) and properties expressly authorized by law or incidental to its existence. (Sec 2)
BASED ON THE COURSE OUTLINE AND BOOK OF ATTY RUBEN LADIA **Corporation may enter in joint venture, however, generally they are not eligible to be a partner in a
partnership. This is because in entering into a partnership, the identity of the corporation is lost or merged
REVIEWER with that of another and the discretion of the officials is placed in other hands than those permitted by the
law in its creation.
PART I (MIDTERMS)
Exception if the following conditions are met it is allowed by the SEC: A.) the articles of
*Midterm recitation questions are in the end of part 1. Cases questions are not included. incorporation expressly authorizes the corporation to enter into contract of partnership; B.) the agreement
or the articles of partnership must provide that all the partners will manage the partnership; and C.) the
CHAPTER I- INTRODUCTION
articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all
GENERAL obligations of the partnership.
The economic capability of a country depends largely on its natural and financial resources. NOTE: SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code
Man power or human resources, of course plays and important role in the development of a nation’s has the power and capacity: (h) To enter into a partnership, joint venture, merger, consolidation,
economy because it is through the people that economic activities are undertaken and without which a or any other commercial agreement with natural and juridical persons.
country’s development could not proceed or prosper.
**CORPORATIONS ARE NOW SPECIFICALLY EMPOWERED TO ENTER INTO PARTNERSHIP
Business management then comes into play with the very important role of assuring a smooth
**Corporation plays the most important role in the economic development of a country, because it permits
flow of economic transition or activity. It is in this regard that public authority formulates certain norms of
the combination of resources of investors, natural or juridical, to raise the much needed capital for large
conduct, substantive, formal and procedural, to provide a better climate for such activity. General and
scale business or enterprise. It has become a tool to the growth of industries creating massive employment
special law are passed and enacted to formalize rules relating to manner, mode, procedure by which such
opportunities and further improving and giving more meaning to the idea of technological transfer and
economic endeavour may be undertaken or conducted. We thus have the Constitution, the Revised
development.
Corporation Code, the Civil Code and other Special Laws prescribing the manner and providing
qualification and/or disqualification relating to operating and ownership of certain business concern. HISTORICAL BACKGROUND (read in the book)
KIINDS OF BUSINESS ORGANIZATION
1. SOLE PROPRIETORSHIP CHAPTER II- DEFINITION AND ATTRIBUTES

Is a one-man form of business entity and is defined as one conducted for profit by a lone or single individual DEFINITION: SEC. 2 Corporation Defined- A corporation is an artificial being created by operation of law,
who owns all the assets, personally owes and answers all the liabilities or suffers all the losses and enjoys having the right of succession and the powers, attributes and properties expressly authorized by law or
all the profits to the exclusion of others. ** different from a one person corporation, the latter is a kind of incidental to its existence.
corporation, it has a personality separate from that of the single stockholder.
ATTRIBUTE:
2. PARTNERSHIP
1. Artificial being; in that it has a personality separate and distinct from the person composing it.
By the contract of partnership two or more persons bind themselves to contribute money property or 2. Created by operation of law; becuase formal requirements imposed by the state for its creation
industry to a common fund with the intention of dividing the profits among themselves. It may be brought must be followed
about by express or implied contract and is established for the common benefit or interest of all parties. It 3. Right of succession; it persists to exist despite the death, civil interdiction or incapacity of the
presupposes a personal relationship between and among the partners which is based on mutual trust and individuals or persons composing it; and
confidence. 4. Powers, attributes and properties expressly authorized by law or incident to its existence. This
presupposes that it can exercise only such powers and can hold only such properties as are
3. JOINT VENTURE
granted to it by enabling satutes unlike natural persons who can do anything as they please.
Basahin, Itindihin, Huwag na Natin Ulitin BABY 411 NOTES 1 | P a g e

SY 2019-2020, 1st semester REVIEWER
Filipinas Broadcasting Network vs. Ago Medical and Educational Center (GR NO. 141954) necessary or incidental to its good custom and public order
existence (sec 2 in re sec 44) or policy.
A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code this provision authorizes As to who may exercise GR: must transact business GR: any one of the partners
the recovery of moral damages in cases of LIBEL, SLANDER, or ANY FORM OF DEFAMATION. This is through its board of directors, may validly bind the
because article 2219 (7) does not qualify whether the plaintiff is a natural or juridical person. UNLESS validly delegated partnership, UNLESS there is
expressly or impliedly. (sec 22) an agreement to the contrary.
Advantages of corporate form of business:
(art 1308 par 1)
1. Capacity to act as a single unit; As to the right of succession Has the right to succession (sec No right to succession,
2. Limited shareholder’s liability; which presupposes that is 2) dissolution results upon
3. Continuity in existence; continues to exist despite incapacity or civil interdiction or
4. Feasibility of greater undertaking; death, withdrawal, incapacity or mere withdrawal of a partner.
5. Transferability of shares; civil interdiction or mere (article 1830 par 6 and 7)
6. Centralized management; and withdrawal of the stockholder or
7. Standardized method of organization, management and finance member, or a partner.
As to transferability of A stockholder can ordinarily A partner cannot transfer
Disadvantage of corporate form of business: rights/interest transfer, sell, or assign his without the consent of the other
shares of stock without the partners (article 1830 par 6 and
1. To have valid and binding corporate act, formal proceedings, such as board meetings are consent of other stockholders. 7)
required. (sec 62)
2. The business transactions of a corporation is limited to the State of its incorporation and As to extent of liability Stockholder or members has a all partners are liable pro rata
may not act as such corporation in other jurisdiction unless it has obtained a license or limited liability, it is only to the with all their properties and after
authority from the foreign state. extent of their subscription or all the properties of the
3. The shareholders’ limited liability tends to limit the credit available to the corporation as a their promised contribution. partnership has been
separate legal entity. exhausted, for all partnership
4. By the very nature of shares of stock which are personal properties, transferable at will liability, except limited partner in
by the owners thereof, transfers of share may result to uniting incompatible and conflicting a limited partnership. (art 1813)
interests. As to term of existence A corporation shall have a May exist for an indefinite
5. The minority shareholders have practically no say in the conduct of corporate affairs. perpetual existence unless its period subject only to the
6. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and article of incorporation provides causes of dissolution provided
theoretical because of disinterest in management, wide-scale ownership and inaccessible otherwise (sec 11) for purposes by the law of its creation (art
place of meeting. of liquidation it shall be 1824)
7. Double taxation may be imposed on corporate income. considered as inexistence for 3
8. Corporations are subject to governmental regulations supervision and control including years (sec 139)
submission of reportorial requirements not otherwise imposed in other business form.
As to dissolution Cannot be dissolve by mere The partners may dissolve the
Distinction between Corporation and Partnership
agreement of the stockholders. partnership at will or at anytime
Corporation Partnership The consent of the state is they deem fit. (art 1824)
necessary for it to cease as a
As to creation By operation of law (sec 2 and By mere agreement of the body corporate.
4) parties (article 1767)
As to # of person required for its Not more than 15 persons, Two or more natural person Government powers in relation to corporations
creation natural or juridical (sec 10) (art 1676)
Except: one-person The regulation of corporations registered under Philippine laws is effected by the state’s exercise of its
corporation, only a natural inherent powers. (police power, eminent domain and taxation)
person, an estate or a trust
(sec116)
As to powers Can exercise only such powers Can do anything by agreement
and functions expressly granted of the parties provided only that CHAPTER III- CLASSIFICATION OF CORPORATIONS
to it by law and those that are it is not contrary to law, morals, STOCK and NONSTOCK
STOCK distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares
held by them. In the case at bar nowhere in its articles of incorporation or by-laws could be
SEC. 3. Classes of Corporations- corporations formed or organized under this Code may be found an authority for the distribution of its dividends or surplus profits.
stock or nonstock corporations. STOCK corporations are those which have capital stock divided into
shares and are authorized to distribute to the holders of such shares, dividends or allotments of the surplus CORPORATIONS CREATED BY SPECIAL LAW
profit on the basis of the shares held. All other corporations are nonstock corporations.
SEC 4- Corporations Created by Special Laws or Charters- corporations created
NONSTOCK by special laws or charters shall be governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented by the provisions of this Code,
SEC 86. Definition- for purposes of this Code and subject to the provisions on dissolution a insofar as they are applicable.
nonstock corporation is one where no part of its income is distributable as dividends to its members,
trustees, or officers: Provided, that any profit which a nonstock corporation may obtain incidental to its Corporations created by special law or charter owe their existence not by virtue of their compliance with
operations shall, whether necessary or proper, be used for the furtherance of the purpose for which the the requirements of registration under the Corporation Code but by virtue of the law specially creating
corporation was organized, subject to the provisions of this title. them.
NOTE: NON-STOCK CORPORATIONS CAN DECLARE DIVIDENDS BUT THEY CANNOT They are primarily governed by the special law creating them. But unless otherwise provided by the law of
DISTIRBUTE IT! their creation, they are not immune from suits. In PNB VS Pabolar 82 SCRA 595 and in PNB vs Union de
Maquintas, 84 SCRA 223 it was held that when the government engages in a particular business through
Implicit from Sec 3 there are 2 requisites to be classified as a stock corporation: the instrumentality of a corporation, it divests itself pro hac vice of its sovereign character so as to be
subject itself to the rules governing private corporations.
1. That they have a capital stock divided into shares; and
2. That they are authorized to distribute dividends or allotments as surplus profits to its CASE:
stockholders on the basis of the shares held by them
PNOC-ENERGY DEV’T CORP. VS. NLRC (201 SCRA 487)
CASE:
Issue: what law governs the employees of PNOC-EDC
Collector of Internal Revenue v. Club Filipino, INC. De Cebu (55 SCRA 312)
The doctrine that “employees of government owned or controlled corporations,
Issue: whether the Club is liable to pay the taxes assessed against it whether created by special law or formed as subsidiaries under the general corporation law are
governed by the civil service law and not by the labor code,” has been SUPPLANTED by the
It has been held that the liability for fixed percentage taxes as provided for in the tax
present Constitution. THUS, under the present state of law, the TEST in determining whether
code does not ipso facto attach by mere reason of the operation of a bar and restaurant. For
a GOCC is subject to CSL is the manner of its creation, such that GOCC created by special
liability to attach, the operator thereof must be engaged in the business as a barkeeper and
charter or law are subject to its provisions, while those incorporated under the general
restaurateur. The plain and ordinary meaning of BUSINESS is restricted to activities or affairs
corporation law are NOT within its coverage.
where profit is the purpose or livelihood is the motive, and the term business when used without
qualification, should be construed in its plain and ordinary meaning; restricted to activities for The PNOC-EDC having been incorporated under the General Corporation Law was
profit or livelihood. held to be a GOCC whose employees are sunject to the provisions of the Labor Code.
In the case at bar, it is concocted that club the club derived profits from the operation Other classes of corporations:
of its bar and restaurant, but such facts does not necessarily convert it into a profit making
enterprise. The bar and restaurant are necessary adjunct of the club to foster its purpose and 1. Public and Private.
the profits derived therefrom are necessarily incidental to the primary object of developing and
cultivating sports for healthful and recreational and entertainment of the stockholders and Query: Are special corporations a public corporation? Some are, but not all.
members.
Public Corporations – those created, formed or organized for political or governmental purposes with
The fact that the capital of the club is divided into shares does not detract from the political powers to be exercised for purposes connected with the public good in the administration of civil
finding of the trial court that it is not engaged in the business of operator of bar and restaurant. government. (fletcher)
What is determinative of whether or not the club is engaged in the business is its purpose or
CASE:
object as stated in its articles and by-laws.
National Coal Corporation vs CIR (145 PHIL 583)
Moreover, for a stock corporation to exist, two requisites must be complied with, to
wit: That they have a capital stock divided into shares; and That they are authorized to Issue: whether the plaintiff is a public corporation
The plaintiff is a private corporation. The mere fact that the government happens to (b) all the issued stock of all classes shall be subject to one (1) or more specified
be a majority stockholder does not make it a public corporation. As a private corporation, it has restrictions on transfer per,itted by this Title; and (c) the corporation shall not list in
no greater rights, powers, and privileges than any other corporation which might be organized any stock exchange or make any public offering of its stock of any class.
for the same purpose under the corporation law, and certainly it was not the intention of the b. Open corporations – those formed to openly accept outsiders as stockholders or
legislature to give preference or right or privilege over other legitimate private corporations in investors.
the mining coal. 5. Domestic and Foreign.
a. Domestic corporations – those that are organized or created under or by virtue of
Private corporations – those formed for some private purpose, benefit, aim or end. They are created for the Philippine laws. Note: issues of intra-corporate nature are governed by
the immediate benefit and advantage of the individuals or members composing it and their franchise may Philippine law.
be considered as privileges conferred by the state to be exercised and enjoyed by them in the form of a b. Foreign corporations – those formed, organized or existing under any laws other
corporation. than those of the Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or state.
2. Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or
6. Parent or Holding Companies and Subsidiaries and Affiliates.
civil).
a. Holding corporations – corporations that confine their activities to owning stock in,
a) Ecclesiastical or religious corporations – those composed exclusively of ecclesiastics organized
and supervising management of other companies.
for spiritual purposes or for administering properties held for religious ones. They are further
b. Subsidiary corporations – those which another corporation owns at least a majority
classified as
of the shares, and thus have control.
a. religious societies; or
c. Affiliates – those corporations which are subject to common control and operated
SEC 114 Religious Societies- Unless forbidden by competent authority, the
as part of a system.
Constitution, pertinent rules and regulation, or discipline of the religious
7. Quasi-public corporations – private corporations which have accepted from the State
denomination, sect or church of which it is a part, any religious societies may upon
the grant of a franchise or contract involving the performance of public duties (public
written consent and/or affirmative vote at a meeting called for the purpose of at least
service corporations).
two third (2/3) of its membership, incorporate for the administration of its
8. Quasi corporations– public bodies or municipal societies such as townships, counties,
temporalities or for the management of its affairs, properties, and estate.
school districts, road or highway districts which, though not vested with the general
b. corporation sole
powers of corporations, are organized by statutes or immemorial usage, as persons or
SEC 108. Corporation Sole- for purposes of administering and managing =, as
aggregate corporations with precise duties which may be enforced, and privileges which
trustee, the affairs, property and temporalities of any religious denomination, sect or
may be maintained, by suits of law.
church, a corporation sole may be formed by the chief archbishop, bishop, priest,
9. De jure corporations- juridical entities created or organized in strict or substantial
minister, rabbi, or other presiding elder of such religious denomination, sect or
compliance with the statutory requirements of incorporation and whose right to exist as
church.
such cannot be successfully attacked even by the State in a quo warranto proceeding.
b) Lay corporations – those established for the purposes other than religion. They exists for
10. De facto corporations– those which exist by virtue of an irregularity or defect in the
secular or business purposes.
organization or constitution or from some other omission to comply with the conditions
They are further classified as eleemosynary or civil.
precedent by which corporations de jure are created, but there was colorable compliance
a. Eleemosynary corporations- are created for charitable and benevolent purposes.
with the requirements of the law under which they might be lawfully incorporated for the
b. Civil corporations- are organized not for the purpose of public charity but for the
purposes and powers assumed, and user of the rights claimed to be conferred by law.
benefit, pecuniary or otherwise, of its members.
11. Corporations by estoppel– those which are so defectively formed as not to be either de
3. Aggregate and Sole.
jure or de facto corporations but which are considered as corporations in relation only to
a. Aggregate corporations – those composed of a number of individuals vested with
those who cannot deny their corporate existence due to their agreement, admission or
corporate powers.
conduct.
b. Corporations sole – those that consist of one person or individual only and who are
12. ONE PERSON CORPORATION- SEC 116. One Man Corporation- a one man
made as bodies corporate and politic in order to give them some legal capacity and
corporation is a corporation with a single stockholder: Provided, That only a natural
advantage which, as natural persons, they cannot have.
person, trust, or an estate may form a one man corporation.
4. Close and Open.
a. Close corporations – those whose shares of stock are held by limited number of
persons.
SEC 95. Definition and Applicability of title- a close corporation, within the meaning CHAPTER IV- FORMATION AND ORGANIZATION
of this code is one whose articles of incorporation provides that: (a) all the
corporation’s issued stock of all classes, exclusive of treasury shares, shall be held Stages in the life of a corporation:
of record by not more than a specified number of persons, not exceeding twenty(20);
1. Creation

2. Reorganization or quasi-reorganization 8. Names, nationalities and residences of directors/trustees
3. Dissolution and winding up 9. If a stock corporation, amount of authorized capital stock, number of shares, par value, original
subscribers. If a non-stock corporation, amount of capital, contributors
Three Steps in CREATION: 10. Treasurer Elect
11. Such other matters not inconsistent with law and which the incorporator may deem necessary
a) Promotional stage- the act of getting a corporation organized including the procurement of
and convenient
subscription to its capital stock. (fletcher)
a. Undertaking to Change the Name
b) Process of incorporation- it is the formal and procedural requisite of drafting the Articles of
b. Restrictions and Preference
Incorporation and preparing the necessary documents and their subsequently filling with, and
c. No Transfer Clause
finally approval of the SEC by the issuance of the Certificate of Incorporation.
d. Arbitration Agreement
c) Organization and commencement of business- refers to certain overt acts after the
e. Acknowledgement
incorporation, e.g. adoption of by-laws, election of officers and other acts tending to show intent
of transacting business. **The list above is provided for in Sec. 13 and 14
A. PROMOTIONAL STAGE - A promoter acting for a proposed corporation has 3 options: (a SEC. 13. Contents of the Articles of Incorporation. – All corporations shall file with the Commission
promoter is an organizer or projector who brings persons to unite in forming a corporation ) articles of incorporation in any of the official languages, duly signed and acknowledged or
1. He may make a continuing offer on behalf of the corporation, which, if accepted after authenticated, in such form and manner as may be allowed by the Commission, containing
incorporation, will become a contract. In this case, the promoter does not assume any personal substantially the following matters, except as otherwise prescribed by this Code or by special law:
liability, whether or not the corporation will accept the offer.
2. The promoter may make a contract at the time binding himself, with the understanding that if (a) The name of the corporation;
the corporation, once formed, accepts or adopts the contract, he will be relieved of
(b) The specific purpose or purposes for which the corporation is being formed. Where a
responsibility.
corporation has more than one stated purpose, the articles of incorporation shall indicate the
3. The promoter may bind himself personally and assume the responsibility of looking to the
primary purpose and the secondary purpose or purposes: Provided, That a nonstock corporation
proposed corporation, when formed, for reimbursement.
may not include a purpose which would change or contradict its nature as such;
NOTE: As to the liability of the promoter. As a general rule, a promoter will be held personally liable on
(c) The place where the principal office of the corporation is to be located, which must be within
contracts made by him for the benefit of a corporation he intends to organize. The personal liability will
the Philippines;
continue even after the contemplated corporation is formed and has received the benefits of the contract
UNLESS there is a novation or other agreement to release him from liability. He is not relieved from his (d) The term for which the corporation is to exist, if the corporation has not elected perpetual
liability even after the corporation ratifies the contract and assumes its own liability. (batelle vs northwest existence;
cement *U.S. case)
(e) The names, nationalities, and residence addresses of the incorporators;
B. PROCESS OF INCORPORATION:
(f) The number of directors, which shall not be more than fifteen (15) or the number of trustees
1. Drafting the articles of incorporation which may be more than fifteen (15);
2. Preparation and submission of additional and supporting documents (g) The names, nationalities, and residence addresses of persons who shall act as directors or
trustees until the first regular directors or trustees are duly elected and qualified in accordance
3. Filing with the SEC
with this Code;
4. Subsequent issuance of certificate of incorporation
(h) If it be a stock corporation, the amount of its authorized capital stock, number of shares into
Contents of the Articles of Incorporation which it is divided, the par value of each, names, nationalities, and residence addresses of the
original subscribers, amount subscribed and paid by each on the subscription, and a statement
1. Prefatory Clause that some or all of the shares are without par value, if applicable;
2. Corporate Name
3. Purpose Clause (i) If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence
4. Principal office addresses of the contributors, and amount contributed by each; and
5. Term of Existence
(j)Such other matters consistent with law and which the incorporators may deem necessary and
6. Incorporators
convenient.
7. Number of directors/trustees

An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 Name Nationality Residence
of this Code.
______________ __________________________ ____________________________
The articles of incorporation and applications for amendments thereto may be filed with the
Commission in the form of an electronic document, in accordance with the Commission’s rules ______________ __________________________ ____________________________
and regulations on electronic filing.
______________ __________________________ ____________________________
SEC. 14. Form of Articles of Incorporation. – Unless otherwise prescribed by special law, the
articles of incorporation of all domestic corporations shall comply substantially with the following
form: Seventh: That the authorized capital stock of the corporation is ______________ PESOS
(P________), divided into _____ shares with the par value of ____________ PESOS
Articles of Incorporation
(P_______________) per share. (In case all the shares are without par value): That the capital stock
of of the corporation is __________________________ shares without par value.
______________________ (In case some shares have par value and some are without par value): That the capital
stock of said corporation consists of __________________________ shares, of which
(Name of Corporation) _______________________ shares have a par value of _________________ PESOS
(P____________) each, and of which _______________________ shares are without par value.
The undersigned incorporators, all of legal age, have voluntarily agreed to form a (stock)
(nonstock) corporation under the laws of the Republic of the Philippines and certify the following: Eighth: That the number of shares of the authorized capital stock above-stated has been
subscribed as follows:
First: That the name of said corporation shall be “_______________, Inc., Corporation or
OPC”; Name of Nationality No. of Shares Amount Amount
Subscriber Subscribed Subscribed Paid
Second: That the purpose or purposes for which such corporation is incorporated are:
(If there is more than one purpose, indicate primary and secondary purposes);
Third: That the principal office of the corporation is located in the City/Municipality of (Modify No. 8 if shares are with no-par value. In case the corporation is nonstock, Nos. 7 and 8 of
______________________, Province of _______________________, Philippines; the above articles may be modified accordingly, and it is sufficient if the articles state the amount
of capital or money contributed or donated by specified persons, stating the names, nationalities,
Fourth: That the corporation shall have perpetual existence or a term of ______________ and residence addresses of the contributors or donors and the respective amount given by each.)
years from the date of issuance of the certificate of incorporation;
Ninth: That _____________________ has been elected by the subscribers as Treasurer
Fifth: That the names, nationalities, and residence addresses of the incorporators of the of the Corporation to act as such until after the successor is duly elected and qualified in
corporation are as follows: accordance with the bylaws, that as Treasurer, authority has been given to receive in the name and
for the benefit of the corporation, all subscriptions, contributions or donations paid or given by
Name Nationality Residence the subscribers or members, who certifies the information set forth in the seventh and eighth
clauses above, and that the paid-up portion of the subscription in cash and/or property for the
______________ __________________________ ____________________________ benefit and credit of the corporation has been duly received.
______________ __________________________ ____________________________ Tenth: That the incorporators undertake to change the name of the corporation
immediately upon receipt of notice from the Commission that another corporation, partnership or
______________ __________________________ ____________________________
person has acquired a prior right to the use of such name, that the name has been declared not
______________ __________________________ ____________________________ distinguishable from a name already registered or reserved for the use of another corporation, or
that it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or activity reserved for
Sixth: That the number of directors or trustees of the corporation shall be _________________; and Filipino citizens shall provide the following):
the names, nationalities, and residence addresses of the first directors or trustees of the
corporation are as follows: “No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than
the required percentage of capital stock as provided by existing laws shall be allowed or permitted

to be recorded in the proper books of the corporation, and this restriction shall be indicated in all If the corporation fails to comply with the Commission’s order, the Commission may hold the
stock certificates issued by the corporation.” corporation and its responsible directors or officers in contempt and/or hold them administratively,
civilly and/or criminally liable under this Code and other applicable laws and/or revoke the
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this _______ day registration of the corporation.
of _____________, 20_____ in the City/Municipality of ______________________, Province of
_______________________, Republic of the Philippines. A corporation cannot use a name which is:
_______________________ _______________________ 1. not distinguishable from a name already reserved or registered for the use of another
corporation;
_______________________ _______________________ 2. already protected by law (which means that is already reserved for another corporation); or
3. contrary to law, rules and regulations
CASES:
_______________________ _______________________
RED LINE TRANSPORTATION CO. vs. RURAL TRANSIT CO., LTD. G.R. No. 41570, September 6,
_______________________ _______________________
1934
Held: We know of no law that empowers the Public Service Commission or any court in this jurisdiction to
(Names and signatures of the incorporators) authorize one corporation to assume the name of another corporation as a trade name. Both the Rural
Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very
_______________________________________ law of their creation and continued existence requires each to adopt and certify a distinctive name.
(Name and signature of Treasurer) ‘The incorporators "constitute a body politic and corporate under the name stated in the certificate."
(Section 11, Act No. 1459, as amended.) A corporation has the power "of succession by its corporate
PREFATORY CLAUSE name." (Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change
Must specify the nature of the corporation being organized in order to prevent difficulties of administration its name except in the manner provided by the statute. By that name alone is it authorized to transact
and supervision. business. The law gives a corporation no express or implied authority to assume another name that is
unappropriated: still less that of another corporation, which is expressly set apart for it and protected by
CORPORATE NAME the law. If any corporation could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open the door to frauds and
SEC. 17. Corporate Name. – No corporate name shall be allowed by the Commission if it is not evasions and difficulties of administration and supervision. The policy of the law expressed in our
distinguishable from that already reserved or registered for the use of another corporation, or if corporation statute and the Code of Commerce is clearly against such a practice. (Cf. Scarsdale
such name is already protected by law, or when its use is contrary to existing law, rules and Pub. Co. Colonial Press vs. Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish
regulations. Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)
A name is not distinguishable even if it contains one or more of the following: The order of the commission of November 26, 1932, authorizing the Bachrach Motor Co.,
Incorporated, to assume the name of the Rural Transit Co., Ltd. likewise incorporated, as its trade
(a) The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an
name being void, and accepting the order of December 21, 1932, at its face as granting a certificate
abbreviation of one of such words; and
of public convenience to the applicant Rural Transit Co., Ltd., the said order last mentioned is set
(b) Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different aside and vacated on the ground that the Rural Transit Company, Ltd., is not the real party in
tenses, spacing, or number of the same word or phrase. interest and its application was fictitious.
The Commission, upon determination that the corporate name is: (1) not distinguishable from a UNIVERSAL MILLS CORPORATION vs. UNIVERSAL TEXTILE MILLS, INC. G.R. No. L-28351 July 28,
name already reserved or registered for the use of another corporation; (2) already protected by 1977
law; or (3) contrary to law, rules and regulations, may summarily order the corporation to
immediately cease and desist from using such name and require the corporation to register a new Issue: Whether the order of the Commission enjoining petitioner to its corporate name constitutes, in the
one. The Commission shall also cause the removal of all visible signages, marks, advertisements, light of the circumstances found by the Commission, a grave abuse of discretion.
labels, prints and other effects bearing such corporate name. Upon the approval of the new
Held: We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary and capricious.
corporate name, the Commission shall issue a certificate of incorporation under the amended
Clearly, it has rational basis. The corporate names in question are not Identical, but they are indisputably
name.

so similar that even under the test of "reasonable care and observation as the public generally are capable Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated
of using and may be expected to exercise" invoked by appellant. in the following terms:
We are apprehensive confusion will usually arise, considering that under the second amendment of its " . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the
articles of incorporation, appellant included among its primary purposes the "manufacturing, dyeing, market, because geographically or otherwise descriptive, might nevertheless have been used so long and
finishing and selling of fabrics of all kinds" in which respondent [UTM] had been engaged for more than a so exclusively by one producer with reference to his article that, in that trade and to that branch of the
decade ahead of petitioner[UMC]. Factually, the Commission found existence of such confusion, and there purchasing public, the word or phrase has come to mean that the article was his product."
is evidence to support its conclusion.
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites.
Since respondent is not claiming damages in this proceeding, it is, of course, immaterial whether or not No evidence was ever presented in the hearing before the Commission which sufficiently proved that the
appellant has acted in good faith. But we cannot perceive why of all names, it had to choose a name word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this
already being used by another firm engaged in practically the same business for more than a decade kind, the same tend to prove only that the appellant had been using the disputed word for a long period of
enjoying well-earned patronage and goodwill, when there are so many other appropriate names it could time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as
possibly adopt without arousing any suspicion as to its motive and, more importantly, any degree of in fact the evidence tend to convey that the cross-claimant[Western Pangasinan Lyceum] was already
confusion in the mind of the public which could mislead even its own customers, existing or prospective. using the word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same word
Premises considered, there is no warrant for our interference. in its corporate name. It follows that if any institution had acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.
LYCEUM OF THE PHILIPPINES, INC. vs. COURT OF APPEALS G.R. No. 101897. March 5, 1993
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
Issue: whether the use by petitioner of "Lyceum" in its corporate name should be deleted DEVELOPMENT, INC. vs. COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and
STANDARD PHILIPS CORPORATION G.R. No. 96161 February 21, 1992
Held: The policy underlying the prohibition in Section 18(now sec. 17) against the registration of a
corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation Doctrine: A corporation's right to use its corporate and trade name is a property right, a right in rem, which
or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of it may assert and protect against the world in the same manner as it may protect its tangible property, real
fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one
obligations and duties, and the reduction of difficulties of administration and supervision over corporations. which cannot be impaired or defeated by subsequent appropriation by another corporation in the same
field.
We do not consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names In determining the existence of confusing similarity in corporate names, the test is whether the similarity is
of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively such as to mislead a person using ordinary care and discrimination. Proof of actual confusion need not be
precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the shown. It suffices that confusion is probably or likely to occur.
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the
"Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected in the use of trademarks and tradenames. NOTE:
Etymologically, the word "Lyceum" is the Latin word for the Greek associated with schools and other Section 8 is applicable also to or against foreign corporation.
institutions providing public lectures and concerts and public discussions. While the Latin word "lyceum"
has been incorporated into the English language, the word is also found in Spanish (liceo) and in French A mere change in the name of a corporation, either by the legislature or by the corporators or stockholders
(lycee). "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be under legislative authority, does not, generally speaking, affect the identity of the corporation, nor in any
(though this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not way affect the rights, privileges or obligations previously acquired or incurred by it.
yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of
educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since IN CASE OF AMENDMENT OR CHANGE upon a corporate name or identity, it does not affect the rights
"Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to of the corporation or lessen or adds to its obligation. The corporation upon such change in its name is on
designate an entity which is organized and operating as an educational institution. no sense a new corporation, nor successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation
to petitioner with the result that that word, although originally a generic, has become appropriable by PURPOSE CLAUSE
petitioner to the exclusion of other institutions like private respondents herein.
Under SEC. 44, a corporation has only such powers as are expressly granted to it by law and by its articles
The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, of incorporation including those which are incidental to such conferred powers, those reasonably
been extended to corporate names sine the right to use a corporate name to the exclusion of others is necessary to accomplish its purpose and those which may be incidental to its existence. also known as
based upon the same principle which underlies the right to use a particular trademark or tradename. In the Doctrine of Limited Capacity.

Reasons for requiring a statement of purposes or objects: Held: It is clear that the case for damages filed with the city court is based upon tort and not upon a written
contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in inferior courts,
a. In order that the stockholder who contemplates on an investment in a business provides in its paragraph (b) (3) that when "the action is not upon a written contract, then in the municipality
enterprise shall know within what lines of business his money is to be put at risk. where the defendant or any of the defendants resides or may be served with summons."
b. So that the board of directors and management may know within what lines of
business they are authorized to act. Settled is the principle in corporation law that the residence of a corporation is the place where its
c. So that anyone who deals with the company may ascertain whether a contract or principal office is established. Since it is not disputed that the Clavecilla Radio System has its
transaction into which he contemplates entering is one within the general authority principal office in Manila, it follows that the suit against it may properly be filed in the City of Manila.
of the management.
The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue was
If the corporate purpose or objective includes any purpose under the supervision of another government properly laid on the principle that the appellant may also be served with summons in that city where it
agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will maintains a branch office.
be required. As provided in section 16 last paragraph:
This Court has already held in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526; that the
SEC. 16. No articles of incorporation or amendment to articles of term "may be served with summons" does not apply when the defendant resides in the Philippines for, in
incorporation of banks, banking and quasi-banking institutions, preneed, insurance and such case, he may be sued only in the municipality of his residence, regardless of the place where he may
trust companies, NSSLAS, pawnshops, and other financial intermediaries shall be be found and served with summons.
approved by the Commission unless accompanied by a favorable recommendation of
the appropriate government agency to the effect that such articles or amendment is in As any other corporation, the Clavecilla Radio System maintains a residence which is Manila in this case,
accordance with law. and a person can have only one residence at a time (See Alcantara vs. Secretary of the Interior, 61 Phil.
459; Evangelists vs. Santos, 86 Phil. 387). The fact that it maintains branch offices in some parts of the
Sec. 13 (b) provides that, where a corporation has more than one stated purpose, the articles of country does not mean that it can be sued in any of these places. To allow an action to be instituted in any
incorporation shall indicate the primary purpose and the secondary purpose or purposes: Provided, That place where a corporate entity has its branch offices would create confusion and work untold
a nonstock corporation may not include a purpose which would change or contradict its nature as such; inconvenience to the corporation.
There are also other limitations to note at page 37 to 39 of Atty. Ladia’s book The order appealed from is therefore reversed, but without prejudice to the filing of the action in Which the
venue shall be laid properly. With costs against the respondents-appellees.
General limitations on the purpose clause:
TERM OF EXISTENCE
1. The purpose must be lawful.
2. The purpose must be specific or stated concisely although in broad or general terms. SEC. 13 (d) The term for which the corporation is to exist, if the corporation has not elected
3. If there is more than one purpose, the primary as well as the secondary ones must be specified. perpetual existence
4. The purpose must be capable of being lawfully combined.
In relation to:
THE PRINCIPAL OFFICE
SEC. 11. Corporate Term. – A corporation shall have perpetual existence unless its articles of
SEC 13 (c) The place where the principal office of the corporation is to be located, which must be incorporation provides otherwise.
within the Philippines.
Corporations with certificates of incorporation issued prior to the effectivity of this Code, and
Importance: Venue of meetings-Service of summons - Registration of chattel mortgage - Venue of action. which continue to exist, shall have perpetual existence, unless the corporation, upon a vote of its
stockholders representing a majority of its outstanding capital stock, notifies the Commission that
XPN: When there is a written contract and there is a stipulation on the venue of action. it elects to retain its specific corporate term pursuant to its articles of incorporation: Provided,
That any change in the corporate term under this section is without prejudice to the appraisal right
NOTE: There must be only ONE principal office which must be located within the Philippines.
of dissenting stockholders in accordance with the provisions of this Code.
CASE:
A corporate term for a specific period may be extended or shortened by amending the articles of
CLAVECILLIA RADIO SYSTEM, petitioner-appellant, vs. HON. AGUSTIN ANTILLON, as City Judge incorporation: Provided, That no extension may be made earlier than three (3) years prior to the
of the Municipal Court of Cagayan de Oro City and NEW CAGAYAN GROCERY, respondents- original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension
appellees. G.R. No. L-22238 February 18, 1967 as may be determined by the Commission: Provided, further, That such extension of the corporate
term shall take effect only on the day following the original or subsequent expiry date(s).
Issue: whether the case filed in Cagayan de Oro will prosper

A corporation whose term has expired may apply for a revival of its corporate existence, together NOTE: Minors are not qualified to become incorporators, for they do not have legal capacity. Exception if
with all the rights and privileges under its certificate of incorporation and subject to all of its duties, represented by their guardian, parents or administrator.
debts and liabilities existing prior to its revival. Upon approval by the Commission, the corporation
shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving There is no nationality requirement, only residence. However, subject to limitations as provided for by
it perpetual existence, unless its application for revival provides otherwise. Nationalization Laws. i.e. majority of the incorporators must be residents of the Philippines
No application for revival of certificate of incorporation of banks, banking and quasi-banking THE DIRECTORS/TRUSTEES
institutions, preneed, insurance and trust companies, non-stock savings and loan associations
SEC 13 (f) The number of directors, which shall not be more than fifteen (15) or the number of
(NSSLAs), pawnshops, corporations engaged in money service business, and other financial
trustees which may be more than fifteen (15);
intermediaries shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency. (g) The names, nationalities, and residence addresses of persons who shall act as directors or
trustees until the first regular directors or trustees are duly elected and qualified in accordance
NOTE: The corporate term is necessary in determining at what point in time the corporation will cease to
with this Code
exist or have lost its juridical personality.
In relation to SEC. 174. Designation of Governing Boards. – The provisions of specific provisions of this
SEC 139 of the Code provides that a corporation shall nevertheless be continued as a body corporate for
Code to the contrary notwithstanding, nonstock or special corporations may, through their articles of
three (3) years after the effective date of dissolution, for the purpose of prosecuting and defending suits
incorporation or their bylaws, designate their governing boards by any name other than as board of
by or against it and enabling it to settle and close its affairs, dispose of and convey its property, and
trustees.
distribute its assets, but not for the purpose of continuing the business for which it was established.
General Rule: There shall not be more than fifteen (15) or the number of trustees which may be more than
Extension prior or earlier than 3 years is allowed ONLY if there is justifiable reason.
fifteen (15), Exceptions:
On the day of the expiration of corporate term, extension is still allowed. However, after the expiration of
1. SEC. 106. Board of Trustees. –Trustees of educational institutions organized as nonstock
its term, extension is no longer allowed for the corporate ceases to exist already and there is nothing to
corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the number
extend.
of trustees shall be in multiples of five (5);
INCORPORATORS 2. In close corporations where all the stockholders are considered as members of the board of
directors thereby effectively allowing 20 members in the board;
SEC. 5. Corporators and Incorporators, Stockholders and Members. – Corporators are those who 3. SEC. 108. Corporation sole. – a corporation sole may be formed by the chief archbishop,
compose a corporation, whether as stockholders or shareholders in a stock corporation or as bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect, or
members in a nonstock corporation. Incorporators are those stockholders or members mentioned church; and
in the articles of incorporation as originally forming and composing the corporation and who are 4. One Man Corporation- SEC. 121. Single Stockholder as Director, President. – The single
signatories thereof. stockholder shall be the sole director and president of the One Person Corporation
Corporators- is applied to all persons who compose the corporation at any given time and need not be The RCC provides for the minimum qualifications and disqualifications of directors/trustees which the
among those who execute the articles of incorporation at the start of its formation and organization. corporation may not do away with. However, the by-laws may provide for additional qualifications and
disqualifications SEC. 46. Contents of Bylaws. – A private corporation may provide the following in its
Incorporators- is applied to those persons mentioned in the articles of incorporation as originally forming bylaws: (f) The directors’ or trustees’ qualifications, duties and responsibilities.
the corporation and who are signatories of the AI.
Qualifications:
SEC. 10. Number and Qualifications of Incorporators. – Any person, partnership, association or
corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless
corporation for any lawful purpose or purposes: Provided, That natural persons who are licensed otherwise provided in this Code, the board of directors or trustees shall exercise the corporate
to practice a profession, and partnerships or associations organized for the purpose of practicing powers, conduct all business, and control all properties of the corporation.
a profession, shall not be allowed to organize as a corporation unless otherwise provided under
special laws. Incorporators who are natural persons must be of legal age. Xxx xxx xxx A director who ceases to own at least one (1) share of stock or a trustee who ceases
to be a member of the corporation shall cease to be such.
Each incorporator of a stock corporation must own or be a subscriber to at least one (1) share of
the capital stock. The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:
A corporation with a single stockholder is considered a One Person Corporation as described in
Title XIII, Chapter III of this Code.
a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The iii. other analogous factors.
Securities Regulation Code”, namely those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00) This corporations are covered with public interest and the RCC requires that it shall have independent
and having two hundred (200) or more holders of shares, each holding at least one hundred (100) directors constituting at least twenty percent (20%) of such board.
shares of a class of its equity shares;
Independent directors:
b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
1. must be elected by the shareholders present or entitled to vote in absentia during the election
business, pre-need, trust and insurance companies, and other financial intermediaries; and
of directors.
c) Other corporations engaged in business vested with public interest similar to the above, as may 2. shall be subject to rules and regulations governing their:
be determined by the Commission, after taking into account relevant factors which are germane to a. qualifications,
the objective and purpose of requiring the election of an independent director, such as the extent b. disqualifications, voting requirements,
of minority ownership, type of financial products or securities issued or offered to investors, public c. duration of term and term limit,
interest involved in the nature of business operations, and other analogous factors. d. maximum number of board memberships and
e. other requirements that the Commission will prescribe to strengthen their
An independent director is a person who, apart from shareholdings and fees received from the independence and align with international best practices.
corporation, is independent of management and free from any business or other relationship which
could, or could reasonably be perceived to materially interfere with the exercise of independent Disqualifications:
judgment in carrying out the responsibilities as a director.
SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be disqualified from
Independent directors must be elected by the shareholders present or entitled to vote in absentia being a director, trustee or officer of any corporation if, within five (5) years prior to the election or
during the election of directors. Independent directors shall be subject to rules and regulations appointment as such, the person was:
governing their qualifications, disqualifications, voting requirements, duration of term and term
(a) Convicted by final judgment: (1) Of an offense punishable by imprisonment for a period
limit, maximum number of board memberships and other requirements that the Commission will
exceeding six (6) years; (2) For violating this Code; and (3) For violating Republic Act No. 8799,
prescribe to strengthen their independence and align with international best practices.
otherwise known as “The Securities Regulation Code”;
Lone requirement: Directors must own at least one (1) share of the capital stock of the corporation.
(b) Found administratively liable for any offense involving fraudulent acts; and
Trustees must be members.
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
Note the requirement that majority of the directors or trustees must be residents of the Philippines has
similar to those enumerated in paragraphs (a) and (b) above.
already been omitted by the RCC.
The foregoing is without prejudice to qualifications or other disqualifications, which the
Note: When a corporation is:
Commission, the primary regulatory agency, or the Philippine Competition Commission may
1. Covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities impose in its promotion of good corporate governance or as a sanction in its administrative
Regulation Code”, namely: proceedings.
a. those whose securities are registered with the Commission,
NOTE: A minor, having no legal capacity, cannot be a director for they cannot bind the corporation nor
b. Listed with an exchange or with assets of at least Fifty million pesos
represent the same.
(P50,000,000.00); and
c. having two hundred (200) or more holders of shares, each holding at least one A by-laws may validly provide that no person may be elected as director unless he owns a specified
hundred (100) shares of a class of its equity shares; number of shares required for the directorate qualification.
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries; and It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a
3. Other corporations: competitor corporation to avoid any possible adverse effects of conflicting interest of a director.
a. engaged in business vested with public interest similar to the above, as may be
determined by the Commission, In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the
b. after taking into account relevant factors which are germane to the objective and stock as appearing on the books of the corporation. (Lee vs. CA)
purpose of requiring the election of an independent director, such as:
i. the extent of minority ownership, If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act
ii. type of financial products or securities issued or offered to investors, as such in a hold over capacity until the election is held and a qualified candidate is so elected. (Detective
public interest involved in the nature of business operations, and and Protective Bureau vs. Cloribel)

CAPITALIZATION Shares of stock and their classification
SEC 13 (h) If it be a stock corporation, the amount of its authorized capital stock, number of shares Shares of stock- designate the interest or right which the stockholder has in the management of the
into which it is divided, the par value of each, names, nationalities, and residence addresses of the corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the payment
original subscribers, amount subscribed and paid by each on the subscription, and a statement of its debts.
that some or all of the shares are without par value, if applicable;
Stock certificate- is a document or instrument evidencing the interest of a stockholder in the corporation.
Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured
to be paid by the subscribers. The maximum number of share a corporation can issue. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of
which classes or series of shares may have such rights, privileges or restrictions as may be stated in the
Subscribed capital stock – the total number of shares and its total value for which there are contracts articles of incorporation.
for their acquisition or subscription.
SEC. 6. Classification of Shares. – The classification of shares, their corresponding rights,
Paid-up capital stock or paid-in capital – the actual amount or value which has been actually contributed privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of
or paid to the corporation in consideration of the subscriptions made thereon. incorporation. Each share shall be equal in all respects to every other share, except as otherwise
provided in the articles of incorporation and in the certificate of stock.
Outstanding Capital Stock- SEC. 173-The term “outstanding capital stock”, as used in this Code, shall
mean the total shares of stock issued under binding subscription contracts to subscribers or stockholders, The shares in stock corporations may be divided into classes or series of shares, or both. No share
whether fully or partially paid, except treasury shares. may be deprived of voting rights except those classified and issued as “preferred” or “redeemable”
shares, unless otherwise provided in this Code: Provided, That there shall always be a class or
In relation to: SEC. 61. Consideration for Stocks. – Stocks shall not be issued for a consideration series of shares with complete voting rights.
less than the par or issued price thereof. Consideration for the issuance of stock may be:
Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters:
(a) Actual cash paid to the corporation;
(a) Amendment of the articles of incorporation;
(b) Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of (b) Adoption and amendment of bylaws;
the stock issued;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the
(c) Labor performed for or services actually rendered to the corporation; corporate property;
(d) Previously incurred indebtedness of the corporation; (d) Incurring, creating, or increasing bonded indebtedness;
(e) Amounts transferred from unrestricted retained earnings to stated capital; (e) Increase or decrease of authorized capital stock;
(f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; (f) Merger or consolidation of the corporation with another corporation or other corporations;
(g) Shares of stock in another corporation; and/or (g) Investment of corporate funds in another corporation or business in accordance with this Code;
and
(h) Other generally accepted form of consideration.
(h) Dissolution of the corporation.
Where the consideration is other than actual cash, or consists of intangible property such as
patents or copyrights, the valuation thereof shall initially be determined by the stockholders or the Except as provided in the immediately preceding paragraph, the vote required under this Code to
board of directors, subject to the approval of the Commission. approve a particular corporate act shall be deemed to refer only to stocks with voting rights.
Shares of stock shall not be issued in exchange for promissory notes or future service. The same The shares or series of shares may or may not have a par value: Provided, That banks, trust,
considerations provided in this section, insofar as applicable, may be used for the issuance of insurance, and preneed companies, public utilities, building and loan associations, and other
bonds by the corporation. corporations authorized to obtain or access funds from the public, whether publicly listed or not,
shall not be permitted to issue no-par value shares of stock.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board
of directors pursuant to authority conferred by the articles of incorporation or the bylaws, or if not Preferred shares of stock issued by a corporation may be given preference in the distribution of
so fixed, by the stockholders representing at least a majority of the outstanding capital stock at a dividends and in the distribution of corporate assets in case of liquidation, or such other
meeting duly called for the purpose. preferences: Provided, That preferred shares of stock may be issued only with a stated par value.

The board of directors, where authorized in the articles of incorporation, may fix the terms and The amount of preference is stated in the contract of subscription and is usually on a fixed percentage or
conditions of preferred shares of stock or any series thereof: Provided, further, That such terms by specified amount indicated their.
and conditions shall be effective upon filing of a certificate thereof with the Securities and
Exchange Commission, hereinafter referred to as the “Commission”. Remember: BoD cannot be compelled to declare dividends as provided in Sec 42. However, it depends
on the type of preference share.
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect Participating and Non participating preferred shares
thereto: Provided, That no-par value shares must be issued for a consideration of at least Five
Preferred shares are presumed to be non-participating and non-cumulative.
pesos (P5.00) per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for Participating preferred shares – the holders thereof are still given the right to participate with the
distribution as dividends. common stockholders in dividends beyond their stated preference.
A corporation may further classify its shares for the purpose of ensuring compliance with If after paying a preferred stock and there are no more surplus profits remaining, the other holders of
constitutional or legal requirements. stocks, not so preferred, have no more recourse. On the other hand, if there will be remaining surplus after
payment of preferred stockholders, the other stockholders, being entitled with the residuary rights, can
Purpose of classification:
possibly receive higher or bigger dividends than the preferred stockholder, in other word, in such situation
1. To specify and define the rights and privileges of the stockholders. preferred stock holder will no longer have a share in the residuary surplus profit.
2. For regulation and control of the issuance of sale of corporate securities for the protection of
Cumulative and Non-Cumulative preferred Shares
purchasers and stockholders.
3. As a management control device. Cumulative preferred share – those that entitle the owner thereof to payment not only of current
4. To comply with statutory requirements. dividends but also back dividends not previously paid whether or not, during the past years, dividends
5. To better insure return on investment. were declared or paid.
6. For flexibility in price.
In absence of express stipulation, preferred shares are presumed to be non-cumulative.
NOTE: Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share. Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of
current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before
If there is no specification of rights, privilege or advantage of a class over the other, they are considered any other stockholders are paid the same.
as equal. That any privilege or advantage of preferred shares over other shares must be indicated in the
Articles of Incorporation, by-laws or stock certificate, as required by law. Types of non-cumulative preferred shares:
Common and Preferred shares 1. Discretionary dividend type – gives the holder of such shares the right to have dividends paid
thereon in a particular year depending on the judgment or discretion of the board of directors.
Common stock– a stock which entitles its owner to an equal pro-rata division of profits, if there be any, but
without any preference or advantage in that respect over any other stockholder or class of stockholders. 2. Mandatory if earned type – impose a positive duty on directors to declare dividends every
year when profits are earned. Mandatory if there is profit.
Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect
to the payment of dividends and/or with respect to distribution of capital upon liquidation. It may include 3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in
such other preference not inconsistent with this code. dividends if there were profits earned during the previous years but dividends were not declared.
Cumulative if there is profit.
Subject to limitations on preferred stock provided in sec 6: (1) Must be issued with a stated par value; and
(2) The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, 2016 2017 2018 2019
each share shall be, in all respect, equal to every other share. 200T 200T 0 400T
2020 100T 100T 100T 100T
Preference as to DIVIDENDS
DDT 0 0 0 100T
The guarantee to preference as to dividends does not create a relation of debtor and creditor between the MET 100T 100T 0 100T
corporation and the holders of such stock. The board has the discretion to determine whether or not to EC/DC 100T (2021) 100T 0 100T
declare dividends.
Preferred as to voting rights

Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote. Except as provided in the immediately preceding paragraph, the vote required under this Code to
approve a particular corporate act shall be deemed to refer only to stocks with voting rights.
Preferred upon Liquidation
Exception to the exception- Only preferred and redeemable shares may be denied the right to vote, SEC
Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with 6 “No share may be deprived of voting rights except those classified and issued as “preferred” or
other shares. Such fact must be stipulated in the contract of subscription. “redeemable” shares, unless otherwise provided in this Code”- THE LAST PHRASE “unless
otherwise provided in this Code” refers to SEC 7.
Par and Non-par Value Shares
NOTE: There must always be a class or series of shares which have complete voting rights.
Par value shares – those whose value are fixed in the articles of incorporation. Par value shares cannot
be issued nor sold by the corporation at less than par. ** note: for purposes of complying with the nationalization law read the case of heirs of gamboa vs teves
and roy vs hibert
No par value shares – those whose issued price are not stated in the certificate of stock but which may be
fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or Founders’ Shares
by the by-laws, or in the absence thereof, by the stockholders themselves.
They are presumed to be shares of stock which are issued to the founders of a corporation.
Limitations in the issuance of no par value shares as provided by sec 6:
SEC. 7. Founders’ Shares. – Founders’ shares may be given certain rights and privileges not
(a) Such shares, once issued, are deemed fully paid and thus, non assessable; enjoyed by the owners of other stocks. Where the exclusive right to vote and be voted for in the
(b) The consideration for its issuance should not be less than P5.00; election of directors is granted, it must be for a limited period not to exceed five (5) years from the
(c) The entire consideration for its issuance constitutes capital, hence, not available for dividend date of incorporation: Provided, That such exclusive right shall not be allowed if its exercise will
declaration; violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No.
(d) They cannot be issued as preferred stock; and 7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws.
(e) They cannot be issued by banks, trust companies, insurance companies, public utilities and
building and loan associations and other corporations authorized to obtain or access public Redeemable shares
funds.
Redeemable shares- are those issued by a corporation subject to redemption as maybe provided by the
Advantages that attach to the issuance of no par value shares: terms of the subscription.
(a) Gives the advantage of flexibility in price; SEC. 8. Redeemable Shares. – Redeemable shares may be issued by the corporation when
(b) Evasion of the danger of liability upon watered stock; and expressly provided in the articles of incorporation. They are shares which may be purchased by
(c) Disappearance of personal liability on the part of the holder thereof for unpaid subscription. the corporation from the holders of such shares upon the expiration of a fixed period, regardless
Since they are deemed to be fully paid and non-assessable. of the existence of unrestricted retained earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incorporation and the certificate of stock
*watered stock- stocks issued below their par value stated. representing the shares, subject to rules and regulations issued by the Commission..
Voting and non-voting shares Depending on the terms of contract, redeemable shares (usually attached to preferred shares and other
debt securities like bonds and debentures) grants the issuing corporation the right to purchase or reacquire
Voting shares – gives the holder thereof the right to vote and participate in the management of the
the shares at its option or at the option of the holder thereof based on the face or issued value thereof plus
corporation through the exercise of such right, either at the election of the board of directors, or in any
a specified premium. Redemption may either be optional or mandatory either at a fixed or future date.
matter requiring the stockholder’s approval.
Treasury Shares
Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate
paragraph of Sec. 6- Holders of nonvoting shares shall nevertheless be entitled to vote on the SEC. 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully
following matters: (a) Amendment of the articles of incorporation; (b) Adoption and amendment of paid for, but subsequently reacquired by the issuing corporation through purchase, redemption,
bylaws; (c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all donation, or some other lawful means. Such shares may again be disposed of for a reasonable
of the corporate property; (d) Incurring, creating, or increasing bonded indebtedness; (e) Increase price fixed by the board of directors.
or decrease of authorized capital stock; (f) Merger or consolidation of the corporation with another
corporation or other corporations; (g) Investment of corporate funds in another corporation or Inre to: SEC. 56. Voting Right for Treasury Shares. – Treasury shares shall have no voting right as
business in accordance with this Code; and (h) Dissolution of the corporation. long as such shares remain in the Treasury.
(Note that treasury shares do not form part of Capital Stock as provided in Section )

Treasury shares may again be issued for a price less than par. segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent
capital resources of the corporation by the device of capitalizing the same, and the issuance to the
Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of stockholders of additional shares of stock representing the profits so capitalized."
stock. (CIR vs. Manning)
The declaration by the respondents and Reese’s trustees of MANTRASCO’s alleged treasury stock
NOTE: All redeemable shares become treasury shares but not all treasury shares come from redeemable dividends in favor of the former, brings, however, into clear focus the ultimate purpose which the parties
shares. to the trust instrument aimed to realize: to make the respondents the sole owners of Reese’s interest in
MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize
CASE:
their purchase of the said interests, and by making it appear outwardly, through the formal declaration of
FIRST DIVISION [G.R. No. L-28398. August 6, 1975.] COMMISSIONER OF INTERNAL REVENUE, non-existent stock dividends in the treasury, that they have not received any income from those firms
Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX when, in fact, by that declaration they secured to themselves the means to turn around as full owners of
APPEALS, Respondents. Reese’s shares. In other words, the respondents, using the trust instrument as a convenient technical
device, bestowed unto themselves the full worth and value of Reese’s corporate holdings with the use of
Issue: Whether the shares involved are treasury shares the very earnings of the companies. Such package device, obviously not designed to carry out the usual
stock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities and
Held: In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares other capital budget items, but exclusively for expanding the capital base of the respondents in
declared as stock dividends were treasury shares. We are however convinced, after a careful study of the MANTRASCO, cannot be allowed to deflect the respondents’ responsibilities toward our income tax laws.
trust agreement, that the said shares were not, on December 22, 1958 or at anytime before or after that The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of
date, treasury shares. The reasons are quite plain. their earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and result making a
distribution of such earnings to the respondents. All these amounts are consequently subject to income
Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," tax as being, in truth and in fact, a flow of cash benefits to the respondents.
they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury Capital Requirement
shares are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the SEC. 12. Minimum Capital Stock Not Required of Stock Corporations. – Stock corporations shall
corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the not be required to have a minimum capital stock, except as otherwise specifically provided by
corporation as a treasury share, participates neither in dividends, because dividends cannot be special law.
declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers among stockholders will be effectively lost and the OTHER MATTERS CONSISTENT WITH LAW
directors will be able to perpetuate their control of the corporation, though it still represents a paid-
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
for interest in the property of the corporation. The foregoing essential features of a treasury stock are
lacking in the questioned shares. (citation omitted) General Rule: Corporations may or may not provide for restrictions and preferences regarding the transfer,
sale or assignment of shares in the articles of incorporation. It is discretionary.
In this case, and under the terms of the trust agreement, the shares of stock of reese participated in the
dividends which the trustee received and the shares were voted upon by the trustee in all corporate Exception: Close corporations are required to subject their shares to specified restrictions as required in
meetings. They were not therefor, treasury shares. SEC. 95. Definition and Applicability of Title. – A close corporation, within the meaning of this
Code, is one whose articles of incorporation provides that: (b) all the issued stock of all classes
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700
shall be subject to one or more specified restrictions on transfer permitted by this Title;
shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. Such being
the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete General Rule: Restrictions or preferences must be contained in the articles of incorporation and in all stock
nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be certificates to be issued by the corporation. However, In close corporations, such restrictions and
declared out of outstanding corporate stock, but only from retained earnings: preferences must also be embodied in the by-laws.
Of pointed relevance is this useful discussion of the nature of a stock dividend: "‘A stock dividend always NO TRANSFER CLAUSE
involves a transfer of surplus (or profit) to capital stock.’ As the court said in United States v. Siegel, ‘A
stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to (The purpose is to protect or guarantee compliance with nationalization laws)
stockholders in lieu of a cash dividend.’ Congress itself has defined the term ‘dividend’ in No. 115(a) of the
Act as meaning any distribution made by a corporation to its shareholders, whether in money or in other SEC 14. Form of Articles of Incorporation- xxx xxx xxx Eleventh: (Corporations which will engage
property, out of its earnings or profits. In Eisner v. Macomber, both the prevailing and the dissenting in any business or activity reserved for Filipino citizens shall provide the following):
opinions recognized that within the meaning of the revenue acts the essence of a stock dividend was the

“No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than SEC. 16. Grounds When Articles of Incorporation or Amendment May be Disapproved. – The
the required percentage of capital stock as provided by existing laws shall be allowed or permitted Commission may disapprove the articles of incorporation or any amendment thereto if the same
to be recorded in the proper books of the corporation, and this restriction shall be indicated in all is not compliant with the requirements of this Code: Provided, That the Commission shall give the
stock certificates issued by the corporation.” incorporators, directors, trustees, or officers a reasonable time from receipt of the disapproval
within which to modify the objectionable portions of the articles or amendment. The following are
TREASURY ELECT grounds for such disapproval:
SEC 14. Form of Articles of Incorporation- xxx xxx xxx Ninth: That _____________________ has (a) The articles of incorporation or any amendment thereto is not substantially in accordance with
been elected by the subscribers as Treasurer of the Corporation to act as such until after the the form prescribed herein;
successor is duly elected and qualified in accordance with the bylaws, that as Treasurer, authority
has been given to receive in the name and for the benefit of the corporation, all subscriptions, (b) The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or
contributions or donations paid or given by the subscribers or members, who certifies the contrary to government rules and regulations;
information set forth in the seventh and eighth clauses above, and that the paid-up portion of the
subscription in cash and/or property for the benefit and credit of the corporation has been duly (c) The certification concerning the amount of capital stock subscribed and/or paid is false; and
received.
(d) The required percentage of Filipino ownership of the capital stock under existing laws or the
UNDERTAKING TO CHANGE NAME Constitution has not been complied with.
SEC 14. Form of Articles of Incorporation- xxx xxx xxx Tenth: That the incorporators undertake to No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-
change the name of the corporation immediately upon receipt of notice from the Commission that banking institutions, preneed, insurance and trust companies, NSSLAS, pawnshops, and other
another corporation, partnership or person has acquired a prior right to the use of such name, that financial intermediaries shall be approved by the Commission unless accompanied by a favorable
the name has been declared not distinguishable from a name already registered or reserved for recommendation of the appropriate government agency to the effect that such articles or
the use of another corporation, or that it is contrary to law, public morals, good customs or public amendment is in accordance with law.
policy.
Only substantial and not strict compliance is required.
EXECUTION CLAUSE and ACKNOWLEDGEMENT
Grounds for disapproval:
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this _______ day
1. The articles of incorporation or any amendment thereto is not substantially in accordance with
of _____________, 20_____ in the City/Municipality of ______________________, Province of
the form prescribed;
_______________________, Republic of the Philippines.
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or
_______________________ _______________________ contrary to government rules and regulations;
3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false;
_______________________ _______________________ 4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws or the Constitution,
5. The articles of incorporation of corporations subject to government supervision are not
accompanied by a favorable recommendation from the appropriate government agency.
_______________________ _______________________
The grounds are not exclusive. (e.g. Capital requirement)
_______________________ _______________________
Remember: If there is no valid ground for disapproval, SEC is duty bound to approve the same,
constitutional right to association.
(Names and signatures of the incorporators)
COMMENCEMENT OF CORPORATE EXISTENCE
_______________________________________
SEC. 18. Registration, Incorporation and Commencement of Corporate Existence. – A person or
(Name and signature of Treasurer) group of persons desiring to incorporate shall submit the intended corporate name to the
Commission for verification. If the Commission finds that the name is distinguishable from a name
already reserved or registered for the use of another corporation, not protected by law and is not
contrary to law, rules and regulations, the name shall be reserved in favor of the incorporators.
GROUNDS FOR DISAPPROVAL The incorporators shall then submit their articles of incorporation and bylaws to the Commission.

If the Commission finds that the submitted documents and information are fully compliant with the That a corporation should have a full and complete organization and existence as an entity before
requirements of this Code, other relevant laws, rules and regulations, the Commission shall issue it can enter into any kind of a contract or transact any business, would seem to be self-evident. A
the certificate of incorporation. corporation, until organized, has no being, franchises or faculties. Nor do those engaged in
bringing it into being have any power to bind it by contract, unless so authorized by the charter
A private corporation organized under this Code commences its corporate existence and juridical there is not a corporation nor does it possess franchise or faculties for it or others to exercise,
personality from the date the Commission issues the certificate of incorporation under its official until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance
seal and thereupon the incorporators, stockholders/members and their successors shall Company, 107 Ill., 652, 658.)
constitute a body corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner dissolved in If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows
accordance with law. that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.
General Rule: It is only from the time of the issuance of the certificate of incorporation that a corporation DEFECTIVELY FORMED CORPORATIONS
acquires juridical personality and legal existence.
Kinds of Defectively Formed Corporations
Exceptions:
1. De Facto Corporation
Special Corporation, as provided for in the law creating them. 2. Corporation by Estoppel
Corporate Sole, from the time of filing the articles of incorporation. DE FACTO CORPORATION
Other special provisions of the law which provide otherwise. SEC. 19. 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
CASE: 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.
G.R. No. L-43350 December 23, 1937 CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-
appellant, vs. TEODORO SANDIKO, defendant-appellee. De facto corporation – one that is so defectively created as not to be a de jure corporation but
nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona fide attempt to
Issue: Whether the subsequent sale of the properties to sandikio is valid
incorporate under existing statutory authority, coupled with the exercise of corporate powers.
Held: In dismissing the complaint against the defendant, the court below, reached the conclusion that the
Requisites:
sale is invalid because of vice in consent and repugnancy to law. While we do not agree with this
conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall 1. There is a valid law under which the corporation could have been created as a de jure
presently state. corporation;
2. An attempt, in good faith, to form a corporation according to the requirements of law which goes
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected
far enough as to constitute a colorable compliance with law;
on May 31, 1930 and the actual incorporation of said company was affected later on October 22, 1930. In
3. A user of corporate powers (e.g. the transaction of business in someway as if it were a
other words, the transfer was made almost five months before the incorporation of the company.
corporation); and
Unquestionably, a duly organized corporation has the power to purchase and hold such real property as
4. Good faith in claiming to be and doing business as a corporation.
the purposes for which such corporation was formed may permit and for this purpose may enter into such
contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation Apparent for the provision of section 19 that the importance of the distinction between a DEJURE and a
may be said to be lawfully organized, many things have to be done. DE FACTO corporation may only be for the purpose of determining the applicability of the rules on
collateral and direct attack against corporate existence:
Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459).
Although there is a presumption that all the requirements of law have been complied with (sec. 334, par. 1. The corporate existence of a DE JURE corporation cannot be directly attacked either directly
31 Code of Civil Procedure), in the case before us it cannot be denied that the plaintiff was not yet or collaterally, even by the State.
incorporated when it entered into a contract of sale. The contract itself referred to the plaintiff as "una 2. The corporate existence of a DE FACTO corporation can be directly attacked on a quo warranto
sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal proceeding. ONLY THE STATE however can institute a quo warranto proceeding.
existence then, it did not possess juridical capacity to enter into the contract. 3. The corporate existence of a DE FACTO corporation is not subject to collateral attack by any
party.
Corporations are creatures of the law, and can only come into existence in the manner prescribed
by law. X X X CASES:

[G.R. No. L-28113 March 28, 1969] THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and Issue: FELC is a de facto corporation whose existence can be attacked in a quo warranto proceeding
AMER MACAORAO BALINDONG, petitioners, vs. PANGANDAPUN BENITO, HADJI NOPODIN
MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, Held: Section 19(now section 20) reads as follows:. . . The due incorporation of any corporations claiming
MARONSONG ANDOY, MACALABA INDAR LAO. respondents. in good faith to be a corporation under this Act and its right to exercise corporate powers shall not be
inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may
ISSUE: whether the municipality of Balabagan is a De Facto corporation be had at the suit of the Insular Government on information of the Attorney-General.
Held: In the cases where a de facto municipal corporation was recognized as such despite the fact There are least two reasons why this section does not govern the situation. Not having obtained the
that the statute creating it was later invalidated, the decisions could fairly be made to rest on the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders — may
consideration that there was some other valid law giving corporate vitality to the organization. not probably claim "in good faith" to be a corporation.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had
not been invalidated cannot conceivably make it a de facto corporation, as, independently of the First, under our statue it is to be noted (Corporation Law, sec. 11[now sec 18]) that it is the issuance of a
Administrative Code provision in question, there is no other valid statute to give color of authority to certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a
its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a similar petition for corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith
prohibition and nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities;
Pelaez ruling, despite the fact that the municipality was created in 1961, before section 68 of the but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply
Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de with the law the claim to be a corporation "under this act" could not be made "in good faith."
facto municipal corporation did not arise in that case.
Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as jure corporation may be terminated in a private suit for its dissolution between stockholders,
inoperative as though it had never been passed." For the existence of Executive, Order 386 is "an without the intervention of the state.
operative fact which cannot justly be ignored." As Chief Justice Hughes explained in Chicot County
There might be room for argument on the right of minority stockholders to sue for dissolution; but that
Drainage District v. Baxter State Bank:
question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to review
The courts below have proceeded on the theory that the Act of Congress, having on appeal. Which brings us to one principal reason why this petition may not prosper, namely: the
been found to be unconstitutional, was not a law; that it was inoperative, conferring no rights petitioners have their remedy by appealing the order of dissolution at the proper time.
and imposing no duties, and hence affording no basis for the challenged decree. Norton v.
CORPORATION BY ESTOPPEL
Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is
quite clear, however, that such broad statements as to the effect of a determination of Corporation by estoppel- is corporation that exist on the ground of estoppel by virtue of the AGREEMENT,
unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to ADMISSION, or CONDUCT of the PARTIES such that they will not be permitted to deny the fact of the
such a determination, is an operative fact and may have consequences which cannot justly be existence of the corporation.
ignored. The past cannot always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in various aspects — with respect SEC. 20. Corporation by Estoppel. – All persons who assume to act as a corporation knowing it to
to particular relations, individual and corporate, and particular conduct, private and official. be without authority to do so shall be liable as general partners for all debts, liabilities and damages
Questions of rights claimed to have become vested, of status of prior determinations deemed incurred or arising as a result thereof: Provided, however, That when any such ostensible
to have finality and acted upon accordingly, of public policy in the light of the nature both of the corporation is sued on any transaction entered by it as a corporation or on any tort committed by
statute and of its previous application, demand examination. These questions are among the it as such, it shall not be allowed to use its lack of corporate personality as a defense. Anyone who
most difficult of those which have engaged the attention of courts, state and federal, and it is assumes an obligation to an ostensible corporation as such cannot resist performance thereof on
manifest from numerous decisions that an all-inclusive statement of a principle of absolute the ground that there was in fact no corporation.
retroactive invalidity cannot be justified.
The doctrine of corporation by estoppel may apply to the alleged corporation or to a third party transacting
There is then no basis for the respondents' apprehension that the invalidation of the executive order with the former.
creating Balabagan would have the effect of unsettling many an act done in reliance upon the validity of
the creation of that municipality. The doctrine CAN be invoked on the following instances:
[G.R. No. L-2598 June 29, 1950 ] C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. 1. conduct showing a recognition of the ASSOCIATION as a corporation; or
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, 2. a conduct express or implied that it is a coporation
HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co.,
Inc., respondents The doctrine CANNOT be invoked on the following instances:

1. to one who has not dealt with the association, or in anyway recognized it as having a corporate of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall
existence, or vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be
2. in any way participated in holding it out as a corporation, or sued independently.
3. infavor of a person who is a member of the association and therefore must be presumed to
know that it is a corporation. The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here.
Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in
If a corporation by estoppel exists and enters into a contract or transacts business with a third party, the such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that
latter has three remedies: this was "a corporation duly organized and existing under the laws of the Philippines," and obviously misled
plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his
1. He may file a suit against the ostensible corporation to recover from the corporate properties; wilful misrepresentation that a corporation was duly organized and existing under the law, cannot
2. He may file the case directly against the associates personally who held out the association as thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos,
a corporation; and 56 O.G. 3069).
3. Against both the ostensible corporation and persons forming it, jointly and severally.
Even with regard to corporations duly organized and existing under the law, we have in many a case
As regards the liability of the associates of the alleged corporation, only those who actively participated in pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs. Garlitos, we
holding out the association as a corporation should be held personally liable. This is because of Sec 20 ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes
which provides that “All persons who assume to act as a corporation knowing it to be without such privileges and obligations and becomes personally liable for contracts entered into or for other acts
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred performed as such agent." Had Jose M. Aruego been named as party defendant instead of, or together
or arising as a result thereof” with, "University Publishing Co., Inc.," there would be no room for debate as to his personal liability. Since
he was not so named, the matters of "day in court" and "due process" have arisen.
Note: article 1897 of the civil code holds out an agent personally liable to the party with whom he contracts
in case when he exceeds the limits of his authority, without giving the other party sufficient notice of his The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal,
power. was the real party to the contract sued upon; that he was the one who reaped the benefits resulting from
it, so much so that partial payments of the consideration were made by him; that he violated its terms,
Note: the last two remedies cannot be availed of, if the third party by his conduct is estopped from denying
thereby precipitating the suit in question; and that in the litigation he was the real defendant. Perforce, in
the existence of the association as a corporation and as such, recovery should be limited only against the
line with the ends of justice, responsibility under the judgment falls on him.
corporate assets.
G.R. No. L-58028 April 18, 1989 CHIANG KAI SHEK SCHOOL, petitioner, vs. COURT OF APPEALS
NOTE: THE DOCTRINE OF ESTOPPEL ARISES ONLY WHEN THERE IS A TRANSACTION WITH A
and FAUSTINA FRANCO OH, respondents.
THIRD PERSON
Issue:
CASES:
1. Whether or not a school that has not been incorporated may be sued by reason alone of its long
[G.R. No. 125221 June 19, 1997] REYNALDO M. LOZANO, Petitioner, v. HON. ELIEZER R. DE LOS
continued existence and recognition by the government,
SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA, Respondents.
2. Whether or not a complaint filed against persons associated under a common name will justify a
DOCTRINE: Corporation by estoppel is founded on principles of equity and is designed to prevent injustice
judgment against the association itself and not its individual members.
and unfairness. It applies when persons assume to form a corporation and exercise corporate functions
and enter into business relations with third person. Where there is no third person involved and the conflict Held: We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules of
arises only among those assuming the form of a corporation, who therefore know that it has not been Court clearly provides that "only natural or juridical persons may be parties in a civil action." It is also not
registered, there is no corporation by estoppel. denied that the school has not been incorporated. However, this omission should not prejudice the private
respondent in the assertion of her claims against the school.
G.R. No. L-19118 January 30, 1965 MARIANO A. ALBERT, plaintiff-appellant, vs. UNIVERSITY
PUBLISHING CO., INC., defendant-appellee. As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which provided
as follows:
Issue: whether the writ of execution may be effected upon aruego as the supposed president of University,
the real party defendant. Unless exempted for special reasons by the Secretary of Public Instruction, any
private school or college recognized by the government shall be incorporated under the
Held: The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange
provisions of Act No. 1459 known as the Corporation Law, within 90 days after the date of
Commission has not been disputed. Defendant would only raise the point that "University Publishing Co.,
recognition, and shall file with the Secretary of Public Instruction a copy of its incorporation
Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that "University Publishing Co.,
papers and by-laws.
Inc." is an existing corporation with an independent juridical personality. Precisely, however, on account
Having been recognized by the government, it was under obligation to incorporate under the Corporation lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe
Law within 90 days from such recognition. It appears that it had not done so at the time the complaint was that such corporation was duly organized in accordance with law.
filed notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot now invoke
its own non-compliance with the law to immunize it from the private respondent's complaint. There can be no question that a corporation when registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
There should also be no question that having contracted with the private respondent every year cannot be held liable for the personal indebtedness of a stockholder even if he should be its
for thirty-two years and thus represented itself as possessed of juridical personality to do so, the president and conversely, a stockholder or member cannot be held personally liable for any
petitioner is now estopped from denying such personality to defeat her claim against it. According financial obligation by the corporation in excess of his unpaid subscription. But this rule is
to Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered understood to refer merely to registered corporations and cannot be made applicable to the liability of
conclusive upon the person making it and cannot be denied or disproved as against the person members of an unincorporated association. The reason behind this doctrine is obvious-since an
relying on it." organization which before the law is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15, under or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives
which the persons joined in an association without any juridical personality may be sued with such or agents do so without authority and at their own risk. And as it is an elementary principle of law that a
association. Besides, it has been shown that the individual members of the board of trustees are not liable, person who acts as an agent without authority or without a principal is himself regarded as the principal,
having been appointed only after the private respondent's dismissal. possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to
act on behalf of a corporation which has no valid existence assumes such privileges and
[G.R. No. 22106 September 11, 1924] ASIA BANKING CORPORATION, plaintiff-appellee, vs.
obligations and comes personally liable for contracts entered into or for other acts performed as
STANDARD PRODUCTS, CO., INC., defendant-appellant.
such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the
Issue: whether the parties here in are corporations with juridical personality Philippines, Fifth Ed., P. 689-690).
Held: Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers
Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as
There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In
a person who has contracted or otherwise dealt with an association in such a way as to recognize acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the
and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate consequential damages or resultant rights, if any, arising out of such transaction.
existence in any action leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing relied on as an FIRST DIVISION [G.R. No. 119002. October 19, 2000.] INTERNATIONAL EXPRESS TRAVEL & TOUR
estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese SERVICES, INC., Petitioner, v. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINES FOOTBALL
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.) FEDERATION, Respondents.
The defendant having recognized the corporate existence of the plaintiff by making a promissory note in Issue: whether the CA erred in holding that the petitioner had dealt with the PHILIPPINE FOOTBALL
its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate FEDERATION (PFF) as a corporate entity and in holding private respondent Henri Khan personally liable
existence. It is, of course, also estopped from denying its own corporate existence. Under these for the obligation of the un incorporated PFF.
circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of
Held: The powers and functions granted to national sports associations clearly indicate that these entities
either of the parties. It may be noted that there is no evidence showing circumstances taking the case out
may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts
of the rules stated.
which may only be done by persons, whether natural or artificial, with juridical capacity. However, while
[G.R. No. L-11442 May 23, 1958] MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON. we agree with the appellate court that national sports associations may be accorded corporate status,
LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch such does not automatically take place by the mere passage of these laws.
II, and SEGUNDINO REFUERZO, respondents.
It is a basic postulate that before a corporation may acquire juridical personality, the State must
Issue: whether refuerzo may can be made personally liable give its consent either in the form of a special law or a general enabling act. We cannot agree with
the view of the appellate court; and the private respondent that the Philippine Football Federation came
Held: While as a general rule a person who has contracted or dealt with an association in such a into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any
way as to recognize its existence as a corporate body is estopped from denying the same in an provision creating the Philippine Football Federation. These laws merely recognized the existence of
action arising out of such transaction or dealing, yet this doctrine may not be held to be applicable national sports associations and provided the manner by which these entities may acquire juridical
where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was personality.
unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant
Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract It is required that before an entity may be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine, Amateur Athletic Federation under R.A. 3135,
and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, ORGANIZATION AND COMMENCEMENT OF BUSINESS
Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri
Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and by- Corporate Organization
laws of the Philippine, Football Federation. Unfortunately, the same does not prove that said Federation
SEC. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation. – If a corporation
has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the
does not formally organize and commence its business within five (5) years from the date of its
Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation
incorporation, its certificate of incorporation shall be deemed revoked as of the day following the
is not a national sports association within the purview of the aforementioned laws and does not have
end of the five (5)-year period.
corporate existence of its own.
However, if a corporation has commenced its business but subsequently becomes inoperative for
This being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
a period of at least five (5) consecutive years, the Commission may, after due notice and hearing,
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation
place the corporation under delinquent status.
law that any person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract entered into or for A delinquent corporation shall have a period of two (2) years to resume operations and comply
other acts performed as such agent. As president of the Federation, Henri Kahn is presumed to have with all requirements that the Commission shall prescribe. Upon compliance by the corporation,
known about the corporate existence or non-existence of the Federation. We cannot subscribe to the the Commission shall issue an order lifting the delinquent status. Failure to comply with the
position taken by the appellate court that even assuming that the Federation was defectively incorporated, requirements and resume operations within the period given by the Commission shall cause the
the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt revocation of the corporation’s certificate of incorporation.
with the Federation in such a manner as to recognize and in effect admit its existence. The doctrine of
corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory
application of the doctrine applies to a third party only when he tries to escape liabilities on a agency prior to the suspension or revocation of the certificate of incorporation of companies under
contract from which he has benefited on the irrelevant ground of defective incorporation. In the their special regulatory jurisdiction.
case at bar, the petitioner is not trying to escape liability from the contract but rather is the one
claiming from the contract.. This provision shall not apply if the failure to organize, commence the transaction of its businesses
or the construction of its works, or to continuously operate is due to causes beyond the control of
[G.R. No. 109272 August 10, 1994] GEORG GROTJAHN GMBH & CO., petitioner, vs. HON. LUCIA the corporation as may be determined by the Securities and Exchange Commission.
VIOLAGO ISNANI, Presiding Judge, Regional Trial Court, Makati, Br. 59; ROMANA R.
LANCHINEBRE; and TEOFILO A. LANCHINEBRE, respondents. Formal Organization- refers to the process of structuring the corporation to enable it to effectively pursue
the purpose for which it was organized. (e.g. the election of officers, providing for the subscription and
Issue: whether the petitioner has the capacity to sue. payment of capital stock, the adoption of by-laws, and such other steps as are necessary to endow the
legal entity with the capacity to transact the legitimate business for which it was created.)
Held: There is no general rule or governing principle as to what constitutes "doing" or "engaging in" or
"transacting" business in the Philippines. Each case must be judged in the light of its peculiar Commencement of Bussiness/Transacion
circumstances. In the case at bench, petitioner does not engage in commercial dealings or activities in the
country because it is precluded from doing so by P.D. No. 218, under which it was established. Commencement of Bussiness/Transacion means that the corporation has actually functioned and
Nonetheless, it has been continuously, since 1983, acting as a supervision, communications and engaged in the business for which it was organized.
coordination center for its home office's affiliates in Singapore, and in the process has named its local
agent and has employed Philippine nationals like private respondent Romana Lanchinebre. From this Note: Failure of the corporation to organize within the prescribed period would result in its automatic
uninterrupted performance by petitioner of acts pursuant to its primary purposes and functions as a dissolution, unless its failure to do so as may be determined by the SEC, is due to causes beyond its
regional/area headquarters for its home office, it is clear that petitioner is doing business in the country. control, then its existence will not be affected. Substantial compliance is sufficient.
Moreover, private respondents are estopped from assailing the personality of petitioner. So we held in Subsequent in operation is merely a ground for suspension or revocation of corporate franchise.
Merrill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824, 837 (1992): Dissolution is not automatic.
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a contract with it. And
the "doctrine of estoppel to deny corporate existence applies to foreign as well as to CHAPTER V- THE CORPORATE CHARTER AND ITS AMENDMENTS
domestic corporations;" "one who has dealth with a corporation of foreign origin as a
corporate entity is estopped to deny its corporate existence and capacity." The principle THE CORPORATE CHARTER
"will be applied to prevent a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in cases where such Corporate charter – an instrument or authority from the sovereign power, bestowing rights and power.
person has received the benefits of the contract, . . . (Citations omitted.)

Note: it is interchangeable with the term “acts of Incorporation” where the corporation was formed under a "even in the case of a one-man corporation. The mere fact that one is president of a corporation does not
special act of the legislature and with the term “articles of incorporation” when the corporation was formed render the property which he owns or possesses the property of the corporation, since the president, as
under the general law. Note further that this is not entirely true because a charter is much broader than individual, and the corporation are separate similarities. Similarly, stockholders in a corporation engaged
the two terms. in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment
in the distribution of the land of the corporation upon surrender of their stock certificates were considered
The corporate charter is a three-fold contract: not to have such legal or equitable title or interest in the land, as would support a suit for title, especially
against parties other than the corporation.
1. Between the corporation and the state insofar as it concerns its primary franchise to be and act
as a corporation; It has not been claimed that the members have assigned or transferred whatever rights they may have on
2. Between the corporation and the stockholders or members insofar as it governs their respective the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a corporation,
rights and obligations; and like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its stockholders or
3. Between and among the stockholders or members themselves as far as their relationship with members for the purpose of recovering property which belongs to said stockholders or members in their
one another is concerned. personal capacities.
The charter as far as corporations created under the Corporation Code are concerned, consists of the It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right conferred'
articles of incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all by law upon a person. Evidently, there can be no wrong without a corresponding right, and no breach of
pertinent provisions of any statute governing them. duty by one person without a corresponding right belonging to some other person.
The charter of corporations created by special laws consists of the special law creating the same and any FIRST DIVISION [June 30, 1987 G.R. No. L-48627] FERMIN Z. CARAM, JR. and ROSA O. DE CARAM,
and all laws, rules and regulations affecting or applicable to them. petitioners vs. THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO,
respondents.
Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.
Issue: whter the petitioner themselves are also liable for such expenses and if so, wo what extent.
Two kinds of franchises:
Held: The petitioners were not involved in the initial stages of the organization of the airline, which were
1. Primary franchise – the right or privilege of being a corporation which the state confers upon
being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to
the applicant for this faculty.
speak. The petitioners were merely among the financiers whose interest was to be invited and who were
2. Secondary franchise – the powers and privileges vested in, and to be exercised by the
in fact persuaded, on the strength of the project study, to invest in the proposed airline.
corporate body as such.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did
THE CORPORATE ENTITY THEORY
not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof,
Sec 18 provides that a corporation comes into existence upon the issuance of its certificate f incorporation. responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone
Then and only then will the corporation be possessed with a personality separate and distinct from the be liable for its corporate acts as duly authorized by its officers and directors.
individual stockholders or members.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the
CASES: compensation claimed by the private respondent for the services performed by him in the organization of
the corporation. To repeat, the petitioners did not contract such services. It was only the results of such
SECOND DIVISION [G.R. No. L-31061 August 17, 1976] SULO NG BAYAN INC., plaintiff-appellant, services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed
vs. GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS & airline. The most that can be said is that they benefited from such services, but that surely is no
SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF BULACAN, justification to hold them personally liable therefor. Otherwise, all the other stockholders of the
defendants-appellees. corporation, including those who came in later, and regardless of the amount of their share
holdings, would be equally and personally liable also with the petitioners for the claims of the
Issue: whether the plaintiff may institute an action for recovery of property private respondent.
Held: It is a doctrine well-established and obtains both at law and in equity that a corporation is a WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged
distinct legal entity to be considered as separate and apart from the individual stockholders or decision, which is hereby modified accordingly. It is so ordered.
members who compose it, and is not affected by the personal rights, obligations and transactions
of its stockholders or members. The property of the corporation is its property and not that of the [G.R. No. 70789 October 19, 1992] RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
stockholders, as owners, although they have equities in it. Properties registered in the name of the TANTOCO, SR., and ROMEO S. VERGARA, petitioners, vs. THE INTERMEDIATE APPELLATE
corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation COURT and ILIGAN DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and ROBERTO G.
ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, BORROMEO, respondents.

Issue: whether individual petitioners could be held to answer for the damages and attorney’s fees. Held: It is basic that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as wen as from that of any other legal entity to which it may be
Held: Petitioners argue that Tantoco and Vergara should not have been adjudged to pay moral damages related. As a general rule, a corporation may not be made to answer for acts or liabilities of its
and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and Paper Mills, Inc. stockholders or those of the legal entities to which it may be connected and vice versa. However,
while Romeo S. Vergara was not privy to the contract of sale. On this score, We have to agree with the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive
petitioners' citation of authority to the effect that the President and Manager of a corporation who of justice; or for purposes that could not have been intended by the law that created it; or to defeat
entered into and signed a contract in his official capacity, cannot be made liable thereunder in his public convenience, justify wrong, protect fraud, or defend crime.; or to perpetuate fraud or
individual capacity in the absence of stipulation to that effect due to the personality of the confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego,
corporation being separate and distinct from the person composing it (Bangued Generale Belge vs. adjunct or business conduit for the sole benefit of the stockholders.
Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's supposed non-participation
in the contract of sale although he signed the letter dated September 30, 1968 is completely immaterial. We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6
The two exceptions contemplated by Article 1897 of the New Civil Code where agents are directly (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had
responsible are absent and wanting. sold it to a third person.
WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only petitioner Rustan In this case, petitioner Onstott was made liable because he was then the President of the corporation and
Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by respondent he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the
Court. corporation to defraud private respondent. He cannot, therefore, be made personally liable just because
he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another
THIRD DIVISION [Adm. Matter No. R-181-P July 31, 1987] ADELIO C. CRUZ, complainant, vs. corporation is not of itself sufficient ground for disregarding the separate corporate personality. In this
QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents. respect then, a modification of the Resolution under review is called for.
Issue: whether the charge against the respondent should be upheld for ttaching the personal property of SECOND DIVISION [G.R. No. L-49834 June 22, 1989] PAULINO SORIANO, NENITA C. ESPERANZA
the corporate president and JANDRO G. MACADANGDANG, petitioners, vs. HON. COURT OF APPEALS (Former Sixth
Division) and GERVACIO CU, respondents.
Held: We hold that respondent's actuation in enforcing a judgment against complainant who is not the
judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his duty Issue: whether the individual petitioner can be held liable for the money judgement rendered by the trial
in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of court
a decision ordained or decreed in the dispositive part should be the subject of execution. No more,
no less. That the title of the case specifically names complainant as one of the respondents is of Held: Contrary to the view espoused by the respondent Court of Appeals, the act of the petitioners
no moment as execution must conform to that directed in the dispositive portion and not in the indicating in the controversial receipt their official designations in the Bacarra (I.N.) FaCoMa, Inc.-is vital
title of the case. in the proper resolution of this case. We cannot accept the conclusion that the official designations of the
petitioners were written on the document merely as meaningless and hollow decorations or as mere
The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans description personae without any relevance to the liability of the corporation these officers obviously
Limousine Service, Inc. to reinstate the discharged employees and pay them full backwages. Respondent, represented. Indeed, taken in conjunction with the other obtaining circumstances, the receipt discloses the
however, chose to "pierce the veil of corporate entity" usurping a power belonging to the court and capacity by which the petitioners entered into the "deal" with the private respondent.
assumed improvidently that since the complainant is the owner/president of Qualitrans Limousine Service,
Inc., they are one and the same. It is a well-settled doctrine both in law and in equity that as a legal entity, The subject receipt itself states that the conditions contained therein were between the private respondent
a corporation has a personality distinct and separate from its individual stockholders or members. The and the "Association." The lower courts ruled that the "Association" referred only to the signatories. We
mere fact that one is president of a corporation does not render the property he owns or possesses the disagree. It is quite plain and we are convinced that the "Association is none other than the Bacarra (I.N.)
property of the corporation, since the president, as individual, and the corporation are separate entities.3 FaCoMa, Inc., which is a farmers' cooperative marketing association. Not only that, we cannot find any
cogent reason why the petitioners (and their co-defendants) used the word "Association" when they could
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the enforcement have more easily and conveniently placed "the undersigned" or words to the same effect in its stead.
of the writ of execution in NLRC Case-No. 8-12389-91, and a fine equivalent to three [3] months salary is
hereby imposed with a stern warning that the commission of the same or similar offense in the future will In the light of the foregoing, it is clear that the liability of the petitioners under the document subject of the
merit a heavier penalty. Let a copy of this Resolution be filed in the personal record of the respondent. instant case, is not personal but corporate, and therefore attached to the Bacarra (I.N.) FaCoMa, Inc.
which, being a corporation, has a personality distinct and separate from that of the petitioners who are
FIRST DIVISION [G.R. No. L-56076 September 21, 1983] PALAY, INC. and ALBERT ONSTOTT, only its officers. It is the general rule that the protective mantle of a corporation's separate and
petitioner, vs. JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING distinct personality could only be pierced and liability attached directly to its officers and/or
AUTHORITY and NAZARIO DUMPIT respondents. members-stockholders, when the same is used for fraudulent, unfair or illegal purpose.
Issue: whether the corporate president is liable to refund the amount stated in the NHA ruling

in the case at bar, there is no showing that the Association entered into the transaction with the private The piercing of the corporate veil is premised on the fact that the corporation concerned must have been
respondent for the purpose of defrauding the latter of his goods or the payment thereof. More importantly, properly served with summons or properly subjected to the jurisdiction of the court a quo. Corollary thereto,
there is no proof whatsoever that the majority of the directors used the distinct and separate personality of it cannot be subjected to a writ of execution meant for another in violation of its right to due process.
Bacarra (I.N.) FaCoMa, Inc. as a protective shield for any wrongdoing. Therefore, the general rule on
corporate liability, not the exception, should be applied in resolving this case. Consequently, the private There exists, however, an exception to this rule: if it is shown "by clear and convincing proof that the
respondent's cause of action lies against the Bacarra (I.N.) FaCoMa, Inc., and not against the petitioners. separate and distinct personality of the corporation was purposefully employed to evade a legitimate and
binding commitment and perpetuate a fraud or like wrongdoings."
WHEREFORE, the petition is GRANTED; the Decision dated April 4, 1978 of the Court of Appeals, and
its Resolution dated December 4, 1978 are REVERSED and SET ASIDE. The resistance of the Court to offend the right to due process of a corporation that is a nonparty in a main
case, may disintegrate not only when its director, officer, shareholder, trustee or member is a party to the
PIERCING THE VEIL OF CORPORATE FICTION main case, but when it finds facts which show that piercing of the corporate veil is merited. Thus, as the
Court has already ruled, a party whose corporation is vulnerable to piercing of its corporate veil cannot
Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or being argue violation of due process.
used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues,
or to circumvent the law or perpetuate deception, or an alter-ego, adjunct or business conduit for the sole This Court agrees with the CA that Santos used I/AME as a means to defeat judicial processes and to
benefit of a stockholder or a group of stockholders or another corporation. evade his obligation to Litton. Thus, even while I/AME was not impleaded in the main case and yet was
so named in a writ of execution to satisfy a court judgment against Santos, it is vulnerable to the piercing
Test in determining the applicability of the doctrine of piercing the veil of corporation fiction: of its corporate veil. We will further expound on this matter.
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but Piercing the Corporate Veil may Apply to Non-stock Corporations
of policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock corporations,
and not to non-stock, nonprofit corporations such as I/AME since there are no stockholders to hold liable
2.Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation in such a situation but instead only members. Hence, they do not have investments or shares of stock or
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal assets to answer for possible liabilities. Thus, no one in a non-stock corporation can be held liable in case
rights; and the corporate veil is disregarded or pierced.
3.The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained In determining the propriety of applicability of piercing the veil of corporate fiction, this Court, in a number
of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC) of cases, did not put in issue whether a corporation is a stock or non-stock corporation.
CASES: In the United States, from which we have adopted our law on corporations, non-profit corporations are not
immune from the doctrine of piercing the corporate veil. Their courts view piercing of the corporation as an
FIRST DIVISION [ G.R. No. 191525, December 13, 2017 ] INTERNATIONAL ACADEMY OF
equitable remedy, which justifies said courts to scrutinize any organization however organized and in
MANAGEMENT AND ECONOMICS (I/AME), PETITIONER, V. LITTON AND COMPANY, INC.,
whatever manner it operates. Moreover, control of ownership does not hinge on stock ownership.
RESPONDENT.
As held in Barineau v. Barineau: [t]he mere fact that the corporation involved is a nonprofit corporation
The issues boil down to the alleged denial of due process when the court pierced the corporate veil of
does not by itself preclude a court from applying the equitable remedy of piercing the corporate veil. The
I/AME and its property was made to answer for the liability of Santos.
equitable character of the remedy permits a court to look to the substance of the organization, and its
Held: decision is not controlled by the statutory framework under which the corporation was formed and
operated. While it may appear to be impossible for a person to exercise ownership control over a nonstock,
There was no violation of due process against I/AME not-for-profit corporation, a person can be held personally liable under the alter ego theory if the evidence
shows that the person controlling the corporation did in fact exercise control, even though there was no
In general, corporations, whether stock or non-stock, are treated as separate and distinct legal entities stock ownership. Given the foregoing, this Court sees no reason why a non-stock corporation such as
from the natural persons composing them. The privilege of being considered a distinct and separate entity I/AME, may not be scrutinized for purposes of piercing the corporate veil or fiction.
is confined to legitimate uses, and is subject to equitable limitations to prevent its being exercised for
fraudulent, unfair or illegal purposes. However, once equitable limitations are breached using the coverture Piercing the Corporate Veil may Apply to Natural Persons
of the corporate veil, courts may step in to pierce the same.
The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural person - in
When [the] corporate veil is pierced, the corporation and persons who are normally treated as distinct from this case, Santos - simply because as a human being, he has no corporate veil shrouding or covering his
the corporation are treated as one person, such that when the corporation is adjudged liable, these person.
persons, too, become liable as if they were the corporation.

a) When the Corporation is the Alter Ego of a Natural Person This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing was not
meant to encourage a creditor's failure to undertake such remedies that could have otherwise been
The piercing of the corporate veil may apply to corporations as well as natural persons involved with available, to the detriment of other creditors.
corporations. This Court has held that the "corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of another corporation.” Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead to disastrous
consequences for both stock and non-stock corporations. We are aware that ordinary judgment collection
This Court allowed the piercing of the corporate veil against another natural person, in Arcilla v. Court of procedures or other legal remedies are preferred over that which would risk damage to third parties (for
Appeals. We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was adjudged liable instance, innocent stockholders or voluntary creditors) with unprotected interests in the assets of the
to pay on a judgment against him; (2) he became President of a corporation; (3) he formed a corporation beleaguered corporation.
to conceal assets which were supposed to pay for the judgment against his favor; (4) the corporation which
has Santos as its President, is being asked by the court to pay on the judgment; and (5) he may not use Thus, this Court would recommend the application of the current 1997 Rules on Civil Procedure on
as a defense that he is no longer President of I/AME (although a visit to the website of the school shows Enforcement of Judgments. Under the current Rules of Court on Civil Procedure, when it comes to
he is the current President). satisfaction by levy, a judgment obligor is given the option to immediately choose which property or part
thereof may be levied upon to satisfy the judgment. If the judgment obligor does not exercise the option,
b) Reverse Piercing of the Corporate Veil personal properties, if any, shall be first levied and then on real properties if the personal properties are
deemed insufficient to answer for the judgment.
We borrow from American parlance what is called reverse piercing or reverse corporate piercing or piercing
the corporate veil "in reverse." In the instant case, it may be possible for this Court to recommend that Litton run after the other properties
of Santos that could satisfy the money judgment - first personal, then other real properties other than that
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership, "in a traditional veil-piercing
of the school. However, if we allow this, we frustrate the decades-old yet valid MeTC judgment which
action, a court disregards the existence of the corporate entity so a claimant can reach the assets of a
levied on the real property now titled under the name of the school. Moreover, this Court will unwittingly
corporate insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of a
condone the action of Santos in hiding all these years behind the corporate form to evade paying his
corporation to satisfy claims against a corporate insider."
obligation under the judgment in the court a quo. This we cannot countenance without being a party to the
"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and makes the injustice.
corporation liable for the debt of the shareholders."
Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of the Makati
It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse piercing real property where the school now stands is applied.
occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of
EN BANC [G.R. No. L-15121 August 31, 1962] GREGORIO PALACIO, in his own behalf and in behalf
a corporation owned or substantially controlled by the defendant. In contrast, in insider reverse piercing,
of his minor child, MARIO PALACIO, plaintiffs-appellants, vs. FELY TRANSPORTATION COMPANY,
the controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit
defendant-appellee.
available to the corporation, such as an interest in a lawsuit or protection of personal assets.
Issue: whether the corporation can be held liable for the subsidiary civil liability of Isabel Calingasan
Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, seeks the
Court's intervention to pierce the corporate veil of I/AME in order to make its Makati real property answer Held: The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely
for a judgment against Santos, who formerly owned and still substantially controls I/AME. Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's main
purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction
The Court has pierced the corporate veil in a reverse manner in the instances when the scheme was to
of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely
avoid corporate assets to be included in the estate of a decedent as in the Cease case and when the
Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We
corporation was used to escape a judgment to pay a debt as in the Arcilla case.
believe that this is one case where the defendant corporation should not be heard to say that it has
In a 1962 Philippine case, this Court also employed what we now call reverse-piercing of the corporate a personality separate and distinct from its members when to allow it to do so would be to sanction
veil. In Palacio v. Fely Transportation Co., we found that the president and general manager of the private the use of the fiction of corporate entity as a shield to further an end subversive of justice. (La
respondent company formed the corporation to evade his subsidiary civil liability resulting from the Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25,
conviction of his driver who ran over the child of the petitioner, causing injuries and medical expenses. 1953) Furthermore, the failure of the defendant corporation to prove that it has other property than
The Court agreed with the plaintiffs that the president and general manager, and Fely Transportation, may the jeep (AC-687) strengthens the conviction that its formation was for the purpose above
be regarded as one and the same person. Thus, even if the president and general manager was not a indicated.
party to the case, we reversed the lower court and declared both him and the private respondent company,
And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v.
jointly and severally liable to the plaintiffs. Thus, this Court allowed the outsider-plaintiffs to pierce the
Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation as to the
corporate veil of Fely Transportation to run after its corporate assets and pay the subsidiary civil liability of
real party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties
the company's president and general manager.

unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; were not actual dummies. This failure on their part to take the witness stand to deny or refute the charge
Quison v. Salud, 12 Phil. 109.) that they were mere dummies is to us of utmost significance. What could have been easier to disprove the
charge that they were dummies, than for them to come to court and show their receipts and testify on the
Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for payments they have paid on their subscriptions? This they, however refused to do so. They had it in their
P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not pay power to rebut the charges, but they chose to keep silent. The non-production of evidence that would
on account of insolvency. naturally have been produced by an honest and therefore fearless claimant permits the inference that its
tenor is unfavorable to the party's cause (II Wigmore, Sec. 285, p.162). A party's silence to adverse
EN BANC [G.R. No. L-5081 February 24, 1954] MARVEL BUILDING CORPORATION, ET AL.,
testimony is equivalent to an admission of its truth (Ibid, Sec. 289, p. 175).
plaintiffs-appellees, vs. SATURNINO DAVID, in his capacity as Collector, Bureau of Internal
Revenue, defendant-appellant. This circumstantial evidence is not only convincing; it is conclusive. The existence of endorsed
certificates, discovered by the internal revenue agents between 1948 and 1949 in the possession of the
Issue: Is Maria B. Castro the owner of all the shares of stock of the Marvel Building and the other
Secretary-Treasurer, the fact that twenty-five certificates were signed by the president of the corporation,
stockholders her mere dummies.
for no justifiable reason, the fact that two sets of certificates were issued, the undisputed fact that Maria
Held: The most important evidence presented by the Collector of Internal Revenue to prove his claim that B. Castro had made enormous profits and, therefore, had a motive to hide them to evade the payment of
Maria B. Castro is the sole and exclusive owner of the shares of stock of the Marvel Building Corporation taxes, the fact that the other subscribers had no incomes of sufficient magnitude to justify their big
is (1) the supposed endorsement in blank of the shares of stock issued in the name of the other subscriptions, the fact that the subscriptions were not receipted for and deposited by the treasurer in the
incorporators, and the possession thereof by Maria B. Castro. The existence of said endorsed name of the corporation but were kept by Maria B. Castro herself, the fact that the stockholders or the
certificates was testified to by witnesses Felipe Aquino, internal revenue examiner, Antonio Mariano, directors never appeared to have ever met to discuss the business of the corporation, the fact that Maria
examiner, and Crispin Llamado, Under Secretary of Finance, who declared as follows: Towards the end B. Castro advanced big sums of money to the corporation without any previous arrangement or accounting,
of the year 1948 and about the beginning of the year 1949, while Aquino and Mariano were examining the and the fact that the books of accounts were kept as if they belonged to Maria B. Castro alone — these
books and papers were furnished by its secretary, Maximo Cristobal, they came across an envelope facts are of patent and potent significance. What are their necessary implications? Maria B. Castro would
containing eleven stock certificates, bound together by an Acco fastener, which (certificates) corresponded not have asked them to endorse their stock certificates, or be keeping these in her possession, if they
in number and in amount on their face to the subscriptions of the stockholders that all the certificates, were really the owners. They never would have consented that Maria B. Castro keep the funds without
except that in the name of Maria B. Castro, were endorsed in the bank by the subscribers; that as the two receipts or accounting, nor that she manages the business without their knowledge or concurrence, were
revenue agents could not agree what to do with the certificates, Aquino brought them to Under-Secretary they owners of the stocks in their own rights. Each and every one of the facts all set forth above, in the
of Finance Llamado, who thereupon suggested that photostatic copies thereof be taken; that this was same manner, is inconsistent with the claim that the stockholders, other than Maria B. Castro, own their
done, and the photostatic copies taken are (Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13; and in that July, shares in their own right. On the other hand, each and every one of them, and all of them, can point to no
1950, copy-cat copies of the above photostats were taken, and said copy-cat copies are Exhibits 40-49. other conclusion than that Maria B. Castro was the sole and exclusive owner of the shares and that they
were only her dummies.
Next in importance among the evidence submitted by the defendant collector to prove his contention that
Maria B. Castro is the sole owner of the shares of stock of the Marvel Building Corporation, (2) is the fact In our opinion, the facts and circumstances duly set forth above, all of which have been proved to our
that the other stockholders did not have incomes in such amounts, during the time of the satisfaction, prove conclusively and beyond reasonable doubt (section 89, Rule 123 of the Rules of Court
organization of the corporation in 1947, or immediately thereto, as to enable them to pay in full for and section 42 of the Provisional law for the application of the Penal Code) that Maria B. Castro is the sole
their supposed subscriptions. This fact is proved by their income tax returns, or the absence thereof. and exclusive owner of all the shares of stock of the Marvel Building Corporation and that the other partners
Let us take Amado A. Yatco as an example. Before 1945 his returns were exempt from the tax, in 1945 are her dummies.
he had P12,600 and in 1946, P23,000. He has four children. How could he have paid P100,000 in 1945
EN BANC [G.R. No. L-13203 January 28, 1961] YUTIVO SONS HARDWARE COMPANY, petitioner,
and 1946? Santiago Tan who also contributed P100,000 had no appreciable income before 1946, and this
vs. COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.
year an income of only P9,167.95. Jose T. Lopez also did not file any income tax returns before 1940 and
1946 he had an income of only P20,785, whereas he is supposed to have subscribed P90,000 worth of Issue: whether Yutivo’s could be made liable to pay the judgement rendered by the CTA
stock early in 1947. Benita Lamagna had no returns either up to 1945, except in 1942, which was exempt
and in 1945 she had an income of P1,550 and in 1946, P6,463.36. In the same situation are all the others, Held: It is an elementary and fundamental principle of corporation law that a corporation is an entity
and besides, brothers and sisters and brother-in-law of Maria B. Castro. On the other hand, Maria B. separate and distinct from its stockholders and from other corporation petitions to which it may
Castro had been found to have made enormous gains or profits in her business such that the taxes thereon be connected. However, "when the notion of legal entity is used to defeat public convenience,
were assessed at around P3,000,000. There was, therefore, a prima facie case out by the defendant justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association
collector that Maria B. Castro had furnished (& all the money that the Marvel Building Corporation had. of persons, or in the case of two corporations merge them into one. Another rule is that, when the
corporation is the "mere alter ego or business conduit of a person, it may be disregarded."
Lastly, it is significant that the plaintiffs, (3) the supposed subscribers, who should have come to court
to assert that they actually paid for their subscriptions, and are not mere dummies, did not do so. After going over the voluminous record of the present case, we are inclined to rule that the Court of
They could not have afforded such a costly indifference, valued at from P70,000 to P100,000 each, if they Tax Appeals was NOT justified in finding that SM was organized for no other purpose than to

defraud the Government of its lawful revenues. In the first place, this corporation was organized in directed towards common ends. Likewise, cash or funds of SM, including those of its branches which are
June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to
a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence
resold them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for became dependent upon the latter.
sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued Apart from the accounting system, other facts corroborate or independently show that SM is a branch or
its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as department of Yutivo. (5) Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo
a tax evasion device runs counter to the fact that there was no tax to evade. — Manila as their "Head Office" or "Home Office" as shown by their letters of remittances or other
correspondences. These correspondences were actually received by Yutivo and the reference to
We are, however, inclined to agree with the court below that SM was actually owned and controlled Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's
by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or
selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. stationery of Yutivo.
It is not disputed that (1) the petitioner, which is engaged principally in hardware supplies and
equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre
corporation are closely related to each other either by blood or affinity, and most of its conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and
stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and
organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged
2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges
Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM,
are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip it plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense
are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. that the latter is a mere adjunct, branch or department of the former.
(2) According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the
paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The credit to the latter not only in the form of starting capital but also in the form of credits extended for the
additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the
itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply latter when the capital had been exhausted=
charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the
Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly
shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers
disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of
were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing
Yutivo.
that the former initiated the subscription.
EN BANC [G.R. No. L-17618 August 31, 1964] COMMISSIONER OF INTERNAL REVENUE, petitioner,
The issued capital stock of SM was increased by additional subscriptions made by various person's but
vs. NORTON and HARRISON COMPANY, respondent.
except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging
the accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually Issue: Whether the two corporations may be merged into a single corporation?
transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere
unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would Held: It has been settled that the ownership of all the stocks of a corporation by another corporation does
necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party not necessarily breed an identity of corporate interest between the two companies and be considered as
which really undertook to pay or underwrite payment thereof. a sufficient ground for disregarding the distinct personalities. However, in the case at bar, we find sufficient
grounds to support the theory that the separate identities of the two companies should be disregarded.
(3) The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of
Yutivo, so even conceding that the original subscribers were stockholders bona fide Yutivo was Among these circumstances, which we find not successfully refuted by appellee Norton are: (a) Norton
at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary and Harrison owned all the outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on
of the former. March 31, 1958, 14,993 shares belonged to Norton and Harrison and one each to seven others; (b) Norton
constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the
(4) SM is under the management and control of Yutivo by virtue of a management contract entered other's affairs by making the same officers of the board for both companies. (c) Norton financed the
into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also operations of the Jackbilt, and this is shown by the fact that the loans obtained were used in the expansion
the controlling majority of the Board of Directors of SM. At the same time the principal officers of both program of Jackbilt, to pay advances for the purchase of equipment, materials rations and salaries of
corporations are identical. In addition both corporations have a common comptroller in the person of employees of Jackbilt and other sundry expenses. (d) Norton treats Jackbilt employees as its own.
Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by Furthermore service rendered in any one of the two companies were taken into account for purposes of
virtue of such control, the business, financial and management policies of both corporations could be promotion; (e) Compensation given to board members of Jackbilt, indicate that Jackbilt is merely a

department of Norton. The offices of Norton and Jackbilt are located in the same compound. Payments point beyond it reason and policy, and when invoked in support of an end subversive of this policy
were effected by Norton of accounts for Jackbilt and vice versa. Payments were also made to Norton of it should be disregarded by the courts.
accounts due or payable to Jackbilt and vice versa.
Emilio and Rodlfo Cano were indicted in the case, not in their personal capacity, but as president and
The circumstances presented by the facts of the case, yields to the conclusion that the Jackbilt is merely manager of the corporation. Having been sued officialy, their connection with the case must be deemed
an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of corporate entities, to be impressed with the representation of the corporation. In fact, the court’s order is for them to reinstate
separate and distinct from each, should be disregarded. This is a case where the doctrine of piercing the Honorata Cruz to her former position in the corporation and incidentally pay her the wages she had been
veil of corporate fiction, should be made to apply. deprived of during her separation. Verily, the order against them is in effect against the corporation. No
benefit can be attained if this case were to be remanded to the court a quo merely in response to a technical
WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making substitution of parties.
the appellee Norton & Harrison liable for the deficiency sales taxes assessed against it by the appellant
Commissioner of Internal Revenue, plus 25% surcharge thereon. FIRST DIVISION [G.R. No. L-28694 May 13, 1981] TELEPHONE ENGINEERING & SERVICE
COMPANY, INC., petitioner, vs. WORKMEN'S COMPENSATION COMMISSION, PROVINCIAL
EN BANC [G.R. No. L-5677 May 25, 1953] LA CAMPANA FACTORY, INC., and TAN TONG doing SHERIFF OF RIZAL and LEONILA SANTOS GATUS, for herself and in behalf of her minor children,
business under the trial name "LA CAMPANA GAUGAU PACKING", petitioners, vs. KAISAHAN NG Teresita, Antonina and Reynaldo, all surnamed GATUS, respondents.
MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE COURT OF INDUSTRIAL RELATIONS,
respondents. Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V. Roxas for petitioners. ISSUE: Whether the WCC may render award against TESCO
Issue: Whether the corporate entity of La Campana Coffee Factory, Inc. may be disregarded? HELD: We note that it is only in this Petition that petitioner denied, for the first time, the employer-employee
relationship. In fact, in the letters it submitted to the Acting Referee and to the Commission, petitioner
Held: La Campana Guagua Packing and La Campana Coffee Factory, Inc. are operating under on single represented and defended itself as the employer of the deceased. Petitioner even admitted that TESCO
management, that is, as one business though with two trade names. True, the coffee factory is a and UMACOR are sister companies operating under one single management and housed in the same
corporation and, by legal fiction, an entity existing separate and apart from the person composing building. Although respect for the corporate personality as such, is the general rule, there are
it, that Tan Tong and his family. But it is settled that this fiction of law, which has been introduced exceptions. In appropriate cases, the veil of corporate fiction may be pierced as when the same is
as a matter of convenience and to subserve the ends of justice cannot be invoked as to further and made as a shield to confuse the legitimate issues.
end subversive of that purpose.
While indeed, jurisdiction cannot be conferred by acts or omission of the parties. TESCO’s denial at this
In the present case, Tan Tong appears to be the owner of the guagua factory. And the factory, though an stage that it is the employer of the deceased is obviously an afterthought, a devise to defeat the law and
incorporated business, is in reality owned exclusively by Tan Tong and his family. As found by the CIR, evade its obligations. This denial also constitutes a change of theory on appeal which is not allowed in this
one payroll, except after July 17, the day the case was certified to the CIR, when the person who was jurisdiction.
discharging the office of cashier for both branches of the business began preparing separate payrolls for
the two. And above all, it should not be overlooked that, as also found by the industrial court, the laborers WHEREFORE, this Petition is hereby dismissed.
of the guagua factory and the coffee factory were interchangeable. In view of all these, the attempt to make
the two factories appear as two separate businesses, when in reality they are but one, is but a device to FIRST DIVISION G.R. No. L-30822 July 31, 1975 EDUARDO CLAPAROLS, ROMULO AGSAM and/or
defeat the ends of the law and should not be permitted to prevail. CLAPAROLS STEEL AND NAIL PLANT, petitioners, vs. COURT OF INDUSTRIAL RELATIONS,
ALLIED WORKERS' ASSOCIATION and/or DEMETRIO GARLITOS, ALFREDO ONGSUCO, JORGE
In view of the foregoing, the petition is denied, with costs against the petitioner. SEMILLANO, SALVADOR DOROTEO, ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER
AMANCIO, MAXIMO QUIOYO, GAUDENCIO QUIOYO, and IGNACIO QUIOYO, respondents.
EN BANC [G.R. No. L-20502 February 26, 1965] EMILIO CANO ENTERPRISES, INC., petitioner, vs.
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents. ISSUE: Whether the veil of corporate fiction should be pierced?
Issue: can the judgement against Emilio and Rodolfo Cano in their capacity as officials of the corporation HELD: It is very clear that the latter corporation was a continuation and successor of the first entity, and
be made effective against the latter which is not a party to the case? its emergence was skilfully timed to avoid financial liability that already attached to its predecessor,
Clarapols Steel and Nail Plant. (1) Both predecessor and successor were owned and controlled by the
Held: the answer is in the affirmative. We should not lose sight of the fact that Emilio Cano Enterprises, petitioner Eduardo Clarapols; and (2) there was no break in the succession and continuity in the same
Inc. is a closed family corporation where the incorporators and directors belong to one single family. Here business. This avoiding-the-liability scheme is very patent, considering that (3) 90% of the subscribed
is an instance where the corporation and its members are considered as one. And to hold such shares of stock of the second corporation was owned by Clarapols himself, and (4) all assets of the
entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning dissolved Clarapols Steel and Nail Plant were turned over to the emerging Clarapols Steel Corporation.
to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further
an end subversive of justice. And so it has been held that while a corporation is a legal entity
existing separate and apart from the person composing it, that concept cannot be extended to a

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil AC Ransom, and which is still in existence. Both corporations were closed corporations owned and
in the present case could, and should be pierced as it was deliberately and maliciously designed to evade managed by members of the same family. Its organization proved to be a convenient instrument to avoid
its financial obligations to its employees. payment of backwages and the reinstatement of 22 workers. This is another instance where the fiction of
separate and distinct corporate entities should be disregarded.
SECOND DIVISION [G.R. No. L-68661 July 22, 1986] NATIONAL FEDERATION OF LABOR UNION
(NAFLU) AND TERESITA LORENZO, ET AL., petitioners, vs. HON. MINISTER BLAS OPLE, as FIRST DIVISION [G.R. No. 108734. May 29, 1996.] CONCEPT BUILDERS, INC., Petitioner, v. THE
Minister of Labor and Employment; LAWMAN INDUSTRIAL/LIBRA GARMENTS/DOLPHIN NATIONAL LABOR RELATIONS, COMMISSION.
ENTERPRISES, respondents.
ISSUE: Whether the NLRC gravely abused its discretion in issuing the break-open order
ISSUE: Whether the corporate fiction of LIBRA (now DOLPHIN) garments should be pierced?
HELD: The conditions under which the juridical entity may be disregarded vary according to the particular
HELD: It is very obvious from the above findings that the second corporation seeks the protective shield facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly
of a corporate fiction to achieve illegal purpose. As enunciated in Clarapols vs. CIR, its view in the present there are some probative factors of identity that will justify the application of the doctrine of piercing the
case should, therefore be pierced as it was deliberately and maliciously designed to evade its financial veil of corporate veil, to wit:
obligations to it employees. It is an established principle that when the veil of corporate fictions is made as
a shield to perpetrate a fraud or to confuse legitimate issues (here, the relation of employer-employee), 1. Stock ownership by one or common ownership of both corporations;
the same should be pierced.
2. Identity of directors and officers;
After finding that Lawman Industrial Corporation had transferred business operations to Libra Garments,
3. The manner of keeping corporate books and records;
which later changed to Dolphin Garments, the public respondent cannot deny reinstatement to the
petitioners simply because Lawman has ceased its operation. 4. Methods of conducting the business.
As Libra Garments is but an alter-ego of the old employer, Lawman Industrial, the former must bear the The SEC en banc explained the “instrumentality rule” which the courts have applied in disregarding
consequences of the latter’s unfair act by reinstating petitioners to their former positions without loss of separate juridical personality of corporations as follows:
seniority rights.
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
FIRST DIVISION [G.R. No. L-69494 May 29, 1987] A.C. RANSOM LABOR UNION-CCLU, petitioner, mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may
vs. NATIONAL LABOR RELATIONS COMMISSION, First Division A.C. RANSOM (PHIIS.) be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but
CORPORATION RUBEN HERNANDEZ, MAXIMO C. HERNANDEZ, SR., PORFIRIO R. VALENCIA, such domination of finances, policies, and practices that the controlled corporation has, so to speak, no
LAURA H. CORNEJO, FRANCISCO HERNANDEZ, CELESTINO C. HERNANDEZ and MA. ROSARIO separate mind, will or existence of its own and is a business conduit of its principal. It must be kept in mind
HERNANDEZ, respondents. that the control must be shown to have been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the
ISSUE: Whether the NLRC is correct is relieving the offices of AC RANSOM of any liability
complaint is made.
HELD: The NLRC, on appeal, could not have modified the CIR decision as affirmed by this Court, by
The test in determining the applicability of piercing the veil of corporate fictions is as follows:
relieving AC Ransom’s officers and agent of liability which we are held to be jointly and severally liable to
the 22 employees for unfair labor practice. 1. Control, not mere majority or complete stock control, but complete domination, not only in finances but
of policy and business practice in respect to the transaction attacked so that the corporate entity as to this
This finding does not ignore the legal fiction that a corporation has a personality separate and
transaction had at the time no separate mind, will or existence of its own;
distinct from its stockholders and members for, as this Court had held “―where the incorporators
belong to a single family, the corporation and its members can be considered as one in order to 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
avoid it being used as an instrument to commit injustice,” or to further an end subversive of violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff’s
justice. In the case of Clarapols vs. CIR involving almost similar facts as in this case, it was also held that legal rights; and
the shield of corporate fiction should be pierced when it is deliberately and maliciously designed to evade
financial obligations to employees. 3. The aforesaid control and breach of duty must proximately cause the injury or unjust lost complained
of.
Aggravating AC Ransom’s clear evasion of payment of it financial obligations is the organization of a ―run-
away‖ corporation, ROSARIO Industrial Corpoartion, in 1969 at the time the unfair labor practice case was The absence of one of the elements prevents piercing the corporate veil. In applying the ”instrumentality”
proceeding before the CIR by the same person who were the officers and stockholders of AC Ransom, or “alter-ego” doctrine, the courts are concerned with reality and not form, with how the corporation
engaged in the same line of business, producing the same line of product, occupying the same compound, operated and the individual defendant’s relationship to that operation. Thus, the question of whether a
using the same machineries, buildings, factories, bodega and sales and accounts departments used by

corporation is mere alter-ego, a mere sheet of paper corporation, a sham or a subterfuge is purely one of ISSUE: whether the order of the respondent judge should be upheld
fact.
HELD: It is true that a corporation, upon coming into being, is invested by law with a personality
In this case, while petitioner claimed that it ceased on operations on April 29, 1986, it filed an information separate and distinct from that of the persons composing it as well as from any other legal entity
sheet with the SEC on May 15, 1987 stating that its office address is at 355 Maysan Road, Valenzuela to which it may be related. As a matter of fact, the doctrine that a corporation is a legal entity distinct and
Metro Manila. On the other hand, third-party claimant Hydro, on the same day, filed an information sheet separate from the members and stockholders who compose it is recognized and respected in all cases
with the same address, both information sheets filed by the same Virgilio O. Casino. Both companies have which are within reason and the law. However, this separate and distinct personality is merely a
the same president, the same BOD, the same corporate officers and substantially the same subscribers. fiction created by law for convenience and to promote justice. Accordingly, this separate
personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where
back wages and to bar their reinstatement to their former position. Hydro is obviously a business conduit necessary to achieve equity or when necessary for the protection of creditors. Corporations are
of petitioner corporation and its emergence was skilfully orchestrated to avoid the financial liability attached composed of natural persons and the legal fiction of a separate corporate personality is not a shield for
to petitioner corporation. the commission of injustice and inequity. Likewise, this is true when the corporation is merely an adjunct,
business conduit or alter-ego of another corporation. In such case, the fiction of separate and distinct
EN BANC [G.R. No. L-10510 March 17, 1961] M. MC CONNEL, W. P. COCHRANE, RICARDO
corporate entities should be disregarded.
RODRIGUEZ, ET AL., petitioners, vs. THE COURT OF APPEALS and DOMINGA DE LOS REYES,
assisted by her husband, SABINO PADILLA, respondents. In the instant case, petitioner’s evidence established that PADCO never engaged in the printing business;
that the BOD and the officers of PADCO and Graphic are the same; and that PADCO holds 50% share of
ISSUE: Whether the individual incorporators may be held liable for obligations contracted by the
stock of Graphic. The printing machine in question was in the premises of Graphic, long before PADCO
corporation
even acquired its alleged title from Capitol Publishing.
HELD: The Court has already answered the question in the affirmative wherever the circumstances
Considering the above, respondent judge should have pierced PADCO’s veil of corporate identity.
have shown that the corporate entity is being used as an alter-ego or business conduit for the sole
benefit of the stockholders, or else to defeat public convenience, justify wrong, protect fraud, or FIRST DIVISION [G.R. No. L-33172 October 18, 1979] ERNESTO CEASE et. al. and the F.L. CEASE
defend crime. PLANTATION CO., INC. as Trustee of properties of the defunct TIAONG MILLING & PLANTATION
CO., petitioners, vs. HONORABLE COURT OF APPEALS, (Special Seventh Division), HON.
The evidence shows that Cirilio Paredes and Ursula Tolentino (present stockholders) and M. McConnel,
MANOLO L. MADDELA, Presiding Judge, Court of First Instance of Quezon, BENJAMIN CEASE
WP Cochrane and Ricardo Rodriguez (previous stockholders) completely dominated and controlled the
and FLORENCE CEASE, respondents.
corporation and that the functions of the corporation were solely for their benefit, as shown that the other
shareholders were merely qualifying shares. This is strengthened by the fact that the office of Cirilio ISSUE: Whether the assets of the corporation are also the properties of Forrest L. Cease?
Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor, and in the
same room. This is further shown by the fact that the funds of the corporation were kept by Cirilio Paredes HELD: In sustaining respondent’s theory of “merger of Forrest Cease and the Tiaong Milling as one
in his own name. The corporation itself had no visible assets, as correctly found by the trial court, except personality”, or that “the company is only the business conduit and alter-ego of the deceased FL Cease
perhaps the toll house, the wire fence around the lot and the signs thereon It was for this reason that the and the registered properties of Tiaong Milling are actually properties of FL Cease and should be divided
judgment against it could not be fully satisfied. equally among his children”, the trial court did aptly apply the familiar exception to the general rule
by disregarding the legal fiction of distinct and separate corporate personality and regarding the
While the mere ownership of all or nearly all of the capital stock of a corporation does not corporation and the individual members one and the same. In shredding the fictitious corporate
necessarily mean that it is a mere business conduit of the stockholder, that conclusion is amply veil, the trial judge narrated the undisputed factual premise:
unjustified where it is shown, as in this case before us, that the operations of the corporation were
so merged with the stockholders as to be practically indistinguishable from them. To hold the latter “While the records show that originally, the incorporators were aliens, friends or third-parties in relation of
liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but merely one to another, in the course of its existence, it developed into a close family corporation. The Board of
to apply the established principle that such entity cannot be invoked or used for purposes that Directors and stockholders belong to one family the head of which FL Cease always retained the majority
could not have been intended by the law that created the separate personality. and hence, the control and management of its affairs. In fact, during the reconstruction of its records before
the SEC, only 9 nominal shares out of 300 appear in the name of his 3 eldest children then and another
Finding no error in the judgment appealed from, the same is hereby affirmed, with costs against petitioners- person close to them (Ternate). It is likewise noteworthy to observe that as his children increase or perhaps
appellants Cirilo Paredes and Ursula Tolentino. become of age, he continued distributing his shares among them adding Florence, Teresa and Marion
until at the time of his death, only 190 were left to his name. Definitely, only the members of his family
SECOND DIVISION [G.R. No. L-41337 June 30, 1988] TAN BOON BEE & CO., INC., petitioner, vs.
benefited from the corporation.”
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the Court of
First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG The accounts of the corporation and therefore its operation, as well as that of the family appears to be
COMPANY, respondents. indistinguishable and apparently joined together. As admitted by the defendants, the corporation never

had any account with any banking institution or if any account was carried in a bank on its behalf, it was HELD: Under the law, a corporation is bestowed juridical personality, separate and distinct from its
in the name of FL Cease. In brief, the operation of the Corporation is merged with those of the majority stockholders. But when the juridical personality of the corporation is used to defeat public convenience,
stockholders, the latter using the former as his instrumentality and for the exclusive benefit of all his family. justify wrong, protect fraud or defend crime, the corporation shall be considered as a mere association of
From the foregoing indication, therefore, there is truth in plaintiffs’ allegation that the corporation is only a persons, and its responsible officers and/or stockholders shall be held individually liable. For the same
business conduit of his father and an extension of his personality, they are once and the same thing. Thus, reasons, a corporation shall be liable for the obligation of a stockholder or a corporation and its successor-
the assets of the corporation are also the estate of FL Cease, the father of the parties herein who are al in-interest shall be considered as one and the liability of the former shall attach to the latter.
legitimate children of full blood‖
But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must
Were we to sustain petitioners, the legal fiction of separate corporate personality shall have been used to be clearly and convincingly established. It cannot be presumed. In this regard, we find the NLRC
delay and ultimately deprive and defraud the respondents of their successional right to the estate of their decision wanting.
deceased father.
1. the claim that PHILSA allowed its license to expire so as to evade payment of private respondent’s claim
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED – not supported by facts. The license expired in 1985, it was delisted in 1986, there was no judgment yet
in favour of PR. An intent to evade payment of his claims cannot therefore be implied from the expiration
Piercing the veil of corporate fiction is resorted to only upon the showing of following circumstances, absent of PHILSA‘s license and its delisting.
any of the following circumstances, the courts will not be justified in disregarding the corporate entity:
2. Organization of PHILSA International Placemen and Services Corp. and its registration with POEA
1. That the corporation is used or being used to: (a) defeat public convenience; (b) Justify wrong; implies fraud – it was organized and registered in 1981, several years before private respondent filed his
(c) Protect fraud; (d) Defend crime; (e) Confuse legitimate issues; (f) Circumvent the law; g. complaint with the POEA in 1985. The creation of the second corporation could not therefore have been
Perpetuate deception; or (h) An alter-ego, adjunct or business conduit for the sole benefit of a in anticipation of PR‘s money claims and the consequent adverse judgment against PHILSA.
stockholder or a group of stockholders or another corporation.
2. The wrong doing must be clearly and convincingly established. It cannot be justified by 3. Substantial identity of the incorporators of the two corporations – does not necessarily imply fraud.
speculation and can never be presumed.
3. That the plaintiff sought to hold the officers and stockholders directly liable for a corporate debt *Distinguished from other cases*
or obligation.
LA CAMPANA – the two companies were substantially owned by the same person. They had one office,
CASES: one management, and a single payroll for both businesses. The laborers were also interchangeable.
CRUZ VS. DALISAY (supra) CLARAPOLS – Both corporations were substantially owned and controlled by the same person and there
was no break or cessation in operations. Moreover, all the assets of the old was transferred to the new
DOCTRINE: It is well-settled doctrine, both in law and in equity that as a legal entity, a corporation has a corporation.
personality distinct and separate from its individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns or possesses the property of the AC RANSOM – The distinguishing mark of fraud were clearly apparent in AC Ransom, when such
corporation, since the president, as individual, and the corporation are separate entities corporation ceased operation after the decision of the CIR and new one replacing it which was owned by
the same family, engaging in the same business and operating in the same compound. In the present
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405; April 18, 1989) case, not only has there been failure to establish fraud, but it has also not been shown that petitioner is
the corporation officer responsible for PR‘s predicament. It must be emphasized that the claims were
ISSUE: Whether petitioner Remo, Jr. could be jointly and severally liable actually directed against the employer, PHILSA became liable only because of its undertaking to be jointly
and severally bound with the foreign employer, as required by POEA rules.
HELD: The facts of the case show that there is no cogent basis to pierce the corporate veil of Akron and
hold petitioner personally liable for its obligation to private respondent. While it is true that he is a member INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA 697; Feb. 3, 1992)
of the board at the time the resolution to purchase the trucks were adopted, it does not appear that said
resolution was intended to defraud anyone. It was Coprada who negotiated with respondent and the ISSUE: Whether the veil of corporate entity should be pierced
one who signed the promissory note. The word ―We‖ in the said promissory note must refer to the
corporation and Coprada and not of its stockholders and directors. Petitioner did not sign such note so he HELD: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the
cannot be personally bound thereby. Thus, if there was any fraud or misrepresentation that was foisted on legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members
private respondent in that there was forthcoming loan from the DBP when in fact there as none, it is or stockholders may be disregarded. In such cases, the corporation will be considered as a mere
Coprada who should account for the same and not the petitioner. association of persons. The members or stockholders of a corporation will be considered as the
corporation, that is, liability will attach directly to the officers and stockholders.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990)
In the case at bar, petitioner alleges that the creation of the ACRYLIC is a devise to evade the application
ISSUE: Whether the writ of execution as against the properties of the corporation must be upheld of the CBA between petitioner and TEXTILE MILL. While we do not discount the possibility of the
similarities of the businesses of the two corporations, neither are we inclined to apply the doctrine invoked a. Control, not mere majority of complete control, but complete domination, not only of finances, but of
by petitioner. policy and business practices in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
1. The fact that the business of Indophil Textile Mills and Indphil Acrylic Manufacturing are related; 2. That
some of the employees of Private Respondent are the same persons manning and providing for auxilliary b. Such control must have been used by the defendant to commit fraud, or wrong to perpetuate the
services to the units of ACRILYC, and that; 3. The physical plants, offices and facilities are situated in the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention to plaintiff‘s
same compound. legal rights; and
It is our considered opinion that these facts are not sufficient to justify piercing the corporate veil c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of ACRILYC. of.
In the case of UMALI VS. CA we already emphasized that “the legal corporate entity is disregarded The absence of any one of these elements prevents ―piercing the corporate veil‖. In applying the
only if it is sought to hold the officers and stockholders directly liable for a corporate debt or “instrumentality” or “alter-ego” doctrine, the courts are concerned with reality and not form, with how the
obligation.” In the instant case, petitioner does not seek to impose a claim against the members of corporation operated and the individual defendant‘s relationship to the operation. (Concept Builders, Inc
ACRILYC. vs. NLRC)
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001) Aside from the fact that IFL is a wholly owned subsidiary, there is no showing of the indicative factors
that the it is a mere instrumentality of PNB. Neither is there a demonstration that any of the evils
ISSUE: Whether the corporate entity of IFL may be disregarded? sought to be prevented by the doctrine of piercing the corporate veil based on the alter-ego or
instrumentality doctrine finds application in the case at bar.
HELD: Respondents, therefore do not have any cause of action against it. The trial court erred in
disregarding the corporate entity by saying that IFL is a wholly owned subsidiary of PNB and that it is a The injunction suit was directed against PNB, as agent of IFL and not as parent. A suit against an agent,
mere alter-ego or business conduit of the latter. cannot, without compelling reasons be considered a suit against the principal, for he is not the real party
in interest provided under the Rules of Court.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a FIRST DIVISION [G.R. No. 199687, March 24, 2014] PACIFIC REHOUSE CORPORATION, Petitioner,
subsidiary‘s separate existence may be respected, and the liability of the parent corporation as v. COURT OF APPEALS
well as the subsidiary will be confined to those arising in their respective businesses.
DOCTRINE: “control, by itself, does not mean that the controlled corporation is a mere instrumentality or
In the case of KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence of the parent a business conduit of the mother company. Even control over the financial and operational concerns of a
and subsidiary on the ground that the latter was formed merely for the purpose of evading the payment of subsidiary company does not by itself call for disregarding its corporate fiction. There must be a
higher taxes. In the case at bar, respondents failed to show any cogent reason why the separate perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the
entities of PNB and IFL should be disregarded. control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in
this case.”
While there exists no definite test of general application in determining when a subsidiary may be treated
as a mere instrumentality of the parent corporation some factors have been identified that will justify Furthermore, ownership by Export Bank of a great majority or all of stocks of E–Securities and the
the application of the treatment of the doctrine of piercing the corporate veil: existence of interlocking directorates may serve as badges of control, but ownership of another
corporation, per se, without proof of actuality of the other conditions are insufficient to establish an alter
1. As a general rule, the stock ownership alone by one corporation of the stock of another does not thereby
ego relationship or connection between the two corporations, which will justify the setting aside of the
render the dominant corporation liable for the torts of the subsidiary unless the separate corporate
cover of corporate fiction. The Court has declared that “mere ownership by a single stockholder or by
existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is by an
another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground
instrumentality or adjunct of the dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC);
for disregarding the separate corporate personality.” The Court has likewise ruled that the “existence of
2. The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of
the separate corporate personality of a corporation is abused or used for wrongful purpose. The doctrine corporate fiction in the absence of fraud or other public policy considerations.”
applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE ESTOCE AND RODRIGO
defend crime, or when it is used as a shield to confuse legitimate issues or where the corporation is so
SANTOS (245 SCRA 134)
organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation; ISSUE1: Whether the order of execution is void
3. The test in determining the doctrine of piercing the veil of corporation fiction:

HELD: The decision dated May 24, 1989, was already final and executory and cannot be amended or There being not the least indication that the second corporation is a dummy or serves as a client of the
corrected except for clerical errors or mistakes. An examination of the said decision does not in any manner first corporation, the fiction of separate and distinct corporate entities cannot be disregarder and brushed
obligate Tanduay or even petitioners Yu and Young to reinstate Private Respondents. Only TDI was held aside. (Yu vs. NLRC)
liable upto the time of change of ownership. The order of execution in effect amended the decision. It is
beyond the power and competence of Labor Arbiter Cueto to amend a final decision. The writ of execution
must not go beyond the scope of judgment.
AMENDMENT OF THE CORPORATE CHARTER
ISSUE2: Whether the NLRC committed grave abuse of discretion in holding petitioner Yu and Young liable
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has
HELD: It cannot be said that TDI and Tanduay are one and the same, as seems to be the impression of the power and capacity: X X X (d) To amend its articles of incorporation in accordance with the
respondents when they impleaded petitioners as party-respondents in their complaint. provisions of this Code;
Such a stance is not supported by the facts. The name of the company for whom the petitioners are In relation to:
working is Twin Ace Holdings Corporation. As stated by the Solicitor Genenear, Twin Ace is part of the
SEC. 15. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or
Allied Banking Group although it conducts the rum business under the name of Tanduay Distillers. The
by special law, and for legitimate purposes, any provision or matter stated in the articles of
use of a similar sounding or almost identical name is an obvious device to capitalize on the goodwill which
incorporation may be amended by a majority vote of the board of directors or trustees and the vote
Tanduay Rhum has built over the years. Twin Ace or Tanduay Distillers and TDI are distinct and separate
or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding
corporations. There is nothing to suggest that the owners of TDI, have any common relationship as to
capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance
identify it with Allied Banking Group which runs Tanduay Distillery.
with the provisions of this Code. The articles of incorporation of a nonstock corporation may be
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent amended by the vote or written assent of majority of the trustees and at least two-thirds (2/3) of
interested buyer. PRs have not presented any proof as to communality of ownership and management to the members.
support their contention that the two companies are one firm or closely related.
The original and amended articles together shall contain all provisions required by law to be set
The complaint was filed against TDI. Only later when the manufacture and sale of Tanduay products was out in the articles of incorporation. Amendments to the articles shall be indicated by underscoring
taken over by Twin Ace or Tanduay Distillers were James Yu and Wilson Young impleaded. The the change or changes made, and a copy thereof duly certified under oath by the corporate
corporation itself was never made a party to the case. secretary and a majority of the directors or trustees, with a statement that the amendments have
been duly approved by the required vote of the stockholders or members, shall be submitted to
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its assets, equiment and machinery. the Commission.
Thus, Tanduay Distillers or Twin-Ace did not take over the corporate personality of TDI although they
manufacture the same product at the same plant with the same equipment and machinery. Obviously, the The amendments shall take effect upon their approval by the Commission or from the date of filing
trade name ―Tanduay‖ went with the sale because the new firm does business as Tanduay Distillers and with the said Commission if not acted upon within six (6) months from the date of filing for a cause
its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was not attributable to the corporation.
absorbed by Twin Ace or that it ceased to exist as a separate corporation. In point of fact, TDI is now
Steps to be followed for an effective amendment of the articles of incorporation:
herein a party respondent represented by its own counsel.
1. Resolution by at least a majority of the board of directors or trustees.
The fiction of separate and distinct corporate entites cannot, in the instant case, be disregarded
2. Vote or written assent of the stockholders representing at least 2/3 of the outstanding capital
and brushed aside, there being not the lease indication that the second corporation was a dummy
stock or 2/3 of the members in case of non-stock corporation.
or serves as a client of the first corporate entity.
3. Submission and filing of the amendments with the SEC as follows:
Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate transactions. a. The original and amender articles together shall contain all the provisions required
(Remo, JR vs. IAC) by law to be set out in the articles of incorporation. Such articles, as amended, shall
be indicated by underscoring the change or changes made.
For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be clearly b. A copy thereof, duly certified under oath by the corporate secretary and a majority
and convincingly established. (Del Rosario vs. NLRC) of the directors or trustees stating the fact that such amendments have been duly
approved by the required vote of the stockholders or members.
Mere corporate ownership of all the stocks of another corporation will not justify their being treated as c. Favorable recommendation of the appropriate government agency concerned in the
single entity. (PNB vs. Ritratto) case where the corporation is under its supervision.

Time when the amendments shall take effect: (1) Upon approval of the SEC; or (2) From the date of filing increase any bonded indebtedness unless approved by a majority vote of the board of directors
with the SEC if not acted upon with 6 months from the date of filing for a cause not attributable to the and by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called for
corporation. (Note: not applicable to special amendments) the purpose. Written notice of the time and place of the stockholders’ meeting and the purpose for
said meeting must be sent to the stockholders at their places of residence as shown in the books
In relation to SEC 6 Classification of Stocks- X X X Holders of nonvoting shares shall nevertheless of the corporation and served on the stockholders personally, or through electronic means
be entitled to vote on the following matters: (a) Amendment of the articles of incorporation; X X X. recognized in the corporation’s bylaws and/or the Commission’s rules as a valid mode for service
Thus for purposes of voting requirement even the nonvoting shares are counted. of notices.
In relation further to SEC 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a A certificate must be signed by a majority of the directors of the corporation and countersigned by
corporation shall have the right to dissent and demand payment of the fair value of the shares in the chairperson and secretary of the stockholders’ meeting, setting forth:
the following instances: (A.1) In case an amendment to the articles of incorporation has the effect
of (1) changing or restricting the rights of any stockholder or class of shares, or (2) of authorizing (a) That the requirements of this section have been complied with;
preferences in any respect superior to those of outstanding shares of any class, or (A.2) of
extending or shortening the term of corporate existence; (b) The amount of the increase or decrease of the capital stock;
Special amendments (c) In case of 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 addresses of the persons
Pertinent provisions: subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the
amount paid by each on the subscription in cash or property, or the amount of capital stock or
SEC. 36. Power to Extend or Shorten Corporate Term. – A private corporation may extend or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose
shorten its term as stated in the articles of incorporation when approved by a majority vote of the of making effective stock dividend therefor authorized;
board of directors or trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of its members. Written (d) Any bonded indebtedness to be incurred, created or increased;
notice of the proposed action and the time and place of the meeting shall be sent to stockholders
or members at their respective place of residence as shown in the books of the corporation, and (e) The amount of stock represented at the meeting; and
must either be deposited to the addressee in the post office with postage prepaid, served
(f) The vote authorizing the increase or decrease of the capital stock, or the incurring, creating or
personally, or when allowed in the bylaws or done with the consent of the stockholder, sent
increasing of any bonded indebtedness.
electronically in accordance with the rules and regulations of the Commission on the use of
electronic data messages. In case of extension of corporate term, a dissenting stockholder may Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
exercise the right of appraisal under the conditions provided in this Code. indebtedness shall require prior approval of the Commission, and where appropriate, of the
Philippine Competition Commission. The application with the Commission shall be made within
REQUIREMENTS:
six (6) months from the date of approval of the board of directors and stockholders, which period
1. Approval by a majority vote of the board of directors or trustees; may be extended for justifiable reasons.
2. Ratification at a meeting by the stockholders or members representing at least two-thirds (2/3) of the Copies of the certificate shall be kept on file in the office of the corporation and filed with the
outstanding capital stock or of its members. Commission and attached to the original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
3. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders be deemed increased or decreased and the incurring, creating or increasing of any bonded
or members at their respective place of residence as shown in the books of the corporation indebtedness authorized, as the certificate of filing may declare: Provided, That the Commission
shall not accept for filing any certificate of increase of capital stock unless accompanied by a
Note: In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing
under the conditions provided in this Code. SEC 80. When the Right of Appraisal May Be Exercised. – of the certificate, showing that at least twenty-five percent (25%) of the increase in capital stock
Any stockholder of a corporation shall have the right to dissent and demand payment of the fair has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been
value of the shares in the following instances: (A.1) In case an amendment to the articles of paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-
incorporation has the effect of (1) changing or restricting the rights of any stockholder or class of five percent (25%) of the subscription, has been transferred to the corporation: Provided, further,
shares, or (2) of authorizing preferences in any respect superior to those of outstanding shares of That no decrease in capital stock shall be approved by the Commission if its effect shall prejudice
any class, or (A.2) of extending or shortening the term of corporate existence; the rights of corporate creditors.
SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness. – No corporation shall increase or decrease its capital stock or incur, create or

Nonstock corporations may incur, create or increase bonded indebtedness when approved by a THERE ARE THREE SPECIAL AMENDMENTS:
majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose. 1.Extension or shortening of corporate term (Sec. 36)
Bonds issued by a corporation shall be registered with the Commission, which shall have the 2.Increase or decrease of capital stock (Sec. 37)
authority to determine the sufficiency of the terms thereof.
3.Incurring, creating or increasing bonded indebtedness (Sec. 37)
REQUIREMENTS:
SEC. 36&37 vs. SEC. 15:
1. Approval by a majority vote of the board of directors;
1. In the former a meeting of the stockholders would be REQUIRED, unlike in Sec. 15, where the “written
2. Approval by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called for assent” would suffice.
the purpose.
2. Former requires the approval of the SEC.
3. Written notice of the time and place of the stockholders’ meeting and the purpose for said meeting
NOTE: When the amendment of the corporate charter involves shortening the life of the corporation with
must be sent to the stockholders at their places of residence as shown in the books of the corporation and
the effect of dissolution, the rules on dissolution would apply, requiring approval by the SEC.
served on the stockholders personally, or through electronic means recognized in the corporation’s bylaws
and/or the Commission’s rules as a valid mode for service of notices. PROVISIONS SUBJECT TO AMENDMENT
4. A certificate must be signed by a majority of the directors of the corporation and countersigned by the Matters which are fait accompli (established facts can no longer be changed) are not subject to change.
chairperson and secretary of the stockholders’ meeting, setting forth:
Subject to Amendment
a. That the requirements of this section have been complied with; Provisions (based in SEC 14) YES NO
b. The amount of the increase or decrease of the capital stock;
Corporate Name ✓
c. In case of an increase of the capital stock, the amount of capital stock or number of
Purpose Clause ✓
shares of no-par stock thereof actually subscribed, the names, nationalities and
Principal office ✓
addresses 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 the subscription in Term of Existence ✓
cash or property, or the amount of capital stock or number of shares of no-par stock The names, nationalities, and residence addresses of the ✓
allotted to each stockholder if such increase is for the purpose of making effective incorporators
stock dividend therefor authorized; Sixth: (A) That the number of directors or trustees of the (B) (A)- it is fait
d. Any bonded indebtedness to be incurred, created or increased; corporation and (B) the names, nationalities, and residence accompli
e. The amount of stock represented at the meeting; and addresses of the first directors or trustees of the corporation
f. The vote authorizing the increase or decrease of the capital stock, or the incurring, Seventh: (A)That the authorized capital stock of the (B) (A)
creating or increasing of any bonded indebtedness. corporation (B) That the capital stock of the corporation
Eight: classifications of shares (A) ordinary corporation and (A) (B)
5. Prior approval of the Commission, and where appropriate, of the Philippine Competition Commission. (B) Closed corporation
Ninth: Treasury Elect X
6. The application with the Commission shall be made within six (6) months from the date of approval Tenth: Undertaking to Change the Name X
of the board of directors and stockholders, which period may be extended for justifiable reasons. Eleventh: No transfer Clause X
7. Accompanied by a sworn statement of the treasurer of the corporation lawfully holding office at Change in Corporate Name
the time of the filing of the certificate, showing that at least twenty-five percent (25%) of the increase in
Subject to limitations of SEC 15
capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed
has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty- CASE:
five percent (25%) of the subscription, has been transferred to the corporation; and
[GR No. L-26370; 74 SCRA 252; July 31, 1970] PHILIPPINE FIRST INSURANCE CO., plaintiff-
8. in case of decrease in capital stock it shall not prejudice the rights of corporate creditors. appellant vs. MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants-appellees
In case of a nonstock corporation- it may incur, create or increase bonded indebtedness when approved ISSUE: Whether the trial court correctly dismissed the case
by a majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
HELD: Sec. 18 (Now Sec. 15) of the Corporation Law (Act No. 1459) explicitly permits the articles of HELD: The privilege of extension is purely statutory. All the statutory conditions precedent must be
incorporation to be amended. The law does not only authorize corporations to amend their charter; complied with in order that the extension may be effectuated. And, generally, these conditions must be
it also lays down the procedure for such amendment; and, what is more relevant to the present complied with, and the steps necessary to effectuate an extension must be taken, during the life of the
discussion, it contains provisos restricting the power to amend when it comes to the term of their corporation, and before the expiration of the term of existence as originally fixed by its charter or the
existence and the increase or decrease of the capital stock. There is no prohibition therein against general law, since, as a rule, the corporation is ipso facto dissolved as soon as the time expires. So where
the change of name. The inference is clear that such a change is allowed, for if the legislature had the extension is by amendment of the articles of incorporation, the amendment must be adopted before
intended to enjoin corporations from changing names, it would have expressly stated so in this that time.
section or in any other provision of the law.
The logic of this position is well-expressed in a four square case decided by the CA of Kentucky: “But
No doubt, the name of the corporation is peculiarly important as necessary to the very existence of a section 561 provides that, when any corporation expires by the terms of its articles of incorporation, it may
corporation. The general rule as to corporation is that each corporation shall have a name by which it is to be thereafter continued to act for the purpose of closing up its business, but for no other purpose. The
sue and be sued and do all legal acts. The name of the corporation in this respect designates the corporate life of the Home Building Association expired on May 3, 1905. After that date, by the mandate
corporation in the same manner as the name of an individual designates the person. Since an individual of the statute, it could continue to act for the purpose of closing up its business, but for no other purpose.
has the right to change his name under certain conditions, there is no compelling reason why a corporation The proposed amendment was not made until January 16, 1908, or nearly three years after the corporation
may not enjoy the same right. The sentimental considerations which individuals attach to their names are expired by the terms of the articles of incorporation. When the corporate life of the corporation was ended,
not present in corporations and partnerships. Of course, as in the case of an individual, such change may there was nothing to extend. X X X”
not be made exclusively by the corporation‘s own act. It has to follow the procedure prescribed by law for
the purpose, and this is what is important and indispensably prescribed – strict adherence to such There is a broad distinction between the extension of a charter and the grant of a new one. To renew a
procedure. charter it is to revive a charter which has expired, or in other words, to give new existence to one which
has expired, or which has lost its validity by the lapse of time. TO EXTEND A CHARTER is to increase the
A change in the name of the corporation does not affect the identity of the corporation, nor in any time for the existence of one which would otherwise reached its limit at an earlier period. nowhere in the
way affect the rights, privileges, or obligations previously acquired or incurred by it. section 18 (now 17) do we find the word “renew” in reference to the authority given to corporations to
protract their lives. And, as so understood, extension may be made only before the term provided in the
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) corporate charter expires.
DOCTRINE: A change in the corporate name does not make a new corporation, and whether effected by
special act or under a general law, has no effect on the identity of the corporation, or on its property rights
or liabilities. The corporation continues, as before, responsible in its new name for all debts or other CHAPTER VI- BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
liabilities which it had previously contracted or incurred.
POWERS OF THE BOARD
AMENDMENT OF THE CORPORATE TERM
SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless
To reiterate the procedure to amend the corporate term: otherwise provided in this Code, the board of directors or trustees shall exercise the corporate
powers, conduct all business, and control all properties of the corporation.
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served to each Directors shall be elected for a term of one (1) year from among the holders of stocks registered
stockholder or member either by mail or by personal service. in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 from among the members of the corporation. Each director and trustee shall hold office until the
of the members in case of non-stock corporations. successor is elected and qualified. A director who ceases to own at least one (1) share of stock or
4. The extension can be made earlier than 5 years prior to the original or subsequent expiry a trustee who ceases to be a member of the corporation shall cease to be such.
date(s) unless there are justifiable reasons for an earlier extension as may be determined by
the SEC. The board of the following corporations vested with public interest shall have independent
5. In cases of extension of corporate term, a dissenting stockholder may exercise his appraisal directors constituting at least twenty percent (20%) of such board:
rights.
a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The
CASE: Securities Regulation Code”, namely those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00)
[G.R. No. L-23606 July 29, 1968] ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, and having two hundred (200) or more holders of shares, each holding at least one hundred (100)
INC., petitioner, vs. SECURITIES & EXCHANGE COMMISSION, respondent shares of a class of its equity shares;
ISSUE: Whether the extension of corporate term should be allowed

b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service Independent directors:
business, pre-need, trust and insurance companies, and other financial intermediaries; and
1. must be elected by the shareholders present or entitled to vote in absentia during the election
c) Other corporations engaged in business vested with public interest similar to the above, as may of directors.
be determined by the Commission, after taking into account relevant factors which are germane to 2. shall be subject to rules and regulations governing their:
the objective and purpose of requiring the election of an independent director, such as the extent a. qualifications,
of minority ownership, type of financial products or securities issued or offered to investors, public b. disqualifications, voting requirements,
interest involved in the nature of business operations, and other analogous factors. c. duration of term and term limit,
d. maximum number of board memberships and
An independent director is a person who, apart from shareholdings and fees received from the e. other requirements that the Commission will prescribe to strengthen their
corporation, is independent of management and free from any business or other relationship which independence and align with international best practices.
could, or could reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director. Classification of powers of Corporate Agents/Officers
Independent directors must be elected by the shareholders present or entitled to vote in absentia Unless the law so provides, corporate powers may be delegated to individual directors or other officers or
during the election of directors. Independent directors shall be subject to rules and regulations agents. Whether or not the acts of the individual director, officer or agent would bind the corporation
governing their qualifications, disqualifications, voting requirements, duration of term and term depend on the nature of the agency created or the powers conferred upon such person by the statute, the
limit, maximum number of board memberships and other requirements that the Commission will corporate charter, the by-laws, the corporate action of the board or stockholders, or whether it is necessary
prescribe to strengthen their independence and align with international best practices. or incidental to one’s office.
The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority The general rule is that a corporation is bound by the acts of its corporate officers who act within the scope
in matter of management of the regular and ordinary business affairs of the corporation. of the 5 classification of powers of corporate agents, which are:
However, this authority does not extend to the fundamental changes in the corporate charter such as 1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by
amendments or substantial changes thereof, which belong to the stockholders as a whole. The equitable the official act of the board of directors;
principle therefore is that the stockholders may have all the profits but shall turn over the management of
the enterprise to the Board of Directors. 2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable
and necessary to carry out the corporate purpose or purposes;
Note: When a corporation is:
3. Those that are inherent or acts that go with the office;
1. Covered by Section 17.2 of Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”, namely: 4. Those that are apparent or those acts which although not actually granted, the principal knowingly
a. those whose securities are registered with the Commission, allows or permits it to be done; and
b. Listed with an exchange or with assets of at least Fifty million pesos
5. Powers arising out of customs, usage or emergency.
(P50,000,000.00); and
c. having two hundred (200) or more holders of shares, each holding at least one CASES:
hundred (100) shares of a class of its equity shares;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service [G.R. No. 11897 September 24, 1918] J. F. RAMIREZ, plaintiff-appellee, vs. THE ORIENTALIST CO.,
business, pre-need, trust and insurance companies, and other financial intermediaries; and and RAMON J. FERNANDEZ, defendants-appellants
3. Other corporations:
a. engaged in business vested with public interest similar to the above, as may be ISSUE: Whether the corporation could be held liable for the contract
determined by the Commission,
b. after taking into account relevant factors which are germane to the objective and HELD: The public is not supposed nor required to know the transactions which happen around the
purpose of requiring the election of an independent director, such as: table where the corporate board of directors or the stockholders are from time to time convoked.
i. the extent of minority ownership, In dealing with corporations, the public at large is bound to rely to a large extent upon outward
ii. type of financial products or securities issued or offered to investors, appearances. If a man is acting for a corporation with the external indicia of authority, any person not
public interest involved in the nature of business operations, and having notice of want of authority may usually rely upon those appearances; and if it be found that the
iii. other analogous factors. directors had permitted the agent to exercise that authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in a contract and retained the benefit
This corporations are covered with public interest and the RCC requires that it shall have independent supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual
directors constituting at least twenty percent (20%) of such board. authority may ever have been granted.

The failure of the defendant corporation to make an issue in its answer with regard to the authority of terminated for part services rendered gratuitously by them to the corporation. To permit the transaction
Ramon Fernandez to bind it, and particularly to deny specifically under oath the genuineness and due involved in this case would be to create an obligation unknown to law, and to countenance a
execution of the contracts sued upon have the effect of eliminating the question of his authority from the misapplication of the funds of the defendant building and loan association to the prejudice of the
case. substantial rights of its shareholders.
It is declared under Sec. 28 (now 22) that corporate powers shall be exericsed, and all corporate business Irrespective of the above, the conclusion is the same. The article which the appellees rely upon is merely
conducted by the board of directors, and this principle is recognized in the by-laws of the corporation in a by-law provision adopted by the stockholders of the defendant corporation, without any action having
question which contain a provision declaring that the power to make contracts shall be vested in the board been taken in relation thereto by its board of directors. The law is settled that contracts between a
of directors. corporation and third person must be made by or under the authority of its board of directors and
not by its stockholders. Hence, the action of the stockholders in such matters is only advisory and not
It is true that it is also true in the by-laws, that the president shall have the power and it shall be his duty, in any wise binding on the corporation. There could not be a contract without mutual consent, and it
to sign contract; but this has reference rather to the formality of reducing to proper form the contract which appears that the plaintiffs did not consent to the provisions of the by-law in question, but, on the contrary,
are authorized by the board and is not intended to confer an independent power to make contract binding they objected to and voted against it in the stockholders‘ meeting in which it was adopted.
on the corporation.
QUALIFICATIONS AND DISQUALIFICATIONS
The fact that the power to make corporate contracts is thus vested in the board of directors does
not signify that a formal vote of the board must always be taken before contractual liability can be SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – Unless
fixed upon a corporation; for a board can create liability, like an individual, by other means than otherwise provided in this Code, the board of directors or trustees shall exercise the corporate
by a formal expression of its will. powers, conduct all business, and control all properties of the corporation.
Participation of the stockholders. The letter accepting the offer was dispatched in a meeting of the board XXX XXX XXX. Each director and trustee shall hold office until the successor is elected and
called by Ramon Fernandez, where 4 members, including the president was present. The minutes add qualified. A director who ceases to own at least one (1) share of stock or a trustee who ceases to
that terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a special be a member of the corporation shall cease to be such.
meeting of the stockholders to consider the matter and definite action was postponed. From the meeting
of the stockholders, it can be inferred that this body was then cognizant that the offer had already been Qualifications:
accepted. It is not, however, necessary to find the judgment of the stockholder proceedings, even if the
Directors must own at least one (1) share of the capital stock of the corporation. Trustees must be
assumption is that they did not approve of the contract.
members.
Both upon the principle and authority it is clear that the action of the stockholders, whatever its character,
Disqualifications:
must be ignored. The theory of a corporation is that the stockholders may have all the profits but shall turn
over the complete management of the enterprise to their representatives and agents, called directors. SEC. 26. Disqualification of Directors, Trustees or Officers. – A person shall be disqualified from
Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and being a director, trustee or officer of any corporation if, within five (5) years prior to the election or
exercising certain other special powers defined by law. In conformity with this idea, it is settled that appointment as such, the person was:
contract between a corporation and third person must be made by the director and not by the
stockholders. The corporation, in such matters, is represented by the former and not by the latter. It (a) Convicted by final judgment:
results that where a meeting of the stockholders is called for the purpose of passing on the propriety of
making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board. (1) Of an offense punishable by imprisonment for a period exceeding six (6)
years;
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932)
(2) For violating this Code; and
ISSUE: Whether the amendment to the by-laws could have a binding effect as to grant plaintiffs’ claim
(3) For violating Republic Act No. 8799, otherwise known as “The Securities
HELD: Sec. 20 of the Corporation Law limits the authority of a corporation to adopt by-laws which are not Regulation Code”;
consistent with the provisions of the law. The appellees contend that the articled in question is merely a
provision of the compensation of directors which is not only consistent with but expressly authorized by (b) Found administratively liable for any offense involving fraudulent acts; and
Sec. 21 of the Corporation Law.
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
We cannot agree with this contention. The authority conferred upon corporations in that section refers only similar to those enumerated in paragraphs (a) and (b) above.
to providing compensation for the future services of directors, officers, and employees thereof after the
adoption of the by-law or other provisions in relation thereto, and cannot in any sense be held to authorize The foregoing is without prejudice to qualifications or other disqualifications, which the
the giving, as in this case, of continuous compensation to particular directors after their employment has Commission, the primary regulatory agency, or the Philippine Competition Commission may

impose in its promotion of good corporate governance or as a sanction in its administrative Corporation Law and consequently he cannot be a managing director by virtue of the by-laws of the
proceedings. corporation that the manager shall be elected by the BOD among its members.
CASES: Accordingly, Faustino Alberto could not be compelled to vacate his office and cede the same to dela Rosa
because the by-laws provide that the Directors shall serve until the election and qualification of their duly
[GR No. 93695; 205 SCRA 752; Feb. 4, 1992] RAMON C. LEE and ANTONIO DM. LACDAO, qualified successor.
petitioners, vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO
GONZALES, JR. and THOMAS GONZALES, respondents. TERM OF OFFICE
ISSUE: Whether the petitioners can still be authorized to receive the summons despite the voting trust Gleaned from the above case and the law in force at hat time, it becomes apparent that directors serve for
agreement(VTA) with DBP 1 year until their successors are elected and qualified. This means that if no election is conducted or no
qualified candidate is elected, the incumbent director shall continue to act as such in a hold-over capacity
HELD: Sec. 59 of the Code expressly recognizes VTAs and gives a more definitive meaning. By its very until an election is held and a candidate is so elected.
nature, a VTA results in the separation of the voting right of a stockholder from his other rights
such as the right to receive dividends, the right to inspect the books of the corporation, the right SEC. 22. The Board of Directors or Trustees of a Corporation; Qualification and Term. – xxx xxx
to sell certain interests in the assets of the corporation and other rights to which a stockholder xxx
may be entitled until the liquidation of the corporation.
Directors shall be elected for a term of one (1) year from among the holders of stocks registered
However, in order to distinguish a VTA from proxies and other voting pool and agreements, it must pass in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years
three criteria or tests, namely: (1) the voting rights of the stock are separated from other attributes of from among the members of the corporation.
ownership; (2) that the voting right granted are intended to be irrevocable for a definite period of time; and
(3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation.
The execution of VTA, therefore, may create a dichotomy between the equitable and beneficial ownership In the case of VALLE VERDE COUNTRY CLUB, INC, ET AL. Petitioners, vs. VICTOR AFRICA,
of the corporate shares of stockholder, on the one hand and the legal title thereto, on the other hand. Respondent. The holdover period is not part of the term of office of a member of the board of directors
By virtue of the VTA, the petitioners are no longer directors. Under the old and new Corporation Code, the The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined
most immediate effect of a VTA on the status of a stockholder who is a party to its execution is that he "term" as the time during which the officer may claim to hold the office as of right, and fixes the interval
becomes only an equitable or beneficial owner, from being the legal titleholder or owner of the shares after which the several incumbents shall succeed one another. The term of office is not affected by the
subject of the VTA. holdover. The term is fixed by statute and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a
Under the old code, the eligibility of a director, strictly speaking, cannot be adversely affected by a VTA successor has not been elected and has failed to qualify.
inasmuch as he remains the owner (although beneficial or equitable only) of the shares subject of the VTA
pursuant to which a transfer of the stockholder’s shares in favor of the trustee is required. No Term is distinguished from tenure in that an officer’s "tenure" represents the term during which the
disqualification arises by virtue of the phrase “in his own right” provided under the Old Code, which has incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term
been omitted. for reasons within or beyond the power of the incumbent.
Hence, this omission requires that in order to be eligible as director, what is material is the legal Based on the above discussion, when Section 23 (NOW SEC22) of the Corporation Code declares that
title to, not beneficial ownership, of the stock as appearing on the books of the corporation. "the board of directors…shall hold office for one (1) year until their successors are elected and qualified,"
we construe the provision to mean that the term of the members of the board of directors shall be only for
The petitioners ceased to be the owners of at least one share standing in their names on the books of Alfa one year; their term expires one year after election to the office. The holdover period – that time from the
as required under Sec. 23 of the new Code. They also ceased to have anything to do with the management lapse of one year from a member’s election to the Board and until his successor’s election and qualification
of the enterprise. The petitioners ceased to be directors. Considering the VTA, DBP as trustee, became – is not part of the director’s original term of office, nor is it a new term; the holdover period, however,
the stockholder of record with respect to the said shares of stocks. constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues
to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 256; Nov. 29, 1968) incumbent is holding the succeeding term.
ISSUE: Whether Jose Dela Rosa could be elected managing director ELECTION AND VOTING
HELD: There is no record showing that Jose dela Rosa owned a share of stock in the corporation. SEC. 23. Election of Directors or Trustees. – Except when the exclusive right is reserved for holders
If he did not own any share of stock, certainly he could not be a director pursuant to Sec. 30 of the of founders’ shares under Section 7 of this Code, each stockholder or member shall have the right

to nominate any director or trustee who possesses all of the qualifications and none of the Three ways by which a stockholder may vote (stock corporation only):
disqualifications set forth in this Code.
a. vote such number of shares for as many persons as there are directors to be
At all elections of directors or trustees, there must be present, either in person or through a elected;
representative authorized to act by written proxy, the owners of majority of the outstanding capital b. cumulate said shares and give one (1) candidate as many votes as the number of
stock, or if there be no capital stock, a majority of the members entitled to vote. When so authorized directors to be elected multiplied by the number of the shares owned; or
in the bylaws or by a majority of the board of directors, the stockholders or members may also c. distribute them on the same principle among as many candidates as may be seen
vote through remote communication or in absentia: Provided, That the right to vote through such fit:
modes may be exercised in corporations vested with public interest, notwithstanding the absence i. Provided, That the total number of votes cast shall not exceed the
of a provision in the bylaws of such corporations. number of shares owned by the stockholders as shown in the books of
the corporation multiplied by the whole number of directors to be elected:
A stockholder or member who participates through remote communication or in absentia, shall be ii. Provided, however, That no delinquent stock shall be voted.
deemed present for purposes of quorum.
CUMULATIVE VOTING:
The election must be by ballot if requested by any voting stockholder or member.
1. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as
In stock corporations, stockholders entitled to vote shall have the right to vote the number of the number of directors to be elected multiplied by the number of his shares shall equal or he may distribute
shares of stock standing in their own names in the stock books of the corporation at the time fixed them among the candidates as he may see fit.
in the bylaws or where the bylaws are silent, at the time of the election. The said stockholder may:
(a) vote such number of shares for as many persons as there are directors to be elected; (b) 2. This is granted by law to each stockholder with voting rights. However, in non-stock corporations,
cumulate said shares and give one (1) candidate as many votes as the number of directors to be cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-laws.
elected multiplied by the number of the shares owned; or (c) distribute them on the same principle
among as many candidates as may be seen fit: Provided, That the total number of votes cast shall 3. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000
not exceed the number of shares owned by the stockholders as shown in the books of the votes which he may cast in favor of one candidate or may apportion to any number of candidate he may
corporation multiplied by the whole number of directors to be elected: Provided, however, That no wish;
delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in
4. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
the bylaws, members of nonstock corporations may cast as many votes as there are trustees to
be elected but may not cast more than one (1) vote for one (1) candidate. Nominees for directors In stock corporations, the majority of the outstanding capital stock, in person or by representative
or trustees receiving the highest number of votes shall be declared elected. authorized to act by written proxy, must be present at the election of directors.
If no election is held, or the owners of majority of the outstanding capital stock or majority of the In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if allowed in
members entitled to vote are not present in person, by proxy, or through remote communication its articles of incorporation or by-laws, must be present in the election.
or not voting in absentia at the meeting, such meeting may be adjourned and the corporation shall
proceed in accordance with Section 25 of this Code. The election may be adjourned if, for any reason, no election is held, or if the required quorum is not
obtained. However, it may not be adjourned indefinitely.
The directors or trustees elected shall perform their duties as prescribed by law, rules of good
corporate governance, and bylaws of the corporation. Candidates receiving the highest number of votes shall be declared elected.
NOTE: In stock corporations, cumulative voting is a matter of right. In non-stock corporations, cumulative voting
is not available unless provided for in the articles of incorporation or by-laws. I.e., a member may cast as
1. Majority of the outstanding capital stock, whether in person or by written proxy must be present many votes as there are trustees to be elected but may not cast more than one vote for one candidate.
at the election of the directors; or majority of members entitled to vote, in the case of a non-
stock corporation. If the required quorum is not obtaining, the meeting may be adjourned; As to other corporate officers
Note: for purposes of quorum only the NON voting shares are NOT entitled to vote, because it does not SEC. 24. Corporate Officers. – Immediately after their election, the directors of a corporation must
fall within the exception provided for in SEC 6. formally organize and elect: (a) a president, who must be a director; (b) a treasurer, who must be
a resident; (c) a secretary, who must be a citizen and resident of the Philippines; and (d) such other
2. On the request of any voting stockholder or member, the election may be held by ballot officers as may be provided in the bylaws. If the corporation is vested with public interest, the
otherwise viva-voce would suffice. board shall also elect a compliance officer. The same person may hold two (2) or more positions
3. The candidates receiving the highest number of votes shall be elected. concurrently, except that no one shall act as president and secretary or as president and treasurer
at the same time, unless otherwise allowed in this Code.

Officers to be elected VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
1. President, who must be a director SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. – Unless the articles of
2. Treasurer, who must be a resident (in the old code it requires that the treasurer may or may incorporation or the bylaws provides for a greater majority, a majority of the directors or trustees
not be a director) as stated in the articles of incorporation shall constitute a quorum to transact corporate business,
3. Secretary, who shall be a resident and citizen of the Philippines and every decision reached by at least a majority of the directors or trustees constituting a quorum,
4. Such other officers as may be provided for in the by-laws. except for the election of officers which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act. Xxxx xxx xxx
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. Except in a one man corporation Genera Rule: requirement for a valid board meeting is the majority of the number of the board fixed in the
AOI, and a decision of at least a majority of the directors/trustees present in a meeting at which there is a
In relation to: quorum shall be a valid corporate act, except:
SEC. 122. Treasurer, Corporate Secretary, and Other Officers. – Within fifteen (15) days from the 1. Election of officers, which shall require the majority of all the members of the board; and
issuance of its certificate of incorporation, the One Person Corporation shall appoint a treasurer,
corporate secretary, and other officers as it may deem necessary, and notify the Commission 2. Unless the AOI or the by-laws provide for a greater quorum/voting requirement.
thereof within five (5) days from appointment.
Every action of the board without a meeting and without the required voting and quorum requirement will
The single stockholder may not be appointed as the corporate secretary. not bind the corporation unless subsequently ratified, expressly or impliedlly.
A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a Individual directors, however, can rightfully be considered as agents of the corporation. And although they
bond to the Commission in such a sum as may be required: Provided, That the said cannot bind the corporation by their individual acts, this is subject to certain EXCEPTIONS: (1) by
stockholder/treasurer shall undertake in writing to faithfully administer the One Person delegation of authority; (2) when expressly conferred; or (3) where the officer or agent is clothed with actual
Corporation’s funds to be received as treasurer, and to disburse and invest the same according to or apparent authority.
the articles of incorporation as approved by the Commission. The bond shall be renewed every
two (2) years or as often as may be required. CASES:
Who elects? GENERAL RULE: they are elected by the directors YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992)
Exception: ISSUE: Whether the letter-offer sent by the president (Maglana) binds the corporation
1. SEC. 92. List of Members and Proxies, Place of Meetings. – The corporation shall, at all times, HELD: A corporation can act only through its officers and agents, all acts within the powers of said
keep a list of its members and their proxies in the form the Commission may require. The list shall corporation may be performed by agents of his selection and except in so far as limitations or restrictions
be updated to reflect the members and proxies of record twenty (20) days prior to any scheduled may be imposed by special charter, by-law or statutory provisions, the same general provision of law which
election. The bylaws may provide that the members of a nonstock corporation may hold their govern the relation of agency for natural person govern the officer or agent of a corporation, of whatever
regular or special meetings at any place even outside the place where the principal office of the status or rank, in respect to his power to act for the corporation; and the agents once appointed, or
corporation is located: Provided, That proper notice is sent to all members indicating the date, time members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of
and place of the meeting: Provided, further, That the place of meeting shall be within Philippine individuals and private persons.
territory.
Moreover, a corporate officer or agent may represent and bind the corporation in transactiosn with third
2. SEC. 96. Articles of Incorporation. – The articles of incorporation of a close corporation may person to the extent that authority has been conferred upon him, and this includes powers which have
provide for: xxx xxx xxx been (1) intentionally conferred, and (2) also such powers as, in the usual course of business, are
incidental thereto, or may be implied therefrom, (3) powers added by custom and usage, as usually
The articles of incorporation may likewise provide that all officers or employees or that specified pertaining to the particular officer or agent, and (4) such apparent powers as the corporation has caused
officers or employees shall be elected or appointed by the stockholders, instead of by the board persons dealing with the officer or agent to believe that it has conferred.
of directors
While Mr. Maglana was an officer, the by-laws do not in any way confer upon the president the
Note sec 51 and 52 for quorum requirment authority to enter into contracts for the corporation independently of the BOD. That power is
expressly lodged in the latter.
SEC. 51. Quorum in Meetings. – Unless otherwise provided in this Code or in the bylaws, a quorum
shall consist of the stockholders representing a majority of the outstanding capital stock or a Nevertheless, to expedite or facilitate the execution of the contract, only the President shall sign the contact
majority of the members in the case of nonstock corporations. for the corporation. No greater power can be implied from such express, but limited delegated authority.

Neither can it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from
Maglana’s position as president and chairman of the corporation. adoption of the act, acceptance or acquiescence. Moreover, the unauthorized acts of an officer of a
corporation may be ratified by the corporation by conduct implying approval and adoption of the act in
Although there is authority "that if the president is given general control and supervision over the question. Such ratification may be expressed or may be inferred from silence and inaction.
affairs of the corporation, it will be presumed that he has authority to make contract and do acts
within the course of its ordinary business," We find such inapplicable in this case. We note that the In the case at bench, it was established that petitioner corporation did not issue any resolution revoking
private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: nor nullifying the board resolution granting gratuity pay to private respondents. Instead, they paid the
"(a) to have the active and direct management of the business and operation of the corporation, conducting gratuity pay, particularly, the first two installments thereof.
the same accordingly to the order, directives or resolutions of the Board of Directors or of the president."
It goes without saying then that Mr. Maglana did not have a direct and active and in the management of Despite lack of notice to Asuncion, we can glean from the records that she was aware of the corporation’s
the business and operations of the corporation. obligations under the said resolution. More importantly she acquiesced thereto by affixing her signature
on two cash vouchers. The conduct of petitioners had estopped them from assailing the validity of the said
Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. board resolutions.
Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he
was conferred with such power. The rule is of course settled that "[a]lthough an officer or agent acts PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924)
without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which
ISSUE: Whether the corporation is responsible for the money borrowed by its president
the corporation has clothed him by holding him out or permitting him to appear as having such authority,
the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such HELD: The evidence presented shows that (1) W. Neumark is the principal stockholder, president and
apparent authority, as where an officer is allowed to exercise a particular authority with respect to the general business manager of the defendant corporation. On behalf of the corporation, (2) he solicited a
business, or a particular branch of it, continuously and publicly, for a considerable time." Also, "if a private loan and was given a check, which was endorsed by him in his capacity as president and deposited to the
corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts corporation’s account. It may be true that a large part of the amount so deposited was diverted by Neumark
for it, the corporation will be estopped to deny that such apparent authority in real, as to innocent third to his own use, but that does not alter that the money was borrowed for the corporation and was placed in
persons dealing in good faith with such officers or agents." This "apparent authority may result from (1) its possession.
the general manner, by which the corporation holds out an officer or agent as having power to act or, in
other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his It is conceded that Neumark was not expressly authorized by the board of directors to borrow the money
acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the in question and the general rule is that a business manager or other officer of a corporation, has no
scope of his ordinary powers. implied power to borrow money on its behalf. But much depends upon the circumstances of each
particular case and the rule state is subject to important exceptions. Thus, where a general business
It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana manager of a corporation is clothed with apparent authority to borrow money and the amount
with the apparent power to execute Exhibit "A" or any similar contract. This could have been easily done borrowed does not exceed the ordinary requirements of the business, it has often been held that
by evidence of similar acts executed either in its favor or in favor of other parties. Petitioner miserably the authority is implied and that the corporation is bound.
failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being approved by the Board of Directors; such (3) There are ample amplifications in the record that the corporation was in need of funds to carry on its
approval may only be given after the contract passes through, at least, the comptroller, who is the NIDC business and it does not appear that the amount borrowed was disproportionate to the volume of the
representative, and the legal counsel. business. As president, GM, and principal stockholder Neumark appeared, in a sense, to be almost the
whole corporation and was clothed with apparent authority to do everything necessary for the conduct of
LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) the business.
ISSUE: Whether the respondent acted with grave abuse of discretion in holding that private respondents YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924)
are entitled to gratuity under the assailed board resolution
ISSUE: Whether Chen had the power to bind the corporation under a contract of that character
HELD: The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, the HELD: The general rule is that the power to bind a corporation by contract lies with its board of directors
directors must act as a body in a meeting called pursuant to the law or the corporation’s by-laws, or trustees, but this power may either be expressly or impliedly be delegated to other officers or
otherwise, any action taken therein may be questioned by any objecting director or shareholder. agents of the corporation, and it is well settled that except where the authority of employing
servants and agents is expressly vested in the BOD/T, an officer or agent who has general control
Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which and management of the corporation‘s business, or a specific part thereof, may bind the corporation
was illegal for lack of notice, may be ratified either (1) expressly, by the action of the directors in as are usual and necessary in the conduct of such business. But the contracts of employment
subsequent legal meeting, or (2) impliedly, by the corporations‘ subsequent conduct. must be reasonable.

Chen, as general manager of Kong Li Po, had implied authority to bind the defendant corporation by a These previous contacts, it should be stressed, were signed by Kalaw without prior authority from the
reasonable and usual contract of employment with the plaintiffs, but we do not think that contract here in board. Said contracts were known all along to the board members. Nothing was said by them. The
question can be so considered. Not only is the term of employment usually long, but the conditions are aforesaid contracts stand to prove one thing. Obviously, NACOCO’s board met difficulties attendant to
otherwise so onerous to the defendant that the possibility of the corporation being thrown into insolvency forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO’s general
thereby is expressly contemplated in the same contract. This fact, in itself was, in our opinion, sufficient to manager Maximo Kalaw.
put the plaintiffs upon inquiry as to the extent of the business manager’s authority; they had not the right
to presume that he or any other single officer or employee of that corporation had implied authority to enter Where similar acts have been approved by the directors as a matter of general practice, custom,
into a contract of employment which might bring about its ruin. and policy, the general manager may bind the company without formal authorization of the BOD.
In varying language, existence of such authority is established, by proof of the course of business,
TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) the usages and practices of the company and by the knowledge which the BOD has, or must be
presumed to have, of acts and doings of its subordinates in and about the affairs of the
ISSUE: Whether the telegram sent by the Andal binds the corporation corporation.
HELD: The terms of the offer were clear and over the signature of Andnal, plaintiff was informed that the In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and
proposal has been accepted. There was nothing in the telegram that hinted at any anomaly, or gave execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval.
grounds to suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There is If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate
no denying that the telegram was within Andal’s apparent authority, but his defense is that he did not sign contracts. But the Board itself, by its acts and through acquiescence, practically laid aside the by-law
it, but that it was sent by the board secretary in his name and without his knowledge. Assuming this to be requirement of prior approval.
true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every
person dealing with a corporation were held duty-bound to disbelieve every act of its responsible officers, BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969)
no matter how regular they should appear on their face. ISSUE: Whether the agreement was binding
Indeed, it is well-settled that If a private corporation intentionally or negligently clothes its officers HELD: It is not here pretended that the BOD of the defendant corporation had no knowledge of the
or agents with apparent power to perform acts for it, the corporation will be estopped to deny that agreement between Bowen and plaintiff. Indeed, at the time the said Agreement was made, the BOD of
such apparent authority is real, as to innocent third persons dealing in good faith with such officers the corporation was composed of Bowen himself, his wife, Buenaseda and two others, with Bowen and
or agents. his wife controlling the majority of the stocks of the corporation. The Board did not repudiate the
Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the agreement but on the contrary, acquiesced in and took advantage of the benefits afforded by said
binding effect produced by the telegram. agreement. Such acts are equivalent to an implied ratification of the agreement by the BOD and
bound the corporation even without formal resolution passed and recorded.
The error in the wording cannot be taken seriously. All the while GSIS pocketed the various remittances,
and kept silent as to the true facts as it now alleges. This silence, taken together with the unconditional It is agreed by the respondents, defendants below, that the profits of the corporation form part of its assets
acceptance of three other subsequent remittances from plaintiff constitutes in itself a binding ratification of and payment of a certain percentage of the profits requires a declaration of dividends and/or resolution of
the original agreement. the BOD. The agreement is untenable. Although the plaintiff is a stockholder of the corporation he does
not, however, claim a share of the profits as such stockholder, but under the agreement between him and
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10, 1965) the president of the corporation which has been impliedly ratified by the BOD.
ISSUE: Whether the contracts executed by Kalaw binds the corporation NOTE: From the forgoing cases it is clear that: An unauthorized act, or the act of a single director, officer
or agent of a corporation may be ratified either expressly or impliedly.
HELD: A rule that has gained acceptance through the years is that a corporate officer “entrusted” with
the general management and control of its business, has implied authority to make any contract 1. Express ratification is made through a formal board action;
or do any other act which is necessary or appropriate to the conduct of the ordinary business of 2. Implied ratification can either be
the corporation. As such officer, he may, without any special authority from the BOD perform all a. silence or acquiescence (Francisco case);
acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the b. acceptance and/or retention of benefits (Buenaseda case), or
corporation by contracts in matters arising in the usual course of business. c. by recognition or adoption. (Lopez Realty case)
Long before the disputed contracts came into being, Kalaw contracted by himself alone as general REMOVAL AND FILLING UP OF VACANCIES
manager – for forward sales of copra (which is a necessity in the business) which were profitable. So
pleased was NACOCO;s BOD that it voted to grant Kalaw special bonus in recognition of the signal REMOVAL
achievement rendered by him.

SEC. 27. Removal of Directors or Trustees. – Any director or trustee of a corporation may be b. If there is no secretary, or if the secretary, despite demand, fails or refuses to call
removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) the special meeting or to give notice thereof:
of the outstanding capital stock, or in a nonstock corporation, by a vote of at least two-thirds (2/3) i. the stockholder or member of the corporation signing the demand may
of the members entitled to vote: Provided, That such removal shall take place either at a regular call for the meeting by directly addressing the stockholders or members.
meeting of the corporation or at a special meeting called for the purpose, and in either case, after 5. Notice of the time and place of such meeting, as well as of the intention to propose such
previous notice to stockholders or members of the corporation of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code.
removal at the meeting. A special meeting of the stockholders or members for the purpose of 6. Removal may be with or without cause: Provided, that removal without cause may not be used
removing any director or trustee must be called by the secretary on order of the president, or upon to deprive minority stockholders or members of the right of representation to which they may
written demand of the stockholders representing or holding at least a majority of the outstanding be entitled under Section 23 of this Code.
capital stock, or a majority of the members entitled to vote. If there is no secretary, or if the
secretary, despite demand, fails or refuses to call the special meeting or to give notice thereof, the REMOVAL BY THE COMMISSION
stockholder or member of the corporation signing the demand may call for the meeting by directly
1. The Commission shall,
addressing the stockholders or members. Notice of the time and place of such meeting, as well as
a. motu proprio or
of the intention to propose such removal, must be given by publication or by written notice
b. upon verified complaint, and
prescribed in this Code. Removal may be with or without cause: Provided, That removal without
2. after due notice and hearing,
cause may not be used to deprive minority stockholders or members of the right of representation
to which they may be entitled under Section 23 of this Code. order the removal of a director or trustee elected despite the disqualification, or whose disqualification
arose or is discovered subsequent to an election.
The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected despite the disqualification, or whose The removal of a disqualified director shall be without prejudice to other sanctions that the Commission
disqualification arose or is discovered subsequent to an election. The removal of a disqualified may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to
director shall be without prejudice to other sanctions that the Commission may impose on the remove such director or trustee.
board of directors or trustees who, with knowledge of the disqualification, failed to remove such
director or trustee. NOTES:
In relation to: Sec 22- the hold over capacity and Sec 26- for the disqualification General rule: Directors or trustees may be removed with or without just cause.
Who may remove? 1. Stockholders or Member and 2. The Commission Exception: Removal without just cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Sec. 23.
Requirements and procedure:
PD 902-A grants the court the power and authority to remove or oust a director and it can do so, even
REMOVAL BY STOCKHOLDERS motu propio by the appointment of a management committee.
1. Any director or trustee of a corporation may be removed from office by: In case of a deadlock in a close corporation, the SEC is authorized to issue an order cancelling, altering,
a. a vote of the stockholders holding or representing at least two-thirds (2/3) of the or enjoining any resolution or other act of the corporation or its board of directors or directing or prohibiting
outstanding capital stock, or any act of the corporation or the board of directors thereby effectively taking away the rights of the directors
b. in a nonstock corporation, by a vote of at least two-thirds (2/3) of the members to act as managers of the corporation.
entitled to vote;
2. Such removal shall take place either at a regular meeting of the corporation or at a special CASE:
meeting called for the purpose, and
3. Where at a special or regular meeting their must be previous notice to stockholders or VALLE VERDE COUNTRY CLUB, INC., ET AL, Petitioners vs. Victor Africa, Respondend
members of the corporation of the intention to propose such removal at the meeting.
4. If a special meeting of the stockholders or members for the purpose of removing any director ISSUE: Whether the appointment of Roxas and Ramirez made by the remaining members of the Board,
or trustee must be called by: still constituting a quorum, were valid?
a. the secretary on: HELD: The resolution of this legal issue is significantly hinged on the determination of what constitutes a
i. order of the president, or director’s term of office.
ii. upon written demand of the stockholders representing or holding at least
a majority of the outstanding capital stock, or The holdover period is not part of the term of office of a member of the board of directors. The word ―term‖
iii. a majority of the members entitled to vote. has acquired a definite meaning in jurisprudence. In several cases, we have defined ―term‖ as the time
during which the officer may claim to hold the office as of right, and fixes the interval after which the several

incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum;
by statute and it does not change simply because the office may have become vacant, nor because the otherwise, said vacancies must be filled by the stockholders or members in a regular or special
incumbent holds over in office beyond the end of the term due to the fact that a successor has not been meeting called for that purpose.
elected and has failed to qualify.
When the vacancy is due to term expiration, the election shall be held no later than the day of such
Term is distinguished from tenure in that an officer’s ―tenure‖ represents the term during which the expiration at a meeting called for that purpose. When the vacancy arises as a result of removal by
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term the stockholders or members, the election may be held on the same day of the meeting authorizing
for reasons within or beyond the power of the incumbent. the removal and this fact must be so stated in the agenda and notice of said meeting. In all other
cases, the election must be held no later than forty-five (45) days from the time the vacancy arose.
Based on the above discussion, when Section 23 of the Corporation Code declares that ―the board of A director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee
directors…shall hold office for one (1) year until their successors are elected and qualified,‖ we construe and shall serve only for the unexpired term of the predecessor in office.
the provision to mean that the term of the members of the board of directors shall be only for one year;
their term expires one year after election to the office. The holdover period – that time from the lapse of However, when the vacancy prevents the remaining directors from constituting a quorum and
one year from a member’s election to the Board and until his successor’s election and qualification – is emergency action is required to prevent grave, substantial, and irreparable loss or damage to the
not part of the director’s original term of office, nor is it a new term; the holdover period, however, corporation, the vacancy may be temporarily filled from among the officers of the corporation by
constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues unanimous vote of the remaining directors or trustees. The action by the designated director or
to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the trustee shall be limited to the emergency action necessary, and the term shall cease within a
incumbent is holding the succeeding term. reasonable time from the termination of the emergency or upon election of the replacement
director or trustee, whichever comes earlier. The corporation must notify the Commission within
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of three (3) days from the creation of the emergency board, stating therein the reason for its creation.
office is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover
capacity cannot be considered as extending his term. This holdover period is not to be considered as part Any directorship or trusteeship to be filled by reason of an increase in the number of directors or
of his term, which, as declared, had already expired. trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of directors
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 29 of or trustees if so stated in the notice of the meeting.
the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called
for the purpose. To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of
1998, not by the expiration of his term in 1997, is both illogical and unreasonable. His resignation as a this Code shall apply.
holdover director did not change the nature of the vacancy; the vacancy due to the expiration of
Makalintal’s term had been created long before his resignation. HOW FILLED UP
The powers of the corporation‘s board of directors emanate from its stockholders IF vacancies are due to EXPIRATION OF TERM:
This theory of delegated power of the board of directors similarly explains why, under Section 29 of the 1. By votes of the stockholders or members in a regular or special meeting called for that purpose.
Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not by the 2. The election shall be held no later than the day of such expiration at a meeting called for that
expiration of a member’s term, the successor ―so elected to fill in a vacancy shall be elected only for the purpose.
unexpired term of the his predecessor in office.‖ The law has authorized the remaining members of the
DUE TO REMOVAL by the Stockholder or Members:
board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s
operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the 1. By votes of the stockholders or members in a regular or special meeting called for that purpose.
period during which the successor shall serve only to the ―unexpired term of his predecessor in office.‖ 2. The election may be held on the same day of the meeting authorizing the removal and this fact
must be so stated in the agenda and notice of said meeting.
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the
director‘s term of office. When a vacancy is created by the expiration of a term, logically, there is no more IF DUE TO OTHER CAUSES
unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who
shall possess the authority to fill in a vacancy caused by the expiration of a member’s term. (PROVISION 1. By the vote of at least a majority of the remaining directors or trustees, if still constituting a
MENTIONED ARE NOW SEC 22 AND 28 RESPECTIVELY) quorum
2. The election must be held no later than forty-five (45) days from the time the vacancy arose.
VACANCIES
NOTE: EMERGENCY BOARD, A vacancy may be temporarily filled from among the officers of the
SEC. 28. Vacancies in the Office of Director or Trustee; Emergency Board. – Any vacancy occurring corporation by unanimous vote of the remaining directors or trustees. REQUISITES:
in the board of directors or trustees other than by removal or by expiration of term may be filled

1. The vacancy prevents the remaining directors from constituting a quorum; the Commission, the names, nationalities, shareholdings, and residence addresses of the
2. Emergency action is required to prevent grave, substantial, and irreparable loss or damage directors, trustees, and officers elected.
to the corporation;
3. The action by the designated director or trustee shall be limited to the emergency action The non-holding of elections and the reasons therefor shall be reported to the Commission within
necessary; thirty (30) days from the date of the scheduled election. The report shall specify a new date for the
4. The term shall cease: election, which shall not be later than sixty (60) days from the scheduled date.
a. within a reasonable time from the termination of the emergency; or
If no new date has been designated, or if the rescheduled election is likewise not held, the
b. upon election of the replacement director or trustee, whichever comes earlier.
Commission may, upon the application of a stockholder, member, director or trustee, and after
5. The corporation must notify the Commission within three (3) days from the creation of the
verification of the unjustified non-holding of the election, summarily order that an election be held.
emergency board, stating therein the reason for its creation.
The Commission shall have the power to issue such orders as may be appropriate, including
VACANCY by reason of an increase in the number of directors or trustees orders directing the issuance of a notice stating the time and place of the election, designated
presiding officer, and the record date or dates for the determination of stockholders or members
1. shall be filled only by an election at a regular or at a special meeting of stockholders or members entitled to vote.
duly called for the purpose, or
2. in the same meeting authorizing the increase of directors or trustees if so stated in the notice Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares
of the meeting. of stock or membership represented at such meeting and entitled to vote shall constitute a quorum
for purposes of conducting an election under this section.
NOTE: A director or trustee elected to fill a vacancy shall be referred to as replacement director or trustee
and shall serve only for the unexpired term of the predecessor in office. Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary,
or the director, trustee or officer of the corporation, shall, within seven (7) days from knowledge
NOTE: In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of thereof, report in writing such fact to the Commission.
this Code shall apply.
NOTE: Any change in the constitution of the board of directors or trustees must be reported to the SEC.
SEC 23
PURPOSE: to give public information, under sanction of oath responsible officers, of the nature of the
1. Majority of the outstanding capital stock, whether in person or by written proxy must be present business, financial condition and operational status of the company together with information on its key
at the election of the directors; or majority of members entitled to vote, in the case of a non- officers or managers so that hose dealing with it and those who intend to do business with it may know or
stock corporation. If the required quorum is not obtaining, the meeting may be adjourned; have the means of knowing facts concerning the corporation’s financial resources and business
responsibility.
Note: for purposes of quorum only the NON voting shares are NOT entitled to vote, because it does not
fall within the exception provided for in SEC 6. NOTE: If no new date has been designated, or if the rescheduled election is likewise not held, the
Commission:
2. On the request of any voting stockholder or member, the election may be held by ballot
otherwise viva-voce would suffice. 1. may, upon the application of a stockholder, member, director or trustee, and
3. The candidates receiving the highest number of votes shall be elected. 2. after verification of the unjustified non-holding of the election,
3. summarily order that an election be held.
Three ways by which a stockholder may vote (stock corporation only):
The Commission shall have the power to issue such orders as may be appropriate, including orders
1. vote such number of shares for as many persons as there are directors to be elected; directing the issuance of a notice stating the time and place of the election, designated presiding officer,
2. cumulate said shares and give one (1) candidate as many votes as the number of directors to and the record date or dates for the determination of stockholders or members entitled to vote.
be elected multiplied by the number of the shares owned; or
3. distribute them on the same principle among as many candidates as may be seen fit: NOTE: Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares
a. Provided, That the total number of votes cast shall not exceed the number of shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum
owned by the stockholders as shown in the books of the corporation multiplied by for purposes of conducting an election under this section. THUS , FOR PURPOSES OF QUORUM,
the whole number of directors to be elected: ONLY THOSE WHO ARE PRESENT DURING THE ELECTION SHALL BE COUNTED.
b. Provided, however, That no delinquent stock shall be voted.
COMPENSATION OF DIRECTORS
SEC. 25. Report of Election of Directors, Trustees and Officers, Non-holding of Election and
Cessation from Office. – Within thirty (30) days after the election of the directors, trustees and SEC. 29. Compensation of Directors or Trustees. – In the absence of any provision in the bylaws
officers of the corporation, the secretary, or any other officer of the corporation, shall submit to fixing their compensation, the directors or trustees shall not receive any compensation in their
capacity as such, except for reasonable per diems: Provided however, That the stockholders
representing at least a majority of the outstanding capital stock or majority of the members may CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA 593; June 30, 1970)
grant directors or trustees with compensation and approve the amount thereof at a regular or
special meeting. ISSUE: Whether the BOD had the power to appropriate funds for the expenses claimed by respondent
In no case shall the total yearly compensation of directors exceed ten (10%) percent of the net HELD: The by-laws expressly reserved unto the stockholders the power to determine the compensation
income before income tax of the corporation during the preceding year. of the members of the BOD, and the stockholders did restrict such compensation to (1) actual
transportation expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
Directors or trustees shall not participate in the determination of their own per diems or
compensation. Even without the express prohibition, the directors are not entitled to compensation for “The law
is well-settled that directors of corporations presumptively serve without compensation and in the
Corporations vested with public interest shall submit to their shareholders and the Commission, absence of an express agreement or a resolution thereto, no claim can be asserted therefor.” Thus
an annual report of the total compensation of each of their directors or trustees it has been held that there can be no recovery of compensation, unless expressly provided for,
when director serves as president or vice-president, as secretary or treasurer or cashier, as
General rule: Directors shall not receive any compensation, as such directors, except for reasonable per member of an executive committee, as chairman of a building committee, or similar offices.
diems.
Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted
Exceptions: within their power, but by voting for themselves compensation for such additional duties, they acted in
excess of their authority, as express in the by-laws.
1. When there is a provision in the by-laws fixing their compensation;
2. When the stockholders, by a majority vote the outstanding capital stock grant the same AND [GR No. 113032; 278 SCRA 216; Aug. 21, 1997] WESTERN INSTITUTE OF TECHNOLOGY, INC., et
approve the amount thereof at a regular or special meeting; and al., petitioner, vs. RICARDO T. SALAS, et al., respondents
3. If the director renders extra-ordinary or unusual service.
ISSUE: Whether the resolution granting compensation to OFFICERS of the corporation is valid
NOTE: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the
net income before income tax of the corporation during the preceding year. HELD: The proscription under Sec. 30(now SEC 29), is against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of
NOTE: SEC 29 is clear on the point when it provides “as such directors”. Therefore, special and Sec 30 which states, “The directors shall not receive any compensation, as such directors, …”The
extraordinary service rendered, outside of the regular duties, may form the basis for a claim of special phrase as such directors is not without significance for it delimits the scope of the prohibition to
compensation, such as when a director acts as a general counsel. compensation given to them for services performed purely in their capacity as directors or
trustees. The unambiguous implication is that members of the board may receive compensation,
REASON: the office of a director is usually filled up by those chiefly interested in the welfare of the
in addition to reasonable per diems, when they render services to the corporation in a capacity
institution by virtue of their interest in stock or other advantages and such interests are presumed to be
other than as directors/trustees. In the case at bench, the Resolution granted monthly compensation to
the motive for executing duties of the office without compensation.
private respondents not in their capacity as members of the board, but rather as officers of the corporation,
MAY THE COURTS LOOK INTO THE REASONABLENESS OF COMPENSATION? The courts will not more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of WIT.
generally undertake to review the fairness of official salaries, at the suit of a stockholder unless wrongdoing
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the compensation to 10% of
and oppression or possible abuse of fiduciary position are shown.
the net income before income tax does not likewise find application in this case since the
When the recipient does not stand in the dual relation of the (1) one compensated and (2) a participant in compensation is being given to private respondents in their capacity as officers of WIT and not as
fixing his own compensation, it is considered outside the proper judicial function to go into business board members.
policy question of the fairness or reasonableness of compensation as fixed by the board.
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927)
Otherwise, it will call for a scrutiny of the reasonableness or fairness of the compensation. Likewise,
even if consented to by the majority of stockholders, the courts may still look into such reasonableness ISSUE: Whether the courts may declared the by-law provision granting compensation to members of the
if: (1) it would amount to giving away corporate funds in the guise of compensation as against the interest BOD null and void
of the dissenting minority; or (2) in fraud of creditors, either amounting to wastage of assets.
HELD: The Corporation Law does not undertake to prescribe the rate of compensation for the directors of
If there is wastage of corporate assets, the courts may be justified to look into the reasonableness and corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to
fairness of the compensation despite the fact that the grant thereof is authorized pursuant to the by-laws be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for the
and by the vote of the majority of the holders of the outstanding capital stock of the corporation. directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice
and propriety of this provision was a proper matter for the shareholders when the by-laws were
CASES:
framed; and the circumstance that, with the growth of the corporation, the amount paid as

compensation to the directors has increased beyond what would probably be necessary to secure Indeed, complainants seek to hold Carag personally liable for the debts of MAC based solely on Article
adequate service from them is matter that cannot be corrected in this action; nor can it properly 212(e) of the Labor Code. This is the specific legal ground cited by complainants, and used by Arbiter
be made a basis for depriving the respondent of its franchise, or even for enjoining it from Ortiguerra, in holding Carag personally liable for the debts of MAC.
compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted
in the by-laws has been found to work harmful results, the remedy is in the hands of the We have already ruled in McLeod v. NLRC and Spouses Santos v. NLRC that Article 212(e) of the Labor
stockholders who have the power at any lawful meeting to change the rule. The remedy, if any, Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. The
seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action governing law on personal liability of directors for debts of the corporation is still Section 31 of the
is in our opinion without merit. Corporation Code. Thus, we explained in McLeod:
LIABILITY OF CORPORATE OFFICERS Personal liability of corporate directors, trustees or officers attaches only when
The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly or (1) they assent to a patently unlawful act of the corporation, or when they are guilty
criminally liable for acts done by him as such officer or agent. of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest
resulting in damages to the corporation, its stockholders or other persons;
CASES:
(2) they consent to the issuance of watered down stocks or when, having knowledge
DIVISION [ GR No. 225544, Dec 04, 2017 ] ROGEL N. ZARAGOZA v. KATHERINE L. TAN of such issuance, do not forthwith file with the corporate secretary their written objection;
ISSUE: WHETHER OR NOT THE MONETARY AWARD IN FAVOR OF PETITIONER IN NLRC CASE (3) they agree to hold themselves personally and solidarity liable with the
CAN STILL BE ENFORCED AGAINST RESPONDENT TAN IN HER CAPACITY AS PRESIDENT OF corporation; or
CONDIS AND AGAINST RESPONDENT EDI, EVEN THOUGH THEY WERE NOT IMPLEADED IN SAID
LABOR CASE. (4) they are made by specific provision of law personally answerable for their
corporate action
HELD: Petitioner argues that respondent Tan, as President of Condis, can be held solidarily liable for the
judgment award despite not being impleaded as a party in the illegal dismissal case relying on A.C. xxxx
Ransom Labor Union-CCLU v. NLRC. We are not impressed.
Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction
In A.C. Ransom, Ransom was found guilty of unfair labor practice; thus, it was ordered, together with its is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of
officers and agents, to reinstate the 22 union members to their respective positions with backwages, which malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer
decision became final and executory but the writ of execution could not be implemented against Ransom cannot be made personally liable for corporate
because of the disposition posthaste of its leviable assets. We found that Ransom put up another
xxxxx
corporation, the Rosario Industrial Corporation (Rosario), while the ULP case was pending with the Court
of Industrial Relations and that both corporations were closed corporations, owned and managed by the Thus, to hold a director or officer personally liable for corporate obligations, two requisites must
members of the Hernandez family; and that Rosario was established to phase out Ransom if an concur: (1) complainant must allege in the complaint that the director or officer assented to
unfavorable decision would be rendered against the latter, hence, Ransom's operation was discontinued patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad
few months after the LA ruled in the employees' favor. As Ransom had the intention of evading its just and faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or
due obligations to the employees, We allowed the piercing of the veil of corporate fiction by making the bad faith.
officers of Ransom personally liable for the debts of the latter. We said that since Ransom is a corporation,
an artificial person, it must have an officer who can be presumed to be the employer, which as defined To stress, respondent Tan was not at all impleaded in the illegal dismissal case; thus, her participation in
under Article 212(c) (now Article 212 [e]) of the Labor Code, includes any person acting in the interest of petitioner's dismissal was never established in any of the proceedings therein. Consequently, it was not
an employer, directly or indirectly, but does not include any labor organization or any of its officers or shown at all that she assented to patently unlawful acts of the corporation, or that she was guilty of gross
agents, except when acting as employer. negligence or bad faith. In fact, the LA Resolution granting the alias writ of execution against the
respondents did not make any finding as to why respondent Tan was ordered to pay the judgment award
The factual milieu of A.C. Ransom case is different from the instant case. As the CA correctly found, in in the alternative, with Condis and respondent EDI, other than his reliance on our ruling in A.C. Ransom,
A.C. Ransom, the officers and agents were already held liable in the final and executory decision as they which as we found is misplaced.
were named individual respondents in the case. Here, respondents were included in this case only in
petitioner's motion for issuance of alias writ of execution. WHEREFORE, the petition for review is DENIED. The Decision dated January 27, 2016 and the Resolution
dated May 26, 2016 of the Court of Appeals are hereby AFFIRMED.
Moreover, in Carag v. NLRC, where the employees therein sought to hold Carag, the company's Chairman
of the Board, personally liable for the separation pay owed by the company to them on the basis of Article TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994)
212 (e) of the Labor Code, We made this clarification and held:

ISSUE: Whether Ong should be held jointly and severally liable HELD: Yes. A corporation is a juridical entity with legal personality separate and distinct from those acting
for and, in its behalf, and, in general, from the people comprising it. The general rule is that obligations
HELD: It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.
the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of There are times, however, when solidary liabilities may be incurred but only when exceptional
a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the circumstances warrant such as in the following cases:
corporation, not the person acting for and on its behalf, that properly could be made liable thereon.
“1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent
Personal liability of a corporate director, trustee or officer along (although not necessarily) with to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the
the corporation may so validly attach, as a rule, only when — corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge
or other persons; thereof, did not forthwith file with the corporate secretary his written objection thereto;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
file with the corporate secretary his written objection thereto; solidarily liable with the corporation; or
3. He agrees to hold himself personally and solidarily liable with the corporation; 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate
action.”
4. He is made, by a specific provision of law, to personally answer for his corporate action.
In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the
In the case at bench, there is no indication that petitioner David Ong could be held personally accountable
termination of employment of corporate employees done with malice or in bad faith. In this case, it is
under any of the abovementioned cases.
undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They were
(GR No. 99032; 270 SCRA 423; March 26, 1997) RICARDO A. LLAMADO, petitioner, vs. COURT OF the ones, who as high-ranking officers and directors of Crispa, Inc., signed the Board Resolution
APPEALS and PEOPLE OF THE PHILIPPINES, respondents retrenching the private respondents on the feigned ground of serious business losses that had no basis
apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be held civilly and criminally value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held jointly
liable and severally liable with Crispa, Inc. for all the money claims of the illegally terminated respondent
employees in this case.
HELD: Petitioner denies knowledge of the issuance of the check without sufficient funds and involvement
in the transaction with private complainant. However, knowledge involves a state of mind difficult to THREE-FOLD DUTY OF DIRECTORS
establish. Thus, the statute itself creates a prima facie presumption, i.e., that the drawer had knowledge
of the insufficiency of his funds in or credit with the bank at the time of the issuance and on the check's SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully and
presentment for payment. Petitioner failed to rebut the presumption by paying the amount of the check knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
within five (5) banking days from notice of the dishonor. His claim that he signed the check in blank which negligence or bad faith in directing the affairs of the corporation or acquire any personal or
allegedly is common business practice, is hardly a defense. If as he claims, he signed the check in blank, pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and
he made himself prone to being charged with violation of BP 22. It became incumbent upon him to prove severally for all damages resulting therefrom suffered by the corporation, its stockholders or
his defenses. As Treasurer of the corporation who signed the check in his capacity as an officer of the members and other persons.
corporation, lack of involvement in the negotiation for the transaction is not a defense.
A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
Petitioner's argument that he should not be held personally liable for the amount of the check because it corporation in respect of any matter which has been reposed in them in confidence, and upon
was a check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the said
the corporation, is also untenable. “The third paragraph of Section 1 of BP Blg. 22 states: ―Where the director, trustee, or officer shall be liable as a trustee for the corporation and must account for the
check is drawn by a corporation, company or entity, the person or persons who actually signed the check profits which otherwise would have accrued to the corporation.
in behalf of such drawer shall be liable under this Act”
Three-fold duty of directors: 1. Obedience; 2. Diligence ; 3. Loyalty
(GR No. 121434; 273 SCRA 35; June 2, 1997) ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F.
OBEDIENCE: as stated in the first part of Sec. 30 refers to the act of voting or assenting, either willfully or
BASILIO, petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS,
knowingly, to patently unlawful acts thereby making the responsible director liable for damages resulting
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
therefrom; SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully
ISSUE: WON petitioners can be held liable? and knowingly vote for or assent to patently unlawful acts of the corporation xxxx xxx xxx shall be

liable jointly and severally for all damages resulting therefrom suffered by the corporation, its Negros) have granted progressively increasing participations to their adhered planter at an average rate
stockholders or members and other persons. of 62.333% for the 1951-52 crop year; 64.2% for 1952-53; 64.3% for 1953-54; 64.5% for 1954-55; and
63.5% for 1955-56, the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
DILIGENCE: Under the second part of Sec. 30, the directors are required to manage the corporate affairs August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
with reasonable care and prudence. This is because the liability of a corporation is not limited to willful
breach of trust or excess of power, but extends also to negligence. Their liability rests upon the common LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
law rule which renders liable every agent who violates his authority or neglects his duty to the damage of
his principal. SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who xxx Generally: a director is not liable for the acts of their co-directors, unless: (1) He connives or participates;
xxx xxx are guilty of gross negligence or bad faith in directing the affairs of the corporation xxx or (2) He is negligent in not discovering or acting to prevent it. Thus, absent of actual knowledge of the
xxx xxx shall be liable jointly and severally for all damages resulting therefrom suffered by the wrongful activities, on the part of the co-directors, the same cannot be imputed to the other director unless
corporation, its stockholders or members and other persons. in the exercise of reasonable care attending his responsibilities, he should have been aware of suspicious
circumstances demanding correlative action.
The degree of diligence is relative. The fairer and more satisfactory rule is that degree of care and diligence
which an ordinary prudent director could reasonably be expected to exercise in a like position under similar LOYALTY: refers to the proscription imposed on directors on acquiring any personal or pecuniary interest
circumstances. in conflict with their duty as director. Their relationship is regarded as “fiduciary relation”. As fiduciaries,
they are obliged to act with utmost candor and fair dealing for the interest of the corporation and without
BUSINESS JUDGMENT RULE: Although directors are commonly said to be responsible both for selfish motives. The degree of diligence is relative. The fairer and more satisfactory rule is that degree of
reasonable care and also prudence, the formula is continually repeated that they are not liable for losses care and diligence which an ordinary prudent director could reasonably be expected to exercise in a like
due to imprudence or honest error of judgment. The business judgment rule in effect states that questions position under similar circumstances. SEC 30 Liability of Directors, Trustees or Officers. – Directors
of policy and management are left solely to the honest decision of the board of directors and the or trustees xxx xxx xxx who acquire any personal or pecuniary interest in conflict with their duty
courts are without authority to substitute its judgment as against the former. The directors are as such directors or trustees shall be liable jointly and severally for all damages resulting
business managers and as long as they act in good faith, its actuations are not subject to judicial therefrom suffered by the corporation, its stockholders or members and other persons.
review.
A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
CASE: corporation in respect of any matter which has been reposed in them in confidence, and upon
which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the said
(GR No. L-15092; 5 SCRA 36; May 18, 1962) ALFREDO MONTELIBANO, ET AL., plaintiffs- director, trustee, or officer shall be liable as a trustee for the corporation and must account for the
appellants, vs. BACOLOD-MURCIA MILLING CO., INC., defendant-appellee. profits which otherwise would have accrued to the corporation.
ISSUE: WON the resolutions passed by the board are valid and binding? The common law principle regarding loyalty is also contained in:
HELD: There can be no doubt that the directors of the appellee company had authority to modify the SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a business
proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of
the other contracting parties. such corporation, the director must account for and refund to the latter all such profits, unless the
act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3)
As the resolution in question was passed in good faith by the board of directors, it is valid and
of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that
binding, and whether or not it will cause losses or decrease the profits of the central, the court has
the director risked one’s own funds in the venture.
no authority to review them.
Gleaned from Sec. 30 and 33, the duty of loyalty is violated in the following instances:
“They hold such office charged with the duty to act for the corporation according to their best judgment,
and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. 1. When a director or trustee “acquires any personal or pecuniary interest in conflict with
Whether the business of a corporation should be operated at a loss during depression, or close down at a (his) duty as such director or trustee”;
smaller loss, is a purely business and economic problem to be determined by the directors of the 2. When he “attempts to acquire or acquires, in violation of his duty, any interest adverse
corporation and not by the court. It is a well-known rule of law that questions of policy or of to the corporation in respect to any matter which has been reposed in him in confidence,
management are left solely to the honest decision of officers and directors of a corporation, and as to which equity imposes a disability upon him to deal in his own behalf”; and
the court is without authority to substitute its judgment of the board of directors; the board is the 3. When he, “by virtue of his office, acquires for himself a business opportunity which
business manager of the corporation, and so long as it acts in good faith its orders are not should belong to the corporation, thereby obtaining profit to the prejudice of such
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).” corporation”.
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San FORBIDDEN PROFITS (SEC 30): Forbidden in the sense that directors and officers are fiduciary
Carlos and Binalbagan (which produce over one-third of the entire annual sugar production in Occidental representatives of the corporation and as such they are not allowed to obtain any personal profit,

commission, bonus or gain for their official actions. This may also refer to those arising from transactions company, and was elected by the board the agent and administrator general of such company, "with
of directors with third persons which may involve misappropriation of corporate opportunities and disloyal exclusive intervention in the management" of its general business. Concealing his identity when procuring
diverting of business. Directors and officers are corporate insiders and cannot, therefore, utilize their the purchase of stock, by his agent, was in itself stock evidence of fraud on the part of the defendant. The
strategic position for their own preferment or use their powers and opportunities for their personal concealment was not a mere inadvertent omission but was a studied and intentional omission, to be
advantage to the exclusion of the interest which they represent. characterized as part of the deceitful machination to obtain the purchase without giving information
whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to, in that
CORPORATE OPPORTUNITY DOCTRINE(SEC 33): it places a director of a corporation in the position way, obtain the same at a lower price.
of a fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense
and with the facilities of the corporation. He cannot appropriate to himself opportunity which in fairness SELF-DEALING DIRECTORS
should belong to the corporation.
SDD- is one who deas or transact business with his own corporation.
RATIFICATION:
SEC. 31. Dealings of Directors, Trustees or Officers with the Corporation. – A contract of the
1. The second paragraph of Sec. 30 which makes a director liable to account for profits if he attempts to corporation with (1) one or more of its directors, trustees, officers or their spouses and relatives
acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in within the fourth civil degree of consanguinity or affinity is voidable, at the option of such
confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to corporation, unless all the following conditions are present:
ratification.
(a) The presence of such director or trustee in the board meeting in which the contract was
2. Whereas, in Sec. 33, if a director acquires a business opportunity which should belong to the approved was not necessary to constitute a quorum for such meeting;
corporation, he is bound to account for such profits unless his act is ratified by the stockholders
owing or representing at least 2/3 of the outstanding capital stock. (b) The vote of such director or trustee was not necessary for the approval of the contract;
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market (c) The contract is fair and reasonable under the circumstances;
value of P100M for P90M.
(d) In case of corporations vested with public interest, material contracts are approved by at least
a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 33 and may be subject two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent
to ratification; A merely acquired a business opportunity owing to the corporation. directors voting to approve the material contract; and
b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit (e) In case of an officer, the contract has been previously authorized by the board of directors.
of P5M, it would fall under Sec. 30 and not subject to ratification, A should return the profits to REALTY
Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the
CORP. It was a matter reposed in him in confidence.
case of a contract with a director or trustee, such contract may be ratified by the vote of the
CASE: 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
STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) of the adverse interest of the directors or trustees involved is made at such meeting and the
contract is fair and reasonable under the circumstances.
ISSUE: WON it was the duty of the defendant to disclose to the agent of the plaintiff the facts bearing upon
or which might affect the value of the stock A contract of the corporation with one or more of its directors or trustees or officers is Generally voidable,
at the option of such corporation, unless all of the following conditions are present:
HELD: A director upon whose action the value of the shares depends cannot avail of his knowledge of
what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his (a) The presence of such director or trustee in the board meeting in which the contract was approved was
expected action and the resulting value of the shares. Even though a director may not be under the not necessary to constitute a quorum for such meeting;;
obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares,
that duty may exist in special cases, and did exist upon the facts in this case. In this case, the facts clearly (b) The vote of such director or trustee was not necessary for the approval of the contract;
indicate that a director of a corporation owning friar lands in the Philippine Islands, and who controlled the
(c) The contract is fair and reasonable under the circumstances;
action of the corporation, had so concealed his exclusive knowledge of the impending sale to the
government from a shareholder from whom he purchased, through an agent, shares in the corporation, (d) In case of corporations vested with public interest, material contracts are approved by at least two-
that the concealment was in violation of his duty as a director to disclose such knowledge, and amounted thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors
to deceit sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the voting to approve the material contract; and
shareholder's agent did or did not have power to sell the stock. In addition to his ownership of almost three-
fourths of the shares of the stock of the company, the defendant was one of the five directors of the (e) In case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the case of a bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the
contract with a director or trustee, such contract may be ratified: circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was
attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the
1. The contract is ratified by the vote of the stockholders representing at least two-thirds (2/3) of stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract
the outstanding capital stock or of at least two-thirds (2/3) of the members was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.
2. Such ratification is made at a meeting called for that purpose;
3. Full disclosure of the adverse interest of the directors or trustees involved is made; and (GR No. 6217; 21 Phil. 95; Dec. 26, 1911) CHARLES W. MEAD, plaintiff-appellant, vs. E. C.
4. The contract is fair and reasonable under the circumstances. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY,
defendant-appellants
CASES:
ISSUE: WON officers or directors of the corporation may purchase the corporate property
PRIME WHITE CEMENT CORPORATION, petitioner, vs. IAC and ALEJANDRO TE, respondents
(GR No. L-68555; 220 SCRA 103; March 19, 1993 HELD: While a corporation remains solvent, we can see no reason why a director or officer, by the authority
of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money
ISSUE: WON the dealership agreement entered into by Te with his own corporation is valid and binding or buy property from it, in like manner as a stranger. So long as a purely private corporation remains
solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to
HELD: In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board
others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors,
of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing"
whether they are members of the corporation or not, and must manage its property and assets with strict
director.
regard to their interest; and if they are themselves creditors while the insolvent corporation is under their
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his management, they will not be permitted to secure to themselves by purchasing the corporate property or
corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good
latter to his own advantage and benefit. As corporate managers, directors are committed to seek faith and for an adequate consideration purchase from a majority of the directors or stockholders the
the maximum amount of profits for the corporation. This trust relationship "is not a matter of property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the
statutory or technical law. It springs from the fact that directors have the control and guidance of minority. (citation omitted)
corporate affairs and property and hence of the property interests of the stockholders.
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if
That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings
entered into with a person other than a director or officer of the corporation, the fact that the other party to
with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided
the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of
to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine
all, we believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into
founded on the soundest morality, and which has received the clearest recognition in this court and others.
in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five
(citation omitted) The general doctrine, however, in regard to contracts of this class, is, not that they are
years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman
absolutely void, but that they are voidable at the election of the party whose interest has been so
himself and must have known, or at least must be presumed to know, that at that time, prices of
represented by the party claiming under it. We say, this is the general rule; for there may be cases where
commodities in general, and white cement in particular, were not stable and were expected to rise. At the
such contracts would be void ab initio; as when an agent to sell buys of himself, and by his power of
time of the contract, petitioner corporation had not even commenced the manufacture of white cement,
attorney conveys to himself that which he was authorized to sell. but even here, acts which amount t a
the reason why delivery was not to begin until 14 months later. He must have known that within that period
ratification by the principal may validate the sale
of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own
Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, The sale or transfer of the corporate property in the case at bar was made by three directors who were at
it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow the same time a majority of stockholders. If a majority of the stockholders have a clear and a better right
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag to sell the corporate property than a majority of the directors, then it can be said that a majority of the
for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he stockholders made this sale or transfer to the defendant McCullough.
was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a
basis which renders a contract entered into by the President, without authority from the Board of Directors, What were the circumstances under which said sale was made? The corporation had been going from
void or voidable, although it may have been in the ordinary course of business. We believe that the fixed bad to worse. The work of trying to raise the sunken Spanish fleet had been for several months abandoned.
price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, The corporation under the management of the plaintiff had entirely failed in this undertaking. It had broken
when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee and its contract with the naval authorities and the $10,000 Mexican currency deposited had been confiscated.
Gaudencio Galang stipulated as follows: It had no money. It was considerably in debt. It was a losing concern and a financial failure. To continue
its operation meant more losses. Success was impossible. The corporation was civilly dead and had
The price of white cement shall be mutually determined by us but in no case shall the same be less than passed into the limbo of utter insolvency. The majority of the stockholders or directors sold the assets of
P14.00 per bag (94 lbs) As director, especially since he was the other party in interest, respondent Te's this corporation, thereby relieving themselves and the plaintiff of all responsibility. This was only the wise
and sensible thing for them to do. They acted in perfectly good faith and for the best interests of all the 3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right –
stockholders. "It would be a harsh rule that would permit one stockholder, or any minority of stockholders wherein the corporation itself is joined as a necessary party, and recovery is in favor of and for
to hold a majority to their investment where a continuation of the business would be at a loss and where the corporation. It is a suit granted to any stockholder to institute a case to remedy a wrong
there was no prospect or hope that the enterprise would be profitable." done directly to the corporation and indirectly to stockholders.
We therefore conclude that the sale or transfer made by the quorum of the board of directors — a majority CASES:
of the stockholders — is valid and binding upon the majority-the plaintiff.
(GR No. L-5174; 19 Phil. 83; March 17, 1911) CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO
INTERLOCKING DIRECTORS DEL SAZ OROZCO, ET AL, defendants-appellees
An interlocking director is a director in one corporation who deals or transacts with another corporation of ISSUE: WON plaintiff has capacity to sue?
which he is also a director. In such case, there may effectively be a dual agency, a divided allegiance
where allegiance in one corporation may subordinated to the other. HELD: In suits of this character the corporation itself and not the plaintiff stockholder is the real
party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a
The prevailing view is that these contracts entered into where there is an interlocking director is not universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the
voidable merely by reason of conflicting duties or interest as to corporations represented, even when a corporate property; that both of these are in the corporation itself for the benefit of all the stockholders.
majority or all of the directors are common to both corporations. It is recognized that such will be upheld if Text writers illustrate this rule by the familiar example of one person or entity owning all the stock and still
there is no bad faith or unfairness or collusion. having no greater or essentially different title than if he owned but one single share. Since, therefore, the
stockholder has no title, it is evident that what he does have, with respect to the corporation and his fellow
SEC. 32. Contracts Between Corporations with Interlocking Directors. – Except in cases of fraud, stockholder, are certain rights sui generis. These rights are generally enumerated as being, first, to have
and provided the contract is fair and reasonable under the circumstances, a contract between two a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of
(2) or more corporations having interlocking directors shall not be invalidated on that ground the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to
alone: Provided, That if the interest of the interlocking director in one (1) corporation is substantial participate proportionately in the distribution of the corporate assets upon the dissolution or winding up.
and the interest in the other corporation or corporations is merely nominal, the contract shall be (Purdy's Beach on Private Corporations, sec. 554.)
subject to the provisions of the preceding section insofar as the latter corporation or corporations
are concerned. The right of individual stockholders to maintain suits for and on behalf of the corporation was denied until
within a comparatively short time, but his right is now no longer doubted. Accordingly, in 1843, in the
Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be leading case of Foss vs. Harbottle, a stockholder brought suit in the name of himself and other defrauded
considered substantial for purposes of interlocking directors. stockholders, and for the benefit of the corporation, against the directors, for a breach of their duty to the
corporation. This case was decided against the complaining stockholder, on the ground that the
NOTE:
complainant had not proved that the corporation itself was under the control of the guilty parties, and had
1. The contract between corporations with interlocking director is valid absent fraud and provided it is not proved that it was unable to institute suit. The court, however, broadly intimated that a case might arise
reasonable under the circumstances; when a suit instituted by defrauded stockholders would be entertained by the court and redress given.
Acting upon this suggestion, and impelled by the utter inadequacy of suits instituted by the corporation,
2. If the interest of the interlocking director in one corporation exceeds 20% and in the other merely defrauded stockholders continued to institute these suits and to urge the courts of equity to grant relief.
nominal, the contract becomes voidable at the latter corporation’s option. In effect, the director would be These efforts were unsuccessful in clearly establishing the right of stockholders herein until the cases of
treated as a self-dealing director under Sec. 31 and thus becomes generally voidable subject to ratification; Atwol against Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, in 1855. These
two great and leading cases have firmly established the law for England and America, that where corporate
3. If the interest in both companies is either BOTH substantial or BOTH nominal, Sec. 32 will apply which directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
means that it is valid and binding without need of ratification. corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute
that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring
DERIVATIVE SUIT about a redress of the wrong done directly to the corporation and indirectly to the stockholders.
In case of a wrongful or fraudulent act of a director, officer or agent, stockholders have the following So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a
options: right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon
1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to when, how, and for what purpose he acquired the shares which he now owns. In the determination of
inspect corporate books and records or pre-emptive rights; these questions we can not see how, if it be true that the bank is a quasi-public institution, it can affect in
2. Representative or Class Suit – in which one or more members of a class sue for themselves any way the final result.
as a class or for all to whom the right was denied, either as an individual action or a derivative It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the defendants,
suit; and as members of the board of directors and board of government, respectively, during each and all the years
1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice of the bank and its ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF
stockholders, appropriate to their own use from the profits of the bank sums of money amounting THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees
approximately to P20,000 per annum.
ISSUE: WON the court below erred in dismissing the complaint?
It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903, the
shares which he now owns, injured or affected in any manner by the transactions set forth in the second HELD: The defendants mainly controvert the right of plaintiff to question the appointment and selection of
cause of action. His vendor could have complained of these transactions, but he did not choose to do so. defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff,
The discretion whether to sue to set them aside, or to acquiesce in and agree to them, is, in our opinion, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an
incapable of transfer. If the plaintiff himself had been injured by the acts of defendants' predecessors that individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation
is another matter. He ought to take things as he found them when he voluntarily acquired his ten shares. wherein he holds stock in order to protect or vindicate corporate rights, whenever (1) the officials of the
If he was defrauded in the purchase of these shares he should sue his vendor. (Thus, he may sue for the corporation refuse to sue, or (2) are the ones to be sued or (3) hold the control of the corporation. In such
second half of 1903 to 1907 but not for the years 1989 to the first half of 1903.) actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest (Citation Omitted). Plaintiff-appellant's action here is precisely in conformity, with these principles.
So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law, that He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic
a stockholder in a corporation who was not such at the time of the transactions complained of, or whose Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to
shares had not devolved upon him since by operation of law, cannot maintain suits of this character, unless be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since
such transactions continue and are injurious to the stockholder, or affect him especially and specifically in its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds
some other way. charged by plaintiff are frauds against the Bank that redounded to its prejudice.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926) HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
TEAL and GEORGE W. ROBINSON, plaintiffs-appellants, vs. THE ASIA BANKING CORPORATION, Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo
NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are
MACINTOSH, defendants-appellees. Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of
action for the bank: if the questioned appointments were made solely to protect Roman from criminal
ISSUE: WON the plaintiffs have the legal capacity to bring an action? prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in
favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the
HELD: Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs
Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments
done to the corporation, but that the action must be brought by the Board of Directors, the appellees argue
would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin
— and the court below held — that the corporation Teal and Company is a necessary party plaintiff and
disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the
that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the
complaint in this case (Angeles vs. Santos, supra.).
proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the
complaint and, consequently, admitted through the demurrer that the corporation Teal and Company is Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to
under the complete control of the principal defendants in the case, and, in these circumstances, it is bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action
obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively taken by the manager and the board of directors of the Republic Bank; and any demand for intra-corporate
would have been useless, and the law does not require litigants to perform useless acts. (Citation Omitted) remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder
to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to
The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors
make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no
Corporation, had no legal right to proceed against that corporation in the manner suggested in the
ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the
complaint evidently rest upon a misconception of the character of the action. In this proceeding it was
proceedings for the absence of other stockholders to be of any significance, no issues having even been
necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to
joined.
the alleged loss of their property and, in making a full disclosure, references to the Philippine Motors
Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against ISSUE2: WON the Corporation should be a plaintiff or defendant?
the corporation itself at this stage of the proceedings.
HELD2: The English practice is to make the corporation a party plaintiff, while in the United States, the
In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not in usage leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123).
any respect fatally defective. The judgment of the court below is therefore reversed, the defendants Objections can be raised against either method. (1) Absence of corporate authority would seem to militate
demurrer is overruled, and it is ordered that the return of the record to the Court within ten days from the against making the corporation a party plaintiff, while (2) joining it as defendant places the entity in the
return of the record to the Court of First Instance. So ordered awkward position of resisting an action instituted for its benefit. What is important is that the corporation'
should be made a party, in order to make the Court's judgment binding upon it, and thus bar future
(GR No. L-22399; 19 SCRA 671; March 30, 1967) REPUBLIC BANK, represented in this action by
relitigation of the issues. On what side the corporation appears loses importance when it is considered
DAMASO P. PEREZ, etc., plaintiff-appellant, vs. MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO

that it lay within the power of the trial court to direct the making of such amendments of the pleadings, by It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644%
adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately
Misjoinder of parties is not a ground to dismiss an action. (Ibid.) represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock —
ISSUE3: WON the action of the plaintiff amounts to a quo warranto proceeding? finds no support whatever in the law. The requisites for a derivative suit are as follows:
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,
directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers the number of his shares not being material;
appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on the corporation's
bank business. Whether the complaint's allegations to such effect are true or not must be determined after b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for
due hearing. the appropriate relief but the latter has failed or refused to heed his plea; and
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under Compensation of c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
Directors) caused to the corporation and not to the particular stockholder bringing the suit.
ISSUE: WON the appeal may be considered as a derivative action? The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to
bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he
HELD: A derivative suit is an action brought by minority shareholders in the name of the corporation to is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress
redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.
equity and has been the principal defense of the minority shareholders against abuses by the majority.
Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles
Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally
Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent
for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing with that of the PCGG, or that, not having been elected by the minority stockholders, his vote would
on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated necessarily never consider the latter's interests. The proposition is not only logically indefensible, non
who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the sequitur, but also constitutes an erroneous conception of a director's role and function, it being plainly a
allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over the director's duty to vote according to his own independent judgment and his own conscience as to what is
subject matter and nature of the action. This was not complied with by the petitioners either in their in the best interests of the company. Moreover, it is undisputed that apart from the qualifying shares given
complaint before the court a quo nor in the instant petition which, in part, merely states that "this is a to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be
petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in deemed to be "beholden" to the PCGG, his ownership of these shares being precisely what he invokes as
Criminal Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal failed to impose any the source of his authority to bring the derivative suit.
civil liability against the private respondents. By no amount of equity considerations, if at all deserved, can
a mere appeal on the civil aspect of a criminal case be treated as a derivative suit. (GR No. L-20395; 136 SCRA 365; May 13, 1985) ELTON W. CHASE, as minority Stockholder and on
behalf of other Stockholders similarly situated and for the benefit of AMERICAN MACHINERY AND
Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, PARTS MANUFACTURING, INC., plaintiff-appellant, vs. DR. VICTOR BUENCAMINO, SR., VICTOR
the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any BUENCAMINO, JR., JULIO B. FRANCIA and DOLORES A. BUENCAMINO, respondents.
jurisdiction to entertain the complaint. The ease should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being ISSUE: WON Chase has capacity to institute a derivative suit?
intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A.
HELD: The evidence of defendants proves very clearly that right from the start, Chase was by them
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989) SAN MIGUEL CORPORATION, represented by recognized as a stockholder and initial incorporator with 600 paid up shares representing a 1/3 interest in
EDUARDO DE LOS ANGELES, petitioners, vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO Amparts, and that would be enough for Chase to have the correct personality to institute this derivative
TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO suit; the second place, it also appears apparently undenied that Chase did not win in California so that he
SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR., respondents. did not recover the $150,000.00 that he had prayed for there against Overseas, which if he had would
really in the mind of the Court have put him in estoppel to intervene in any manner as incorporator or
ISSUE: WON De Los Angeles can institute a derivative suit? stockholder of Amparts; and in the third place and most important it should not be forgotten that Chase
has filed the present case not for his personal benefit, but for the benefit of Amparts, so that to the Court
HELD: The theory that de los Angeles has no personality to bring suit in behalf of the corporation — the argument of estoppel as against him would appear to be out of place; the estoppel to be valid as a
because his stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG — defense must be an estoppel against Amparts itself; the long and short of it is that the Court is impelled
cannot be sustained. and constrained to discard all the other defenses set up by Dr. Buencamino on the principal complaint; the
result of all these would be to sustain so far, the position of Chase that Dr. Buencamino must account for

the P570,000.00 used to pay the second series of payment on the subscription, the P330,000.00 used in ISSUE: WON a derivative suit is the more proper action that should have been filed by respondents?
paying the lsst series on the subscription, plus another sum of P245,000.00 entered as loan on his favor
and against Amparts, for the sum of P434,000.00 earned in the blackmarketing of the excess of HELD: The petitioners contend that the proper remedy of the plaintiffs would be to institute a derivative
$140,000.00 dollars on the forwarding costs and promotional expenses, for the sum of P391,200.00 suit against the petitioners in the name of the corporation in order to secure a binding relief after exhausting
earned in the blackmarketing of the excess of $117,000.00 in the transaction with Bertoni and Cotti, and all the possible remedies available within the corporation.
all these would reach a total of P1,970,200.00; and as the appropriation of the profits for himself was a
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he
quasi-delict, the liability therefore assuming that it had been done with the cooperation of Cranker would
holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse
have to be solidary, 2194 New Civil Code.
to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961) CATALINA R. REYES, petitioner, vs. HON. stockholder is regarded as a nominal party, with the corporation as the real party in interest. In the case at
BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and FRANCISCA bar, however, the plaintiffs are alleging and vindicating their own individual interests or prejudice, and not
R. JUSTINIANI, respondents. that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an action.
ISSUE: WON Justiniani may be allowed to institute the case for receivership and damages?
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS, defendant-appelle (86
HELD: It is not denied by petitioner that the allocation of dollars to the corporation for the importation of Phil. 387; May 19, 1950)
raw materials was suspended. In the eyes of the court below, as well as in our own, the importation of
textiles instead of raw materials, as well as the failure of the Board of Directors to take action against those ISSUE: WON plaintiffs have a right to bring the action for their benefit?
directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the part of
HELD: No. The complaint shows that the action is for damages resulting from mismanagement of the
the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority
affairs and assets of the corporation by its principal officer, it being alleged that defendant's
stockholder on behalf of the corporation.
maladministration has brought about the ruin of the corporation and the consequent loss of value of its
―It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of stocks. The injury complained of is thus primarily to that of the corporation, so that the suit for the damages
mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
The stockholders may not directly claim those damages for themselves for that would result in the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon
appropriation by, and the distribution among them of part of the corporate assets before the dissolution of
the stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz Orozco
the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in
(19 Phil. 82), decided by this Court as early as 1911. In that case, the Banco Español-Filipino suffered
view of section 16 of the Corporation Law.
heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the president and directors had been more vigilant But while it is to the corporation that the action should pertain in cases of this nature, however, if the
in the administration of the affairs of the bank. The stockholders constituting the minority brought a suit in officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a
behalf of the bank against the directors to recover damages, and this over the objection of the majority of demand upon them to file the necessary suit would be futile because they are the very ones to be sued or
the stockholders and the directors. This court held that the suit could properly be maintained.‖ (64 Phil., because they hold the controlling interest in the corporation, then in that case any one of the stockholders
Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697). is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real property in interest, so that such damages
The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two
as may be recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In
years is also without merit. During that period of time respondent had the right to assume and expect that
other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of
the directors would remedy the anomalous situation of the corporation brought about by their own wrong
the corporation, which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).
doing. Only after such period of time had elapsed could respondent conclude that the directors were remiss
in their duty to protect the corporation property and business. In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation
but for their own benefit, since they ask that the defendant make good the losses occasioned by his
We are led to agree with the judge below that the appointment of a receiver was not only expedient but
mismanagement and pay to them the value of their respective participation in the corporate assets on the
also necessary to restore the faith and confidence of the Central Bank authorities in the administration of
basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any,
the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to
are paid and the existence of the corporation terminated by the limitation of its charter or by lawful
the operation of the textile mills.
dissolution in view of the provisions of section 16 of the Corporation Law.
(GR No. -40620; 90 SCRA 40; May 6, 1979) RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO
It results that plaintiff's complaint shows no cause of action in their favor so that the lower court did not err
DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO,
in dismissing the complaint on that ground.
petitioners, vs. HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of
Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE,
and LUISA U. DACLES respondents.
While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the the board, as may be delegated to it in the bylaws or by majority vote of the board, except with
Corporation Law be first complied with, we note that the action stated in their complaint is susceptible of respect to the: (a) approval of any action for which shareholders’ approval is also required; (b)
being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer. filling of vacancies in the board; (c) amendment or repeal of bylaws or the adoption of new bylaws;
Such amendment, however, is not possible now, since the complaint has been filed in the wrong court, so (d) amendment or repeal of any resolution of the board which by its express terms is not
that the same last to be dismissed. amendable or repealable; and (e) distribution of cash dividends to the shareholders.
The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in The board of directors may create special committees of temporary or permanent nature and
which the venue shall be laid in the proper province. Appellant's shall pay costs. So ordered determine the members’ term, composition, compensation, powers, and responsibilities.
IN SUMMARY: Rules, requirements and procedure so that a derivative suit may proceed or prosper: NOTE: the phrase “Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board” means that members of the committee must also be members of the
1. That the party bringing the suit should be a stockholder as of the time the act or transaction complained board.
of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does
not apply if such act or transaction continues and is injurious to the stockholder or affect him specifically CHAPTER VII- CORPORATE POWER AND AUTHORITY
in some other way.
Note: A corporation merely exists by virtue of a grant by the State and may, therefore, only exercise such
The number of his shares is immaterial since he is not suing in his own behalf or for the protection or powers, authority or functions that the State allows it to do.
vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for
the benefit of the corporation. The statement of the objects, purposes or powers in the AOI results practically in defining the scope of the
authorized corporate enterprise or undertaking. This statement both confers and also limits the actual
2. He has tried to exhaust intra-corporate remedies, he has made a demand on the board of directors for authority of the corporation.
the appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required
if the company is under the complete control of the directors who are the very ones to be sued (or where Along with the powers indicated in the AOI, a corporation can also exercise powers that may be granted
it becomes obvious that a demand upon them would have been futile and useless) since the law does not by law, particularly those provided under Sec. 35 and 43 of the Corporation Code and those which may
require a litigant to perform useless acts; be necessary or incidental to tis existence.
3. The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of In short, corporate authority may be classified as:
action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is
1. Express powers – those expressly granted by law inclusive of the corporate charter or AOI;
dismissible. This is because the cause of action actually devolves on the corporation and not to a particular
stockholder. 2. Implied Powers – those impliedly granted as are essential or reasonably necessary to the carrying out
of the express powers; and
4. The corporation should be made a party, either as party-plaintiff or defendant, in order to make the
court’s judgment binding upon it, and thus, bar future litigation of the same issues. On what side the 3. Incidental Powers – those incidental to its existence.
corporation appears loses importance when it is considered that it lay
within the power of the court to direct the making of amendment of the pleading, by adding or dropping the power and capacity:
parties, as may be required in the interest of justice. Misjoinder of parties is not a ground to dismiss action;
and, (a) To sue and be sued in its corporate name;
5. Any benefit or damages recovered shall pertain to the corporation. This is so because in all instances, (b) To have perpetual existence unless the certificate of incorporation provides otherwise;
derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a
right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an (c) To adopt and use a corporate seal;
individual or personal suit to vindicate his personal or individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or (d) To amend its articles of incorporation in accordance with the provisions of this Code;
individually. Suits that stockholders may bring against erring directors or officers: (e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same
EXECUTIVE COMMITTEE in accordance with this Code;
SEC. 34. Executive, Management, and Other Special Committees. – If the bylaws so provide, the (f) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks
board may create an executive committee composed of at least three (3) directors. Said committee in accordance with the provisions of this Code; and to admit members to the corporation if it be a
may act, by majority vote of all its members, on such specific matters within the competence of nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise SEC. 13. Service upoin private domestic corporation or partnership. — If defendant is a corporation
deal with such real and personal property, including securities and bonds of other corporations, organized under the laws of the Philippines or a partnership duly registered, service may be made on the
as the transaction of the lawful business of the corporation may reasonably and necessarily president, manager, secretary, cashier, agent, or any of its directors.
require, subject to the limitations prescribed by law and the Constitution;
For the purpose of receiving service of summons and being bound by it, a corporation is identified with its
(h) To enter into a partnership, joint venture, merger, consolidation, or any other commercial agent or officer who under the rule is designated to accept service of process. "The corporate power to
agreement with natural and juridical persons; receive and act on such service, so far as to make it known to the corporation, is thus vested in such officer
or agent." (Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
(i) To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
donations in aid of any political party or candidate or for purposes of partisan political activity; corporation. The officer upon whon service is made be one who is named in the statute; otherwise the
service is insufficient. So, where the statute required that in the case of a domestic corporation summons
(j) To establish pension, retirement, and other plans for the benefit of its directors, trustees, should be served on "the president or head of the corporation secretary treasurer, cashier or managing
officers, and employees; and agent thereof", service of summons on the secretary's wife did not confer jurisdiction over the corporation
in the foreclosure proceeding against it. Hence, the the decree of forclosure and the deficiency judgment
(k) To exercise such other powers as may be essential or necessary to carry out its purpose or
were void and should be vacated. (Reader vs. District Court, 94 Pacific 2nd 858).
purposes as stated in the articles of incorporation.
The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in
POWER TO SUE AND BE SUED
an action against it or to insure that the summons be served on a representative so integrated with the
A corporation may sue and be sued in its corporate name just like any other person. corporation that such person will know what to do with the legal papers served on him. In other words, "to
bring home to the corporation notice of the filing of the action". (35A C.J.S. 288 citing Jenkins vs. Lykes
VENUE: the action filed against it must be instituted at the place of principal office of the corporation. Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249).
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: Sec. 11. Service upon In the instant case the Manila court did not acquire jurisdiction over Delta Motor because it was not properly
domestic private juridical entity. When the defendant is a corporation, partnership or association served with summons. The service of summons on Dionisia G. Miranda, who is not among the persons
organized under the laws of the Philippines with a juridical personality, service may be made on mentioned in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor. Courts acquire
the president, managing partner, general manager, corporate secretary, treasurer, or in-house jurisdiction over the person of a party defendant and of the subject-matter of the action by vertue of the
counsel. service of summons in the manner required by law. Where there is no service of summons or a voluntary
general appearance by the defendant, the court acquires no jurisdiction to pronounce a judgment in the
Service of summons upon persons other than those named under than those named in the above provision cause. (Syllabi Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556).
is without force and effect.
Consequently, the order of default, the judgment by default and the execution in Civil Case No. 97373 are
NOTE: that this rule will hold true if the corporation is sued by a third party. IT WILL NOT hold true and IS void and should be set aside.
NOT applicable in INTRA-CORPORATE controversies. SEC 5 RULE 2, “if defendant is a domestic
corporation service shall be deemed adequate if made upon any of the statutory or corporate officer as (GR No. 136426; Aug. 6, 1999) E. B. VILLAROSA & PARTNER CO., LTD., petitioner, vs. HON.
fixed in the by-laws or their respective secretaries. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City and
IMPERIAL DEVELOPMENT CORPORATION, respondent.
Intra-corporate controversy- these are conflicts between 1. Stockholders themselves, 2. The Corporation
and The Stockholders, and 3. State and the Corporation. ISSUE: WON the court acquired jurisdiction?
CASES HELD: No. Earlier cases have uphold service of summons upon a construction project manager; a
corporation's assistant manager; ordinary clerk of a corporation; private secretary of corporate executives;
(GR No. L-41667; April 30, 1976) DELTA MOTOR SALES CORPORATION, petitioner, vs. HON. retained counsel; officials who had charge or control of the operations of the corporation, like the assistant
JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First Instance of Manila, THE CITY SHERIFF general manager; or the corporation's Chief
OF MANILA, and JOSE LUIS PAMINTUAN, respondents
Finance and Administrative Officer. In these cases, these persons were considered as "agent" within the
ISSUE: WON there was proper service of summons? contemplation of the old rule. Notably, under the new Rules, service of summons upon an agent of the
corporation is no longer authorized.
HELD: Rule 14 of the Revised Rules of Court provides:
The designation of persons or officers who are authorized to accept summons for a domestic corporation
or partnership is now limited and more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil

Procedure. The rule now states "general manager" instead of only "manager"; "corporate secretary" SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has
instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is the power and capacity: x x x (c) To adopt and use a corporate seal; xxx xxx xxx
conspicuously deleted in the new rule.
This right has be expressly granted by law. However, it is not mandatory but merely permissive. This is
The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice because the corporate seal performs no further or greater function than to impart prima facie evidence of
Florenz Regalado, thus: the due execution by the corporation of a written document or obligation.
. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be made on the Statutes empowering corporations to make and own a seal are not mandatory but merely permissive.
president, manager, secretary, cashier, agent or any of its directors." The aforesaid terms were obviously
ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word "agent" POWER TO AMEND ARTICLES OF INCORPORATION
of the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely appeared
The procedures for the exercise of this right are provided under Sec. 15, Sec. 36 and 37 as discussed
to challenge the validity of service of summons but whose very appearance for that purpose was seized
earlier under CHAPTER 5: CORPORATE CHARTER AND ITS AMENDMENTS.
upon to validate the defective service, is an illustration of the need for this revised section with limited
scope and specific terminology. Thus the absurd result in the Filoil case necessitated the amendment As far as corporations created by special law are concerned, amendment may NOT be considered as a
permitting service only on the in-house counsel of the corporation who is in effect an employee of the matter of right. The law creating it may or may not authorize or empower the corporation to make any
corporation, as distinguished from an independent practitioner. (emphasis supplied). changes in its AOI or charter. However, whether empowered or not, Congress may amend or repeal a
corporate charter by virtue of its inherent authority to amend or repeal laws under the Consitution.
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision Committee, stated
that "(T)he rule must be strictly observed. Service must be made to one named in (the) statute . . . POWER TO ADOPT BY-LAWS
It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict compliance The Corporation Code actually REQUIRES a corporation to adopt by-laws, not contrary to law, morals, or
with the rules has been enjoined. In the case of Delta Motor Sales Corporation vs. Mangosing, the Court public policy, within 1 month from receipt of official notice of the issuance of the certificate of incorporation
held: or registration (Sec. 45).
A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a Amendment of the by-laws are allowed subject to the procedure and requirement provided under Sec. 47.
corporation. The officer upon whom service is made must be one who is named in the statute; otherwise
the service is insufficient. . . . POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS (Governed by title 10 and 11 of the RCC)
The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in The power of a corporation to issue or sell its stocks is an inherent right of any stock corporation except
an action against it or to insure that the summons be served on a representative so integrated with the only as it may be regulated by law or by the AOI.
corporation that such person will know what to do with the legal papers served on him. In other words, "to
bring home to the corporation notice of the filing of the action." . . . . Admission, as well as termination of members is a prerogative granted by law to non-stock corporations
and the manner, requirements or procedures for such admission or termination may be contained in the
The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements AOI or by-laws.
as to the manner in which summons should be served on a domestic corporation. . . . . (emphasis supplied).
POWER TO ACQUIRE/ALIENATE PROPERTY
Accordingly, we rule that the service of summons upon the branch manager of petitioner at its branch
office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is Limitations prescribe in:
improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner.
POWER TO HAVE PERPETUAL EXISTENCE the power and capacity: xxx xxx xxx (g) To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage, and otherwise deal with such real and personal property, including
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code has securities and bonds of other corporations, (1) as the transaction of the lawful business of the
the power and capacity: (b) To have perpetual existence unless the certificate of incorporation corporation may reasonably and necessarily require, (2) subject to the limitations prescribed by
provides otherwise; law and the Constitution; xxx xxx xxx
Right of succession – a corporation persists to exist despite the death, incapacity, civil interdiction or The first limitation practically sets the limit of the corporate authority to acquire, own, hold or alienate
withdrawal of the stockholders or members thereof. property. As it has been said the purpose clause in the AOI grants as well as limits the powers which a
corporation may exercise. Verily, WON the acquisition of such property is within the corporate powers or
POWER TO ADOPT AND USE COMMON SEAL authority may reasonably be determined from the purpose or purposes indicated in the AOI.
CASES:
LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL., respondents (Gr No. 17716; It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under
July 31, 1962) consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the foregoing
authorities. In dealing with the powers of a national bank the court, in this case, said:
ISSUE: WON Petitioner may acquire the certificate of public convenience?
When an occasion arises for an investment in real property for either of the purposes specified in the
HELD: Petitioner claims in this regard that its corporate purposes are to carry on a general mercantile and statute the national bank act permits banking associations to act as any prudent person would act in
commercial business, etc., and that it is authorized in its articles of incorporation to operate and otherwise making an investment in real estate, and to exercise the same measure of judgment and discretion. The
deal in and concerning automobiles and automobile accessories' business in all its multifarious ramification act ought not to be construed in such a way as to compel a national bank, when it acquires real property
(petitioner's brief p. 7) and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own for a legitimate purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with such
and operate steamship and sailing ships and other floating craft and deal in the same and engage in the property.
Philippine Islands and elsewhere in the transportation of persons, merchandise and chattels by water; all
this incidental to the transportation of automobiles (id. pp. 7-8 and Exhibit B). At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts
alleged in the second cause of action to have been done by the respondent in excess of its powers that
We find nothing in the legal provision and the provisions of petitioner's articles of incorporation relied upon we refrain from commenting at any length upon said cases. The ground stated in the second cause of
that could justify petitioner's contention in this case. To the contrary, they are precisely the best evidence action is in our opinion without merit.
that it has no authority at all to engage in the business of land transportation and operate a taxicab service.
That it may operate and otherwise deal in automobiles and automobile accessories; that it may engage in (GR No. L56613; March 14, 1988) THE DIRECTOR OF LANDS, petitioner, vs. THE HONORABLE
the transportation of persons by water does not mean that it may engage in the business of land COURT OF APPEALS and IGLESIA NI CRISTO, respondents
transportation — an entirely different line of business. If it could not thus engage in the line of business, it
follows that it may not acquire an certificate of public convenience to operate a taxicab service, such as ISSUE: WON the corporation may acquire the land in question
the one in question, because such acquisition would be without purpose and would have no necessary
HELD: As observed at the outset, had this case been resolved immediately after it was submitted for
connection with petitioner's legitimate business.
decision, the result may have been quite adverse to private respondent. For the rule then prevailing under
GOVERNMENT VS. EL HOGAR FILIPINO (supra) the case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in Republic v.
Villanueva, 114 SCRA 875 as well as the other subsequent cases involving private respondent adverted
ISSUE: WON the erection of the building was reasonable? to above', is that a juridical person, private respondent in particular, is disqualified under the 1973
Constitution from applying for registration in its name alienable public land, as such land ceases to be
HELD: With this contention we are unable to agree. Under the Corporation Law, every corporation has the public land "only upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of
power to purchase, hold and lease such real property as the transaction of the lawful business of the Commonwealth Act No. 141, as amended. These are precisely the cases cited by petitioner in support of
corporation may reasonably and necessarily require. When this property was acquired in 1916, the its theory of disqualification.
business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such
as to justify its directors in acquiring a lot in the financial district of the City of Manila and in constructing Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier
thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of the lot — cases of Carino v. Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95
1,413 square meters — was in excess of its reasonable requirements. The law expressly declares that SCRA 437, among others. Thus, in the recent case of Director of Lands v. Intermediate Appellate Court,
corporations may acquire such real estate as is reasonably necessary to enable them to carry out the 146 SCRA 509, We categorically stated that the majority ruling in Meralco is "no longer deemed to be
purposes for which they were created; and we are of the opinion that the owning of a business lot upon binding precedent", and that "[T]he correct rule, ... is that alienable public land held by a possessor,
which to construct and maintain its offices is reasonably necessary to a building and loan association such personally or through his predecessors-in-interest, openly, continuously and exclusively for the prescribed
as the respondent was at the time this property was acquired. A different ruling on this point would compel statutory period [30 years under the Public Land Act, as amended] is converted to private property by mere
important enterprises to conduct their business exclusively in leased offices — a result which could serve lapse or completion of said period, ipso jure." We further reiterated therein the timehonored principle of
no useful end but would retard industrial growth and be inimical to the best interests of society. non-impairment of vested rights.
We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the The crucial factor to be determined therefore is the length of time private respondent and its predecessors-
respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which in-interest had been in possession of the land in question prior to the institution of the instant registration
would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any proceedings. The land under consideration was acquired by private respondent from Aquelina de la Cruz
other owner; and an intention to discriminate between owners in this respect is not lightly to be imputed to in 1947, who, in turn, acquired by same by purchase from the Ramos brothers and sisters, namely:
the Legislature. The point here involved has been the subject of consideration in many decisions of Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
American courts under statutes even more restrictive than that which prevails in this jurisdiction; and the 141, as amended, "those who by themselves or through their predecessors-in-interest have been in open,
conclusion has uniformly been that a corporations whose business may properly be conducted in a continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain,
populous center may acquire an appropriate lot and construct thereon an edifice with facilities in excess under a bona fide claim of acquisition or ownership, for at least thirty years immediately preceding the
of its own immediate requirements filing of the application for confirmation of title except when prevented by war or force majeure" may apply
to the Court of First Instance of the province where the land is located for confirmation of their claims, and
the issuance of a certificate of title therefor, under the Land Registration Act. Said paragraph [b] further Ordinarily, a pure gift of funds or property by a corporation not created for charitable purpose is not
provides that "these shall be conclusively presumed to have performed all the conditions essential to a authorized and would constitute a violation of the rights of its stockholders unless it is empowered by
Government grant and shall be entitled to a certificate of title under the provisions of this chapter." Taking statute. There are circumstances, however, under which a donation by a corporation may be to it benefit
the year 1936 as the reckoning point, there being no showing as to when the Ramoses first took as a means of increasing its business or promoting patronage.
possession and occupation of the land in question, the 30-year period of open, continuous, exclusive and
notorious possession and occupation required by law was completed in 1966. Thus, Sec. 35 (I) expressly authorizes a corporation to make donations, subject to the following limitations:
The completion by private respondent of this statutory 30-year period has dual significance in the light of 1. The donation must be reasonable;
Section 48[b] of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point,
2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and
the land in question ceased by operation of law to be part of the public domain; and [2] private respondent
could have its title thereto confirmed through the appropriate proceedings as under the Constitution then 3. It shall not be in aid of political party or candidate, or for purposes of partisan political activity.
in force, private corporations or associations were not prohibited from acquiring public lands, but merely
prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares. Only reasonable donations are allowed since it is not for the corporation to be generous with other people’s
property or money. (Ladia)
If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the
registration proceedings were commenced. This being the case, the prohibition under the 1973 POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS
Constitution would have no application. Otherwise construed, if in 1966, private respondent could have its
title to the land confirmed, then it had acquired a vested right thereto, which the 1973 Constitution can It is now generally recognized in almost all jurisdiction to empower a corporation to establish pension
neither impair nor defeat. plans, pension trust, profit sharing plans, stock bonus or stock option plans and other incentive plans to
directors, officers and employees. In fact, the power may include any act to promote convenience, welfare
POWER TO ENTER INTO PARTNERSHIP, JOINT VENTURE, MERGER, CONSOLIDATION, OR and benefit of the employees or officers.
OTHER COMMERCIAL AGREEMENT
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, 1963)
the power and capacity: (h) To enter into a partnership, joint venture, merger, consolidation, or any ISSUE: WON the subject resolution is within the powers of the company to adopt
other commercial agreement with natural and juridical persons;
HELD: The opening of the post office branch was undertaken because of a request submitted by
Corporation may enter in joint venture, however, generally they are not eligible to be a partner in a respondent company to promote the convenience and benefit of its employees. The idea did not come
partnership. This is because in entering into a partnership, the identity of the corporation is lost or merged from the government and the Director of Posts was prevailed upon to agree to the request only after
with that of another and the discretion of the officials is placed in other hands than those permitted by the studying the necessity for its establishment and after imposing upon the company certain requirements
law in its creation. intended to safeguard and protect the interest of the government. Accordingly, the company cannot now
be heard to complain of its liability upon the technical plea that the resolution is ultra vires. The least that
Exception if the following conditions are met it is allowed by the SEC: A.) the articles of can be said is that it cannot now go back on its plighted word on the ground of estoppel.
incorporation expressly authorizes the corporation to enter into contract of partnership; B.) the agreement
or the articles of partnership must provide that all the partners will manage the partnership; and C.) the The resolution covers a subject which concerns the benefit, convenience and welfare of the company’s
articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all employees and their families. There are certain corporate acts that may be performed outside of the scope
obligations of the partnership. of the powers expressly conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that “although not expressly authorized to do so a corporation may
NOTE: SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this Code become a surety where the particular transaction is reasonably necessary or proper to the conduct of its
has the power and capacity: (h) To enter into a partnership, joint venture, merger, consolidation, business”, and here it is undisputed that the establishment of the local post office is a vital improvement
or any other commercial agreement with natural and juridical persons. in the living condition of its employees and laborers who came to settle in it mining camp which is far
removed from the postal facilities or means of communication accorded to people living in a city or
**CORPORATIONS ARE NOW SPECIFICALLY EMPOWERED TO ENTER INTO PARTNERSHIP municipality. Real or personal properties must be acquired, held or conveyed as the transaction of the
lawful business of the corporation may reasonably and necessarily require. Furthermore, it shall be subject
In relation to: SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a
to the limitations imposed by law and the Constitution.
corporation shall have the right to dissent and demand payment of the fair value of the shares in
the following instances: xxx xxx xxx (c) In case of merger or consolidation; xxx xxx xxx While as a rule an ultra vires act is one committed outside the object for which a corporation is created as
defined by law of its organization and therefore beyond the powers conferred upon it by law, there are
POWER TO MAKE REASONABLE DONATIONS
however certain corporate acts that may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the corporation.

IMPLIED POWERS ISSUE: WON under its articles of incorporation, Filipinas is authorized to operate and maintain an electric
plant
the power and capacity: XXX (k) To exercise such other powers as may be essential or necessary HELD: Paragraph 7 of the AOI of Filipinas provides for authority to secure from any governmental, state,
to carry out its purpose or purposes as stated in the articles of incorporation. municipality, or provincial, city or other authority, and to utilize and dispose of in any lawful manner, rights,
powers, privileges, franchises and concessions – obviously necessary or at least related to the operation
Incidental Powers are those that attach to the corporation from the date of its incorporation which may of its cement factory. Moreover, said AOI also provide that the corporation may generally perform any and
likewise be said to be inherent. all acts connected with the business of manufacturing portland cement or arising therefrom or incidental
thereto.
Classification of implied powers:
It cannot be denied that the operation of an electric light, heat and power plant is necessarily connected
1. Acts in the usual course of business
with the business of manufacturing cement. If in the modern world where we live today electricity is virtually
2. Acts to protect debts owing to the corporation
a necessity for our daily needs, it is more so in the case of industries like the manufacture of
3. Embarking on a different business
4. Acts in part or wholly to protect or aid employees NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
5. Acts to increase business
ISSUE: WON NPC may embark in stevedoring and arrastre services
A corporation has authority to do what will legitimately tend to effectuate the express purposes and objects;
that it may ordinarily do all things that are convenient, suitable or necessary to enable it to fully perform HELD: The NPC was created and empowered not only to construct, operate and maintain power plants,
the undertaking designated in its charter, and for which it is organized. reservois, transmission lines and other works, but also: …to exercise such powers and do such things as
may be reasonably necessary to carry out the business and purposes for which it was organized, or which,
There must be a logical and necessary relation of the act to the corporate purpose. (NPC vs. Vera) from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to
accomplish said purpose… (Sec. 3[1] of RA 6395, as amended)
If the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving
corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a To determine whether or not the NPC act falls within the purview of the above provision, the Court must
remote and fanciful sense, it may be fairly considered within the corporation’s charter powers. (NPC vs. decide whether or not a logical and necessary relation exists between the act questioned and the corporate
Vera) purpose expressed in the NPC charter. For if the act is one which is lawful in itself and not otherwise
prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the
Remember the test in determining implied powers: Whether the act in question is in direct and immediate
promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered
furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary
within the corporation‘s charter powers (Montelibano vs. Bacolod-Murcia Milling Co., Inc.)
to their exercise, then the corporation may do it, otherwise it is beyond the scope of their authority.
In the instant case, it is an undisputed fact that the pier owned by NPC, receives various shipment of coal
Examples:
which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for the
1. Operation and maintenance of an electric plant for a cement factory. (Teresa Electric Power Co., Inc. generation of electric power. The stevedoring services which involve the unloading of the coal shipments
vs. PSC) into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the
operation of the plant. The Court holds that NPC is empowered under its Charter to undertake such
2. NPC’s undertaking of stevedoring services for its power plant. (NPC vs. Vera) services, it being reasonably necessary to the operation and maintenance of the power plant.
3. International School’s imposition of a development fee for expansion and maintenance. (Powers vs. POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
Marshall)
ISSUE: WON the imposition of the development fee is within the powers of the school
It is a question, in each case, of the logical relation of the act to the corporate purpose expressed in the
charter. For if the act is one which is lawful in itself and not otherwise prohibited, and is done for the HELD: Section 2(b) of PD No. 732 granting certain rights to the sch0ol, expressly authorized the Board of
purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a Trustees ―upon consultation with the Secretary of Education and Culture‖ to determine the amount of
substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation‘s fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the
charter powers (Montelibano vs. Bacolod-Murcia Milling Co., Inc. as cited in NPC vs. VERA) school’s standard of education. Such consultation complied with and the Secretary expressed his
conformity with the reasonableness of the assessment. The lower court observed that:
CASES:
Xxx the expansion of the school facilities, which is to be done by improving old buildings and/or
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198; Sept. 25, 1967) constructing new ones, is an ordinary business transaction well within the competence of the Board of
Trustees to act upon. Xxx Being directly related to the purpose of elevating and maintaining the school’s

standard of instruction, which is ordained in fact by PD 732, the expansion cannot result in any radical or A certificate must be signed by a majority of the directors of the corporation and countersigned by
fundamental change in the kind of activity being conducted by the school that might require the consent of the chairperson and secretary of the stockholders’ meeting, setting forth:
the members composing it.
(a) That the requirements of this section have been complied with;
POWER TO EXTEND/SHORTEN CORPORATE TERM
(b) The amount of the increase or decrease of the capital stock;
Pertinent provisions:
(c) In case of an increase of the capital stock, the amount of capital stock or number of shares of
SEC. 36. Power to Extend or Shorten Corporate Term. – A private corporation may extend or no-par stock thereof actually subscribed, the names, nationalities and addresses of the persons
shorten its term as stated in the articles of incorporation when approved by a majority vote of the subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the
board of directors or trustees, and ratified at a meeting by the stockholders or members amount paid by each on the subscription in cash or property, or the amount of capital stock or
representing at least two-thirds (2/3) of the outstanding capital stock or of its members. Written number of shares of no-par stock allotted to each stockholder if such increase is for the purpose
notice of the proposed action and the time and place of the meeting shall be sent to stockholders of making effective stock dividend therefor authorized;
or members at their respective place of residence as shown in the books of the corporation, and
must either be deposited to the addressee in the post office with postage prepaid, served (d) Any bonded indebtedness to be incurred, created or increased;
personally, or when allowed in the bylaws or done with the consent of the stockholder, sent
(e) The amount of stock represented at the meeting; and
electronically in accordance with the rules and regulations of the Commission on the use of
electronic data messages. In case of extension of corporate term, a dissenting stockholder may (f) The vote authorizing the increase or decrease of the capital stock, or the incurring, creating or
exercise the right of appraisal under the conditions provided in this Code. increasing of any bonded indebtedness.
REQUIREMENTS: Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Commission, and where appropriate, of the
1. Approval by a majority vote of the board of directors or trustees;
Philippine Competition Commission. The application with the Commission shall be made within
2. Ratification at a meeting by the stockholders or members representing at least two-thirds (2/3) of the six (6) months from the date of approval of the board of directors and stockholders, which period
outstanding capital stock or of its members. may be extended for justifiable reasons.
3. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders Copies of the certificate shall be kept on file in the office of the corporation and filed with the
or members at their respective place of residence as shown in the books of the corporation Commission and attached to the original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
Note: In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal be deemed increased or decreased and the incurring, creating or increasing of any bonded
under the conditions provided in this Code. SEC 80. When the Right of Appraisal May Be Exercised. – indebtedness authorized, as the certificate of filing may declare: Provided, That the Commission
Any stockholder of a corporation shall have the right to dissent and demand payment of the fair shall not accept for filing any certificate of increase of capital stock unless accompanied by a
value of the shares in the following instances: (A.1) In case an amendment to the articles of sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing
incorporation has the effect of (1) changing or restricting the rights of any stockholder or class of of the certificate, showing that at least twenty-five percent (25%) of the increase in capital stock
shares, or (2) of authorizing preferences in any respect superior to those of outstanding shares of has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been
any class, or (A.2) of extending or shortening the term of corporate existence. Xxx xxx xxx paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-
five percent (25%) of the subscription, has been transferred to the corporation: Provided, further,
POWER TO INCREASE/DECREASE CAPITAL; INCUR, CREATE OR INCREASE BONDED That no decrease in capital stock shall be approved by the Commission if its effect shall prejudice
INDEBTEDNES the rights of corporate creditors.
SEC. 37. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Nonstock corporations may incur, create or increase bonded indebtedness when approved by a
Indebtedness. – No corporation shall increase or decrease its capital stock or incur, create or majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
increase any bonded indebtedness unless approved by a majority vote of the board of directors called for the purpose.
and by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called for
the purpose. Written notice of the time and place of the stockholders’ meeting and the purpose for Bonds issued by a corporation shall be registered with the Commission, which shall have the
said meeting must be sent to the stockholders at their places of residence as shown in the books authority to determine the sufficiency of the terms thereof.
of the corporation and served on the stockholders personally, or through electronic means
recognized in the corporation’s bylaws and/or the Commission’s rules as a valid mode for service REQUIREMENTS:
of notices.
1. Approval by a majority vote of the board of directors;

2. Approval by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called for 1. In the former a meeting of the stockholders would be REQUIRED, unlike in Sec. 15, where the “written
the purpose. assent” would suffice.
3. Written notice of the time and place of the stockholders’ meeting and the purpose for said meeting 2. Former requires the approval of the SEC.
must be sent to the stockholders at their places of residence as shown in the books of the corporation and
served on the stockholders personally, or through electronic means recognized in the corporation’s bylaws NOTE: When the amendment of the corporate charter involves shortening the life of the corporation with
and/or the Commission’s rules as a valid mode for service of notices. the effect of dissolution, the rules on dissolution would apply, requiring approval by the SEC.
4. A certificate must be signed by a majority of the directors of the corporation and countersigned by the METHODS OF INCREASING CAPITAL STOCK:
chairperson and secretary of the stockholders’ meeting, setting forth:
1. Increase the par value of the existing number of shares without increasing the number of shares;
a. That the requirements of this section have been complied with;
2. Increase the number of existing shares without increasing the par value thereof;
b. The amount of the increase or decrease of the capital stock;
c. In case of an increase of the capital stock, the amount of capital stock or number of 3. Increasing the number of shares and at the same time increasing the par value of the shares
shares of no-par stock thereof actually subscribed, the names, nationalities and
addresses of the persons subscribing, the amount of capital stock or number of no- REASONS/PURPOSE FOR THE INCREASE:
par stock subscribed by each, and the amount paid by each on the subscription in
cash or property, or the amount of capital stock or number of shares of no-par stock 1. Expansion;
allotted to each stockholder if such increase is for the purpose of making effective 2. Payment of Debt Obligations;
stock dividend therefor authorized; 3. To acquire additional assets such as providing cars to employees to distribute the goods;
d. Any bonded indebtedness to be incurred, created or increased;
e. The amount of stock represented at the meeting; and *Nothing in law prohibits increase of capital stock
f. The vote authorizing the increase or decrease of the capital stock, or the incurring, REASONS FOR DECREASE:
creating or increasing of any bonded indebtedness.
1. To reduce or wipe out existing deficit where no creditors would thereby by affected;
5. Prior approval of the Commission, and where appropriate, of the Philippine Competition Commission. 2. When the capital is more than what is necessary to procreate the business or reduction of
6. The application with the Commission shall be made within six (6) months from the date of approval capital surplus;
of the board of directors and stockholders, which period may be extended for justifiable reasons. 3. To write down the value of its fixed assets to reflect their present actual value in case where
there is a decline in the value of the fixed assets of the corporation.
7. Accompanied by a sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five percent (25%) of the increase in TRUST FUND DOCTRINE: The subscriptions to capital stock of the corporation constitute a fund which
capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed the creditors have a right to look up for the satisfaction of their claims. Accordingly, if the decrease would
has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty- affect the rights of creditors, the same would not be approved by the SEC.
five percent (25%) of the subscription, has been transferred to the corporation; and CASES:
8. in case of decrease in capital stock it shall not prejudice the rights of corporate creditors. PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923)
In case of a nonstock corporation- it may incur, create or increase bonded indebtedness when approved ISSUE: WON the reduction is valid and proper
by a majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose. HELD: A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as
THERE ARE THREE SPECIAL AMENDMENTS: against creditors a reduction of the capital stock can take place only in the manner and under the
1.Extension or shortening of corporate term (Sec. 36) conditions prescribed by the statute or the charter or the AOI. Moreover, strict compliance with the
statutory regulations is necessary. In the case before us, the resolution releasing the shareholders from
2.Increase or decrease of capital stock (Sec. 37) their obligation to pay 50% of their respective subscriptions was an attempted withdrawals of so much
capital from the fund upon which the company’s creditors were entitled ultimately to rely and, having been
3.Incurring, creating or increasing bonded indebtedness (Sec. 37) effected without compliance with the statutory requirements, was wholly ineffectual.
SEC. 36&37 vs. SEC. 15: MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987)

ISSUE: WON the decrease in capital stock is valid and binding Exception to the exceptions: The exceptions do not apply to stockholders of a close corporation. In effect,
pre-emptive right in a close corporation is generally absolute UNLESS denied in the Articles of
HELD: What clearly emerges from the recorded facts is that the petitioner, awash with profits from its Incorporation.
business operations but confronted with the demand of the union for wage increase, decided to evade its
responsibility towards the employees by a devised capital reduction. While the reduction in capital stock The right may be lost by waiver, expressly or impliedly by inability or failure to exercise it after having been
created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of notified.
union members, who, by then, had agitated for wage increases. In the face of the petitioner
company’s piling profits, the unionists had the right to demand for such salary adjustments. The pre-emptive right covers all issues or disposition of share of any class. It includes new share issued
pursuant to an increase in capital stock, unissued shares which form part of the original capital stock and
That the petitioner made quite handsome profits is clear from the records. treasury shares.
This court is convinced that the petitioner’s capital reduction efforts were, to begin with, a CASE:
subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and
consequently, to justify the mass layoff in it employee ranks, especially the union members. They BENITO VS. SEC (123 SCRA 722; July 25, 1983)
were nothing but a premature and plain distribution of corporate assets to obviate a just sharing
ISSUE: WON the above ruling is correct
to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can
neither countenance nor condone this. It is an unfair labor practice. HELD: The issuance of the unsubscribed portion of the capital stock or P110,980 is valid even if assuming
that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of
POWER TO DENY PRE-EMPTIVE RIGHTS
stocks in a corporation is lodged in the bard of directors and no stockholders’ meeting is necessary to
Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to subscribe consider it because such issuance does not need approval of stockholders.
to all issues or disposition of shares of any class, in proportion to their respective stockholdings, subject
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not
only to the limitations imposed under Sec. 38. Also known us the Right of First Refusal.
with respect to additional issues of originally authorized shares. This is on theory that when a corporation,
SEC. 38. Power to Deny Pre-emptive Right. – All stockholders of a stock corporation shall enjoy at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite
their respective shareholdings, unless such right is denied by the articles of incorporation or an proportionate part of the whole number of authorized shares. When the shares left unsubscribed are
amendment thereto: Provided, That such pre-emptive right shall not extend to shares issued in reoffered, he cannot therefore claim a dilution of interest.
compliance with laws requiring stock offerings or minimum stock ownership by the public; or to
With respect to the claim that the increase in the authorized capital stock was without consent, expressed
shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of
or implied, of the stockholder, it was the finding of the Commission that a meeting was called for the
the outstanding capital stock, in exchange for property needed for corporate purposes or in
purpose. The petitioner had not sufficiently overcome the evidence of respondent that such meeting was
payment of a previously contracted debt.
in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said
The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old stockholders’ meeting and that he never attended the same as he was out of the country at the time, attending the Mecca
relative and proportionate voting strength and control, that is, the existing ratio of their proprietary interest pilgrimage. Another thing that petitioner was able to disprove was the allegation that all stockholders who
and voting power in the corporation. To avoid dilution of the holdings of the shareholders. did not subscribe to the increase have waived their pre-emptive right. As far as petitioner is concerned, he
had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was
General Rule: All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for
or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his
denied by the articles of incorporation or an amendment thereto. present shareholdings.
Exceptions: POWER TO SELL/DISPOSE ASSETS
1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock SEC. 39. Sale or Other Disposition of Assets. – Subject to the provisions of Republic Act No. 10667,
ownership by the public; or otherwise known as “Philippine Competition Act”, and other related laws, a corporation may, by a
2. Shares to be issued in good faith with the approval of the stockholders representing two-thirds majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge, or
(2/3) of the outstanding capital stock, otherwise dispose of its property and assets, upon such terms and conditions and for such
a. in exchange for property needed for corporate purposes or consideration, which may be money, stocks, bonds, or other instruments for the payment of money
b. in payment of a previously contracted debt. or other property or consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation’s properties and assets, including its goodwill, 4.Prior written notice of the proposed action must be made stating the time and place of meeting addressed
must be authorized by the vote of the stockholders representing at least two-thirds (2/3) of the to each stockholder or member at his place of residence, either by mail or personal service;
outstanding capital stock, or at least two-thirds (2/3) of the members, in a stockholders’ or
members’ meeting duly called for the purpose. 5.The sale of the assets shall be subject to the provisions of existing laws Philippine Competition Act; and
In nonstock corporations where there are no members with voting rights, the vote of at least a 6.Any dissenting stockholder shall have the option to exercise his appraisal right.
majority of the trustees in office will be sufficient authorization for the corporation to enter into any
7.(Note: In non-stock corporations where there are no members with voting rights, the vote of at least a
transaction authorized by this section.
majority of the trustees in office will be sufficient authorization for the corporation to enter into such
The determination of whether or not the sale involves all or substantially all of the corporation’s transaction.)
properties and assets must be computed based on its net asset value, as shown in its latest
Exception to application of the procedure and requirements:
financial statements. A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered incapable of 1. The sale, lease, exchange, mortgage, pledge or other dispose of property and assets is
continuing the business or accomplishing the purpose for which it was incorporated. necessary in the usual and regular course of business of the corporation; or
2. The proceeds of the sale or other disposition of property and assets are appropriated for the
Written notice of the proposed action and of the time and place for the meeting shall be addressed
conduct of the corporation’s remaining business.
to stockholders or members at their places of residence as shown in the books of the corporation
and deposited to the addressee in the post office with postage prepaid, served personally, or when General Rule: Where a corporation sells or otherwise transfers all of its assets to another corporation, the
allowed by the bylaws or done with the consent of the stockholder, sent electronically: Provided, latter is not liable for the debts and liabilities of the transferor.
That any dissenting stockholder may exercise the right of appraisal under the conditions provided
in this Code. Exceptions:
After such authorization or approval by the stockholders or members, the board of directors or 1. Where the purchaser expressly or impliedly agrees to assume such debts;
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, 2. Where the transaction amounts to a consolidation or merger of the corporations;
pledge, or other disposition of property and assets, subject to the rights of third parties under any 3. Where the purchasing corporation is merely a continuation of the selling corporation; and
contract relating thereto, without further action or approval by the stockholders or members. 4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
Nothing in this section is intended to restrict the power of any corporation, without the CASES:
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 ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454; May 4, 1997)
regular course of business of the corporation or if the proceeds of the sale or other disposition of
such property and assets shall be appropriated for the conduct of its remaining business. ISSUE: WON the sale is valid
In relation to: SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its consent through a legitimate
corporation shall have the right to dissent and demand payment of the fair value of the shares in Board of Trustees. Therefore, this is not a case of vitiated consent, but one where consent on the part of
the following instances: xxx xxx xxxx (b) In case of sale, lease, exchange, transfer, mortgage, one of the contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect
pledge or other disposition of all or substantially all of the corporate property and assets as whatsoever.
provided in this Code; xxx xxx xxx The Caprizo group-INC sale is further deemed null and void ab initio because of the Caprizo Group’s
There is a sale or other disposition of substantially all the corporate property and assets if the corporation failure to comply with Sec. 40 of the Corporation Code pertaining to the disposition of all or substantially
would thereby be rendered incapable of continuing the business or accomplishing the purpose for which all assets of the corporation.
it was incorporated. The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence,
Conditions for the valid exercise of this right: its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely
within the contemplation of Sec. 40. For the sale to be valid, the majority vote of the legitimate Board of
1.Resolution by the majority vote of the board of directors or trustees; Trustees, concurred in by vote of at least 2/3 of the bona fide members of the corporation should have
been obtained. These twin requirements were not met as the Caprizo Groups which voted to sell the
2.Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of property was a fake Board and those whose names and signatures were affixed by the Caprizo Group
the members in case of non-stock corporations; together with the sham Board Resolution authorizing negotiation for the sale were, from all indications, not
bona fide members of the IDP as they were made to appear to be.
3.The ratification must be at a meeting duly called for that purpose;

EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29, 1965) 3. In cases of deadlocks in clos corporation
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms The acquisition of shares must be made in good faith, free from fraud, actual or constructive, and that the
corporation is not insolvent or in the process of dissolution and that the rights of creditors and other
HELD: It appears on record that the appellee purchase 1,000 shares of stock of Insular Farms, and stockholders are in no way injuriously affected.
thereupon sold said shares of stock to certain individuals, who forthwith reorganized said corporation and
that the board of directors thereof, as reorganized, then caused its assets, including its leasehold right Creditors of a corporation have the right to assume that so long as there are outstanding debts and
over a public land in Pangasinan to be sold to herein appellee. These facts do not prove that the appellee liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and
is an alter ego of Insular Farms, or is liable for its debts. that it will not declare dividends to stockholders when the corporation is insolvent. (Steinberg vs Velasco)
Generally where on corporation sells or otherwise transfers all o its assets to another corporation, the latter POWER TO INVEST FUNDS
is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or
impliedly agrees to assumes such debts; (2) where the transaction amounts to a consolidation or merger SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; Purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any
and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. other corporation, business, or for any purpose other than the primary purpose for which it was
organized, when approved by a majority of the board of directors or trustees and ratified by the
In the case at bar, there is neither proof nor allegation of the foregoing exceptions. In fact, these sales took stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
place not only over 6 months before the rendition of the judgment sought to be collected in the present two thirds (2/3) of the members in the case of nonstock corporations, at a meeting duly called for
action, but also, appellee purchase the shares of stock of Insular Farms as the highest bidder at an auction the purpose. Notice of the proposed investment and the time and place of the meeting shall be
sale held at the instance of a bank to which said shares had been pledged as security for the obligation of addressed to each stockholder or member at the place of residence as shown in the books of the
Insular Farms in favor of said bank. corporation and deposited to the addressee in the post office with postage prepaid, served
personally, or sent electronically in accordance with the rules and regulations of the Commission
POWER TO ACQUIRE OWN SHARES on the use of electronic data message, when allowed by the bylaws or done with the consent of
the stockholders: Provided, That any dissenting stockholder shall have appraisal right as provided
SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has unrestricted retained
in this Code: Provided, however, That where the investment by the corporation is reasonably
earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall
necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval
have the power to purchase or acquire its own shares for a legitimate corporate purpose or
of the stockholders or members shall not be necessary.
purposes, including the following cases:
“MAY INVEST FUND” has been held by the SEC to mean an investment in the form of money, stock,
(a) To eliminate fractional shares arising out of stock dividends;
bonds and other liquid assets and does not include real properties or other fixed assets, otherwise the law
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid would have phrased Sec. 41 to include “assets” rather than “to invest funds”.
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
SECONDARY PURPOSE: the law uses the phrase ―for any purpose other than the primary purpose‖
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the signifying that even if the business or undertaking is allowed or authorized in the secondary purpose or
provisions of this Code. purposes of the corporation, the provision of Sec. 41 would apply.
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate RATIFICATION: as a requirement, applies only to investments that are beyond the corporation’s primary
purpose or purposes, including but not limited to the following cases: (Examples of legitimate purpose) purpose, or outside the express or implied powers of the investing corporation. Thus, if the investment is
reasonably necessary to accomplish its primary purpose, the approval of the stockholders or members is
1. To eliminate fractional shares arising out of stock dividends; not required.
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; The right refers to investment in the form of money, stock, bonds and other liquid assets and does not
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares; and include real properties or other fixed assets.
4. To redeem redeemable shares.
Requirements and procedure:
General rule: the corporation must have unrestricted retained earnings before it can acquire its own shares.
1. Resolution by the majority vote of the board of directors or trustees;
Exceptions:
2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3
1. Redemption of redeemable shares; and of the members in case of non-stock corporations;
2. Stockholder’s right to compel a close corporation to purchase his shares when the corporation 3. The ratification must be at a meeting duly called for that purpose;
has sufficient assets to cover its debts and liabilities. And

4. Prior written notice of the proposed investment and the time and place of meeting shall be 3. Stock dividends – corporation’s own shares of stock out of the remaining unissued shares which
made, addressed to each stockholder or member at his place of residence, either by mail or would require the approval of the stockholders representing 2/3 of the outstanding capital stock
personal service; and at a regular or special meeting duly called for that purpose. This is to be valued at par value or
5. Any dissenting stockholder shall have the option to exercise his appraisal right. issue price.
The approval of the stockholders or members is not required where the investment is reasonably Note: Sabi sa Sec 42, sa delinquent lang merong lien, kapag unpaid subscription pa lang, no lien, the
necessary to accomplish its primary purpose. dividends will not be applied to the unpaid portion, Sec 72.
Remember: Primary purpose lang ang hindi need ng stockholder’s approval, all other purpose requires Note: Cash and property dividends have the effect of reducing corporate assets to the extent of the
the approval of the stockholders. But if there is a logical connection with the primary purpose and then the dividends declared. In stock dividends, it would generally not increase the proportionate interest of the
stockholder’s approval is not needed anymore, kasi it is considered as incidental to the primary purpose. stockholders of the corporation although it will have the effect of increasing the subscribed and paid-up
capital (exception is when the stock dividend declaration would result in fractional shares like when 1 share
An unauthorized investment which is not illegal or void ab initio or not contrary to law, morals, public order is declared as dividend for every 9 shares held)
or public policy, is merely voidable and may become binding and enforceable when ratified by the
stockholders. (Gokongwei, Jr. vs. SEC) Rules on dividends due on delinquent stock:
NOTE: SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a corporation 1. Cash dividend – first applied to the unpaid balance on subscription costs and expenses.
shall have the right to dissent and demand payment of the fair value of the shares in the following 2. Stock dividend – withheld until subscription is fully paid.
instances: xxx xxx xxx (d) In case of investment of corporate funds for any purpose other than the
primary purpose of the corporation. General Rule: Walang obligation to declare ang BOD except for those shares na mandatory ang
pagreceive ng dividends. Discretion ng BOD on business judgment, they cannot be compelled to declared
POWER TO DECLARE DIVIDENDS dividends.
SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their PAID
dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in IN CAPITAL (not outstanding capital stock but rather paid up or paid in capital). They can be compelled.
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 Exceptions to the Exceptions:
plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders
1. When justified by definite corporate expansion projects or programs approved by the board of
until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be
directors; or
issued without the approval of stockholders representing at least two-thirds (2/3) of the
2. When the corporation is prohibited under any loan agreement with any financial institution or
outstanding capital stock at a regular or special meeting duly called for the purpose.
creditor, whether local or foreign, from declaring dividends without its/his consent, and such
Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent consent has not yet been secured; or
(100%) of their paid-in capital stock, except: (a) when justified by definite corporate expansion 3. When it can be clearly shown that such retention is necessary under special circumstances
projects or programs approved by the board of directors; or (b) when the corporation is prohibited obtaining in the corporation, such as when there is need for special reserve for probable
under any loan agreement with financial institutions or creditors, whether local or foreign, from contingencies.
declaring dividends without their consent, and such consent has not yet been secured; or (c) when
General rule: The board of directors’ exercise exclusive authority in declaring dividends.
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. Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3 of the
outstanding capital stock is required.
Dividends- are corporate profits set aside, declared and ordered by the Board of Directors to be paid to
the stockholders. Dividends can only be declared out of Unrestricted Retained Earnings (URE). This is the The judgment of the board of directors in the matter of declaring dividends is conclusive except when they
undistributed earnings of a corporation which have not been allocated for any managerial, contractual or act in bad faith, or for a dishonest purpose or act fraudulently, oppressively, unreasonably or unjustly or
legal purpose and which are free for distribution to the stockholders as dividends. It is the surplus profits abuse of discretion can be shown so as to impair the rights of the complaining stockholders to their just
of the corporation. proportion of corporate profits.
TYPES OF DIVIDENDS: The essential test of bad faith is to determine if the policy of the directors is dictated by their personal
interest rather than the corporate welfare.
1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g., bonds, notes, shares in another
corporation);

Note: Not all forms of dividends would have an effect of decrease in the corporate assets. In effect, cash to vote of the managing corporation; or (b) where a majority of the members of the board of
and property dividends lang ang may effect sa corporate assets, because stock dividends is just a form directors of the managing corporation also constitute a majority of the members of the board of
of capitalization of URE. (Ladia) 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
Dividends, regardless of the form they are declared are valued at the amount of the declared dividends. capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a nonstock
(PLDT vs NTC) corporation.
The right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally These shall apply to any contract whereby a corporation undertakes to manage or operate all or
declared by the Board of Directors. substantially all of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise: Provided, however, That such service contracts or
No revocation of dividend may be had unless it has not been officially communicated to the stockholders
operating agreements which relate to the exploration, development, exploitation or utilization of
or is in the form of stock dividends which is revocable at any time prior to distribution.
natural resources may be entered into for such periods as may be provided by the pertinent laws
Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs. Lepanto or regulations.
Consolidated Mining Co.)
No management contract shall be entered into for a period longer than five (5) years for any one
Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith, gross (1) term.
negligence or willful and knowing assent. (Ladia)
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:
OVERISSUANCE OF SHARES happens when a corporation issues shares beyond its authorized capital
1. Resolution of the BOD;
stock, even in the form of stock dividends.
2. Approval by the stockholders representing a majority of the outstanding capital stock or majority
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to declare dividends, except: of the members of both the managing and the managed corporation;
(1) When the unrestricted retained earnings is in excess of 100% of the paid-up capital; and (2) In the case 3. The approval of the stockholders or members must be made at the meeting called for that
of Mandatory If Earned Preference Shares. purpose; and
4. The contract shall not be for a period longer than 5 years for any one term, except those which
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad faith; (2) for a dishonest relate to exploration, development or utilization of natural resources which may be entered into
purpose; (3) they act fraudulently, oppressively, unreasonably or unjustly; or (4) abuse of discretion can for such periods as may be provided by pertinent laws and regulations;
be shown as to impair the rights of the complaining shareholders. The TEST of bad faith is to determine if 5. 2/3 of the stockholders or members would be required, where:
the policy of the directors is dictated by their personal interest rather than the corporate welfare. a. The stockholders representing the same interest of both the managing and the
managed corporation own or control more than 1/3 of the total outstanding capital
WHEN DIVIDENDS RIGHTS VES It has been succinctly said that the right of the stockholders to be paid stock of the managing corporation;
dividends vest as soon as they have been lawfully and finally declared by the BOD. It is not revocable b. A majority f the members of the BOD of the managing corporation also constitute a
unless: (1) it has not been officially communicated to the stockholders; or (2) it is in the form of stock majority of the directors of the managed corporation;
dividends which is revocable any time prior to distribution because this does not result in the distribution c. The contract would constitute the management or operation of all or substantially all
of assets but merely the division of existing shares of a stockholder into smaller units or integers. of the business of another corporation, whether such contracts are called service
contracts. If it will not constitute the management of all or substantially all of the
TRANSFER OF SHARES The dividends already declared belong to the owner at the time of declaration. business of another corporation, the first paragraph of Sec. 43 will apply and not
Usually, however, the dividends are payable to stockholders of record on a specific future date and as far that of the second, that is, only the vote of the majority is required.
as the corporation is concerned, the registered owner is the one entitled to dividends. As against his
transferor, however, the transferee has presumably the right to such dividends and is oftentimes taken into ULTRA VIRES ACTS
account in entering effecting the transfer of shares.
SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or exercise corporate
POWER TO ENTER INTO MANAGEMENT CONTRACT powers other than those conferred by this Code or by its articles of incorporation and except as
necessary or incidental to the exercise of the powers conferred.
SEC. 43. Power to Enter into Management Contract. – No corporation shall conclude a management
contract with another corporation unless such contract is approved by the board of directors and ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they
by stockholders owning at least the majority of the outstanding capital stock, or by at least a are not within its express, inherent, or implied powers as defined by its charter or AOI. Accordingly, it may
majority of the members in the case of a nonstock corporation, of both the managing and the be subject to a collateral attack questioning the authority of the corporation to engage in such particular
managed corporation, at a meeting duly called for the purpose: Provided, That (a) where a endeavor.
stockholder or stockholders representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled CONSEQUENCES:

1. On the Corporation itself: The proper forum may suspend or revoke, after proper notice and hearing, of the stockholders themselves as shown by the fact the same has been expressly ratified in a resolution
the franchise or certificate of registration of the corporation for serious misrepresentation as to what the duly approved by the latter. By this ratification, the infirmity of the corporate act, if any has been obliterated
corporation can do or is doing to the great damage or prejudice of the general public. thereby making the act perfectly valid and enforceable. This is specially so if the donation is not merely
executory but executed and consummated and no creditors are prejudiced, or if there are creditors
2. On the rights of the Stockholders: A stockholder may bring either an individual or derivative suit to enjoin affected, the latter has expressly given their conformity.
a threatened ultra-vires act or contract. If already performed, a derivative suit against the directors may be
filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in ISSUE2: What is the difference between an illegal act and that which is ultra-vires?
entering into the contract.
HELD: The former contemplates the doing of an act which is contrary to law, morals, or public order or
3. On the immediate parties: contravene some rules of public policy or public duty, and are, like similar transactions between the
individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance,
a. If the contract is fully executed in both sides, the contract is effective and the courts will not interfere to ratification or estoppel. Mere ultra-vires acts, on the other hand, or those which are not illegal and void ab
deprive either party of what has been acquired under it; initio, but are merely beyond the scope of the AOI, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
b. If the contract is executory on both sides,, as a rule, neither party can maintain an action for its non-
performance; and Since it is not contended that the donation under consideration is illegal, or contrary to any of the express
provisions of the AOI, nor prejudicial to the creditors of the defendant corporation, we cannot but logically
c. Where the contract is executory on one side only, and has been fully performed on the other, the courts
conclude that said donation, even if ultra vires in the supposition we have adverted to, is not void, and if
differ as to whether an action will lie on the contract against the party who has received benefits of
voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation. The
performance under it. Majority of the courts, however, hold that the party who has received benefits from
corporation is now prevented or estopped from contesting the validity of the donation.
the performance is ―estopped‖ to set up that the contract is ultra vires to defeat an action on the contract.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL., defendant-appellees (57
CASES:
Phil. 343; Oct. 26, 1932)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec. 29, 1954)
ISSUE: Whether PTC’s act was ultra-vires?
ISSUE: Whether the donation was an ultra vires act?
HELD: No. Firstly, PTC although secondarily engaged in banking, was primarily organized as a trust
HELD: No. After a careful perusal of the AOI, we find that the corporation was given broad and almost corporation with full power to acquire personal property such as the bonds in question according to both
unlimited powers to carry out the purposes for which it was organized among them, (1) ―to invest and sec. 13 (par. 5) of the Corporation Law and its duly registered by-laws and AOI; Secondly, that being thus
deal with the money of the company not immediately required, in such manner as fro time to time may be authoriezd to acquire the bonds, it was given implied power to guarantee them in order to place them upon
determined‖ and (2) ―to aid in any manner any person association, or corporation or in the affairs of the the market under better, more advantageous conditions, and thereby secure the profit derived from their
property of which this corporation has lawful interest‖. The donation in question undoubtedly comes within sale.
the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds were
―It is not, however, ultra vires for a corporation to enter into contracts of guaranty where it does so in the
not immediately required when they were given away.
legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires
We don‘t see much distinction between the acts of generosity of the benevolence extended to some commercial papers or bonds in the legitimate transaction of its business it may sell them, and in furtherance
employees of the corporation, and even to some in whom the corporation was merely interested because of such a sale, it may in order to make them more readily marketable, indorse or guarantee their payment.‖
of certain moral or political consideration, and the donations which the corporation has seen fit to give the
Even if PTC did not acquire the bonds in question, but only guaranteed them, it would at any rate, be valid
children of the late Enrico Privano from the point of view of the power of the corporation as expressed in
and the said corporation is bound to pay the appellant their value with the accrued interest in view of the
the AOI. And if the former had been sanctioned and had been valid and intra-vires, we see no plausible
fact that they become due on account of the lapse of 60 days, without the accrued interest due having
reaons why the latter should now be deemed ultra-vires. It may perhaps be argued that the donation given
been paid; and the reason is that it is estopped from denying the validity of its guarantee.
to the children of the late Enrico Privano is so large and disproportionate that it can hardly be considered
a pension or gratuity that can be placed ona par with the instances above-mentioned, but this argument The doctrine of ultra vires as a defense, is by some courts regarded as an ungracious and odious one, to
overlooks one consideration: the gratuity here given was not merely motivated by pure liberality or act of be sustained only where the most persuasive consideration of public policy are involved, and there are
generosity, but by a deep sense of recognition of the valuable services rendered by the late Enrico Privano numerous decisions and dicta to the effect that the plea should not as a general rule prevail whether
which had immensely contributed to the growth of the corporation to the extent that from its humble interposed for or against the corporation, where it will not advance justice but on the contrary will
capitalization it blossomed into a multi-million corporation that it is today. accomplish a legal wrong.
Granting that it was ultra-vires, it may be said that the same cannot be invalidated, or declared legally When a contract is not on its face necessarily beyond the scope of the power of the corporation by which
ineffective for that reason alone, it appearing that the donation represents not only the act of the BOD but it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are

presumed to contract within their powers. The doctrine of untra vires, when invoked for or against a 7. what would be the importance of knowing the type of corporations involved? To determine what law
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal may apply to them.
wrong.
8. Commencement of corporate existence.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil 540; May 23, 1957)
9. if it will expire today, may it be extended today? YES,
ISSUE: Whether the SEC erred in issuing the questioned order?
10. it will expire 7 years today, may it be extended today? Yes, if there are justifiable reasons as may be
HELD: No. The articles authorize collection of fees from members; but they do not authorize the determined by SEC.
corporation to engage in the business of registering and accepting war notes for deposit and collecting
fees from such services. This was the ruling of the Commission and this we find to be correct. 11.When should it be extended?
Neither do we find any merit in the third contention that the association has authority to accept and collect 12. Who may be incorporators and corporators?
fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers of the
association as embodied in its articles and have absolutely no relation to the avowed purpose of the 13. how many incorporators should there be?
association to work for the redemption of war notes.
14. May a corporation be an incorporator? NO (pd 922)
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) -
15. How about minors?
ISSUE: WON private respondent, one of the signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under NIL and a debtor of petitioner to the extent of the 16. May a corp organized by incorporators consisting solely of foreigners? YES, no nationality
amount of said check? requirement only residence
HELD: Yes. The liability of an accommodation party to a holder for value, although such holder does not 17.May a corp exist w/o governing board? YES, corpo sole
include nor apply to corporations which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for the accommodation of 18. What are share of stocks?
another is ultra vires. One who has taken the instrument with knowledge of the accommodation nature
thereof cannot recover against a corporation where it is only an accommodation party. By way of exception, 19. Are corporations authorize to classify their shares? Yes
an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person only if specifically authorized to do so. 20. purpose of classification?
Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their individual debts or transactions arising 21. What is outstanding capital?
from or in relation to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation, especially since it is not involved 22. Who determines the issue price of no-par value shares?
in any aspect of the corporate business or operations, the signatories thereof (president and vice-
23. Distinguish the voting and nonvoting shares?
president) shall be personally liable therefor, as
24. May common shares be denied of voting rights? NO
25. May they be effectively denied he right to vote? YES

RECIT QUESTIONS:
26. instances that OS may be denied the right to vote?
1. Is there another type of corporation in Sec 3? Yes, corporation created by special law
27. What are these redeemable shares?
2. What law governs the GOCCS? Governed by SL creating them.
28. De facto coporation and De jure corporation?
3. What is ecclesiastical and lay?
29.May SEC refuse to approve the registration of AOI?
4. Is one-man corporation allowed? Sec 116
30. Is there no shareholder’s liability? NO
5. Who may organize a one-man corp?
31. What are the steps to be followed for an effective amendment of the AOI?
6. liability of the corp? up to what extent

- were the acts valid? YES –
33. what provision of the AOI may be amended?
34. can the names and addresses of the incorporators be changed? No
35. if the name of the corpo is changed, will there be an effect on the rights and obligations? None
36. what are the qualifications of a director?
37. may aliens qualify as a director? Yes
38. CUMULATIVE VOTING
39. how are the directors selected?
32. A – 200T. absent 40. A – 200T. a and b
B – 200T. non voting B – 200T. non voting
C – 200T C – 200T
D - 100T D - 100T
E – 100T E – 100T
F – 100T F – 100T
G – 50T G – 50T
H – 25T H – 25T
I – 25T I – 25T
1M 1M
FROM XYZ TO ABC
a. change of name, do you include A and B for the voting in AOI? YES(SEC 6) a. will you include the non-voting shares? NO
b. A and B absent – all others present. A gave written assent. Is there a valid amendment? YES b. Who will be elected ?
c. is the number of the shareholders the one that matters? NO, number of shares matter. c. what is the vote required inorder that a director may be elected? highest number of votes
d. Decrease in capital? No, (sec 37, Special amendment) d. Are they all elected? NO
e. change in purpose? Yes.
f. SEPT 19 – filed 41. what is cumulative voting.
Jan 19 2020 – corpo engaged in real business 42. is cumulative voting applies to NSC- generally no, unlkess allowed in the AOI ot by – laws
June 19 2020 - 43. May two persons concurrently hold 2 posotions? SEC 122
44. A – 200T. compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale,
and to purchase delinquent shares sold during said sale; and (c) To pay dissenting or withdrawing
B – 200T. a- e Majority stockholders entitled to payment for their shares under the provisions of this Code.
C – 200T SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other
Purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any other
D - 100T
corporation, business, or for any purpose other than the primary purpose for which it was organized, when
E – 100T 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
F – 100T F-I minority the case of nonstock corporations, at a meeting duly called for the purpose. Notice of the proposed
investment and the time and place of the meeting shall be addressed to each stockholder or member at
G – 50T the place of residence as shown in the books of the corporation and deposited to the addressee in the
H – 25T post office with postage prepaid, served personally, or sent electronically in accordance with the rules and
regulations of the Commission on the use of electronic data message, when allowed by the bylaws or
I – 25T done with the consent of the stockholders: Provided, That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however, That where the investment by the corporation is
1M 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.
a. May f be validly removed? It depends
SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare
b. How is the special meeting be called?
dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in stock to
c. what happens when the secretary failed to call for a meeting? 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
d. F removed from office with cause last Dec. Who will fill up the vacancy? – the board cannot expenses, while stock dividends shall be withheld from the delinquent stockholders until their unpaid
fill the vacancy caused by the removal. If the removal was caused by the expiration of the term and or subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
removal of the directors – only the shareholders or members in a regular meeting or special meeting can stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special
fill up the vacancy. meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%)
of their paid-in capital stock, except: (a) when justified by definite corporate expansion projects or programs
45. are directors entitled for compensation? approved by the board of directors; or (b) when the corporation is prohibited under any loan agreement
46. may they be granted? with financial institutions or creditors, whether local or foreign, from declaring dividends without their
consent, and such consent has not yet been secured; or (c) when it can be clearly shown that such
47. how much? retention is necessary under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies.
48. What do you understand by that statement “ 10% of net income”? earnings – expenses and cost
SEC. 40. POWER TO ACQUIRE OWN SHARES
49. What do you understand by the phrase as to their capacity as directors?
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate
October 15, 2019 purpose or purposes, including the following cases:
Corporation Law (a) To eliminate fractional shares arising out of stock dividends (fractional shares are not
(Atty. Ladia discussion) anymore allowed);
SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has unrestricted retained (b) To collect or compromise an indebtedness to the corporation, arising out of unpaid
earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall have the subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including the
following cases: (a) To eliminate fractional shares arising out of stock dividends; (b) To collect or
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the X Co.
provisions of this Code;
ACS – 3M
(d) To redeem redeemable shares under section 8 of the Code (irrespective of existence of SUB – 2M
URE) 1M paid-up capital
URE – 2M
(e) To eliminate capital stock; and
A 200T
(f) In cases of indebtedness. B 200T
C 200T
SECTION 41. POWER TO INVEST FUNDS
D 100T
- Requirements E 100T
- Stockholder’s approval is applicable only to investments that: F 100T
▪ are beyond the corporation’s primary purpose, or G 50T
▪ outside the express or implied powers of the corporation. H 25T
I 25T
Example Scenario: Q1: X Co. invested 500T to SMC shares. SMC gave 500T dividends. Is SH approval required for
Realty Co. invested its funds for general construction, one of its purposes. Does the Board need the distribution of the dividend?
SH approval?
No. 500T is considered Property Dividend. The 500T is property of X Co.
No. Where the investment is reasonably necessary to accomplish its primary purpose, the approval of the - Bonds, notes, shares of stock can be considered property dividends because they make
SH or Members is not required. Mere board resolution is necessary.
surplus profits.
Read Case: Dela Rama vs. Ma-Ao Sugar Central Co., Inc.
SEC. 42. POWER TO DECLARE DIVIDENDS Q2: Same facts. X Co. declared 1M as cash dividends. May the BOD declare the entire 2M URE as
stock dividends with the approval of the SH?
Dividends
No. There is only 1M free portion in the ACs. If declared, there will be an increase of ACS to 4M which
Are corporate profits set aside, declared and ordered by the BOD to be paid to the stockholders either on results to over issuance, penalized by the Code under section 71.
demand or on a fixed date.
Remedy: Corporations can only increase the ACS through the amendment of the AOI.
Limitation: dividends are to be declared out of the URE or Unrestricted Retained Earnings.
Q3: How much will the SH receive?
Unrestricted Retained Earnings
The amount w/c each SH receives as his share in the dividends is based on the stock held by him
This is the undistributed earnings of the corporation which have not been allocated for any managerial, regardless of whether he has paid his subscription in full. (Section 71, RCCP)
contractual or legal purposes and which are free for distribution to the stockholders as dividends.
Q4: Will there be an increase in the proportionate interest of SH if there is a declaration of stock
It is also known as “Surplus Profits”. dividends?
Kinds of Dividends: cash, property and stock dividends. No. They receive their dividends in their proportionate interest.
Q: Who has the power to declare what kind of dividends shall be declared? If A has 3.333% this is considered Fractional Shares thus it may be paid by cash or property dividend.
Board of Directors whether cash or property dividends. As for stock dividends, the approval of the SH, When Dividend Rights Vest
holding or representing at least 2/3 of OCS is required.
General Rule: The SH can compel the Board to declare dividends.
Example Scenario:
Exception: Regardless if the URE exceeds 100% of their paid-in capital, the Board of Directors have 3
justifications to deny the SH.
(a) when justified by definite corporate expansion projects or programs approved by

the board of directors; or
(b) when the corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring dividends without their consent,
and such consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve for
probable contingencies.
Can a stockholder compel the BOD to declare dividends when the URE is exactly 100% of the paid-
up capital?
Yes, when the SH is a holder of a mandatory- if-earned dividend kind of shares.
A sold Z his shares. Dividends was declared on Oct. 15. The payment is on Oct. 30. On Oct. 30, Z
was named at record as the owner of shares. Who has the better right, A or Z?
A has the better right. The SH named at the time of the declaration of the dividend has the right for the
dividends, unless there is a contract that such declared dividends shall inure to the name of the buyer.
Corp Assets in Stock Dividends will not have a reduction because they are considered capital of
URE. (Forced Purchase)
Dividends illegally paid (paid from capital), are directors liable?
Directors are not liable unless there is bad faith or negligence. Apply Business Judgement Rule).
Example Scenario:
1M No Par Value Shares

P 10/s
P20/s
Counsel said the no par value are profits. Is he liable?
He may be under Section 30 of the Code. The entire consideration of no par value shares are
considered as capital. (Limitation of no par value)

BUSSINESS ORGANIZATION II 2. After incorporation
REQUIRMENT:
RA 11232 (REVISED CORPORATIN CODE) a) Affirmative vote of either of the following shall be necessary:
I. the stockholders representing at least a majority of the
BASED ON THE COURSE OUTLINE, DISCUSSIONS, RECITATIONS AND BOOK OF ATTY RUBEN
outstanding capital stock, or
LADIA
II. of at least a majority of the members in case nonstock
PART II (FINALS) corporation
b) The bylaws shall be signed by the stockholders or members voting for
CHAPTER VIII- BY-LAWS them;
c) Shall be kept in the principal office of the corporation, subject to the
ADOPTION AND MODES inspection of the stockholders or members during office hours.
d) A copy thereof, duly certified by a majority of the directors or trustees
By-laws- are rules and ordinance made by a corporation for its own government; to regulate the conduct and countersigned by the secretary of the corporation, shall be filed with
of and define the duties of the stockholders or members towards the corporation and among themselves. the Commission and attached to the original articles of incorporation.
(1bouvier’s dictionary, 8th edition)
Note: In all cases, bylaws shall be effective only upon the issuance by the Commission of a certification
May also be defined as “rules and regulation or private laws enacted by the corporation to regulate, govern that the bylaws are in accordance with this Code.
and control it’s own action, affairs and concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it. (8 fletcher, 1992 Ev. Ed.) Note: The Commission shall not accept, for filing the bylaws or any amendment thereto of any special
corporations governed by special laws, unless accompanied by a certificate of the appropriate
SEC. 45. Adoption of Bylaws. – For the adoption of bylaws by the corporation, the affirmative vote government agency to the effect that such bylaws or amendments are in accordance with law.
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 nonstock corporations, shall be necessary. The bylaws shall Note: As to stockholder/members and to directors or trustees, they are conclusively presumed to know
be signed by the stockholders or members voting for them and shall be kept in the principal office the contents or provisions of the by-laws.
of the corporation, subject to the inspection of the stockholders or members during office hours.
A copy thereof, duly certified by a majority of the directors or trustees and countersigned by the Note: As to THIRD PERSONS are GENERALLY not bound, affected or prejudiced by the by-laws, it being
secretary of the corporation, shall be filed with the Commission and attached to the original articles merely internal rules of the corporation, EXCEPT: if they have knowledge of its existence and contents.
of incorporation.
Contents of the by-laws:
Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and filed prior
to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators SEC. 46. Contents of Bylaws. – A private corporation may provide the following in its bylaws:
and submitted to the Commission, together with the articles of incorporation.
(a) The time, place and manner of calling and conducting regular or special meetings of the
In all cases, bylaws shall be effective only upon the issuance by the Commission of a certification directors or trustees;
that the bylaws are in accordance with this Code. (b) The time and manner of calling and conducting regular or special meetings and mode
of notifying the stockholders or members thereof;
The Commission shall not accept for filing the bylaws or any amendment thereto of any bank, (c) The required quorum in meetings of stockholders or members and the manner of voting
banking institution, building and loan association, trust company, insurance company, public therein;
utility, educational institution, or other special corporations governed by special laws, unless (d) The modes by which a stockholder, member, director, or trustee may attend meetings
accompanied by a certificate of the appropriate government agency to the effect that such bylaws and cast their votes;
or amendments are in accordance with law. (e) The form for proxies of stockholders and members and the manner of voting them;
(f) The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for
Modes of adoption: setting the compensation of directors or trustees and officers, and the maximum number
of other board representations that an independent director or trustee may have which
1. Prior to incorporation shall, in no case, be more than the number prescribed by the Commission;
REQUIRMENTS: (g) The time for holding the annual election of directors or trustees and the mode or manner
a) bylaws shall be approved and signed by all the incorporators and of giving notice thereof;
b) submitted to the Commission, together with the articles of (h) The manner of election or appointment and the term of office of all officers other than
incorporation. directors or trustees;
Note: the signature of the stockholder are not necessary in here. (i) The penalties for violation of the bylaws;
(j) In the case of stock corporations, the manner of issuing stock certificates; and
(k) Such other matters as may be necessary for the proper or convenient transaction of its 5. It must be reasonable.
corporate affairs for the promotion of good governance and anti-graft and corruption
measures. **ELEMENTS 1-3- CASE OF FLEISCHER; AND ELEMENTS 4& 5- CASE OF GOKONGWEI
An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code. CASES:
Amendment or Repeal of By-laws [GR No. L-23241; March 14 ,1925] HENRY FLEISCHER, plaintiff-appellee, vs. BOTICA NOLASCO
CO., INC., defendant-appellant.
SEC. 47. Amendment to Bylaws. – A majority of the board of directors or trustees, and the owners
of at least a majority of the outstanding capital stock, or at least a majority of the members of a ISSUE: Whether Fleischer is bound by the provisions of the corporation’s by-laws
nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or
HELD: Section 13, paragraph 7 (of Act 1459), empowers a corporation to make by-laws, not
repeal the bylaws or adopt new bylaws. The owners of two-thirds (2/3) of the outstanding capital
inconsistent with any existing law, for the transferring of its stock. It follows from said provision,
stock or two-thirds (2/3) of the members in a nonstock corporation may delegate to the board of
that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the
directors or trustees the power to amend or repeal the bylaws or adopt new bylaws: Provided, That
law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459.
any power delegated to the board of directors or trustees to amend or repeal the bylaws or adopt
Said section specifically provides that the shares of stock “are personal property and may be transferred
new bylaws shall be considered as revoked whenever stockholders owning or representing a
by delivery of the certificate indorsed by the owner, etc.” Said section 35 defines the nature, character and
majority of the outstanding capital stock or majority of the members shall so vote at a regular or
transferability of shares of stock. Under said section they are personal property and may be transferred as
special meeting.
therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It
Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the does not suggest that any discrimination may be created by the corporation in favor or against a certain
Commission such amended or new bylaws and, if applicable, the stockholders’ or members’ purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose
resolution authorizing the delegation of the power to amend and/or adopt new bylaws, duly of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general
certified under oath by the corporate secretary and a majority of the directors or trustees. provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares
of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and
The amended or new bylaws shall only be effective upon the issuance by the Commission of a said by-law should be made to harmonize with said provisions. It should not be inconsistent
certification that the same is in accordance with this Code and other relevant laws. therewith.
Modes of amending or repealing by-laws or adopting new one: As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the general policy of
1. By a majority vote of: the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala.,
a. the board of directors or trustees, AND (not OR) 436; 46 Am. Rep., 332.)
b. the owners of at least a majority of the outstanding capital stock, or at least a majority
of the members of a nonstock corporation; On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for
c. at a regular or special meeting duly called for the purpose. a corporate purpose, and always within the charter limits. They must always be strictly subordinate
2. By the board of directors or trustees, when the power to amend or repeal the bylaws or adopt to the constitution and the general laws of the land. They must not infringe the policy of the state,
new bylaws are delegated to them by a vote of the owners of two-thirds (2/3) of the outstanding nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair
capital stock or two-thirds (2/3) of the members in a nonstock corporation. the obligation of a contract, take away or abridge the substantial rights of stockholder or member,
affect rights of property or create obligations unknown to the law. (People’s Home Savings Bank vs.
Note: Any power delegated to the board of directors or trustees to amend or repeal the bylaws or adopt Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
new bylaws MAY BE revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a regular or special meeting. The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs.
Rhodes, 25 Fla., 40.)
Note: The amended or new bylaws shall only be effective upon the issuance by the Commission of a
certification that “the same is in accordance with this Code and other relevant laws.” “The power to enact by-laws restraining the sale and transfer of stock must be found in the governing
statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment,
FROM THE CASES BELOW, the following are the ELEMENTS of a VALID BY-LAWS: as the corporation itself cannot create such impediments. By-laws are intended merely for the protection
of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of
1. It must not be contrary to law, public policy, or morals;
the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass
2. It must not be inconsistent with the articles of incorporation;
upon the legality of the transaction by which its stock passes from one person to another, nor can it
3. It must be general and uniform in its effect or applicable to all alike or those similarly situated;
question the consideration upon which a sale is based. A by-law cannot take away or abridge the
4. It must not impair obligations and contracts or vested rights; and
substantial rights of stockholder. Under a statute authorizing bylaws for the transfer of stock, a corporation

can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an not have the power to force the surrender and withdrawal of unmatured stock except in case of
unreasonable restriction upon the right of sale.” liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this
provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board
The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions of directors to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer
hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view
right to alien them which attaches to the ownership of any other species of property. A shareholder is that said article was invalid. It was therefore suggested that the article in question should be eliminated
under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to from the by-laws. At the next meeting of the board of directors the matter was called to their attention and
secure the welfare of the corporation, or to enable another shareholder to make gains and profits. (10 it was resolved to recommend to the shareholders that in their next annual meeting the article in question
Cyc., p. 577.) be abrogated. It appears, however, that no annual meeting of the shareholders called since that date has
been attended by a sufficient number of shareholders to constitute a quorum, with the result that the
It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares,
provision referred to has not been eliminated from the by-laws, and it still stands among the by-laws of the
unless such power is expressly conferred in its charter or governing statute. This conclusion follows
association, notwithstanding its patent conflict with the law.
from the further consideration that by-laws or other regulations restraining such transfers, unless
derived from authority expressly granted by the legislature, would be regarded as impositions in It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the
restraint of trade. (10 Cyc., p. 578.) association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we
are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even
The foregoing authorities go farther than the stand we are taking on this question. They hold that the power
if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to
of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony
incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident
with the law or charter of the corporation, but such power should be expressly granted in said law or
to corporate effort would certainly be largely increased. There is no merit in this cause of action.
charter.
ISSUE2: Owing to the failure of a quorum at most of the general meetings since the respondent has been
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of
in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable
Act No. 1459, quoted above, as follows: “No transfer, however, shall be valid, except as between the
persons from among the stockholders. This custom finds its sanction in article 71 of the by-laws, which
parties, until the transfer is entered and noted upon the books of the corporation so as to show the names
reads as follows:
of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of
shares transferred.” This restriction is necessary in order that the officers of the corporation may ―ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may
know who are the stockholders, which is essential in conducting elections of officers, in calling occur in the board of directors until the election at the general meeting‖
meeting of stockholders, and for other purposes. But any restriction of the nature of that imposed
in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in WHETHER Art. 71 is valid?
restraint of trade
HELD: Yes. We are unable to see the slightest merit in the charge. No fault can be imputed to the
And moreover, the by-laws now in question cannot have any effect on the appellee. He had no corporation on account of the failure of the shareholders to attend the annual meetings; and their non-
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the
and for a valuable consideration. He was not a privy to the contract created by said by-law between way in which things have been conducted. Upon failure of a quorum at any annual meeting the directorate
the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat naturally holds over and continues to function until another directorate is chosen and qualified. Unless the
his rights as a purchaser. law or the charter of a corporation expressly provides that an office shall become vacant at the expiration
of the term of office for which the officer was elected, the general rule is to allow the officer to holdover
GOVERNMENT VS. EL HOGAR (supra) until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App.,
Fourth cause of action. It appears that among the by-laws of the association there is an article (No. 10)
550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs.
which reads as follows:
Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 Missouri,
“The board of directors of the association, by the vote of an absolute majority of its members, is empowered 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated
to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof finds expressions in article 66 of the by-laws of the respondent which declares in so many words that
whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners directors shall hold office “for the term of one year on until their successors shall have been elected and
of such shares is not desirable.” taken possession of their offices.”
ISSUE: Whether the above provision is valid? It result that the practice of the directorate of filling vacancies by the action of the directors themselves is
valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill
HELD: No. This by-law is of course a patent nullity, since it is in direct conflict with the latter part vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen
of section 187 of the Corporation Law, which expressly declares that the board of directors shall

of financial responsibility instead of electing poor persons to so responsible a position. The possession of It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation,
means does not disqualify a man for filling positions of responsibility in corporate affairs. who is also the officer or owner of a competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel
GOKONGWEI VS. SEC (supra) Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem improbable, if not
ISSUE1: Whether the amended by-laws of SMC disqualifying a competitor from nomination or election to
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to
the BOD are valid and reasonable
both corporations and place the performance of his corporation duties above his personal
HELD1: The validity or reasonableness of a by-law of a corporation in purely a question of law. Whether concerns.
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
Sound principles of corporate management counsel against sharing sensitive information with a director
unreasonable and therefore unlawful is a question of law. This rule is subject, however, to the limitation
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable
These dangers are enhanced considerably where the common director such as the petitioner is a
minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the
controlling stockholder of two of the competing corporations. It would seem manifest that in such situations,
judgment of those who are authorized to make by-laws and who have exercised their authority.
the director has an economic incentive to appropriate for the benefit of his own corporation the corporate
It is a settled state law in the United States, according to Fletcher, that corporations have the power to plans and policies of the corporation where he sits as director.
make by-laws declaring a person employed in the service of a rival company to be ineligible for
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
the corporation’s Board of Directors. ... (A)n amendment which renders ineligible, or if elected,
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
subjects to removal, a director if he be also a director in a corporation whose business is in
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
competition with or is antagonistic to the other corporation is valid.” This is based upon the
existing or new markets of existing or new products could enable said competitor to utilize such knowledge
principle that where the director is so employed in the service of a rival company, he cannot serve
to his advantage.
both, but must betray one or the other. Such an amendment “advances the benefit of the
corporation and is good.” An exception exists in New Jersey, where the Supreme Court held that the Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner
Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the
empowered to add additional qualifications. This is the exact opposite of the situation in the Philippines case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory
because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the
may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before
cannot engage in a business in direct competition with that of the corporation where he is a director by petitioner can be declared ineligible to run for director, there must be hearing and evidence must be
utilizing information he has received as such officer, under “the established law that a director or officer of submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and
a corporation may not enter into a competing enterprise which cripples or injures the business of the management, therefore, support the view that a by-law which disqualifies a competition from election to
corporation of which he is an officer or director. the Board of Directors of another corporation is valid and reasonable.
It is also well established that corporate officers “are not permitted to use their position of trust ISSUE2: Whether the Corporation has the power to prescribe qualifications
and confidence to further their private interests.” In a case where directors of a corporation cancelled
a contract of the corporation for exclusive sale of a foreign firm’s products, and after establishing a rival HELD2: Yes. Private respondents contend that the disputed amended by laws were adopted by the Board
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of of Directors of San Miguel Corporation as a measure of self-defense to protect the corporation from the
its products, the court held that equity would regard the new contract as an offshoot of the old contract clear and present danger that the election of a business competitor to the Board may cause upon the
and, therefore, for the benefit of the corporation, as a “faultless fiduciary may not reap the fruits of his corporation and the other stockholders’ inseparable prejudice. Submitted for resolution, therefore, is the
misconduct to the exclusion of his principal. issue of whether or not respondent San Miguel Corporation could, as a measure of self-protection,
disqualify a competitor from nomination and election to its Board of Directors.
The doctrine of “corporate opportunity” is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing It is recognized by an authorities that ‘every corporation has the inherent power to adopt by-laws
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an ‘for its internal government, and to regulate the conduct and prescribe the rights and duties of its
officer or director taking advantage of an opportunity for his own personal profit when the interest members towards itself and among themselves in reference to the management of its affairs. At
of the corporation justly calls for protection. common law, the rule was “that the power to make and adopt by-laws was inherent in every corporation
as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that
It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to in the absence of positive legislative provisions limiting it, every private corporation has this inherent power
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in
budget for expansion and diversification; (c) research and development; and (d) sources of funding, its charter or in general law, such power of self-government being essential to enable the corporation to
availability of personnel, proposals of mergers or tie-ups with other firms. accomplish the purposes of its creation.

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by- incorporators shall then submit their articles of incorporation and bylaws to the Commission.” In relation to
laws “the qualifications, duties and compensation of directors, officers and employees ... “This SEC 21 which provides that a corporation which does not formally organize and commence its
must necessarily refer to a qualification in addition to that specified by section 30 of the business within five (5) years from the date of its incorporation, its certificate of incorporation shall
Corporation Law, which provides that “every director must own in his right at least one share of be deemed revoked as of the day following the end of the five (5)-year period.
the capital stock of the stock corporation of which he is a director ... “ In Government v. El Hogar,
the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the 6. When do by-laws become effective?
Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as
A: bylaws shall be effective only upon the issuance by the Commission of a certification that the bylaws
security for their action, on the ground that section 21 of the Corporation Law expressly gives the power
are in accordance with this Code.
to the corporation to provide in its by-laws for the qualifications of directors and is “highly prudent and in
conformity with good practice 7. What are the elements of a valid by-law?
RECIT QUESTIONS A: 1. It must not be contrary to law, public policy, or morals; 2. It must not be inconsistent with the articles
of incorporation; 3. It must be general and uniform in its effect or applicable to all alike or those similarly
1. What are the requirements if the adoption of by-laws is made PRIOR to incorporation?
situated; 4. It must not impair obligations and contracts or vested rights; and 5. It must be reasonable.
A: 1) bylaws shall be approved and signed by all the incorporators and 2) submitted to the Commission,
8. What is the presumption for stockholder/directors with regards to the provisions of a by
together with the articles of incorporation.
law?
2. What is the effect if not filed within 1 month?
A: stockholder/members and to directors or trustees, they are conclusively presumed to know the contents
A: None, however, we note that adoption of the by-laws is a part and parcel of the formation and or provisions of the by-laws. THUS, it is binding upon them even if they have no actual knowledge of its
organization of a corporation, as SEC 18 provides that after the name of the corporation has been reserved contents.
in favor of the incorporators, the incorporators shall then submit their articles of incorporation and bylaws
9. How about 3rd person?
to the Commission. In relation to SEC 21 which provides that a corporation which does not formally
organize and commence its business within five (5) years from the date of its incorporation, its A: As to THIRD PERSONS they are GENERALLY not bound, affected or prejudiced by the by-laws, it
certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)- being merely internal rules of the corporation, EXCEPT: if they have actual or constructive knowledge of
year period. its existence and contents.
3. What are the requirements if made AFTER incorporation? 10. Case of Fleischer vs Botica
11. Assuming that in the case of Fleischer the provision in the by law was declared valid,
A:
will it bind Fleischer?
a) Affirmative vote of either of the following shall be necessary:
A: NO, THIRD PERSONS are GENERALLY not bound, affected or prejudiced by the by-laws, it being
I. the stockholders representing at least majority of the outstanding capital stock, or
merely internal rules of the corporation, EXCEPT: if they have actual or constructive knowledge of its
II. of at least majority of the members in case nonstock corporation
existence and contents. In the case Fleischer being a third person, acting in good faith and without any
b) The bylaws shall be signed by the stockholders or members voting for them;
actual or constructive knowledge of the by law provision is therefore not bound by it.
c) Shall be kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. 12. Case of Gokongwei vs sec
d) A copy thereof, duly certified by a majority of the directors or trustees and countersigned by 13. May the by-law be amended, altered or repealed?
the secretary of the corporation, shall be filed with the Commission and attached to the
original articles of incorporation. A: YES
4. Which is more convenient prior or after?
14. How may the by-law be amended, altered or repealed?
A: Filing prior to the incorporation because the signature required are only those of the
INCORPORATORS, on the other hand of it is filed AFTER incorporation you need the signature and assent A: there are two ways:
of all the stockholder, the latter is much harder to do.
1. By a majority vote of:
5. What happens if the corporation fails to adopt the by-law? a. the board of directors or trustees, AND (not OR)
b. the owners of at least a majority of the outstanding capital stock, or at least a majority
A: Adoption of the by-laws is a part and parcel of the formation and organization of a corporation, as SEC of the members of a nonstock corporation;
18 provides “after the name of the corporation has been reserved in favor of the incorporators, the c. at a regular or special meeting duly called for the purpose.

2. By the board of directors or trustees, when the power to amend or repeal the bylaws or adopt law, or regulation: Provided, further, That written notice of regular meetings may be sent to all
new bylaws are delegated to them by a vote of the owners of two-thirds (2/3) of the outstanding stockholders or members of record through electronic mail or such other manner as the
capital stock or two-thirds (2/3) of the members in a nonstock corporation. Commission shall allow under its guidelines.
15. May the power delegated to the board of directors be repealed, how?
At each regular meeting of stockholders or members, the board of directors or trustees shall
A: YES, Any power delegated to the board of directors or trustees to amend or repeal the bylaws or adopt endeavor to present to stockholders or members the following:
new bylaws MAY BE revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a regular or special meeting. (a) The minutes of the most recent regular meeting which shall include, among others:
1. A description of the voting and vote tabulation procedures used in the
16. When is the amended by law become effective? previous meeting;
2. A description of the opportunity given to stockholders or members to ask
A: The amended or new bylaws shall only be effective upon the issuance by the Commission of a questions and a record of the questions asked and answers given;
certification that “the same is in accordance with this Code and other relevant laws.” 3. The matters discussed and resolutions reached;
4. A record of the voting results for each agenda item;
17. What if the SEC did not act within 6mons after the filing of the amendment, without fault
5. A list of the directors or trustees, officers and stockholders or members who
on the part of the corporation?
attended the meeting; and
A: It can never be effective until the SEC issues a certification, the amended or new bylaws shall only be 6. Such other items that the Commission may require in the interest of good
effective upon the issuance by the Commission of a certification. Note: section 15 which provides for corporate governance and the protection of minority stockholders.
the effect of the SEC does not act within 6 months, applies only to amendment of articles of incorporation (b) A members’ list for nonstock corporations and, for stock corporations, material
information on the current stockholders, and their voting rights;
(c) A detailed, descriptive, balanced and comprehensible assessment of the corporation’s
performance, which shall include information on any material change in the
CHAPTER IX- MEETINGS corporation’s business, strategy, and other affairs;
(d) A financial report for the preceding year, which shall include financial statements duly
NOTE: Meetings are of two kinds: signed and certified in accordance with this Code and the rules the Commission may
1. STOCKHOLDERS/MEMBERS; and prescribe, a statement on the adequacy of the corporation’s internal controls or risk
2. DIRECTORS/TRUSTEES management systems, and a statement of all external audit and non-audit fees;
(e) An explanation of the dividend policy and the fact of payment of dividends or the
NOTE: Stockholders/Members and Directors/Trustees meetings are furthermore of two kinds: reasons for nonpayment thereof;
(f) Director or trustee profiles which shall include, among others, their qualifications and
1. Regular; and relevant experience, length of service in the corporation, trainings and continuing
2. Special education attended, and their board representations in other corporations;
(g) A director or trustee attendance report, indicating the attendance of each director or
A. STOCKHOLDERS’ OR MEMBERS’ MEETING trustee at each of the meetings of the board and its committees and in regular or special
stockholder meetings;
In corporate parlance, the term “meeting” applies to every duly conveyed assembly either of stockholders, (h) Appraisals and performance reports for the board and the criteria and procedure for
members, directors of trustees, managers, etc. for any legal purposes, or the transaction of a business of assessment;
common interest. (i) A director or trustee compensation report prepared in accordance with this Code and
the rules the Commission may prescribe;
Classifications of corporate meetings:
(j) Director disclosures on self-dealings and related party transactions; and/or
SEC. 48. Kinds of Meetings. – Meetings of directors, trustees, stockholders, or members may be (k) The profiles of directors nominated or seeking election or reelection.
regular or special.
A director, trustee, stockholder, or member may propose any other matter for inclusion in the
Requirements for a valid meeting agenda at any regular meeting of stockholders or members.
SEC. 49. Regular and Special Meetings of Stockholders or Members. – Regular meetings of Special meetings of stockholders or members shall be held at any time deemed necessary or as
stockholders or members shall be held annually on a date fixed in the bylaws, or if not so fixed, on provided in the bylaws: Provided, however, that at least one (1) week written notice shall be sent
any date after April 15 of every year as determined by the board of directors or trustees: Provided, to all stockholders or members, unless a different period is provided in the bylaws, law or
That written notice of regular meetings shall be sent to all stockholders or members of record at regulation.
least twenty-one (21) days prior to the meeting, unless a different period is required in the bylaws,
A stockholder or member may propose the holding of a special meeting and items to be included 3. It must be held at a proper place;
in the agenda. 4. It must be called by the proper party; and
5. Quorum and voting requirement must be met.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member:
Provided, That general waivers of notice in the articles of incorporation or the bylaws shall not be NOTE: At each regular meeting of stockholders or members, the board of directors or trustees shall
allowed: Provided, further, That attendance at a meeting shall constitute a waiver of notice of such endeavor to present to stockholders or members the following:
meeting, except when the person attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or convened. a) The minutes of the most recent regular meeting which shall include, among others:
1. A description of the voting and vote tabulation procedures used in the previous
Whenever for any cause, there is no person authorized or the person authorized unjustly refuses meeting;
to call a meeting, the Commission, upon petition of a stockholder or member on a showing of good 2. A description of the opportunity given to stockholders or members to ask questions
cause therefor, may issue an order directing the petitioning stockholder or member to call a and a record of the questions asked and answers given;
meeting of the corporation by giving proper notice required by this Code or the bylaws. The 3. The matters discussed and resolutions reached;
petitioning stockholder or member shall preside thereat until at least a majority of the stockholders 4. A record of the voting results for each agenda item;
or members present have chosen from among themselves, a presiding officer. 5. A list of the directors or trustees, officers and stockholders or members who
attended the meeting; and
Unless the bylaws provide for a longer period, the stock and transfer book or membership book 6. Such other items that the Commission may require in the interest of good corporate
shall be closed at least twenty (20) days for regular meetings and seven (7) days for special governance and the protection of minority stockholders.
meetings before the scheduled date of the meeting.
b) A members’ list for nonstock corporations and, for stock corporations, material information on
In case of postponement of stockholders’ or members’ regular meetings, written notice thereof
the current stockholders, and their voting rights;
and the reason therefor shall be sent to all stockholders or members of record at least two (2)
c) A detailed, descriptive, balanced and comprehensible assessment of the corporation’s
weeks prior to the date of the meeting, unless a different period is required under the bylaws, law
performance, which shall include information on any material change in the corporation’s
or regulation.
business, strategy, and other affairs;
The right to vote of stockholders or members may be exercised in person, through a proxy, or d) A financial report for the preceding year, which shall include financial statements duly signed
when so authorized in the bylaws, through remote communication or in absentia. The Commission and certified in accordance with this Code and the rules the Commission may prescribe, a
shall issue the rules and regulations governing participation and voting through remote statement on the adequacy of the corporation’s internal controls or risk management systems,
communication or in absentia, taking into account the company’s scale, number of shareholders and a statement of all external audit and non-audit fees;
or members, structure, and other factors consistent with the protection and promotion of e) An explanation of the dividend policy and the fact of payment of dividends or the reasons for
shareholders’ or member’s meetings. nonpayment thereof;
f) Director or trustee profiles which shall include, among others, their qualifications and relevant
Note: General Rule stockholders have no power to act as or for the corporation EXCEPT at a corporate experience, length of service in the corporation, trainings and continuing education attended,
meeting called and conducted according to law. Exception to the exception in the case of ordinary and their board representations in other corporations;
amendment of the AI where the vote or WRITTEN ASSENT of the stockholders representing 2/3 of the g) A director or trustee attendance report, indicating the attendance of each director or trustee at
outstanding capital stock or2/3 of the members in the case of nonstock corporation would pass a valid each of the meetings of the board and its committees and in regular or special stockholder
amendment. Rationale for the general rule: this rule arises from the need to protect the stockholders by meetings;
providing them with notice of meeting and giving them the opportunity to attend the meeting, discuss the h) Appraisals and performance reports for the board and the criteria and procedure for
issue and vote. assessment;
i) A director or trustee compensation report prepared in accordance with this Code and the rules
Regular meetings of stockholders or members are those held annually on a date fixed in the bylaws, the Commission may prescribe;
or if not so fixed, on any date after April 15 of every year as determined by the board of directors or j) Director disclosures on self-dealings and related party transactions; and/or
trustees. k) The profiles of directors nominated or seeking election or reelection.
Special meetings of stockholders or members are those held at any time deemed necessary or as A director, trustee, stockholder, or member may propose any other matter for inclusion in the agenda at
provided in the bylaws. any regular meeting of stockholders or members.
Requirements for a valid meeting: Discussion of the requirements for a valid meeting:
1. It must be held on the date fixed in the bylaws or in accordance with law; 1. It must be held on the date fixed in the bylaws or in accordance with law
2. Prior notice must be given;

The date required as a rule is either: The Notice must contain the agenda or business matter/s that may be taken up before the meeting
otherwise it may become voidable at the instance of any objecting stockholder or member. Among them
1. annually on a date fixed in the bylaws, are:
2. if not so fixed, on any date after April 15 of every year as determined by the board of directors
or trustees; or a) Removal of directors or trustees; SEC27
3. (in special meeting) at any time deemed necessary or as provided in the bylaws. b) Filing up of vacancies in the office of directors or trustees; SEC28
c) Ratification of contract of the corporation with any of its directors or trustees; SEC 31
Exception, as when the annual meeting cannot be held on the appointed time for some valid and d) Extension and shortening of corporate term; SEC 36
meritorious reasons. It may be postponed. e) Increase and decrease of capital stock or incurring, creating or increasing bonded
indebtedness; SEC 37
2) Prior notice must be given
f) Sale or other disposition of all or substantially all of the assets of the corporation; SEC 39
SEC 49 provides that written notice of regular meetings shall be sent to all stockholders or members of g) Investment of corporate funds in another corporation or business or for any other purpose; SEC
record at least twenty-one (21) days prior to the meeting, unless a different period is required in the 41
bylaws, law, or regulation: Provided, further, That written notice of regular meetings may be sent to all h) Declaration of dividends; SEC 42
stockholders or members of record through electronic mail or such other manner as the Commission shall i) Entering into a management contract with another corporation; SEC 43
allow under its guidelines. j) Amendment or repeal of the by-laws or adoption of a new one; SEC 47
k) Fixing the issue price of no-par value shares by the stockholders; SEC 61
Special meetings at least one (1) week written notice shall be sent to all stockholders or members, l) Merger or consolidation; SEC 76
unless a different period is provided in the bylaws, law or regulation. m) Dissolution of the corporation
EXCEPTIONS: CASE:
a) If the by-laws provide for a different period for sending out notice for regular or special meetings [GR No. L-12282; March 31, 1959] THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF
(failure to comply would render the resolutions adopted void at the option of the stockholder THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL., petitioners, vs. HON.
who was not notified); BIENVENIDO A. TAN, ETC., ET AL., respondents.
b) Waiver, either express or implied. SEC 49- Notice of any meeting may be waived, expressly or
impliedly, by any stockholder or member: ISSUE: Whether the notice requirement is complied with?
a. Provided, That general waivers of notice in the articles of incorporation or the
HELD: No. Section 3, article III, of the constitution and by-laws the association provides:
bylaws shall not be allowed:
b. Provided, further, That attendance at a meeting shall constitute a waiver of notice “Notice of the time and place of holding of any annual meeting, or any special meeting, the members, shall
of such meeting, except when the person attends a meeting for the express purpose be given either by posting the same in a postage prepaid envelope, addressed to each member on the
of objecting to the transaction of any business because the meeting is not lawfully record at the address left by such member with the Secretary of the Association, or at his known post-
called or convened. office address or by delivering the same person at least (5) days before the date set for such meeting. . .
In lieu of addressing or serving personal notices to the members, notice of the members, notice of a regular
NOTE: SEC 50- XXX XXX XXX Notice of meetings shall be sent through the means of
annual meeting or of a special meeting of the members may be given by posting copies of said notice at
communication provided in the bylaws, which notice shall state the time, place and purpose of the
the different departments and plants of the San Miguel Brewery Inc., not less than five (5) days prior to the
meetings.
date of the meeting. (Annex K.)”
Each notice of meeting shall further be accompanied by the following:
Notice of a special meeting of the members should be given at least five days before the date of the
a) The agenda for the meeting; meeting. It appears that the notice was posted on 26 March and the election was set of 28 March.
b) A proxy form which shall be submitted to the corporate secretary within a reasonable Therefore, the five days previous notice required would not be complied with.
time prior to the meeting;
3) it must be held at the proper place
c) When attendance, participation, and voting are allowed by remote communication or in
absentia, the requirements and procedures to be followed when a stockholder or SEC. 50. Place and Time of Meetings of Stockholders or Members. – Stockholders’ or members’
member elects either option; and meetings, whether regular or special, shall be held in the principal office of the corporation as set
d) When the meeting is for the election of directors or trustees, the requirements and forth in the articles of incorporation, or, if not practicable, in the city or municipality where the
procedure for nomination and election. principal office of the corporation is located: Provided, That any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall, for purposes of this section,
XXX XXX XXX
be considered a city or municipality.

XXX XXX XXX General Rule: A quorum shall consist of the stockholders representing majority of the outstanding capital
stock or majority of the members in nonstock.
Meeting must, at all times at the principal office, or if not practicable at any place in the city or municipality
of the palace where the principal office of the corporation is located. For this purpose, Metropolitan areas Exception: The by-laws or the Code itself may provide for a greater quorum and if there is an agenda
is considered as one city or municipality. requiring such to be valid.
While there is no law allowing a STOCK corporation to hold a meeting outside the city or municipality NOTE: A by-law provision may provide for a higher quorum requirement than that prescribed in the Code,
where the principal office is located, in a NON-STOCK corporations SEC. 92 provides that the bylaws but not less. Otherwise, the by-law provision providing for a lesser quorum requirement have no force and
may provide that the members of a nonstock corporation may hold their regular or special meetings at effect since a by-law provision is subordinate to the statute and could not defeat the requirements of the
any place even outside the place where the principal office of the corporation is located: law.
(a) Provided, that proper notice is sent to all members indicating the date, time and The basis of determining the presence of a quorum:
place of the meeting:
(b) Provided, further, That the place of meeting shall be within Philippine territory. 1. Stock corporation – total outstanding capital stock thus total subscription irrespective of the
amount paid by them.
Note: sec 86 last par. “The provisions governing stock corporations, when pertinent, shall be applicable to 2. Non-stock corporation – total number of registered voting members.
nonstock corporations, except as may be covered by specific provisions of this Title.”
A quorum once present is not broken by the subsequent withdrawal of a part or fraction of the
NOTE: The phrase in the first paragraph of sec 50 which provides that “Provided, That any city or stockholders, whether present in person or in their proxies (fletcher 1987 rev. edition)
municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas shall, for purposes
of this section, be considered a city or municipality.” May likewise constitute an exception to the general NOTE: Improperly held meeting. SEC 50 provides that “All proceedings and any business transacted
rule that meetings of stockholders are held in the principal office of the corporation Thus, subject to notice at a meeting of the stockholders or members, if within the powers or authority of the corporation,
requirement, a corporation whose principal office is located at Makati, Metro Manila may hold its meeting shall be valid even if the meeting is improperly held or called: Provided, That all the stockholders
in any place within metro manila since the latter is considered as one city or municipality. or members of the corporation are present or duly represented at the meeting and not one of them
expressly states at the beginning of the meeting that the purpose of their attendance is to object
4) It must be Called by the proper party to the transaction of any business because the meeting is not lawfully called or convened.”
SEC 49 provide that “Whenever for any cause, there is no person authorized or the person General Rule: Ineffective.
authorized unjustly refuses to call a meeting, the Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order directing the petitioning Exception: upon concurrence of the following, then the resolution or act shall be valid per se because any
stockholder or member to call a meeting of the corporation by giving proper notice required by defect has been ratified:
this Code or the bylaws. The petitioning stockholder or member shall preside thereat until at least
1. All stockholders or members are present or duly represented; and
a majority of the stockholders or members present have chosen from among themselves, a
2. Not one of them expressly states at the beginning of the meeting that the purpose of their
presiding officer.”
attendance is to object to the transaction of any business because the meeting is not lawfully
The following are authorized to call a meeting (in the order stated): called or convened.
a. The person or persons authorized under the by-laws; To reiterate: If the voting requirement is met, any resolution passed in the meeting, even if improperly held
b. Absent any provision in the by-laws, it may be called by the President; SEC 53 or called will be valid if all the stockholders or members are present or duly represented.
c. By the secretary on order of the president or on written demand of the stockholders
representing at least a majority of the outstanding capital stock or majority of the DISCUSSION (to be transcribed) and RECIT QUESTIONS
members entitled to vote, or the stockholder or member making the demand if there
1. What are the requisites for a valid stockholders meeting? A:
is no secretary or he refuses to do so, under SEC. 27; and
a) It must be held on the date fixed in the bylaws or in accordance with law;
d. A stockholder as empowered by the proper forum pursuant to SEC. 49.
b) Prior notice must be given;
5) Quorum and Voting requirement must be met c) It must be held at a proper place;
d) It must be called by the proper party; and
SEC. 51. Quorum in Meetings. – Unless otherwise provided in this Code or in the bylaws, a quorum e) Quorum and voting requirement must be met.
shall consist of the stockholders representing majority of the outstanding capital stock or majority
of the members in the case of nonstock corporations. 2. What is the notice requirement in stockholders meeting?

A: SEC 49 provides that written notice of regular meetings shall be sent to all stockholders or members 2. Not one of them expressly states at the beginning of the meeting that the purpose of their
of record at least twenty-one (21) days prior to the meeting. attendance is to object to the transaction of any business because the meeting is not lawfully
called or convened.
Special meetings at least one (1) week written notice prior to the meeting. 6. The case of Board of Directors vs Tan?
7. Where shall meetings be held?
3. How is notice given to the stockholder?
A: SEC 50 PROVIDES THAT as a GR: shall be held in the principal office of the corporation as set forth
A: sec 49 provides that written notice in a regular meeting may be sent to all stockholders or members
in the articles of incorporation. EXCEPTION: if not practicable, in the city or municipality where the principal
of record through electronic mail or such other manner as the Commission shall allow under its
office of the corporation is located: Provided, That any city or municipality in Metro Manila, Metro Cebu,
guidelines, OR as the by-laws so provide.
Metro Davao, and other Metropolitan areas shall, for purposes of this section, be considered a city or
SEC 50 provide further that notice of meetings shall be sent through the means of communication municipality.
provided in the bylaws, which notice shall state the time, place and purpose of the meetings. Each
8. Will the answer in q7 be the same if it is a nonstock corporation?
notice of meeting shall further be accompanied by the following:
A: NO, in a NON-STOCK corporations SEC. 92 provides that the bylaws may provide that the members
a) The agenda for the meeting;
of a nonstock corporation may hold their regular or special meetings at any place even outside the
b) A proxy form which shall be submitted to the corporate secretary within a reasonable time
place where the principal office of the corporation is located:
prior to the meeting;
c) When attendance, participation, and voting are allowed by remote communication or in (a) Provided, that proper notice is sent to all members indicating the date, time and
absentia, the requirements and procedures to be followed when a stockholder or member place of the meeting:
elects either option; and (b) Provided, further, That the place of meeting shall be within Philippine territory.
d) When the meeting is for the election of directors or trustees, the requirements and 9. What if, in a non-stock corporation, there is no by-law provision where they are
procedure for nomination and election. authorized to hold the meeting within the Philippines, can they have meetings anywhere
within the Philippines?
4. May notice requirement be dispensed with?
A: NO, SEC 86 PROVIDES THAT The provisions governing stock corporations, when pertinent, shall be
A: YES, Waiver, either express or implied. SEC 49- Notice of any meeting may be waived, expressly or applicable to nonstock corporations, except as may be covered by specific provisions of this Title. SEC 92
impliedly, by any stockholder or member: of the code only authorizes the corporation to include in there by laws that they may have their meetings
in any other place within the Philippines, absent which in their by-laws they are not authorized to conduct
a) Provided, That general waivers of notice in the articles of incorporation or the
a meeting outside its principal office.
bylaws shall not be allowed:
b) Provided, further, That attendance at a meeting shall constitute a waiver of 10. Who calls the meetings?
notice of such meeting, except when the person attends a meeting for the
express purpose of objecting to the transaction of any business because the A: The following are authorized to call a meeting (in the order stated):
meeting is not lawfully called or convened.
5. What happens if notice requirement is not met? a.The person or persons authorized under the by-laws;
b.Absent any provision in the by-laws, it may be called by the President; SEC 53
A: It may or may not be valid, it is not necessarily null and void. SEC 50 last paragraph provides that “All c.By the secretary on order of the president or on written demand of the stockholders
proceedings and any business transacted at a meeting of the stockholders or members, if within the representing at least a majority of the outstanding capital stock or majority of the
powers or authority of the corporation, shall be valid even if the meeting is improperly held or members entitled to vote, OR the stockholder or member making the demand if
called: Provided, That all the stockholders or members of the corporation are present or duly represented there is no secretary or the latter refuses to do so, under SEC. 27; and
at the meeting and not one of them expressly states at the beginning of the meeting that the purpose of d. A stockholder as empowered by the proper forum pursuant to SEC. 49.
their attendance is to object to the transaction of any business because the meeting is not lawfully called 11. What if there is no person authorized or the person authorized refuses to call the
or convened.” meeting, who may call the meeting?
Thus, it is generally INVALID, UNLESS upon concurrence of the following, then the resolution or act shall A: SEC 49 provide that “Whenever for any cause, there is no person authorized or the person authorized
be valid per se because any defect has been ratified: unjustly refuses to call a meeting, the Commission, upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order directing the petitioning stockholder or member to
1. All stockholders or members are present or duly represented; and call a meeting of the corporation by giving proper notice required by this Code or the bylaws. The
petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or
members present have chosen from among themselves, a presiding officer.”

12. Who presides the meeting called for that purpose (referring to to Q11)? it is the election of member of the board, what happens to the proceedings conducted
during that meeting?
A: The petitioning stockholder or member shall preside.
A: It may or may not be valid, it is not necessarily null and void. SEC 50 last paragraph provides that “All
13. Until when does the petitioning stockholder or member presides? proceedings and any business transacted at a meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid even if the meeting is improperly held or called:
A: Until at least a majority of the stockholders or members present have chosen from among themselves,
Provided, That all the stockholders or members of the corporation are present or duly represented at the
a presiding officer.
meeting and not one of them expressly states at the beginning of the meeting that the purpose of their
14. Who will have the right to vote in case of a meeting called in accordance with the attendance is to object to the transaction of any business because the meeting is not lawfully called or
provision of sec 49 paragraph 7? Who will have the right to vote in a meeting called for convened.”
that purpose?
Thus, upon concurrence of the following, then the resolution or act shall be valid per se because any defect
A: Only the stockholder or members appearing in the stock and transfer book or in the members has been ratified:
book. This stock and transfer book or membership book shall be closed at least twenty (20) days, for
1. All stockholders or members are present or duly represented; and
regular meetings, and seven (7) days, for special meetings, before the scheduled date of the meeting.
2. Not one of them expressly states at the beginning of the meeting that the purpose of their
Only those listed during the closed period shall be entitled to vote or have the right to vote, nobody else.
attendance is to object to the transaction of any business because the meeting is not lawfully
The corporation will not look beyond its book to determine who its stockholders are who may have the
called or convened.
right to vote or be voted upon in a directors election.
Otherwise, the proceeding shall be null and void.
15. What is the quorum requirement in a stockholders or members meeting?
18. A is one of the stockholder he cannot attend the meeting he appointed his brother as
A: SEC. 51. General Rule- a quorum shall consist of the stockholders representing majority of the
his proxy, but then in that meeting in that particular place, just as when the meeting is
outstanding capital stock or majority of the members in the case of nonstock corporations.
about to be held, B had an LBM, and was not able to attend the meeting, all other
Exception: Unless otherwise provided in this Code or in the bylaws, stockholders are present or duly represented, may A question the validity of the
meeting?
16. FACTS: authorized outstanding capital stock 1M; 200T are non-voting shares; the BOD A: YES, he was not DULY REPRESENTED. SEC 50 provides that All stockholders or
passed a resolution for the approval of the stockholders to 1) amend the articles of members are present OR duly represented.
incorporation, 2) to amend the by-laws, and 3) for purposes of entering into a
management contract. For number 1 it requires 2/3 votes from the stockholders or B. DIRECTOR’S OR TURSTEE’S MEETING
members, in num. 2 only majority of SH/M, and in num. 3 also a majority. What is your
quorum requirement in order that the stockholders may discuss these 3 matters in the SEC. 52. Regular and Special Meetings of Directors or Trustees; Quorum. – Unless the articles of
agenda for their meetings? incorporation or the bylaws provides for a greater majority, a majority of the directors or trustees
as stated in the articles of incorporation shall constitute a quorum to transact corporate business,
A: IN NUMBER 1- 2/3 vote of the 1M outstanding capital stock, include the 200t non-voting shares because and every decision reached by at least a majority of the directors or trustees constituting a quorum,
the matter is included in the list in SEC 6. Around 666,667 votes except for the election of officers which shall require the vote of a majority of all the members of
the board, shall be valid as a corporate act.
IN NUMBER 2- majority vote of the 1M outstanding capital stock, include the 200t non-voting shares
because the matter is included in the list in SEC 6. 500,001 votes Regular meetings of the board of directors or trustees of every corporation shall be held monthly,
unless the bylaws provide otherwise.
IN NUMBER 3- majority vote of the 800T outstanding capital stock, exclude the 200t non-voting shares
because the matter is not included in the list in SEC 6. Apply SEC 43. This is an ordinary management Special meetings of the board of directors or trustees may be held at any time upon the call of the
contract so only majority is required. 400,001 votes president or as provided in the bylaws.
17. What is the effect of a SH/M meeting or resolution if it is improperly held or called? Meetings of directors or trustees of corporations may be held anywhere in or outside of the
FACTS: principal office is in Pasay, a meeting has been called to be held in Baguio; Philippines, unless the bylaws provide otherwise. Notice of regular or special meetings stating the
notice requirement is 15 days, but notice requirement has only been posted and sent 10 date, time and place of the meeting must be sent to every director or trustee at least two (2) days
days prior to the meeting; the president is the person authorized to call for the meeting, prior to the scheduled meeting, unless a longer time is provided in the bylaws. A director or trustee
but the meeting was called by the finance manager; the scheduled annual meeting is 3rd may waive this requirement, either expressly or impliedly.
week of April, but the meeting is scheduled at the first week of April, let us assume that

Directors or trustees who cannot physically attend or vote at board meetings can participate and Quorum requirement:
vote through remote communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable opportunities to participate. Unless the articles of incorporation or the bylaws provides for a greater majority, a majority of the
Directors or trustees cannot attend or vote by proxy at board meetings. directors or trustees as stated in the articles of incorporation shall constitute a quorum to transact
corporate business, and every decision reached by at least a majority of the directors or trustees
A director or trustee who has a potential interest in any related party transaction must recuse from constituting a quorum, except for the election of officers which shall require the vote of a majority
voting on the approval of the related party transaction without prejudice to compliance with the of all the members of the board, shall be valid as a corporate act.
requirements of Section 31 of this Code.
GR: A majority of the directors or trustees as stated in the articles of incorporation shall constitute a
Regular Meeting: Held monthly, unless the by-laws provide otherwise quorum to transact corporate business
Special Meeting: Held at any time upon the call of the president or as provided in the by-laws Exception: Unless the articles of incorporation or the bylaws provides for a greater majority; OR In the
election of officers which shall require the vote of a majority of all the members of the board,
Where held? A: Meetings may be held anywhere in or outside of the Philippines, unless the by-laws
provide otherwise. DISCUSSION (to be transcribed) RECIT QUESTIONS
Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every 1. When should the regular or special meetings of directors or trustees be held?
director or trustee at least two (2) days prior to the scheduled meeting, unless a longer time is provided in
the bylaws. Notice may, however, be waived, expressly or impliedly. Note that presence at a meeting A: In Regular Meeting: Held monthly, unless the by-laws provide otherwise; In Special Meeting: Held at
waives want of notice. any time upon the call of the president or as provided in the by-laws
Notice of regular or special meetings must state the date, time and place of the meeting 2. Where should the place of meeting be held?
GENERLA RULE: Meeting conducted in the absence of some of the directors or trustees and without A: Meetings may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.
notice to them is illegal, and the action at such meeting, although by a majority of the directors is invalid.
3. What is the notice requirement?
EXCEPT:
A: Notice of regular or special meetings stating the date, time and place of the meeting must be sent to
1. When subsequently ratified;
every director or trustee at least two (2) days prior to the scheduled meeting, unless a longer time is
2. In close corporations where a director may bid the corporation even without a meeting;
provided in the bylaws.
3. When the right to a notice is waived.
4. What shall be the voting requirement for a valid corporate act? There are 5 man member
The SEC has ruled that a special meeting conducted in the absence of some of the directors and without
board as provided for in the AoI, the directors will have a meeting now (October 29,
any notice to them is illegal and the action at such meeting although by a majority of the directors is invalid,
2019), C and D, the third and fourth member of the board rode in 1 car, binarakbak sila
unless ratified.
ng PDEA, patay, there are only 3 directors alive, what is the quorum requirement in order
However, if all the directors are present, their presence at the meeting waives the want of notice. If the that they may proceed with the meeting?
notice requirement is not complied with the meeting is illegal and will not bind the corporation except when
A: The code provides that majority of the directors or trustees as stated in the articles of incorporation
subsequently ratified. (Lopez vs. Fontecha)
shall constitute a quorum to transact corporate business, thus since there 5 directors stated in the AoI,
Physical presence at the meeting is not required; teleconferencing and videoconferencing is allowed, RA and 3 is enough to constitute a quorum.
8792. The board must act and meet as a body corporate. Note this is now specifically provided in the
5. What is the voting requirement in order that they may pass a valid corporate act?
code “Directors or trustees who cannot physically attend or vote at board meetings can participate and
vote through remote communication such as videoconferencing, teleconferencing, or other alternative A: A majority of the directors or trustees as stated in the articles of incorporation shall constitute a quorum
modes of communication that allow them reasonable opportunities to participate. Directors or trustees to transact corporate business, and every decision reached by at least a majority of the directors or
cannot attend or vote by proxy at board meetings.” trustees constituting a quorum xxx xxx shall be valid as a corporate act.
General Rule: A director or trustee cannot vote by proxy. 6. In the above case may the vote of 2 member be enough in order for the board to pass
upon a valid corporate act?
Exception: If he is duly represented in a stockholder’s meeting.
A: YES, A majority of the directors or trustees as stated in the articles of incorporation shall constitute a
Rule: A director cannot vote by proxy in a BoD meeting but may do so in a stockholder’s meeting.
quorum to transact corporate business, and every decision reached by at least a majority of the
directors or trustees constituting a quorum xxx xxx shall be valid as a corporate act. Thus, in the
case above, a vote of 2 of the directors is enough, the quorum requirement is only 3, and the code requires The right to vote is vested with the legal owner of the shares. The corporation will not look beyond its
that every decision reached by the D/T CONSTITUTING A QUORUM shall be a valid corporate act. record. Only those appearing in the books of the corporation have the right of a stockholder.
7. The rule is that quorum requirement is majority of their number as fixed in the articles SEC. 54. Right to Vote of Secured Creditors and Administrators. – In case a stockholder grants
of incorporation, voting requirement is majority vote of those present, thus if 3 of them security interest in his or her shares in stock corporations, the stockholder-grantor shall have the
are present and 2 of them voted for a particular act or transaction then it is a valid right to attend and vote at meetings of stockholders, unless the secured creditor is expressly given
corporate act. Do you know of any exception to that rule that the vote of 2 members of 5 by the stockholder-grantor such right in writing which is recorded in the appropriate corporate
man governing board may pass a valid corporate act or transaction? books.
A: under sec 52 it provides for 2 exceptions: 1.) Unless the articles of incorporation or the bylaws provides Executors, administrators, receivers, and other legal representatives duly appointed by the court
for a greater majority; and 2.) except in the case of election of officers which shall require the vote of a may attend and vote in behalf of the stockholders or members without need of any written proxy.
majority of all the members of the board.
GENERAL RULE: The pledgor or mortgagor or the stockholder-grantor is entitled to vote
8. May the directors vote by Proxy?
EXCEPTION: Unless there is a written agreement which is recorded in the corporate books to the contrary.
A: NO, they may not, Sec 52 provides that “Directors or trustees cannot attend or vote by proxy at
board meetings.” Note: Executors, administrators, receivers, and other legal representatives MUST BE duly appointed by
the court.
9. Election of the members of the board, A is one of the directors, incumbent, there term
of office has expired, so a meeting was called in order that a new set of directors be Executors, administrators, receivers, and other legal representatives duly appointed by the court may
elected, A cannot attend, he sent his brother B to attend, is the proxy valid? attend and vote in behalf of the stockholders or members without need of any written proxy. In the absence
of an appointment, no person is legally capable to represent and vote. Unless a duly appointed executor
A: Yes. The prohibition is categorical, they are only prohibited to attend by proxy only to a BOARD meeting, or administrator of a stockholder holds a legal title to at least 1 share of stock, he may not be elected as a
it does not extend to stockholder’s meeting. Elections of officers constitute a stockholder’s meeting; thus, director. The appointed representative may ask the court to transfer to him at least one share so he may
proxy is allowed because the director shall vote in his capacity as a stockholder. be elected. Rationale sec 22, a director must own at least 1 share of capital stock.
SEC. 53. Who Shall Preside at Meetings. – The chairman or, in his absence, the president shall SEC. 55. Voting in Case of Joint Ownership of Stock. – The consent of all the co-owners shall be
preside at all meetings of the directors or trustees as well as of the stockholders or members, necessary in voting shares of stock owned jointly by two (2) or more persons, unless there is a
unless the bylaws provide otherwise. written proxy, signed by all the co-owners, authorizing one (1) or some of them or any other person
to vote such share or shares: Provided, That when the shares are owned in an “and/or” capacity
The president shall preside at the meeting, unless the by-laws provide otherwise. by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.
Note: sec 49 provides that a petitioning stockholder may preside a meeting. General Rule: In case of shares jointly owned, the consent of all the co-owners shall be necessary. They
must agree upon the vote.
STOCKHOLDER RIGHT TO VOTE AND MANNER OF VOTING
Exception:
Being a property right, a stockholder has the inherent right to vote his share the way he pleases except in
the following: 1. unless there is a written proxy, signed by all the co-owners, authorizing one (1) or some of them
or any other person to vote such share or shares; or
1. Non-voting shares are not entitled to vote except in those instances provided in the penultimate
2. when the shares are owned in an “and/or” capacity by the holders thereof, any one of the joint
paragraph of Sec. 6 of the Code; (note: only the PREFERRED and REDEEMABLE shares may
owners can vote said shares or appoint a proxy therefor.
be deprived the right to vote)
2. Treasury shares have no voting rights while they remain in the treasury (Sec. 56); In case of dispute, apply rule on co-ownership and presumption of equal share shall be applied.
3. Shares of stock declared delinquent are not entitled to vote at any meeting (SEC 70); and
4. Unregistered transferee of shares of stock. (SEC.__) SEC. 56. Voting Right for Treasury Shares. – Treasury shares shall have no voting right as long as
such shares remain in the Treasury.
General Rule: Stockholders or members may vote personally or through a representative by way of proxy,
voting trust agreement or by the executor, administrator, receiver or other legal representative. Treasury shares are deprived of the right to vote to prevent or deter the incumbent directors and officers
of the corporation from perpetuating to themselves as such or prolong their stay in the office by voting on
Exception: In non-stock corporations, the right to vote may be limited, broadened or denied in the articles the shares reacquired by it.
of incorporation or in the by-laws.
DISCUSSION AND RECIT QUESTIONS

** The right to vote is inherent and incidental to SH, it is a property right. Stockholding insofar as maybe 5. How about shares held in an AND/OR capacity, who will have the right to vote? FACTS:
restricted by law, or may reasonably be limited by AoI or by-laws. San Miguel Corporation has Shares of stock in the name of A and/or B and/or C, who
amongst them will have the right to vote?
As an exception to the SH inherent right to vote, First the non-voting shares, except in cases enumerated
in Sec 6, as we have said, then only preferred and redeemable shares may be denied the right to vote, A: When the shares are owned in an “and/or” capacity by the holders thereof, any one of the joint owners
the provision continuous to the effect that “unless otherwise provided by code”, and that unless otherwise can vote said shares or appoint a proxy therefor.
provided for by the code would be sec 7 the issuance of founders shares it may be granted the right to
vote be voted upon in the election of directors or officers for a maximum of 5 years. A common share 6. Let us see, in a stockholders of San Miguel Corporation will conduct a meeting, A,B and
cannot be denied the right to vote by a provision in the articles of incorporation, because of the doctrine of C all attended the meeting, comes the election of the board they cannot agree as to who
limited capacity. The law only allows a corporation to deny voting rights to preferred and redeemable to vote, A says 1, B says 2, C says 3, they cannot likewise agree as to who is a proxy.
shares, Gamboa vs Teves provides that the articles cannot validly provide that common shares are denied The shares of stock were issued in the name of A and/or B and/or C, which was left by
to that effect. the parents of A, B, and C to them amounting to 1M, they cannot agree as to who will be
the proxy, if you were the corporate secretary how will you act or address the issue?
Second, treasury shares have no votes, while they remain in the treasury under sec 56. Of course, we
have known that treasury shares can subsequently be reissued. If they are reissued, they retain their A: Divide the 1M shares equally to them, 1/3 each, we apply the rules governing co ownership under the
status as outstanding capital depending on the type of shares, if it’s a common share then it retains its civil code, they are presumed to have equal ownership of the 1M shares. We apply the rules on co
voting shares, if its non-voting so be it. ownership because in the study of this subject we apply different rules and law.
Third, Shares of stocks declared delinquent are not entitled to vote. 7. Since there is a fraction in the shares, giving each 333, 333.333 shares, as we have
learned before, fractional shares are not allowed, so what will you do with the fraction?
Fourth, Unregistered transferees of shares of stock. The corporation will not look beyond its book to
determine who its stockholders or members are who may be entitled to vote. As we were saying then, the A:
stock and transfer book and membership book will be closed at least 20 days prior to the meeting. Only
PROXY AND OTHER REPRESENTATIVE VOTING
the stockholders or members listed in the book, 20 days before the meeting will be entitled to vote.
Kinds of Representative Voting
And the right to vote is generally vested with the legal owner of the shares, whoever owns the shares as
appearing in the books of the corporation also exercises the right to vote. a) Through a proxy;
b) Voting Trust; and
1. In case the shares are used as a security for a loan, mortgaged, or pledge who will vote
c) Voting Pool
the shares?
PROXY
A: General rule: The stockholder-grantor shall have the right to attend and vote at meetings of
stockholders, Exception: unless the secured creditor is expressly given by the stockholder-grantor such Definition- It is the authority given by the stockholder or member to another to vote for him at a
right in writing AND recorded in the appropriate corporate books. stockholders’ or members’ meeting. The term is also used to refer to the instrument or paper which is
evidence of the authority of an agent or the holder thereof to vote for and in behalf of the stockholder or
2. Who will vote the shares of a deceased or incapacitated person?
member.
A: Executors, administrators, receivers, and other legal representatives duly appointed by the court may
SEC. 57. Manner of Voting; Proxies. – Stockholders and members may vote in person or by proxy
attend and vote in behalf of the stockholders or members without need of any written proxy.
in all meetings of stockholders or members.
3. What if there was no person authorized or appointed by the court, who will have the right
Xxx xxx xxx
to vote?
Proxies shall be in writing, signed and filed, by the stockholder or member, in any form authorized
A: Nobody can vote the shares if there is no person authorize or appointed by the court.
in the bylaws and received by the corporate secretary within a reasonable time before the
4. How about shares held in common who will have the right to vote? scheduled meeting. Unless otherwise provided in the proxy form, it shall be valid only for the
meeting for which it is intended. No proxy shall be valid and effective for a period longer than five
A: General rule: The consent of all the co-owners shall be necessary in voting shares of stock owned (5) years at any one time.
jointly by two (2) or more persons,
Note: proxy voting is a right granted by law to all stockholders entitled to vote in stock corporations and
Exception: Unless there is a written proxy, signed by all the co-owners, authorizing one (1) or some of cannot, therefore, be denied.
them or any other person to vote such share or shares

Note: in nonstock corporation, SEC 88- xxx xxx xxx Unless otherwise provided in the articles of When so authorized in the bylaws or by a majority of the board of directors, the stockholders or
incorporation or the bylaws, a member may vote by proxy, in accordance with the provisions of this Code. members of corporations may also vote through remote communication or in absentia: Provided,
The bylaws may likewise authorize voting through remote communication and/or in absentia. Thus, proxy That the votes are received before the corporation finishes the tally of votes.
voting maybe denied in nonstock corporation.
A stockholder or member who participates through remote communication or in absentia, shall be
No proxy shall be valid and effective for a period longer than five (5) years at any one time. deemed present for purposes of quorum.
Note: Proxy voting is a matter of right in a stock corporation and not in a non-stock corporation, where it The corporation shall establish the appropriate requirements and procedures for voting through
may be denied. It cannot be denied in a stock corporation and may be denied in the Articles of remote communication and in absentia, taking into account the company’s scale, number of
Incorporation in a non-stock corporation. However, absence of such provision in the Articles of shareholders or members, structure and other factors consistent with the basic right of corporate
Incorporation, it cannot be denied. suffrage.
By-laws may reasonably regulate the form and execution of proxies. Xxx xxx xxx
REQUIREMENTS: In the absence of a by-law provision regulating the form and execution of proxy, Sec. REQUIREMENTS:
57 requires:
a) Must be authorized
a) shall be in writing; a. in the bylaws or
b) signed and filed, by the stockholder; and b. by a majority of the board of directors
c) received by the corporate secretary within a reasonable time before the scheduled meeting. b) the votes are received before the corporation finishes the tally of votes; and
c) Such other appropriate requirements and procedures for voting through remote communication
Two types of proxies: and in absentia, taking into account the company’s scale, number of shareholders or members,
structure and other factors consistent with the basic right of corporate suffrage, as established
1. General – gives a general discretionary power of attorney to vote for directors and all ordinary matters
by the corporation.
that may properly come before a meeting. It is not an authority, however, to vote for fundamental changes
in the corporate charter or for other unusual transactions, unless specified. Note: A stockholder or member who participates through remote communication or in absentia, shall be
deemed present for purposes of quorum.
2. Limited – restricts the authority to vote on specified matters only and may direct the manner in which
the vote will be cast. DISCUSSION and RECIT QUESTIONS
General Rule: It shall be valid only for the meeting for which it is intended, thus limited or specific. **there are three types of representative voting 1) proxy, 2) voting trust, and 3) voting pool agreement.
Exception: Unless otherwise provided in the proxy, then it will become general or extended. Proxy is the authority given by the stockholder or member in favor of another to vote for him at a meeting.
The term also refers to the instrument or paper which evidences that authority.
Note: No proxy shall be valid and effective for a period longer than five (5) years at any one time, which
means that it is subject to an extension of not more than 5 years for each renewal. Where the proxy has Of course, when authorized by the by-law, or by majority of the BoD he may also vote via remote
no fixed period, it ceases to exist after the meeting for which it was given. communication or in absentia. Even if not provided in the by-laws, if it is a corporation vested with public
interest, they can do so by remote communication or in absentia. If that be the case, that they vote in
NOTE: As General Rule: Proxy is Revocable, either oral or in writing.
absentia, they will be deem present at that meeting for purposes of determining the quorum.
Exception: Unless coupled with an interest.
1. What are the requisites for a valid proxy? A:
Instances when revoked: a) shall be in writing;
b) signed and filed, by the stockholder or member; and
1. Expressed to the proxy holder or election committee c) received by the corporate secretary within a reasonable time before the scheduled meeting
2. Stockholder attend the meeting 2. When should it be submitted to the corporate secretary?
3. By a subsequent proxy to another
4. By sale of the shares A: within a reasonable time before the scheduled meeting.
REMOTE COMMUNICATION OR IN ABSENTIA 3. At which meeting is the proxy valid?
SEC. 57. Manner of Voting; Proxies. – xxx xxx xx A: Unless otherwise provided in the proxy form, it shall be valid only for the meeting for which it is
intended.

4. Stockholder meeting was to be held on November 10, 2019. “A” appointed or authorized conditions thereof. A certified copy of such agreement shall be filed with the corporation and with
B to be his proxy, but the meeting was postponed to November 20, may B validly the Commission; otherwise, the agreement is ineffective and unenforceable. The certificate or
represent A during the meeting to beheld on November 20? certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall
be issued in the name of the trustee or trustees, stating that they are issued pursuant to said
A: NO, he cannot, it shall be valid only for the meeting for which it is intended, unless A indicates otherwise agreement. The books of the corporation shall state that the transfer in the name of the trustee or
in the proxy. trustees is made pursuant to the voting trust agreement.
5. For how long is a proxy valid? The trustee or trustees shall execute and deliver to the transferors, voting trust certificates, which
shall be transferable in the same manner and with the same effect as certificates of stock.
A: No proxy shall be valid and effective for a period longer than five (5) years at any one time.
The voting trust agreement filed with the corporation shall be subject to examination by any
**Proxies are of two types, the general and the limited.
stockholder of the corporation in the same manner as any other corporate book or record:
**The general is the power to vote for directors and on all ordinary matters that may properly come before Provided, That both the trustor and the trustee or trustees may exercise the right of inspection of
a meeting. And the limited, it restricts the authority to vote on specified matters only and may direct the all corporate books and records in accordance with the provisions of this Code.
manner in which the vote will be cast.
Any other stockholder may transfer the shares to the same trustee or trustees upon the terms and
6. May the right to vote by proxy be curtailed or prohibited? How? conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions
of said agreement.
A: Yes, it MAY in a non-stock corporation, under Sec 88 it provides that the right of the members of any
class or classes to vote may be limited, broadened, or denied to the extent specified in the articles of No voting trust agreement shall be entered into for purposes of circumventing the laws against
incorporation or the bylaws. anti-competitive agreements, abuse of dominant position, anti-competitive mergers and
acquisitions, violation of nationality and capital requirements, or for the perpetuation of fraud.
**Note: in a stock corporation it cannot be denied, because of the doctrine of limited capacity in the
corporate form of business. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire
at the end of the agreed period. The voting trust certificates as well as the certificates of stock in
**of course, it may also be reasonably restricted or limited by the by-laws, or subject to the R and R of the the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock
SEC, pursuant to Sec 179 of the code. Like for instance the SEC has rules regarding proxies, it is generally shall be reissued in the name of the trustors.
revocable unless coupled with interest, so if a stockholder executes a proxy, but stockholder attend the
meeting, the proxy is revoked; or by a subsequent proxy to another, the proxy is deemed revoked; or by The voting trustee or trustees may vote by proxy or in any manner authorized under the bylaws
sale of the shares or as expressed to the proxy holder or election committee, it is deemed revoked. unless the agreement provides otherwise.
**there are also rules and regulations regarding proxies in listed companies, or whose shares are sold in Requirements:
the stock exchange, SRC rule 20, it requires that the proxy must be submitted to the validating committee
1. It should confer upon the trustee or trustees the right to vote and other rights pertaining
“X”(sir cannot remember) number of days.
to the shares. Note: The right to vote must be separated from the other rights vested in the
VOTING TRUST shares;
2. It should be for a period not exceeding five (5) years at any time UNLESS the voting trust is
A voting trust is one created by an agreement between a group of stockholders of a corporation and a specifically required as a condition in a loan agreement, in which case, the voting trust may
trustee, OR a group of identical agreements between individual stockholders and a common trustee, be for a period exceeding five (5) years but shall automatically expire upon full payment of
whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the the loan;
agreement is terminated, control over the stock owned by such stockholders, shall be lodged in the trustee, 3. It must be in writing and notarized, and shall specify the terms and conditions thereof;
either with or without reservation to the owners or persons designated by them the power to direct how 4. A certified copy thereof must be filed with the corporation and with the Securities and
such control shall be used. It is a device of binding stockholders to vote as a unit and thus assuring a Exchange Commission, otherwise, said agreement is ineffective and unenforceable;
desirable stability and continuity in management in situations where it is needed. 5. The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees stating that
SEC. 58. Voting Trusts. – One or more stockholders of a stock corporation may create a voting they are issued pursuant to said agreement. In the books of the corporation, it shall be noted
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights that the transfer in the name of the trustee or trustees is made pursuant to said voting trust
pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the agreement;
case of a voting trust specifically required as a condition in a loan agreement, said voting trust 6. The trustee or trustees shall execute and deliver to the transferors voting trust certificates,
may be for a period exceeding five (5) years but shall automatically expire upon full payment of the which shall be transferable in the same manner and with the same effect as certificates of
loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and stock.

7. It should not be entered into for purposes of circumventing the laws against anti-competitive [G.R. No. L-34213 June 30, 1988] PHILIPPINE NATIONAL BANK, petitioner, vs. HON. BENJAMIN H.
agreements, abuse of dominant position, anti-competitive mergers and acquisitions, violation AQUINO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch VIII and
of nationality and capital requirements, or for the perpetuation of fraud. BATJAK INCORPORATED, respondents And CONSOLIDATED WITH “NATIONAL INVESTMENT
AND DEVELOPMENT CORPORATION, ET AL. petitioners, vs. HON. BENJAMIN AQUINO, in his
What is the effect of a Voting Trust? official capacity as Presiding Judge of Branch VIII of the Court of First Instance of Rizal, BATJAK
INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents.”
A: The voting trustee becomes merely a “sham owner with a colorable and fictitious title” for the purpose
of voting upon the stocks he does not actually own. ISSUE: Whether Batjak has the personality to enforce the voting trust agreement executed by its
stockholders and whether it may compel the trustee to turn over the assets of the corporation?
It creates a dichotomy between the equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other hand. It divests the stockholder HELD: No. In support of the third ground of their motion to dismiss, PNB and NIDC contend that Batjak’s
participation in the management. complaint for mandamus is based on its claim or right to recovery of possession of the three (3) oil mills,
on the ground of an alleged breach of fiduciary relationship. Noteworthy is the fact that, in the Voting Trust
It involves a surrender of all legal rights and remedies by the shareholders than any other control or devise.
Agreement, the parties thereto were NIDC and certain stockholders of Batjak. Batjak itself was not a
By it, the beneficial owner ceases to be recognized as a shareholder of record and may be deprived not
signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be prosecuted and
only of the right vote for directors, but also to be elected as such, notice of information as against the
defended in the name of the real party in interest. Applying the rule in the present case, the action should
corporation or any voice in making most fundamental changes, such as merger and consolidation, sale of
have been filed by the stockholders of Batjak, who executed the Voting Trust Agreement with NIDC, and
entire assets, increase or reduction of capital, and by-laws and charter amendments which may adversely
not by Batjak itself which is not a party to said agreement, and therefore, not the real party in interest in
affect him.
the suit to enforce the same.
Note: The voting trustee or trustees may vote by proxy or in any manner authorized under the bylaws
In addition, PNB claims that Batjak has no cause of action and prays that the petition for mandamus be
unless the agreement provides otherwise.
dismissed. A careful reading of the Voting Trust Agreement shows that PNB was really not a party thereto.
CASE: Hence, mandamus will not lie against PNB.
[GR No. 93695; 205 SCRA 752; Feb. 4, 1992] RAMON C. LEE and ANTONIO DM. LACDAO, Batjak has no clear right to be entitled to the writ prayed for. What Batjak seeks to recover is title to, or
petitioners, vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO possession of, real property (the three (3) oil mills which really made up the assets of Batjak) but which
GONZALES, JR. and THOMAS GONZALES, respondents. the records show already belong to NIDC. It is not disputed that the mortgages on the three (3) oil mills
were foreclosed by PNB and NIDC and acquired by them as the highest bidder in the appropriate
DOCTRINE: Sec. 59 (NOW SECTION 58) of the Code expressly recognizes VTAs and gives a more foreclosure sales. Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed
definitive meaning. By its very nature, a VTA results in the separation of the voting right of a to exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC. From the
stockholder from his other rights such as the right to receive dividends, the right to inspect the foregoing, it is evident that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs.
books of the corporation, the right to sell certain interests in the assets of the corporation and Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367,
other rights to which a stockholder may be entitled until the liquidation of the corporation. the Court said that the writ of mandamus will not issue to give to the applicant anything to which he is not
entitled by law.
However, in order to distinguish a VTA from proxies and other voting pool and agreements, it must pass
three criteria or tests, namely: (1) the voting rights of the stock are separated from other attributes of Batjak premises its right to the possession of the three (3) off mills on the Voting Trust Agreement, claiming
ownership; (2) that the voting right granted are intended to be irrevocable for a definite period of time; and that under said agreement, NIDC was constituted as trustee of the assets, management and operations
(3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. of Batjak, that due to the expiration of the Voting Trust Agreement, on 26 October 1970, NIDC should tum
over the assets of the three (3) oil mills to Batjak. From the foregoing provisions, it is clear that what
UNDER SEC 59 a VTA may confer upon a trustee not only the stockholder’s voting rights but also the was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak,
other rights pertaining to his shares as long as the voting trust agreement is not entered for purposes of representing 60% of Batjak’s outstanding shares, and who are the signatories to the agreement.
circumventing the law or used to perpetuate fraud. Thus, the traditional concept of a VTA primarily intended The power entrusted to NIDC also included the authority to execute any agreement or document
to single out a stockholder’s right to vote from his other rights as such and made irrevocable for a limited that may be necessary to express the consent or assent to any matter, by the stockholders.
duration may in practice become a legal device whereby a transfer of the stockholder’s shares is effected Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made
subject to the specific provisions of the voting trust agreement. of any transfer or assignment to NIDC of Batjak’s assets, operations, and management. NIDC was
constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of
The execution of VTA, therefore, may create a dichotomy between the equitable and beneficial stock in Batjak. This is confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
ownership of the corporate shares of stockholder, on the one hand and the legal title thereto, on
the other hand. 2. TERMINATION- “Upon termination of this Agreement as heretofore provided, the certificates
delivered to the TRUSTEE by virtue hereof shall be returned and delivered to the undersigned

stockholders as the absolute owners thereof, upon surrender of their respective voting trust Voting trust is an agreement whereby one or more stockholders of a stock corporation may create a voting
certificates, and the duties of the TRUSTEE shall cease and terminate.” trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a certain period at any time.
Under the afore cited provision, what was to be returned by NIDC as trustee to Batjak’s
stockholders, upon the termination of the agreement, are the certificates of shares of stock The voting trustee in reality becomes merely a “sham owner with a colorable and fictitious title” for the
belonging to Batjak’s stockholders, not the properties or assets of Batjak itself which were never purpose of voting upon shares that he does not actually own.
delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement.
The higher court explained the effects of voting trust agreement as to the right of the stockholder executing
In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of it vis-à-vis the right of the trustee in the case of Lee vs CA, that it creates a dichotomy between the
the agreement or control over the stock. The law on the matter is Section 59, Paragraph 1 of the equitable or beneficial ownership thereof of the corporate shares of a stockholder, on the one hand, and
Corporation Code (BP 68) which provides: the legal title thereto on the other hand, it is transferred to the trustee. Legal title is vested with the voting
trustee.
Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for
the purpose of 93onferring upon a trustee or trusties the right to vote and other rights pertaining to the Proxys by their very nature are revocable unless coupled with an interest, preceding the irrevocable proxy
shares for a period not exceeding five (5) years at any one time: ... the VTA came into existence, under this agreement the stockholders remain the beneficial or equitable
owner but legal ownership is transferred to the trustee.
The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity
of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of The essence of the voting trust agreement, as compared to the proxy, is that the real ownership of shares
Batjak. is separated from the voting rights, it is the usual aid to ensure the election of a particular director or even
set of directors and remove from the stockholders the power to change the management during the
Voting Trust distinguished from Proxy duration of the VTA, unless of course he violates the trust by his misconduct and unless of course it is
given by virtue of a loan, it should make the VTA automatically expired upon full payment thereof.
VOTING TRUST PROXY
The beneficial owner of the shares ceases to be Legal title remains with the beneficial owner The requisites for a valid VTA is that 1.) It must be in writing and notarized, and shall specify the terms
a stockholder of record of the Corporation and conditions thereof; 2.) It should be for a period not exceeding five (5) years at any time UNLESS the
The trustee votes as owner of the shares The proxy holder votes merely as an agent voting trust is specifically required as a condition in a loan agreement, in which case, the voting trust may
The beneficial owner of the shares is disqualified The owner of the shares may be elected as a be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan; 3.) A
to be a director director since legal title remains with him certified copy thereof must be filed with the corporation and with the Securities and Exchange Commission,
The purpose is to acquire voting control of Generally used to secure voting and quorum otherwise, said agreement is ineffective and unenforceable; 4.) The certificate or certificates of stock
the corporation requirements or merely for the purpose of covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the
representing an absent stockholder trustee or trustees stating that they are issued pursuant to said agreement. (example: A executes a VTA
Irrevocable Revocable unless coupled with an interest in favor of Z, certificate stock of A will be canceled then a new one shall be issued in favor of Z); thereafter
The trustee can act and vote at any meeting A proxy holder can generally act as such only at 5.) The trustee or trustees shall execute and deliver to the transferors voting trust certificates to the
during the duration of the voting trust Agreement a particular meeting stockholder thereof, which according to the code will have the same manner and effect like any other stock
certificate which the beneficial owner may endorse and deliver to his transferee.
The trustee may vote in person or by proxy or A proxy holder must vote in person, not by a sub-
other kinds of representative voting proxy QUERY: When we will be taking up transfers of shares of stock we’ll note that if the certificate of
The duration may exceed 5 years The duration may not exceed 5 years stock has already been issued it cannot be transferred by the owner by a mere notarize deed, it
must be coupled with endorsement and delivery, and the question that may be posed here is how
Must be notarized and filed with the SEC Need not be notarized nor filed with the SEC
will the beneficial ownership, in this case A, be able to transfer his beneficial ownership over the
shares covered by the VTA, is it by endorsing and delivering the Voting Trust Certificate (VTC)?
VOTING POOL
A: According to the code it the VTC shall have the same effect as any other stock certificates, because as
Two or more shareholders will appoint one trustee for their shares, thus all votes for those shares, those I have said it cannot be done by a mere notarize deed if the SC has been issued, eh walag stock cert si
of the shareholder-trustor, will be voted by the one trustee. This is different from cumulative voting because A, so how can he transfer? It is through indorsing and delivering his voting trust certificate to his transferee.
in this case, the legal ownership is thereby transferred to the trustee. It says to the same effect like any other stock certificate.
DISCUSSION: Both the transferor and the transferee may exercise the right of inspection of all corporate books and
records and expires automatically unless expressly renewed at the end of the agreement or upon payment
of (Bond? 8:01). If that be the case the VTA and the VTC will be deemed canceled and a new stock
certificate will be issued in favor of the beneficial owner.

The code also says, the voting trustee may vote by proxy. The VTA is subject to inspection by any SH. 3 ways in which a person may become a stockholder:
In the NIDC vs Aquino, the corporation has no personality to enforce a VTA executed by its SHs to a 1. By a contract of subscription with the corporation for unissued shares;
trustee, because he is not a signatory, he is not a part of the contract and therefore it has no personality 2. By the purchase of treasury shares from the corporation; and
to enforce the same. 3. By purchase or acquisition of shares from existing stockholders (includes purchase from the
stock exchange).
The distinctions between the VTA and proxies is that:
SUBSCRIPTION CONTRACT
1. In the VTA beneficial owner of the stockholder executing the same ceases to be a SH, also
held in Lee vs CA, the code says if he ceases be a stockholder he thereby cease to be a “Subscription” is the mutual agreement of the subscribers to take and pay for the stocks of a corporation.
director, meaning it is automatic, while in the case of a proxies the title remains with the stock
holder executing. He does not part ways with his legal ownership of the shares covered by the While “Subscription Contract” is defined as: SEC. 59. Subscription Contract. – Any contract for the
proxy. acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be
2. The trustee votes as a legal owner, while a proxy votes merely as an agent or representative. deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties
3. The beneficial owner of the VTA is disqualified to be elected as member of the board because refer to it as a purchase or some other contract.
he does not have any title over the shares covered by the VTAs, while the SH executing the
While Subscription Contract is any contract for the acquisition of unissued stock in an existing corporation
proxy has legal title, thus qualified.
or a corporation still to be formed, notwithstanding the fact that the parties refer to it as a purchase or some
4. The purpose of VTA is to acquire voting control of the corporation where as in the case of proxy
other contract. No matter what the parties designate the contract, all subscriptions shall be a contract of
only to secure voting and quorum requirements or merely for the purpose of representing an
subscription.
absent stockholder
5. VTA is irrevocable, while proxy is revocable at any time. Note: Any stipulation that full payment must be made before one can become a shareholder shall be void
6. The voting trustee may vote at any meeting because it is the legal owner, while the proxy may and unenforceable.
only vote for the meeting for which it is authorized.
7. The trustee may vote in person or by proxy because he is deemed the real owner, while the A person, whether deemed a purchaser or subscriber of the unissued stocks of an existing corporation or
proxy must vote in person by virtue of the rules on agency, an agent can have no agent unless a corporation still to be formed becomes entitled to all the rights of a stockholder and subjected to all
expressly authorized in writing by the principal. liabilities that attach thereunder upon execution and effectivity of the contract or upon acceptance and
8. The VTA may exceed 5 years, unless given as a condition in loan, proxy is of a shorter period creation of the corporation. (Speilbert vs Neilson, 72 Phil. 396)
it may not exceed 5 years.
9. The VTA must be notarized, proxy not necessarily it is sufficient if in writing, not necessarily A subscription contract is not required to be written; an oral contract for subscription is valid and
because it says “unless the by-law provides otherwise” enforceable. Rationale: The Supreme Court has ruled that such an agreement does not seem to fall within
10. In order that the VTA will be valid a certified copy thereof must be filed with the SEC. Proxy as the definition of SALE in our substantive law, and is therefore believed that an oral subscription agreement
a general rule certified copy is not required to be filed with the SEC in order to be valid and as distinguished form sale of stock, is valid and enforceable. (salvatierra vs garlitos, 103 Phil. 757)
enforceable.
Note: Sale of treasury shares or purchase from existing shareholders is not a contract of subscription.
The other kind of voting by representative is the “voting pool agreement” we have actually seen this already Thus, it is not covered by the restrictions and limitations imposed for subscription contract.
when we were taking up cumulative voting.
Note: Subscriptions may be made upon a condition precedent or upon special terms (condition
QUERY: The example then is that F, G, H, I minority stock holders they have 200T shares out of 1M subsequent).
OCS, how can they may have a right of representation in the board?
Conditional subscription is one made upon a condition precedent, does not make the subscriber a
A: By cumulative voting, 200T multiplied by 5 members of the board to be elected, that’s 1M votes, 5 stockholder, or render him to pay the amount of his subscription, until the performance or fulfillment of the
members of the board to be elected OCS 1M total number of votes therefore 5M, in order that one may condition.
be guaranteed a seat therefor 1M vote is required. The minority can agree between and among themselves
to cast the 1M vote in favor of only one and they will be guaranteed a sit. If they do this here, they can Subscription upon special terms is an absolute subscription, making the subscriber a stockholder, and
agree that they will cast in favor, every other year, to F G H I. This of course is governed by the rules rendering him liable as such, as soon as the subscription is accepted, the special term being an
governing obligations and contracts as I was saying we apply different rules in the study of this course. independent stipulation.
In case of doubt, a subscription shall be considered one upon special terms in order to protect the creditors
and other subscribers.
CHAPTER X- STOCKS AND STOCKHOLDERS
General Rule: Conditional subscriptions are valid.

Exceptions: existing stockholders, this will include shares that are acquired through the facilities of the stock exchange,
person wants to buy a share of stocks of San Miguel corporation for instance, the acquiring person wants
1. The charter or enabling act prohibits the same; or to buy only 1000 shares of SMC, the broker will look for a seller and if he finds one he will confirm the sale,
2. The conditions are such as to render their performance beyond the powers of the corporation so that person acquiring it acquired it from an existing stockholder; the Third one is through the acquisition
or in violation of law or contrary to public policy. or purchase of treasury shares.
Effect: The condition is illegal and has no binding force. It becomes an absolute contract of subscription. Under the first instance of subscription, in preference to a mutual agreement to take and pay for shares of
stock and under SEC 59 a Subscription Contract is any contract for the acquisition of unissued stocks in
[GR No. L-5003; June 27, 1953] NAZARIO TRILLANA, administrator-appellee, vs. QUEZON
an existing corporation or a corporation still to be formed. And it says no matter how the parties refer to it.
COLLEGE, INC., claimant-appellant
As long as it comes from the unissued stock of a corporation whether they will caption it a contract of
ISSUE: Whether the subscription offered by Crisostomo is valid and enfroceable? sale or purchase it is a subscription contract.
HELD: No. It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was Example, 10M authorized capital, 5M subscribed so there are 5M unissued stock, if for instance Z wants
written on a general form indicating that an applicant will enclose an amount as initial payment and will to acquire 1M of the unissued stocks that is a contract of subscription, no matter how the parties refer to
pay the balance in accordance with law and the regulations of the College. On the other hand, in the letter it.
actually sent by Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be
That used to be the 4th mode of becoming a stockholder, “purchase of shares from the corporation”. Like
entered) not only did not enclose any initial payment but stated that "babayaran kong lahat pagkatapos na
for instance Z acquires 1m of the unissued shares of the corporation, let’s assume that the stipulation is
ako ay makapagpahuli ng isda." There is nothing in the record to show that the Quezon College, Inc.
that “he will pay 50% DP, the balance will be paid at or before the end of the year, and that he will not be
accepted the term of payment suggested by Damasa Crisostomo, or that if there was any acceptance the
considered as a stock holder until he pays the full amount of his acquisition,” let us assume that the
same came to her knowledge during her lifetime. As the application of Damasa Crisostomo is
corporation is engaged in the manufacturing industry, it lease a piece of property where it put out its plant,
obviously at variance with the terms evidenced in the form letter issued by the Quezon College,
its corporate offices and its corporate headquarters and its warehouse.
Inc., there was absolute necessity on the part of the College to express its agreement to Damasa's
offer in order to bind the latter. Conversely, said acceptance was essential, because it would be QUERY: And on November the entire property is ravaged by fire, will Z be liable to pay the full
unfair to immediately obligate the Quezon College, Inc. under Damasa's promise to pay the price amount of his acquisition cost?
of the subscription after she had caused fish to be caught. In other words, the relation between
Damasa Crisostomo and the Quezon College, Inc. had only thus reached the preliminary stage A: YES, because it is a subscription contract, it is not a sale or purchase of share. As I was saying that
whereby the latter offered its stock for subscription on the terms stated in the form letter, and used to be 4th mode of becoming a stockholder.
Damasa applied for subscription fixing her own plan of payment, a relation, in the absence as in
the present case of acceptance by the Quezon College, Inc. of the counter offer of Damasa Meaning there is no more distinction between purchase or subscription when it comes to the
Crisostomo, that had not ripened into an enforceable contract. UNISSUED STOCK of a corporation. SEC 60 of the then corporation code, or BP 68, now SEC 59 of the
RCC, was inserted by the framers of BP 68, as amended, prior thereto, PH jurisprudence follow the
Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the more American view that a subscription contract differs from purchase of shares of stock from the corporation.
imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription after she Under this view, whether this subscription or purchase depends on the good intention of the parties and
has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, of course, the terms of their agreement. If their intention is to withhold the rights of the purchaser as a SH
rendering the obligation void, under article 1115 of the old Civil Code which provides as follows: "If until full payment of a shares, then it is a purchase, on the other hand, a subscriber becomes a SH once
the fulfillment of the condition should depend upon the exclusive will of the debtor, the conditional the contract is executed and becomes effective, and will there after enjoy all the rights and corresponding
obligation shall be void. If it should depend upon chance, or upon the will of a third person, the liability that attach to the SH, including the payment of the unpaid subscription. Because under Sec 71
obligation shall produce all its effects in accordance with the provisions of this code." It cannot be subscribers of shares of stock not fully paid which are not delinquent shall have all the rights of a
argued that the condition solely is void, because it would have served to create the obligation to pay, unlike stockholder. If that was a purchase, and everything is ravage by fire, the sale is not valid, because there
a case, exemplified by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition was held is no consideration. This distinction between subscription contract and purchase of shares was therefore
void because it referred merely to the fulfillment of an already existing indebtedness. important to determine the rights, duties, obligations and liabilities of the contracting parties. If the
agreement is one of purchase, the obligation of the parties would be reciprocal and dependent on each
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already held that "a condition, other, the corporation cannot sue for specific performance or for the entire purchase price, unless it is
facultative as to the debtor, is obnoxious to the first sentence contained in article 1115 and renders the ready, able and willing to issue a valid stock certificate. Neither can the purchase require the issuance of
whole obligation void." stock certificate, unless he tenders payment of the full purchase price. Thus, if the corporation become
insolvent it can have no claim against the purchase for the price, since it is no longer in a position to issue
DISCUSSION:
a valid stock certificate, there will be no consideration.
A person may become a stockholder in only of either of the three ways: First, is by a contract of
On the other hand, if the contract is one of subscription, the subscriber becomes liable to pay his shares,
subscription with the corporation for unissued shares; Second by acquisition or grant of shares from
even if the corporation becomes insolvent, for his right as a SH is not dependent upon the issuance of a
stock certificate. He (subscriber) becomes a debtor of the corporation, from the moment he subscribed to A: NO, irrespective of the amount given, subscription contracts need not be in writing because an oral
the shares, conversely, he acquires all the rights of SH, from that time. This has been strongly criticized contract of subscription is valid and enforceable under the statute of fraud. As it has been held in
because an investor whether he be called a subscriber or purchaser, undertakes to contribute capital, with Salvatierra vs Garlitos and Edaward Keller vs COD group, that such an agreement does not seem to fall
the end in view of sharing whatever profits the corporation will gain, why should he therefore, be absolved within the definition of SALE under the civil code, and is therefore believed that an oral subscription
of paying the price, if the corporation instead of making profits incurs losses and becomes insolvent. As a agreement as distinguished from sale of stock, is valid and enforceable.
result of this criticism, Batas Pambansa 68, now RA 11232, erased the distinction between purchase and
subscription, in so far as unissued stock of the corporation is concerned, it is deemed a subscription no A subscription agreement may also be made conditional, there is nothing in the law which would prevent
matter how the parties refer to it. it. So that Fletcher thus states, that conditional subscription is valid, provided there is nothing in the charter
or enabling act forbidding such condition, and provided the conditions are not such as to render there
The effect of this is a purchaser or a subscriber for that matter of unissued stocks is entitled to all the right performance beyond the powers of the corporation or in violation of the law or contrary to public policy.
of a SH and all the corresponding liability that attach thereat, it includes the payment of unpaid subscription.
That used to be the 4th mode of becoming a stockholder of the then sec 60 of the corporation codes. QUERY: We go back to our example, Z acquires 1M unissued stock of the corporation, stipulation
“it is a contract of purchase, and that he shall not be considered a SH until and unless he pays the
Of course, it speaks of unissued stock. Let’s see, let us assume that A is one of the SH of the corporation full amount of his subscription”. Is that a valid condition?
he subscribed to 1M shares, he paid 500T out of the subscription contract, so he has 500T unpaid
subscription, and one of the modes by which a corporation may enforce the payment of a subscription is A: NO, it is contrary to law, the law considers an acquisition of unissued shares as Subscription Contract.
to make a call for the payment thereto. If the SH does not pay on the day specified in the call, his shares it is contrary to law.
will become delinquent. The corporation then will have the option to either institute a collection case in
**Discusses NAZARIO TRILLANA, administrator-appellee, vs. QUEZON COLLEGE, INC., claimant-
court or to sell the shares in a delinquent sale. Assuming that the corporation opted to sell the shares in a
appellant. (Just read the ruling above)
delinquency sale, if there are no bidders under the code the corporation maybe. Unpaid share is 500T, A
did not pay on the day specified so his shares are delinquent and his shares are being sold at a public PRE-INCORPORATION SUBSCRIPTIONS
auction, no bidders, under the code the corporation maybe, subject to the provisions of the code. If the
corporation pays the 500T unpaid subscriptions plus costs interest and expenses, if any, the corporation Subscription contract may either be those made or executed pre or post incorporation subscription
will acquire the 1M shares of A, they will become treasury shares.
SEC. 60. Pre-incorporation Subscription. – A subscription of shares in a corporation still to be
QUERY: Now assume that Z acquires the 1M treasury shares, same stipulation “50% DP, balance formed shall be irrevocable for a period of at least six (6) months from the date of subscription,
will be paid on or at the end of the year, and that until and unless he pays the full amount of the unless all of the other subscribers consent to the revocation, or the corporation fails to incorporate
acquisition cost, he will not deemed a SH”, that is the stipulation. The entire compound of the within the same period or within a longer period stipulated in the contract of subscription. No pre-
corporation is ravaged by fire, may Z be compelled to pay the full acquisition cost? incorporation subscription may be revoked after the articles of incorporation is submitted to the
Commission.
A: NO, because it is a purchase it is not a subscription contract, it is dependent on the agreement. That
provision (sec 59) speaks only of unissued stocks, treasury shares are shares of stocks issued and in fact Types of subscriptions as to time of execution:
fully paid, and is therefore it is subject to a contract of purchase and sale. As I have said the obligations of
the parties will be the reciprocal and dependent on the parties. 1. Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to be
formed; and
QUERY: Let’s see, instead of the compound being rotten by fire, let us assume that it is an 2. Post-incorporation subscriptions – those made or executed after the formation or organization
acquisition of unissued stock of the corporation, the corporation declares a cash dividend, Z of the corporation.
acquired 1M shares, in the stipulation he will not be considered a stockholder until he pays the full
amount thereof. Will Z be entitled to his entire dividends? General Rule: A subscription for shares of stock of a corporation still to be formed is irrevocable.
A: Yes, because he is SH entitled to all the rights of a SH as Sec 71 says, “Holders of subscribed shares Exceptions:
not fully paid which are not delinquent shall have all the rights of a stockholder.”
1. Lapse of a period of 6 months from the date of subscription;
Subscription need not be in writing, of course it should not be confused with issuance of shares and 2. Within six months from date of subscription and all the subscribers consent to the revocation;
issuance of stock certificate. or
3. The corporation fails to incorporate within the same period or within a longer period stipulated
Once there is a valid subscription there is issuance of shares, the issuance of the certificate of stock will in the contract of subscription.
come later.
Exception to the exceptions: No pre-incorporation subscription may be revoked after the articles of
QUERY: And one of the issues raised regarding subscription contract, is that should they be in incorporation is submitted to the Commission.
writing?

NOTE: In the previous code pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 “PAR” or “ISSUED PRICE” while it may not reflect the true value of the shares which constantly
which mandates that a corporation may be registered as such only if at least 25% of its authorized capital fluctuates, merely indicates the amount which the original subscribers are supposed to contribute to the
stock has been subscribed and that at least 25% of the total subscription has been paid. HOWEVER, the corporate capital as the basis of the privilege of profit sharing with limited liability. The issuance of shares
Revised Corporation code has deleted SEC 13. So, it is no longer mandatory. is not dependent on the delivery of a certificate of stock.
Stock issuance is generally the initial and primary source of corporate capital. Other sources may include Actual cash paid to the corporation
corporate borrowings, loans and advances from creditors or stockholders. Corporate earnings may also
be a source of corporate funds if it is reinvested or ploughed back to the company. It is the most common form of consideration.
In the issuance of corporate stocks, the consideration should not be less than the par or issued price Property, tangible or intangible
thereof. The code is specific on this matter:
Requirements:
SEC. 61. Consideration for Stocks. – Stocks shall not be issued for a consideration less than the
1. It must actually be received by the corporation and necessary or convenient for its use and
par or issued price thereof. Consideration for the issuance of stock may be:
lawful purposes; AND
a) Actual cash paid to the corporation; 2. at a fair valuation equal to the par or issued value of the stock issued.
b) Property, tangible or intangible, actually received by the corporation and necessary or
Valuation of properties given as a consideration for issuance of stock:
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued; 1. Tangible properties (particularly real properties):
c) Labor performed for or services actually rendered to the corporation; a. Appraisal report of an independent appraiser;
d) Previously incurred indebtedness of the corporation; b. Zonal valuation as certified by the BIR; or
e) Amounts transferred from unrestricted retained earnings to stated capital; c. Market value indicated in the Real Estate Tax Declaration.
f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; 2. Intangible properties (such as patents or copyrights):
g) Shares of stock in another corporation; and/or a. Initial determination by the stockholders or the board of directors, subject to the
h) Other generally accepted form of consideration. approval of the SEC; or
b. Appraisal report of an independent appraiser.
Where the consideration is other than actual cash, or consists of intangible property such as
patents or copyrights, the valuation thereof shall initially be determined by the stockholders or the Labor or Services
board of directors, subject to the approval of the Commission.
Requirements:
Shares of stock shall not be issued in exchange for promissory notes or future service. The same
considerations provided in this section, insofar as applicable, may be used for the issuance of 1. Must have actually been rendered to the corporation; and
bonds by the corporation. 2. Must be capable of valuation and in fact fairly valued.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board Two theories in the valuation of property or services:
of directors pursuant to authority conferred by the articles of incorporation or the bylaws, or if not
so fixed, by the stockholders representing at least a majority of the outstanding capital stock at a 1. True value rule – the motives or intent of those making the valuation are disregarded and the
meeting duly called for the purpose. sole and decisive factor or question is whether or not the property or services are in fact worth
the value placed on them.
Note: Stocks shall not be issued in exchange of promissory notes or future services. Rationale: Their 2. Good faith rule – the value of the property or services is a matter about which there can be an
realization is uncertain. The consideration must be certainly realized since issuance of shares is a source honest difference of opinion. Therefore, if the parties have acted in good faith without fraud or
of financing for the corporation. (Ladia) intentional over-valuation, the transaction cannot be overturned even if the later becomes
evident that the property or services were in fact worth much less than the value fixed on them
Note: In case of No-Par Value shares, the issue price may be fixed in the Articles of Incorporation or by initially.
the Board of Directors pursuant to an authority granted by the AoI or by-laws, or if not so fixed by majority
vote of the SH. Most jurisdiction follow the good faith rule.
“ISSUE” is generally employed to indicate the making of a share contract or contract of subscription, that Previously incurred indebtedness of the corporation
is, transaction by which a person becomes the owner of shares and by which new share contracts are
created. It is often associated with the execution and delivery of a share certificate but the issuance of the The set-off or satisfaction of a debt due from the corporation is a lawful and valid consideration for the
shares is not dependent on the delivery of a certificate of stock. issuance of stock. (see apocada vs. Nlrc)

Amounts transferred from unrestricted retained earnings to stated capital is illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no
Refers to the declaration and distribution of stock dividends where corporate earnings are capitalized liability at all. This is a discrimination in favor of the particular subscriber, and hence the stipulation
rather than distributed as cash dividend. It merely converts income into capital, the consideration being is unlawful.
the retained earnings itself which would have accrued to the stockholders in proportion to their respective
stockholdings The general doctrine of corporation law is in conformity with this conclusion, as may be seen from the
following proposition taken from the standard encyclopedia treatise, Corpus Juris:
Note: stocks may not be issued without consideration for the following reasons: (1) it is discriminatory
against other stockholders; and (2) it prejudices the rights of creditors under the Trust Fund Doctrine. Nor has a corporation the power to receive a subscription upon such terms as will operate as a
fraud upon the other subscribers or stockholders by subjecting the particular subscriber to lighter
Outstanding shares exchanged for stocks in the event of reclassification or conversion burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital. It is well settled therefore, as a general rule,
Refers to stocks surrendered to the corporation in exchange for a new or different type of shares. (Ex.
that an agreement between a corporation and a particular subscriber, by which the subscription is
conversion of founder’s shares where they are granted the exclusive right to vote and be voted upon at
not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that
the election of directors and officers for a maximum period of 5 years, if after the 5 year period as far as
the stock is really greater than it is, or for the purpose of preventing the predominance of certain
___ said founders shares may be reclassified or converted to, let’s say, common shares and the value for
stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders or
which this preferred shares(founders share) were issued will be the same consideration for the issuance
creditors, or both, and cannot be either enforced by the subscriber or interposed as a defense in
of the converted common shares .)
an action on the subscription. (14 C. J., p. 570.)
Shares of stock in another corporation; and
The rule thus stated is supported by a long line of decisions from numerous courts, with little or no diversity
(newly include) of opinion. As stated in the headnote to the opinion of the Supreme Court of United States in the case of
Putnan vs. New Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that "Conditions
Other generally accepted form of consideration attached to subscriptions, which, if valid, lessen the capital of the company, are a fraud upon the
grantor of the franchise, and upon those who may become creditors of the corporation, and upon
(newly include) unconditional stockholders."
[GR No. L-27872; Feb. 25, 1928] THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B. In the appellant's brief attention is called to the third headnote to Bank vs. Cook (125 Iowa, 111), where it
DEXTER, defendant-appellant is stated that a collateral agreement with a subscriber to stock that his subscription shall not be collectible
except from dividends on the stock, is valid as between the parties and a complete defense to a suit on
ISSUE: Whether the stipulation contained in the subscription to the effect that the subscription is payable notes given for the amount of the subscription. A careful perusal of the decision will show that the rule thus
from the first dividends declared on the shares has the effect of relieving the subscriber from personal broadly stated in the headnote is not justified by anything in the reported decision; for what the court really
liability in an action to recover the value of the shares? held was that the making of such promise by the agent of the corporation who sold the stock is admissible
HELD: Under the American regime corporate franchises in the Philippine Islands are granted subject to in evidence in support of the defense of fraud and failure of consideration. Moreover, even if the decision
the provisions of section 74 of the Organic Act of July 1, 1902, which, in the part here material, is had been to the effect supposed, the rule announced in the headnote, could have no weight in a jurisdiction
substantially reproduced in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is like this where there is a statutory provision prohibiting such agreements.
among other things, declared: "That all franchises, privileges, or concessions granted under this Act shall DISCUSSION
forbid the issue of stock or bonds except in exchange for actual cash or for property at a fair valuation
equal to the par value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.) There are two type of subscription 1. Pre-incorporation subscriptions and 2. Post-incorporation
subscriptions. Pre-incorporation subscriptions is subscriptions for shares of stock of a corporation still to
Pursuant to this provision we find that the Philippine Commission inserted in the Corporation Law, enacted be formed and Sec 60 provides for the rules and requirements for pre incorporation, irrevocability for at
March 1, 1906, the following provision: ". . . no corporation shall issue stock or bonds except in exchange least 6 mons from the date of subscription unless all subscribers consent to the revocation or the
for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the incorporation fails to materialize within said period of six months or for a longer period, but once the
par value of the stock or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.) certificate of incorporation has been filed with the SEC it will remain irrevocable.
The prohibition against the issuance of shares by corporations except for actual cash to the par As I was saying awhile back it should not be confused with the issuance of shares from the issuance of
value of the stock to its full equivalent in property is thus enshrined in both the organic and certificate of stock, once there is a valid subscription there is issuance of shares.
statutory law of the Philippine Islands; and it would seem that our lawmakers could scarcely have
chosen language more directly suited to secure absolute equality stockholders with respect to QUERY: And one of the questions asked regarding this, is what do they use as a consideration for
their liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated the issuance of shares of stock and how much?
it is self-evident that a stipulation such as that now under consideration, in a stock subscription,

A: The code is specific, SEC 61 Stocks shall not be issued for a consideration less than the par or issued by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued
price thereof. Any consideration may be any or a combination of : a) actual cash paid to the corporation; in accordance with the bylaws. Shares of stock so issued are personal property and may be
or b) Property, please note, actually received by the corporation and necessary or convenient for its use transferred by delivery of the certificate or certificates indorsed by the owner, his attorney-in-fact,
and lawful purposes at a fair valuation, again, equal to the par or issued value of the stock issued, because or any other person legally authorized to make the transfer. No transfer, however, shall be valid,
it cannot be issued below the par or issued value; c) Labor performed for or services actually rendered except as between the parties, until the transfer is recorded in the books of the corporation
to the corporation; d) Previously incurred indebtedness of the corporation; e) Amounts transferred from showing the names of the parties to the transaction, the date of the transfer, the number of the
unrestricted retained earnings to stated capital, note: this would be a stock dividend, the capitalization of certificate or certificates, and the number of shares transferred. The Commission may require
URE; f) Outstanding shares exchanged for stocks in the event of reclassification or conversion, you’re corporations whose securities are traded in trading markets and which can reasonably
looking at for instance the founders shares they may be granted the exclusive right to vote or be voted demonstrate their capability to do so to issue their securities or shares of stocks in uncertificated
upon in the election of directors or officers for a maximum period of 5 years, if after the 5 year period or scripless form in accordance with the rules of the Commission.
expires then said founders shares may be reclassified or converted to let’s say common shares and the
value of this founder shares were issued will be the same consideration for the issuance of the converted No shares of stock against which the corporation holds any unpaid claim shall be transferable in
shares; g) Shares of stock in another corporation; and/or h) Other generally accepted form of the books of the corporation.
consideration.
SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall be issued to a subscriber
There is no problem regarding par value shares, if the par value is 1 peso per share so be it, it cannot be until the full amount of the subscription together with interest and expenses (in case of delinquent
issued below 1 peso. shares), if any is due, has been paid.
QUERY: But when it comes to no par value shares at what amount shall such shares be sold? Requisites for the issuance of a certificate of stock:
A: The issue price may be fixed in the Articles of Incorporation or by the Board of Directors pursuant to an 1. It must be signed by the president or vice-president and countersigned by the secretary or
authority granted by the AoI or by-laws, or still in absence of authority in AoI or by-laws by majority vote of assistant secretary;
the OCS. The provision of the code says it shall not be less than 5 pesos (sec 6). It can be anywhere form 2. It must be sealed with the corporate seal; and
5 pesos to even 1000 Pesos. 3. The full amount of subscription together with interest and expenses (in case of delinquent
shares) if any is due, has been paid.
Once the issue price is determined it cannot be issued below that amount, again if they are issued below
the issue price it will become a watered stock. While it appears, that a subscriber to shares of stock cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription together with interest and expenses (in case of delinquent
Promissory notes and Future services cannot be used as a consideration for the issuance of shares. shares) if any is due, has been paid, a subscriber, even if not yet fully paid, is entitled to exercise all the
Because their realization is uncertain. The consideration must be certainly realized since issuance of rights of a stockholder and the corresponding liability that attach thereunder:
shares is a source of financing for the corporation
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of subscribed shares not fully paid
**discusses THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B. DEXTER, defendant- which are not delinquent shall have all the rights of a stockholder.
appellant. TRUST FUND DOCTRINE states to the effect that subscription in a stock corporation inclusive
of any unpaid portion thereof constitutes a trust fund of which the creditors have the right to rely upon for In essence, the issuance of a certificate of stock is not a condition sine qua non to consider a subscriber
the satisfaction of their credit, so that a creditor may enforce payment of unpaid subscription of a a stockholder. To all intents and purposes, as a General Rule: a subscriber is a shareholder upon
stockholder to satisfy his claim. It is not always the corporation who enforces payment of unpaid subscription and entitled to the all the rights as such, except:
subscription and therefore cannot be interposed as a defense in an action of the unpaid subscription.
1. For the issuance of a certificate of stock;
CERTIFICATES OF STOCK AND THEIR TRANSFER 2. If his shares are declared delinquent; or
3. When he exercises appraisal right under Sec. 82.
Share of Stock: may rightfully be described as a profit-sharing contract, a series of units of interest and
participation in a corporation in consideration of a proportionate right to participate in dividend and other SEC. 82. Effect of Demand and Termination of Right. – From the time of demand for payment of the
distributions. They are personal properties and the owners thereof have the unbridled right to transfer the fair value of a stockholder’s shares until either the abandonment of the corporate action involved
same to anyone they please subject only to reasonable charter provisions. or the purchase of the said shares by the corporation, all rights accruing to such shares, including
voting and dividend rights, shall be suspended in accordance with the provisions of this Code,
Certificate of Stock: is the piece of paper or document which evidences the ownership of shares and a except the right of such stockholder to receive payment of the fair value thereof: Provided, That if
convenient instrument in the transfer of the title. the dissenting stockholder is not paid the value of the said shares within thirty (30) days after the
award, the voting and dividend rights shall immediately be restored.
SEC. 62. Certificate of Stock and Transfer of Shares. – The capital stock of corporations shall be
divided into shares for which certificates signed by the president or vice president, countersigned

Note: Unpaid shares however do not entitle the holders thereof to the issuance of the certificate until the 4. To avoid fictitious and fraudulent transfers; and
same has been fully paid. 5. To protect creditors who have the right to look upon stockholders, in case of non-payment or
watered shares, for the satisfaction of their claims.
Modes of transferring shares of stocks:
The duty of the corporate secretary to record a valid transfer of shares of stock is ministerial. Should the
General Rule: Sec 62: Endorsement AND Delivery corporation or corporate secretary refuse to record the transfer, mandamus will lie to compel registration.
Exception: Notarized Deed, if the Stock Certificate has not yet been issued. (Rural Bank of In Rural Bank of Salinas vs. CA the court ruled that the duty of the corporate secretary to register a valid
Salinas vs CA) transfer of shares is ministerial. Therefore, mandamus will lie to compel registration in case the corporation
or the corporate secretary refuses registration. However, in the case of Tay vs. CA the court held that the
Exception to the Exception: If the certificate of stock has already been issued, it must be coupled by
transferee has no such right when his title to said shares has no prima facie validity of is uncertain.
delivery or endorsement; (Rural Bank of Lipa vs CA)
NOTE: General Rule: A certificate of stock is not a negotiable instrument. A bona-fide purchaser of a
Exception to the Exception to the Exception: Even if the certificate of stock has already been
certificate of stock will acquire no better title to the shares than his transferor had and will be subject to all
issued, mere delivery OR endorsement may still be valid, if it there is estoppel; (TAN vs SEC)
rights, remedies and defenses which the true and lawful owner may have.
Exception to the Exception to the Exception to the Exception: The Voting Trust Agreement
Exception: When the general principles of estoppel apply. Thus, if the legal owner thereof, by his act or
Note: The SEC has ruled that when a corporation has already issued stock certificates, any transfer of the negligence, is estopped from claiming ownership, (as when he clothes another with apparent title or
shares can only be effectively made by endorsement and delivery of the stock certificate. A deed of authority to dispose of the same) a purchaser in good faith and without notice will acquire a better title as
transfer, sale or assignment alone would not suffice (as affirmed by the SC in Rural Bank of Lipa City, Inc. against the owner so estopped.
vs. CA) for to rule otherwise would open the door to fraudulent or fictitious transfer which the SEC seeks
Restrictions in the Transfer of Shares
to avoid. In effect, while a formal contract of sale in a notarized document is equivalent to actual
delivery of the certificate itself, this mode of transfer is available only if no certificate of stock has Shares of stock are personal properties and the owners thereof have the unbridled right to transfer the
been issued. same to anyone they please subject only to reasonable charter provisions.
Note: NON-REGISTRATION of shares disposed of by the holder will not affect the validity of the transfer The right to transfer shares of stock may not be unreasonably restricted or prohibited. Every owner of
at least in so far as the contracting parties are concerned. As regards, the corporation, the transferee will corporate shares has the same uncontrollable right to alienate them and is under no obligation from selling
not be recognized as such stockholder and could not exercise the rights until the transfer has been duly them at his sacrifice and for the welfare and benefit of the corporation and other stockholders. (Padgett
recorded in the stock and transfer book. As such, “he cannot vote or be vote for, and he will not be entitled vs. Bobcock & Templeton; Fleischer vs. Botica Nolasco)
to dividends. The corporation may be protected when it pays dividends to the registered owner despite a
previous transfer of which it had no knowledge. The purpose of registration therefore is two-fold: (1) to However, the right to transfer may be “regulated” to give the corporation protection against colorable or
enable the transferee to exercise all the rights of stockholder, and (2) to inform the corporation of any fraudulent transfer or to enable it to know who its stockholders are. Also, as a matter of policy, the SEC
change in share ownership so that it can ascertain the person entitled to the rights and subject to the allows the grant of “preferential rights” to existing stockholders and/or the corporation, giving them the first
liabilities of a corporation” (De Erquiga vs. CA) option to purchase the shares of a selling stockholder within a reasonable period not exceeding 30 days
provided that the same is contained in the articles of incorporation and in all of the stock certificates to be
Note: No transfer shall be valid, except as between the parties, until the transfer is recorded in the books issued by the corporation. This is considered “reasonable” since it merely suspends the right to transfer
of the corporation. Until registration is accomplished, the transfer of stock, though valid between the within the period specified. (SEC opinion)
parties, cannot be effective as against the corporation. The corporation looks only through its books for
the purpose of determining who its stockholders are. Non-registration of a transfer of stock will not, A corporation may classify its shares and grant such “rights, privileges or restrictions” provided that such
however, affect the validity thereof at least in so far as the contracting parties are concerned. are made in the articles of incorporation and subject to reasonable terms, conditions or period. (Go Soc &
Sons vs. IAC)
Note: Stockholder A, a holder of unpaid shares, may validly sell his shares to others. It shall be a valid
sale. However, it will not be allowed to be recorded in the book of the corporation until and unless the Other restrictions on the right to transfer shares:
unpaid portion has been paid.
1. It is not valid, except as between the parties, until recorded in the books of the corporation;
Reasons for the necessity of the registration of transfers of stock: (Sec 62)
2. Share of stock against which the corporation holds any unpaid claim shall not be transferable
1. To enable the corporation to know who its stockholders are; in the books of the corporation;(Sec 62) unpaid claims, refer to claims arising from unpaid
2. To enable the transferee to exercise his rights as a stockholder; subscription and not to any indebtedness which a stockholder may owe the corporation such
3. To afford the corporation an opportunity to object or refuse registration of the transfer in cases as monthly dues;(China Banking Corporation vs CA; 270 SCRA 503)
allowed by law (as when it has unpaid claims on the shares transferred);
3. Restrictions required to be indicated in the articles of incorporation, by-laws and stock They are non-negotiable however, as I have said, in that the holder there takes it without prejudice without
certificates of a close corporation;(Sec 95 and 97) prejudice to all the rights or defenses which the true or lawful owner may have and this non-negotiability
4. Restrictions imposed by special law, such as the Public Service Act requiring the approval of of stocks certificate is now applied in our jurisprudence in at least 3 cases, Bachrach vs _____, Santa
the government agency concerned if it will vest unto the transferee 40% of the capital of the Maria vs ____, and Delos Santos vs Mcgrath. There the higher court ruled that a CoS is merely quasi-
public service company; negotiable again because they may be transferred by endorsement and delivery, and if it is indorsed in
5. Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws; and blank the transferee is justified in believing that it belongs to the holder or transferor. This doctrine has no
6. Those covered by reasonable agreement of the parties. (Lambert vs Fox) application when the rules governing estoppel will apply.
DISCUSSION: QUERY: Let us see. A stock certificate is owned by A his brother B stole the stock certificate and
forged the signature of A, B transfers it to C, purchaser for value and in good faith, will C acquire
SEC 62- CERTIFICATE OF STOCKS AND THEIR TRANSFER. Certificate of stocks, the requirements: title?
signed by the president or vice-president, countersigned by the secretary or assistant secretary, sealed
with the corporate seal; and the full amount of subscription has been paid. A: NO, it is subject to all the rights and defenses of A.
Meaning holders of subscribed shares not fully paid are not entitled to the issuance of certificate, because QUERY: What are these defenses?
the full amount must be paid.
A: That B forged his signature, that B is the one who transferred the certificate. and even if C transfer it to
QUERY: For instance, A subscribed to 1M shares, par value 1 peso per share, he paid 500T out of D, also a purchaser for value and good faith, D will not also acquire title. If it were a negotiable instrument,
1M, can he be issued a certificate of stock covering 500T shares? C would have become a holder in due course.
A: NO, he has not paid any single share, because subscription to the capital stock of the corporation is Unless of course the rules on estoppel applies, hindi naman pala ninakaw ni B, si A mismo nag endorse
indivisible, meaning the 500T that is paid out of this 1M subscription will be applied to the entire 1M that is kay B, kasi tatakbo siya, siya mismo nag bigay kay B sabi niya, tol itago mo muna, tatakbo muna ako kasi
subscribed, he has not paid a single share, he only paid 50 centavo of the entire 1M shares that he hinahanap na ako ng PDEA lalo na ngayon na si Vice President pa ang head patay tayo diyan. Inendorse
subscribed (50 centavo per 1 peso share), therefor he cannot be issued a certificate of shares. Sa lahat niya dineliver niya kay B, tumakbo. Ito namang si B loko rin, sabi niya **** *** mo billions na pera mo sa
ng shares na sinubscribed nya, 50 percent lang ng kada share ang bayad niya. kakadrugs mo, binenta nya kay C purchaser in good faith and for value.
It is an exception to the rule of sec 71. Sec 71 is not therefor absolute, because he is not entitled to the QUERY: Will C acquire title?
issuance of a certificate until the full amount is paid. Having said that the issuance of the stock certificate
is not necessary to consider a subscriber a stockholder, because as I was saying awhile back once that A: YES, because of a valid transfer, inendorse niya diniliver niya sa another person. The operative act of
there is a valid subscription agreement the person who subscribed thereto becomes a SH for all intents transferring shares is endorsement and delivery, meaning it clothes B the apparent authority or title to
and purposes and is subjected to the rights and liabilities of a stockholder. And this CERTIFICATE of dispose of the shares. A is estopped. Kung inendorse niya at tinago niya that’s a different story will see
STOCK is transferrable under sec 62 by indorsement made by the owner or his attorney-in-fact and by that in Delos Santos, or dineliver niya pero di niya inendorse, rason vs intermediate appellate court.
delivery thereof to the transferee. Being transferable by indorsement coupled with delivery they are merely
In transferring shares, we will note under sec 62, there nonregistration in the stock and transfer book will
quasi-negotiable because they are actually non-negotiable.
not affect its validity, insofar as the contracting parties is concerned. Because again to reiterate the
Quasi-negotiable in that they may be transferred by indorsement coupled by delivery, but non-negotiable, operative act of transferring of shares is endorsement and delivery in so far as the contracting parties
note, in the sense, that the holder thereof takes it without prejudice to all the rights or defenses which the themselves is concerned. But in so far as to the corporation and third parties it will not be valid until it is
true or lawful owner may have, except in so far as the rules on estoppel may apply. registered in the books of the corporation. The corporation will not look beyond its books to determine who
its stockholders are, who may be entitled to vote be voted upon entitled to the dividends.
Example, Certificate of stock no. 1 in X CO. 1M shares, it is certified that A is the owner, the stock certificate
number and the number of shares appear on the face of this instrument, in witness whereof we sign our The word “transfer”, however, as used in the code, so as to require the registration in the stock and transfer
names, this blank day of blank in the city of blank. Signed by the president, countersigned by the corporate book in order that the transfer shall valid and binding against the corporation and third parties refers to an
secretary and sealed with corporate seal, at the back of the certificate is what is called the indorsement absolute and unconditional conveyance of the shares of stock.
form, it says ”for value received I hereby transfer, sell, assign and cede unto blank, this stock certificate
**discusses Monserrat case
and is hereby authorized to make proper representation to the corporation for the cancelation of this stock
certificate and the issuance of a new one be received”, signed the owner. CASES:
If A indorses that stock certificate and it is found in the hand of another person, the person in possession [G.R. No. 37078; September 27, 1933] ENRIQUE MONSERRAT, plaintiff-appellee, vs. CARLOS G.
thereof is presumably the owner of the shares covered by the certificate because they are called “STREET CERON, ET AL., defendants. ERMA, INC., and, THE SHERIFF OF MANILA, respondents
CERTIFICATE”.

ISSUE: Whether it is necessary to enter upon the books of the corporation a mortgage constituted on transfer is not absolute but constitutes a mere security for the payment of the mortgage debt, the
shares of stock in order that such mortgage may be valid and may have force and effect as against third transfer in question becoming null and void from the time the mortgage debtor complies with his
persons? obligation to pay his debt.
HELD: Section 35 (NOW SEC 62) of the Corporation Law provides the following: In the case of Noble vs. Ft. Smith Wholesale Grocery Co., cited in Words and Phrases, second series, vol.
4, p. 978, the following appears:
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed
by the president or the vice-president, counter signed by the secretary or clerk and sealed with the seal of A "transfer" is the act by which owner of a thing delivers it to another with the intent of passing
the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal the rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such
property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact term.
or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation so as to Therefore, the chattel mortgage is not the transfer referred to in section 35 of Act No. 1459
show the names of the parties to the transaction, the date of the transfer the number of the certificate, and commonly known as the Corporation law, which transfer should be entered and noted upon the
the number of shares transferred. books of a corporation in order to be valid, and which, as has already been said, means the
absolute and unconditional conveyance of the title and ownership of a share of stock.
No share of stock against which the corporation hold, any unpaid claim shall be transferable on the books
of the corporation. If, in accordance with said section 35 of the Corporation Law, only the transfer or absolute conveyance of
the ownership of the title to a share need be entered and noted upon the books of the corporation in order
The legal provision just quoted does not require any entry except of transfers of shares of stock in order that such transfer may be valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not
that such transfers may be valid as against third persons. Now, what did the Legislature mean in using the a complete and absolute alienation of the dominion and ownership thereof, its entry and notation
word "transfer"? upon the books of the corporation is not necessary requisite to its validity.
Inasmuch as it does not appear from the text of the Corporation Law that an attempt was made to give a It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional purchaser of the shares of
special signification to the word "transfer", we shall construe it according to its accepted meaning in stock in question given as security for the payment of his credit, acquired in good faith Carlos G. Ceron's
ordinary parlance. right and title to the 600 common shares of stock evidenced by certificate No. 7 of the MYTC, and as such
conditional purchaser in good faith, it is entitled to the protection of the law.
The word "transferencia" (transfer) is defined by the (the act and effect of transferring); and (to
assign or waive the right in, or absolute ownership of, a thing in favor of another, making him the In view of the foregoing considerations, we are of the opinion and so hold that, inasmuch as section 35 of
owner thereof). the Corporation Law does not require the notation upon the books of a corporation of transactions relating
to its shares, except the transfer of possession and ownership thereof, as a necessary requisite to the
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589, the word "transfer" is defined validity of such transfer, the notation upon the aforesaid books of the corporation, of a chattel mortgage
as follows: constituted on the shares of stock in question is not necessary to its validity.
"Transfer" means any act by which property of one person is vested in another, and "transfer of shares", [G.R. No. L-42091; November 2, 1935] GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG
as used in Uniform Stock Transfer Act (Comp. St. Supp., 690), implies any means whereby one may be MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, as
divested of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136 A., 209, 210.)" president, secretary and treasurer respectively of the same, defendants-appellees
In view of the definitions cited above, the question arises as to whether or not a mortgage constituted on ISSUE: Whether the registration of the mortgage in the registry of chattel mortgage in the office of the
certain shares of stock in accordance with Act No. 1508, as amended by Act No. 2496, is a transfer of register of deeds give constructive notice to the said attaching creditors and thus gave preference to the
such shares in the abovementioned sense. mortgage over the other debts?
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496, defines the phrase "hipoteca HELD: In passing, let it be noted that the registration of the said chattel mortgage in the office of the
mobiliaria" (chattel mortgage) as follows: corporation was not necessary and had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long
mooted question as to whether or not shares of a corporation could be hypothecated by placing a chattel
SEC. 3. A chattel mortgage is a conditional sale of personal property as security for the payment of a debt,
mortgage on the certificate representing such shares we now regard as settled by the case of Monserrat
or the performance of some other obligation specified therein, the condition being that the sale shall be
vs. Ceron, supra. But that case did not deal with any question relating to the registration of such a
avoided upon the seller paying to the purchaser a sum of money or doing some other act named. If the
mortgage or the effect of such registration. Nothing appears in the record of that case even tending
condition is performed according to its terms the mortgage and sale immediately become void, and the
to show that the chattel mortgage there involved was ever registered anywhere except in the office
mortgage is hereby divested of his title.
of the corporation, and there was no question involved there as to the right of priority among
According to the legal provision just quoted, although a chattel mortgage, accompanied by delivery of conflicting claims of creditors of the owner of the shares
the mortgaged thing, transfers the title and ownership thereof to the mortgage creditor, such
Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall be ISSUE: Whether a bona fide transfer of the shares of a corporation, not registered or noted on the books
effective against third persons. First, the possession of the property mortgage must be delivered to and of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether
retained by the mortgagee; and, second, without such delivery the mortgage must be recorded in the the attaching creditor had actual notice of said transfer or not?
proper office or offices of the register or registers of deeds. If a chattel mortgage of shares of stock of a
corporation may validly be made without the delivery of possession of the property to the mortgagee and HELD: Section 35 of the Corporation Law is as follows:
the mere registration of the mortgage is sufficient to constructive notice to third parties, we are confronted
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed
with the question as to the proper place of registration of such a mortgage. Section 4 provides that in such
by the president or the vice-president, countersigned by the secretary or clerk and sealed with the by-laws.
a case the mortgage resides at the time of making the same or, if he is a non-resident, in the province in
Shares of stock so issued are personal property and may be transferred by delivery of the certificate
which the property is situated; and it also provides that if the property is situated in a different province
indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No
from that in which the mortgagor resides the mortgage shall be recorded both in the province of the
transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted
mortgagor's residence and in the province where the property is situated.
upon the books of the corporation so as to show the names of the parties to the transaction, the date of
If with respect to a chattel mortgage of shares of stock of a corporation, registration in the province the transfer, the number of the certificate, and the number of shares transferred
of the owner's domicile should be sufficient, those who lend on such security would be confronted
We prefer to adopt the line followed by the Supreme Courts of Massachusetts and of Wisconsin. (See
with the practical difficulty of being compelled not only to search the records of every province in
Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this
which the mortgagor might have been domiciled but also every province in which a chattel
case the court had under consideration a statute identical with our own section 35, supra, and the court
mortgage by any former owner of such shares might be registered. We cannot think that it was the
said:
intention of the legislature to put this almost prohibitive impediment upon the hypothecation of
shares of stock in view of the great volume of business that is done on the faith of the pledge of We think the true meaning of the language is, and the obvious intention of the legislature in using
shares of stock as collateral. it was, that all transfers of shares should be entered, as here required, on the books of the
corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as
It is a common but not accurate generalization that the situs of shares of stock is at the domicile of the
to attaching or execution creditors of the assignors, as well as to the corporation and to
owner. The term situs is not one of fixed of invariable meaning or usage. Nor should we lose sight of the
subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties
difference between the situs of the shares AND the situs of the certificates of shares. The situs of
to such transfers. All transfers not so entered on the books of the corporation are absolutely void;
shares of stock for some purposes may be at the domicile of the owner and for others at the domicile of
not because they are without notice or fraudulent in law or fact, but because they are made so void
the corporation; and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black
by statute.
Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City Southern Ry. Co., 7 Fed.
[2d]. 158.) It is a general rule that for purposes of execution, attachment and garnishment, it is not To us the language of the legislature is plain to the effect that the right of the owner of the shares
the domicile of the owner of a certificate but the domicile of the corporation which is decisive. of stock of a Philippine corporation to transfer the same by delivery of the certificate, whether it be
(Fletcher, Cyclopedia of the Law of Private Corporations, vol. 11, paragraph 5106. Cf. sections 430 and regarded as statutory on common law right, is limited and restricted by the express provision that
450, Code of Civil Procedure.) "no transfer, however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation." Therefore, the transfer of the 75 shares in the North
By analogy with the foregoing and considering the ownership of shares in a corporation as property distinct
Electric Company, Inc., made by the defendant Diosomito to the defendant Barcelon was not valid as to
from the certificates which are merely the evidence of such ownership, it seems to us a reasonable
the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date on which she obtained her attachment
construction of section 4 of Act No. 1508 to hold that the property in the shares may be deemed to
lien on said shares of stock which still stood in the name of Diosomito on the books of the corporation.
be situated in the province in which the corporation has its principal office or place of business. If
this province is also the province of the owner's domicile, a single registration sufficient. If not, the chattel [G.R. No. L-38684; December 21, 1933] CYRUS PADGETT, plaintiff-appellee, vs. BABCOCK &
mortgage should be registered both at the owner's domicile and in the province where the corporation has TEMPLETON, INC., and W. R. BABCOCK, defendants-appellants
its principal office or place of business. In this sense the property mortgaged is not the certificate but the
participation and share of the owner in the assets of the corporation. ISSUE: Whether the restriction imposed on the right to transfer the shares is valid?
In view of the premises, the attaching creditors are entitled to priority over the defectively registered HELD: The opinion seems to be unanimous that a restriction imposed upon a certificate of shares,
mortgage of the appellant and the judgment appealed from must be affirmed without special similar to the ones under consideration, is null and void on the ground that it constitutes and
pronouncement as to costs in this instance. unreasonable limitation of the right of ownership and is in restraint of trade.
[G.R. No. L-42135; June 17, 1935] TORIBIA USON, plaintiff-appellee, vs. VICENTE DIOSOMITO, ET Shares of corporate stock being regarded as property, the owner of such shares may, as a general
AL., defendants. VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH rule, dispose of them as he sees fit, 1.) unless the corporation has been dissolved, or 2.) unless
ELECTRIC COMPANY, INC., appellants. the right to do so is properly restricted, or the owner's privilege of disposing of his shares has
been hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)

Any restriction on a stockholder's right to dispose of his shares must be construed strictly; and any attempt Branch CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B. EVANGELISTA,
to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon respondents
its shares, and except to the extent that valid restrictive regulations and agreements exist and are
applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from ISSUE: Whether Evangelista has a better right to the shares and control of the corporate affairs?
exercising his right to transfer by the corporation or its officers or by other stockholders, even though the
HELD: Yes. From the pleadings submitted by the parties it is clear that although Evangelista has
sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is
indorsed in blank the shares outstanding in his name he has not delivered the certificate of stocks
sold to one purchaser. (Ibid., sec. 1035, pp. 665, 666.)
to Asuncion because the latter has not fully complied with his obligations under the MOA. There
In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have discussed the validity of a clause being no delivery of the indorsed shares of stock Asuncion cannot therefore effectively transfer to
in the by-laws of the defendant corporation, which provided that, under the same conditions, the owner of other person or his nominees the undelivered shares of stock. For an effective transfer of shares
a share of stock could not sell it to another person except to the defendant corporation. In deciding the of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers
legality and validity of said restriction, we held: Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang 68, otherwise
known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 the transferee of the certificate properly indorsed. Title may be vested in the transferee by the
of Act No. 1459. This restriction is necessary in order that the officers of the corporation may know delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA
who are the stockholders, which is essential in conducting elections of officers, in calling meetings 643). However, no transfer shall be valid, except as between the parties until the transfer is properly
of stockholders, and for other purposes. But any restriction of the nature of that imposed in the recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines).
by-law now in question, is ultra vires, violative of the property rights of shareholders, and in
restraint of trade. (Id., p. 592.) In the case at bar the indorsed certificate of stock was not actually delivered to Asuncion so that
Evangelista is still the controlling stockholder of Embassy Farms despite the execution of the
It is obvious, therefore, that the restriction consisting in the word "nontransferable", appearing on the 12 memorandum of agreement and the turn-over of control and management of the Embassy Farms to
certificates, Exhibits F to F-11, is illegal and should be eliminated. Asuncion on August 2, 1984.
ISSUE2: WON the corporation may be compelled to buy the shares of a selling stockholder? When Asuncion filed on April 10, 1986 an action for the rescission of contracts with damages, the Pasig
Court merely restored and established the status quo prior to the execution of the MOA by the issuance
HELD: There is no existing law nor authority in support of the plaintiff's claim to the effect that the of a restraining order on July 10, 1987 and the writ of preliminary injunction on July 30, 1987. It would be
defendants are obliged to buy his shares of stock value at par value, plus the interest demanded thereon. unjust and unfair to allow Asuncion and his nominees to control and manage the Embassy Farms despite
In this respect, we hold that there has been no such contract, either express or implied, between the the fact that Asuncion, who is the source of their supposed shares of stock in the corporation, is not asking
plaintiff and the defendants. In the absence of a similar contractual obligation and of a legal provision for the delivery of the indorsed certificate of stock but for the rescission of the MOA. Rescission would
applicable thereto, it is logical to conclude that it would be unjust and unreasonable to compel the result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow Evangelista
said defendants to comply with a non-existent or imaginary obligation. Whereupon, we are likewise to manage the farm. Compared to Asuncion or his nominees Evangelista would be more interested in the
compelled to conclude that the judgment originally rendered to that effect is untenable and should preservation of the assets, equipment and facilities of Embassy Farms during the pendency of the main
be set aside case.
[G.R. No. L-7991; January 29, 1914] LEON J. LAMBERT, plaintiff-appellant, vs. T. J. FOX, defendant- [G.R. No. 74306 March 16, 1992] ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE
appellee COURT and VICENTE B. CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased
JUAN T. CHUIDIAN, respondents.
ISSUE: Whether the stipulation in the contract is valid?
[G.R. No. 74315 March 16, 1992] VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE APPELLATE
HELD: Yes it is valid. It is urged by the appellee in this case that the stipulation in the contract suspending
COURT, ENRIQUE RAZ0N, and E. RAZON, INC., respondents
the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore,
offends public policy. We do not so regard it. The suspension of the power to sell has a beneficial ISSUE: Whether petitioner Razon is the rightful owner of the shares?
purpose, results in the protection of the corporation as well as of the individual parties to the
contract, and is reasonable as to the length of time of the suspension. We do not here undertake HELD: In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled: “. . . For
to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be
to the statement that the suspension in this particular case is legal and valid. followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa
Bilang, 68 otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred
[G.R. No. 80682 August 13, 1990] EMBASSY FARMS, INC., petitioner, vs. HON. COURT OF by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by
APPEALS (INTERMEDIATE APPELLATE COURT), HON. ZENAIDA S. BALTAZAR, Judge of the the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA
Regional Trial Court, Branch CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, 643). However, no transfer shall be valid, except as between the parties until the transfer is properly

recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise: “Said
Corporation Law)” Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to
whom the stocks may be transferred. It does not suggest that any discrimination may be created by the
In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property,
are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this
show that during his lifetime Chuidian was elected member of the Board of Directors of the respect, than the general provisions of law.”
corporation which clearly shows that he was a stockholder of the corporation. (See Section 30,
Corporation Code) From the point of view of the corporation, therefore, Chuidian was the owner of The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any
the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned unpaid claim against the shares intended to be transferred, which is absent here.
shares of stock must show that the same were transferred to him by proving that all the
requirements for the effective transfer of shares of stock in accordance with the corporation's by A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in transfers, because: “Restrictions in the traffic of stock must have their source in legislative enactment, as
accordance with the provisions of law. the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always subject to the charter of the
The petitioner failed in both instances. The petitioner did not present any by-laws which could show that corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the
the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws legality of the transactions by which its stock passes from one person to another, nor can it question the
or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made consideration upon which a sale is based.” (Tomson on Corporation Sec. 4137, cited in Fleisher vs.
applicable to the instant case. Nolasco, Supra).
The law is clear that in order for a transfer of stock certificate to be effective, the certificate must The right of a transferee/assignee to have stocks transferred to his name is an inherent right
be properly indorsed and that title to such certificate of stock is vested in the transferee by the flowing from his ownership of the stocks. Thus: Whenever a corporation refuses to transfer and
delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate register stock in cases like the present, mandamus will lie to compel the officers of the corporation
of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian to transfer said stock in the books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138;
was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong Fleisher vs. Botica Nolasco, 47 Phil. 583, 594).
to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock
in view of his intimate friendship with the late Juan Chuidian cannot overcome the failure to follow the The corporation's obligation to register is ministerial.
procedure required by law or the proper conduct of business even among friends. To reiterate,
In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to
indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer oflla
decide the question of ownership. (Fletcher, Sec. 5528, page 434).
certificate of stock.
The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without
Moreover, the preponderance of evidence supports the appellate court's factual findings that the shares
good cause, it may be compelled to do so by mandamus. (See. 5518, 12 Fletcher 394)
of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled
the legal affairs of the corporation. We give credence to the testimony of the private respondent that the For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent
Petitioner Razon failed to overcome this testimony. of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the
Decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the
[G.R. No. 96674 June 26, 1992] RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA
473 shares in the stock and transfer book in the names of private respondents. At all events, the
TRIAS and FRANCISCO TRIAS, petitioners, vs. COURT OF APPEALS, SECURITIES AND
registration is without prejudice to the proceedings in court to determine the validity of the Deeds of
EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
Assignment of the shares of stock in question.
FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR., respondents
[G.R. No. 126891; August 5, 1998] LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND CO.
ISSUE: Whether the mandamus was properly granted for the registration of the transfer of the 473 shares
INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents
in question?
ISSUE: Whether the rulings in the Abejo case and the Rural Bank of Salinas case will apply?
HELD: Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in
private respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit: HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas,
Sec. 63 “Shares of stock so issued are personal property and may be transferred by delivery of the Inc. v. Court of Appeals is misplaced.
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines,
recorded in the books of the corporation”. Inc. Subsequent to such contract of sale, the corporate secretary, Norberto Braga, refused to record the

transfer of the shares in the corporate books and instead asked for the annulment of the sale, claiming ISSUE3: Whether by Guiok and Lim’s failure to pay, the ownership of the shares automatically passed to
that he and his wife had a pre-emptive right over some of the shares, and that his wife's shares were sold Lim Tay?
without consideration or consent.
HELD: On appeal, petitioner claimed that ownership over the shares had passed to him, not via the
At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby contracts of pledge, but by virtue of prescription and by respondents' subsequent acts which amounted to
demonstrating that Telectronic Systems, Inc. was already the prima facie owner of the shares and, a novation of the contracts of pledge. We do not agree.
consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled later on,
Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of
until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a the contracts of pledge. Article 2112 of the Civil Code states: “The creditor to whom the credit has not
rule, retroact to the time the sale was made. Therefore, at the time the Bragas questioned the validity of been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale
the tranfers made by the Abejos, Telectronic Systems, Inc. was already a prima facie shareholder of the shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in
corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature. a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is
Hence, the Court held that "the issue is not on ownership of shares but rather the non-performance by the not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale
corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an
which he is secretary." acquittance for his entire claim.”
Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of
Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged. clarity: “3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months
Further, whether prescription effectively transferred ownership of the shares, whether there was a novation from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of
of the contracts of pledge, and whether laches had set in were difficult legal issues, which were unpleaded stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR,
and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer, in at which sale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby authorized
his favor, of the shares pledged to him. and empowered at his option to transfer the said shares of stock on the books of the corporation to his
own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the
In Rural Bank of Salinas: Melenia Guerrero executed deeds of assignment for the shares in favor of the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and
respondents in that case. When the corporate secretary refused to register the transfer, an action for interest, in the manner hereinabove provided;”
mandamus was instituted. Subsequently, a motion for intervention was filed, seeking the annulment of the
deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in There is no showing that petitioner made any attempt to foreclose or sell the shares through public or
fact donations because the considerations therefor were below the book value of the shares. private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during
Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie shareholders the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the
when the deeds of assignment were questioned. If the said deeds were to be annulled later on, same Code: “Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.”
respondents would still be considered shareholders of the corporation from the time of the assignment
until the annulment of such contracts. [G.R. No. 124535; September 28, 2001] THE RURAL BANK OF LIPA CITY, INC., et al. petitioners, vs.
HONORABLE COURT OF APPEALS, et. Al., respondents
ISSUE2: Whether petitioner is entitled to the relief of mandamus as against the company?
ISSUE: Whether the transfer of the shares is ineffective for non-indorsement and non-delivery of the
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of certificate of stocks?
respondent corporation to have the shares transferred to his name in the corporate books, to issue new
certificates of stock and to deliver the corresponding dividends to him. HELD: The Corporation Code specifically provides:
In order that a writ of mandamus may issue, it is essential that the person petitioning for the same SECTION 63. Certificate of stock and transfer of shares. “The capital stock of stock corporations shall be
has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to divided into shares for which certificates signed by the president or vice president, countersigned by the
perform the act required. It neither confers powers nor imposes duties and is never issued in secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance
doubtful cases. It is simply a command to exercise a power already possessed and to perform a with the by-laws. Shares of stocks so issued are personal property and may be transferred by delivery of
duty already imposed. the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer
In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is is recorded in the books of the corporation so as to show the names of the parties to the transaction, the
the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does date of the transfer, the number of the certificate or certificates and the number of shares transferred.”
not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership
claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain Mandamus No shares of stock against which the corporation holds any unpaid claim shall be transferable in
will not issue to establish a legal right, but only to enforce one that is already clearly established. the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment, private respondents had relinquished to them This Court held in Chua v. Samahang Magsasaka, that "the word "may" indicates that the transfer may be
any and all rights they may have had as stockholders of the Bank. While it may be true that there was effected in a manner different from that provided for in the law." (62 Phil. 472)
an assignment of private respondents' shares to the petitioners, said assignment was not
sufficient to effect the transfer of shares since there was no endorsement of the certificates of Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of
stock by the owners, their attorneys-in-fact or any other person legally authorized to make the the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6 and
transfer. Moreover, petitioners admit that the assignment of shares was not coupled with delivery, 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of
the absence of which is a fatal defect. The rule is that the delivery of the stock certificate duly the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement.
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the
For all intents and purposes, however, since this was already cancelled which cancellation was also
transferee. Thus, title may be vested in the transferee only by delivery of the duly indorsed
reported to the respondent Commission, there was no necessity for the same certificate to be endorsed
certificate of stock.
by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks were
We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode attendant and even the corporation was protected from other parties, considering that said transfer was
of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock earlier recorded or registered in the corporate stock and transfer book.
certificate: (b) The certificate must be endorsed by the owner or his attorney-in-fact or other
Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where this Court held,
persons legally authorized to make the transfer; and (c) To be valid against third parties, the
that:
transfer must be recorded in the books of the corporation. As it is, compliance with any of these
requisites has not been clearly and sufficiently shown. But delivery is not essential where it appears that the persons sought to be held as stockholders are
officers of the corporation, and have the custody of the stock book . . . (67 Phi. 36).
It may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment
was valid between the parties, meaning the private respondents as assignors and the petitioners as Furthermore, there is a necessity to delineate the function of the stock itself from the actual delivery or
assignees. While the assignment may be valid and binding on the petitioners and private respondents, it endorsement of the certificate of stock itself as is the question in the instant case. A certificate of stock is
does not necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot not necessary to render one a stockholder in corporation.
enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar
as the assigned shares are concerned. Parenthetically, the private respondents cannot, as yet, be Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and
deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the
in question is resolved with finality. holder's interest and status in the corporation, his ownership of the share represented thereby, but is not
in law the equivalent of such ownership. It expresses the contract between the corporation and the
There being no showing that any of the requisites mandated by law was complied with, the SEC Hearing stockholder, but is not essential to the existence of a share in stock or the nation of the relation of
Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by shareholder to the corporation. (13 Am. Jur. 2d, 769)
petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC
en banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding the Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his
SEC en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of rights and prerogatives as stockholder and was even elected as member of the board of directors in the
the instant petition for review. respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty
(50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent
[G.R. No. 95696; March 3, 1992] ALFONSO S. TAN, Petitioner, vs. SECURITIES AND EXCHANGE corporation when he was elected as officer thereof.
COMMISSION, VISAYAN EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL
S. TAN and PATRICIA AGUILAR, Respondents Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it is
sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled
ISSUE: Whether the cancellation and transfer of stock certificate no. 2 was valid? with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice
to such rights or defenses as the registered owner/s or transferror's creditor may have under the law,
HELD: Petitioner claims that "(T)he cancellation and transfer of petitioner's shares and Certificate of Stock
except insofar as such rights or defenses are subject to the limitations imposed by the principles governing
No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently
estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that Section 63 of the
Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual delivery and To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing
endorsement of the certificate in question, there can be no transfer, or that such transfer is null and void. Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of
delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by
Contrary to the understanding of the petitioner with respect to the use of the word "may", in the case of
petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself
Shauf v. Court of Appeals, (191 SCRA 713, 27 November 1990), this Court held, that "Remedial law
as the only law governing transfer of stocks. While Section 47(s) grants a stock corporation the authority
statues are to be construed liberally." The term 'may' as used in adjective rules, is only permissive and not
to determine in the by-laws "the manner of issuing certificates" of shares of stock, however, the power to
mandatory.

regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to 1. Chua Guan vs Samahang magsasaka?
transfer their shares. (Emphasis supplied)
2. Follow up question. It was registered in the RD of Manila, where the owner is a resident, it was
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits a transfer of stock without registered in the books of the corporation in Cabanatuan city where it has its principal office, will
the consent or approval of all the stockholders or of the president or board of directors is illegal as that constitute a reasonable notice to the whole world?
constituting undue limitation on the right of ownership and in restraint of trade. (47 Phil. 583)
A: NO, under the mortgage law, as construed by the supreme court in the case of Chua Guan it provide
[G.R. No. L-10122; August 30, 1958] LEE E. WON alias RAMON LEE, plaintiff-appellant, vs. WACK that “If this province is also the province of the owner's domicile, a single registration is sufficient. If not,
WACK GOLF and COUNTRY CLUB, INC., defendant-appellee the chattel mortgage should be registered both at the owner's domicile and in the province where the
corporation has its principal office or place of business.” Thus, in order to be valid and binding to the third
ISSUE: Whether plaintiff was bound to present and register the certificate assigned to him within any
parties and the corporation it must be registered in the RD of manila and Cabanatuan.
definite or fixed period?
**SEC 62 speaks of transfer of certificate of stock, the general rule is that it must be endorsed by the owner
HELD: The defendant has not made herein any pretense to that effect; but it contends that from the
or his authorized agent AND delivery thereof to the transferee. That is the operative act of transferring of
moment the certificate was assigned to the plaintiff, the latter's right to have the assignment registered
shares in so far as the contracting parties themselves is concerned. However, to be valid and binding to
commenced to exist. This contention is correct, but it would not follow that said right should be
the corporation and other third parties it must be registered in the stock and transfer book.
exercised immediately or within a definite period. The existence of a right is one thing, and the
duration of said right is another. The reason for registration of transfer in the stock and transfer book (1)To enable the corporation to know
who its stockholders are, because the corporation will not look beyond its book to determine who its
On the other hand, it is stated in the appealed order of dismissal that the plaintiff sought to register the
stockholders are who may be entitled to vote, be voted upon and/or receive dividend; in so far as the SH
assignment on April 13, 1955; whereas in plaintiff's brief it is alleged that it was only in February, 1955,
is concerned (2) To enable the transferee to exercise his rights as a stockholder, because if he is not listed
when the defendant refused to recognize the plaintiff. If, as already observed, there is no fixed period
in the stock exchange, the stock and transfer book he cannot exercise his right as a stockholder; the other
for registering an assignment, how can the complaint be considered as already barred by the
reason includes (3) To afford the corporation an opportunity to object or refuse registration of the transfer
Statute of Limitations when it was filed on April 26, 1955, or barely a few days (according to the
in cases allowed by law like for instance sec 62 itself, shares of stock where the corporation has unpaid
lower court) and two months (according to the plaintiff), after the demand for registration and its
claims cannot be transferred to the S and T book, unpaid claims however as the courts stressed in the
denial by the defendant. Plaintiff's right was violated only sometime in 1955, and it could not
case of china banking vs ca refers only to the unpaid portion of the subscription of the transferee, it does
accordingly have asserted any cause of action against the defendant before that.
not include any other indebtedness the transferor may have to the corporation, it only refers to its unpaid
The defendant seems to believe that the plaintiff was compelled immediately to register his assignment. subscription; or perhaps (4) those covered by the nationalization laws, if it is violative of the nationalization
Any such compulsion is obviously for the benefit of the plaintiff, because it is only after registration that the laws it will not be registered, as we were saying then “the no transfer clause” bars its registration, no
transfer would be binding against the defendant. But we are not here concerned with a situation where the transfer of shares of stock which will reduce the ownership of Filipino citizens to less than that allowed by
plaintiff claims anything against the defendant allegedly accruing under the outstanding certificate in law shall be permitted and recorded in the books of the corporation; or even (5) To avoid fictitious and
question between the date of the assignment to the plaintiff and the date of the latter’s demand for fraudulent transfers; and perhaps (6) to protect creditors who have the right to look upon stockholders, in
registration and issuance of a new certificate. case of non-payment or watered shares, for the satisfaction of their claims, under the trust fund doctrine.
RECITATION and DISCUSSION 3. Uson vs Diosomito?
**CERTIFICATE of STOCK are transferrable under sec 62 by indorsement made by the owner or his **As I was saying the operative act is endorsement and delivery of the SC, there is a valid transfer that
attorney-in-fact AND by delivery thereof to the transferor. In transferring shares, under sec 62, there non- transpires in so far as the contracting parties themselves are concerned. But to be valid and binding against
registration will not affect its validity, insofar, as the contracting parties is concerned. Because again to 3rd Persons and Corporation. It must be registered in the book of the corporation. All transfer not registered
reiterate the operative act of transferring of shares is endorsement and delivery in so far as the contracting in the books in the corporation are not valid and without force and effect to third parties and the corporation.
parties themselves is concerned. However, to be valid and binding to the corporation and other third parties
4. May the right to transfer shares of stock be restricted or regulated?
it must be registered in the stock and transfer book, because if it is not so registered it will not bind third
parties and even the corporation. A: It may be regulated or restricted either by law or agreement of the parties or even by the provision of
the AoI. The right however may not be unreasonably restricted or prohibited, so that in the case of
Transfer however as used in the code refers to an absolute and unconditional transfer such that mortgages
Fliescher the court ruled that every owner of the corporate shares has the same uncontrollable right to
being conditional transfer are not required to be registered in the stock and transfer book. In moserrat vs
alienate them and is under no obligation from selling them at his sacrifice, for the welfare and benefit of
ceron the registration or lack of registration of a mortgage in the stock and transfer book will not affect its
the corporation and other stockholder.
validity, because mortgage is only a conditional transfer.

But while unreasonable restriction may not be allowed, the right to transfer maybe regulated in order for You have the Rural bank of Salinas vs C.A.in that case Guerrerro executed an SPA in favor of his wife to
corporation to protect itself against colorable or fraudulent transfers or to enable it to know who its sell and dispose of 400+ share of the rural bank of Salinas, the wife assigned the shares by deed of
stockholders are. Also as a matter of policy the SEC allows the grant of preferential rights to existing assignments to Rose, she presented the assignment to the corporation for recording of the transfer, the
stockholders and/or the corporation itself giving them the first option or the preferential right to purchase corporation refused, so an action for mandamus was filed with the SEC, that was in a point in time where
the shares of a selling stockholder within a reasonable period of time not exceeding 30 days if the same the SEC still has the jurisdiction over cases involving intra-corporate controversies, it was granted by the
is contained in all the stock certificates to be issued by the corporation. This is considered by the SEC as SEC, it went all the way to Supreme Court, where it ruled that the transfer is valid , because sec 62 now
uses the word “MAY” be transferred by endorsement and delivery, IT MAY THERE FOR BE
reasonable as it does not unduly restrict the ultimate transfer thereof, but merely grants the existing
TRANSFERRED BY ANY OTHER MODE, as in this case now it is transferred by an authorized agent
stockholder or the corporation itself the first option to purchase the shares of the selling stockholder. through a deed of assignment notarized. It went on ruling that, the right of a transferee/assignee to have
Other restrictions includes the law itself, because the law may restrict under sec 62, valid only between stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus, whenever
the contracting parties until its registered in the S and T book; another sec 62 again provides that share of a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel
stock against which the corporation holds any unpaid claim shall not be transferable in the books of the the officers of the corporation to transfer said stock in the name of the transferee in the books of the
corporation; another is under sec 95 closed corporation all of it shares of stock of any class shall be corporation". In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and
subjected to one or more specified restrictions allowed by law; there may also be restrictions imposed by does not try to decide the question of ownership. The duty of the corporation to transfer is a ministerial
special laws like the general banking law, if the transfer of shares of banking institution would result in the one and if it refuses to make such transaction without good cause, PLEASE TAKE NOTE OF THE phrase
transferee holding more than 20% of the outstanding stocks entitled to vote, it is subject to the approval of “without good cause”, it may be compelled to do so by mandamus. Taking note of that phrase, mandamus
the BSP, we also have sale to foreigners in violation of our nationalization law; and of course those covered therefor is not a matter of right available to all allege transferor, for instance 62 itself, regarding unpaid
by reasonable agreement of the parties. claims, or of course violation of our nationalization law or any other where there is no good cause for the
issuance or writ of mandamus, and you are looking as an example in the case of TAY vs CA, in that case
5. Padgett vs Babcock? the court ruled mandamus may issue if the petitioner has a clear legal right to the thing demanded, and
that it is the imperative duty on the part of the respondent to perform the act required of it. The court neither
**the case went all the way to the supreme court where it ruled the restriction is null and void and held that confers nor imposes mandamus in doubtful cases. In this case the petitioner has failed to establish a clear
any restriction on a stockholder's right to dispose of his shares must be construed strictly; and any attempt legal right with the thing demanded. The petitioner did not acquire ownership by virtue of the contract of
to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon pledge and the failure of the debtor to pay upon maturity. We go back to the civil code, article 212_ of the
its shares (that would be if there are unpaid claim), and except to the extent that valid restrictive regulations civil code provides that for a valid transfer of the thing pledged a sale at public auction is necessary.
and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be Corollary thereto is the provision in the contract of pledge which empower the creditor to foreclose the
controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other share either at public or private sale. However, there is no showing that the petitioner tried to foreclose the
stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even shares either at public or private sale. Under the civil code the pledgor remains the owner during the
pendency of the pledge and prior to foreclosure. In essence therefor, a mandamus will not lie if petitioner
though a controlling interest is sold to one purchaser. And obviously the words stamped “non-transferable”
has no prima facie title to the share.
in now not allowed.
General rule endorsement and delivery, but the Sec 62 uses the word “MAYBE transferred” that’s why in
6. Lambert vs Fox? the case of Salinas, a notarized deed as an exception, there is however an exception to that exception the
case RURAL BANK of LIPA vs CA, in this case Villanueva Sr. executed a deed of assignment where he
** the court ruled, that the agreement between two major stock holders suspending their power to sell their
assigned his shares as well as 8 other stockholders totaling 10,457T shares in favor of the SH of the bank,
respective shares has a beneficial purpose and results in the protection of the corporation as well as of that in a subsequent meeting of the SH to elect a new set of directors and officers, held in January 15,
the individual parties to the contract, and is reasonable as to the length of time as in this particular case is 1994, Villanueva was not notified, thus the validity of the meeting was questioned. In reply the corporation
legal and valid. argue that Villanueva is no longer entitled to notice since they have relinquished their rights as
stockholders, the court ruled that the transfer is not valid, while it may be true that there was an assignment
**Sec 62 is the general rule regarding transfer of shares of stock it says endorsement made by the of private respondent shares to the petitioners, said assignment was not valid. This case emanated from
owner or his atty-in-fact AND delivery thereof. the SEC at a point of time when the SEC has still the original and exclusive jurisdiction over intra-corporate
**discusses Embassy Farms vs CA- note: here there is endorsement but there is NO DELIVERY. The controversies, the ruling of the SEC is that a mere notarized deed is not sufficient, since no certificate
conjunction is “AND”, endorsement AND delivery. In the reverse which is held in Razon vs IAC- note: here of stock was endorsed and delivered, the rationale of the SEC is to avoid fictitious and fraudulent
there is delivery but NO ENDORSEMENT. transfer of shares. Because what would prevent the owner of the Shares of Stock to endorse and
execute a notarized deed, and transfer his shares to a transferee and later on endorse and deliver
There is however an exception to this general rule, it may also be transferred by A DULY NOTARIZED his stock certificate to another transferee, it will result to double sale. While the supreme court did
DEED, so much so that as early as (ulpiaco vs ca?) the higher court citing 1462 of the civil code ruled that not rationalize on their decision, the supreme court has affirmed the decision of the SEC, that IF THE
a formal contract of sale, said that notarized document is equivalent to delivery of the thing itself. CERTIFICATE OF STOCK HAS ALREADY BEEN ISSUED, it cannot be transferred by a mere
notarized deed it must still be coupled with the delivery of the endorsed stock certificate. Thus,

while a notarized did may be valid transfer of share, it may not hold true if the CoS is already issued. Gusto and was refused. The case for mandamus was filed on April 26, 1955, or barely a few days (according to
nila ng notarized deed? So be it but it, but it must still be coupled with delivery. the lower court) and two months (according to the plaintiff), after the demand for registration and its denial
by the defendant. Wala pang 5 years two months palang. So, having said that there is no time frame or
Exception to the Exception to the Exception, even if the certificate of stock has already been issued, fixed period within which the transferee may demand that the transfer be register in his name in the books
endorsement and/or delivered will not be required, if the transferor is in estoppel, you are looking of the corporation.
at TAN VS SEC, the court ruled that delivery and endorsement is not essential where it appears that the
person sought to be held as a stockholder is an officer of the corporation and has the custody of the stock NOTE: that in a non-stock corporation, the corporation may have capital stock divided into shares, but is
and transfer book, all the acts required for the transferee to exercise his right over the acquired shares not authorized to distribute allotments of its surplus profits by declaration of dividends. Share of stock in a
were all attended and even if the corporation were protected from other parties considering that the said non-stock corporation are a lot more expensive than in stock corporations.
transfer was earlier recorded in the S and T book, the new holder Tan in his very own right has already
exercised his rights and prerogatives as stockholder. CASES:
NOTE: [G.R. No. L-4818; February 28, 1955] APOLINARIO G. DE LOS SANTOS and ISABELO
ASTRAQUILLO, plaintiffs-appellees, vs. J. HOWARD MCGRATH ATTORNEY GENERAL OF THE
General Rule: Sec 62: Endorsement AND Delivery UNITED STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE
UNITED STATES, defendant-appellant.
Exception: Notarized Deed, if the Stock Certificate has not yet been issued.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant
Exception to the Exception: If the certificate of stock has already been issued, it must be coupled by
delivery or endorsement; ISSUE: Whether the plaintiffs are the rightful owners of the shares?
Exception to the Exception to the Exception: Even if the certificate of stock has already been HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares of stock in question, as
issued, mere delivery or endorsement mas still be valid, if it there is estoppel; testified to by De los Santos, the result, insofar as plaintiffs are concerned, would be the same. It is not
disputed that said shares of stock were registered, in the records of the Lepanto, in the name of Vicente
Exception to the Exception to the Exception to the Exception: Voting Trust Agreement, it Madrigal. Neither is it denied that the latter was, as regards said shares of stock, a mere trustee for the
is endorsed and delivered through the VTC. benefit of the Mitsuis. The record shows “and there is no evidence to the contrary” that Madrigal had never
disposed of said shares of stock in any manner whatsoever, except by turning over the corresponding
Certificate of stock of a stockholder executing the VTA is canceled but he remains the beneficial owner of
stock certificates, late in 1941, to the Mitsuis, the beneficial and true owners thereof. It has, moreover,
the shares.
been established, by the uncontradicted testimony of Kitajima and Miwa, the managers of the Mitsuis in
QUERY: How may he transfer his beneficial ownership if he has no more stock certificate that he the Philippines, from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares
will endorse and deliver? Because as we were saying once a certificate of stock is issued it cannot be of stock, nor delivered the aforementioned stock certificates, to anybody during said period. Section 35 of
transferred by a mere notarized deed, the Corporation Law reads:
A: The provision of the code itself regarding voting trust, “after the cancelation of the stock certificate of The capital stock corporations shall be divided into shares for which certificates signed by the president or
the SH executing the VTA the voting trustee shall thereafter execute a VOTING TRUST CERTIFICATE the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation,
and deliver it to the stockholder executing the VTA, which according to the code itself IS JUST LIKE ANY shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may
OTHER STOCK CERTIFICATE which he may endorse and deliver to his transferee. be transferred by delivery of the certificate endorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties,
We will also see later on how a stockholder can transfer stock certificate which is lost or destroyed. until the transfer is entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares
QUERY: As I was saying once there is a valid transfer, endorsement and delivery, there is a valid transferred.
transfer, the question that may be aske is that, IS THERE A TIME FRAME OR A FIXED PERIOD AS
TO WHEN THE REGISTRATION OF TRANSFER BE MADE OR DEMANDED? Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding stock
certificate, coupled with its delivery. However, the transfer shall "not be valid, except as between the
A: THERE IS NONE, the operative act in the transfer of shares is endorsement and delivery of the stock parties," until it is "entered and noted upon the books of the corporation." no such entry in the name of the
certificate, unless there is no stock certificate it may be by a notarized deed. plaintiffs herein having been made, it follows that the transfer allegedly effected by Juan Campos and Carl
Hess in their favor is "not valid, except as between" themselves. It does not bind either Madrigal or the
So much so that in the case of Won vs Wack Wack Golf and Country Club, the court ruled that there is no Mitsuis, who are not parties to said alleged transaction. What is more, the same is "not valid," or, in the
fixed period for registering transfers of shares, as I was saying the right of ownership accrues from words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) which were quoted
transferors’ endorsement and delivery, that is the operative act. Assuming there is a fixed period, the approval in Uson vs. Diosomito (61 Phil., 535) "absolutely void" and, hence, as good as non-existent,
stature of limitation does not apply, and even if it does it should be reckoned with after the demand is made insofar as Madrigal and the Mitsuis are concerned. For this reason, although a stock certificate is

sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled B. If X Co. cancelled the certificate and issued a new one to C:
with delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it a. If A later on finds out that his certificate was stolen, C may still be required to return
without prejudice to such rights or defenses as the registered owner or creditor may have under the law, the new certificate;
except insofar as such rights or defenses are subject to the limitations imposed by the principles governing b. If C sold it to D, an innocent purchaser, D may rightfully acquire thereto since X Co.
estoppel. is estopped to deny the validity of the certificate;
c. If A later on finds out that his certificate was stole, X Co. may be compelled to
Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee under a recognize both A and D as stockholders.
forged assignment acquires no title which can be asserted against the true owner, unless his own
negligence has been such as to create an estoppel against him (Clarke on Corporations, Sec. Ed. p. 415). Note: This is so because the A cannot be deprived of his rights as owner by virtue of a forged transfer,
If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an and D, because of X Co.’s representation that the person named therein is the owner of shares in the
innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood corporation.
vs. mining co., 50 Calif. 412).
C. If (B c) above would result in over-issuance of shares
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is not even a. Only A, the rightful owner may be recognized and A will have a right to compel X
claimed that either had, through negligence, given occasion for an improper or irregular disposition of the Co. to issue him a new certificate;
corresponding stock certificates. b. D will be entitled to damages from the X Co.;
c. X Co. will have a right of action against the person who made false representation
FORGED AND UNAUTHORIZED TRANSFERS and in whose favor a new certificate is issued.
Forged and unauthorized TRANSFER – what is forged or unauthorized is the transfer of the certificate Note: In this sense, if D sues X Co., the latter will have no valid defense, but he may institute a third party
from the true and lawful owner to another person. complaint against C. If C is an innocent purchaser, X Co., may file a fourth party complaint against B.
Unauthorized ISSUANCE of certificate of stock – the act of the corporation in issuing a certificate, either RECITATION and DISCUSSION
fraudulently or by mistake.
1. The case of Delos Santos vs Mcgrath?
In forged or unauthorized transfer:
2. Why cannot Delos Santos be considered as the rightful owner?
a) The purchaser or purchasers, no matter how innocent they may have been, will acquire no title
as against the lawful owner by virtue of the doctrine of non-negotiability of certificates of stock; **discusses Delos Santos case. Note: The code uses the words endorsement and delivery, indorsement
b) The purchaser will have no right or remedy against the corporation because he took the shares alone is not sufficient because certificate of stock is non-negotiable in the sense that it is always be subject
not by virtue of a misrepresentation made by the corporation but on the faith of a forged to all the rights and defenses which the true and lawful owner may possess. Truly it was endorsed but it
endorsement or unauthorized transfer; was never delivered, no valid transfer. Therefor there was a fraudulent transfer of the shares of stock
c) The corporation incurs no liability to the person in whose favor the certificate is endorsed or covered by the number of shares in the said certificate. Non-negotiable because he cannot be a transferee
issued. under a forge or unauthorized transfer, he acquires no title. If the owner of the certificate has endorsed it
d) If the old certificate is cancelled and new one is issued by the corporation, the holder thereof in blank, and it is stolen from him, no title is acquired even by an innocent purchaser for value.
may be required to return the same for its cancellation;
e) However, if new certificates are issued and passes into the hands of a subsequent bona fide Forged and authorized transfer must however be distinguished from unauthorized ISSUANCE of certificate
purchaser, the latter may rightfully acquire title thereto since the corporation will be estopped of stock. Where in the former, what is forged or unauthorized is the transfer of the certificate from real
to deny the validity thereof; owner to another person. As may be compared to ISSUANCE of a new certificate of stock by the
f) The subsequent purchaser in good faith took the shares, not by virtue of a forged or corporation. In the case a forged or unauthorized transfer the original owner cannot be deprived of his right
unauthorized transfer but on reliance to the genuineness of the certificate issued by the by the forgery.
corporation or by virtue of the representation made by the corporation that the same is valid
The purchaser of share in an unauthorized transfer will have no right and remedy against the corporation
and therefore, compel the corporation to recognize him as a stockholder or claim
because he took the shares not by virtue of a misrepresentation made by the corporation but on the faith
reimbursement and damages against the latter.
of a forged endorsement or unauthorized transfer.
Example: A owns 100 shares of X Co., B stole the stock certificate and forged A’s signature:
3. A is the owner of the stock certificate, Stock Certificate (SC) #1, B stole the SC forged the
A. If B indorsed and sold it to C: signature of A, transfers it to C a purchaser for value and in good faith, may C acquire title?
a. C will not acquire title to the shares whether he is innocent or not;
A: No, C does not acquire title. Because he is subject to all the rights and defenses of A.
b. C cannot compel the corporation to register him as stockholder;
c. X Co. does not incur any liability in favor of C 4. What are this rights or defenses?
A: That A did not endorse the SC, neither did he deliver the SC. Even if C transfers it to D, D will not SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall be issued to a subscriber
acquire better title, because it will always be subject to the right and defenses of the true and legal owner. until the full amount of the subscription together with interest and expenses (in case of delinquent
shares), if any is due, has been paid.
**In the case of unauthorized issuance of CoS, however, the purchase for value and good faith acquires
title thereto. He acquires title on the claim of the representation made by the corporation that the same is Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock certificate.
valid, existing and in fact owned by the person named in the certificate.
As the law stands now, subscription to shares of stock are deemed indivisible and no certificate of stock
5. Let us see, C upon receipt of the SC: 1. Goes to the corporation, armed with forged and the can be issued unless and until the full amount of his subscription including interest and expenses, if any
endorsed SC, for the cancelation of SC #1 and the issuance of a new SC in his name, the is paid.
corporation checked the signature part and believed that the signature in the endorsement form of
SC #1 is the same as that of the signature of A. So, the Corporation canceled SC #1 and issued SC NOTE: Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock
#11 in the name of C, C transfers the SC in favor of D, will D acquire title? certificate and, in the event, that the corporation refuses to do so, the stockholder may institute a case
for mandamus with damages, such issuance being ministerial.
A: YES, D will acquire title, he took it no longer by virtue of the forge or unauthorized transfer, but by virtue
of representation made by the corporation that the SC #11 is valid, subsisting and owned by C. RECITATION and DISCUSSION
**So D may now also tell the corporation to cancel SC #11 and issue a new SC in his name. 1. When are Certificate of stocks issued?
6. What happens to A, will he be deprived of stocks? A: Sec 63 provides that it is upon payment full amount of the subscription together with interest and
expenses (in case of delinquent shares), if any is due.
A: NO, he will not be deprived of stocks, because he will always be subject to all the rights and defenses
of a true and lawful owner. 2. A subscribed to 1M shares valued at 1 peso per share, or a total of 1M shares, he has paid 500T
of his subscription can he be issued a SC covering 500T?
**So D and A may now compel the corporation to be recognized as a stockholder, the question is why
can they compel? A: As to D, because he took the shares no longer by virtue of the forged or A: NO, he cannot be issued because subscription is deemed indivisible. A has not paid any single shares,
unauthorized transfer but by virtue of representation made by the corporation that the SC #11 is valid, the 500T he has paid applies to the entire 1M shares, he is deemed to have paid only 50 centavos of the
subsisting and owned by C. As to A, because of the non-negotiability of CoS, it will always be subject to 1 peso per share if applied to the 1M shares, so much so that in a 19:04-19:09(**citing a case) expressed
all the right and defenses of the true and lawful owner, unless the rules governing estoppel may apply. that no certificate shall be issued until the full amount has been paid.
7. The next question is what happens if the entire Authorized Capital Stock has been subscribed WATERED STOCK
and fully paid, and recognize both A and D, will it result to over issuance of shares, who among A,
B and D will be recognized as the stockholder? Watered stock – one which is issued by the corporation as fully paid-up shares when in fact the whole
amount of the value thereof has not been paid.
A: As held (Citizens National Bank vs State?) only the original and true owner can be recognized as
stockholder. If the shares have thus been issued by the corporation as fully paid, when in fact it has intentionally and
knowingly received or agreed to receive nothing at all for them, or less than their par value, either in money,
**The purchaser for value and good faith and 14:19-14:21 however, have the right of action to recover the property or services, the shares are said to be “watered” or “fictitiously paid-up” “to the extent to which
value of the shares and for damages against the corporation. Why? Because he relied on the they have not been issued or are not to be paid for”.
representation made by the corporation, the SC # 11 is valid, subsisting and owned by C.
SEC. 64. Liability of Directors for Watered Stocks. – A director or officer of a corporation who: (a)
**The corporation then can file a third-party claim against C, why? Because he represented that his title is consents to the issuance of stocks for a consideration less than its par or issued value; (b)
good but in fact it was by virtue of a forged or unauthorized transfer. consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair
value; or (c) having knowledge of the insufficient consideration, does not file a written objection
**but C also acted in good faith, C can file a fourth-party complaint against B, the source of the issue, of
with the corporate secretary, shall be liable to the corporation or its creditors, solidarily with the
course, that would be the end of the issue.
stockholder concerned for the difference between the value received at the time of issuance of the
ISSUANCE OF STOCK CERTIFICATES stock and the par or issued value of the same.
Subscriptions to shares of stock are indivisible. Thus, no certificate of stock shall be issued to a subscriber Directors or officers shall be solidarily liable with the stockholder or subscriber concerned to the corporation
until the full amount of his subscription together with interest and expenses (in case of delinquent shares), and its creditors for the DIFFIRENCE between the fair value received at the time of issuance of the stock
if any is due, has been paid. AND the par or issued value of the same for the following acts:
a) consents to the issuance of stocks for a consideration less than its par or issued value;
b) consents to the issuance of stocks for a consideration other than cash, valued in excess of its 2. As between the corporation and the subscriber – the subscription is void; the subscriber is
fair value; or liable to pay the full par or issued value thereof, to render it valid and effective.
c) having knowledge of the insufficient consideration, does not file a written objection with the 3. As to the consenting stockholders – they are estopped from raising any objection thereto.
corporate secretary 4. As to dissenting stockholder – in view of the dilution of their proportionate interest in the
corporation, they may compel the payment of the “water” in the stock solidarily against the
Extend of Liability: Difference of par or issue value and the consideration given or actually paid. responsible and consenting directors and officers inclusive of the holder of the watered stock.
5. As to creditors – they may enforce payment of the difference in the price, or the water in the
RIGHT of the CORPORATION and CREDITORS: The law does not make any distinction as to the right of
stock, solidarily against the responsible directors/officers and the stockholders concerned.
the corporation and its creditors to enforce payment of the water in the stocks issued, thus, it applies to all
6. As against transferees of the watered stock – his right is the same as that of his transferor.
creditors whether prior or subsequent to the issuance of the watered stock.
If however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser,
Note: All consenting directors and officers are solidarily liable for the “water” in the stock. without knowledge, actual or constructive, the latter cannot be held liable, at least as against
the corporation, since he took the shares on reliance of the misrepresentation made by the
Non-consenting Directors: may be absolved of liability by their written dissent. Otherwise, if they did not corporation that the stock certificate is valid and subsisting. This is because a corporation is
issue such written dissent or are passive, they may be held liable for not objecting thereto. prohibited from issuing certificates of stock until the full value of the subscriptions have been
paid and could not, therefore, deny the validity of the stock certificate it issued as against a
Note: There is no stock watering in treasury shares because they were already issued and fully paid, AS purchaser in good faith. Thus, Ballantine states that whether there is any liability on the part of
WELL AS in case of no-par value shares because no par value shares are deemed fully paid and non- the transferee of watered stock is made to depend upon whether he acquired the same without
assessible. notice, either as purchaser or donee. If he had knowledge thereof, he is subject to the same
liability as his transferor.
Ways in which watered stocks may be issued:
Note: Unless so required or provided in the subscription contract or by-laws, subscribers to shares of stock
1. For a monetary consideration less than its par or issued value; not fully paid are not liable to pay interest on their unpaid subscriptions.
2. For a consideration in property, tangible or intangible, valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or Liability for Interest: Aside from the value of their subscription, subscribers may likewise be required to pay
4. In the guise of stock dividends when there are no surplus profits of the corporation. interest on all unpaid subscriptions, if so imposed in the contract or in the corporate by-laws, at such rate
as may be indicated thereat or the legal rate if so not fixed. Unless so required or provided however, the
Evil effects of stock watering: subscribers to shares of stock, not fully paid, are not liable to pay interest on their unpaid subscriptions.
1. The corporation is deprived of its capital thereby hurting its business prospects, financial SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to stocks shall be liable to the
capability and responsibility; corporation for interest on all unpaid subscriptions from the date of subscription, if so
2. Stockholders who paid their subscriptions in full, or promised to pay the same, are injured and required, by and at the rate of interest fixed in the subscription contract. If no rate of
prejudiced by the reduction of their proportionate interest in the corporation; and interest is fixed in the subscription contract, the prevailing legal rate shall apply.
3. Present and future creditors are deprived of corporate assets for the protection of their interest.
Two theories advanced as the basis for the liability on water stocks:
RECITATION and DISCUSSION
1. Trust fund doctrine – treating the capital of the corporation, inclusive of the unpaid portion of
subscriptions to said capital, as a “trust fund” which the creditors have a right to look up to for 1. At how much consideration are shares of stock to be issued?
the satisfaction of their claims. It is not only the corporation which may compel full payment, but
also creditors. A: SEC. 61 provides that Stocks shall not be issued for a consideration less than the par or issued price
2. Fraud or misrepresentation theory – liability is based on the false representation made by the thereof.
corporation and the stockholder concerned to the creditors that the true par value or issued
price of the shared has been paid or promised to be paid full. 2. How about if it is issued below the determined issue price?
Effects of issuance of watered stock: A: It will be a watered stock
1. As to the corporation – when a corporation is guilty of ultra-vires acts which constitute an **When we speak of the issued price, we refer to the non-par value shares. If the determined value of the
injury to or fraud upon the public, or which will tend to injure or defraud the public, the State no par shares is 10 peso per share it cannot be issued below that. If the par value of the par value shares
may institute a quo-warranto proceeding to forfeit its charter for the misuse or abuse of its is 1 peso it cannot also be issued below that. If they are issued below the par or determined issued price
franchise. then they will be considered as watered stock.

** Watered stock is one which is issued by the corporation as fully paid-up shares when in fact the whole A: Only with respect to the par value shares, because one of the limitations and restrictions on the issuance
amount of the value thereof has not been paid or promised to be paid. They are otherwise known as of no-par value shares is that once they are issued they are deemed fully paid and none assessible. The
“fictitiously paid-up to the extent to which they have not been issued or are not to be paid for”. stock to whom the no par shares were issued can no longer be assessed for the difference between the
issue price and the water in the stock.
And they may be issued in 4 different ways:
**the effect of the issuance of watered stock is that 1. As to the corporation – the issuance is prohibited
1. For a monetary consideration less than its par or issued value; or
under sec 60 and the corporation maybe dissolved by the court, but the dissolution is harsh, and in most
2. For a consideration in property, tangible or intangible, valued in excess of its fair market value;
cases the courts merely enjoins the further commission of such acts. 2. As between the corporation and
or
the subscriber – the subscription is also void; to be valid and binding the stock holder concerned should
3. Gratuitously or under an agreement that nothing shall be paid at all; or
fully pay or assume to pay the full value thereof that is of course if they are PAR VALUE SHARES. Because
4. In the guise of stock dividends when there are no surplus profits of the corporation.
if it is NO PAR it is deemed to be fully paid and none assessible against the holder thereof. 3. As to the
**The stock watering is prohibited because the corporation is deprived of its capital thereby hurting its consenting stockholders – they are estopped from raising any objection thereto. 4. As to dissenting
business prospects, financial capability and responsibility; the existing stockholders who paid their stockholder –they may compel the payment of the “water” in the stock solidarily against the responsible
subscriptions in full, or promised to pay the same, are injured and prejudiced by the reduction of their and consenting directors and officers inclusive of the holder of the watered stock, if again PAR VALUE
proportionate interest in the corporation; and third, creditors are deprived of corporate assets for the SHARES. Because if they are NO PAR the stockholder to whom it is issued is no longer liable. 5. As
protection of their interest under the trust fund doctrine. against subsequent transferees of the watered stock – his right is the same as that of his transferor. if
in good faith he is not liable, but if he is in bad faith he is solidarily liable, again if it is NO PAR VALUE
3. What is the extent of the liability of the corporate officers or directors consenting or assenting SHARES. 6. As to creditors – they may enforce payment of the difference in the price, or the water in the
to the issuance of watered stock? stock, solidarily against the responsible directors/officers and the stockholders concerned, again if they
are PAR VALUE SHARES.
A: Under SEC. 64 it provides for Liability of Directors for Watered Stocks. A director or officer of a
corporation shall be liable to the corporation or its creditors, solidarily with the stockholder concerned for 7. Assume that there 1M unissued no par value shares, the board of directors subscribed to the no
the difference between the value received at the time of issuance of the stock and the par or issued value par value shares, assuming of course that there is no pre-emptive right, 34:42 the issued price 10
of the same. pesos, in the course of time the fair value of the no par shares have gone up to 22 pesos, the 5
man member board, subscribed to 200T no par value shares for only 12 pesos instead of the fair
4. Are passive directors or officers also solidarily liable? market value of 22 pesos, is there a stock watering?
A: Yes, they are also solidarily liable, under SEC. 64. Liability of Directors for Watered Stocks. – A director A: There is no stock watering. The basis is the par or the determined issue price. If they are not issued
or officer of a corporation who xxx xxx xxx c) having knowledge of the insufficient consideration, does not below that there is no stock watering.
file a written objection with the corporate secretary, shall be liable to the corporation or its creditors, 8. Let’s go further, 2 days later, the 5-man member board sold there 200T no par shares to 3rd
solidarily with the stockholder concerned for the difference between the value received at the time of persons at 22 pesos, may you question the actuations of the board? What is your cause of action?
issuance of the stock and the par or issued value of the same.
A: Yes, you can question. The board cannot advance their self-interest to the damage and prejudice of
**It includes passive directors, if they had knowledge of the issuance but they did not interpose their the corporation. Those that 37:34 (interest?) would have gone to the coffers of the corporation, it would be
objection with the corporate secretary. in better financial position to answer for its liabilities. With that 10M (the gain from selling of the no par
shares) that would have gone to the coffers of the corporation the creditors will be more amply protected
5. 1M par value shares, 1M no par share, the value of par value shares is 1 peso, the determined because they can rely on these funds to satisfy their claims. So yes, they question, because they owe a
issue price of the no par value shares is 10 pesos, Z acquired the 1M par value shares at 50 fiduciary relation to the stockholder and the corporation as a body.
centavos only, and he acquired the 1M no par value shares at 8 pesos only, is there stock watering
in both? ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
A: Yes, there is stock watering in both. Sec. 61 of the code provides that Stocks shall not be issued for a When unpaid subscription or any percentage thereof, together with interest if required, shall be paid:
consideration less than the par or issued price thereof. Thus, both the par value and no par value, having
1. On the date or dates fixed in the contract of subscription; or
issued below the par value of the par value shares and below the determined issue price for no par value
2. On the date or dates that may be specified by the board of directors pursuant to a “call”
share, there is stock watering.
declaring any or all unpaid portion thereof to be so payable.
6. Is Z solidarily liable with the responsible corporate officer for the water in the stock in both the
Two possible remedies available to the corporation to enforce payment of unpaid subscription:
par and no-par value share?
1. By board action (in accordance with SEC. 66 to 68);

2. By a collection case in court (SEC. 69). the smallest number of shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited as fully paid in the books
Failure or refusal of the corporation, through its board of directors to enforce or collect payment of unpaid of the corporation. Title to all the shares of stock covered by the subscription shall be vested in
subscription will not prevent the creditors or the receiver of the corporation to institute a court action to the corporation as treasury shares and may be disposed of by said corporation in accordance with
collect the unpaid portion thereof under the trust fund doctrine. (Gariva vs Suarez) Rationale: This is the provisions of this Code.
because the capital of the corporation is the basis of the credit of and financial responsibility of
the corporation. Persons dealing with a corporation and extending credit to it have a right to insist that Procedure for the enforcement of payment through board action:
the unpaid subscription shall be paid in, when this becomes necessary for the satisfaction of their claims.
(Ballantine)This is otherwise known as the Trust Fund Doctrine which states that subscriptions to the 1. The board of directors, by a formal resolution, declares the whole or any percentage of unpaid
capital of a corporation constitute a fund to which creditors have the right to look up to for the satisfaction subscriptions to be due and payable on a specific date;
of their claims. (Phil Trust vs Rivera) 2. The stockholders concerned are given notice of the BOARD RESOLUTION by the corporation
either personally or by registered mail or through other means provided in the bylaws.
For purposes of enforcing or collecting unpaid subscription by Board action, the Code provides: Publication of the notice of call is not required unless the by-laws provide otherwise. Notice
is not likewise necessary if the contract of the subscription stipulates a specific date when any
SEC. 66. Payment of Balance of Subscription. – Subject to the provisions of the subscription unpaid portion is due and payable;
contract, the board of directors may, at any time, declare due and payable to the corporation unpaid 3. Payment shall be made in the date specified in the call or on the date provided for in the contract
subscriptions and may collect the same or such percentage thereof, in either case, with accrued of subscription;
interest, if any, as it may deem necessary. 4. Failure to pay on the date required in the call or as specified in the contract of subscription will
render the entire balance due and payable and making the stockholder liable for the interest;
Payment of unpaid subscription or any percentage thereof, together with any interest accrued shall
5. If within 30 days from the date stated in the call or as may be provided in the contract of
be made on the date specified in the subscription contract or on the date stated in the call made
subscription no payment is made, all the stock covered by the subscription shall become
by the board. Failure to pay on such date shall render the entire balance due and payable and shall
delinquent and shall be subject to a delinquency sale;
make the stockholder liable for interest at the legal rate on such balance, unless a different interest
rate is provided in the subscription contract. The interest shall be computed from the date Note: Instances when a “call” is not necessary:
specified, until full payment of the subscription. If no payment is made within thirty (30) days from
the said date, all stocks covered by the subscription shall thereupon become delinquent and shall 1. The contract of subscription provides for a date or dates when payment is due; or
be subject to sale as hereinafter provided, unless the board of directors orders otherwise. 2. The corporation has become insolvent.
SEC. 67. Delinquency Sale. – The board of directors may, by resolution, order the sale of delinquent Procedure for the sale of a delinquent share:
stock and shall specifically state the amount due on each subscription plus all accrued interest,
and the date, time and place of the sale which shall not be less than thirty (30) days nor more than 1. The board, by resolution, orders the sale of the delinquent stock stating the amount due and
sixty (60) days from the date the stocks become delinquent. the date, time and place of the sale;
2. The sale shall be made not less than 30 days nor more than 60 days from the date the
Notice of the sale, with a copy of the resolution, shall be sent to every delinquent stockholder either stocks became delinquent;
personally, by registered mail, or through other means provided in the bylaws. The same shall be 3. Notice of the SALE, with the copy of the board resolution should be sent to every delinquent
published once a week for two (2) consecutive weeks in a newspaper of general circulation in the stockholder either personally or by registered mail or through other means provided in the
province or city where the principal office of the corporation is located. bylaws;
4. Publication of the notice of SALE must be made once a week for two consecutive weeks in
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the the newspaper of general circulation in the province or city where the principal officer is located;
sale of the delinquent stock, the balance due on the former’s subscription, plus accrued interest, 5. Sale at public auction if no payment is made by the delinquent stockholder in favor of the
costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, bidder who offered to pay the full amount of the balance in the subscription, inclusive of
said delinquent stock shall be sold at a public auction to such bidder who shall offer to pay the full interest, cost of advertisement and expenses for the smallest number of shares;
amount of the balance on the subscription together with accrued interest, costs of advertisement 6. Registration or transfer of the shares of stock in the name of the bidder and corresponding
and expenses of sale, for the smallest number of shares or fraction of a share. The stock so issuance of the stock certificate covering the shares successfully bidded;
purchased shall be transferred to such purchaser in the books of the corporation and a certificate 7. If there be any remaining shares, the same shall be credited in favor of the delinquent
for such stock shall be issued in the purchaser’s favor. The remaining shares, if any, shall be stockholder who shall be entitled to the issuance of a certificate of stock covering such shares;
credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a 8. If there is no bidder at the public auction who offers to pay the total amount due plus interest,
certificate of stock covering such shares. cost and expenses, the corporation may, subject to the provisions of the Code, bid for the
same and the total amount due shall be credited or paid in full in the corporate books, Provided
Should there be no bidder at the public auction who offers to pay the full amount of the balance on
that there are Unrestricted Retained Earnings; and
the subscription together with accrued interest, costs of advertisement, and expenses of sale, for

9. The shares so purchased by the corporation shall be vested in the latter as treasury shares. NOTE: Notwithstanding the provisions of Sec. 66 to 68, the corporation may enforce payment of unpaid
subscriptions by court action.
Note: If the corporation has no Unrestricted Retained Earnings, it cannot be a bidder in the auction sale.
SEC. 69. Court Action to Recover Unpaid Subscription. – Nothing in this Code shall prevent the
“LOWEST BIDDER”, in the case of sale of delinquent stock, and as indicated in number 5 for sale of corporation from collecting through court action, the amount due on any unpaid subscription, with
delinquent share above, is such bidder who shall offer to pay the full amount of the balance on the accrued interest, costs and expenses.
subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. It should be properly termed “Lowest” Bidder because the bidders Consistent with Art. 1169 of the Civil Code, a “call” is a condition precedent before the right of action to
are offering to pay the same amount, and their bids are based on the number of shares they are willing to institute a recovery suit accrues. This is because a demand is required before a debtor may incur a delay
receive, the lowest of which is the winning bid. in the performance of his obligation.
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50% and later on declared to be CASES:
delinquent. For the full amount of P5,000 (unpaid balance) and the interests, costs, and expenses, the
following bidders are willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X would be [G.R. No. L-11528; March 15, 1918] MIGUEL VELASCO, assignee of The Philippine Chemical
the highest bidder. The remaining 30 shares would be credited to A. Product Co. (Ltd.), plaintiff-appellant, vs. JEAN M. POIZAT, defendant-appellee
Note: If there was no bidder, the company has to have unrestricted retained earnings in order to acquire ISSUE: Whether Poizat is liable upon the unpaid subscription?
the shares as thus provided under Sec. 40 of the Corporation Code (Power to Acquire Own Shares).
HELD: We think that Poizat is liable upon this subscription. A stock subscription is a contract between the
Accordingly, if the company has no unrestricted retained earnings, it cannot acquire the said shares by
corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It
virtue of a delinquency sale, however, it may institute an action for the recovery of the subscription price
is a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does
under Sec. 69.
not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the
QUERY: MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS SUBSCRIPTION BE part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the Corporation Law clearly recognizes
ALLOWED TO CARRY OUT HIS FUNCTIONS AS SUCH DIRECTOR? that a stock subscription is subsisting liability from the time the subscription is made, since it requires the
subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws
A: Yes, he is still a shareholder entitled to all the rights as such, and pending the sale, the shares still of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as
stand in his name. Even after the sale, he may still be credited to some of the shares and he only needs he would be to pay any other debt, and the right of the company to demand payment is no less
1 to qualify as a director. incontestable.
Grounds to question the delinquency sale: The provisions of the Corporation Law (Act No. 1459) has given recognition of two remedies for
the enforcement of stock subscriptions. The first and most special remedy given by the statute
1. Irregularity or defect in the notice of sale; or consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the
2. Irregularity or defect in the sale itself. account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive of the
Corporation Law are applicable and must be followed. The other remedy is by action in court,
QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE NOTICE OR IN THE SALE ITSELF:
concerning which we find in section 49 the following provision:
SEC. 68. When Sale May be Questioned. – No action to recover delinquent stock sold can be
“Nothing in this Act shall prevent the directors from collecting, by action in any court of proper jurisdiction,
sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the
the amount due on any unpaid subscription, together with accrued interest and costs and expenses
delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party
incurred.”
holding the stock the sum for which the same was sold, with interest from the date of sale at the
legal rate. No such action shall be maintained unless a complaint is filed within six (6) months from [G.R. No. L-19893; March 31, 1923] ARNALDO F. DE SILVA, plaintiff-appellant, vs. ABOITIZ &
the date of sale. COMPANY, INC., defendant-appellee
Two conditions before an action to recover delinquent stocks irregularly sold may be allowed: ISSUE: Whether the BOD may declare the unpaid shares delinquent or collect or enforce payment of the
same despite the provision of the by-laws?
1. The party seeking to maintain such action first pays or tenders to the party holding the stock
the sum for which the same was sold, with interest from the date of the sale at the legal rate; HELD: It is discretionary on the part of the board of directors to do whatever is provided in the
and said article (by-law provision) relative to the application of a part of the 70 percent of the profit
2. The action shall be commenced by the filing of a complaint within six months from the date of distributable in equal parts on the payment of the shares subscribed to and not fully paid.
the sale.

If the board of directors does not wish to make, or does not make, use of said authority it has two other [G.R. No. L-39861; March 21, 1934] BONIFACIO LUMANLAN, plaintiff-appellee, vs. JACINTO R.
remedies for accomplishing the same purpose. As was said by this court in the case of Velasco vs. Poizat CURA, ET AL., defendants. DIZON & CO., INC., ETC., appellant.
(37 Phil., 802):
ISSUE: Whether Lumanlan is still liable to the corporation for the unpaid subscription despite the fact that
“The first and most special remedy given by the statute consists in permitting the there was a compromise agreement executed between the parties?
corporation to put the unpaid stock for sale and dispose of it for the account of the delinquent
subscriber. In this case the provisions of sections 38 to 48, inclusive, of the Corporation Law HELD: Yes. In the promissory note given by the corporation to Valenzuela the former obligated itself to
are applicable and must be followed. The other remedy is by action in court.” pay Valenzuela the sum of P8,000 with interest at 12 per cent per annum and, upon failure to pay said
sum and interest when due, 25 per cent of the principal as expenses of collection and judicial costs in case
Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract between the of litigation.
defendant corporation and its stockholders , yet as it is only to the board of directors of the corporation
that said articles gives the authority or right to apply on the payment of unpaid subscriptions such amount By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840
of the 70 percent of the profit distributable among the shareholders in equal parts as may be deemed fit, and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to
it cannot be maintained that the said article has prescribe an operative method for the payment of said collect, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or
subscription continuously until their full amortization. a total of P13,840. This leaves a balance due Dizon & co., Inc., of P1,269 on that judgment with interest
thereon at 6 per cent per annum from August 30, 1930.
In the instant case, the defendant corporation, through its board of directors, made use of its discretionary
power, taking advantage of the first of the two remedies provided by the aforesaid law. On the other hand, It appears from the record that during the trial of the case now under consideration, the Bank of
the plaintiff has no right whatsoever under the provision of the above cited article 46 of the said the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon &
by-laws to prevent the board of directors from following, for that purpose, any other method than Co., Inc. That bank was appointed assignee in case No. 43065 of the Court of First Instance of the
that mentioned in the said article, for the very reason that the same does not give the stockholders City of Manila on November 28, 1932. It is therefore evident that there are still other creditors of
any right in connection with the determination of the question whether or not there should be Dizon & Co., Inc. This being the case that corporation has a right to collect all unpaid stock
deducted from the 70 percent of the profit distributable among the stockholders such amount as subscriptions and any other amounts which may be due it.
may be deemed fit for the payment of subscriptions due and unpaid. Therefore, it is evident that
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
the defendant corporation has not violated, nor disregarded any right of the plaintiff recognized by
which the creditors have a right to look for satisfaction of their claims and that the assignee in
the said by-laws, nor exceeded its authority in the discharge of its executive functions, nor abused
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
its discretion when it performed the acts mentioned in the complaint as grounds thereof, and,
for the payment of its debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
consequently, the facts therein alleged do not constitute a cause of action.
[G.R. Nos. L-24177-85; June 29, 1968] PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.
[G.R. No. 80039; April 18, 1989] ERNESTO M. APODACA, petitioner, vs. NATIONAL LABOR
BITULOK SAWMILL, INC., ET. AL., defendants-appellees.
RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS PHILS., INC., respondents
ISSUE: Whether the lumber producers are liable for the full value of their subscriptions?
ISSUE: Whether the set-off was properly made?
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of Velasco v. Poizat, this Court held:
HELD: NO. Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between
"It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is
which creditors have a right to look for satisfaction of their claims and that the assignee in
within the exclusive jurisdiction of the Securities and Exchange Commission.
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under for the payment of its debt.... A corporation has no power to release an original subscriber to its
the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made capital stock from the obligation of paying for his shares, without a valuable consideration for such
by the corporation for payment. Private respondents have not presented a resolution of the board release; and as against creditors a reduction of the capital stock can take place only in the manner
of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does and under the conditions prescribed by the statute or the charter or the articles of incorporation.
not even appear that a notice of such call has been sent to petitioner by the respondent Moreover, strict compliance with the statutory regulations is necessary...." The Poizat doctrine found
corporation. acceptance in later cases. One of the latest cases, Lingayen Gulf Electric Power v. Baltazar, Speaks to
this effect: "In the case of Velasco v. Poizat, the corporation involved was insolvent, in which case all
What the records show is that the respondent corporation deducted the amount due to petitioner from the unpaid stock subscriptions become payable on demand and are immediately recoverable in an action
amount receivable from him for the unpaid subscriptions. No doubt such set-off was without lawful instituted by the assignee."
basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same
is not yet due and payable. It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock
subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be
invested by the Government would not be available. Even if such were the case, however, and such a

promise were in fact made, to further the laudable purpose to which the proposed corporation would be 1. To vote or be voted upon;
devoted and the possibility that the lumber producers would lose money in the process, still the plain and 2. Representation at any stockholder's meeting; or
specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a 3. Any other rights of a stockholder.
well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the
prerogative of suspending the operation of any statute or any of its terms. Exception: Delinquent stocks are entitled to the right to dividends as provided for in the code:
[G.R. No. L-68097; January 16, 1986] EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, be entitled to vote, or be
COB GROUP MARKETING, INC., ET. AL., respondents-appellees. represented at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the
rights of a stockholder except the right to dividends in accordance with the provisions of this Code,
ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders? until and unless payment is made by the holder of such delinquent stock for the amount due on
the subscription with accrued interest, and the costs and expenses of advertisement, if any.
HELD: Yes. It is settled that a stockholder is personally liable for the financial obligations of a corporation
to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311- Note: The RIGHT TO RECEIVE DIVIDENDS is subject to Sec. 42 which provides that “any cash dividend
2). due on delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost
and expenses, while stock dividends shall be withheld until his unpaid subscription is paid in full”
[G.R. No. L-45493; April 21, 1939] GERARDO GARCIA, plaintiff-appellee, vs. ANGEL SUAREZ,
defendant-appellant Note: In a delinquency sale, all subscribed shares declared delinquent are sold even if there is partial
payment. Subscriptions are indivisible once subscribed.
ISSUE: Whether defendant Suarez is liable?
Example 1: Ana subscribed to 1000 shares with a total price of Php100, 000.00. She paid Php50, 000.00
HELD: Yes. The premise of the argument is wrong because it confuses two distinct obligations: and was unable to pay the remaining balance despite the demand and call for payment by the corporation.
the obligation to pay interest and that to pay the amount of the subscription. The said section 37 of
the Corporation Law provides when the obligation to pay interest arises and when payment should be In a delinquency sale for the 1000 shares, Baldo being the highest bidder (lowest number of shares for
made, but it is absolutely silent as to when the subscription to a stock should be paid. Of course, the the highest amount) was able to buy the 1000 shares.
obligation to pay arises from the date of the subscription, but the coming into being of an
obligation should not be confused with the time when it becomes demandable. In a loan for example, Note that the entire 1000 shares subscribed to by Ana was made subject to the delinquency sale despite
the obligation to pay arises from the time the loan is taken; but the maturity of that obligation, the date the payment. This is because the contract of subscription is an indivisible contract. The payment made by
when the debtor can be compelled to pay, is not the date itself of the loan, because this would be absurd. Ana was in effect forfeited.
The date when payment can be demanded is necessarily distinct from and subsequent to that the
NOTE: If the shares are not delinquent, however, subscribers to the capital stock of a corporation though
obligation is contracted.
not fully paid, are entitled to all the rights of a stockholder (Sec. 71). They can vote and be voted upon and
By the same token, the subscription to the capital stock of the corporation, unless otherwise stipulation, is entitled to receive all dividends due their shares.
not payable at the moment of the subscription but on a subsequent date which may be fixed by the
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of subscribed shares not fully paid
corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518, provides that:
which are not delinquent shall have all the rights of a stockholder.
“The board of directors or trustees of any stock corporation formed, organized, or existing under this Act
General Rule: Holders of subscribed shares not fully paid which are not delinquent shall have all the rights
may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock . . .”
of a stockholder.
The board of directors of the Compañia Hispano-Filipino, Inc., not having declared due and payable the
Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock. (SEC 63)
stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only
commenced to run from June 18, 1931 when the plaintiff, in his capacity as receiver and in the exercise of NOTE: Director whose shares are delinquent shall still remain as director as long as he still holds at least
the power conferred upon him by the said section 38 of the Corporation Law, demanded of the appellant one share in the books.
to pay the balance of his subscription. The present action having been filed on October 10, 1935, the
defense of prescription is entirely without basis. NOTE: The rules on delinquent shareholders applies to non-stock corporations, such as when members
are delinquent in paying membership dues.
EFFECTS OF DELINQUENCY
DISCUSSION
Shares of stock become delinquent when no payment is made on the balance of all or any portion of the
subscription on the date or dates fixed in the contract of subscription without need of call, or on the date ** Unpaid subscriptions are payable subject to the subscription contracts,
specified by the board of directors pursuant to a call made by it.
There are two possible remedies available to the corporation to enforce payment of unpaid subscription.
General Rule: where shares are declared delinquent the stockholder loses the following rights: First is by board action under sec 66 to 68, and second by collection case in court under sec 69.
If the date for the payment is stated in the contract a “call” or “demand” is not necessary for payment of A: No, it has another recourse, a direct collection case in court under Sec. 69, because as stated in the
the balance, because Sec 65 says “subject to the provision of the subscription contract’. code there are 2 available rights, by a delinquent sale or by a court action.
If there is failure of the subscriber to pay them on the date specified or on any call or demand made by the Let as assume that the delinquent stocks are irregularly sold, the stockholders can question the validity of
board, by the subscriber who is to pay, an action for collection may be brought thereafter or the board will the sale thereof on 2 conditions, it must go hand in hand. First, he pays or tenders payment to the party
subject the shares to be declared delinquent, and they oath to sell the shares at delinquency sale. holding the stocks for the sum for which it was sold AND Second, the action must be made within 6 months
from the day of the sale, otherwise this right shall forever be barred.
In our scenario a while ago, subscribe to 1M only paid 500T, if the 500T is not paid upon a call made by
the board the entire 1M will be declared delinquent not just the 500T, because he has not paid as we have **discusses Silva vs Aboitiz, Apocada vs NLRC, Lumanlan vs Cura, PNB vs Bituluk sawmill, Edward Keller
said a single share, applied to all the number of shares that he subscribed, the entire 1M shares will be vs COD group
delinquent. Thereafter a board resolution will be issued ordering the sale of the delinquency, specifying
the amount, date, time and place of the said sale, the sale shall not be made less than 30 days but not QUERY: May a stockholder be made liable for the obligations of the corporation?
more than 60 days from the date of the delinquency. Notice of the resolution shall be sent to the
A: Yes, a stockholder is financially liable for the obligations of the corporation, to the extent of his unpaid
stockholder and a publication is required once a week for 2 consecutive weeks. If no payment is made at
subscription, because that is the maximum liability for corporate obligations. They are not liable for the
or before the scheduled date, the sale at public auction will proceed. And the delinquent shares shall be
obligations incurred by the corporation if they have fully paid their subscription.
sold to the bidder who shall offer to pay the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or QUERY: May a creditor file a suit to recover the company’s indebtedness against the company
fraction of a share. It shall then be registered in the name of the winning bidder and the issuance of the itself and all its stockholders?
stock certificate, if there are remaining shares left, if any, it shall be credited to the delinquent stockholder.
A: Yes, but as to the stockholder, only to the extent of his unpaid subscription.
The winning bidder, is the lowest bidder not he highest, because the code says “ it will be sold to the bidder
who tenders the full amount of the balance on the subscription together with accrued interest, costs of QUERY: Is there a prescriptive period within which a demand for the payment of unpaid
advertisement and expenses of sale, for the smallest number of shares or fraction of a share.” subscription should be made?
QUERY: A subscribed to 1M, paid 500T, the corporation will call for the payment, and A failed to A: There is none, if there is any it must be reckoned with from the date it was demanded and it was not
pay on the specified date, his 1M shares will there become delinquent, the corporation may then paid, not from the time of subscription. This is a ruling from Garcia vs Suarez. **(side comment) “In the
sell the 1M at a public auction. X, Y, and Z appears during the bidding, all of them will offer to pay first place why should the corporation made the call for the payment of the unpaid subscription of the
the 500T balance plus interest, costs and expenses, let’s assume that there is 3,000 cause of stockholder if it is creating a lot of profits, hindi naman nila kailangan yang payment ng unpaid subscription
publication, 503,000T all in all. X bids to pay the 503T for 990T shares, Y will bid 503T for 980T na yan. What is its purpose.
shares, and Z will bid 503T for 975T shares. Who is the winning bidder?
**Of course, if there is a demand and it is not paid that would be the time, that prescription will set in.
A: Z, the lowest bidder.
QUERY: Now what happens if the shares are delinquent, what happens to the stockholder per se?
Thereafter the 975T shares shall be recorded in the name of winning bidder. The remaining 25T shares
shall be registered in the name of the delinquent stockholder, all his subscriptions are already paid up. A: The stockholder whose shares are delinquent will have no right to vote or to be voted for, he losses all
his right as a stockholder, except the right to receive dividends in accordance with the provisions of this
Now the code says, in case there are no bidders the corporation maybe, subject to the provisions of the code. So you are looking at Sec 42 second paragraph “when the shares of stock are delinquent any cash
code. Let us see, the right of the corporation to acquire its own shares, general rule, in order that it may dividend will first be applied to unpaid balance, including cost, expenses and interest, and if it is by way of
do so it must have unrestricted retained earnings. stock dividend it will be withheld for the delinquent stockholder until full payment of the delinquency.”
QUERY: Let us see, the corporation made the call for the payment of the unpaid subscription of QUERY: Lets’ see, asked about 12 years ago in the bar exam, if the delinquent stockholder is also
the stockholder because it has been incurring losses, it did not make any profits for the year and a director will he lose his right to be and act as such director upon declaration of delinquency?
it has debts to pay. In order to pay for its responsibilities, it made the call. A among others did not
pay on the date specified in the call, so his shares were declared delinquent, the corporation opted A: NO, his shares shall still remain in his name in the books of corporation and until and unless all his
to sell his shares at a delinquency sale, no bidder appeared, may the corporation bid? shares are taken by a winning bidder, he is still a stockholder of his shares. And even if his shares are
bidded out in a delinquency sale, some shares will remain in his name. Unless of course, in the next
A: No, they cannot bid, because it has no unrestricted retain earnings, kaya nga nag call eh kasi walang subsequent election he is not elected.
kita.
QUERY: If a stockholder concerned is not delinquent, what right will the holder of unpaid
QUERY: So, if that be the case, the corporation cannot bid because it has no URE is the corporation subscription has?
now left without recourse to enforce the payment of the unpaid subscription of the SH?

A: Sec 71, which I have said is very important, Holders of subscribed shares not fully paid and are not a. The circumstances as to how the certificate was lost, stolen or destroyed;
delinquent shall have all the rights of a stockholder. The only exception to that statement or that provision b. The number of shares represented by such certificate;
is that, he is not entitled to the issuance of certificate of stock, because the code says it will never be c. The serial number of the certificate; and
issued until the full amount of his subscription has been paid in full. d. The name of the corporation which issued the same.
2. He shall also submit such other information and evidence which he may deem necessary.
3. Publication of a notice in a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for 3 consecutive weeks at the expense of
LOST OR DESTROYED CERTIFICATES
the registered owner of such certificate of stock. The notice shall state:
One of the basic rights of a stock holder is the right to secure the issuance of a new stock certificate in a. the name of the corporation,
case the same is lost or destroyed. b. the name of the registered owner, the serial number of the certificate, the number
of shares represented by such certificate, and
SEC. 72. Lost or Destroyed Certificates. – The following procedure shall be followed by a c. shall state that after the expiration of one (1) year from the date of the last
corporation in issuing new certificates of stock in lieu of those which have been lost, stolen or publication, if no contest has been presented within 1 year from the date of the last
destroyed: publication, the right to make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost, stolen or destroyed
(a) The registered owner of a certificate of stock in a corporation or such person’s legal and issue in lieu thereof new certificate of stock.
representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the Note however, that the registered owner may file a bond or other
circumstances as to how the certificate was lost, stolen or destroyed, the number of shares security, effective for a period of 1 year, for such amount and in such form and with
represented by such certificate, the serial number of the certificate and the name of the corporation such sureties as may be satisfactory to the board of directors, in which case a new
which issued the same. The owner of such certificate of stock shall also submit such other certificate may be issued even before the expiration of the one 1 year period.
information and evidence as may be deemed necessary; and 4. If a contest has been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock, the issuance of the new certificate of stock
(b) After verifying the affidavit and other information and evidence with the books of the shall be suspended until the final decision by the court regarding the ownership of said
corporation, the corporation shall publish a notice in a newspaper of general circulation in the certificate of stock.
place where the corporation has its principal office, once a week for three (3) consecutive weeks
at the expense of the registered owner of the certificate of stock which has been lost, stolen or Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action
destroyed. The notice shall state the name of the corporation, the name of the registered owner, may be brought against any corporation which shall have issued certificate of stock in lieu of those lost,
the serial number of the certificate, the number of shares represented by such certificate, and shall stolen or destroyed pursuant to the procedure above-described.
state that after the expiration of one (1) year from the date of the last publication, if no contest has
been presented to the corporation regarding the certificate of stock, the right to make such contest RATIONALE of the reissuance of CoS:
shall be barred and the corporation shall cancel the lost, destroyed or stolen certificate of stock in
its books. In lieu thereof, the corporation shall issue a new certificate of stock, unless the 1. To avoid duplication of certificates of stock;
registered owner files a bond or other security as may be required, effective for a period of one (1) 2. To avoid fictitious and fraudulent transfers; and
year, for such amount and in such form and with such sureties as may be satisfactory to the board 3. To protect the corporation against damage from whatever source arising from the issuance of
of directors, in which case a new certificate may be issued even before the expiration of the one the duplicate certificate including liability to the holder of the original certificate or to innocent
(1) year period provided herein. If a contest has been presented to the corporation or if an action holders of certificate based on the duplicate.
is pending in court regarding the ownership of the certificate of stock which has been lost, stolen
Thus, the BOD has the authority to decide the amount and the kind of surety bond that may be required
or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until
for the issuance of a certificate of stock, in lieu of the lost or destroyed one, if the same is to be issued
the court renders a final decision regarding the ownership of the certificate of stock which has
prior to the expiration of the 1 year period provided by Sec. 72.
been lost, stolen or destroyed.
RIGHTS AND LIABILITIES OF STOCKHOLDERS
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no
action may be brought against any corporation which shall have issued certificate of stock in lieu Certain basic rights for the protection of stockholders:
of those lost, stolen or destroyed pursuant to the procedure above-described.
1. Participation in the management of the corporate affairs by exercising their right to vote and be
Requirements and procedure for issuance of new certificates of stock in lieu of those lost, stolen or voted upon either personally or by proxy;
destroyed: 2. To enter into a voting trust agreement;
3. To receive dividends and to compel their declaration if warranted;
1. The registered owner of a certificate of stock in a corporation or his legal representative shall
4. To transfer shares of stock subject only to reasonable restrictions inclusive of the right of the
file with the corporation an affidavit in triplicate setting forth:
transferee to compel the registration of the transfer in the books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares; 2. When will the replacement of the certificate of stock be issued as a general rule?
6. To exercise pre-emptive rights;
7. To exercise their appraisal right; A: After the expiration of one (1) year from the date of the last publication, if no contest has been
8. To institute and file a derivative suit; presented to the corporation regarding the certificate of stock, the corporation shall issue a new
9. To recover shares of stock unlawfully sold for delinquency; certificate of stock.
10. To inspect the books of the corporation;
11. To be furnished the most recent financial statements of the corporation; 3. What if there is a contest or a pending action in court regarding the ownership of the CoS, may
12. To be issued a new stock certificate in lieu of the lost or destroyed one; it be issued after 1 year?
13. To have the corporation dissolved;
14. To participate in the distribution of the assets of the corporation upon dissolution; A: No, the issuance of the new certificate of stock shall be suspended until the final decision by the court
15. In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and regarding the ownership of said certificate of stock.
16. In the case of a close corporation, to withdraw therefrom, for any reason, and to compel the
purchase of his shares. 4. Assuming there is no contest may the replacement certificate be issued earlier than 1 year?
Certain obligations and liabilities of stockholders: A: Yes, it may be issued earlier than 1 yr. under the code the registered owner may file a bond or other
security, effective for a period of 1 year, for such amount and in such form and with such sureties as may
1. To pay the corporation the balance of his unpaid subscriptions; be satisfactory to the board of directors, in which case a new certificate may be issued even before
2. To pay interest on his unpaid subscription if required by the by-laws or by the contract of the expiration of the one 1 year period.
subscription;
3. To answer to creditors for the unpaid portion of their subscription; 5. Pending issuance of the replacement certificate, may the owner of the lost, destroyed, or stolen
4. To answer the “water” in their stocks; certificate transfer the shares covered by the lost, stolen or destroyed one?
5. To be liable, as general partners, for all debts, liabilities and damages of ostensible
A: No, he cannot, it may be transferred by indorsement and delivery.
corporations; and
6. In case of a close corporation, to be personally liable for corporate torts when they actively 6. Can he transfer it through a notarize deed?
participate in the management of the corporation.
A: No, it cannot be transferred through a notarized deed, because as held in rural bank (lipa) case, if the
RECIT and DISCUSSION certificate of stock has already been issued it cannot be transferred by a mere notarized deed, it must be
transferred by indorsement and delivery of the Stock Certificate to the transferee, if the parties want it to
1. If the certificate of stock is lost, stolen or destroyed what should be done?
be notarized they can do so, but it will not be valid and binding until and unless there is indorsement and
A: delivery. In this case there is already an issued certificate of stock, but it was L, S, or D.
1. The registered owner of a certificate of stock in a corporation or his legal representative shall 7. May the corporate officers be held liable for the unauthorized issuance of a new certificate of
file with the corporation an affidavit in triplicate setting forth: stock?
a. The circumstances as to how the certificate was lost, stolen or destroyed; A: General rule, NO. Except in case of fraud, bad faith, or gross negligence on the part of the corporation
b. The number of shares represented by such certificate; and its officers. **Actually, this is a reiteration of Sec. 30, where corporate directors and officers may be
c. The serial number of the certificate; and held personally or solidarilly liable with the corporation, when they vote or assent to patently unlawful acts
d. The name of the corporation which issued the same. or for bad faith or gross negligence in the conduct of the corporate affairs.
2. He shall also submit such other information and evidence which he may deem necessary.
3. Publication of a notice in a newspaper of general circulation published in the place where the **The rationale of sec 72 is to 1. To avoid duplication of certificates of stock; 2. To avoid fictitious and
corporation has its principal office, once a week for 3 consecutive weeks at the expense of the fraudulent transfers; and 3. To protect the corporation against damage from whatever source arising from
registered owner of such certificate of stock. The notice shall state: the issuance of the duplicate certificate including liability to the holder of the original certificate or to
a. the name of the corporation, innocent holders of certificate based on the duplicate.
b. the name of the registered owner, the serial number of the certificate, the number
of shares represented by such certificate, and
a. shall state that after the expiration of one (1) year from the date of the last
publication, if no contest has been presented within 1 year from the date of the last CHAPTER XI - CORPORATE BOOKS AND RECORDS
publication, the right to make such contest shall be barred and said corporation shall
SEC. 73. Books to be Kept; Stock Transfer Agent. – Every corporation shall keep and carefully
cancel in its books the certificate of stock which has been lost, stolen or destroyed
preserve at its principal office all information relating to the corporation including, but not limited
and issue in lieu thereof new certificate of stock.
to:

(a) The articles of incorporation and bylaws of the corporation and all their amendments; the demand to examine or reproduce corporate records, or is a competitor, director, officer,
(b) The current ownership structure and voting rights of the corporation, including lists of controlling stockholder or otherwise represents the interests of a competitor.
stockholders or members, group structures, intra-group relations, ownership data, and
beneficial ownership; If the corporation denies or does not act on a demand for inspection and/or reproduction, the
(c) The names and addresses of all the members of the board of directors or trustees and aggrieved party may report such to the Commission. Within five (5) days from receipt of such
the executive officers; report, the Commission shall conduct a summary investigation and issue an order directing the
(d) A record of all business transactions; inspection or reproduction of the requested records.
(e) A record of the resolutions of the board of directors or trustees and of the stockholders
Stock corporations must also keep a stock and transfer book, which shall contain a record of all
or members;
stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid
(f) Copies of the latest reportorial requirements submitted to the Commission; and
on all stocks for which subscription has been made, and the date of payment of any installment; a
(g) The minutes of all meetings of stockholders or members, or of the board of directors or
statement of every alienation, sale or transfer of stock made, the date thereof, by and to whom
trustees. Such minutes shall set forth in detail, among others: the time and place of the
made; and such other entries as the bylaws may prescribe. The stock and transfer book shall be
meeting held, how it was authorized, the notice given, the agenda therefor, whether the
kept in the principal office of the corporation or in the office of its stock transfer agent and shall
meeting was regular or special, its object if special, those present and absent, and every
be open for inspection by any director or stockholder of the corporation at reasonable hours on
act done or ordered done at the meeting. Upon the demand of a director, trustee,
business days.
stockholder or member, the time when any director, trustee, stockholder or member
entered or left the meeting must be noted in the minutes; and on a similar demand, the A stock transfer agent or one engaged principally in the business of registering transfers of stocks
yeas and nays must be taken on any motion or proposition, and a record thereof in behalf of a stock corporation shall be allowed to operate in the Philippines upon securing a
carefully made. The protest of a director, trustee, stockholder or member on any action license from the Commission and the payment of a fee to be fixed by the Commission, which shall
or proposed action must be recorded in full upon their demand. be renewable annually: Provided, That a stock corporation is not precluded from performing or
making transfers of its own stocks, in which case all the rules and regulations imposed on stock
Corporate records, regardless of the form in which they are stored, shall be open to inspection by
transfer agents, except the payment of a license fee herein provided, shall be applicable: Provided,
any director, trustee, stockholder or member of the corporation in person or by a representative at
further, That the Commission may require stock corporations which transfer and/or trade stocks
reasonable hours on business days, and a demand in writing may be made by such director,
in secondary markets to have an independent transfer agent.
trustee or stockholder at their expense, for copies of such records or excerpts from said records.
The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing Records to be kept and maintained by the corporation:
laws, such as the rules on trade secrets or processes under Republic Act No. 8293, otherwise
known as the “Intellectual Property Code of the Philippines”, as amended, Republic Act No. 10173, (a) The articles of incorporation and bylaws of the corporation and all their
otherwise known as the “Data Privacy Act of 2012”, Republic Act No. 8799, otherwise known as amendments;
“The Securities Regulation Code”, and the Rules of Court. (b) The current ownership structure and voting rights of the corporation, including lists
of stockholders or members, group structures, intra-group relations, ownership data,
A requesting party who is not a stockholder or member of record, or is a competitor, director, and beneficial ownership;
officer, controlling stockholder or otherwise represents the interests of a competitor shall have no (c) The names and addresses of all the members of the board of directors or trustees
right to inspect or demand reproduction of corporate records. and the executive officers;
(d) A record of all business transactions;
Any stockholder who shall abuse the rights granted under this section shall be penalized under
(e) A record of the resolutions of the board of directors or trustees and of the
Section 158 of this Code, without prejudice to the provisions of Republic Act No. 8293, otherwise
stockholders or members;
known as the “Intellectual Property Code of the Philippines”, as amended, and Republic Act No.
(f) Copies of the latest reportorial requirements submitted to the Commission; and
10173, otherwise known as the “Data Privacy Act of 2012”.
(g) The minutes of all meetings of stockholders or members, or of the board of directors
Any officer or agent of the corporation who shall refuse to allow the inspection and/or reproduction or trustees. Such minutes shall set forth in detail, among others: the time and place
of records in accordance with the provisions of this Code shall be liable to such director, trustee, of the meeting held, how it was authorized, the notice given, the agenda therefor,
stockholder or member for damages, and in addition, shall be guilty of an offense which shall be whether the meeting was regular or special, its object if special, those present and
punishable under Section 161 of this Code: Provided, That if such refusal is made pursuant to a absent, and every act done or ordered done at the meeting. Upon the demand of a
resolution or order of the board of directors or trustees, the liability under this section for such director, trustee, stockholder or member, the time when any director, trustee,
action shall be imposed upon the directors or trustees who voted for such refusal: Provided, stockholder or member entered or left the meeting must be noted in the minutes;
further, That it shall be a defense to any action under this section that the person demanding to and on a similar demand, the yeas and nays must be taken on any motion or
examine and copy excerpts from the corporation’s records and minutes has improperly used any proposition, and a record thereof carefully made. The protest of a director, trustee,
information secured through any prior examination of the records or minutes of such corporation stockholder or member on any action or proposed action must be recorded in full
or of any other corporation, or was not acting in good faith or for a legitimate purpose in making upon their demand.

Note: the list is not exclusive copying thereof, shall be guilty of an offense which shall be punishable under Section 161 of
this Code.
Note: Basis of the right is to protect his interest as a stockholder. Thus, it has been said that: “The right
of the shareholders to ascertain how the affairs of his company are being conducted by its directors and NOTE: That if such refusal is made pursuant to a resolution or order of the board of directors or trustees,
officers is founded by his beneficial interest through ownership of shares and the necessity of self- the liability under this section for such action shall be imposed upon the directors or trustees who voted
protection. Managers of some corporations deliberately keep the shareholders in ignorance or under for such refusal.
misapprehension as to the true condition of its affairs. Business prudence demands that the investor keep
a watchful eye on the management and the condition of the business. Those in charge of the company NOTE: General Rule: Any officer or agent of the corporation who refuses to allow the inspection of
may be guilty of gross incompetence or dishonesty for years and escape liability if the shareholders cannot corporate books and records, or any director or trustee who through a resolution by the board votes for
inspect the records and obtain information.” such refusal shall be liable for damages and shall be guilty of an offense which shall be punishable under
Sec. 161. Except that they may set as a defense to any action any of the following:
Note: The right of the stockholder to examine corporate books extends to a wholly owned subsidiary
which is completely under the control and management of the parent company where he is such a 1. the person demanding to examine and copy excerpts from the corporation’s records and
stockholder. But if the two entities are legally being operated as separate and distinct entities, there is no minutes has improperly used any information secured through any prior examination of
such right of inspection on the part of the stockholder of the parent company. the records or minutes of such corporation or of any other corporation, or
2. was not acting in good faith or for a legitimate purpose in making the demand to examine
Note it may be delegated to an AGENT, while the right is founded on stock ownership, thus personal in or reproduce corporate records, or
nature, it may be made by the stockholder’s agent or representative since it may be unavailing in many 3. is a competitor, director, officer, controlling stockholder or otherwise represents the interests
instances. of a competitor.
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or member, the right of a director Attendance of the above defenses can be a valid ground to refuse the demanding person inspection of
or trustee to inspect and examine corporate books and records is considered absolute and unqualified the records. Also, when the records of the corporation are not within the possession of the corporation, it
and without regard to motive. This is because a director supervises, directs and manages corporate may be a valid ground to refuse inspection of the books. Like for example if such is with the auditors for
business and it is necessary that he be equipped with all the information and data with regard to the affairs audit purposes.
of the company in order that he may manage and direct its operations intelligently and according to this
best judgment in the interest of all the stockholders he represents. The DEFENSE OF CORPRATE OFFICERS is reiterated in the case Gonzales vs PNB:
Thus, while stockholders and members are entitled to inspect and examine the books and records as 1. That the person demanding has improperly used any information secured through any prior examination
provided in Sec. 73 and 74, they may not gain access to highly sensitive and confidential information. In of the records or minutes of such corporation or any other corporation;
the case of directors, “it is not denied” that they have such access. This would include, among others, (a)
2. That he was not acting in good faith or for a legitimate purpose in making his demand; or
marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel, proposals for mergers or tie-ups with 3. The right is limited or restricted by special law or the law of its creation.
other firms.”
Note: STOCKHOLDERS MAY ALSO BE PENALIZED: SEC 73 PROVIDES “Any stockholder who shall
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE RIGHT TO INSPECT THE abuse the rights granted under this section shall be penalized under Section 158 of this Code,
CORPORATE BOOKS: without prejudice to the provisions of Republic Act No. 8293, otherwise known as the “Intellectual
Property Code of the Philippines”, as amended, and Republic Act No. 10173, otherwise known as
1. Filing of Mandamus.
the “Data Privacy Act of 2012”.”
If the corporation denies or does not act on a demand for inspection and/or reproduction, the aggrieved
Note: Stockholders may not be unduly or arbitrarily refused inspection of the corporate books and records,
party may report such to the Commission. Within five (5) days from receipt of such report, the Commission
however, such right is not absolute as there may be some information which the corporation may
shall conduct a summary investigation and issue an order directing the inspection or reproduction of the
undoubtedly keep secret such as highly sensitive and confidential information.
requested records. (newly added paragraph in sec 73). In such event, the corporate secretary shall be
included as a party respondent since he is customarily charged with the custody of all documents or Note: Sec 73 now provides that “A requesting party who is not a stockholder or member of record,
records of the corporation and against whom personal order of the court would be made; or is a competitor, director, officer, controlling stockholder or otherwise represents the interests
of a competitor shall have no right to inspect or demand reproduction of corporate records.” THIS
2. Damages either against the corporation or the responsible officer who refused the inspection;
WAS PREVIOUSLY ONLY A JURISPRUDENCE AS HELD IN THE CASE GOKOWNGWEI.
or
3. Criminal complaint for violation of his right to inspect and copy excerpts of all business Note: A stock transfer agent was previously disallowed, now it is allowed. A stock transfer agent
transactions and minutes of meetings. The officer or agent who refused the examination or or one engaged principally in the business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines.
Requisites for stock transfer agent: corporation. As it stands now: At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a financial report of the
1. Upon securing a license from the Commission and operations of the corporation for the preceding year, which shall include financial statements, duly
2. The payment of a fee to be fixed by the Commission, which shall be renewable annually: signed and certified in accordance with this Code, and the rules the Commission may prescribe.
a. Provided, That a stock corporation is not precluded from performing or making However, if the total assets or total liabilities of the corporation is less than Six hundred thousand
transfers of its own stocks, in which case all the rules and regulations imposed on pesos (P600,000.00), or such other amount as may be determined appropriate by the Department
stock transfer agents, except the payment of a license fee herein provided, shall be of Finance, the financial statements may be certified under oath by the treasurer and the president.
applicable:
b. Provided, further, That the Commission may require stock corporations which CASES:
transfer and/or trade stocks in secondary markets to have an independent transfer
agent. [G.R. No. L-15568; November 8, 1919] W. G. PHILPOTTS, petitioner, vs. PHILIPPINE
MANUFACTURING COMPANY and F. N. BERRY, respondents.
STOCK AND TRANSFER AGENT is the person who records every movement of the shares by the minute
or by the hour. ISSUE: Whether the right the law concedes to a stockholder may be exercised by a proper agent or
attorney?
NON-STOCK CORPORATIONS can also have a stock and transfer agent for purposes of the club share-
membership. For non-stock corporation, Membership Book is kept in lieu of Stock and Transfer Book. HELD: Yes. The right of inspection given to a stockholder can be exercised either by himself or by
any proper representative or attorney in fact, and either with or without the attendance of the
Note: Corporate records, regardless of the form in which they are stored, shall be open to inspection by stockholder. This is in conformity with the general rule that what a man may do in person he may
any director, trustee, stockholder or member of the corporation in person or by a representative at do through another; and we find nothing in the statute that would justify us in qualifying the right
reasonable hours on business days, and a demand in writing may be made by such director, trustee in the manner suggested by the respondents.
or stockholder at their expense, for copies of such records or excerpts from said records.
This conclusion is supported by the undoubted weight of authority in the United States, where it is generally
In so far as Financial Statements are concerned, the Code provides: held that the provisions of law conceding the right of inspection to stockholders of corporations are to be
liberally construed and that said right may be exercised through any other properly authorized person. As
SEC. 74. Right to Financial Statements. – A corporation shall furnish a stockholder or member, was said in Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in the sense that only
within ten (10) days from receipt of their written request, its most recent financial statement, in the a stockholder may enjoy it; but the inspection and examination may be made by another. Otherwise it
form and substance of the financial reporting required by the Commission. would be unavailing in many instances." An observation to the same effect is contained in Martin vs.
Bienville Oil Works Co. (28 La., 204), where it is said: "The possession of the right in question would be
At the regular meeting of stockholders or members, the board of directors or trustees shall present
futile if the possessor of it, through lack of knowledge necessary to exercise it, were debarred the right of
to such stockholders or members a financial report of the operations of the corporation for the
procuring in his behalf the services of one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.],
preceding year, which shall include financial statements, duly signed and certified in accordance
108), the court said: "That stockholders have the right to inspect the books of the corporation, taking
with this Code, and the rules the Commission may prescribe.
minutes from the same, at all reasonable times, and may be aided in this by experts and counsel,
However, if the total assets or total liabilities of the corporation is less than Six hundred thousand so as to make the inspection valuable to them, is a principle too well settled to need discussion."
pesos (P600,000.00), or such other amount as may be determined appropriate by the Department Authorities on this point could be accumulated in great abundance, but as they may be found cited in any
of Finance, the financial statements may be certified under oath by the treasurer and the president. legal encyclopedia or treaties devoted to the subject of corporations, it is unnecessary here to refer to
other cases announcing the same rule.
Note: Previous rule: Within ten (10) days from receipt of a written request of any stockholder or member,
the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as prayed, unless within
as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in 5 days from notification hereof the respondents answer to the merits.
reasonable detail its assets and liabilities and the result of its operations. As it stands now: A corporation
[G.R. No. L-22442; August 1, 1924] ANTONIO PARDO, petitioner, vs. THE HERCULES LUMBER CO.,
shall furnish a stockholder or member, within ten (10) days from receipt of their written request,
INC., and IGNACIO FERRER, respondents
its most recent financial statement, in the form and substance of the financial reporting required
by the Commission. ISSUE: Whether the BOD may choose specific performance and particular dates when the right of
inspection may be exercised?
Note: Previous rule: At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of the corporation for HELD: No. The general right given by the statute may not be lawfully abridged to the extent
the preceding year, which shall include financial statements, duly signed and certified by an independent attempted in this resolution. It may be admitted that the officials in charge of a corporation may
certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the deny inspection when sought at unusual hours or under other improper conditions; but neither
financial statements may be certified under oath by the treasurer or any responsible officer of the the executive officers nor the board of directors have the power to deprive a stockholder of the

right altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. ISSUE: Whether the petitioner may be properly denied examination of the books and records of San Miguel
Authorities to this effect are too numerous and direct to require extended comment. (14 C.J., 859; International, Inc., a fully owned subsidiary of SMC?
7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107
Am., St. Rep., 664. 681.) HELD: No. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the inspection of
The demurrer is, therefore, sustained; and the writ of mandamus will issue as prayed, with the costs any director, member or stockholder of the corporation at reasonable hours."
against the respondent.
The stockholder's right of inspection of the corporation's books and records is based upon their ownership
[G.R. No. L-37064; October 4, 1932] EUGENIO VERAGUTH, Director and Stockholder of the Isabela of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
Sugar Company, Inc., petitioner, vs. ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
President, and AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents. a ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority
of the courts that where the right is granted by statute to the stockholder, it is given to him as such and
ISSUE: Whether the corporate secretary is justified in refusing to furnish copies of the minutes of the must be exercised by him with respect to his interest as a stockholder and for some purpose germane
meeting of the BOD? thereto or in the interest of the corporation. In other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the
HELD: Yes. The Corporation Law, section 51, provides that:
interest of the corporation. In Grey v. Insular Lumber, this Court held that "the right to examine the books
“All business corporations shall keep and carefully preserve a record of all business transactions, and a of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify
minute of all meetings of directors, members, or stockholders, in which shall be set forth in detail the time curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious
and place of holding the meeting was regular or special, if special its object, those present and absent, purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the
and every act done or ordered done at the meeting. . . . right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and
motives in seeking inspection. Thus, it was held that "the right given by statute is not absolute and may be
The record of all business transactions of the corporation and the minutes of any meeting shall be open to refused when the information is not sought in good faith or is used to the detriment of the corporation." But
the inspection of any director, member, or stockholder of the corporation at reasonable hours.” the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if
the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the
The above puts in statutory form the general principles of Corporation Law. Directors of a corporation stockholder the burden of showing propriety of purpose and place upon the corporation the burden of
have the unqualified right to inspect the books and records of the corporation at all reasonable showing impropriety of purpose or motive. It appears to be the general rule that stockholders are entitled
times. Pretexts may not be put forward by officers of corporations to keep a director or shareholder to full information as to the management of the corporation and the manner of expenditure of its funds,
from inspecting the books and minutes of the corporation, and the right of inspection is not to be and to inspection to obtain such information, especially where it appears that the company is being
denied on the ground that the director or shareholder is on unfriendly terms with the officers of mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the
the corporation whose records are sought to be inspected. A director or stockholder cannot of stockholders to the exclusion of others."
course make copies, abstracts, and memoranda of documents, books, and papers as an incident
to the right of inspection, but cannot, without an order of a court, be permitted to take books from While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is
the office of the corporation. We do not conceive, however, that a director or stockholder has any a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
absolute right to secure certified copies of the minutes of the corporation until these minutes have subsidiary of the corporation in which he is a stockholder is a different thing.
been written up and approved by the directors. (See Fisher's Philippine Law of Stock Corporations,
sec. 153, and Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.) Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held
that where a corporation owns approximately no property except the shares of stock of subsidiary
Combining the facts and the law, we do not think that anything improper occurred when the secretary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
declined to furnish certified copies of minutes which had not been approved by the board of directors, and distinct corporate entities may be disregarded and the books, papers and documents of all the corporations
that while so much of the last resolution of the board of directors as provides for prior approval of the may be required to be produced for examination, and that a writ of mandamus, may be granted, as the
president of the corporation before the books of the corporation can be inspected puts an illegal obstacle records of the subsidiary were, to all incontents and purposes, the records of the parent even though
in the way of a stockholder or director, that resolution, so far as we are aware, has not been enforced to subsidiary was not named as a party. Mandamus was likewise held proper to inspect both the subsidiary's
the detriment of anyone. In addition, it should be said that this is a family dispute, the petitioner and the and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the
individual respondents belonging to the same family; that a test case between the petitioner and the relation of principal or agent or something similar thereto.
respondents has not been begun in the Court of First Instance of Occidental Negros involving hundreds
of thousands of pesos, and that the appellate court should not intrude its views to give an advantage to On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
either party. We rule that the petitioner has not made out a case for relief by mandamus. is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and
is not legally subject to the control of the parent company, although it owned a vast majority of the stock
GOKONGWEI VS. SEC (supra) of the subsidiary. Likewise, inspection of the books of an allied corporation by stockholder of the parent

company which owns all the stock of the subsidiary has been refused on the ground that the stockholder As may be noted from the above-quoted provisions, among the changes introduced in the new Code with
was not within the class of "persons having an interest." respect to the right of inspection granted to a stockholder are the following (1) the records must be kept at
the principal office of the corporation; (2) the inspection must be made on business days; (3) the
In the Nash case, The Supreme Court of New York held that the contractual right of former stockholders stockholder may demand a copy of the excerpts of the records or minutes; (4) and the refusal to allow
to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities.
books and records which were in corporation's possession and control in its office in New York."
However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the
In the Bailey case, stockholders of a corporation were held entitled to inspect the records of a controlled same. It is now expressly required as a condition for such examination that (1) the one requesting it must
subsidiary corporation which used the same offices and had identical officers and directors. not have been guilty of using improperly any information through a prior examination, and (2) that the
person asking for such examination must be "acting in good faith and for a legitimate purpose in making
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
his demand."
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as
corporation as extending to books and records of such wholly-owned subsidiary which are in respondent amended, no longer holds true under the provisions of the present law. The argument of the petitioner that
corporation's possession and control. the right granted to him under Section 51 of the former Corporation Law should not be dependent on the
propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine
whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness
the books and records of San Miguel International, Inc., as specified by him.
of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation
[G.R. No. L-33320; May 30, 1983] RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL Law must be dependent on a showing of proper motive on the part of the stockholder demanding the
BANK, respondent. same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
ISSUE: Whether the petitioner is correct in saying that he has an unqualified right to inspect the books as
provided under Sec. 51 of the Corporation Law? ISSUE2: Whether petitioner is in good faith in the exercise of his right to inspect the books of PNB?
HELD: No. Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, HELD: No. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of
regarding the right of a stockholder to inspect and examine the books and records of a corporation. The the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires
former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions
otherwise known as the "Corporation Code of the Philippines." entered into by the respondent bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not
The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order
with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 to pry into transactions entered into by the respondent bank even before he became a stockholder. His
provide the following: obvious purpose was to arm himself with materials which he can use against the respondent bank for acts
done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a
“The records of all business transactions of the corporation and the minutes of any meeting shall be open laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest
to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on as a stockholder.
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense. ISSUE3: Whether the right of a stockholder to inspect the books provided under Sec. 74 of the Corporation
Code is applicable to PNB?
Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with HELD: No. We also find merit in the contention of the respondent bank that the inspection sought to be
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:
Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be imposed upon the directors or trustees who voted Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. — The National
for such refusal; and Provided, further, That it shall be a defense to any action under this section that the Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank'
person demanding to examine and copy excerpts from the corporation's records and minutes has
Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General, or other
improperly used any information secured through any prior examination of the records or minutes of such
officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to
corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making
any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors
his demand.”
the details of the inspection or investigation, nor shall they give any information relative to the funds in its

custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, A: They may 1. File for mandamus, if the corporation denies or does not act on a demand for inspection
except by order of a Court of competent jurisdiction,' and/or reproduction, to the Commission. 2. They may also file Damages either against the corporation or
the responsible officer who refused the inspection; or 3. A criminal complaint for violation of his right to
Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer, employee, or agent of inspect and copy excerpts of all business transactions and minutes of meetings.
the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten **mandamus, claim for damages, and criminal complaint, under sec 161 a fine of 10T to 200T at the
thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment. discretion of the court, but when the violation is injurious or detrimental to the public, the penalty is a fine
20T to 400T. Without prejudice to the contempt powers of the SEC under Sec 157 also if the corporation
The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, the corporation denies or does not act upon demand of inspection or reproduction the aggrieved party may
as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides: report the same to the SEC, within 5 days from the date of such report the SEC shall conduct a summary
investigation and they shall order directly the inspection or reproduction thereof. The inspecting or
SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or
reproducing party however shall be bound by the confidentiality rule, under the prevailing law, and any
charters shall be governed primarily by the provisions of the special law or charter creating them or
stockholder who abuses the right shall be penalized under Sec 158 imposing a penalty of 5T to maximum
applicable to them. supplemented by the provisions of this Code, insofar as they are applicable.
of 2M pesos.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the
6. If the responsible officers deny the right to inspection, may they advance some justifications for
right of a stockholder to demand an inspection or examination of the books of the corporation may not be
their refusal to inspect the books and records so that they will not be liable?
reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim,
therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a A: The code provides that “it shall be a defense of a corporate director or trustee or officer that
supplementary capacity to the charter of the respondent bank.
1. the person demanding to examine and copy excerpts from the corporation’s records and
RECIT and DISCUSSION minutes has improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or
**the corporation code requires every corporation to keep books and records. Among others are: the AoI;
2. was not acting in good faith or for a legitimate purpose in making the demand to examine or
the by-laws, and amendments thereto; current structure of ownership; the name and addresses of directors
reproduce corporate records, or
or trustees, and other executive officers; records of all business transactions; the resolutions of the BoD
3. is a competitor, director, officer, controlling stockholder or otherwise represents the interests of
or SH; copies of latest reportorial requirements submitted to the commission; including of course, the
a competitor.
audited financial statements.
7. What is this stock and transfer book all about?
1. This books and records may they be examined?
A: It is a record containing a list of stockholders, the amount paid by them and the transfers made thereon,
A: Yes, they may be. Under the code it provides that corporate records, regardless of the form in which
etc.
they are stored, shall be open to inspection by any director, trustee, stockholder or member of the
corporation in person or by a representative at reasonable hours on business days. 8. Where should the stock and transfer book be kept?
2. May outsider do so? A: The stock and transfer book shall be kept in the principal office of the corporation or in the office of its
stock transfer agent.
A: No, they may not examine. Under the code it provides that “A requesting party who is not a stockholder
or member of record, or is a competitor, director, officer, controlling stockholder or otherwise represents 9. How about the financial statements, are stockholders or members entitled to a copy thereof?
the interests of a competitor shall have no right to inspect or demand reproduction of corporate records.”
A: under the code it provides that “A corporation shall furnish a stockholder or member, within ten (10)
3. May Stockholders copy them? days from receipt of their written request, its most recent financial statement, in the form and substance of
the financial reporting required by the Commission.”
A: Yes. Under the code it provides that “a demand in writing may be made by such director, trustee or
stockholder at their expense, for copies of such records or excerpts from said records.” 10. What is the basis for the grant of this right of inspection by the stockholder?
4. At whose expense? A: It is founded by his beneficial interest through ownership of shares and the necessity of self-protection
or even preservation.
5. If they are denied the right to inspect the books and records, what remedy or remedies may the
stockholder have? **Those in-charge of management may be held guilty of gross mismanagement, dishonesty or even
incompetence and escape liability if the shareholders cannot inspect the records and obtain information
as to the manner in which the management is running the affairs of the corporation.

11. Is there a distinction between the right of a SH or Member to inspection as may be compared CHAPTER XII- MERGER AND CONSOLIDATION
to the right of a Director or Trustee?
MERGER is a union effected by absorbing one or more existing corporations by another which survives
A: Yes, there is. The right of directors or trustees to inspect the books and records of the corporation is and continues the combined business. It is the uniting of two or more corporations by the transfer of
absolute and unqualified, because directors/trustees directs and manages the corporate business and property to one of them which continue in existence, the other or the others being dissolved and merged
is therefore necessary that they be well equipped with all the information and data with regard to the affairs therein.
of the company in order that he may manage and direct its operations intelligently and according to this
best judgment in the interest of all the stockholders he represents. While the right of a stockholder is Example: It was agreed that B Company will take over and acquire all the business, assets, properties,
subject to the provision of the code. rights and liabilities of C Corporation and by virtue of which B will absorb C which is to be dissolved.
12. This right to inspection by the stockholder, may it be exercised by another? CONSOLIDATION is the uniting or amalgamation of two or more existing corporations to form a new
corporation. It signifies a union as necessarily results in the creation of a new corporation and the
A: Yes, it may be exercised by and agent or representative. As paragraph 2 now states “in person or by a termination of existence of old ones. The united concern resulting from such union is called consolidated
representative”. corporation.
**it can be exercised therefor by the stockholder or by any proper representative or atty-in-fact and even Thus, in the example given, if B and C agreed to form a new corporation, A Company, which will absorb
with or without the assistance of the stockholders. This is more inconformity with the rule that what a man both business, and all of B’s and C’s assets, properties, rights and liabilities are transferred to A which will
can do, he may do so through another. Jurisprudence provides that the right may be personal in nature, continue their combined business while B and C will be dissolved, a consolidation takes place.
but it may be made by another since it may be unavailing in many instance, an ordinary lawyer may not
be able to understand the entries in the financial statement so the stockholder concerned may thus desire Remember: Merger or consolidation may involve two or more corporations. In merger, one absorbs the
to appoint a ___ to inspect financials of the corporation, so that he may be able to grasp more intelligently other and there is a surviving corporation. While in consolidation, new corporation is formed and no
the entries made therein. surviving, except the new corporation and both constituent ceases to exist.
13. Pardo vs Hercules lumber? In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing
or surviving corporation is not, only the absorbed.
14. Vegaruth vs Isabela Sugar Company?
Sec. 35, par. H of the Revised Corporation Code of the Philippines expressly empowers a corporation to
15. May a stockholder of a holding company inspect the books and records of the subsidiary of merge or consolidate with another corporation subject to the requirements and procedure prescribed in
the holding company, if he is not a stockholder of the subsidiary? TITLE IX.
A: Yes, he MAY inspect, provided that the subsidiary is a wholly owned subsidiary which is completely SEC. 75. Plan of Merger or Consolidation. – Two (2) or more corporations may merge into a single
under the control and management of the parent company where he is such a stockholder. corporation which shall be one of the constituent corporations or may consolidate into a new
Jurisprudence provides that the right of the stockholder to examine corporate books extends to a wholly single corporation which shall be the consolidated corporation.
owned subsidiary which is completely under the control and management of the parent company
where he is such a stockholder. But if the two entities are legally being operated as separate and The board of directors or trustees of each corporation, party to the merger or consolidation, shall
distinct entities, there is no such right of inspection on the part of the stockholder of the parent approve a plan of merger or consolidation setting forth the following:
company.
(a) The names of the corporations proposing to merge or consolidate, hereinafter referred to as
16. Gokongwei vs SEC? the constituent corporations;
17. Gonzales vs PNB? (b) The terms of the merger or consolidation and the mode of carrying the same into effect;
18. Assume that Gonzales acted in good faith and properly motivated, may he be allowed to (c) A statement of the changes, if any, in the articles of incorporation of the surviving corporation
inspect? in case of merger; and, in case of consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this Code; and
A: No, he will not be allowed, because the bank has its own charter, it was created by special law, and
under sec 4 of that law as it stands now, corporation created by special law are primarily governed by the (d) Such other provisions with respect to the proposed merger or consolidation as are deemed
law creating it, supplemented only by the general law, which provides “that the financial books and records necessary or desirable.
of PNB is subject to inspection only by the monetary board of the Bangko Sentral and the result of the
SEC. 76. Stockholders’ or Members’ Approval. – Upon approval by a majority vote of each of the
examination may be divulged only to the President of the Republic of the Philippines, the Secretary of
board of directors or trustees of the constituent corporations of the plan of merger or
Finance and of course, the member of the BOD of the bank itself.” And there is even a penal sanction for
consolidation, the same shall be submitted for approval by the stockholders or members of each
any violation of the charter, any person who violates the charter may be subject to a fine.
of such corporations at separate corporate meetings duly called for the purpose. Notice of such Code and existing laws, it shall issue a certificate approving the articles and plan of merger or of
meetings shall be given to all stockholders or members of the respective corporations in the same consolidation, at which time the merger or consolidation shall be effective.
manner as giving notice of regular or special meetings under Section 49 of this Code. The notice
shall state the purpose of the meeting and include a copy or a summary of the plan of merger or If, upon investigation, the Commission has reason to believe that the proposed merger or
consolidation. consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it
shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice
The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital of the date, time, and place of hearing shall be given to each constituent corporation at least two
stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code.
members in the case of nonstock corporations shall be necessary for the approval of such plan.
Any dissenting stockholder may exercise the right of appraisal in accordance with this Code: SEC. 79. Effects of Merger or Consolidation. – The merger or consolidation shall have the following
Provided, That if after the approval by the stockholders of such plan, the board of directors decides effects:
to abandon the plan, the right of appraisal shall be extinguished.
(a) The constituent corporations shall become a single corporation which, in case of merger, shall
Any amendment to the plan of merger or consolidation may be made: Provided, That such be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall
amendment is approved by a majority vote of the respective boards of directors or trustees of all be the consolidated corporation designated in the plan of consolidation;
the constituent corporations and ratified by the affirmative vote of stockholders representing at
(b) The separate existence of the constituent corporations shall cease, except that of the surviving
least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each
or the consolidated corporation;
of the constituent corporations. Such plan, together with any amendment, shall be considered as
the agreement of merger or consolidation. (c) The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and shall be subject to all the duties and liabilities of a corporation
SEC. 77. Articles of Merger or Consolidation. – After the approval by the stockholders or members
organized under this Code;
as required by the preceding section, articles of merger or articles of consolidation shall be
executed by each of the constituent corporations, to be signed by the president or vice president (d) The surviving or the consolidated corporation shall possess all the rights, privileges,
and certified by the secretary or assistant secretary of each corporation setting forth: immunities and franchises of each constituent corporation; and all real or personal property, all
receivables due on whatever account, including subscriptions to shares and other choses in
(a) The plan of the merger or the plan of consolidation;
action, and every other interest of, belonging to, or due to each constituent corporation, shall be
(b) As to stock corporations, the number of shares outstanding, or in the case of nonstock deemed transferred to and vested in such surviving or consolidated corporation without further
corporations, the number of members; act or deed; and
(c) As to each corporation, the number of shares or members voting for or against such plan, (e) The surviving or consolidated corporation shall be responsible for all the liabilities and
respectively; obligations of each constituent corporation as though such surviving or consolidated corporation
had itself incurred such liabilities or obligations; and any pending claim, action or proceeding
(d) The carrying amounts and fair values of the assets and liabilities of the respective companies brought by or against any constituent corporation may be prosecuted by or against the surviving
as of the agreed cut-off date; or consolidated corporation. The rights of creditors or liens upon the property of such constituent
corporations shall not be impaired by the merger or consolidation.
(e) The method to be used in the merger or consolidation of accounts of the companies;
Rationale: The reasons inducing a reorganization are not in every case the same, but for the most part,
(f) The provisional or pro forma values, as merged or consolidated, using the accounting method; they are to be found in the weak financial or insolvent condition of the particular corporations. The
and aim of corporate reorganization or combination is generally to put the company upon a sound financial
basis and to enable it to take care of its obligations thereby avoiding liquidation or bankruptcy. But in
(g) Such other information as may be prescribed by the Commission.
some cases, a reorganization is effected, notwithstanding the fact that the corporation is solvent.
SEC. 78. Effectivity of Merger or Consolidation. – The articles of merger or of consolidation, signed
Note: While a merger or consolidation is a right, granted by law, to corporations registered under the Code,
and certified as required by this Code, shall be submitted to the Commission for its approval:
Act 3518 proscribes illegal combination. It provides, under Sec. 20 thereof that “no corporation engaged
Provided, That in the case of merger or consolidation of banks or banking institutions, loan
in commerce may acquire, directly or indirectly, the whole or any part of the stock or other share capital of
associations, trust companies, insurance companies, public utilities, educational institutions, and
another corporation or corporations engaged in commerce, where the effect of such acquisitions may be
other special corporations governed by special laws, the favorable recommendation of the
to substantially lessen competition between the corporation or corporations whose stock is so acquired
appropriate government agency shall first be obtained. If the Commission is satisfied that the
and the corporation making the acquisition, or between any of them, or to restrain such commerce in any
merger or consolidation of the corporations concerned is consistent with the provisions of this
section community, or tends to create a monopoly of any line of commerce.” Corollary to this is Art. 186 of

the Revised Penal Code which imposes a penalty of imprisonment and/or fine on any person who enters SEC shall set a hearing to give the corporations concerned an opportunity to be heard upon
into a contract or conspiracy to create monopolies and combinations in restraint of trade. notice and thereafter, the Commission shall proceed as provided in the Code.
Note: However, there is no liquidation or winding up of affairs in merger or consolidation. There would be NOTE : Any amendment to the plan of merger or consolidation may be made: Provided, That such
no need to liquidate or wind-up the affairs of the corporation because (1) there are no assets to distribute; amendment is approved by a majority vote of the respective boards of directors or trustees of all the
(2) no debts and liabilities to pay – since all these are transferred to the surviving or consolidated constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds
corporation. (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be considered as the agreement of merger
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION: or consolidation.
1. The BOD/T of each constituent corporations shall approve a plan or merger or EFFECTS OF MERGER OR CONSOLIDATION:
consolidation setting for the following:
a. The names of the corporations proposing to merge or consolidate, hereinafter a) The constituent corporations shall become a single corporation which, in case of merger, shall
referred to as the constituent corporations; be the surviving corporation designated in the plan of merger; and, in case of consolidation,
b. The terms of the merger or consolidation and the mode of carrying the same into shall be the consolidated corporation designated in the plan of consolidation;
effect; b) The separate existence of the constituent corporations shall cease, except that of the surviving
c. A statement of the changes, if any, in the articles of incorporation of the surviving or the consolidated corporation;
corporation in case of merger; and, in case of consolidation, all the statements c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities,
required to be set forth in the articles of incorporation for corporations organized and powers and shall be subject to all the duties and liabilities of a corporation organized under
under this Code; and this Code;
d. Such other provisions with respect to the proposed merger or consolidation as are d) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
deemed necessary or desirable; and franchises of each constituent corporation; and all real or personal property, all receivables
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of due on whatever account, including subscriptions to shares and other choses in action, and
the member in non-stock corporations of each of such corporations at separate corporate every other interest of, belonging to, or due to each constituent corporation, shall be deemed
meetings called for the purpose; transferred to and vested in such surviving or consolidated corporation without further act or
3. Prior notice of such meetings shall be given to all stockholders or members of the respective deed; and
corporations in the same manner as giving notice of regular or special meetings under Section e) The surviving or consolidated corporation shall be responsible for all the liabilities and
49 of this Code. The notice shall state the purpose of the meeting and include a copy or a obligations of each constituent corporation as though such surviving or consolidated
summary of the plan of merger or consolidation; corporation had itself incurred such liabilities or obligations; and any pending claim, action or
4. Execution of the articles of merger or consolidation by each constituent corporations to be proceeding brought by or against any constituent corporation may be prosecuted by or against
signed by the president or vice-president and certified by the corporate secretary or assistant the surviving or consolidated corporation. The rights of creditors or liens upon the property of
secretary setting forth the following: such constituent corporations shall not be impaired by the merger or consolidation.
a. The plan of the merger or the plan of consolidation;
b. As to stock corporations, the number of shares outstanding, or in the case of CASES:
nonstock corporations, the number of members;
[G.R. No. 123793; June 29, 1998] ASSOCIATED BANK, petitioner, vs. COURT OF APPEALS and
c. As to each corporation, the number of shares or members voting for or against such
LORENZO SARMIENTO JR., respondents.
plan, respectively;
d. The carrying amounts and fair values of the assets and liabilities of the respective ISSUE: Whether Associated Bank, the surviving corporation, may enforce the promissory note made by
companies as of the agreed cut-off date; Sarmiento in favor of CBTC, the absorbed company after the effectivity of the merger?
e. The method to be used in the merger or consolidation of accounts of the companies;
f. The provisional or pro forma values, as merged or consolidated, using the HELD: Ordinarily, in the merger of two or more existing corporations, one of the combining corporations
accounting method; and survives and continues the combined business, while the rest are dissolved and all their rights, properties
g. Such other information as may be prescribed by the Commission. and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed
5. Submission of the articles of merger or consolidation to the SEC subject to the requirement corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving
of Sec. 78 that if it involve corporations under direct supervision of any other government corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.
agency or governed by special laws the favorable recommendation of the government agency
concerned shall first be secured; and The merger, however, does not become effective upon the mere agreement of the constituent
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger corporations. The procedure to be followed is prescribed under the Corporation Code. Section 79 of said
or consolidation shall be effective. If the plan, however, is believed to be contrary to law, the Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger
which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent

corporations. The same provision further states that the merger shall be effective only upon the issuance In light of the foregoing, the Court holds that petitioner has a valid cause of action against private
by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the respondent. Clearly, the failure of private respondent to honor his obligation under the promissory note
merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as constitutes a violation of petitioner's right to collect the proceeds of the loan it extended to the former.
liabilities pass on to the surviving corporation.
[G.R. No. 164301; August 10, 2010] BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. BPI
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, which EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS IN BPI UNIBANK, Respondent
Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into,
provided that its effectivity "shall, for all intents and purposes, be the date when the necessary papers to FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed
carry out this merger shall have been approved by the Securities and Exchange Commission." As to the on January 20, 2000 by and between BPI, herein petitioner, and FEBTC. This Article and Plan of Merger
transfer of the properties of CBTC to ABC, the agreement provides: was approved by the Securities and Exchange Commission on April 7, 2000.
“10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC were transferred to and
property of [CBTC], whether real, personal or mixed, and including [CBTC's] goodwill and tradename, and absorbed by BPI as the surviving corporation. FEBTC employees, including those in its different branches
all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of the across the country, were hired by petitioner as its own employees, with their status and tenure recognized
effective date of the merger shall be vested in [ABC], the SURVIVING BANK, without need of further act and salaries and benefits maintained.
or deed”
BPI has an existing Union Shop Clause agreement with the BPI Employees Union-Davao Chapter-
The records do not show when the SEC approved the merger. Private respondent's theory is that it took Federation of Unions in BPI Unibank (BPI Union) whereby it is a pre-condition that new employees must
effect on the date of the execution of the agreement itself, which was September 16, 1975. Private join the union before they can be regularized otherwise they will not have a continued employment. By
respondent contends that, since he issued the promissory note to CBTC on September 7, 1977 — two reason of the failure of the FEBTC employees to join the union, BPI Union recommended to BPI their
years after the merger agreement had been executed — CBTC could not have conveyed or transferred to dismissal. BPI refused. The issue went to voluntary arbitration where BPI won but the Court of Appeals
petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, reversed the Voluntary Arbitrator. Hence, this petition.
petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such right
ISSUE: Whether the employees of a dissolved corporation in a merger are considered absorbed by the
properly pertains only to CBTC.
surviving corporation?
Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that
HELD: No. Absorbed FEBTC Employees are neither assets nor liabilities. In legal parlance, however,
petitioner no longer has any interest in the promissory note. A closer perusal of the merger agreement
human beings are never embraced in the term "assets and liabilities." Moreover, BPI’s absorption of former
leads to a different conclusion. The provision quoted earlier has this other clause:
FEBTC employees was neither by operation of law nor by legal consequence of contract. There was no
Upon the effective date of the merger, all references to [CBTC] in any deed, documents, or other papers government regulation or law that compelled the merger of the two banks or the absorption of the
of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references employees of the dissolved corporation by the surviving corporation. Had there been such law or
to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. . . regulation, the absorption of employees of the non-surviving entities of the merger would have been
mandatory on the surviving corporation. In the present case, the merger was voluntarily entered into by
Thus, the fact that the promissory note was executed after the effectivity date of the merger does not both banks presumably for some mutually acceptable consideration. In fact, the Corporation Code does
militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the not also mandate the absorption of the employees of the non-surviving corporation by the surviving
date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving corporation in the case of a merger. Section 80 of the Corporation Code provides.
bank, herein petitioner. Since, in contrast to the earlier afore quoted provision, the latter clause no longer
specifically refers only to contracts existing at the time of the merger, no distinction should be made. The This Court believes that it is contrary to public policy to declare the former FEBTC employees as forming
clause must have been deliberately included in the agreement in order to protect the interests of the part of the assets or liabilities of FEBTC that were transferred and absorbed by BPI in the Articles of
combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at Merger. Assets and liabilities, in this instance, should be deemed to refer only to property rights and
evading fulfillment of a due obligation. obligations of FEBTC and do not include the employment contracts of its personnel. A corporation cannot
unilaterally transfer its employees to another employer like chattel. Certainly, if BPI as an employer had
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note the right to choose who to retain among FEBTC’s employees, FEBTC employees had the concomitant
shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, right to choose not to be absorbed by BPI. Even though FEBTC employees had no choice or control over
"as if such reference [was a] direct reference to" the latter "for all intents and purposes." the merger of their employer with BPI, they had a choice whether or not they would allow themselves to
be absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from resigning or retiring and
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, seeking employment elsewhere instead of going along with the proposed absorption.
the provision must be given its literal meaning and applied without a convoluted interpretation. Verba legis
non est recedendum. Employment is a personal consensual contract and absorption by BPI of a former FEBTC employee
without the consent of the employee is in violation of an individual’s freedom to contract. It would have
been a different matter if there was an express provision in the articles of merger that as a condition for

the merger, BPI was being required to assume all the employment contracts of all existing FEBTC The lack of a provision in the plan of merger regarding the transfer of employment contracts to the surviving
employees with the conformity of the employees. In the absence of such a provision in the articles of corporation could have very well been deliberated on the part of the parties to the merger, in order to grant
merger, then BPI clearly had the business management decision as to whether or not employ FEBTC’s the surviving corporation the freedom to choose who among the dissolved corporation’s employees to
employees. FEBTC employees likewise retained the prerogative to allow themselves to be absorbed or retain, in accordance with the surviving corporation’s business needs. If terminations, for instance due to
not; otherwise, that would be tantamount to involuntary servitude. redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be valid. The
surviving corporation too is duty-bound to protect the rights of its own employees who may be affected by
There appears to be no dispute that with respect to FEBTC employees that BPI chose not to employ or the merger in terms of seniority and other conditions of their employment due to the merger. Thus, we are
FEBTC employees who chose to retire or be separated from employment instead of "being absorbed," not convinced that in the absence of a stipulation in the merger plan the surviving corporation was
BPI‘s assumed liability to these employees pursuant to the merger is FEBTC’s liability to them in terms of compelled, or may be judicially compelled, to absorb all employees under the same terms and conditions
separation pay, retirement pay or other benefits that may be due them depending on the circumstances. obtaining in the dissolved corporation as the surviving corporation should also take into consideration the
state of its business and its obligations to its own employees, and to their certified collective bargaining
Although not binding on this Court, American jurisprudence on the consequences of voluntary mergers on
agent or labor union.
the right to employment and seniority rights is persuasive and illuminating. We quote the following pertinent
discussion from the American Law Reports: Even assuming we accept Justice Brion’s theory that in a merger situation the surviving corporation should
be compelled to absorb the dissolved corporation’s employees as a legal consequence of the merger and
Several cases have involved the situation where as a result of mergers, consolidations, or shutdowns, one
as a social justice consideration, it bears to emphasize his dissent also recognizes that the employee may
group of employees, who had accumulated seniority at one plant or for one employer, finds that their jobs
choose to end his employment at any time by voluntarily resigning. For the employee to be "absorbed" by
have been discontinued except to the extent that they are offered employment at the place or by the
BPI, it requires the employees’ implied or express consent. It is because of this human element in
employer where the work is to be carried on in the future. Such cases have involved the question whether
employment contracts and the personal, consensual nature thereof that we cannot agree that, in a merger
such transferring employees should be entitled to carry with them their accumulated seniority or whether
situation, employment contracts are automatically transferable from one entity to another in the same
they are to be compelled to start over at the bottom of the seniority list in the "new" job. It has been
manner that a contract pertaining to purely proprietary rights – such as a promissory note or a deed of sale
recognized in some cases that the accumulated seniority does not survive and cannot be transferred to
of property – is perfectly and automatically transferable to the surviving corporation.
the "new" job.
That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool to adjudicate
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that, absent some specific contract
rights and obligations between and among the merged corporations and the persons that deal with them.
provision otherwise, seniority rights were ordinarily limited to the employment in which they were earned,
Although in a merger it is as if there is no change in the personality of the employer, there is in reality a
and concluding that the contract for which specific performance was sought was not such a completed
change in the situation of the employee. Once an FEBTC employee is absorbed, there are presumably
and binding agreement as would support such equitable relief, since the railroad, whose concurrence in
changes in his condition of employment even if his previous tenure and salary rate is recognized by BPI.
the arrangements made was essential to their effectuation, was not a party to the agreement.
It is reasonable to assume that BPI would have different rules and regulations and company practices than
Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the dissolved FEBTC and it is incumbent upon the former FEBTC employees to obey these new rules and adapt to their
corporation‘s employees or the recognition of the absorbed employees‘ service with their previous new environment. Not the least of the changes in employment condition that the absorbed FEBTC
employer may be demanded from the surviving corporation if required by provision of law or contract. The employees must face is the fact that prior to the merger they were employees of an unorganized
dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and conditions of employment establishment and after the merger they became employees of a unionized company that had an existing
of the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take collective bargaining agreement with the certified union. This presupposes that the union who is party to
away from corporate management the prerogative to make purely business decisions on the hiring of the collective bargaining agreement is the certified union that has, in the appropriate certification election,
employees or will give it an excuse not to apply the CBA in force to the prejudice of its own employees been shown to represent a majority of the members of the bargaining unit.
and their recognized collective bargaining agent. In this regard, we disagree with Justice Brion.
Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to be absorbed,
Justice Brion takes the position that because the surviving corporation continues the personality of the then due to BPI’s blanket assumption of liabilities and obligations under the articles of merger, BPI was
dissolved corporation and acquires all the latter’s rights and obligations, it is duty-bound to absorb the bound to respect the years of service of these FEBTC employees and to pay the same, or commensurate
dissolved corporation’s employees, even in the absence of a stipulation in the plan of merger. He proposes salaries and other benefits that these employees previously enjoyed with FEBTC.
that this interpretation would provide the necessary protection to labor as it spares workers from being "left
As the Union likewise pointed out in its pleadings, there were benefits under the CBA that the former
in legal limbo."
FEBTC employees did not enjoy with their previous employer. As BPI employees, they will enjoy all these
However, there are instances where an employer can validly discontinue or terminate the employment of CBA benefits upon their "absorption." Thus, although in a sense BPI is continuing FEBTC’s employment
an employee without violating his right to security of tenure. Among others, in case of redundancy, for of these absorbed employees, BPI’s employment of these absorbed employees was not under exactly the
example, superfluous employees may be terminated and such termination would be authorized under same terms and conditions as stated in the latter’s employment contracts with FEBTC. This further
Article 283 of the Labor Code. strengthens the view that BPI and the former FEBTC employees voluntarily contracted with each other for
their employment in the surviving corporation.

Outline of Process: Consolidation, on the other hand, is the uniting or amalgamation of two or more corporations to form a
new corporation. It signifies a union as necessarily results in the creation of a new corporation and the
1. Plan of merger or consolidation termination of existence of old ones. Example, A and B are existing corporations, they transfer all their
2. Approval of the Board or Trustee (majority) assets, rights and properties to C, a corporation still to be formed and when it is approved by the SEC, C
3. Notice for meeting will issue to A and B shares of stock, A and B will be dissolved and C will be born as a new corporation.
4. Meeting duly called for the purpose
5. Approval of the stockholders or members (two-thirds) In effect, the parties called the constituent corporations in a consolidation are all dissolved, while the
6. Dissenting, appraisal right constituents in a merger are not all dissolved because there is a surviving corporation which continues the
7. Amendment, approved and ratified combined business.
8. Agreement of merger or consolidation
9. Articles of merger or consolidation And merger and consolidation are effected by simply following the requirements and procedures laid down
10. Submission to the SEC of Articles by Sections 75 to 79. But even if the merger or consolidation is a right, granted by law, to all corporations
11. Favorable recommendation, if required registered under the provisions of the Code, there are certain restrictions and limitations. Act 3518
12. Certificate of merger or consolidation proscribes illegal combination, Sec. 20 thereof provides that “no corporation engaged in commerce may
13. If not approved, notice (at least 2 weeks) and hearing acquire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation
or corporations engaged in commerce, where the effect of such acquisitions may be to substantially lessen
DISCUSSION: competition between the corporation or corporations whose stock is so acquired and the corporation
making the acquisition, or between any of them, or to restrain such commerce in any section community,
Merger and Consolidation are the two most common types of corporate re-organization. or tends to create a monopoly of any line of commerce.” Corollary thereto is Art. 186 of the Revised Penal
Code which imposes a penalty of imprisonment and/or fine on any person (the word person, still incudes
And the reasons inducing a reorganization are not in every case the same, but for the most part, they are
a corporation as a Juridical person) who enters into a contract or conspiracy to create monopolies and
to be found in the weak financial or insolvent condition of the particular corporations. The usual aim being
combinations in restraint of trade.
to put the company upon a sound financial basis and to enable it to answer its obligations thereby avoiding
liquidation or bankruptcy. But in some cases, a reorganization is effected notwithstanding the fact that the But the more important provisions of title 9 is section 79, the effects of merger and/consolidation.
corporation involved are very much solvent, i.e. solvent banking corporations may merge or consolidate
to be more competitive with foreign banking corporations. 1. There will only be one single corporation. In a merger, the absorbing or surviving corporation
and in consolidation, the consolidated corporation.
Purchase and sale of assets is another form of corporate reorganization. 2. There will be a termination of the corporate existence of a constituent corporation, except the
surviving and the consolidated corporation.
Merger or consolidation may therefore be used not only as a method of expansion or acquisition of
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities,
business by another corporation but also a method of reorganization or recapitalization. For instance,
and powers and shall be subjected to all the duties and liabilities of a corporation organized
where the then lending investors or the direct lending companies, prior to financing companies of the PH,
under the provision of the Code;
were only required by the Central Bank the minimum paid up capital of 100T pesos. When the financing
companies came to picture, this lending companies were covered by that act, they are now under the Once the SEC approves article of the consolidation, in this case (referering to the example above), C will
financing company act of the PH. And under the latter, the lending companies are now considered as become a corporation vested with all the rights, privileges, immunities and powers.
financing companies.
Item 4 and 5 are all the more important
The minimum paid up capital of financing companies, if based on metro manila 10 M, while in other cities
and municipalities 5M. When this law came to effect the SEC grated the 3 year moratorium to the lending 4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
investors, to come up with the minimum paid up capital requirement imposed by the act, some of them and franchises of each constituent corporation; and all properties, receivables and every
merged or consolidated, some of them did not and opted to pull out there business. interests belonging to, or due to the constituents shall be transferred to and vested in such
surviving or consolidated corporation “without further act or deed” (WHICH MEANS IT IS
Merger is a union effected by absorbing one or more corporations by another which survives and continues AUTOMATIC);
the combined business. It is the uniting of two or more corporations by the transfer of properties, assets
and rights to one of them which continues in existence, the other or the others being dissolved and merged QUERY: In this regard, where the issue of WON the employees of the absorbed corporation are
therein. also automatically, because of the phrase “without further act or deed”, the employee of the
absorbing or the surviving corporation?
Okay, (let’s assume that PSI bank is still is an existing corporation equitably speaking) A transfers all his
assets, rights and properties in favor of B, B issues A shares of stock, A is dissolved, B continues the A: Initially in the August 10, 2010 decision of the SC sitting En Banc, the court ruled, NO, item 4 of that
combined business, that is a merger. provision speaks only of rights, liabilities and choses, employees are not rights, liabilities and choses,
unless there is an agreement in the articles of merger or consolidation. In that original decision there was

one dissenting justice, that the employees of the absorbed corporation must also be automatically A: NO, because it has no assets, properties, and rights to distribute; (2) it has no debts and liabilities to
absorbed by the surviving or absorbing corporation. There was also a motion for recon, although that issue pay, since all these are transferred to the surviving or consolidated corporation. So, there is nothing to
was not raised. So I(atty ladia) did not bother to follow it, only I was advised by student, that despite the liquidate.
fact that it was not raised in the En Banc, the SC sitting En Banc had a change of heart, and adopted the
dissenting opinion of the lone justice. SC held, YES, they are now automatically absorbed by the CHAPTER XIII- APPRAISAL RIGHT
absorbing or surviving corporation. By resolution of the higher court October 11, 2011, in BPI vs BPI
DEFINITION
employees, they merely adopted the dissenting opinion of the lone justice in the August 10, 2010 decision,
that it is more in keeping with the dictates of social justice and state policies, of according full Appraisal Right is the method of paying a shareholder for the taking of his property. It is a statutory means
protection to labor and employment contract as automatically assumed by the surviving whereby a stockholder can avoid the conversion of this property into another property not of his own
corporation in a merger, even in the absence of express stipulation in the articles of merger or choosing and is given to a shareholder as compensation for the abrogation of the common-law rule that a
consolidation. The resolution went on further, ruling that , however, nothing in this resolution shall single stockholder could block a certain corporate act such as merger.
impair the right of the employer to terminate the employment of the absorbed employees for lawful
or authorized causes, or the right of the employee to resign, retire, or otherwise severe his The purpose is to protect the property rights of dissenting stockholders from actions by the majority
employment whether before or after the merger, subject to existing contractual obligation. shareholders which alters the nature and character of their investment. In effect, it is a right granted to
dissenting stockholders on certain corporate or business decisions to demand payment of the fair market
And item 5 as applied in Ong vs Pangilinan and BPI family: value of their shares.
5. The surviving or consolidated corporation shall be responsible for all the liabilities and WHEN EXERCISED
obligations of each constituent corporation as though such surviving or consolidated
corporation had itself incurred such liabilities or obligations; SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a corporation shall
have the right to dissent and demand payment of the fair value of the shares in the following
In the case of Ong vs Pangilinan and BPI Family Corporation, Ong secured a loan from the bank of south instances:
east asia of a cash of 5M secured by real prop located in Makati, the letter of credit was granted and it
comes to a cash loan, only 3M was released in favor of Ong. In the meantime, there was a merger between (a) In case an amendment to the articles of incorporation has the effect of changing or restricting
the Bank of Southeast Asia and BPI Family Savings, the absorbing corporation is the latter, sometime later the rights of any stockholder or class of shares, or of authorizing preferences in any respect
BPI Family Savings wanted to foreclose the real property security of the letter of credit on the cash loan. superior to those of outstanding shares of any class, or of extending or shortening the term of
The court applied Sec 79, because Ong questioned the actuations of the bank to foreclose. The surviving corporate existence;
or consolidated corporation shall be responsible for all the liabilities AND OBIGATIONS of each
constituent corporation in the same manner as such surviving or consolidated corporation had (b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
itself incurred such liabilities or obligations. Applying the pertinent provision of the code, BPI did not substantially all of the corporate property and assets as provided in this Code;
only acquire all the rights, immunities and privileges of the BSA, but likewise acquired all the liabilities and
obligations of the latter, as if the surviving corporation BPI has itself incurred such liabilities or obligations. (c) In case of merger or consolidation; and
Thus applying the ruling in DBP vs Garinia(?) Agricultural realty and development corp., that the debtor, (d) In case of investment of corporate funds for any purpose other than the primary purpose of the
Ong in this case, cannot incur delay, unless the creditor has fully performed his reciprocal obligation, since corporation.
the additional cash loan of 2M has not been released to the debtor Ong it has not yet incurred any delay,
foreclosure cannot yet be granted. Note: the enumeration is not exclusive, it may also cover, in a close corporation, a stockholder has the
unbridled right to compel the corporation “for any reason” to purchase his shares at their fair value which
And, of course, merger and consolidation will only become valid and binding upon the issuance of the SEC shall not be less than the par or issued value, when the corporation has sufficient assets to cover its debts
of the certificate of merger and/or consolidation, that is the first paragraph of Sec 78. Also we’ve seen this and liabilities, exclusive of capital stock (Sec. 104).
earlier on in delos santos case.
Note: The right may only be exercised in cases of amendment which “has the effect of changing or
And be mindful likewise, that there will be no liquidation or winding up of affairs in so far as the dissolved restricting the rights of any stockholder or class of shares, OR of authorizing preferences in any respect
corporation is concerned. The corporation is dissolved, one of them or the both of them if it is a superior to those of outstanding shares of any class,”. Accordingly, if the amendment is to increase or
consolidation, and when we take up liquidation and winding up we know for a fact that L and WU partakes decrease the number of directors, or change the corporate name, or change of principal office, the
the collection of assets, rights, and properties of the dissolved corporation for the payment of its liabilities appraisal right is not available.
and the ultimate distribution of its remaining assets and properties to the SH in proportion to their
respective stockholdings or in accordance with their contract of subscription. STOCKHOLDER WITH UNPAID SUBSCRIPTION MAY exercise the appraisal right, since the subscriber
is entitled to all the rights of a stockholder under Sec. 71 and although Sec. 81 provides for the submission
QUERY: Will there be a liquidation and winding up in so far as the dissolved corporation in merger of certificate of stock, Sec. 85 provides that the notation to such certificate of stock is OPTIONAL at the
or consolidation are involved? instance of the corporation.

REQUIREMENTS AND PROCEDURE EFFECT OF EXERCISE OF APPRAISAL RIGHT
SEC. 81. How Right is Exercised. – The dissenting stockholder who votes against a proposed SEC. 82. Effect of Demand and Termination of Right. – From the time of demand for payment of the
corporate action may exercise the right of appraisal by making a written demand on the corporation fair value of a stockholder’s shares until either the abandonment of the corporate action involved
for the payment of the fair value of shares held within thirty (30) days from the date on which the or the purchase of the said shares by the corporation, all rights accruing to such shares, including
vote was taken: Provided, That failure to make the demand within such period shall be deemed a voting and dividend rights, shall be suspended in accordance with the provisions of this Code,
waiver of the appraisal right. If the proposed corporate action is implemented, the corporation shall except the right of such stockholder to receive payment of the fair value thereof: Provided, That if
pay the stockholder, upon surrender of the certificate or certificates of stock representing the the dissenting stockholder is not paid the value of the said shares within thirty (30) days after the
stockholder’s shares, the fair value thereof as of the day before the vote was taken, excluding any award, the voting and dividend rights shall immediately be restored.
appreciation or depreciation in anticipation of such corporate action.
Note: Upon completion of the steps provided in Sec. 81, the stockholder concerned is regarded as having
If, within sixty (60) days from the approval of the corporate action by the stockholders, the made an election to withdraw from the corporate enterprise and take the value of his stock. Such a
withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall procedure suspends (for a maximum period of 30 days) certain ownership rights associated with
be determined and appraised by three (3) disinterested persons, one of whom shall be named by stockholder status, such as the right to receive dividends or distribution and the right to vote which cannot
the stockholder, another by the corporation, and the third by the two (2) thus chosen. The findings be restored without compliance with the governing statutory conditions.
of the majority of the appraisers shall be final, and their award shall be paid by the corporation
within thirty (30) days after such award is made: Provided, That no payment shall be made to any Effects of demand for payment of the fair value of a stockholder’s shares:
dissenting stockholder unless the corporation has unrestricted retained earnings in its books to
1. From the time of demand for payment – all rights accruing to such shares, including voting
cover such payment: Provided, further, That upon payment by the corporation of the agreed or
and dividend rights, are suspended, except the right to receive payment of dividends.
awarded price, the stockholder shall forthwith transfer the shares to the corporation.
2. After either the right ceases or the period for purchase of the said shares by the
REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF THIS RIGHT ARE: corporation has lapsed– all rights accruing to such shares are restored and all dividend
distributions which would have accrued on the shares shall be paid to the holder thereof.
1. The stockholder must have voted against the proposed corporate action in any of the
instances allowed by law for the exercise of the right of appraisal; Note: If the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
2. The written demand for payment must be made by the dissenting stockholder within 30 days voting and dividend rights shall immediately be restored.
after the date on which the vote was taken. Failure to make the demand within the said
Note: The rights of the stockholder not paid may be restored but the appraisal right exercised stay forever
period shall be deemed a waiver on the part of the stockholder concerned to exercise his
unless withdrawn and the corporation consents thereto. Thus, should the corporation decide to pay the
appraisal right;
stockholder even after the lapse of the 30 days period, it may validly do so. (Ladia)
3. Surrender of the certificate of stock by the dissenting stockholder for notation in the
corporate books AND the payment of the corporation of the fair market value of the said Example: A, stockholder of Corp Z, wanted to exercise his appraisal right but the corporation has no URE.
shares as of the day prior to the date on which the vote was taken. If the stockholder and
the corporation cannot agree on the fair market value thereof, the same shall be determined in After the lapse of 30 days, Corp Z had URE and decided to pay A. In case Corp Z decided to declare
accordance with the provisions of par.2 of Sec. 81 which provides: dividends the following day, A shall not be entitled to dividends since he is no longer a stockholder at the
a. If, within sixty (60) days from the approval of the corporate action by the time the declaration was made.
stockholders, the withdrawing stockholder and the corporation cannot agree on the
fair value of the shares, Note: A director exercising appraisal right may still continue to function as such, prior to payment, unless
b. it shall be determined and appraised by three (3) disinterested persons, there is a contrary provision in the by-laws. A director who exercises his appraisal right remains to be a
i. one of whom shall be named by the stockholder, director until his shares are no longer registered in his name.
ii. another by the corporation, and
iii. the third is chosen by the two (2) thus chosen. Note: A stockholder whose subscription is not fully paid is still entitled to exercise his appraisal right,
c. The findings of the majority of the appraisers shall be final, and their award shall be section 71.
paid by the corporation within thirty (30) days after such award is made; WHEN RIGHT TO PAYMENT CEASES
4. The fair value of the shares of the dissenting stockholder must be paid by the corporation
only if it has “unrestricted retained earnings” in its books to cover such payment. If the SEC. 83. When Right to Payment Ceases. – No demand for payment under this Title may be
corporation has no unrestricted retained earnings, the dissenting stockholder may not, withdrawn unless the corporation consents thereto. If, however, such demand for payment is
therefore, be able to effectively exercise his appraisal right, EXCEPT in the case of a close withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned
corporation under sec 104; or rescinded by the corporation or disapproved by the Commission where such approval is
5. Upon payment of the shares by the corporation, the dissenting stockholder shall transfer necessary, or if the Commission determines that such stockholder is not entitled to the appraisal
his shares to the corporation. right, then the right of the stockholder to be paid the fair value of the shares shall cease, the status
as the stockholder shall be restored, and all dividend distributions which would have accrued on consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title
the shares shall be paid to the stockholder. shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend
distributions which would have accrued on such shares shall be paid to the transferee.
Note: No demand for payment may be withdrawn unless the corporation consents thereto.
The purpose is to give notice and guide to the corporation to determine the respective rights of stockholder.
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO BE PAID THE FAIR VALUE
OF HIS SHARES CEASES: Note: The law does not prohibit the dissenting stockholder to sell, transfer or assign his shares. If such be
the case, the right of the dissenting stockholder to be paid the fair value of his shares shall cease and the
1. When he withdraws his demand for payment and the corporation consents thereto; transferee will acquire all the rights of a regular stockholder inclusive of all dividends which would have
2. When the proposed action is abandoned or rescinded by the corporation; accrued on such shares.
3. When the proposed action is disapproved by the SEC where such approval is necessary;
4. When the SEC determines that he is not entitled to exercise his appraisal right; DISCUSSION
5. When he fails to submit the stock certificate within ten (10) days from demand to the corporation
for notation that such shares are dissenting shares, note: at the option of the corporation (sec Title X of the code speaks of appraisal right, please don’t be confused with this right vis-à-vis pre-emptive
85); and, right.
6. If the shares are transferred and the certificate subsequently cancelled. (sec 85)
Pre-emptive right is a right granted by law to all existing stockholders of a stock corporation to subscribe
Effect: The dissenting stockholder will not be paid the fair value of his shares. The status as a stockholder to all issues or subsequent disposition of shares of any class, in order that they may retain their
shall be restored, and all dividend distributions which would have accrued on the shares shall be proportionate interest in the corporation, that is by voting.
paid to the stockholder.
Appraisal right on the other hand is a right granted to dissenting stockholder to a certain corporate act and
COST OF APPRAISAL demand the payment of the fair market value of the share. I said “a certain corporate act” because it is not
SEC. 84. Who Bears Costs of Appraisal. – The costs and expenses of appraisal shall be borne by available in all cases, as when the stockholder will object but is outvoted.
the corporation, unless the fair value ascertained by the appraisers is approximately the same as Under sec 80 it may only be exercised in cases of (a) amendment to the articles of incorporation has the
the price which the corporation may have offered to pay the stockholder, in which case they shall
effect of changing or restricting the rights of any stockholder, authorizing preferences in any respect
be borne by the latter. In the case of an action to recover such fair value, all costs and expenses
shall be assessed against the corporation, unless the refusal of the stockholder to receive payment superior to those of outstanding shares of any class, or of extending or shortening the term of corporate
was unjustified. existence; (b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets; (c) In case of merger or consolidation; and (d) In
THE CORPORATION BEARS THE COST IF: case of investment of corporate funds for any purpose other than the primary purpose of the corporation.
1. The price offered by the corporation is lower than the fair value of the shares of the dissenting However, in a close corporation, Sec 104 says “a stockholder may “for any reason” compel the corporation
stockholder as determined by the appraisers; that he be paid the fair market value of his shares provided only that the corporation has sufficient assets
2. Where an action is filed by the dissenting stockholder to recover such fair value and the refusal to cover its debts and liabilities, exclusive of capital stock”.
of the stockholder to receive payment is found by the court to be justified.
And this right may be exercised if the stockholder will vote against a certain corporate act, and if he is out
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND EXPENSES OF APPRAISAL voted, he must make a written demand for the payment of the fair value of his shares within 30 days from
WHEN:
the dissent. He must surrender his certificate of stock to the corporation for notation and please observe
1. When the price offered by the corporation is approximately the same as the fair value that payment can only be made if the corporation has unrestricted retained earnings. Upon payment of the
ascertained by the appraisers; FMV the shares will be transferred to the corporation.
2. Where the action filed by the dissenting stockholder and his refusal to accept payment is found
by the court to be unjustified. QUERY: The first question asked in the MCQ in the bar, is that at what point in time the Fair Market
Value representing the shares (value ng shares) be determined? A. will it be on the date of the
NOTATION meeting. Or B. will it be on the date of the written demand that he wants to be paid of his FMV. Or
C. will it be on the date that he is paid of his FMV of his shares.
SEC. 85. Notation on Certificates; Rights of Transferee. – Within ten (10) days after demanding
payment for shares held, a dissenting stockholder shall submit the certificates of stock A: none of the above, it must be on the date prior to the meeting where he interposed his dissent.
representing the shares to the corporation for notation that such shares are dissenting shares.
Failure to do so shall, at the option of the corporation, terminate the rights under this Title. If shares Of course, if the stockholder of the corporation agrees as to the FMV, then there will be no need to appoint
represented by the certificates bearing such notation are transferred, and the certificates an appraiser. But if he disagrees, the cost, will either be borne by the corporation or by the SH.
The corporation will bear the costs: if the price offered is lower than the FMV as determined by the corporation will fail or reduce payment, claiming that it has not changed or restricts any of his rights. If that
appraisers or where an action is filed by the dissenting stockholder to recover such fair value and the be the case there will be an action to be filed in the proper court, and one of that grounds when the SH
refusal of the stockholder to receive payment is found by the court to be justified. will cease to receive payment of the FV of his shares is that the said proper courts determines that he is
not entitled, if that be the case then he cannot. What if the court will decide to that effect? then so be it.
While it may be the stockholder who will bear if the price offered by the corporation is approximately the
same as the fair value ascertained by the appraisers or where the action filed by the dissenting stockholder QUERY: Amendment of the Article of Incorporation changing the primary purpose from general
and his refusal to accept payment is found by the court to be unjustified. construction to realty, by buying and selling all types of real properties, it was all the stockholders,
there were only 5 of them, they are also at the same time the directors, 4 of them are aware that the
Now, note, that the stockholder must surrender his stock certificate for notation, that they are dissenting TPLEX extension shall push through, and they have relatives in la union who have properties in la
shares, and for the payment of their fair market value. union, so they tend to acquire the properties of their relatives that will be traversed by the said
extension project, A being the managing director of the construction business objected, he is
QUERY: May a stockholder, who has not paid his subscription in full, exercise his appraisal right,
outvoted. Thereafter, the corporation engaged in buying properties in la union, exactly 30 days
even if he does not have the stock certificate which was already surrendered for notation?
from the date of the meeting, A made a written demand for the payment of the fair value of his
A: Yes, he may, because of sec 71, subscribers to shares of stock not fully paid and are not delinquent shares. But at that point in time all the funds of the corporation are already spent for buying
shall have all the rights of a stockholder. properties in la union, so it does not have unrestricted retained earnings, the corporation replied
asking A if he agrees that the fair market value of his shares is assuming 20M, A agrees, but the
QUERY: So how will the FMV of the shares be determined in the case above? problem is they don’t have any more funds to pay the FMV of the shares, so 30 days thereafter, his
voting and dividend rights are restored, a year later, the corporation made 120M URE, when they
A: number of shares and the fair value thereof less his paid-up subscription. sold that will be traversed by the TPLEX, may the corporation now pay A the 20M FMV of his shares,
and later declare the entire remaining 100M URE as cash dividend to his exclusion?
QUERY: Now if a stockholder opts to exercise his right, what would be its effects?
A: YES, because he did not withdraw his demand for the payment of the FMV of his shares, the other
A: Sec 82, all rights accruing to such shares, including voting and dividend rights, shall be suspended. instance when the right to be paid of the FMV of his shares of dissenting stockholder ceases is when he
QUERY: For how long will it be suspended? withdraws his demand, with the consent of the corporation. So even if he withdraws now, kasi nalaman
niya na kumita ng 100M, do you ever think that the remaining 4 stockholders will consent to that?
A: 30 days after the award or the agreement that the fair value is “x”.
And the other instances WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO BE PAID THE FAIR
If not paid within 30 day after the award, the voting and dividend rights will thereby be restored. VALUE OF HIS SHARES CEASES 1. When the proposed action is abandoned or rescinded by the
corporation; 2. When the proposed action is disapproved by the SEC where such approval is necessary;
QUERY: Now, a stockholder concerned is A, the Articles of Incorporation is amended changing 3. When he fails to submit the stock certificate within ten (10) days from demand to the corporation for
the principal office of the corporation from QC to Manila, dun lang sa boundary, half of the office notation that such shares are dissenting shares, and it says, at the option of the corporation, **meaning
is in QC while the other half is in Manila, he objected to the transfer of the principal office, but he why should the corporation in the first place demand the SH to surrender his SC when it has never issued
was outvoted, so he tries to exercise his appraisal right claiming that the amendment, because the any SC(in case the SH has not yet fully paid his subscription); and, lastly, If the shares are transferred and
word as used is “changing or restricting the rights of ANY stockholder”, he claims that for the past the certificate subsequently cancelled, **tagal naman sabi niya kay B, bilhin mo nalang yung shares ko ng
20 years he has been attending stockholders meeting personally, he participates in the deliberation 20M 2 mons after his exercise, alam ni B na kikita sila ng 100M so pumayag si B, nirecord yung transaction
of the matters being taken up during SH meeting, kaso dalwang paa niya putol so he is now seeking sa stock and transfer book, kinancle yung Stock cert ni A, nag issue ng bago kay B, A will not be paid the
an appraisal, natatakot akong mag cross dyan sa other side, kasi katabi niya lang yung opisina ng FMV of his shares because he transferred his shares and his certificates is subsequently canceled.
korporasyon, so walang problema di nya kailangang magcross ng kalsada, pero ngayon lilipat sila Imagine that, 100M yung URE, kinuha ni B yung 20% ni A eh di meron siyang 40M na kita.
sa kabilang building na katapat lang, mas maluwag kasi, so now he exercises his appraisal right,
claiming that he can no longer attend meetings, can he exercise his appraisal right? can he be
granted the appraisal right?
CHAPTER XIV- NON-STOCK CORPORATIONS
A: If that is his only excuse that he is advancing, NO, because we all know that meetings of SH if the
principal office is located in metro manila, may be held anywhere in metro manila. DEFINITION
Of course, the situation would be different if the transfer of the principal office is from QC to Marawi City, SEC. 86. Definition. – For purposes of this Code and subject to its provisions on dissolution, a
eh may nabuntis pa syang muslim, di niya pinakasalan, sabi ng mga kapatid ng babae niya doon sa nonstock corporation is one where no part of its income is distributable as dividends to its
marawi, ***** *** mo huwag ka magpakita ditto, putol yang dalawang paa mo, pati yang nasa harap mo members, trustees, or officers: Provided, That any profit which a nonstock corporation may obtain
mapuputol, eh may phobia pa siya mag eroplano or mag boat, if that’s the case then maybe he can. incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the
Because, there may be an instance where a SH will insist to exercise his right of appraisal, but the purpose or purposes for which the corporation was organized, subject to the provisions of this
Title.
The provisions governing stock corporations, when pertinent, shall be applicable to nonstock Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by
corporations, except as may be covered by specific provisions of this Title. proxy, in accordance with the provisions of this Code. The bylaws may likewise authorize voting
through remote communication and/or in absentia.
Note: Under the old notion is that a non-stock corporation is one which has no capital stock divided into
shares – this may no longer hold true under the definition provided by Sec. 87. Thus, even if it may GENERAL RULE: Cumulative voting is not allowed, accordingly, even if the members may cast as many
have capital stock divided into shares, proprietary or otherwise, a corporation is considered “non-stock” so votes as there are trustees to be elected, he may not cast more than one vote for one candidate, UNLESS:
long as it does not distribute dividends to its members and officers. We have, for instance, Club shares allowed in the AOI or the by-laws.
issued to the members, the totality of which may rightfully represent “capital” of the corporation but whose
income (if there be any) is not distributed by way of dividends during its corporate existence. The Note: The by-laws or the AOI may provide for classification as to members with voting or non-voting rights,
corporation, in such a case, is legally “non-stock”. since it is provided that “the right of the members of any class or classes to vote may be limited, broadened
or denied”.
Note: A non-stock corporation is generally not allowed to engage in any business undertaking or activity
for profit as it would run counter to its very nature as a non-profit entity. However, as may be allowed and Note: Proxy voting is generally allowed, unless disallowed by the AOI or the by-laws.
specified in its AOI or incidental to the objects and purposes indicated therein, it may engage in
Note: VOTING OTHER THAN IN PERSON may also be allowed by the AOI or by-laws. Contrary to a stock
certain money-making ventures or economic activities provided that any profits derived therefrom shall
corporation, a stockholder has to vote in the meeting called for the purpose except in case of a general
be used for the furtherance of the purposes for which the corporation was organized or to defray the
amendment where “written assent” is allowed.
operating expenses of the entity.
Note: The bylaws may likewise authorize voting through remote communication and/or in absentia.
It has thus been said that the fact that a non-profit corporation earns a profit, gain or income for
the corporation or members does not make it a profit-making corporation where such profit or income is SEC. 89. Non-transferability of Membership. – Membership in a nonstock corporation and all rights
used for the purpose set forth in the AOI and is not distributable to its incorporators, members or officers, arising therefrom are personal and non-transferable, unless the articles of incorporation or the
since mere intangible or pecuniary benefits to the members do not change the nature of the corporation. bylaws otherwise provide.
Note: The determination of whether or not a non-stock corporation can engage in profit-making business SEC. 90. Termination of Membership. – Membership shall be terminated in the manner and for the
or activity depends largely on the purpose or purposes indicated in the AOI. If the business activity is causes provided in the articles of incorporation or the bylaws. Termination of membership shall
authorized in the said articles, necessary, incidental or essential thereto, the same may be undertaken by extinguish all rights of a member in the corporation or in its property, unless otherwise provided
the corporation, otherwise, not, as it would be an ultra-vires act under Sec. 44. in the articles of incorporation or the bylaws.
Note: The provisions governing stock corporation, when pertinent, shall be applicable to non-stock Note: Non-stock corporations have the right to adopt rules prescribing the mode and manner in which
corporations. membership thereat can be obtained or maintained. This includes the right to limit membership. In other
words, membership in non-stock corporations may be acquired by complying with the provisions of its
PURPOSE
rules prescribed in the by-laws. This is in consonance with the express power granted by law under Sec.
SEC. 87. Purposes. – Nonstock corporations may be formed or organized for charitable, religious, 35, par. F of the Code, authorizing them to admit members thereof and that authority carries with it the
educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar power to prescribe rules on membership.
purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject
It has thus been stated that in the absence of charter or statutory restrictions, non-stock corporations may
to the special provisions of this Title governing particular classes of nonstock corporations.
determine who shall be admitted to membership and how they shall be admitted. It may exclude any
Non-stock corporations may be organized or formed for any purpose or purposes allowed or indicated in person whom it deems unfit for membership. Indeed, in the absence of restrictions, it may act arbitrarily
the above provision. The enumeration, however, is not exclusive as the law itself recognizes similar or and exclude any persons it may see fit, and the courts have no power to interfere. In other words, it is free
allied purpose or purposes for which non-stock corporations may be organized. Recreational, sports club, to fix qualifications for membership and to provide for termination of membership.
athletic or allied activities of similar import, for instance, may likewise be lawful purpose of a non-stock
AUTHORITY TO ADMIT MEMBERS: The provisions in the by-laws, if any, shall govern. Absent any
corporation.
provision to the contrary, it must necessarily be lodged with the BOT since it is the body that exercises all
MEMBERSHIP AND VOTING RIGHTS corporate powers as enunciated in Sec. 22 of the Code.
SEC. 88. Right to Vote. – The right of the members of any class or classes to vote may be limited, SPECIAL CASES: the law itself may provide certain limitations or even perhaps proscription on transfer
broadened, or denied to the extent specified in the articles of incorporation or the bylaws. Unless of membership. Thus, RA 4726, otherwise known as the Condominium Act requires that membership
so limited, broadened, or denied, each member, regardless of class, shall be entitled to one (1) therein shall not be transferred separately from the condominium unit of which it is appurtenant and that
vote. when a member ceases to own a unit, he shall automatically cease to be a member.

Note: Membership may be terminated in the manner and for causes provided in the AOI or by-laws and Compliance with provisions of charter, constitution or by-laws. “In order that membership may be
when a member is so terminated it shall extinguish all his rights in the corporation or in its property unless acquired in a non-stock corporation and valid by-laws must be complied with, except in so far as
otherwise provided in the said articles or by-laws. they may be and are waived. But provisions in the by-laws as to formal steps to be taken to acquire
membership may be waived by the corporation, or it may be estopped to assert that they have not
The power or authority to terminate members in non-stock corporations is said to be inherent but strict been taken.” [12A Fletcher Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
compliance with the manner and procedure laid down in the by-laws must be observed, otherwise it may
render the expulsion ineffective and invalid. Finally, the appealed decision did not give due importance to the undisputed fact therein stated that "at
the board meeting of the association held on December 7, 1965, a list of 174 applications for membership,
In the absence of any provision in the AOI or by-laws relative to the manner and causes of termination or old and new, was submitted to the board and approved by the latter, over the objection of the petitioner
expulsion of member, the decided weight of authority is to the effect that the power is inherent and may [therein private respondent] who was present at said meeting." Such action of the petitioner association's
be exercised in certain situations, namely: board of directors approving the 174 membership applications of old and new members constituting its
active membership as duly processed and screened by the authorized committee just be deemed a waiver
1. When an offense is committed which, although it has no immediate relation to a member’s duty
on its part of any technicality or requirement of form, since otherwise the association would be practically
as such, it is so infamous as to render him unfit for society of honest men, and which is
paralyzed and deprived of the substantial revenues from the membership dues of P17,400.00 (at P100.00
indictable at common law;
per application).
2. When the offense is a violation of his duty as member of the corporation; and
3. When the offense is of a mixed nature, being both against his duty as a member of the WHEREFORE the respondent court's decision is hereby set aside and in lieu thereof judgment is rendered
corporation, and also indictable at common law. dismissing private respondent's petition in the Court of First Instance of Manila and dissolving the
preliminary injunction, with costs against private respondent.
As to whether or not a member should be expelled or maintained is the established right of the corporation
to determine and the courts are without authority to strip a member of his membership without cause. [G.R. No. 160273 ; January 18, 2008] CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D.
ALMENDRAS, JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and
[G.R. No. L-36929; June 18, 1976] CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
JOSE B. SALA, petitioners, vs. RICARDO F. ELIZAGAQUE, respondent
PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director and President of the said
Association, and JUANITO K. TAN, in his capacity as Recording Secretary of the said Association, ISSUE: Whether in disapproving respondent’s application for proprietary membership with CCCI,
petitioners, vs. VICTOR CHING and THE COURT OF APPEALS, respondents petitioners are liable to respondent for damages?
ISSUE: Whether the trial court is justified in stripping members of their membership in a non-stock HELD: Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to
corporation? respondent despite the lack of evidence that they acted in bad faith in disapproving the latter’s application;
and in disregarding their defense of damnum absque injuria.
HELD: The documentary evidence itself as cited by the trial court, consisting of the applications and the
receipts for payment of the membership fees show that they were filed and paid not later than the For his part, respondent maintains that the petition lacks merit, hence, should be denied.
November 26, 1965 deadline, and this was further supported by the bank statement of the petitioner YMCA
deposit account with the China Banking Corporation and the checks paid by certain members to the YMCA CCCI’s Articles of Incorporation provide in part:
which show that the application fees corresponding to the questioned 74 applications (that raised the total
to 249 from 175) were already paid to petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6- SEVENTH: That this is a non-stock corporation and membership therein as well as the right of participation
A, 6-B and 6-C). No evidence could be cited by the trial court to rebut this well nigh conclusive documentary in its assets shall be limited to qualified persons who are duly accredited owners of Proprietary Ownership
evidence other than respondent's unsupported suspicion which the trial court adopted in a negative Certificates issued by the corporation in accordance with its By-Laws.
manner with its statement that it is "not improbable" that "some of those applications filed after said
Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
deadline". If there were indeed any applications filed after the deadline, they certainly should have been
positively pin-pointed and specifically annulled. SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the admission of new members of the
Club shall be as follows:
What is worse, 175 membership applications were undisputedly filed within the deadline (including the 75
withdrawn by respondent) and yet the 100 remaining unquestioned memberships were nullified by the (a) Any proprietary member, seconded by another voting proprietary member, shall submit to the Secretary
questioned decision without the individuals concerned ever having been impleaded or heard (except the a written proposal for the admission of a candidate to the "Eligible-for-Membership List";
individual petitioners president and secretary).
(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club bulletin
The appealed decision thus contravened the established principle that the courts cannot strip a board during which time any member may interpose objections to the admission of the applicant by
member of a non-stock non-profit corporation of his membership therein without cause. communicating the same to the Board of Directors;
Otherwise, that would be an unwarranted and undue interference with the well-established right of
a corporation to determine its membership, as announced by Fletcher, as follows:

(c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if there are, the form respondent filled and submitted to CCCI. What was printed thereon was the original provision of
Board considers the objections unmeritorious, the candidate shall be qualified for inclusion in the "Eligible- Section 3(c) which was silent on the required number of votes needed for admission of an applicant as a
for-Membership List"; proprietary member.
(d) Once included in the "Eligible-for-Membership List" and after the candidate shall have acquired in his Petitioners explained that the amendment was not printed on the application form due to economic
name a valid POC duly recorded in the books of the corporation as his own, he shall become a Proprietary reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being
Member, upon a non-refundable admission fee of P1,000.00, provided that admission fees will only be extremely significant, was introduced way back in 1978 or almost twenty (20) years before
collected once from any person. respondent filed his application. We cannot fathom why such a prestigious and exclusive golf
country club, like the CCCI, whose members are all affluent, did not have enough money to cause
On March 1, 1978, Section 3(c) was amended to read as follows: the printing of an updated application form.
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote of all directors It is thus clear that respondent was left groping in the dark wondering why his application was disapproved.
present at a regular or special meeting, approve the inclusion of the candidate in the "Eligible-for- He was not even informed that a unanimous vote of the Board members was required. When he sent a
Membership List". letter for reconsideration and an inquiry whether there was an objection to his application, petitioners
apparently ignored him. Certainly, respondent did not deserve this kind of treatment. Having been
As shown by the records, the Board adopted a secret balloting known as the "black ball system" of voting
designated by San Miguel Corporation as a special non-proprietary member of CCCI, he should have been
wherein each member will drop a ball in the ballot box. A white ball represents conformity to the admission
treated by petitioners with courtesy and civility. At the very least, they should have informed him why his
of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended, cited above,
application was disapproved.
a unanimous vote of the directors is required. When respondent’s application for proprietary membership
was voted upon during the Board meeting on July 30, 1997, the ballot box contained one (1) black ball. The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper
Thus, for lack of unanimity, his application was disapproved. norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to
another, a legal wrong is committed for which the wrongdoer must be held responsible. It bears
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve
reiterating that the trial court and the Court of Appeals held that petitioners’ disapproval of
or disapprove an application for proprietary membership. But such right should not be exercised
respondent’s application is characterized by bad faith.
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide
restrictions. As to petitioners’ reliance on the principle of damnum absque injuria or damage without injury, suffice it to
state that the same is misplaced. In Amonoy v. Gutierrez, we held that this principle does not apply when
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it with Article 21, thus:
there is an abuse of a person‘s right, as in this case.
“This article, known to contain what is commonly referred to as the principle of abuse of rights,
As to the appellate court’s award to respondent of moral damages, we find the same in order. Under Article
sets certain standards which must be observed not only in the exercise of one's rights but also in
2219 of the New Civil Code, moral damages may be recovered, among others, in acts and actions referred
the performance of one's duties. These standards are the following: to act with justice; to give
to in Article 21. We believe respondent’s testimony that he suffered mental anguish, social humiliation and
everyone his due; and to observe honesty and good faith. The law, therefore, recognizes a
wounded feelings as a result of the arbitrary denial of his application.
primordial limitation on all rights; that in their exercise, the norms of human conduct set forth in
Article 19 must be observed. A right, though by itself legal because recognized or granted by law ISSUE2: Whether the liability is solidary considering that only one voted for disapproval?
as such, may nevertheless become the source of some illegality. When a right is exercised in a
manner which does not conform with the norms enshrined in Article 19 and results in damage to HELD: Section 31 of the Corporation Code provides:
another, a legal wrong is thereby committed for which the wrongdoer must be held responsible.
But while Article 19 lays down a rule of conduct for the government of human relations and for the SEC. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote
maintenance of social order, it does not provide a remedy for its violation. Generally, an action for for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith
damages under either Article 20 or Article 21 would be proper. (Emphasis in the original)” 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
In rejecting respondent’s application for proprietary membership, we find that petitioners violated the rules suffered by the corporation, its stockholders or members and other persons. (Emphasis ours)
governing human relations, the basic principles to be observed for the rightful relationship between human
beings and for the stability of social order. The trial court and the Court of Appeals aptly held that petitioners WHEREFORE, we DENY the petition.
committed fraud and evident bad faith in disapproving respondent’s applications. This is contrary to morals,
TRUSTEES AND OFFICERS
good custom or public policy. Hence, petitioners are liable for damages pursuant to Article 19 in relation
to Article 21 of the same Code. The word “trustees” as used in Sec. 91 makes reference to the governing board or body in a non-stock
corporation.
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-Laws requiring the
unanimous vote of the directors present at a special or regular meeting was not printed on the application

SEC. 91. Election and Term of Trustees. – The number of trustees shall be fixed in the articles of incorporation or their by-laws, designate their governing boards by any name other than as board
incorporation or bylaws which may or may not be more than fifteen (15). They shall hold office for of trustees.
not more than three (3) years until their successors are elected and qualified. Trustees elected to
fill vacancies occurring before the expiration of a particular term shall hold office only for the NOTE: DISQUALIFICATIONS and REMOVAL: Sec. 26 as to disqualifications, and Sec.28 and 29 as to
unexpired period. removal also apply to Trustees.
Except with respect to independent trustees of nonstock corporations vested with public interest,
only a member of the corporation shall be elected as trustee.
CASE:
Unless otherwise provided in the articles of incorporation or the bylaws, the members may directly
[G.R. No. L-61259; April 26, 1983] LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners,
elect officers of a nonstock corporation.
vs. HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First Instance of Manila, Branch
QUALIFICATIONS OF TRUSTEES: XXIV, COURT OF APPEALS and VICENTE JOSEFA, respondents.
1. He is a member of the association, except if he is an independent trustee of a nonstock ISSUE: Whether the dispute between petitioners and Josefa is a justiciable issue cognizable by the courts?
corporation vested with public interest; and
HELD: No. We adopt the general rule that “the courts will not interfere with the internal affairs of an
2. Such other qualifications as may be provided for in the by-laws.
unincorporated association so as to settle disputes between the members, or questions of policy,
NOTE: as to the NUMBER OF TRUSTEES- The number of trustees shall be fixed in the articles of discipline, or internal government, so long as the government of the society is fairly and honestly
incorporation or bylaws which may or may not be more than fifteen (15). administered in conformity with its laws and the law of the land, and no property or civil rights are
invaded. Under such circumstances, the decision of the governing body or established private
NOTE: as to TERM of office of members: the RCC has fixed the term to three years tribunal of the association is binding and conclusive and not subject to review or collateral attack
in the courts. " (7 C.J.S. pp. 38- 39).
SEC 91- xxx They shall hold office for not more than three (3) years until their successors are
elected and qualified. Trustees elected to fill vacancies occurring before the expiration of a The general rule of non-interference in the internal affairs of associations is, however, subject to
particular term shall hold office only for the unexpired period. Xxx xxx xxx exceptions, but the power of review is extremely limited. Accordingly, the courts have and will exercise
power to interfere in the internal affairs of an association where (1) law and justice so require, and
Previous rule under Sec. 92 (now SEC 91) allows the AOI or by-laws to provide a desired term the proceedings of the association are subject to judicial review where there is fraud, oppression, or bad
of office and may vary depending on the needs of a specific corporation. By analogy of the faith, or (2) where the action complained of is capricious, arbitrary, or unjustly discriminatory. Also, the
provisions of Sec. 7, however, a term in excess of 5 years is not allowed as it would unduly courts will usually entertain jurisdiction to grant relief (3) in case property or civil rights are invaded,
deprive other members to take active part in corporate management. although it has also been held that the involvement of property rights does not necessarily authorize judicial
intervention, in the absence of arbitrariness, fraud or collusion. Moreover, the courts will intervene (4)
SEC 92 then also provides that, “The term of office may also be staggered unless the AOI or by-laws
where the proceedings in question are violative of the laws of the society, or the law of the land, as by
otherwise provide. If such be the case, the board shall classify themselves in order that 1/3 of their number
depriving a person of due process of law. Similarly, judicial intervention is warranted (5) where there is a
shall expire every year and subsequent elections of trustees comprising 1/3 shall be held annually. The
lack of jurisdiction on the part of the tribunal conducting the proceedings, where the organization exceeds
trustees so elected to fill up any vacancy occurring before the expiration of a particular term shall hold
its powers, or where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
office only for the unexpired portion of his predecessor.” NOTE: while this is deleted in the present
provision, it is not prohibited so the corporation may provide it in its by-laws. In accordance with the general rules as to judicial interference cited above, the decision of an
unincorporated association on the question of an election to office is a matter peculiarly and exclusively to
Note: While the Code speaks of the BOT as the governing board or body in a non-stock corporation the
be determined by the association, and, in the absence of fraud, is final and binding on the courts. (7 C.J.S.,
same law allows a non-stock corporation or any other special corporation to designate their governing
p. 44).
board by any other name other than BOD/T. The Rotary Club for instance, designates it as Board of
Governors while the Evangelica Independence Metodista En Las Islas Filipinas calls it as the Consistory The instant controversy between petitioner So and respondent Josefa falls squarely within the ambit of the
of Elders. rule of judicial non-intervention or non- interference. The elections in dispute, the manner by which it was
conducted and the results thereof, is strictly the internal affair that concerns only the Lions association
Note: One of the significant features of a non-stock corporation is that it allows the AOI or by-laws to
and/or its members, and We find from the records that the same was resolved within the organization of
provide that the officers thereof shall be directly elected by the members. Unlike in a stock corporation
Lions Clubs International in accordance with the Constitution and By-Laws which are not immoral,
where corporate officers are elected by the BOD.
unreasonable, contrary to public policy, or in contravention of the laws of the land
Section 174. Designation of governing boards. - The provisions of specific provisions of this Code
At the meeting of the International Board of Directors held on June 27, 1982, the election of petitioner
to the contrary notwithstanding, non-stock or special corporations may, through their articles of
James L. So to serve as District Governor of District 301-Al for the fiscal year 1982-83 was approved and

said petitioner was duly informed thereof by Richard G. Rice, Manager, District Operations Department, Let us see, voting rights of stockholders of stock corporation as may be compared to voting rights of
Lions Clubs International in his letter dated July 8, 1982 and marked Annex "K" to the petition, p. 79, members in a nonstock corporation. In nonstock, each member shall be entitled to one vote per member.,
Records. Petitioner attended and completed the District Governors' Executive Seminar as District meaning, as a general rule, cumulative voting is not allowed, whereas cumulative voting as a matter of
Governor of 301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was proclaimed, right is granted by law to a SH, the voting right where the number of shares is multiplied by the number of
sworn to and installed to office as District Governor of District 301-Al by the President of Lions International director the sum of which will be his total number of votes, it is not generally allowed in a nonstock
at the close of the 65th Lions Clubs International Convention held in Atlanta, Georgia, U.S.A corporation because of that provision. However, title XI also provides that the AoI or by-laws may limit,
broaden or deny voting rights of the members, so if there is a by-law or AoI allowing the same they may
The findings upon the evidence submitted and examined at the hearing of the election protest before the also cumulate their votes. Likewise, proxy voting is a matter of right granted by law to stock corporation,
Committee personally attended by both petitioner So and respondent Josefa may not be disturbed by the whereas proxy voting may be denied by the Articles or by laws, because again of that provision the right
courts. The decision of the Association's tribunal, the International Board of Directors, is controlling since to vote of a member maybe broaden, denied or limited by a provision in the article of incorporation or the
respondent Josefa alleges no invasion of this property or civil rights and neither is it claimed that the by-laws. If not denied, however, they can also vote by proxy. And just like a stock corporation the by-laws
government of the Association is not fairly and honestly administered in conformity with its laws and the of a nonstock corporation, may authorize voting through remote communication or in absentia.
law of the land.
Membership in a nonstock corporation is personal and nontransferable, unless the AoI or by-laws provides
LIST of MEMBER and PROXIES AND PLACE of MEETINGS otherwise. Club shares most of them are transferrable.
SEC. 92. List of Members and Proxies, Place of Meetings. – The corporation shall, at all times, keep QUERY: A, the shareholder and member of Wack Wack Golf and Country Club, can no longer play
a list of its members and their proxies in the form the Commission may require. The list shall be golf and he decided to go to united states for good, so he indorsed and delivered his stocks
updated to reflect the members and proxies of record twenty (20) days prior to any scheduled certificate to his trusted driver for the past 20 years, may the driver, the transferee, have the same
election. The bylaws may provide that the members of a nonstock corporation may hold their right, power or privilege to demand the corporation that the transfer be recorded in his name in the
regular or special meetings at any place even outside the place where the principal office of the books of the corporation?
corporation is located: Provided, That proper notice is sent to all members indicating the date, time
and place of the meeting: Provided, further, That the place of meeting shall be within Philippine A: Just like any transferee of shares in a stock corporation, YES, the rules governing stock corporations
territory. when pertinent also applies to a nonstock corporation, there is nothing in title XI governing the transfer.
So, you go back to the general provision.
PLACE OF MEETING: General Rule: Any place in the Municipality or City where the principal office is
located. The right of the transferee of shares to record his name in the book of the corporation is an inherent right
flowing from his stock ownership. And if he is denied without good cause it may be compelled to do so by
Exception: The bylaws may provide that the members of a nonstock corporation may hold their regular or mandamus. It is the duty of the corporation to record transfers of shares, it is ministerial. The operative act
special meetings at any place even outside the place where the principal office of the corporation is of transferring shares is indorsement and delivery of the stock certificate, ones these are done, there is a
located: valid transfer between transferor and transferee.
1. Provided, that proper notice is sent to all members indicating the date, time and place of the QUERY: Now that the driver is a shareholder, is he now a MEMBER?
meeting:
2. Provided, further, that the place of meeting shall be within Philippine territory. A: NO, not just yet, membership is acquired through compliance with the standard set by nonstock
corporation, they can set their own criteria or standard in their admission of members.
DISCUSSION:
Like, Wack Wack Golf and Country Club, Manila Polo Club, Manila Golf Club, they consider the financial
Title XI speaks of Non-stock Corporation status of the shareholder before they are admitted as a member.
Definition is one where no part of its income is distributable as dividends to its members, trustees, or And this right of the nonstock corporation to set their own criteria and standard in the admission of their
officers. Just the reverse of it is the definition of a stock corporation, one with capital stock and the authority members is recognized by the Supreme Court, it was recognized in Cebu Country Club vs Elizaqaque in
to distribute allotment, surplus and profits by way of dividends. that case respondent is a shareholder of CCC he applied for membership, as I was saying being a member
and a stockholder are to different things, he applied for membership September 6, 1966, in a meeting of
Meaning a non-stock corporation can also gain profits to be used for the furtherance of the purpose or
the board on April 7, 1977 and May 30, 1977, the action on the application was deferred, it was only on
purposes for which the corporation was organized, it cannot use these profits for purposes for declaration
July 30 1996 that the application was voted upon, and on august 1, 1997 almost 1 yr. later, he received a
of dividends.
letter form the secretary that his application was disapproved. August 6 1997, she filed a motion for
The last paragraph provides the provisions governing stock corporations, when pertinent, shall be reconsideration but CCC did not answer thus another letter, CCC still did not answer, so that on November
applicable to nonstock corporations, except as may be covered by specific provisions of Title XI. 5 1997 respondent again wrote a letter inquiring whether any of the membership committee members
objected to his application but CCC did not reply, thus he instituted an action, the SC recognized the
inherent right of a nonstock corporation that a non-profit and non-stock membership club may have the

right to approve or disapprove an application for proprietary membership, but the court went on saying the SEC. 93. Rules of Distribution. – The assets of a nonstock corporation undergoing the process of
right should not be exercised arbitrarily. The application form that he filled up is an old one, the number of dissolution for reasons other than those set forth in Section 139 of this Code, shall be applied and
votes required in order to be a member was 5, however about almost 20 years later, the Articles were distributed as follows:
amended requiring now a unanimous vote of the membership committee. Petitioners explained that the
amendment was not printed on the application form due to economic reasons. We find this excuse flimsy (a) All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
and unconvincing. Such amendment, aside from being extremely significant, was introduced way back in adequate provision shall be made therefor;
1978 or almost twenty (20) years before respondent filed his application. We cannot fathom why such a
(b) Assets held by the corporation upon a condition requiring return, transfer or conveyance, and
prestigious and exclusive golf country club, like the CCCI, whose members are all affluent, did not have
which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in
enough money to cause the printing of an updated application form. What the higher court did was to apply
accordance with such requirements;
the article 19 of the civil code, every person must in the exercise of his rights and in the performance of
his duties, acts with justice, give everyone his due, and observe honesty and good faith, and the court (c) Assets received and held by the corporation subject to limitations permitting their use only for
direct the club to admit the respondent as a member. charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or
Membership may also be terminated for causes provided for in the article or by-laws under section 90.
conveyed to one (1) or more corporations, societies or organizations engaged in activities in the
The governing board of a nonstock corporation are normally called the board of trustees, however, section Philippines substantially similar to those of the dissolving corporation according to a plan of
174 allows a nonstock corporation to designate their governing board by any other appropriate name, distribution adopted pursuant to this Chapter;
nonstock or other special corporation. So, this club shares which are nonstock may still refer to their
(d) Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
governing board as board of directors.
accordance with the provisions of the articles of incorporation or the bylaws, to the extent that the
By express provision, except with respect to independent directors or trustees of a nonstock corporation articles of incorporation or the bylaws determine the distributive rights of members, or any class
vested with public interest, only a member of the corporation shall be elected as trustee and others as may or classes of members, or provide for distribution; and
be provided for in the articles of incorporation or the bylaws. As we were saying when we were taking up
(e) In any other case, assets may be distributed to such persons, societies, organizations or
bylaws, the bylaws will provide for other qualifications or membership requirements.
corporations, whether or not organized for profit, as may be specified in a plan of distribution
Number of Directors- may be more than 15. It was inserted primarily to address the national associations adopted pursuant to this Chapter.
who wanted to have representative for each region or district or first-class cities.
SEC. 94. Plan of Distribution of Assets. – A plan providing for the distribution of assets, consistent
Term of Office- it may be 3 years. That’s why I said that the term of 1yr under sec 22 is not absolute, it is with the provisions of this Title, may be adopted by a nonstock corporation in the process of
only a general rule, because in a nonstock a trustee may serve for a term of 3 years. dissolution in the following manner:
Other Corporate Officers- unless the articles or bylaws provides otherwise, they are directly elected by the a) The board of trustees shall, by majority vote, adopt a resolution recommending a plan of
members. Compared to the stock corporation, it is the board of directors which elects the other officers. distribution and directing the submission thereof to a vote at a regular or special meeting of
members having voting rights;
Place of Meetings of members- The bylaws may provide that the members of a nonstock corporation may
hold their regular or special meetings at any place in the Philippines. As compare to stock corporation, at b) Each member entitled to vote shall be given a written notice setting forth the proposed plan of
the principal office if practicable, if not practicable then anywhere within the territorial boundaries of the distribution or a summary thereof and the date, time and place of such meeting within the time and
principal office. in the manner provided in this Code for the giving of notice of meetings; and
QUERY: If there is no law bylaw provision authorizing the holding of members meeting anywhere c) Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the
in the PH may they do so? members having voting rights present or represented by proxy at such meeting.
A: NO, section 86 paragraph 2, the rules governing stock corporation when pertinent, will also apply to Culled from the law is that non-stock corporations may provide in the AOI or by-laws, for the distribution
nonstock corporation, unless specifically covered by title XI. That provision(sec 92) merely allows a of its assets among its members subject to the provisions of Sec. 93 and 94. That is, the exception relative
nonstock corporation to validly provide in there bylaws that meetings of the members may be held to assets which it holds upon some trust. In which event, the claims of the state, beneficiaries, rightful
anywhere in the PH absent any, SEC 50 says, stockholders or members meetings shall be held at the owners or donors will have to be considered. Thus, assets not subject to the provisions of number 2-4 of
principal office if practicable, if not, then of course, anywhere within the territorial bounds of the city or Sec. 93 may be distributed in accordance with a plan of distribution thereof in accordance with the rule
municipality where the principal office is located, notably metro manila etc, are considered one single city established in Sec. 94 of the Code.
or municipality.
DISTRIBUTION OF ASSETS UPON DISSOLUTION

Chapter XV- CLOSE CORPORATIONS
DEFINITION Absent any of the provisions required by the said section, the corporation, will not, for all legal intents and
purposes, be considered as a close corporation and would thus not be governed by TITLE XII of the Code,
SEC. 95. Definition and Applicability of Title. – A close corporation, within the meaning of this but by the general provisions governing ordinary corporation. “A corporation does not become a close
Code, is one whose articles of incorporation provides that: corporation just because man and his wife owns 99.86% if the capital stock” (San Juan Structural Steel
vs. CA). The qualifying conditions required by law must be complied with.
(a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); Note: the last sentence of paragraph 1, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which
(b) all the issued stock of all classes shall be subject to one or more specified restrictions on
is not a close corporation. HOWEVER, even if another corporation owns or controls 2/3 of the “voting”
transfer permitted by this Title; and
stocks of a close corporation, the latter may still be considered as such close corporation if the corporation
(c) the corporation shall not list in any stock exchange or make any public offering of its stocks of owning or controlling the shares is also a close corporation.
any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation
Note: BUSINESS WITH PUBLIC INTEREST may not be formed as close corporation under the second
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
paragraph of Sec. 95. Sec. 176 of the Code lays down a similar policy authorizing NEDA to recommend
corporation which is not a close corporation within the meaning of this Code.
to the legislature the setting of maximum limits to family or group ownership of stock in corporations vested
Any corporation may be incorporated as a close corporation, except mining or oil companies, with public interest, and the determination of whether or not it should be vested with public interest within
stock exchanges, banks, insurance companies, public utilities, educational institutions and its domain.
corporations declared to be vested with public interest in accordance with the provisions of this
PERMISSIVE PROVISIONS
Code.
SEC. 96. Articles of Incorporation. – The articles of incorporation of a close corporation may
The provisions of this Title shall primarily govern close corporations: Provided, That other Titles
provide for:
in this Code shall apply suppletorily, except as otherwise provided under this Title.
(a) A classification of shares or rights, the qualifications for owning or holding the same, and
Note: The ultimate effect of the special provisions of the law on close corporations is to furnish another
restrictions on their transfers, subject to the provisions of the following section;
form of business organization – a “de facto corporation with a corporate shell”. It is referred to sometimes
as a hybrid of both the corporate and partnership forms, an “incorporated partnership” or “corporation de (b) A classification of directors into one (1) or more classes, each of whom may be voted for and
jure but a de facto partnership”. elected solely by a particular class of stock; and
Rationale: This is because a close corporation may partake the nature of a (c) Greater quorum or voting requirements in meetings of stockholders or directors than those
partnership in that the stockholders thereof take an active role in the management of the provided in this Code.
corporate affairs either as directors, officers or even perhaps as partners in management which
is akin to the partnership form of business. This, in fact, is the main distinction between a close The articles of incorporation of a close corporation may provide that the business of the
corporation and the ordinary stock corporation where, in the latter, the stockholders have hardly corporation shall be managed by the stockholders of the corporation rather than by a board of
a voice in management except perhaps to elect the directors. directors. So long as this provision continues in effect, no meeting of stockholders need be called
to elect directors: Provided, That the stockholders of the corporation shall be deemed to be
Note, however, that the stockholders who are active in management still enjoy limited liability to the extent directors for the purpose of applying the provisions of this Code, unless the context clearly
of their subscription in so far as corporate obligations are concerned. Note further, however, that under requires otherwise: Provided, further, That the stockholders of the corporation shall be subject to
letter E of Sec. 99 of the Code, they are made personally liable for corporate torts unless they have all liabilities of directors.
obtained a reasonably adequate insurance liability.
The articles of incorporation may likewise provide that all officers or employees or that specified
Note: to be considered as a close corporation, it must contain all the three provisions required to be officers or employees shall be elected or appointed by the stockholders, instead of by the board
indicated in the AOI as provided by Sec. 95, which are the following: of directors.
1. all the corporation’s issued stock of all classes, exclusive of treasury shares, shall Note: Under no. 1 of the above provision, the close corporation may classify its shares into different classes
be held of record by not more than a specified number of persons, not exceeding to be held of record only by specified persons. Example: Classes A, B and C. Class A is to be held only
twenty (20); by the incorporators; Class B by their relatives within the third civil degree of consanguinity or affinity;
2. all the issued stock of all classes shall be subject to one or more specified Class C by their close business associates.
restrictions on transfer permitted by this Title; and
3. the corporation shall not list in any stock exchange or make any public offering of Note: Under no. 2 above, a close corporation may provide for a classification of directors into one or more
its stocks of any class. class, each of whom may be voted for and elected solely by a particular class of stock. Example: 1,000

Class A shares; 500 Class B shares; and 200 Class C shares. The AOI may provide that each class shall EFFECT OF BREACH OF QUALIFYING CONDITIONS
have a representation in the BOD regardless of the number of shares within each class. So, if the close
corporation has 5 directors, then the AOI may allocate 3 directors for Class A shares, 1 for B and 1 for C. SEC. 97. Validity of Restrictions on Transfer of Shares. – Restrictions on the right to transfer shares
Within each class, cumulative voting may also be exercised by the stockholders of such class to elect their must appear in the articles of incorporation, in the bylaws, as well as in the certificate of stock;
representative in the board. But to the extent that each class can elect its own directors regardless of the otherwise, the same shall not be binding on any purchaser in good faith. Said restrictions shall not
number of shares in such class, cumulative voting may, in effect be restricted. This is so because if there be more onerous than granting the existing stockholders or the corporation the option to purchase
is no provision for a classification of directors, then Class A stockholders, by cumulating their votes the shares of the transferring stockholder with such reasonable terms, conditions or period stated.
(5x1000) will have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B shares, having If, upon the expiration of said period, the existing stockholders or the corporation fails to exercise
2,500 votes (5x500) can vote 2 members and Class C shares having only 1,000 votes(5x200) cannot be the option to purchase, the transferring stockholder may sell their shares to any third person.
guaranteed to any seat in the board.
NOTE: The restriction must be indicated not only in the AOI and the stock certificates but also in the by-
Note: a close corporation may provide for a greater quorum or voting requirement under no. 3 above. laws.
Although the AOI or by-laws of other stock corporations may provide for greater quorum and voting
In order to bind purchasers in good faith, restrictions on the right to transfer shares must appear in:
requirements in DIRECTORS’ meeting as provided in Sec. 52 of the Code, those for STOCKHOLDERS’
meeting, unlike in a close corporation, may not be altered or increased. This provisions in effect, increases 1. The articles of incorporation;
the veto power of the minority stockholders. 2. The by-laws; and
3. The certificate of stock.
Note: the AOI of the close corporation may provide that the corporation shall be managed by the
stockholders rather than by the BOD. If such be the case, the stockholders are deemed directors and are Restrictions on the right to transfer shares shall not be more onerous than granting the existing
subject to all the rights and liabilities of a director. However, their liability would be more extensive in that stockholders or the corporation the option to purchase the shares of the transferring stockholder within
they are personally liable for torts unless, again, the corporation has obtained reasonably adequate liability reasonable terms, conditions or period. If upon the expiration of said period, the existing stockholders or
insurance. As distinguished from the ordinary stock corporation, directors hereof are liable for corporate the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to
torts only if they have been negligent or acted fraudulently in the performance of their functions. As to what any third person.
is “reasonably adequate liability insurance” would vary depending on the facts and circumstances of the
case. If, after the expiration of the period, the existing stockholders or the corporation fails to exercise the option,
the stockholder concerned may transfer his shares to any third person subject to the provisions, however,
In order that the provision allowing a close corporation to do away with a BOD may be effective, the same of Sec. 98:
must contain the continuing provisions required in par. 2 of Sec. 96:
SEC. 98. Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions. –
1. No meeting of stockholder’s need be called to elect directors;
2. That the stockholders of the corporation shall be deemed to be directors for the purpose of (a) If a stock of a close corporation is issued or transferred to any person who is not eligible to be
applying the provisions of this Code, unless the context clearly requires otherwise; and a holder thereof under any provision of the articles of incorporation, and if the certificate for such
3. That the stockholders of the corporation shall be subject to all liabilities of directors. stock conspicuously shows the qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be a
Note: Sec. 96 likewise allows the AOI of a close corporation to provide that all officers or employees stockholder.
shall be elected or appointed by the stockholders instead of the BOD.
(b) If the articles of incorporation of a close corporation states the number of persons, not
THUS, the permissive provision in the AOI of a close corporation are the ff.: exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for such
stock conspicuously states such number, and the issuance or transfer of stock to any person
(a) A classification of shares or rights, the qualifications for owning or holding the same, and
would cause the stock to be held by more than such number of persons, the person to whom such
restrictions on their transfers, subject to the provisions of the following section;
stock is issued or transferred is conclusively presumed to have notice of this fact.
(b) A classification of directors into one (1) or more classes, each of whom may be voted for and
elected solely by a particular class of stock; and (c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the
(c) Greater quorum or voting requirements in meetings of stockholders or directors than those corporation’s stock and the transferee acquires the stock in violation of such restriction, the
provided in this Code. transferee is conclusively presumed to have notice of the fact that the stock was acquired in
(d) The articles of incorporation of a close corporation may provide that the business of the violation of the restriction.
corporation shall be managed by the stockholders of the corporation rather than by a board of
directors. (d) Whenever a person to whom stock of a close corporation has been issued or transferred has
(e) The articles of incorporation may likewise provide that all officers or employees or that specified or is conclusively presumed under this section to have notice of: (1) the person’s ineligibility to be
officers or employees shall be elected or appointed by the stockholders, instead of by the board a stockholder of the corporation; or (2) that the transfer of stock would cause the stock of the
of directors.
corporation to be held by more than the number of persons permitted under its articles of
incorporation; or (3) that the transfer violates a restriction on transfer of stock, and the corporation 1.The stock is issued or transferred to a person The transferee is conclusively presumed to have
may, at its option, refuse to register the transfer in the name of the transferee. not entitled under the articles of incorporation; notice of his ineligibility to be a stockholder.
and
(e) The provisions of subsection (d) shall not be applicable if the transfer of stock, though contrary 2. The stock certificate conspicuously shows the
to subsections (a), (b) or (c), has been consented to by all the stockholders of the close qualifications of the persons entitled.
corporation, or if the close corporation has amended its articles of incorporation in accordance 1. The articles of incorporation states the number The transferee is conclusively presumed to have
with this Title. of persons, not exceeding 20, who are entitled to notice of this fact.
(f) The term “transfer”, as used in this section, is not limited to a transfer for value. be holders of record of its stock
2. The stock certificate conspicuously states such
(g) The provisions of this section shall not impair any right which the transferee may have to either number; and
rescind the transfer or recover the stock under any express or implied warranty. 3. The issuance or transfer of stock causes the
stock to be held by more than such number of
Note: Apparently, a selling stockholder may not be able to transfer his shares if to do so would violate the persons.
qualifying conditions indicated in the AOI, unless of course, all the stockholder consents to the transfer or 1. The stock certificate conspicuously shows a The transferee is conclusively presumed to have
the AOI is amended (letter (e) above). restriction on transfer of stock; notice of this fact.
2. The transfer violates the restriction.
Note: the stockholder concerned is not, however, left without any recourse as he may compel the close
corporation to purchase his shares at their fair value for any reason subject only to the condition laid down
in Sec. 104.
STOCKHOLDER’S AGREEMENT
Note: the transferee, on the other hand, may rescind the transaction or to recover from the transferor under
any applicable warranty, express or implied. SEC. 99. Agreements by Stockholders. –
Note: General Rule: The transfer being invalid, the close corporation may refuse to register the transfer of (a) Agreements duly signed and executed by and among all stockholders before the formation and
stock in the name of the transferee who has or is conclusively presumed to have notice that: organization of a close corporation shall survive the incorporation and shall continue to be valid
and binding between such stockholders, if such be their intent, to the extent that such agreements
a) He is not eligible to be a holder of stock of the corporation; are consistent with the articles of incorporation, irrespective of where the provisions of such
b) Transfer of stock to him causes the stock of the corporation to be held by more than the number agreements are contained, except those required by this Title to be embodied in said articles of
of persons permitted by its articles of incorporation to hold stock of the corporation; or incorporation.
c) The transfer of stock is in violation of a restriction on transfer of stock.
(b) A written agreement signed by two (2) or more stockholders may provide that in exercising any
Exceptions: voting right, the shares held by them shall be voted as provided or as agreed, or in accordance
a) The transfer of stock has been consented to by all the stockholders; or with a procedure agreed upon by them.
b) The close corporation has amended its articles of incorporation. (c) No provision in a written agreement signed by the stockholders, relating to any phase of
Options granted to the transferee: corporate affairs, shall be invalidated between the parties on the ground that its effect is to make
them partners among themselves.
a) Rescind the transfer; or
b) Recover under any applicable warranty, express or implied. (d) A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it relates to the conduct of the business and affairs of the
Note: Order of Priority for Transfer: corporation as to restrict or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are parties thereto the
1. Existing stockholder of the same class liabilities for managerial acts imposed on directors by this Code.
2. Corporation, if with sufficient asset, regardless of URE
3. Third persons (e) Stockholders actively engaged in the management or operation of the business and affairs of
a close corporation shall be held to strict fiduciary duties to each other and among themselves.
Effects of issuance or transfer of stock in breach of qualifying conditions: The stockholders shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
CONDITIONS EFFECTS

Note: PRE-INCORPORATION AGREEMENTS under par.1 do not ordinarily survive the corporation in 20 specified persons. 2. All the issued stock of all classes shall be subjected to one or more specified
ordinary stock corporations unless it has been ratified or adopted by the corporation after incorporation. restrictions on the transfer permitted by this code; and third the corporation shall not list in any stock
Only in such case may the corporation be bound by said agreement. In a close corporation, these pre- exchange or make any public offering of its stocks of any class. The Codal definition however, fails to
incorporation agreements survive and continue to be valid and binding, if such be the intent of the mention what is perhaps the most characteristic feature of a close corporation, that is “the identity of
stockholders, provided that the agreement is not inconsistent with the AOI stock ownership and active management”. It is most if not all of the stockholder, take an active
participation in the management of the corporation either as directors, officer or even as partners in
Note: under par.2 VOTING AGREEMENTS or rights or the manner of exercising voting rights may be the management. This in fact is its main distinction from the other corporations, where the stockholders hardly
subject of agreement of stockholders, such as to vote for a specific person or group or to maintain a certain participate in the management of the corporation, except perhaps their power or authority to elect the
stockholder as their president or chairman. directors who are to manage the corporation.
Note: CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the subject of an agreement, in And the ultimate effect of the special provision on close corporation is to furnish another form of business
writing, and will be effective and binding despite the fact that it may make them partners among organization, a de facto partnership with corporate touch. A de jure corporation but a de facto partnership.
themselves. Agreements may also be entered into by and between the stockholders of a close corporation In effect it is a combination of both the partnership and the corporate form of business this is because sec
which relates to the management of the corporate affairs which would not otherwise be valid and binding 96 allows a close corporation to do away with the board of directors, vesting the management of the
in other corporations. This is because stockholders’ agreement in the latter cannot limit or restrict the corporate affairs directly to the stockholders themselves and anyone of them may bind the corporation just
discretion and powers of the BOD to manage the corporate affairs. like any other partners in a partnership.
DISCUSSION: Likewise, even subparagraph 3 of section 99 considers a written agreement of the stockholder, relating to
any phase of corporate affairs, making the stockholders as partners between and among themselves valid
Title XII speaks of close corporation, it was inserted by the framers of the then BP 68, prior thereto we did
and enforceable. And this will be true even if the agreement relates the conduct of the business and affairs
not have any provision regarding this type of a corporation and from the special provision of title XII the
thereof, which are normally matters addressed to the sound discretion of the board in other corporation,
advantages that attached to a partnership form of business can now be availed of by the formation of a
as we were saying then, stockholders shall have all the profits but in return turn the management of the
corporation known as the close corporation, for the business associates belong to small closely knit group,
corporate affairs to the board of directors. But the significant difference between a close corporation and
like a family for instance. They usually prefer to keep the business organization exclusively and will not
the ordinary stock corporation is that, the stockholder in a close corporation who will take an active
welcome strangers, since it is thru their efforts and skills that they expect the business to grow and prosper
participation in the management of corporate affairs are made liable for corporate torts unless the
despite understandable, while they do not welcome strangers to come in and intervene with the
corporation has obtained a reasonably adequate liability insurance as per section 99. However, they still
management of the corporation and will share whatever profits the company may earn, wishing to avail
enjoy limited liability, insofar as other corporate obligations are concerned.
themselves of limiting their liability or business reversals to the amount of their respective subscription or
promised contributions, which would have otherwise may have formed a partnership ,because we note And as per section 95 it is clear to what close corporation must contain. They must contain all the three
that in partnership a partner will always be a general partner liable for all debts and liabilities incurred by provisions required to be indicated in the articles of incorporation. It would seem, however, that the
the partnership, that is why a close corporation is availed of. corporation may in fact be a close one by deliberately omitting anyone of the provisions required in section
95, thereby avoiding at the same time the liability imposed on the stockholders of corporations, in such
However, the identity of the stockholder is important to his associates, so that although they may consider
cases however it would not be legally considered a close corporation, and would not thus be governed by
their organization a corporation in their dealings with third persons, between and among themselves they
the provisions of title XII but rather the general provision applicable to ordinary stock corporation.
feel and act as bodies. The old notion of family corporation was supposed to be _____, but there were no
safeguarding provisions in the old law, to guarantee the continued existence of the family corporation as The same section 95 provides that it cannot be considered a close corporation when at least 2/3 of its
may have been intended by the stockholders. The provisions of the RCC are still the same to that of the voting stocks is owned or controlled by another corporation which is not a close corporation within the
BP 68. meaning of this code, note the words “voting stocks”. Notably therefore even if another owns or controls
2/3 or more of the stocks if they are non-voting stocks the formation of a close corporation will still be
There was no the no mention as to the number of the stockholders, sec 95 says not more than 20. There
possible. And even if they may be voting stocks if the corporation owning the stock is also a close
was also then no mention as to specific restriction as to who may qualify as stockholder, 95 says, not more
corporation the formation of a close corporation will also be possible.
than 20 specified persons, if you are not one of those specified you cannot be a stockholder and although
restrictions and preferences, such as the right of first refusal and transfer of shares were allowed under Mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational
the corporation law, they were merely directive or permissive in the old law, the present one requires and institutions and corporations declared to be vested with public interest cannot however be formed or
mandates that all of the shares of stock of a close corporation of any class shall be subjected to one or organized as a closed corporation. In banks for instance, not more than 20% of the voting stocks may be
more specified restrictions allowed by the code. And before, shares of stock upon the corporation then owned by relatives within the 3rd degree of affinity or consanguinity. Sec 176 of the code has laid down a
under the corporation law were not prohibited to be listed in the stock exchanged nor were they restricted similar punishment by authorizing the NEDA to recommend to the Congress the setting of maximum limits
to offer their shares to the public. for stock ownership of individuals or groups of individuals related to each other by consanguinity, affinity,
or by close business interests, in corporations declared to be vested with public interest and the
From the definition of Sec 95, a close corporation is one whose articles of incorporation provides that 1.
determination of whether or not it should be vested with public interest is within the domain of the NEDA.
all of the corporations issued stock, exclusive of treasury shares, shall be held of record by not more than
Sec 96 is a permissive provision, it allows a close corporation to provide in its articles of incorporation Another distinctive provision of section 96 is the quorum and voting requirements where by a close
provisions (1) A classification of shares or rights, the qualifications for owning or holding the same, and corporation may provide a (3) greater quorum or voting requirements in BOTH the stockholders and
restrictions on their transfers, as maybe indicated by the code. directors meetings. Although the AoI and bylaws of other stock corporation may provide for greater
quorum and/or voting requirement in DIRECTORS meeting under sec 52, those for stockholders meeting
So that the close corporation may classify its shares in to common A, common B, cannot be altered. This provision in effect increases the veto power of the minority stockholders, for
common C and may provide that class A shares shall be held only by the incorporators and instance investment of corporate funds in another corporation or business, or for any other purpose other
their relatives in the 3rd degree of consanguinity, class B shares will be held of record only by than the primary purpose requires the vote of at least 2/3 of the OCS. But the AoI of a Close Corp may
the relatives of class A shares within the 3rd degree of affinity and class C shares will be held require a vote of ¾ of the OCS, and that’s 75% while 2/3 is only 66.67.
of record only by a close business associates of A shareholders.
And the AoI may likewise provide that the business of the corporation shall be managed by the
Of course, under 95 item 2, all the issued stock of any class shall be subjected to 1 stockholders themselves rather than the BoD. In such case the stockholders are deemed the directors
or more specified restrictions allowed by the code. So, all three types of shares (referring to A, themselves and will be subjected to all the liabilities of a director, however there liability will be more
B and C) must have restriction in their transfer, absent any of the restrictions on classes A, B, extensive in that they are personally liable for corporate torts unless the corporation has acquired a
and C even if only one has no restriction, it is not a close corporation. reasonably adequate liability insurance, as distinguished from ordinary stock corporations, directors
thereof are liable only they have acted fraudulently, in bad faith, or gross negligence in the performance
If an A shareholder transfers his shares to any other person, he must first offer to
of their duties.
the existing A shareholders, specifying the number of days within which they can exercise their
right of first refusal, if the said A shareholder are not willing to pay, then the corporation can Fifth, the officers or employees or that specified officers or employees, are likewise allowed to be elected
exercise the right also within the specified number of days. If the board or the stockholder does or appointed by the stockholders, instead of by the board of directors. So, there are two exception to the
not want to buy the shares, the stockholder of A share can transfer it to any person. Same holds rule that it is the board of directors that elects the other corporate officers, 1. Nonstock Corporation,
true with a holder of B shares. If B shareholder transfers his shares, he must first offer them to unless the AoI or bylaws provides otherwise, they have to be elected by the members; 2. In a close
existing B shareholders, if no takers then the corporation, still the corporation cannot acquire, corporation, unless the articles or by-laws provides otherwise, they are to be elected directly by the
then he can transfer it to anybody. Same holds true with C class holders. stockholders themselves.
Now you have the first 2 requirements, what is left to be included in the articles of incorporation is that it And as regards to restrictions to the transfer of shares, the same must appear in the AoI, in all the Stock
shall not list in any of the stock exchange or make any public offering of its stocks of any class. There you Certificates issued by the corporation AND in the bylaws. Lest it will not be binding to any purchaser in
go we have complied with the requirements of sec 95, in order that a close corporation may be formed or good faith. In ordinary stock corporation restriction on transfer of shares will be valid if it is indicated in its
organized. AoI and in all of its Stock Certificate issued by the corporation. The restriction shall not however be more
onerous than granting the existing stockholders or the corporation itself the preferential right of purchasing
Sec 96 also say that it may also provide for (2) a classification of directors into one or more classes, each
the shares of a selling stockholder, within reasonable terms, conditions, or period stated. If after the
of whom may be voted for and elected solely by a particular class of stock.
expiration of the period, the stockholder or the corporation fails to exercise their option, the selling
So let us assume that the close corporation has 100 A shares, 50 B shares and 20 stockholder may transfer it to any other third person.
C shares, so the articles may provide that each class shall have a representation in the board,
QUERY: What happens if the transfer of shares will have the effect of a breach of the qualifying
regardless of the number of shares each class has, thus if the close corporation has 5 man
condition indicated in the AoI, the bylaws, and/or the stock certificate? “A” is a shareholder of 20
member board it may allocate 3 seats for A shares, 1 for B shares and 1 for C shares, within
shares, he wants out, so he offers his shares to the stockholders no takers, so he also offered it to
each class cumulative voting may also be exercised by the stockholders of such class to the
the corporation which is also not in a position to acquire the shares, so he sells his 20 shares to X
elect the representatives to the board of directors. So, let us assume, “A” has 20 class A shares,
and Y at 10 shares each, there are already 20 stockholders, including A. may the transferee’s X and
3 directors are to be elected from the A class shares, “A” has 60 votes and he may cast his 60
Y, have the same power, rights and privilege to compel the corporation that the transfer be
votes in favor of only 1 man. Same holds true with the B and C shares. But, to the extent that
recorded in the books?
each class can elect his own director regardless of the number of shares, cumulative voting is
in effect restricted. 5 man member board , A shareholders has 100 shares x 5 members to be A: NO, not like any transferee of shares in ordinary stock, because X and Y are not qualified to be
elected= 500 votes, and they can elect 3 directors, 500 divide it by 3 that’s over 150 share votes stockholders, they are not incorporators neither are they relatives of the incorporators within that degree,
each, B shares having 50 shares can elect the remaining 2 directors, because they can pass they are conclusively presumed to know the fact of their disqualification, but they may be admitted of
250(50 x5 ) votes each, C only having 20 shares only have 100(20 x 5) votes they may have course, if ALL the stockholders, will consent. But if in the process of admitting the both of them, there will
no representation, but since the articles of close corporation may validly provide for a already be 21 stockholders, it will no longer be a close corporation. That is why it requires the consent of
classification of directors in 1 or more classes, to be elected solely by that particular class of all of them, all of the stockholder, because at the instance of anyone of them the corporation cannot record
shares, it cannot be denied, that is why if that is the case cumulative voting is in effect restricted the transaction.
or limited.
QUERY: So, what happens to X and Y? What remedy is left of them?

A: The provision is categorical, rescission, and we all know that rescission results to a mutual restoration. SEC. 101. Preemptive Right in Close Corporations. – The preemptive right of stockholders in close
corporations shall extend to all stock to be issued, including reissuance of treasury shares,
Then again, agreements may also be entered into by between and among stockholders of a close whether for money, property or personal services, or in payment of corporate debts, unless the
corporation regarding the operation of its business if ordinarily would not be valid and binding in other articles of incorporation provide otherwise.
corporations, this is because stockholder’s agreement in other corporations cannot ____, in fact sec. 99
says particularly item C they can agree to make themselves partners between and among themselves. Note: General Rule: The pre-emptive right of stockholders in close corporations shall extend to all stock
to be issued, including reissuance of treasury shares, whether for money, property or personal services,
WHEN BOARD MEETINGS NOT NECESSARY: or in payment of corporate debts.
As a rule, directors in ordinary stock corporations must act as a body at a duly constituted meeting to have Exception: The articles of incorporation provide otherwise.
a valid corporate transaction. In a close corporation, directors may validly act even without a meeting
subject only to the conditions laid down in the Code under Sec. 100: Note: Absent any provision in the Articles of Incorporation denying the pre-emptive right of in a close
corporation, the same shall be absolute. Thus, the restrictions as provided in section 38 shall not be
SEC. 100. When a Board Meeting is Unnecessary or Improperly Held. – Unless the bylaws provide applicable.
otherwise, any action taken by the directors of a close corporation without a meeting called
properly and with due notice shall nevertheless be deemed valid if: AMENDMENTS TO ARTICLES OF INCORPORATION
(a) Before or after such action is taken, a written consent thereto is signed by all the directors; or The general provisions of the Code is also applicable in the amendment of AoI, pursuant to the last par.
of sec 95. A special provision, however, is provided:
(b) All the stockholders have actual or implied knowledge of the action and make no prompt
objection in writing; or SEC. 102. Amendment of Articles of Incorporation. – Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title or to reduce a
(c) The directors are accustomed to take informal action with the express or implied acquiescence quorum or voting requirement stated in said articles of incorporation shall require the affirmative
of all the stockholders; or vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided in the articles of
(d) All the directors have express or implied knowledge of the action in question and none of them
incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting
makes a prompt objection in writing.
duly called for the purpose.
An action within the corporate powers taken at a meeting held without proper call or notice, is
Note: Amendments covered:
deemed ratified by a director who failed to attend, unless after having knowledge thereof, the
director promptly files his written objection with the secretary of the corporation. 1. Amendments which seeks to delete or remove any provision required by this title; or
2. To reduce a quorum or voting requirement stated in said AoI.
Note: General Rule: Any action by the directors of a close corporation without a meeting is invalid.
DEADLOCKS
Exceptions:
Deadlock - the directors or stockholders are so divided respecting the management of the corporation's
1. Written consent is signed by all the directors;
business and affairs that the votes required for any corporate action cannot be obtained, with the
2. All the stockholders have actual or implied knowledge of the action and make no prompt
consequence that the business and affairs of the corporation can no longer be conducted to the advantage
objection thereto in writing;
of the stockholders generally.
3. The directors are accustomed to take informal action with the express or implied acquiescence
of all the stockholders; or SEC. 103. Deadlocks. – Notwithstanding any contrary provision in the close
4. All the directors have express or implied knowledge of the action in question and none of them corporation’s articles of incorporation, bylaws, or stockholders’ agreement, if the directors or
makes prompt objection thereto in writing. stockholders are so divided on the management of the corporation’s business and affairs that the
votes required for a corporate action cannot be obtained, with the consequence that the business
(If a director's meeting is held without proper call or notice, an action taken therein within the corporate
and affairs of the corporation can no longer be conducted to the advantage of the stockholders
powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection
generally, the Commission, upon written petition by any stockholder, shall have the power to
with the secretary of the corporation after having knowledge thereof.)
arbitrate the dispute.
Note: Exception to the exceptions: The by-laws provide otherwise.
In the exercise of such power, the Commission shall have authority to make appropriate
PRE-EMPTIVE RIGHTS orders, such as: (a) cancelling or altering any provision contained in the articles of incorporation,
bylaws, or any stockholder’s agreement; (b) cancelling, altering or enjoining a resolution or act of
the corporation or its board of directors, stockholders, or officers; (c) directing or prohibiting any
act of the corporation or its board of directors, stockholders, officers, or other persons party to 4. His compensation shall be determined by agreement between him and the corporation subject
the action; (d) requiring the purchase at their fair value of shares of any stockholder, either by the to approval of the SEC, which may fix his compensation in the absence of agreement or in the
corporation regardless of the availability of unrestricted retained earnings in its books, or by the event of disagreement between the provisional director and the corporation.
other stockholders; (e) appointing a provisional director; (f) dissolving the corporation; or (g)
granting such other relief as the circumstances may warrant. WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION
A provisional director shall be an impartial person who is neither a stockholder nor a creditor of If a stockholder wishes to withdraw therefrom, he may do so “for any reason” and compel the corporation
the corporation or any of its subsidiaries or affiliates, and whose further qualifications, if any, may to purchase his shares at their fair value provided only that the corporation has sufficient ASSETS in its
be determined by the Commission. A provisional director is not a receiver of the corporation and books to cover its debts and liabilities exclusive of capital stock. This can be done by a stockholder in
does not have the title and powers of a custodian or receiver. A provisional director shall have all ordinary stock corporation only upon the exercise of his appraisal right in those instances allowed under
the rights and powers of a duly elected director, including the right to be notified of and to vote at Sec. 80 of the Code.
meetings of directors until removed by order of the Commission or by all the stockholders. The
Likewise, a corporation may be dissolved on petitioner of only one stockholder on the grounds indicated
compensation of the provisional director shall be determined by agreement between such director
in Sec. 104 which include even mere dishonesty. It provides:
and the corporation, subject to approval of the Commission, which may fix the compensation
absent an agreement or in the event of disagreement between the provisional director and the SEC. 104. Withdrawal of Stockholder or Dissolution of Corporation. – In addition and without
corporation. prejudice to other rights and remedies available under this Title, any stockholder of a close
corporation may, for any reason, compel the corporation to purchase shares held at fair value,
The provision above-quoted gives the SEC a very wide discretion in respect to management of a close
which shall not be less than the par or issued value, when the corporation has sufficient assets in
corporation in the event of a deadlock. Sec 103 provides “The Commission, upon written petition by any
its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder
stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission
of a close corporation may, by written petition to the Commission, compel the dissolution of such
shall have authority to make appropriate orders, such as:
corporation whenever any of acts of the directors, officers, or those in control of the corporation
a. cancelling or altering any provision contained in the articles of incorporation, bylaws, is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any
or any stockholder’s agreement; stockholder, or whenever corporate assets are being misapplied or wasted.
b. cancelling, altering or enjoining a resolution or act of the corporation or its board of
Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his
directors, stockholders, or officers;
shares at their fair value, which shall not be less than their par or issued value, when the corporation has
c. directing or prohibiting any act of the corporation or its board of directors,
sufficient assets in its books to cover its debts and liabilities exclusive of capital stock.
stockholders, officers, or other persons party to the action;
d. requiring the purchase at their fair value of shares of any stockholder, either by the Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such
corporation regardless of the availability of unrestricted retained earnings in its corporation whenever:
books, or by the other stockholders;
e. appointing a provisional director; 1. Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent,
f. dissolving the corporation; or or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder; or
g. granting such other relief as the circumstances may warrant.” 2. Corporate assets are being misapplied or wasted.
Note: in the event the SEC opts to appoint a provisional director under letter E, the second paragraph of Note: It is not necessarily the SEC which has jurisdiction over intra-corporate dispute since such jurisdiction
Sec 103 will govern. The provisional director may break the deadlock by casting the deciding vote. is no longer with the SEC but based on the principal place of office of the corporation, thus it should be
submitted before the proper forum having jurisdiction over the same.
Provisional director:
CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION
1. A provisional director shall be an impartial person who is neither:
a. a stockholder nor CLOSE CORPORATION ORDINARY STOCK CORPORATION
b. a creditor of the corporation or of any subsidiary or affiliate of the corporation, and
c. whose further qualifications, if any, may be determined by the commission. As to # of SH The number of stockholders cannot No limitation
2. A provisional director is not a receiver of the corporation and does not have the title and powers exceed 20
of a custodian or receiver. As to #of directors To the extent that all stockholders Maximum number of directors is 15
3. A provisional director shall have all the rights and powers of a duly elected director of the can be deemed directors, the
corporation, including the right to notice of and to vote at meetings of directors, until such time number of directors can effectively
as he shall be removed by order of the SEC or by all the stockholders. be more than 15

As to restriction in Shares of stock are subject to Generally, no restriction on transfer of As the application The proper forum may interfere in the Courts cannot interfere in the business
stocks specified restrictions shares of business management of a close corporation judgment of the directors/stockholders.
As to listing in Shares of stock are prohibited from No prohibition judgement rule. in case of deadlocks under Section
stock exchange or being listed in the stock exchange or Which says that 103, even of the
sale in public offered for sale to the public “as long as the directors/stockholders are acting in
As to management Stockholders may take an active part Management is lodged in the Board of board acts in good good faith
of the corporation in corporate management by vesting Directors faith the courts
management to them rather than a cannot intervene”
Board of Director As to dissolution Any stockholder may petition the Dissolution may be had only on the
As to liability for Those active in management are Directors are liable for torts only if they SEC for corporate dissolution on grounds provided by the provisions of
torts committed personally liable for corporate torts have acted negligently or fraudulently grounds among others, provides for the Code on dissolution and P.D. 902-
unless the corporation has obtained in section 104. A, as amended
an adequate liability insurance CASES:
As to the validity of Directors can validly act even without Directors must, as a rule, act as a body
acts of directors a meeting at a duly constituted meeting [G.R. No. 91889; August 27, 1993] MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY
As to stockholder’s Agreements between stockholders Not valid and binding since AND NEPOMUCENO REDOVAN, petitioners, vs. THE HONORABLE COURT OF APPEALS,
agreement regarding the operations of the stockholders’ agreement cannot limit EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND
business can validly be made the discretion of the Board to manage CASTRENSE C. VELOSO, respondents.
corporate affairs ISSUE: Whether the sale of the subject property between private respondents spouses Veloso and Manuel
As to classification To the extent that directors may be Ordinarily, no such classification and no Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which authorized the
of directors and classified into one or more classes restrictions on cumulative voting sale of the subject property was resolved without the approval of all the members of the board of directors
cumulative voting and to be voted solely by a particular and said Board Resolution was prepared by a person not designated by the corporation to be its secretary?
class of stock, cumulative voting
may, in effect, be restricted HELD: No. Section 101 of the Corporation Code of the Philippines provides:
As to appointment The articles of incorporation may Officers are elected by the Board of
of officers provide that all officers shall be Directors Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise,
elected or appointed by the any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:
stockholders
As to quorum and It may provide for greater quorum Although the articles of incorporation or 1. Before or after such action is taken, written consent thereto is signed by all the directors, or
voting and voting requirements in meetings by-laws may provide for greater quorum 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
requirements of stockholders and directors and voting requirements in directors’ thereto in writing; or
meeting under section 52, those for
stockholders’ meeting cannot generally 3. The directors are accustomed to take informal action with the express or implied acquiese of all the
be altered stockholders, or
As to requirements Restriction on transfer of shares Valid and binding if indicated in the
for restrictions on should be indicated in the articles of articles of incorporation and stock 4. All the directors have express or implied knowledge of the action in question and none of them makes
transfer incorporation, by-laws and stock certificates prompt objection thereto in writing.
certificates
As to pre-emptive Pre-emptive rights of stockholders is Pre-emptive rights may be denied as If a directors' meeting is held without call or notice, an action taken therein within the corporate powers is
rights broader as it include all issues provided for in section 38 deemed ratified by a director who failed to attend, unless he promptly files his written objection with the
without exception secretary of the corporation after having knowledge thereof.
As to SH’s right to A stockholder may withdraw and Unless he sells his shares, a In the instant case, petitioner corporation is classified as a close corporation and consequently a board
compel the compel the corporation to purchase stockholder cannot get back his resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation
corporation to buy his shares for any reason with the investment nor compel the corporation for the action of its president. At any rate, corporate action taken at a board meeting without proper call or
his share limitation only that the corporation to buy his shares except in the exercise notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his
has sufficient assets to cover its of his appraisal right written objection with the secretary of the corporation after having knowledge of the meeting which, in his
liabilities exclusive of capital stock case, petitioner Virgilio Dulay failed to do.

Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private Private respondents failed to substantiate their claim that Naguiat Enterprises managed, supervised and
respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without controlled their employment. It appears that they were confused on the personalities of Sergio F. Naguiat
the knowledge and consent of the other members of the board of directors cannot be sustained. As as an individual who was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate
correctly pointed out by the respondent Court of Appeals: corporate entity with a separate business. They presumed that Sergio F. Naguiat, who was at the same
time a stockholder and director of Sergio F. Naguiat Enterprises, Inc., was managing and controlling the
Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never participated taxi business on behalf of the latter. A closer scrutiny and analysis of the records, however, evince the
nor was even aware of any meeting or resolution authorizing the mortgage or sale of the subject premises truth of the matter: that Sergio F. Naguiat, in supervising the taxi drivers and determining their employment
(see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the terms, was rather carrying out his responsibilities as president of CFTI. Hence, Naguiat Enterprises as a
contrary, he is very much privy to the transactions involved. To begin with, he is a incorporator and one of separate corporation does not appear to be involved at all in the taxi business.
the board of directors designated at the time of the organization of Manuel R. Dulay Enterprise, Inc. In
ordinary parlance, the said entity is loosely referred to as a "family corporation". The nomenclature, if And, although the witness insisted that Naguiat Enterprises was his employer, he could not deny that he
imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual received his salary from the office of CFTI inside the base.
members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, three (3) children and their father whose name identifies their Another driver-claimant admitted, upon the prodding of counsel for the corporations, that Naguiat
corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). Enterprises was in the trading business while CFTI was in taxi services.
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit that he was a In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, admittedly, was the union of
signatory witness to the execution of the post-dated Deed of Absolute Sale of the subject property in favor individual respondents while still working at Clark Air Base, states that members thereof are the employees
of private respondent Torres indicates that he was aware of the transaction executed between his father of CFTI and "(f)or collective bargaining purposes, the definite employer is the Clark Field Taxi Inc."
and private respondents and had, therefore, adequate knowledge about the sale of the subject property
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI may be solidarily liable with
to private respondents.
CFTI?
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president of CFTI, cannot be
property to private respondents by Manuel Dulay is valid and binding. As stated by the trial court:
exonerated from joint and several liability in the payment of separation pay to individual respondents.
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and
Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the business. Thus,
Castrense C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R. Dulay.
applying the ruling in A.C. Ransom, he falls within the meaning of an "employer" as contemplated by the
This is so because Manuel R. Dulay was not only president and treasurer but also the general manager
Labor Code, who may be held jointly and severally liable for the obligations of the corporation to its
of the corporation. The corporation was a closed family corporation and the only non-relative in the board
dismissed employees.
of directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. There is no denying the
fact, however, that Maria Socorro R. Dulay at times acted as secretary, the Court cannot lose sight of the Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were "close family
fact that the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the incorporators and corporations" owned by the Naguiat family. Section 100, paragraph 5, (under Title XII on Close
directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer Corporations) of the Corporation Code, states:
and general manager almost had absolute control over the business and affairs of the corporation.
(5) To the extent that the stockholders are actively engage(d) in the management or operation of the
[G.R. No. 116123; March 13, 1997] SERGIO F. NAGUIAT, doing business under the name and style business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each
SERGIO F. NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners, vs. NATIONAL LABOR other and among themselves. Said stockholders shall be personally liable for corporate torts unless the
RELATIONS COMMISSION (THIRD DIVISION), NATIONAL ORGANIZATION OF WORKINGMEN and corporation has obtained reasonably adequate liability insurance. (emphasis supplied)
its members, LEONARDO T. GALANG, et al., respondents.
Nothing in the records show whether CFTI obtained "reasonably adequate liability insurance;" thus, what
ISSUE: Whether Sergio F. Naguiat Enterprises, Inc., may be held solidarily liable with CFTI? remains is to determine whether there was corporate tort.
HELD: No. From the evidence proffered by both parties, there is no substantial basis to hold that Naguiat Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially, "tort" consists in the
Enterprises is an indirect employer of individual respondents much less a labor only contractor. On the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal
contrary, petitioners submitted documents such as the drivers' applications for employment with CFTI, and duty. Article 283 of the Labor Code mandates the employer to grant separation pay to employees in case
social security remittances and payroll of Naguiat Enterprises showing that none of the individual of closure or cessation of operations of establishment or undertaking not due to serious business losses
respondents were its employees. Moreover, in the contract between CFTI and AAFES, the former, as or financial reverses, which is the condition obtaining at bar. CFTI failed to comply with this law-imposed
concessionaire, agreed to purchase from AAFES for a certain amount within a specified period a fleet of duty or obligation. Consequently, its stockholder who was actively engaged in the management or
vehicles to be "ke(pt) on the road" by CFTI, pursuant to their concessionaire's contract. This indicates that operation of the business should be held personally liable.
CFTI became the owner of the taxicabs which became the principal investment and asset of the company.

As pointed out earlier, the fifth paragraph of Section 100 of the Corporation Code specifically imposes QUERY: So, what happens if there is a deadlock in a close corporation?
personal liability upon the stockholder actively managing or operating the business and affairs of the close
corporation. A: Sec 103 provides the answer, and this is the only question asked in the bar, regarding this type of
corporation.
The Court here finds no application to the rule that a corporate officer cannot be held solidarily liable with
a corporation in the absence of evidence that he had acted in bad faith or with malice. In the present case, The provision of 103 grants the proper forum a very wide discretion with regards to the management of
Sergio Naguiat is held solidarily liable for corporate tort because he had actively engaged in the close corporation in cases of deadlocks, including even the power to prohibit the directors or stockholders
management and operation of CFTI, a close corporation. from performing any act or canceling any of the provision of the articles of incorporation, or it may also bar
the implementation of any resolution of the directors or the stockholders, or requiring a stockholder to sell
Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title of "general manager" his shares to the corporation irrespective of the existence of unrestricted retained earnings, or even
as well, it had not been shown that he had acted in such capacity. Furthermore, no evidence on the extent dissolve the corporation, or the proper forum may also appoint a provisional director. The provisional
of his participation in the management or operation of the business was proferred. In this light, he cannot director may break the deadlock by passing the deciding vote.
be held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private respondents.
So, what can we gather here? Is that, business judgement rule does not apply in a close corporation, in
DISCUSSION: the cases thereof the court can intervene. Business judgement rule says as long as the board acts in good
faith the courts cannot intervene, but here that is not the case, it can bar the implementation of any
Another distinctive feature of a close corporation is section 100, in that the directors may have a valid act resolution of the BoD or the stockholders, it can prevent them from performing any act, and provisional
even without board meetings, subject only to the provisions of that particular section. In ordinary stock director appointed by the court is and extension of the court and he can cast the deciding vote to break
corporations, the directors must, as rule, sit and act as body at a duly constituted meeting. the deadlock. That is a direct interference with the management of the corporation. in fact, it is like God, it
can dissolve the corporation.
But then again, we have section 38, pre-emptive right, enumerating the instances where a stockholder
even if he is not denied by a provision in the AoI, cannot exercise his pre-emptive rights, and it says, (1) As to dissolution the grounds for the dissolution of a close corporation, would be more extensive than in
shares issued incompliance with laws requiring sock offering or minimum stock ownership by the public; ordinary stock corporation, any act prejudicial to any stockholder, and even mere dishonesty are grounds
or (2) to shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of to the dissolution of a close corporation. And it may be dissolved on petition of anyone stockholder. When
the outstanding capital stock either in exchange for property needed for corporate purposes or in payment we will be taking up dissolution, we take note of the fact, that dissolution will not be granted where the
of a previously contracted debt. However, with the exception as to when a stockholder can exercise his stockholders have any other legal remedy, as in the case of Republic vs Visaya Land, visaya land has
pre-emptive right will not apply to stockholder in a close corporation, because first and for most there is no constituted in its AoI including other purposes not originally indicated in the articles, including at that time
public offering of shares of stocks in a close corporation as item 3 of section 95. Likewise, section 101 agriculture, mining etc. so the minority stockholder instituted an action for the dissolution of the corporation,
provides that even for money, property or personal services, or in payment of corporate debts a the court did not allow the dissolution of the corporation, because the stockholders have another course
stockholder of a close corporation can exercise his preemptive right. So that if he is not denied in the of action they can hold the responsible officers under the now sec 30 of the code, voting or assenting to
provisions of AoI of his preemptive right, such right is deemed absolute. patently unlawful acts or for bad faith or gross negligence in the conduct of corporate affairs will render
them personally liable. But if it was a close corporation the story would not be the same, because wastage
Then again in Sec 104, in addition to all his other rights any stockholder in a close corporation may for any
or misuse of corporate assets is a ground for the dissolution of a corporation. the code says any act
reason compel the said corporation to buy his shares which shall not be less than the par or issued value,
prejudicial to any stockholder, and in fact, even mere dishonesty is ground.
provided only that the corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock. In ordinary stock corporation a stockholder cannot yet part away with his As we may gather from all our discussion there are actual and possible distinctions between the close
investment except in the exercise of his appraisal right or of course, when he sells his shares to third corporation and ordinary corporation, I think I have listed 16 in the book, but I am quite sure that I have
person. We were saying for instance in ordinary corporation it may be availed of only in particular not included the fact that in the case of a close corporation the business judgement rule will not apply, and
instances, when we were taking up appraisal right, stockholder A objected to the transfer of principal office the fact that the transferee of shares of a stock of a close corporation does not have the same unbridled
from QC to Manila, he wanted to exercise his appraisal right because he can no longer attend the right to compel the corporation that the transfer be recorded in his name in the book of the corporation, if
meetings, putol kasi dalwang paa niya, if that is his flimsy excuse he cannot, because SH meeting may be it breaches the qualifying conditions provided for in the articles of incorporation, the bylaws and in the
held anywhere in metro manila. But if he was a stockholder in a close corporation, yes, he can, because stock certificate, because at the instance of any one stockholder the corporation cannot transfer the stock
it is for any reason. in favor of the transferee, if any, consent of all the stockholder is needed, and it will no longer be a close
corporation.
As regards amendments of the articles of incorporation, a special provision is provided for in title XII. As
we were saying in sec 96, it allows a close corporation to provide for greater quorum or voting requirements There are already 3 cases decided by the court applying and misapplying the provisions of the code. (1)
in both directors and SH meetings. Such article may also provide the management of the corporate affairs we have San Juan Structural Sphere and Design vs CA, where the higher court ruled that the fact that the
shall be with the SH rather than with the BoD. The presence of this provisions and the fact that in a close spouse happens to own 99.8%of the OCS the remaining .2% by the others, does not make a close
corporation the balance and control is often times in the stockholders, make the chances ___ greater than corporation, because all the three qualifying conditions required by sec 95 must all be indicated in the AoI,
in other corporations. We were saying then that it may provide that in cases of investment of corporate absent anyone of them it is not a close corporation.
funds the AoI may validly require a voting requirement of ¾ of the OCS, instead 2/3 as provided by law.
The other 2 Manuel Dulay vs Ca and Naguiat vs NLRC, Manual Dulay the president, general manager NOTE: this provision was already deleted in the RCC.
and treasurer of Manuel Dulay Enterprise transferred a property of the corporation, despite the fact that a
board resolution was passed without any of the necessary voting requirement, his son questioned the (Sec. 108) SEC. 106. Board of Trustees. –Trustees of educational institutions organized as
validity of the act, the court ruled that the transfer nonetheless is valid. Because the petitioner is a close nonstock corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the
corporation so that a board resolution is not necessary to bind the corporation, for the action of its officer, number of trustees shall be in multiples of five (5).
because section 100 provides that corporate action without a board meeting shall nonetheless be valid, if
Unless otherwise provided in the articles of incorporation or bylaws, the board of trustees of
the absent director does not formally file his written objection with the secretary. In that particular case,
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
the son was a signatory to the deed of sale, indicating of course, that he was aware of the transaction, he
classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year.
never interposed his written objection with the corporate secretary.
Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term,
Naguiat vs NLRC, the court ruled that Naguiat Enterprises are close family corporation owned by the shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused
naguiat spouses, that under section 99 the stockholder who would take an active participation in the by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute
management of the corporation shall be held liable for corporate tort, thus Sergio Naguiat can be held a quorum for the transaction of business. The powers and authority of trustees shall be defined in
liable since he actively participated in the management of the corporation, Antolin on the other hand the bylaws.
cannot be shown that he acted in such, hence not liable.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.
CHAPTER XVI- SPECIAL CORPORATIONS Board of Director/Trustees or the governing board by any name of an educational institution is similar in
number as to any other corporation except that in case it is non-stock, the number must be in multiples of
EDUCATIONAL INSTITUTIONS five (5). As compared to stock corporation, their number may be within the vicinity of five (5) to fifteen (15).
(Sec 106) SEC. 105. Incorporation. – Educational corporations shall be governed by special laws Term of Office- Members of the Board may hold office for five years but they shall be staggered so that
and by the general provisions of this Code. 1/5 of their number shall expire every year.
Educational Institutions- are those which provide facilities for teaching or instruction. It includes both CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, Sec. 4 of Article XIV (Education,
public and private schools or colleges and universities and are subject to the provisions of special laws Science and Technology, Arts, Culture and Sports)
and by the general provisions of the Code.
Educational institutions, other than those established by religious groups and mission boards,
Public Schools or those created by the government are, however, subject to the law of their creation. UP shall be owned solely by citizens of the Philippines or corporations or associations at least sixty
for instance has its own special charter and would thus be governed by the special law creating it. Insofar per centum of the capital of which is owned by such citizens. The Congress may, however,
as they may be applicable however, the provisions of any special law or the Corporation Code supplement require increased Filipino equity participation in all educational institutions. The control and
the law of their creation. administration of educational institutions shall be vested in citizens of the Philippines.
Private Schools or Colleges include any private institutions for teaching, managed by private individuals No educational institution shall be established exclusively for aliens and no group of aliens shall
or corporations which offer courses of kindergarten, primary, intermediary or secondary instructions or comprise more than one-third of the enrollment in any school. The provisions of this sub section
superior courses in vocational, technical, professional or special schools by which diploma or certificates shall not apply to schools established for foreign diplomatic personnel and their dependents
are to be granted or titles and degrees conferred (Sec. 2, Act No. 2076, as amended by CA 180). and, unless otherwise provided by law, for other foreign temporary residents.
These instructions of learning once recognized by the government as such are mandated by law to be Culled from this is that while foreigners may own a maximum of 40% of the capital stock of an educational
incorporated within 90 days under the provisions of the Corporation Code and must, perforce, comply with corporation, not one of them may sit as a member of the governing board thereof. Neither may they act as
the requirements and procedure laid down thereunder. (Sec. 5, Act No. 2076, as amended by CA 180) an officer with the power of control and administration of the institution. In effect their ownership of any
capital would be limited to “non-controlling” interest.
Their failure to do so will not immune the educational institution from suit as a corporation (Chang Kai Shek
School vs. CA; April 18, 1989, supra) Note: General Rule: Educational institutions shall be owned solely by citizens of the Philippines or
corporations or associations at least 60% of the capital of which is owned by such citizens. The control
The SEC, however, shall not act on the incorporation of any educational corporation, unless and administration of educational institutions shall be vested in citizens of the Philippines.
the provision of Sec. 107 is complied with:
Exception: Educational institutions established by religious groups and mission boards.
Sec. 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the
Ministry of Education and Culture, the Securities and Exchange Commission shall not accept Note: General Rule: No educational institution shall be established exclusively for aliens and no group of
or approve the articles of incorporation and by-laws of any educational institution aliens shall comprise more than 1/3 of the enrollment in any school.
Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their (e) The place where the principal office of the corporation sole is to be established and located,
dependents and, unless otherwise provided by law, for other foreign temporary residents. which place must be within the territory of the Philippines.
RELIGIOUS CORPORATIONS The articles of incorporation may include any other provision not contrary to law for the regulation
of the affairs of the corporation.
REGLIGIOUS CORPORATIONS are those composed entirely of spiritual persons, which are created
for the furtherance of religion or perpetuating the rights of the church or for the administration of PROCEDURE FOR THE ORGANIZATION:
church or religious work or property.
(Sec. 112) SEC. 110. Submission of the Articles of Incorporation. – The articles of incorporation
(Sec. 109) SEC. 107. Classes of Religious Corporations. – Religious corporations may be must be verified, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi,
incorporated by one or more persons. Such corporations may be classified into corporations sole or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate
and religious societies. of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi, or
presiding elder, duly certified to be correct by any notary public.
Religious corporations shall be governed by this Chapter and by the general provisions on
nonstock corporations insofar as applicable. From and after filing with the Commission of the said articles of incorporation, verified by affidavit
or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such
CORPORATION SOLE chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall become a corporation sole
and all temporalities, estate and properties of the religious denomination, sect or church
CORPORATION SOLE consists of one person only and his successor in some particular station, who are
theretofore administered or managed as such chief archbishop, bishop, priest, minister, rabbi, or
incorporated by law in order to give them some legal capacities and advantages, particularly that of
presiding elder shall be personally held in trust as a corporation sole, for the use, purpose,
perpetuity, which in their natural persons they could not have had.
exclusive benefit and on behalf of the religious denomination, sect or church, including hospitals,
PURPOSE OF INCORPORATION AND PERSONS WHO MAY INCORPORATE: schools, colleges, orphan asylums, parsonages, and cemeteries thereof.
(Sec. 110) SEC. 108. Corporation sole. – For the purpose of administering and managing, as trustee, Note: As can be gleaned from the law, the AOI of a corporation sole does not require a provision for its
the affairs, property and temporalities of any religious denomination, sect or church, a corporation term of existence. For obvious reasons, since a corporation sole is supposed to exist in perpetuity. It
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder may, however, be dissolved in accordance with Sec. 113 of the Revised Corp. Code.
of such religious denomination, sect, or church.
CORPORATE EXISTENCE begins upon filing of the verified AOI with the SEC and the documents
CONTENTS OF THE ARTICLES OF INCORPORATION: required under Sec. 110. This serves as an exception to the rule that a corporation acquires juridical
personality only upon the issuance of a certificate of incorporation by the said government agency.
(Sec. 111) SEC. 109. Articles of incorporation. – In order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect NOTE: General Rule: A corporation acquires juridical personality only upon the issuance of a certificate of
or church must file with the Commission articles of incorporation setting forth the following: incorporation by the SEC.
(a) That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder Exception: A corporation sole becomes endowed with corporate personality after filing of the verified
represents the religious denomination, sect, or church which desires to become a corporation articles of incorporation together with other required documents.
sole;
POWER TO ALIENATE PROPERTIES, LIMITATION
(b) That the rules, regulations and discipline of the religious denomination, sect or church are
(Sec. 113) SEC. 111. Acquisition and Alienation of Property. – A corporation sole may purchase
consistent with becoming a corporation sole and do not forbid it;
and hold real estate and personal property for its church, charitable, benevolent, or educational
(c) That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged with purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or
the administration of the temporalities and the management of the affairs, estate and properties of mortgage real property held by it by obtaining an order for that purpose from the Regional Trial
the religious denomination, sect or church within the territorial jurisdiction, so described Court of the province where the property is situated upon proof that the notice of the application
succinctly in the articles of incorporation; for leave to sell or mortgage has been made through publication or as directed by the Court, and
that it is in the interest of the corporation that leave to sell or mortgage be granted. The application
(d) The manner by which any vacancy occurring in the office of chief archbishop, bishop, priest, for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop,
minister, rabbi, or presiding elder is required to be filled, according to the rules, regulations or bishop, priest, minister, rabbi, or presiding elder acting as corporation sole, and may be opposed
discipline of the religious denomination, sect or church; and by any member of the religious denomination, sect or church represented by the corporation sole:
Provided, That in cases where the rules, regulations, and discipline of the religious denomination,
sect or church, religious society, or order concerned represented by such corporation sole

regulate the method of acquiring, holding, selling, and mortgaging real estate and personal HELD: Yes. In solving the problem thus submitted to our consideration, We can say the following: A
property, such rules, regulations and discipline shall govern, and the intervention of the courts corporation sole is a special form of corporation usually associated with the clergy. Conceived and
shall not be necessary. introduced into the common law by sheer necessity, this legal creation which was referred to as "that
unhappy freak of English law" was designed to facilitate the exercise of the functions of ownership carried
Note: The extent of the its power to mortgage or sell (not to acquire, purchase or hold) real properties is, on by the clerics for and on behalf of the church which was regarded as the property owner (See I Couvier's
however, subject to certain restriction, that is, a proper court order must first be secured for that purpose, Law Dictionary, p. 682-683).
which is not otherwise imposed in any other corporation. Intervention of the court may dispense with only
if the rules, regulations and discipline of the religious denomination, sect or church concerned provide or A corporation sole consists of one person only, and his successors (who will always be one at a time), in
regulate the manner or method of holding or alienating properties. some particular station, who are incorporated by law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural persons they could not have had. In this
The registration of the real property in the name of a corporation sole will not vest unto the head thereof sense, the king is a sole corporation; so is a bishop, or dens, distinct from their several chapters (Reid vs.
ownership of the property which would devolve upon the church or congregation acquiring it. Barry, 93 Fla. 849, 112 So. 846).
Also, constitutional limitations requiring 60% of the capital of the corporation must be owned by Filipino That leaves no room for doubt that the bishops or archbishops, as the case may be, as corporation's sole
citizens does not apply to corporation sole with regards ownership of real property in its own name. It has are merely administrators of the church properties that come to their possession, in which they hold in trust
thus been held that the Roman Catholic Church of the Philippines, a corporation sole, has no nationality for the church. It can also be said that while it is true that church properties could be administered by a
and that the framers of the Constitution did not have in mind the religious corporation sole when they natural persons, problems regarding succession to said properties can not be avoided to rise upon his
provided that 60% of the capital of the corporation acquiring it must be owned by Filipino citizens. death. Through this legal fiction, however, church properties acquired by the incumbent of a corporation
sole pass, by operation of law, upon his death not his personal heirs but to his successor in office. It could
Whether or not a corporation sole, or any private corporation for that matter, can acquire alienable land of
be seen, therefore, that a corporation sole is created not only to administer the temporalities of the church
the public domain depends upon the character of the land at the time of the institution of the registration:
or religious society where he belongs but also to hold and transmit the same to his successor in said office.
1. If it still forms part of the public domain, it must be answered in the negative. If the ownership or title to the properties do not pass to the administrators, who are the owners of church
2. If, on the other hand, it has become private, the constitutional prohibition against acquisition by properties?.
a private corporation will not apply. (Republic vs INC)
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment:
Thus, it has likewise been earlier held that under the Public Land Act, alienable public land may be subject
In matters regarding property belonging to the Universal Church and to the Apostolic See, the Supreme
to registration by a possessor if he, personally or through his predecessors-in-interest, had openly
Pontiff exercises his office of supreme administrator through the Roman Curia; in matters regarding other
continuously and exclusively possessed the same for 30 years as the same is converted into private
church property, through the administrators of the individual moral persons in the Church according to that
property by mere lapse or completion of the said period. (Director of Lands vs CA)
norms, laid down in the Code of Cannon Law. This does not mean, however, that the Roman Pontiff is the
NOTE: General Rule: A court order is required before a corporation sole may sell or mortgage real property owner of all the church property; but merely that he is the supreme guardian (Bouscaren and Ellis, Cannon
held by it. Before such an order is granted, a verified petition must be made by the chief archbishop, Law, A Text and Commentary, p. 764).
bishop, priest, minister, rabbi or presiding elder acting as corporation sole and it must be shown that notice
We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic Church,
of the application has been given as directed by the court and that it is to the interest of the corporation
every Roman Catholic Church in different countries, if it exercises its mission and is lawfully incorporated
that the petition be granted. However, such application may be opposed by any member of the religious
in accordance with the laws of the country where it is located, is considered an entity or person with all the
denomination, sect or church represented by the corporation sole.
rights and privileges granted to such artificial being under the laws of that country, separate and distinct
Exception: Court intervention is not necessary when the rules, regulations and discipline of the religious from the personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with
denomination, sect or church, religious society or order concerned represented by such corporation sole the latter which are governed by the Canon Law or their rules and regulations.
regulate the method of acquiring, holding, selling and mortgaging real estate and personal property. Or in
The Corporation Law also contains the following provisions:
case of holding or acquisition of real properties.
SECTION 159. Any corporation sole may purchase and hold real estate and personal; property for its
CASES:
church, charitable, benevolent, or educational purposes, and may receive bequests or gifts of such
[G.R. No. L-8451; December 20, 1957] THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for that
DAVAO, INC., petitioner, vs. THE LAND REGISTRATION COMMISSION and THE REGISTER OF purpose from the Court of First Instance of the province in which the property is situated; but before making
DEEDS OF DAVAO CITY, respondents the order proof must be made to the satisfaction of the Court that notice of the application for leave to
mortgage or sell has been given by publication or otherwise in such manner and for such time as said
ISSUE: Whether the corporation sole may register the property transferred? Court or the Judge thereof may have directed, and that it is to the interest of the corporation that leave to
mortgage or sell must be made by petition, duly verified by the bishop, chief priest, or presiding elder acting
as corporation sole, and may be opposed by any member of the religious denomination, society or church
represented by the corporation sole: Provided, however, That in cases where the rules, regulations, and personally or through his predecessors-in-interest, openly, continuously and exclusively for the prescribed
discipline of the religious denomination, society or church concerned represented by such corporation sole statutory period [30 years under the Public Land Act, as amended] is converted to private property by mere
regulate the methods of acquiring, holding, selling and mortgaging real estate and personal property, such lapse or completion of said period, ipso jure." We further reiterated therein the time-honored principle of
rules, regulations, and discipline shall control and the intervention of the Courts shall not be necessary. non-impairment of vested rights.
It can, therefore, be noticed that the power of a corporation sole to purchase real property, like the power The crucial factor to be determined therefore is the length of time private respondent and its predecessors-
exercised in the case at bar, it is not restricted although the power to sell or mortgage sometimes is, in-interest had been in possession of the land in question prior to the institution of the instant registration
depending upon the rules, regulations, and discipline of the church concerned represented by said proceedings. The land under consideration was acquired by private respondent from Aquelina de la Cruz
corporation sole. If corporations sole can purchase and sell real estate for its church, charitable, in 1947, who, in turn, acquired by same by purchase from the Ramos brothers and sisters, namely:
benevolent, or educational purposes, can they register said real properties? As provided by law, lands Eusebia, Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
held in trust for specific purposes me be subject of registration (section 69, Act 496), and the capacity of 141, as amended, "those who by themselves or through their predecessors-in-interest have been in open,
a corporation sole, like petitioner herein, to register lands belonging to it is acknowledged, and title thereto continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain,
may be issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed under a bona fide claim of acquisition or ownership, for at least thirty years immediately preceding the
it is absurd that while the corporations sole that might be in need of acquiring lands for the erection of filing of the application for confirmation of title except when prevented by war or force majeure" may apply
temples where the faithful can pray, or schools and cemeteries which they are expressly authorized by to the Court of First Instance of the province where the land is located for confirmation of their claims, and
law to acquire in connection with the propagation of the Roman Catholic Apostolic faith or in furtherance the issuance of a certificate of title therefor, under the Land Registration Act. Said paragraph [b] further
of their freedom of religion they could not register said properties in their name. As professor Javier J. provides that "these shall be conclusively presumed to have performed all the conditions essential to a
Nepomuceno very well says "Man in his search for the immortal and imponderable, has, even before the Government grant and shall be entitled to a certificate of title under the provisions of this chapter." Taking
dawn of recorded history, erected temples to the Unknown God, and there is no doubt that he will continue the year 1936 as the reckoning point, there being no showing as to when the Ramoses first took
to do so for all time to come, as long as he continues 'imploring the aid of Divine Providence'" possession and occupation of the land in question, the 30-year period of open, continuous, exclusive and
(Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41, September, 1956). Under the notorious possession and occupation required by law was completed in 1966.
circumstances of this case, We might safely state that even before the establishment of the Philippine
Commonwealth and of the Republic of the Philippines every corporation sole then organized and The completion by private respondent of this statutory 30-year period has dual significance in the light of
registered had by express provision of law the necessary power and qualification to purchase in its name Section 48[b] of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point,
private lands located in the territory in which it exercised its functions or ministry and for which it was the land in question ceased by operation of law to be part of the public domain; and [2] private respondent
created, independently of the nationality of its incumbent unique and single member and head, the bishop could have its title thereto confirmed through the appropriate proceedings as under the Constitution then
of the dioceses. It can be also maintained without fear of being gainsaid that the Roman Catholic Apostolic in force, private corporations or associations were not prohibited from acquiring public lands, but merely
Church in the Philippines has no nationality and that the framers of the Constitution, as will be hereunder prohibited from acquiring, holding or leasing such type of land in excess of 1,024 hectares.
explained, did not have in mind the religious corporations sole when they provided that 60 per centum of
If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when the
the capital thereof be owned by Filipino citizens.
registration proceedings were commenced.
THE DIRECTOR OF LANDS vs. CA (supra, POWER TO ACQUIRE PROPERTY)
This being the case, the prohibition under the 1973 Constitution would have no application. Otherwise
ISSUE: Whether the registration of the land should be upheld? construed, if in 1966, private respondent could have its title to the land confirmed, then it had acquired a
vested right thereto, which the 1973 Constitution can neither impair nor defeat.
HELD: As observed at the outset, had this case been resolved immediately after it was submitted for
decision, the result may have been quite adverse to private respondent. For the rule then prevailing under [G.R. No. 75042; November 29, 1988] REPUBLIC OF THE PHILIPPINES, petitioner, vs.
the case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in Republic v. INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP OF LUCENA, represented by
Villanueva, 114 SCRA 875 as well as the other subsequent cases involving private respondent adverted Msgr. Jose T. Sanchez, and REGIONAL TRIAL COURT, BRANCH LIII, LUCENA CITY, respondents
to above', is that a juridical person, private respondent in particular, is disqualified under the 1973
ISSUE: Whether private respondent, corporation sole, is entitled to confirmation of its title to the 4 parcels
Constitution from applying for registration in its name alienable public land, as such land ceases to be
of land?
public land "only upon the issuance of title to any Filipino citizen claiming it under section 48[b]" of
Commonwealth Act No. 141, as amended. These are precisely the cases cited by petitioner in support of HELD: The parties herein do not dispute that since the acquisition of the four (4) lots by the applicant, it
its theory of disqualification. has been in continuous possession and enjoyment thereof, and such possession, together with its
predecessors-in-interest, covering a period of more than 52 years (at least from the date of survey in 1928)
Since then, however, this Court had occasion to re-examine the rulings in these cases vis-a-vis the earlier
with respect to lots 1 and 2, about 62 years with respect to lot 3, all of plan PSU-65686; and more than 39
cases of Carino v. Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95
years with respect to the fourth parcel described in plan PSU-11 2592 (at least from the date of the survey
SCRA 437, among others. Thus, in the recent case of Director of Lands v. Intermediate Appellate Court,
in 1940) have been open, public, continuous, peaceful, adverse against the whole world, and in the
146 SCRA 509, We categorically stated that the majority ruling in Meralco is "no longer deemed to be
concept of owner.
binding precedent", and that "[T]he correct rule, ... is that alienable public land held by a possessor,

Petitioner argues that considering such constitutional prohibition, private respondent is disqualified to own confirmation of title was filed in 1979. There is therefore no cogent reason to disturb the findings of the
and register its title to the lots in question. Further, it argues that since the application for registration was appellate court.
filed only on February 2, 1979, long after the 1973 Constitution took effect on January 17, 1973, the
application for registration and confirmation of title is ineffectual because at the time it was filed, private FILLING UP of VACANCIES
corporation had been declared ineligible to acquire alienable lands of the public domain pursuant to Art.
In case of vacancies in the office of the “head” of the corporation, the person authorized by the rules,
XIV, Sec. 11 of the said constitution. (Rollo, p. 41)
regulations or discipline of the denomination shall exercise all the powers and authority of the corporation
The questioned posed before this Court has been settled in the case of DIRECTOR OF LANDS vs. sole during such vacancy and until such vacancy has been filled-up. The manner in which the vacancy is
Intermediate Appellate Court (146 SCRA 509 [1986]) which reversed the ruling first enunciated in the 1982 to be filled in clearly spelled out in Sec. 114 of the Code:
case of Manila Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the
(Sec. 114) SEC. 112. Filling of Vacancies. – The successors in office of any chief archbishop,
constitutional ban on public land acquisition by private corporations which ruling was declared emphatically
bishop, priest, minister, rabbi, or presiding elder in a corporation sole shall become the corporation
as res judicata on January 7, 1986 in Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo,
sole on their accession to office and shall be permitted to transact business as such upon filing a
Inc., (141 SCRA 21 [1986]). In said case, (Director of Lands v. IAC, supra), this Court stated that a
copy of their commission, certificate of election, or letters of appointment, duly certified by any
determination of the character of the lands at the time of institution of the registration proceedings must
notary public with the Commission.
be made. If they were then still part of the public domain, it must be answered in the negative.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi, or presiding
If, on the other hand, they were already private lands, the constitutional prohibition against their acquisition
elder of any religious denomination, sect or church incorporated as a corporation sole, the person
by private corporation or association obviously does not apply. In affirming the Decision of the Intermediate
or persons authorized by the rules, regulations or discipline of the religious denomination, sect or
Appellate Court in said case, this Court adopted the vigorous dissent of the then Justice, later Chief Justice
church represented by the corporation sole to administer the temporalities and manage the affairs,
Claudio Teehankee, tracing the line of cases beginning with CARINO, in 1909, thru SUSI, in 1925, down
estate, and properties of the corporation sole shall exercise all the powers and authority of the
to HERICO, in 1980, which developed, affirmed and reaffirmed the doctrine that open, exclusive and
corporation sole during such vacancy.
undisputed possession of alienable public land for the period prescribed by law creates the legal fiction
whereby the land, upon completion of the requisite period ipso jure and without the need of judicial or other The successors in office shall become the corporation sole and shall be permitted to transact business as
sanction, ceases to be public land and becomes' private property. (DIRECTOR OF LANDS vs. IAC, supra, such only upon the filing with the SEC:
p. 518).
1. a copy of their commission;
It must be emphasized that the Court is not here saying that a corporation sole should be treated like an 2. certificate of election;
ordinary private corporation. 3. letters of appointment;
4. duly certified by a notary public.
In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land Registration Commission, et al. (L-
8451, December 20,1957,102 Phil. 596). We articulated: DISSOLUTION
In solving the problem thus submitted to our consideration, We can say the following: A corporation sole (Sec. 115) SEC. 113. Dissolution. – A corporation sole may be dissolved and its affairs settled
is a special form of corporation usually associated with the clergy. Conceived and introduced into the voluntarily by submitting to the Commission a verified declaration of dissolution, setting forth:
common law by sheer necessity, this legal creation which was referred to as "that unhappy freak of English
Law" was designed to facilitate the exercise of the functions of ownership carried on by the clerics for and a) The name of the corporation;
on behalf of the church which was regarded as the property owner (See 1 Bouvier's Law Dictionary, p. b) The reason for dissolution and winding up;
682-683). c) The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
A corporation sole consists of one person only, and his successors (who will always be one at a time), in d) The names and addresses of the persons who are to supervise the winding up of the
some particular station, who are incorporated by law in order to give them some legal capacities and affairs of the corporation.
advantages, particulary that of perpetuity, which in their natural persons they could not have had.
Upon approval of such declaration of dissolution by the Commission, the corporation shall cease
There is no doubt that a corporation sole by the nature of its Incorporation is vested with the right to to carry on its operations except for the purpose of winding up its affairs.
purchase and hold real estate and personal property. It need not therefore be treated as an ordinary private
corporation because whether or not it be so treated as such, the Constitutional provision involved will, Requirements for the voluntary dissolution of corporation sole:
nevertheless, be not applicable.
1. Filing with the SEC of a verified declaration of dissolution which must set forth the following:
In the light of the facts obtaining in this case and the ruling of this Court in Director of Lands vs. IAC, (supra, a. The name of the corporation;
513), the lands subject of this petition were already private property at the time the application for b. The reason for dissolution and winding up;

c. The authorization for the dissolution of the corporation by the particular religious NOTE: Purpose – the administration of its temporalities or for the management of its affairs, properties
denomination, sect or church; and and estate; Who – any religious society or religious order, or any diocese, synod, or district organization
d. The names and addresses of the persons who are to supervise the winding up of of any religious denomination, sect or church
the affairs of the corporation.
2. Approval of the SEC. Note: Apparent from the foregoing, is that a religious society is not mandated by law to register as a
corporation but may do so to acquire juridical personality and for the purpose of administration of its
Note: Dissolution by JUDICIAL DECREE is generally not allowed because of the doctrine of separation of temporalities and properties and even to acquire properties of its own. Thus, it has been held that an
the Church and the State. However, the State may exercise its police power if the corporation is being unincorporated religious association cannot acquire private agricultural lands in the Philippines (Register
carried out and is being used for illegal purposes. of Deeds vs. Ung Sui Temple)
RELIGIOUS SOCIETIES Like the corporation sole, the AOI of a religious society need not contain a term of its existence as it is
supposed to exist in perpetuity.
Under common law, a religious society is a body of persons associated together for the purpose of
maintaining religious worship. The religious society and the church are distinct bodies, independent of Note: The BEGINNING OF CORPORATE EXISTENCE is upon issuance of the certificate of registration
each other, though they may exist with each other. by the SEC. Absent any specific provision of the law, it must be deemed to fall within the general rule
under Sec. 18.
Under Philippine Law, a religious society, order, diocese, synod or district organization of any religious
denomination, sect or church may incorporate for the administration of its temporalities or for the Note: General rule: any religious society, religious order, diocese, synod, or district organization of any
management of its affairs, properties and estate in accordance with the Code: religious denomination, sect or church, may, incorporate.
(Sec. 116) SEC. 114. Religious Societies. – Unless forbidden by competent authority, the Except: When it is forbidden by competent authority, the Constitution, pertinent rules, regulations, or
Constitution, pertinent rules, regulations, or discipline of the religious denomination, sect or discipline of the religious denomination, sect or church of which it is a part.
church of which it is a part, any religious society, religious order, diocese, synod, or district
organization of any religious denomination, sect or church, may, upon written consent and/or by Requirements and procedure for incorporation:
an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership,
1. Filing of the articles of incorporation with the SEC;
incorporate for the administration of its temporalities or for the management of its affairs,
2. The articles of incorporation must set forth the following:
properties, and estate by filing with the Commission, articles of incorporation verified by the
a. That the religious society or religious order, or diocese, synod, or district
affidavit of the presiding elder, secretary, or clerk or other member of such religious society or
organization is a religious organization of a religious denomination, sect or church;
religious order, or diocese, synod, or district organization of the religious denomination, sect or
b. That at least 2/3 of its membership have given their written consent or have voted
church, setting forth the following:
to incorporate, at a duly convened meeting of the body;
(a) That the religious society or religious order, or diocese, synod, or district organization is a c. That the incorporation of the religious society or religious order, or diocese, synod,
religious organization of a religious denomination, sect or church; or district organization desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or discipline of the religious
(b) That at least two-thirds (2/3) of its membership has given written consent or has voted to denomination, sect, or church of which it forms a part;
incorporate, at a duly convened meeting of the body; d. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs, properties and
(c) That the incorporation of the religious society or religious order, or diocese, synod, or district estate;
organization is not forbidden by competent authority or by the Constitution, rules, regulations or e. The place where the principal office of the corporation is to be established and
discipline of the religious denomination, sect or church of which it forms part; located, which place must be within the Philippines; and
f. The names, nationalities, and residences of the trustees elected by the religious
(d) That the religious society or religious order, or diocese, synod, or district organization desires
society or religious order, or the diocese, synod, or district organization to serve for
to incorporate for the administration of its affairs, properties and estate;
the first year or such other period as may be prescribed by the laws of the religious
(e) The place within the Philippines where the principal office of the corporation is to be established society or religious order, or of the diocese, synod, or district organization, the board
and located; and of trustees to be not less than 5 nor more than 15.
3. The articles of incorporation must be verified by the affidavit of the presiding elder, secretary,
(f) The names, nationalities, and residence addresses of the trustees, not less than five (5) nor or clerk or other member of such religious society or religious order, or diocese, synod, or
more than fifteen (15), elected by the religious society or religious order, or the diocese, synod, or district organization of the religious denomination, sect or church.
district organization to serve for the first year or such other period as may be prescribed by the 4. Issuance of the SEC of the certificate of incorporation.
laws of the religious society or religious order, or of the diocese, synod, or district organization.

DICUSSION: because the code is specific, that it may be vested with juridical personality from and after the filing of the
verified AoI with the SEC.
Title XIII, the provisions governing special corporations, they are of two types, the educational and religious
corporation. The Educational Corporations are governed by special laws and the general provisions of the QUERY: This corporation sole does it possesses the same right, power or privilege to own, hold
code, that’s what sec 105 says. The special law spoken of is the education __, that particular law requires or alienate properties, just like any other corporation?
that once they are organized and/or recognized as an institution of learning they must incorporate within
a period of 90 days from the date of their recognition as such institution. Failure to do so will not immune A: Sec 111, when it comes to acquisition or owning or buying properties, YES, they have same right,
the school from suit as a corporation, we’ve seen that in the case Chang Kai Shek School vs. CA. They power or privilege. But when it comes to disposition or alienation of real properties, it requires a prior court
are under the supervision of other government agencies. Thus, the favorable recommendation of this order, it goes on saying, unless the rules, regulations, and discipline provide or regulate the mode or
government agencies must first be secured before the SEC will take a look at the contents of the AoI. For manner for the disposition or alienation, if there is such rules, regulations and discipline, the intervention
lower education the DepED, Department of Higher Education for higher education, for law school LEB. of the courts shall not be necessary. Note that this court orders are only required for the disposition or
alienation, meaning it includes mortgaged of REAL properties.
The governing board of the educational institution may be anywhere within 5 to 15, but in a nonstock
corporation it can only be in multiples of 5, meaning it can only be either 5, 10 or 15. QUERY: Since the corporation sole is headed only by one person, speaking of acquisition of
property, will the registration of the property in the name of the corporation sole, vest in the head
Term of office maybe 5 years, in a nonstock corporation. In a nonstock, because in institutions organized ownership of such property?
as stock corporation the number of terms shall be governed by the provisions governing stock
corporations, sec 22 second paragraph provides they shall be elected for a term of 1 year only. There A: NO, sec 108 says, they only act as a TRUSTEE. It devolves upon the church or the corporation so
number maybe two, it cannot be constituted by one person. So, if they have 5-year terms, the nonstock much so that as early as Roman Catholic Apostolic Church vs NLRC it was stressed that the head is not
corporation, they shall also so organize themselves that at least 1/5 of their number starts, the same the owner of church property, but merely a guardian or administrator thereof. The court further ruled that
explanation regarding the three-year term of a nonstock corporation (referring to staggered term). Every a corporation sole consists of one person only, and his successors ,who will always be one at a time, in
year there will be an election to fill up the vacancy of those whose terms will expire. some particular station, who are incorporated by law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural persons they could not have had.
QUERY: May foreigners be a member of the board in an educational institution?
In the case of Director of Lands vs CA, raises the historical right of a corporation to register lands of the
A: Generally, NO, constitutional provision, “Educational institutions, other than those established by public domain in its own name from the early case of Manila Electric Company v. Castro-Bartolome et al.,
religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations to the case in Republic v. Villanueva, the majority view is that a juridical person is disqualified under the
or associations at least sixty per centum of the capital of which is owned by such citizens. And the control Constitution from applying for registration in its name alienable public land, and in that decision of republic
and management of educational institution shall be vested in citizens of the Philippines.” Foreign citizens vs Villanueva it was handed down two months before the Director of Land vs CA, penned by justice
act as managers of the corporation, because as a general rule they cannot sit and act as members of the Teehankee, wrote a dissenting opinion, citing CA 141 and it was adopted by the higher court in this case,
board. General rule in the sense that the first sentence of the provision is also an exception, if they are Director of Lands vs CA, that provision of the law says, alienable public land is converted into private
established by religious groups and mission boards, they may sit as members of the governing board. Like property if the same is held by a possessor or his predecessor-in-interest openly, continuously, exclusively
SLU (Baguio), the chairman and president of the board is a British national, is he qualified? Yes, because and notoriously in the concept of an owner for the statutory period of 30 years ipso jure or automatically,
it was created and organized by a religious organization from Belgium, we also have San Beda or UST. so after two months later on, in Republic vs IAC the court ruled that a determination of the character of the
Mission boards, the British School, majority of the members of the board in that school are British. Or those land must be made in order also to determine whether it is registrable by a corporation, if they still form
organized by charitable institution you have Grace Christian High School. part of the public domain registration cannot be made, but if they were already private land the
constitutional prohibition against its acquisition or registration by the corporation till not apply.
In the case of RELIGIOUS INSTITUTION, they are further classified a Corporation Sole or Religious
Society. With respect to RELIGIUOS SOCIETIES just read the provisions.
The corporation sole consists of one person only, but not any person may incorporate a corporation sole, ONE PERSON CORPORATION
it should either be the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such
religious denomination, sect, or church. And the purpose of its incorporation is the administration and NOTE: The provisions governing One Person Corporation are a newly included provisions in the Revised
management of the affairs, properties and temporalities of the church as trustee thereof. Corporation Code.
The AOI of a corporation sole does not require a provision for its term of existence. For obvious reasons, SEC. 115. Applicability of Provisions to One Person Corporations. – The provisions of this Title
since a corporation sole is supposed to exist in perpetuity. Same holds true now for any other corporation, shall primarily apply to One Person Corporations. Other provisions of this Code apply suppletorily,
if they do not specify their terms of existence, they are deemed to exist in Perpetua. except as otherwise provided in this Title.
As an exception to Sec 18 which provides that corporations will commence to exist and is vested with
juridical personality upon the issuance of Cert of Incorporation, it does not apply to a corporation sole,

SEC. 116. One Person Corporation. – A One Person Corporation is a corporation with a single b) Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder: Provided, That only a natural person, trust, or an estate may form a One Person stockholder, which notice shall be given no later than five (5) days from such
Corporation. occurrence;
c) Notify the Commission of the death of the single stockholder within five (5) days from
Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non- such occurrence and stating in such notice the names, residence addresses, and
chartered government-owned and -controlled corporations may not incorporate as One Person contact details of all known legal heirs; and
Corporations: Provided, further, That a natural person who is licensed to exercise a profession d) Call the nominee or alternate nominee and the known legal heirs to a meeting and advise
may not organize as a One Person Corporation for the purpose of exercising such profession the legal heirs with regard to, among others, the election of a new director, amendment
except as otherwise provided under special laws. of the articles of incorporation, and other ancillary and/or consequential matters.
SEC. 117. Minimum Capital Stock Required for One Person Corporation. – A One Person SEC. 124. Nominee and Alternate Nominee. – The single stockholder shall designate a nominee
Corporation shall not be required to have a minimum authorized capital stock except as otherwise and an alternate nominee who shall, in the event of the single stockholder’s death or incapacity,
provided by special law. take the place of the single stockholder as director and shall manage the corporation’s affairs.
SEC. 118. Articles of Incorporation. – A One Person Corporation shall file articles of incorporation The articles of incorporation shall state the names, residence addresses and contact details of the
in accordance with the requirements under Section 14 of this Code. It shall likewise substantially nominee and alternate nominee, as well as the extent and limitations of their authority in managing
contain the following: the affairs of the One Person Corporation.
a) If the single stockholder is a trust or an estate, the name, nationality, and residence of The written consent of the nominee and alternate nominee shall be attached to the application for
the trustee, administrator, executor, guardian, conservator, custodian, or other person incorporation. Such consent may be withdrawn in writing any time before the death or incapacity
exercising fiduciary duties together with the proof of such authority to act on behalf of of the single stockholder.
the trust or estate; and
b) Name, nationality, residence of the nominee and alternate nominee, and the extent, SEC. 125. Term of Nominee and Alternate Nominee. – When the incapacity of the single stockholder
coverage and limitation of the authority. is temporary, the nominee shall sit as director and manage the affairs of the One Person
Corporation until the stockholder, by self-determination, regains the capacity to assume such
SEC. 119. Bylaws. – The One Person Corporation is not required to submit and file corporate duties.
bylaws.
In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director
SEC. 120. Display of Corporate Name. – A One Person Corporation shall indicate the letters “OPC” and manage the affairs of the One Person Corporation until the legal heirs of the single stockholder
either below or at the end of its corporate name. have been lawfully determined, and the heirs have designated one of them or have agreed that the
estate shall be the single stockholder of the One Person Corporation.
SEC. 121. Single Stockholder as Director, President. – The single stockholder shall be the sole
director and president of the One Person Corporation. The alternate nominee shall sit as director and manage the One Person Corporation in case of the
nominee’s inability, incapacity, death, or refusal to discharge the functions as director and
SEC. 122. Treasurer, Corporate Secretary, and Other Officers. – Within fifteen (15) days from the
manager of the corporation, and only for the same term and under the same conditions applicable
issuance of its certificate of incorporation, the One Person Corporation shall appoint a treasurer,
to the nominee.
corporate secretary, and other officers as it may deem necessary, and notify the Commission
thereof within five (5) days from appointment. SEC. 126. Change of Nominee or Alternate Nominee. – The single stockholder may, at any time,
change its nominee and alternate nominee by submitting to the Commission the names of the new
The single stockholder may not be appointed as the corporate secretary.
nominees and their corresponding written consent. For this purpose, the articles of incorporation
A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a need not be amended.
bond to the Commission in such a sum as may be required: Provided, That the said
SEC. 127. Minutes Book. – A One Person Corporation shall maintain a minutes book which shall
stockholder/treasurer shall undertake in writing to faithfully administer the One Person
contain all actions, decisions, and resolutions taken by the One Person Corporation.
Corporation’s funds to be received as treasurer, and to disburse and invest the same according to
the articles of incorporation as approved by the Commission. The bond shall be renewed every SEC. 128. Records in Lieu of Meetings. – When action is needed on any matter, it shall be sufficient
two (2) years or as often as may be required. to prepare a written resolution, signed and dated by the single stockholder, and recorded in the
minutes book of the One Person Corporation. The date of recording in the minutes book shall be
SEC. 123. Special Functions of the Corporate Secretary. – In addition to the functions designated
deemed to be the date of the meeting for all purposes under this Code.
by the One Person Corporation, the corporate secretary shall:
a) Be responsible for maintaining the minutes book and/or records of the corporation;
SEC. 129. Reportorial Requirements. – The One Person Corporation shall submit the following sixty (60) days from the transfer of the shares, the legal heirs shall notify the Commission of their
within such period as the Commission may prescribe: decision to either wind up and dissolve the One Person Corporation or convert it into an ordinary
stock corporation.
a) Annual financial statements audited by an independent certified public accountant:
Provided, That if the total assets or total liabilities of the corporation are less than Six The ordinary stock corporation converted from a One Person Corporation shall succeed the latter
Hundred Thousand Pesos (P600,000.00), the financial statements shall be certified under and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion.
oath by the corporation’s treasurer and president.
b) A report containing explanations or comments by the president on every qualification, DISCUSSION:
reservation, or adverse remark or disclaimer made by the auditor in the latter’s report;
Title XIII chapter 2 the One Person Corporation.
c) A disclosure of all self-dealings and related party transactions entered into between the
One Person Corporation and the single stockholder; and Definition is a corporation with a single stockholder.
d) Other reports as the Commission may require.
QUERY: Who may form this type of corporation? A: only a natural person, trust, or an estate may form
For purposes of this provision, the fiscal year of a One Person Corporation shall be that set forth a One Person Corporation.
in its articles of incorporation or, in the absence thereof, the calendar year.
It cannot be formed for any business activity however, like banks and quasi-banks, pre-need, trust,
The Commission may place the corporation under delinquent status should the corporation fail to insurance, public and publicly-listed companies, and non-chartered government-owned and -controlled
submit the reportorial requirements three (3) times, consecutively or intermittently, within a period corporations AND natural person who is licensed to exercise a profession cannot be organize as a one-
of five (5) years. person corporation. For the exercise of the profession unless otherwise provided under special laws.
SEC. 130. Liability of Single Shareholder. – A sole shareholder claiming limited liability has the Sec 117, no minimum ACS, except as otherwise provided by special law.
burden of affirmatively showing that the corporation was adequately financed.
Sec 118, the articles will be subject in accordance sec 14, plus it shall likewise contain a) If the single
Where the single stockholder cannot prove that the property of the One Person Corporation is stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator,
independent of the stockholder’s personal property, the stockholder shall be jointly and severally executor, guardian, conservator, custodian, or other person exercising fiduciary duties together with the
liable for the debts and other liabilities of the One Person Corporation. proof of such authority and b) Name, nationality, residence of the nominee and alternate nominee, and the
extent, coverage and limitation of the authority.
The principles of piercing the corporate veil applies with equal force to One Person Corporations
as with other corporations. Sec 119, it is not required to submit and file corporate bylaws. SEC. it is supposed to be governed by the
stockholder or officers between and among themselves.
SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. – When a single
stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for Sec 120, the name must append the words One-Person Corporation wither in the full or in its abbreviated
conversion into a One Person Corporation, subject to the submission of such documents as the form. To distinguish it from any other type of corporation.
Commission may require. If the application for conversion is approved, the Commission shall
issue a certificate of filing of amended articles of incorporation reflecting the conversion. The One Sec 121, the single stockholder is the sole director and the president.
Person Corporation converted from an ordinary stock corporation shall succeed the latter and be
legally responsible for all the latter’s outstanding liabilities as of the date of conversion. Sec 122, the single stockholder or president cannot be appointed as corporate secretary, but there is an
exception to the general rule that the president cannot be at the same time the secretary and /or treasurer
SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation. – A One at the same time. That is if he may be the self-appointed treasurer but subject to posting of bond as the
Person Corporation may be converted into an ordinary stock corporation after due notice to the SEC may require and subject to renewal every two years for as often as may be required.
Commission of such fact and of the circumstances leading to the conversion, and after compliance
with all other requirements for stock corporations under this Code and applicable rules. Such The corporate secretary has special functions enumerated in Sec 123
notice shall be filed with the Commission within sixty (60) days from the occurrence of the
circumstances leading to the conversion into an ordinary stock corporation. If all requirements Sec 124 requires the designation of a nominee or an alternate nominee who shall, take the place of the
have been complied with, the Commission shall issue a certificate of filing of amended articles of single stockholder as director in the event of the single stockholder’s death or incapacity, as well as the
incorporation reflecting the conversion. extent and limitations of their authority in managing the affairs of the One Person Corporation.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer the Sec 125 The term of the nominee or alternate nominee, if the incapacity is temporary it will only be until
shares to the duly designated legal heir or estate within seven (7) days from receipt of either an the single stockholder regains capacity to assume his duties. If it is by death or permanent incapability the
affidavit of heirship or self-adjudication executed by a sole heir, or any other legal document nominee shall sit as director and manage the affairs of the One Person Corporation until the legal heirs of
declaring the legal heirs of the single stockholder and notify the Commission of the transfer. Within

the single stockholder have been lawfully determined, and the heirs have designated one of them or have corporation continues to be possessed with juridical personality and may carry out its business for the
agreed that the estate shall be the single stockholder of the One Person Corporation. period of time granted by virtue of such extension.
Sec 130, liability of single stock holder, a sole shareholder claiming limited liability has the burden of The extension should nonetheless be made before the expiration of the original term, but not earlier than
affirmatively showing that the corporation was adequately financed, if he has not proved that the property 3 years prior to such expiration, otherwise the corporation is dissolved, ipso facto.
of the office is independent of the stockholder’s personal property, the single stockholder shall be held
solidarilly liable with all the debts and liabilities of the OPC. And it also says the principles of piercing the CASE:
corporate veil applies with equal force to One Person Corporations as with other corporations.
[G.R. No. 63201; May 27, 1992] PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF FIRST
An ordinary corporation may also be converted to an OPC when a single stockholder acquires all the INSTANCE OF RIZAL, PASIG — BRANCH XXI, PRESIDED BY JUDGE GREGORIO G. PINEDA,
stocks of an ordinary stock corporation, the latter may apply for conversion into a One Person Corporation. CHUNG SIONG PEK @ BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
The OPC converted from an ordinary stock corporation shall succeed the latter and be legally responsible VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL, PASIG, METRO MANILA
for all the latter’s outstanding liabilities as of the date of conversion. AND/OR HIS DEPUTIES AND AGENTS, respondents
Similarly, an OPC may also be converted to ordinary corporation Sec 132. ISSUE: Whether the cancellation of entries on respondents’ title is valid and proper?
HELD: Yes. The contract of lease expressly provides that the term of the lease shall be twenty years from
the execution of the contract but can be extended for another period of twenty years at the option of the
CHAPTER XVII- DISSOLUTION and WINDING UP lessee should the corporate term be extended in accordance with law. Clearly, the option of the lessee to
extend the lease for another period of twenty years can be exercised only if the lessee as corporation
DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate renews or extends its corporate term of existence in accordance with the Corporation Code which is the
existence. applicable law. Contracts are to be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of the contract of
General Rule: When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue
lease which commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee continued to occupy
the business for which it is incorporated.
the leased premises beyond that date with the acquiescence and consent of the respondents as lessor.
Exception: The Corporation will continue as a body corporate for another period of 3 years from the time Records show however, that PBM as a corporation had a corporate life of only twenty-five (25) years which
it is dissolved for the purpose of winding up its affairs and the liquidation of its assets. ended an January 19, 1977. It should be noted however that PBM allowed its corporate term to expire
without complying with the requirements provided by law for the extension of its corporate term of
METHODS OF DISSOLUTION existence.
THREE WAYS OF DISSOLUTION: Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is extended. Upon the
1. Expiration of its corporate term; expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal
2. Voluntary surrender of its primary franchise (voluntary dissolution); and requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto (16
3. The revocation of its corporate franchise (involuntary dissolution) Fletcher 671 cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Edition p.
617). When the period of corporate life expires, the corporation ceases to be a body corporate for the
Sec. 133, however, mentions only two methods: purpose of continuing the business for which it was organized. But it shall nevertheless be continued as a
(Sec. 117) SEC. 133. Methods of Dissolution. – A corporation formed or organized under the body corporate for three years after the time when it would have been so dissolved, for the purpose of
provisions of this Code may be dissolved voluntarily or involuntarily. prosecuting and defending suits by or against it and enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its assets (Sec. 122, Corporation Code). There is no need
This is rightfully so, because the expiration of corporate term can be considered voluntary dissolution it for the institution of a proceeding for quo warranto to determine the time or date of the dissolution of a
being the intention of the stockholders that it shall exist only for such period. corporation because the period of corporate existence is provided in the articles of incorporation. When
such period expires and without any extension having been made pursuant to law, the corporation is
EXPIRATION OF CORPORATE TERM dissolved automatically insofar as the continuation of its business is concerned. The quo warranto
proceeding under Rule 66 of the Rules of Court, as amended, may be instituted by the Solicitor General
A corporation registered under the Corporation Code, with the exception of religious ones, is required to only for the involuntary dissolution of a corporation on the following grounds: a) when the corporation has
indicate its term of existence in the AOI. It ceases to exist and is deemed automatically dissolved upon the offended against a provision of an Act for its creation or renewal; b) when it has forfeited its privileges and
expiration of the term indicated thereat without the need of any formal proceedings. franchises by non-user; c) when it has committed or omitted an act which amounts to a surrender of its
corporate rights, privileges or franchises; d) when it has mis-used a right, privilege or franchise conferred
Note: It is to be observed, however, that the original term of existence indicated in the AOI is subject to
upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. Hence, there
extension in accordance with the provisions of Sec. 11 and 36 of the Code. If such be the case, the

is no need for the SEC to make an involuntary dissolution of a corporation whose corporate term had The corporation shall submit the following to the Commission: (1) a copy of the resolution
ended because its articles of incorporation had in effect expired by its own limitation. authorizing the dissolution, certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation; (2) proof of publication; and (3) favorable
Considering the foregoing in relation to the contract of lease between the parties herein, when PBM's recommendation from the appropriate regulatory agency, when necessary.
corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired on
January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977 because Within fifteen (15) days from receipt of the verified request for dissolution, and in the absence of
PBM failed to renew or extend its corporate life in accordance with law. From then on, the respondents any withdrawal within said period, the Commission shall approve the request and issue the
can exercise their right to terminate the lease pursuant to the stipulations in the contract. certificate of dissolution. The dissolution shall take effect only upon the issuance by the
Commission of a certificate of dissolution.
The rights of the lessor and the lessee over the improvements which the latter constructed on the leased
premises is governed by Article 1678 of the Civil Code. No application for dissolution of banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, NSSLAs, pawnshops, and other financial intermediaries shall be
The provision gives the lessee the right to remove the improvements if the lessor chooses not to pay one- approved by the Commission unless accompanied by a favorable recommendation of the
half of the value thereof. However, in the case at bar, the law will not apply because the parties herein appropriate government agency.
have stipulated in the contract their own terms and conditions concerning the improvements, to wit, that
the lessee, namely PBM, bound itself to remove the improvements before the termination of the lease. FORMAL AND PROCEDURAL REQUIREMENTS:
Petitioner PNB, as assignee of PBM succeeded to the obligation of the latter under the contract of lease.
It could not possess rights more than what PBM had as lessee under the contract. Hence, petitioner was 1. Majority vote of the board of directors or trustees;
duty bound to remove the improvements before the expiration of the period of lease as what we have 2. A resolution adopted by the affirmative vote of the stockholders owning at least majority of the
already discussed in the preceding paragraphs. Its failure to do so when the lease was terminated was outstanding capital stock or majority of the members of a meeting to be held upon the call
tantamount to a waiver of its rights and interests over the improvements on the leased premises. of the directors or trustees;
3. At least twenty (20) days prior to the meeting, notice shall be given to each shareholder or
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION) member of record personally, by registered mail, or by any means authorized under its bylaws
whether or not entitled to vote at the meeting, in the manner provided in Section 50 of this Code
MODES OF VOLUNTARY DISSOUTION: and shall state that the purpose of the meeting is to vote on the dissolution of the corporation.
4. Notice of the time, place, and object of the meeting shall be published ONCE prior to the
1. Voluntary Dissolution where no creditors are affected (Sec. 134);
date of the meeting in a newspaper published in the place where the principal office of said
2. Voluntary Dissolution where creditors are affected (Sec. 135);
corporation is located, or if no newspaper is published in such place, in a newspaper of general
3. Shortening of corporate term (Sec. 136).
circulation in the Philippines.
VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE AFFECTED: 5. A verified REQUEST FOR DISSOLUTION shall be filed with the Commission stating:
a. the reason for the dissolution;
(Sec. 118) SEC. 134. Voluntary Dissolution Where No Creditors are Affected. – If dissolution of a b. the form, manner, and time when the notices were given;
corporation does not prejudice the rights of any creditor having a claim against it, the dissolution c. names of the stockholders and directors or members and trustees who approved
may be effected by majority vote of the board of directors or trustees, and by a resolution adopted the dissolution;
by the affirmative vote of the stockholders owning at least majority of the outstanding capital stock d. the date, place, and time of the meeting in which the vote was made; and
or majority of the members of a meeting to be held upon the call of the directors or trustees. e. details of publication.
6. The corporation shall submit the following to the Commission: (1) a copy of the resolution
At least twenty (20) days prior to the meeting, notice shall be given to each shareholder or member authorizing the dissolution, certified by a majority of the board of directors or trustees and
of record personally, by registered mail, or by any means authorized under its bylaws whether or countersigned by the secretary of the corporation; (2) proof of publication; and (3) favorable
not entitled to vote at the meeting, in the manner provided in Section 50 of this Code and shall recommendation from the appropriate regulatory agency, when necessary.
state that the purpose of the meeting is to vote on the dissolution of the corporation. Notice of the 7. Issuance of a certificate of dissolution by the SEC, within fifteen (15) days from receipt of
time, place, and object of the meeting shall be published once prior to the date of the meeting in a the verified request for dissolution, and in the absence of any withdrawal within said
newspaper published in the place where the principal office of said corporation is located, or if no period
newspaper is published in such place, in a newspaper of general circulation in the Philippines.
Note: The dissolution shall take effect only upon the issuance by the Commission of a certificate
A verified request for dissolution shall be filed with the Commission stating: (a) the reason for the of dissolution.
dissolution; (b) the form, manner, and time when the notices were given; (c) names of the
stockholders and directors or members and trustees who approved the dissolution; (d) the date, Note: Failure to comply with the above requirements will have no effect on the legal existence of the
place, and time of the meeting in which the vote was made; and (e) details of publication. corporation. Elsewise stated, a corporation being a creation of the law by the grant of its existence by the
State, may only be dissolved in the manner prescribed by the law of its creation. Since it is the State that

grants its right to exist, it is only through the State which can allow the termination of existence. Unless two-thirds (2/3) of the members at a meeting of its stockholders or members called
dissolved pursuant thereto, a corporation does not cease to have a juridical personality. for that purpose.
e. The petition shall likewise state:
A mere resolution by the stockholders or the BOD of a corporation to dissolve the same does not affect i. the reason for the dissolution;
the dissolution but that some other steps, administrative or judicial is necessary. (Daguhoy Enterprises vs. ii. the form, manner, and time when the notices were given; and
Ponce) iii. the date, place, and time of the meeting in which the vote was made.
2. The corporation shall submit to the Commission the following:
VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED
a. a copy of the resolution authorizing the dissolution, certified by a majority of the
(Sec 119) SEC. 135. Voluntary Dissolution Where Creditors are Affected; Procedure and Contents board of directors or trustees and countersigned by the secretary of the corporation;
of Petition. – Where the dissolution of a corporation may prejudice the rights of any creditor, a and
verified petition for dissolution shall be filed with the Commission. The petition shall be signed by b. a list of all its creditors.
a majority of the corporation’s board of directors or trustees, verified by its president or secretary 3. If the petition is sufficient in form and substance, the Commission shall, by an order
or one of its directors or trustees, and shall set forth all claims and demands against it, and that reciting the purpose of the petition, fix a deadline for filing objections to the petition which
its dissolution was resolved upon by the affirmative vote of the stockholders representing at least date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of
two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members at a the order.
meeting of its stockholders or members called for that purpose. The petition shall likewise state: 4. Before such date,
(a) the reason for the dissolution; (b) the form, manner, and time when the notices were given; and a. a copy of the order shall be published at least once a week for three (3)
(c) the date, place, and time of the meeting in which the vote was made. The corporation shall consecutive weeks in a newspaper of general circulation published in the
submit to the Commission the following: (1) a copy of the resolution authorizing the dissolution, municipality or city where the principal office of the corporation is situated, or
certified by a majority of the board of directors or trustees and countersigned by the secretary of if there be no such newspaper, then in a newspaper of general circulation in the
the corporation; and (2) a list of all its creditors. Philippines; AND
b. a similar copy shall be posted for three (3) consecutive weeks in three (3) public
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the places in such municipality or city.
purpose of the petition, fix a deadline for filing objections to the petition which date shall not be 5. Upon five (5) days’ notice, given after the date on which the right to file objections as fixed in
less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such the order has expired, the Commission shall proceed to hear the petition and try any issue
date, a copy of the order shall be published at least once a week for three (3) consecutive weeks raised in the objections filed; and if no such objection is sufficient, and the material allegations
in a newspaper of general circulation published in the municipality or city where the principal office of the petition are true, it shall render judgment dissolving the corporation and directing
of the corporation is situated, or if there be no such newspaper, then in a newspaper of general such disposition of its assets as justice requires, and may appoint a receiver to collect
circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks such assets and pay the debts of the corporation.
in three (3) public places in such municipality or city.
Note: While the foregoing are mandatory requirements, the appointment of a receiver is only permissive.
Upon five (5) days’ notice, given after the date on which the right to file objections as fixed in the As can be gleaned from the Second paragraph of Sec. 119 (now third paragraph of Sec 135), it uses the
order has expired, the Commission shall proceed to hear the petition and try any issue raised in phrase “and may appoint a receiver”, showing the clear intent of the law that the same is merely
the objections filed; and if no such objection is sufficient, and the material allegations of the discretionary on the part of the proper forum. Such language, held by the High Court, “tends to recognize
petition are true, it shall render judgment dissolving the corporation and directing such disposition that in cases of voluntary dissolution, there is no occasion for the appointment of a receiver except under
of its assets as justice requires, and may appoint a receiver to collect such assets and pay the special circumstances and upon proper showing” (China Bank vs. Michellin)
debts of the corporation.
SHORTENING CORPORATE TERM
The dissolution shall take effect only upon the issuance by the Commission of a certificate of
dissolution. Sec. 136 was inserted to incorporate the longstanding practice of dissolving a corporation by amendment
of the AOI by shortening the corporate existence.
FORMAL AND PROCEDURAL REQUIREMENTS:
A corporation may now exist perpetually, but there is no law which prevents the shareholders thereof to
1. A verified PETITION FOR DISSOLUTION shall be filed with the Commission. shorten that period and effect a dissolution of the corporation.
a. The petition shall be signed by a majority of the corporation’s board of directors
or trustees; While a corporation may be given the capacity of “perpetual succession” like the corporation sole and the
b. verified by its president or secretary or one of its directors or trustees; religious society. It does not mean, however, that it shall continue to exist forever. It merely means that it
c. shall set forth all claims and demands against it; has the capacity of continuous existence during a particular period or until dissolved in accordance with
d. that its dissolution was resolved upon by the affirmative vote of the stockholders law.
representing at least two-thirds (2/3) of the outstanding capital stock or at least

It may thus amend its AOI and provide a term of existence or shorten it which may have the effect of a 2. duly verified by any incorporator, director, trustee, shareholder, or member;
dissolution. Thus, while Sec. 113 of the Code provides for the process and procedure for the dissolution 3. signed by the same number of incorporators, directors, trustees, shareholders, or members
of a corporation sole, there is nothing in the law itself which would prohibit it from amending its AOI. It is necessary to request for dissolution as set forth in the foregoing sections.
believed, however, that authorization for the dissolution by the particular religious denomination, sect or 4. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the
church, as required in sub-paragraph 3 of Sec. 113 would still be necessary in the case of amending the Commission of the request for dissolution.
AOI to affect dissolution. 5. Upon receipt of a withdrawal of request for dissolution, the Commission shall withhold action
on the request for dissolution and shall, after investigation:
(Sec 120) SEC. 136. Dissolution by Shortening Corporate Term. – A voluntary dissolution may be a. make a pronouncement that the request for dissolution is deemed withdrawn;
effected by amending the articles of incorporation to shorten the corporate term pursuant to the b. direct a joint meeting of the board of directors or trustees and the stockholders or
provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the members for the purpose of ascertaining whether to proceed with dissolution; OR
Commission in accordance with this Code. c. issue such other orders as it may deem appropriate.
Upon the expiration of the shortened term, as stated in the approved amended articles of REQUISITES and PROCEDURE for the withdrawal of the PETITION for dissolution (applies to Sec 135):
incorporation, the corporation shall be deemed dissolved without any further proceedings, subject
to the provisions of this Code on liquidation. 1. A withdrawal of the petition for dissolution shall be in the form of a motion; and
2. similar in substance to a withdrawal of request for dissolution but,
In the case of expiration of corporate term, dissolution shall automatically take effect on the day a. shall be verified and
following the last day of the corporate term stated in the articles of incorporation, without the need b. filed prior to publication of the order setting the deadline for filing objections to the
for the issuance by the Commission of a certificate of dissolution. petition.
Shortening of the corporate term with the effect of dissolution is a special type of amendment covered and INVOLUNTARY DISSOLUTION
governed by the special provisions of Sec. 36 of the Code. Thus, while the general provision on
amendment under Sec. 15 allows “written assent” in determining the voting requirement for ordinary (Sec. 121) SEC. 138. Involuntary Dissolution. – A corporation may be dissolved by the Commission
amendments, sec. 36 mandates that the vote must be cast at a duly constituted meeting. motu proprio or upon filing of a verified complaint by ANY interested party. The following may be
grounds for dissolution of the corporation:
Likewise, Sec. 15 provides that amendment of the AOI is deemed approved if not acted upon by the SEC
within 6 months from the date of filing for a cause not attributable to the corporation. This is not applicable (a) Non-use of corporate charter as provided under Section 21 of this Code;
in case of shortening the corporate term which will have the effect of dissolution in Sec. 136, which requires
the approval of the SEC. (b) Continuous inoperation of a corporation as provided under Section 21 of this Code;
WITHDRAWAL OF REQUEST and PETITION FOR DISSOLUTION (c) Upon receipt of a lawful court order dissolving the corporation;
SEC. 137. Withdrawal of Request and Petition for Dissolution. – A withdrawal of the request for (d) Upon finding by final judgment that the corporation procured its incorporation through fraud;
dissolution shall be made in writing, duly verified by any incorporator, director, trustee,
(e) Upon finding by final judgment that the corporation:
shareholder, or member and signed by the same number of incorporators, directors, trustees,
shareholders, or members necessary to request for dissolution as set forth in the foregoing (1) Was created for the purpose of committing, concealing or aiding the commission of
sections. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the securities violations, smuggling, tax evasion, money laundering, or graft and corrupt
Commission of the request for dissolution. Upon receipt of a withdrawal of request for dissolution, practices;
the Commission shall withhold action on the request for dissolution and shall, after investigation:
(a) make a pronouncement that the request for dissolution is deemed withdrawn; (b) direct a joint (2) Committed or aided in the commission of securities violations, smuggling, tax
meeting of the board of directors or trustees and the stockholders or members for the purpose of evasion, money laundering, or graft and corrupt practices, and its stockholders knew;
ascertaining whether to proceed with dissolution; or (c) issue such other orders as it may deem and
appropriate.
(3) Repeatedly and knowingly tolerated the commission of graft and corrupt practices
A withdrawal of the petition for dissolution shall be in the form of a motion and similar in substance or other fraudulent or illegal acts by its directors, trustees, officers, or employees.
to a withdrawal of request for dissolution but shall be verified and filed prior to publication of the
order setting the deadline for filing objections to the petition. If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth in
subparagraph (e) hereof, its assets, after payment of its liabilities, shall, upon petition of the
REQUISITES and PROCEDURE for the withdrawal of the REQUEST for dissolution (applies to Sec 134): Commission with the appropriate court, be forfeited in favor of the national government. Such
forfeiture shall be without prejudice to the rights of innocent stockholders and employees for
1. shall be made in writing;

services rendered, and to the application of other penalty or sanction under this Code or other 2. In case of deadlock in a close corporation as provided for in section 104;
laws. 3. In a close corporation, any acts of directors, officers or those in control of the corporation which
is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any
The Commission shall give reasonable notice to, and coordinate with, the appropriate regulatory stockholder or whenever corporate assets are being misapplied or wasted under section 104.
agency prior to the involuntary dissolution of companies under their special regulatory
jurisdiction. Involuntary dissolution is a harsh remedy akin to a capital punishment. Thus, it has been laid to rest in the
case of Government vs. Philippine Sugar Estate that courts proceed with extreme caution which have for
Note: Culled from the above provision is that this is a dissolution is by judicial decree. In a ruling laid down their object the forfeiture of corporate franchise, and forfeiture will not be allowed, except under express
by the SC, actions, for quo warranto against corporations or against persons who usurps an office in a limitation, or for plain abuse of power by which the corporation fails to fulfil the design and purpose of its
corporation fall under the jurisdiction of the SEC (Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999). organization. But when the abuse or violation constitutes or threatens a substantial injury to the public or
such as to amount to a violation of the fundamental conditions of its charter, or its conduct is characterized
This, however, is no longer exclusive and absolute in view of the amendments introduced by the Securities
by “obduracy or pertinacity in contempt of law”, dissolution will be granted.
Regulations Code (SRC) of 2000, or RA 8799, which transferred the jurisdiction of the SEC under Sec. 5
of PD 902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA 8799). The jurisdiction of Likewise, it has been held that the relief of dissolution will be awarded only where no other adequate
the courts and the SEC over revocation proceedings seems to be concurrent under the present set up remedy is available and it will not be allowed where the rights of the stockholders can be, or are, protected
since Sec. 5 of RA 8799, particularly par. (m) thereof, provides that the SEC has the power to “suspend, in some other way.
or revoke, after proper notice and hearing the franchise and certificate of registration of corporations,
partnership or associations, upon any ground provided by law”. This, despite the transfer of its jurisdiction CASES:
under the SRC.
[G.R. No. L-11789; April 2, 1918] THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-
GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided by Sec. 138: appellant, vs. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.) defendant-appellant
a) Non-use of corporate charter as provided under Section 21 of this Code; ISSUE: Whether defendant corporation should be dissolved?
b) Continuous in-operation of a corporation as provided under Section 21 of this Code;
c) Upon receipt of a lawful court order dissolving the corporation; HELD: No. Section 212 of Act No. 190 provides a judgment which may be rendered in said case:
d) Upon finding by final judgment that the corporation procured its incorporation through fraud;
When in any such action, it is found and adjudged that the corporation has, by any act done or omitted
e) Upon finding by final judgment that the corporation:
surrendered, or forfeited its corporate rights, privileges, and franchise, or has not used the same during
1. Was created for the purpose of committing, concealing or aiding the commission of
the term of five years, judgment shall be entered that it be ousted and excluded therefrom and that it be
securities violations, smuggling, tax evasion, money laundering, or graft and corrupt
dissolved; but when it is found and adjudged that a corporation has offended in any matter or manner
practices;
which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power
2. Committed or aided in the commission of securities violations, smuggling, tax
not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise,
evasion, money laundering, or graft and corrupt practices, and its stockholders
judgment shall be rendered that it be ousted from the continuance of such offense or the exercise of such
knew; and
power.
3. Repeatedly and knowingly tolerated the commission of graft and corrupt practices
or other fraudulent or illegal acts by its directors, trustees, officers, or employees. It will be seen that said section (212) gives the court a wide discretion in its judgment in depriving
corporations of their franchise. High, in his work on Extraordinary Legal Remedies, says at page 606:
GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Sec. 6 of PD 902-A:
It is to be observed in the outset that the courts proceed with extreme caution in the proceeding which
1. Fraud in procuring its certificate of registration;
have for their object the forfeiture of corporate franchises, and a forfeiture will not be allowed, except under
2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice
express limitation, or for a plain abuse of power by which the corporation fails to fulfill the design and
of or damage to the general public;
purpose of its organization.
3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise; In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co. (3 L.R.A. 510) the court said
4. Continuous inoperation for a period of at least five (5) years; (p. 518):
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by the Commission within The scope of the remedy furnished by its (quo warranto) is to forfeit the franchises of a corporation for
the prescribed period. misuser or nonuser. It is therefore necessary in order to secure a judicial forfeiture of respondent's charter
to show a misuser of its franchises justifying such a forfeiture. And as already remarked the object being
OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE: to protect the public, and not to redress private grievances, the misuser must be such as to work or threaten
a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the
1. Violation of any provision of the Code under section 158;

contract by which the franchise was granted and thus defeat the purpose of the grant; and ordinarily the fair interpretation of these provisions would seem to indicate that the date of the receiving of the title in this
wrong or evil must be one remediable in no other form of judicial proceeding. case was the date when the respondent received the owner's certificate, or May 7, 1921, for it was only
after that date that the respondent had an unequivocal and unquestionable power to pass a complete title.
Courts always proceed with great caution in declaring a forfeiture of franchises, and require the prosecutor The failure of the respondent to receive the certificate sooner was not due in any wise to its fault, but to
seeking the forfeiture to bring the case clearly within the rules of law entitling him to exact so severe a unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held
penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State vs. Portland Natural Gas Co., accountable.
153, Ind., 483.)
The question then arises whether the failure of the respondent to get rid of the San Clemente property
While it is true that the courts are given a wide discretion in ordering the dissolution of corporations for within five years after it first acquired the deed thereto, even supposing the five-year period to be properly
violations of its franchises, etc., yet nevertheless, when such abuses and violations constitute or threaten counted from that date, is such a violation of law as should work a forfeiture of its franchise and require a
a substantial injury to the public or such as to amount to a violation of the fundamental conditions of the judgment to be entered for its dissolution in this action of quo warranto.
contract (charter) by which the franchises were granted and thus defeat the purpose of the grant, then the
power of the courts should be exercised for the protection of the people. Upon this point we do not hesitate to say that in our opinion the corporation has not been shown to have
offended against the law in a manner that should entail a forfeiture of its charter. Certainly, no court with
Under the law the people of the Philippine Islands have guaranteed the payment of the interest upon cost any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the
of the construction of the railroad which occupied or occupies at least some of the lands purchased by the extreme penalty of the law as a consequence of the delinquency here shown to have been committed.
defendant. Every additional dollar of increase in the price of the land purchased by the railroad company
added that much to the costs of construction and thereby increased the burden imposed upon the people. The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure, as
The very and sole purpose of the intervention of the defendants in the purchase of the land from the applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates Development
original owners was for the purpose of selling the same to the Railroad Company at profit — at an Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered against a corporation in
increased price, thereby directly increasing the burden of the people by way of additional taxation. The an action of quo warranto, among other things says:
purpose of the intervention of the defendant in the transactions in question, was to enrich itself at the
expense of the taxpayers of the Philippine Islands, who had, by a franchise granted, permitted the . . . When it is found and adjudged that a corporation has offended in any matter or manner which does
defendant to exist and do business as a corporation. The defendant was not willing to allow the Railroad not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred
Company to purchase the land of the original owners. Its intervention with The Tayabas Land Company by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be
was to obtain an increase in the price of the land in a resale of the same to the railroad company. The rendered that it be outset from the continuance of such offense or the exercise of such power.
conduct of the defendant in the premises merits the severest condemnation of the law.
This provision clearly shows that the court has a discretion with respect to the infliction of capital
The judgment of the lower court should be modified. It is hereby ordered and decreed that the franchise punishment upon corporation and that there are certain misdemeanors and misuses of franchises which
heretofore granted to the defendant by which it was permitted to exist and do business as a corporation in should not be recognized as requiring their dissolution.
the Philippine Islands, be withdrawn and annulled and that it be disallowed to do and to continue doing
Government of the Philippine Islands vs. Philippine Sugar Estates Development Co.: (38 Phil., 15): In the
business in the Philippine Islands, unless it shall within a period of six months after final decision, liquidate,
PSEC, case, it was found that the offending corporation had been largely (though indirectly) engaged in
dissolve and separate absolutely in every respect and in all of its relations, complained of in the petition,
the buying and holding or real property for speculative purposes in contravention of its charter and contrary
with The Tayabas Land Company, without any findings to costs.
to the express provisions of law. Moreover, in that case the offending corporation was found to be still
[G.R. No. L-26649; July 13, 1927] THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of interested in the properties so purchased for speculative at the time the action was brought. Nevertheless,
the Attorney-General), plaintiff, vs. EL HOGAR FILIPINO, defendant instead of making an absolute and unconditional order for the dissolution of the corporation, the judgment
of ouster was made conditional upon the failure of the corporation to discontinue its unlawful conduct within
ISSUE: Whether the corporation should be dissolved on the first cause of action? six months after final decision. In the case before us the respondent appears to have rid itself of the San
Clemente property many months prior to the institution of this action. It is evident from this that the
HELD: No. It is evident that the strict letter of the law was violated by the respondent; but it is equally dissolution of the respondent would not be an appropriate remedy in this case. We do not of course
obvious that its conduct has not been characterized by obduracy or pertinacity in contempt of the law. undertake to say that a corporation might not be dissolved for offenses of this nature perpetrated in the
Moreover, several facts connected with the incident tend to mitigate the offense. past, especially if its conduct had exhibited a willful obduracy and contempt of law.
It has been held by this court that a purchaser of land registered under the Torrens system cannot acquire Third cause of action. — Under the third cause of action the respondent is charged with engaging in
the status of an innocent purchaser for value unless his vendor is able to place in his hands an owner's activities foreign to the purposes for which the corporation was created and not reasonably necessary to
duplicate showing the title of such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; its legitimate ends. The specifications under this cause of action relate to three different sorts of activities.
Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not The first consist of the administration of the offices in the El Hogar building not used by the respondent
really in a position to pass an indefeasible title to any purchaser. In this connection it will be noted that itself and the renting of such offices to the public.
section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation
Law, allow the corporation "five years after receiving the title," within which to dispose of the property. A

The second specification under the third cause of action has reference to the administration and DISCUSSION:
management of properties belonging to delinquent shareholders of the association
Title XIV Dissolution, Liquidation and Winding Up
The third specification under this cause of action relates to certain activities which are described in the
following paragraphs contained in the agreed statements of facts: Dissolution is the extinguishment of the corporate franchise and the termination of corporate existence.
El Hogar Filipino has undertaken the management of some parcels of improved real estate situated in And a corporation may be dissolved in either of the 1. Expiration of its corporate term; 2. Voluntary
Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as surrender of its primary franchise; and 3. The revocation of its corporate franchise otherwise known as
prepared to do so involuntary dissolution.
For the services so rendered in the management of such properties El Hogar Filipino receives Sec. 133, however, mentions only two methods that is voluntarily or involuntarily. This is probably true
compensation in the form of commissions upon the gross receipts from such properties at rates varying because the expiration of corporate term can be considered voluntary dissolution it being the intention of
from two and one-half per centum to five per centum of the sums so collected, according to the location of the stockholders that it shall exist only for such period.
the property and the effort involved in its management.
As we were saying corporations may now be registered to exist in Perpetua. But they are not barred to
The administration of property in the manner described is more befitting to the business of a real estate provide the specific time for its existence, if that be the case they will cease to exist and are being terminate,
agent or trust company than to the business of a building and loan association. automatically dissolved upon the expiration indicated in the AoI without any need of any formal proceeding.
It should be noted however that the original term indicated in the AoI is subject to extension in accordance
ISSUE2: Whether the defendant should be dissolved on the above-ground? with sec 11 and sec 36. Or it may also opt to amend its articles that record its existence, if such be the
case its corporate existence will be continued and may carry out its business for a period of time granted
HELD: No. It is a general rule of law that corporations possess only such express powers. The by it by virtue of such amendment. The extension of the corporate term shall nonetheless be made prior
management and administration of the property of the shareholders of the corporation is not expressly to the expiration of the original term. Otherwise the corporation upon its expiration will be dissolved.
authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The corporation, upon the point now under the As for instance in the case of PNB vs CFI, issue whether or not PBM is entitled to reimbursement of
criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that reasonable expenses over the improvements in the leased property, the court said NO, the failure of the
the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this lessee to remove the equipment before the lease was terminated was a waiver of its rights or interest over
sort. the equipment, it is the contract and therefor the law between the parties and Art. 1678 of the Civil Code
will not apply, where the lessee is to be reimbursed of certain amount for the improvements made therein.
Fourth cause of action. — It appears that among the by-laws of the association there is an article (No. 10) It was likewise stressed by the higher court in this case, that when period of corporate existence has
which reads as follows: lapsed, the corporation ceases to be a valid corporation for the purpose of continuing the business for
which it is incorporated. There is no need to instate a proceeding for quo warranto to determine the date,
The board of directors of the association, by the vote of an absolute majority of its members, is empowered
time and place of the dissolution, because the period of corporate existence provided for in the articles of
to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof
incorporation, that is its contract with the State, it if it expires without any extension having been made the
whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners
corporation is dissolved automatically, in so far as its continuation of its business is concerned, I said that
of such shares is not desirable.
because it will be vested with another personality for another 3 years but only for the purpose of liquidation
ISSUE3: WON if the above by-law is invalid, the corporation may be dissolved? and winding up of its affairs. Sec 11 a corporation may apply for the revival of its corporate existence, this
however should be done within three years from the expiration, otherwise the corporate entity will cease
HELD: No. This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section to exist for all intents and purposes.
187 of the Corporation Law, which expressly declares that the board of directors shall not have the power
to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation Three modes for Voluntary Dissolution 1. Voluntary Dissolution where no creditors are affected (Sec. 134);
or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been 2. Voluntary Dissolution where creditors are affected (Sec. 135); and 3. Shortening of corporate term (Sec.
enforced, and in fact no attempt has ever been made by the board of directors to make use of the power 136).
therein conferred.
Requirements and procedure for dissolution where no creditors are affected is provided for in Sec 134 it
It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the requires approval of the SEC, it shall take effect only upon the issuance of the certificate of dissolution, so
association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we much so that dissolution will not result by the mere resolution of the board or of the stockholders, the ruling
are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even in Daguhoy Enterprises vs. Ponce. A corporation being the creation of a law and by grant of the state of
if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to its franchise to be and act as such, it may only be dissolved in the manner prescribed by law. Since it is
incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident the state which is granted the right to refuse, it is only through the state which can allow the termination of
to corporate effort would certainly be largely increased. There is no merit in this cause of action. its existence.

Voluntary Dissolution where creditors are affected, it is by way of a petition filed with the SEC, verified by would amount to a grave violation of its franchise under section 158 ; also Violation of any provision of the
the president or the secretary or any of its directors; setting forth all claims and demands against it; showing Code under section 158; or In a close corporation (a) in case of gross mismanagement fraudulent conduct
the approval of at least 2/3 of the OCS or the members in a meeting called for that purpose; the petition of the affairs of the corporation, or (b) in case of deadlocks, or (c) dishonesty or any act prejudicial to the
shall state the reason for the dissolution; the term, manner and time when notices were given; the date, stockholder; Violation of other laws, like violation of the foreign investment act, securities regulation code
place and time of the meeting; a copy of the resolution authorizing the dissolution, certified by a majority etc.
of the board of directors or trustees and countersigned by the secretary of the corporation; and a list of all
its creditors. Involuntary dissolution is an extreme penalty, so much so that the courts in most cases will not impose the
same, because it is likened to a natural person, that it will be tantamount to the imposition of death penalty.
If the petition is sufficient in form and substance the SEC shall fix a date for filing objections to the petition In most cases it will merely enjoin the further commission of the questioned act, like for instance the case
which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. of Government of the PH Islands vs PH Sugar Estate, in this case the court did not impose the extreme
Publication requirement is required, once a week for three consecutive weeks, and posting of intention to penalty of dissolution, it held that it is to be observed in the outset that the courts proceed with extreme
dissolve for three (3) consecutive weeks in three (3) public places in such municipality or city where its caution in the proceeding which have for their object the forfeiture of corporate franchises, and a forfeiture
principal office is located. A hearing will thereafter be held and judgement dissolving the corporation and will not be allowed, except under express limitation, or for a plain abuse of power by which the corporation
directing such disposition of its assets as justice requires, or the appointment of receiver to collect such fails to fulfill the design and purpose of its organization. However, when such abuses and violations
assets and pay the debts of the corporation if required. The appointment of receiver is not mandatory as constitute or threaten a substantial injury to the public or such as to amount to a violation of the
held in China Banking vs Michellin the law uses the word “may” appoint a receiver, showing the clear intent fundamental conditions of the its charter by which the franchises were granted and thus defeat
of the law that the same is merely discretionary on the part of the proper forum, there is no occasion for the purpose of the grant, then the power of the courts should be exercised for the protection of the
the appointment of a receiver except under special circumstances and upon proper showing. people. In this case the purpose of the corporation was to enriched itself at the expense of the taxpayer
which according to the court would merit the highest condemnation of the law yet it cannot be imposed the
Shortening of corporate term, Sec 136, it is effected by an amendment of the AoI, following the extreme penalty of dissolution, it was a conditional decision. It granted the offending corporation six months
requirements of sec 36. Upon the expiration of the term of existence the corporation will be deemed to cease and desists form further committing the act, otherwise it will be dissolved.
dissolved, without any further proceeding, example: a corporation will cease to exist after 50 years, today
is its 25th year, the articles is amended stating that instead of existing for a period of 50 years from the Gov’t vs El Hogar, also a quo warranto proceeding for alleged illegal holding of titles to real properties.
date of its incorporation, it shall exist only for 25 years, finile kanina yung articles, tomorrow dissolved na The court ruled that while it is evident that the corporation has violated the law it is equally obvious that its
yung corporation, it says without further proceeding. conduct is not characterized by obduracy or pertinacity in contempt of the law. It was also noticed by the
court that it is not entirely the fault of El Hogar that it could not dispose of the property at that time, since
However, it may be withdrawn, the petition by way of a motion, or the request by way of writing, not later the government may also be contributory to such. (Just read the ruling of the case above )
than 15 days from receipt of the request/petition for dissolution.
CASES:
The last mode Involuntary Dissolution, sec 137, it is by way of filing of a verified petition. The wording used
in the law now, “it is by ANY interested party”, the Commission motu proprio or upon filing of a verified [G.R. No. L-20583; January 23, 1967] REPUBLIC OF THE PHILIPPINES, petitioner, vs. SECURITY
complain may dissolve the corporation on the ground provided for by law. CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO,
ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D.
It includes non-use of corporate charter; Continuous in-operation; Upon receipt of a lawful court order BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
dissolving the corporation; Upon finding by final judgment that the corporation procured its incorporation
through fraud; Upon finding by final judgment that the corporation: (1) Was created for the purpose of ISSUE: Whether the company should be dissolved?
committing, concealing or aiding the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices; (2) Committed or aided in the commission of securities violations, HELD: Yes. Although, admittedly, defendant corporation has not secured the requisite authority to engage
smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew; and in banking, defendants deny that its transactions partake of the nature of banking operations. It is
(3) Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463 savings
or illegal acts by its directors, trustees, officers, or employees. account deposits have been made by the public with the corporation and its 74 branches, with an
aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed
The corporation is ordered dissolve by final judgement pursuant to grounds provided for in subparagraph suitable therefor. It is clear that these transactions partake of the nature of banking, as the term is used in
e, its assets, after payment of its liabilities, shall, upon petition of the Commission with the appropriate Section 2 of the General Banking Act.
court, be forfeited in favor of the national government. The Commission shall give reasonable notice to,
and coordinate with, the appropriate regulatory agency prior to the involuntary dissolution of companies Accordingly, defendant corporation has violated the law by engaging in banking without securing the
under their special regulatory jurisdiction. administrative authority required in Republic Act No. 337.
Other grounds for dissolution include: violation of other laws e.g. PD 902-A, like Serious misrepresentation That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent
as to what the corporation can do or is doing to the great prejudice of or damage to the general public; from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its
Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which
business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon State through its legal counsel, and that respondents, much less the minority stockholders of said
the public, owing to the number of persons affected thereby. corporation, have no right or personality to maintain the action for dissolution, and that inasmuch as said
action cannot be maintained legally by the respondents, then the auxiliary remedy for the appointment of
Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly, a receiver has no basis.
ordered dissolved.
HELD: True it is that the general rule is that the minority stockholders of a corporation cannot sue and
[G.R. No. L-31490; January 6, 1978] REPUBLIC OF THE PHILIPPINES, petitioner-appellee, vs. demand its dissolution. However, there are cases that hold that even minority stockholders may ask for
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL CUENCO, LOURDES dissolution, this, under the theory that such minority members, if unable to obtain redress and protection
CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO A. REYES (Original Respondents); and of their rights within the corporation, must not and should not be left without redress and remedy. This was
ANTONIO V. CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. what probably prompted this Court to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598
(New Directors of respondent corporation), respondent-appellees. MIGUEL CUENCO, respondent- (47 Off. Gaz. No. 12 Supp., p. 200) that even the existence of a de jure corporation may be terminated in
crossclaimant-appellant. a private suit for its dissolution by the stockholders without the intervention of the State.
ISSUE: Whether the lower court is correct in not dissolving the corporation? We repeat that although as a rule, minority stockholders of a corporation may not ask for its dissolution in
a private suit, and that such action should be brought by the Government through its legal officer in a quo
HELD: Yes. After a very careful and deliberate consideration of the evidence adduced by petitioner, the
warranto case, at their instance and request, there might be exceptional cases wherein the intervention of
lower court came to the conclusion that the same did not really warrant a quo warranto by the State that
the State, for one reason or another, cannot be obtained, as when the State is not interested because the
could truly justify to decapitate corporate life, and that the corporate acts or missions complained of had
complaint is strictly a matter between the stockholders and does not involve, in the opinion of the legal
not resulted in substantial injury to the public, nor were they wilful and clearly obdurate. The court found
officer of the Government, any of the acts or omissions warranting quo warranto proceedings, in which
that the several acts of misuse and misapplication of the funds and/or assets of the Bisaya Land
minority stockholders are entitled to have such dissolution. When such action or private suit is brought by
Transportation Co., Inc. were committed new particularly by the respondent Dr. Manuel Cuenco with the
them, the trial court had jurisdiction and may or may not grant the prayer, depending upon the facts and
cooperation of Jose P. Velez, for the commission of which they may be personally held liable. There
circumstances attending it. The trial court's decision is of course subject to review by the appellate tribunal.
appears to be no reason for us to disregard the findings of the trial court, which, applying well settled
Having such jurisdiction, the appointment of a receiver pendente lite is left to the sound discretion of the
doctrines, ought to be given due weight and credit (De la Rama vs. Ma-ao Sugar Central, L-17504 & L-
trial court. As was said in the case of Angeles vs. Santos (64 Phil., 697), the action having been properly
17506, Feb. 28, 1969). Besides, the court a quo found that the controversy between the parties was more
brought and the trial court having entertained the same, it was within the power of said court upon proper
personal than anything else and did not at all affect public interest.
showing to appoint a receiver pendente lite for the corporation; that although the appointment of a receiver
The Solicitor General himself asserts that the only purpose of his ration for the of this quo warranto is to upon application of the minority stockholders is a power to be exercised with great caution, nevertheless,
take the State out of an unnecessary court litigation, so that the dismissal of the case would result in the it should be exercised necessary in order not to entirely ignore and disregard the rights of said minority
disposition solely of the quo warranto by and between petitioner Republic of the Philippines and the stockholders, especially when said minority stockholders are unable to obtain redress and protection of
respondents named therein. Other interested parties who might feel aggrieved, therefore, would not be their rights within the corporation itself.
without their remedies since they can still maintain whatever claims they may have against each other. It
PRESENT STATE OF LAW: any stockholder or member of a corporation can institute a dissolution
has been held that relief by dissolution will be awarded only where no other adequate remedy is available,
proceeding against his own corporation before the proper forum. This is clear from the provisions of PD
and is not available where the rights of the stockholders can be, or are, protected in some other way (16
902-A, as amended, when it provides that the SEC, now the Special Commercial Courts, shall hear and
Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing vs. McDonald", 134 Minn. 148,156 N.W.
decide cases involving ―intra-corporate dispute or partnership relations between and among
780,158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank of St. Paul, 7 Minn. 252, cited
stockholders, members or associates; between any or all of them and the corporation, partnership or
in De la Rama vs. Ma-ao Sugar Central, supra).
association of which they are stockholders, members or associates, respectively; and between such
ACCORDINGLY, without prejudice to the rights of the private parties herein to take proper steps to enforce corporations, partnerships or association and the State insofar as it concerns their individual franchise or
whatever causes of action they may have against each other, the order of the lower court embodied in its right to exist as such entity‖ (Sec. 5(b) as further amended by Sec. 5.2 of RA 8799). Of note, however, is
"Resolution" dated April 3, 1968, granting the Solicitor General's motion to dismiss the quo warranto that under Sec. 5(m) of RA 8799, the SEC appears to have concurrent jurisdiction to ―suspend or revoke,
proceedings is hereby upheld. after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or
associations upon any of the grounds provided by law.
[G.R. No. L-4900; August 31, 1953] FINANCING CORPORATION OF THE PHILIPPINES and J.
AMADO ARANETA, petitioners, vs. HON. JOSE TEODORO, Judge of the Court of First Instance of It has thus been held as early as 1950 that ―even the existence of a de jure corporation may be
Negros Occidental, Branch II, and ENCARNACION LIZARES VDA. DE PANLILIO, respondents determined in a private suit for its dissolution between stockholders, without the intervention of the state‖
(Hall vs. Piccio). Likewise, in a close corporation, a petition for the dissolution of the corporation may be
ISSUE: The main contention of the petitioners in opposing the appointment of a receiver in this case is instituted by any one individual shareholder on the ground, even by mere dishonesty.
that said appointment is merely an auxiliary remedy; that the principal remedy sought by the respondents
in the action in Negros Occidental was the dissolution of the Financing Corporation of the Philippines; that
according to the law a suit for the dissolution of a corporation can be brought and maintained only by the

EFFECTS OF DISSOLUTION Deposit Insurance Corporation Charter, as amended, every corporation whose charter expires
pursuant to its articles of incorporation, is annulled by forfeiture, or whose corporate existence is
Dissolution terminates its power to enter into contracts or to continue the business as a going concern. terminated in any other manner, shall nevertheless remain as a body corporate for three (3) years
after the effective date of dissolution, for the purpose of prosecuting and defending suits by or
The SC held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which
against it and enabling it to settle and close its affairs, dispose of and convey its property, and
it was organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving
distribute its assets, but not for the purpose of continuing the business for which it was
a grant (Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a contract executed prior to
established.
its dissolution for the purpose of continuing the business of its organization (Cebu Ports vs. State Marine).
At any time during said three (3) years, the corporation is authorized and empowered to convey all
Debts due to or by a corporation are not extinguished. It has thus been held that the termination of the life
of its property to trustees for the benefit of stockholders, members, creditors and other persons in
of a juridical entity does not, by itself, imply the diminution or extinction of rights demandable against such
interest. After any such conveyance by the corporation of its property in trust for the benefit of its
juridical entity (Gonzales vs. Sugar Regulatory Adm.)
stockholders, members, creditors and others in interest, all interest which the corporation had in
As a General Rule, the rights and liabilities of the corporation are not extinguished by its dissolution, this the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
clear from the provisions of the code: (Sec. 145) SEC. 184. Effect of Amendment or Repeal of This stockholders, members, creditors or other persons-in-interest.
Code, or the Dissolution of a Corporation. – No right or remedy in favor of or against any
Except as otherwise provided for in Sections 93 and 94 of this Code, upon the winding up of
corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred
corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown
by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed
or cannot be found shall be escheated in favor of the national government.
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. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
Thus, a lease to a corporation may, by its terms, terminate where the corporation cease to exist. But unless
debts and liabilities.
the lease so provides, the rights and obligations thereunder are not extinguished by the corporation’s
dissolution since leases affect property rights and survives the death of the parties. The stockholders LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS:
succeed to the rights and liabilities of the dissolved corporation in an unexpired leasehold state which may
be enforced by or against the receiver or liquidating trustee. 1. By the corporation itself through the BOD.
This is the usual method or procedure of liquidating a corporation (China
Exception: This rule, however, may not hold true in cases of contracts for personal services which are Banking Corp vs. Michelin) and although there is no law authorizing it, neither is
deemed terminated by the dissolution of the corporation. In such cases, there is found an “implied there anything that prohibits the BOD from undertaking the same.
condition” that the contract shall terminate in such event. If this method is resorted to, the board will only have a period of 3 years
to finish its task of liquidation.
Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years
Claims for or against the corporate entity not filed within the period will
for purposes of liquidation and winding up its affairs (Sec. 139). Upon expiration of the 3 year period to
become unenforceable as there exist no corporate entity against which they can be
wind up its affairs, the juridical personality of the corporation ceases for all intent and purposes, and as a
enforced. d. Actions pending for or against the corporation when the 3 year period
general rule, it can no longer sue and be sued (Gelano vs. CA).
expires are abated, since after the period, the corporation ceases for all intents and
LIQUIDATION AND WINDING UP purposes and is no longer capable of suing or being sued (National Abaca & Other
Fibers Co. vs. Pore)
During the course of liquidation and winding up, the assets will be collected and realized, the rights and 2. By a trustee appointed by the corporation.
claims of creditors will be settled or provided for and a distribution of the remaining assets to the The corporation may opt to convey all corporate assets to a trustee who
shareholders who are entitled thereto. will take charge of liquidation.
If this method is used, the three-year period limitation imposed by section
Therefore, liquidation or winding up of corporate affairs therefore means the collection of all corporate 139 will not apply provided the designation of the trustee is made within that period.
assets, the payments of all its debts and settlement of its obligations and the ultimate distribution Thus, during the period of liquidation, but before the completion thereof,
of corporate assets, if any of it remains, to all stockholders in accordance with their proportionate a dissolved corporation is still liable for all its debts and liabilities in an action filed
stockholdings in the corporation or in accordance with their respective contracts of subscription. against it through its trustee even if the case is filed beyond the 3-year period of
liquidation.
After dissolution, a body corporate continues to exist for 3 years for the purpose of liquidation and winding 3. By appointment of a receiver
up of its affairs: (Sec. 122) SEC. 139. Corporate Liquidation. – Except for banks, which shall be A receiver may be appointed by the proper forum on petition or motu
covered by the applicable provisions of Republic Act No. 7653, otherwise known as the “New proprio upon the dissolution of the corporation (Sec. 135)
Central Bank Act”, as amended, and Republic Act No. 3591, otherwise known as the Philippine

The appointment of a receiver is, however, permissive rather than ISSUE: Whether Buenaflor’s application should be approved?
mandatory and the law tends to recognize that in cases of voluntary dissolution there
is no occasion for the appointment of a receiver except under special circumstances HELD: Yes. It is admitted — and the Commission found – that the needs of Sabang Barrio will be
and upon proper showing (China Banking vs. Michelin) conveniently served with the establishment of a 5-ton ice plant. But it elected to deny Buenaflor's
If a receiver is appointed, the 3-year period fixed by law within which to application, even as it awarded the privilege to the new Camarines Corporation on the ground that it (the
complete the task of liquidation will not likewise apply because the dissolved old corporation) had been serving ice in Sabang up to the time of Buenaflor's application, and was,
corporation is substituted by the receiver who may sue or be sued even after that consequently, the pioneer operator there.
period (Sumera vs. Valencia).
The fact, however, is that since 1953, the old Corporation had been illegally plying its business of selling
Thus, it has been held that when a corporation is dissolved and the
ice in Sabang because, under the Corporation Law, Sec. 77, after November 1953, it could not lawfully
liquidation of assets is placed in the hands of a receiver or assignee, the 3 year
continue the business for which it had been established (operate ice plant, sell ice, etc). After November
period is not applicable and the assignee may institute all actions leading to the
1953, it could only continue to exist for three years for the purpose of prosecuting and defending suits by
liquidation of the corporation even after the expiration of 3 years.
or against it, and of enabling it gradually to settle and close its affairs, to dispose and convey its property
Note however, that a receiver may be appointed by the court even while the corporation is a going concern and to divide its capital stock. It could not, without violating the law, continue to sell ice. And yet, the
and does not always imply dissolution of a corporation. Commission awarded the certificate on the basis of such serve and distribution of ice — applying the "prior
operator" rule. In other words, the new Camarines Corporation is rewarded, precisely because the old
NOTE: corporation, its predecessor, had violated the law during that period (1953-1957). We cannot, and should
not countenance such anomalous result.
Upon dissolution of a corporation, it is considered in equity, even in the absence of a statute that its assets
are held for the benefit of its stockholders after payment of its debts and will be so distributed to the said On the other hand, when the old Camarines Corporation docketed its application October 1, 1957, it had
stockholders in accordance with their proportionate interest in the corporation or their contracts of no juridical personality, it had ceased to exist as a corporation and could not sue nor apply for certificate,
subscription. for it was incapable of receiving a grant. It was not even a corporation de facto. And then, there is no
application subscribed by the new Camarines Corporation. Far from being mere technicality, these point
It must herein be remembered that holders of preferred shares may be granted certain rights or privileges support a conclusion which appears to be just and equitable, not only for the reasons already indicated,
upon dissolution of the corporation. The preference may be in the form of receiving a certain part or portion but also to compensate Buenaflor's diligence and courage in exposing the irregular practice of a "ghost"
of corporate assets upon dissolution. And, depending on their contracts of subscription, they may or may corporation foisting its services upon the unsuspecting public of Sabang and neighboring territory —
not be entitled to share any of the assets remaining, after they may have received their respective enjoying a franchise without paying, perhaps, the corporate income tax and other burdens attached to
preference in accordance therewith. corporate existence.
During the 3 year period granted to a corporation to liquidate or wind up its affairs, the BOD is not normally Remembering the Camarines Corporation's automatic cessation in November 1956 (three years after
permitted to undertake any activity outside of the usual liquidation of the corporation. There is, however, November 1953) we must decline to regard the new Camarines Corporation (formed October 30, 1957)
nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of as a continuation of the old. At most, it is the transferee of the properties of the old corporation (or more
a new corporation to continue the business of the old. This is because winding up is the sole activity of a properly, the assets of the stockholders) plus the certificate of public convenience to operate the ice plant
dissolved corporation that does not intend to incorporate a new. If it does, however, it is not unlawful for in Naga and Magarao. And yet, as stated, the new corporation has not filed any application for certificate
the old BOD to incorporate and transfer the assets of a dissolved corporation to the new corporation of public convenience in Sabang, and has not published such application.
intended to be created as long as the stockholders have given their consent (Chung Ka Bio vs. IAC)
Wherefore, revoking the appealed decision in so far as it awarded the certificate to said Corporation, we
If the 3 year period of liquidation has elapsed and no effort to finally settle or close the corporate affairs hereby approve Buenaflor's application for five tons, instead of one ton, subject to the usual conditions
was undertaken, those having pecuniary interest in the corporate assets, including not only the imposed by the Public Service Commission on ice plant establishments.
stockholders but likewise the creditors, acting for and in behalf, may make proper representations with the
SEC for working out a final settlement of the corporate concern (Clemente vs. CA). [G.R. No. L-9350; May 20, 1957] CEBU PORT LABOR UNION, represented by this President ALEJO
CABABAJAY, petitioner, vs. STATES MARINE CORPORATION, NICASIO PANSACALA,
NOTE: Except as otherwise provided for in Sections 93 and 94 of this Code, upon the winding up of ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS, respondents
corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or
cannot be found shall be escheated in favor of the national government. (Sec. 139). ISSUE: Whether State Marine Corp can be made a party respondent?
CASES: HELD: Section 77 of the Corporation Law reads as follows:
[G.R. Nos. L-14991-94; May 30, 1960] JAIME T. BUENAFLOR, petitioner, vs. CAMARINES SUR SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or
INDUSTRY CORPORATION, respondent otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the time when it would have been so

dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually prosecute that which has already been commenced for the benefit of the corporation, or defend the latter
to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not against any other action already instituted or which may be instituted even outside of the period of three
for the purpose of continuing the business for which it was established. years fixed for the offices of the corporation.
Even a cursory reading of the above-quoted provision would convey the idea clearly manifested in the For the foregoing considerations, we are of the opinion and so hold that when a corporation is dissolved
limitation "but not for the purpose of continuing the business for which it was established", that the 3-year and the liquidation of its assets is placed in the hands of a receiver or assignee, the period of three years
period allowed by the law is only for the purpose of winding up its affairs. Petitioner-appellee prayed that prescribed by section 77 of Act No. 1459 known as the Corporation Law is not applicable, and the assignee
it be declared to have the right to stevedoring work in question "thereby respecting the contract entered may institute all actions leading to the liquidation of the assets of the corporation even after the expiration
into by petitioner and the Elizalde & Co. and subsequently enforced and continued by the respondent of three years.
States Marine Corporation". It appearing that the said States Marine Corporation was already dissolved at
the time said petition was filed, and the vessel subject of the agreement having changed hands, it cannot Wherefore, the order appealed from is reversed and it is ordered that the case be remanded to the court
be compelled now to respect such agreement specially considering the fact that it cannot even be made of origin to the end that it may decide the same on the merits, with costs against the appellee.
a party to this suit (See. 1, Rule 3, of the Rules of Court.
[G.R. No. L-16779; August 16, 1961] NATIONAL ABACA AND OTHER FIBERS CORPORATION,
[G.R. No. 45485; May 3, 1939] TIBURCIO SUMERA, as receiver of the corporation "Devota de plaintiff-appellant, vs. APOLONIA PORE, defendant-appellee
Nuestra Señora de la Correa", plaintiff-appellant, vs. EUGENIO VALENCIA, defendant-appellee
ISSUE: Whether the action commenced within the 3 year period may be continued after the expiration of
ISSUE: Whether the 3 year period prescribed by the Corporation Law is applicable if the liquidation is the said period?
placed on the hands of a receiver or assignee?
HELD: No. The rule appears to be well settled that, in the absence of statutory provision to the contrary,
HELD: No. Passing now to discuss the question raised by plaintiff and appellant in his sole assignment of pending actions by or against a corporation are abated upon expiration of the period allowed by law for
alleged error, section 77 of Act No. 1459 provides that "Every corporation whose charter expires by its the liquidation of its affairs.
own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is
It is generally held, that where a statute continues the existence of a corporation for a certain period after
terminated in any other manner, shall nevertheless be continued as a body corporate for three years after
its dissolution for the purpose of prosecuting and defending suits, etc., the corporation becomes defunct
the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action
against it and of enabling it gradually to settle and close its affairs to dispose of and convey its property
can afterwards be brought by or against it, and must be dismissed. Actions pending by or against the
and to divide its capital stock, but not for the purpose of continuing the business for which it was
corporation when the period allowed by the statute expires, ordinarily abate.
established." And section 77 of the same Act provides, "At any time during said three years said
corporation is authorized and empowered to convey all of its property to trustees for the benefit of . . . This time limit does not apply unless the circumstances are such as to bring the corporation within the
members, stockholders, creditors, and others interested. From and after any such conveyance by the provision of the statute. However, the wording of the statutes, in some jurisdictions authorize suits after
corporation of its property in trust for the benefit of its members, stockholders, creditors, and others in the expiration of the time limit, where the statute provides that for the purpose of any suit brought by or
interest, all interest which the corporation had in the property terminates, the legal interest vests in the against the corporation shall continue beyond such period for a further named period after final judgment.
trustees, and the beneficial interest in the members, stockholders, creditors, or other persons in interest. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892-893.).
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations, says: Our Corporation Law contains no provision authorizing a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three
6537. Effect of expiration of statutory extension of life. — In general. — The qualified existence after
(3) years. In fact, section 77 of said law provides that the corporation shall "be continued as a body
dissolution, as provided for by statute, terminates at the expiration of the time fixed, or, no time is fixed, at
corporate for three (3) years after the time when it would have been . . . dissolved, for the purpose of
the expiration of a reasonable time. Where the extreme limit to which the statute has extended the life of
prosecuting and defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy corporate
a corporation after its dissolution has expired, it has no offices which can bind it by agreement, but only
existence for such purpose. For this reason, section 78 of the same law authorizes the corporation, "at
has statutory trustees. After the expiration of such time, it is generally held not only that the corporation
any time during said three years . . . to convey all of its property to trustees for the benefit of members,
cannot sue or be sued but that actions pending at such time are abated. But a statute authorizing the
stockholders, creditors and other interested", evidently for the purpose, among others, of enabling said
continuance of a corporation for three years to wind up its affairs, does not preclude an action to wind up
trustees to prosecute and defend suits by or against the corporation begun before the expiration of said
brought after the three years.
period. Hence, commenting on said sections, Judge Fisher, in his work entitled Philippines Law on Stock
In the light of the legal provisions and authorities cited, interpretative of said laws, if the corporation carries Corporations (1929 ed.), has the following to say:
out the liquidation of its assets through its own officers and continues and defends the actions brought by
It is to be noted that the time during which the corporation, through its own officers, may conduct the
or against it, its existence shall terminate at the end of three years from the time of dissolution; but if a
liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the
receiver or assignee is appointed, as has been done in the present case, with or without a transfer of its
period of dissolution commences; but that there is no time limit within the trustees must complete a
properties within three years, the legal interest passes to the assignee, the beneficial interest remaining in
liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the
the members, stockholders, creditors and other interested persons; and said assignee may bring an action,
trustees must be made within the three-year period. It may be found impossible to complete the work of precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the
liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after
effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President
sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to create a Board of Liquidators, to continue the management of such matters as may then be pending.
to the authority of section 78 may sue and be sued as such in all matters connected with the liquidation.
By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the [G.R. No. L-39050; February 24, 1981] CARLOS GELANO and GUILLERMINA MENDOZA DE
property conveyed, subject to the beneficial interest therein of creditors and stockholders. (pp. 389-390; GELANO, petitioners, vs. THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC.,
see also Sumera v. Valencia [67 Phil. 721, 726-727). respondents
Obviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) ISSUE: Whether a corporation whose corporate life had ceased by the expiration of its term of existence,
years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to could still continue prosecuting and defending suits after its dissolution and beyond the period of 3 years
continue the management of such matters as may then be pending. The first question must, therefore, be to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee?
answered in the negative.
HELD: Yes. In American corporate law, upon which our Corporation Law was patterned, it is well settled
Wherefore, actions commenced within the 3 year period of liquidation may be continued by the trustee that, unless the statutes otherwise provide, all pending suits and actions by and against a corporation are
despite the expiration of the said period. abated by a dissolution of the corporation. Section 77 of the Corporation Law provides that the corporation
shall "be continued as a body corporate for three (3) years after the time when it would have been ...
[G.R. No. L-18805; August 14, 1967] THE BOARD OF LIQUIDATORS representing THE dissolved, for the purpose of prosecuting and defending suits By or against it ...," so that, thereafter, it shall
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. HEIRS OF no longer enjoy corporate existence for such purpose. For this reason, Section 78 of the same law
MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA, and authorizes the corporation, "at any time during said three years ... to convey all of its property to trustees
LEONOR MOLL, defendants-appellees for the benefit of members, Stockholders, creditors and other interested," evidently for the purpose, among
others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before
ISSUE: Whether the Board of Liquidators has personality to proceed as party-plaintiff in this case? the expiration of said period
HELD: Yes. The executive order abolishing NACOCO and creating the Board of Liquidators should be When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the Corporation
examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence Law, it still has the right until December 31, 1963 to prosecute in its name the present case. After the
of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of expiration of said period, the corporation ceased to exist for all purposes and it can no longer sue or be
prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle sued.
and close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be
read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed However, a corporation that has a pending action and which cannot be terminated within the three-year
that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing period after its dissolution is authorized under Section 78 to convey all its property to trustees to enable it
the affairs of the various government owned corporations, including NACOCO. to prosecute and defend suits by or against the corporation beyond the Three-year period. Although private
respondent did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the
By Section 2 of the executive order, while the boards of directors of the various corporations were corporation in the instant case and who in fact appeared in behalf of the corporation may be considered a
abolished, their powers and functions and duties under existing laws were to be assumed and exercised trustee of the corporation at least with respect to the matter in litigation only. Said counsel had been
by the Board of Liquidators. The President thought it best to do away with the boards of directors of the handling the case when the same was pending before the trial court until it was appealed before the Court
defunct corporations; at the same time, however, the President had chosen to see to it that the Board of of Appeals and finally to this Court. We therefore hold that there was a substantial compliance with Section
Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the lifespan 78 of the Corporation Law and as such, private respondent Insular Sawmill, Inc. could still continue
of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our prosecuting the present case even beyond the period of three (3) years from the time of its dissolution.
conclusions.
The word "trustee" as sued in the corporation statute must be understood in its general concept which
Not that our views on the power of the Board of Liquidators to proceed to the final determination of the could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by
present case is without jurisprudential support. The first judicial test before this Court is National Abaca the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution
and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already is more for the protection of its creditor and stockholders. Debtors like the petitioners herein may not take
dissolved, commenced suit within the three-year extended period for liquidation. That suit was for recovery advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer
of money advanced to defendant for the purchase of hemp in behalf of the corporation. She failed to which petitioner has failed to show, in the first place. To sustain petitioners' contention would be to allow
account for that money. We there said that "the rule appears to be well settled that, in the absence of them to enrich themselves at the expense of another, which all enlightened legal systems condemn.
statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration
of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law [G.R. No. 71837; July 26, 1988] CHUNG KA BIO, et. al., petitioners, vs. INTERMEDIATE APPELLATE
contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to COURT (2nd Special Cases Division), SECURITIES and EXCHANGE COMMISSION EN BANC, HON.
continue in its corporate name actions instituted by it within said period of three (3) years." However, these ANTONIO R. MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR., HON.
SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG TIONG TAY, CHUNG KIAT ISSUE: Whether petitioners can be held, given their submissions, to have succeeded in establishing for
HUA, CHENG LU KUN, EMILIO TAÑEDO, ROBERTO G. CENON and PHILIPPINE BLOOMING MILLS themselves a firm title to the property in question?
COMPANY, INC., respondents
HELD: No. Like the courts below, we find petitioners' evidence to be direly wanting; all that appear to be
ISSUE: Whether the BOD was justified to convey all the assets of the old PBM to the new corporation certain are that the "Sociedad Popular Calambeña," believed to be a "sociedad anonima" and for a while
without the express consent of its stockholders? engaged in the operation and management of a cockpit, has existed sometime in the past; that it has
acquired the parcel of land here involved; and that the plaintiffs' predecessors, Mariano Elepaño and Pablo
HELD: Yes. As the contention is based on the negative averment that no stockholders' meeting was held Clemente, had been original stockholders of the sociedad. Except in showing that they are the successors-
and the 2/3 consent vote was not obtained, there is no need for affirmative proof. Even so, there is the in-interest of Elepaño and Clemente, petitioners have been unable to come up with any evidence to
presumption of regularity which must operate in favor of the private respondents, who insist that the proper substantiate their claim of ownership of the corporate asset.
authorization as required by the Corporation Law was duly obtained at a meeting called for the purpose.
(That authorization was embodied in a unanimous resolution dated March 19, 1977, which was reproduced If, indeed, the sociedad has long become defunct, it should behoove petitioners, or anyone else who may
verbatim in the deed of assignment.) Otherwise, the new PBM would not have been issued a certificate of have any interest in the corporation, to take appropriate measures before a proper forum for a peremptory
incorporation, which should also be presumed to have been done regularly. It must also be noted that settlement of its affairs. We might invite attention to the various modes provided by the Corporation Code
under Section 28-1/2, "any stockholder who did not vote to authorize the action of the board of directors (see Sees. 117-122) for dissolving, liquidating or winding up, and terminating the life of the corporation.
may, within forty days after the date upon which such action was authorized, object thereto in writing and Among the causes for such dissolution are when the corporate term has expired or when, upon a verified
demand payment for his shares." The record does not show, nor have the petitioners alleged or proven, complaint and after notice and hearing, the Securities and Exchange Commission orders the dissolution
that they filed a written objection and demanded payment of their shares during the reglementary forty- of a corporation.
day period. This circumstance should bolster the private respondents' claim that the authorization was
unanimous. The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
While we agree that the board of directors is not normally permitted to undertake any activity outside of culminating in the disposition and distribution of its remaining assets. It may, during the three-year term,
the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical
stockholders from conveying their respective shareholdings toward the creation of a new corporation to entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity (see
continue the business of the old. Winding up is the sole activity of a dissolved corporation that does not Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) nor those of its owners and creditors. If
intend to incorporate anew. If it does, however, it is not unlawful for the old board of directors to negotiate the three-year extended life has expired without a trustee or receiver having been expressly designated
and transfer the assets of the dissolved corporation to the new corporation intended to be created as long by the corporation within that period, the board of directors (or trustees) itself, following the rationale of the
as the stockholders have given their consent. This was not prohibited by the Corporation Act. In fact, it Supreme Court's decision in Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so continue
was expressly allowed by Section 28-1/2. as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of
directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders
What the Court finds especially intriguing in this case is the fact that although the deed of assignment was but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations
executed in 1977, it was only in 1981 that it occurred to the petitioners to question its validity. All of four with the Securities and Exchange commission, which has primary and sufficiently broad jurisdiction in
years had elapsed before the petitioners filed their action for liquidation of both the old and the new matters of this nature, for working out a final settlement of the corporate concerns.
corporations, and during this period, the new PBM was in full operation, openly and quite visibly conducting
the same business undertaken earlier by the old dissolved PBM. The petitioners and the private WHEREFORE, the decision appealed from is AFFIRMED.
respondents are not strangers but relatives and close business associates. The PBM office is in the heart
of Metro Manila. The new corporation, like the old, employs as many as 2,000 persons, the same personnel ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122, such that, in the absence of a
who worked for the old PBM. Additionally, one of the petitioners, Chung Siong Pek was one of the directors known stockholder, member of the BOD or creditor, the properties should have been escheated in favor
who executed the deed of assignment in favor of the old PBM and it was he also who received the deeded of the local government. Following the rule laid down in Clemente will open the door to fraud in a way that
assets on behalf and as treasurer of the new PBM. Surely, these circumstances must operate to bar the any person claiming interest as heir of the corporation may still go to the SEC to make proper
petitioners now from questioning the deed of assignment after this long period of inaction in the protection representations with the SEC for working out a final settlement. Moreover, the corporation being non-
of the rights they are now belatedly asserting. Laches has operated against them. existent for all intents and purposes, after the expiration of the three year period provided by law, could
not have legally transferred such property to any person. The Gonzales case is misapplied, because SRA
[G.R. No. 82407; March 27, 1995] LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS was a successor of Philsucom, while in the Gelano case, there was a lawyer who prosecuted the case
OF ARCADIO C. OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION, MARIANO, who was deemed as trustee. In the Clemente case, there was no such successor nor a lawyer who can
ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND LOURDES, all surnamed ELEPAÑO, be deemed a trustee.
petitioners, vs. THE HON. COURT OF APPEALS, ELVIRA PANDINCO-CASTRO AND VICTOR
CASTRO, respondents.
CHAPTER XVIII- FOREIGN CORPORATIONS

A “foreign corporation” is any corporation, which owe its existence to the laws of another state, government 1. A license or permit to do so; and
or country. Elsewise stated, a foreign corporation is one created or organized under the laws of any state 2. A certificate of authority from the appropriate government agency.
or government other than those of the forum.
The manner in which a foreign corporation may obtain a license to do business in the Philippines is laid
(Sec. 123) SEC. 140. Definition and Rights of Foreign Corporations. – For purposes of this Code, a down in Sec. 142:
foreign corporation is one formed, organized or existing under laws other than those of the
Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own (Sec. 125) SEC. 142. Application for a License. – A foreign corporation applying for a license to
country or State. It shall have the right to transact business in the Philippines after obtaining a transact business in the Philippines shall submit to the Commission a copy of its articles of
license for that purpose in accordance with this Code and a certificate of authority from the incorporation and bylaws, certified in accordance with law, and their translation to an official
appropriate government agency. language of the Philippines, if necessary. The application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically set forth the following:
Note: The phrase “whose laws allow Filipino citizens and corporations to do business in its own
country or State” is not an accurate inclusion in the definition as any corporation registered or organized (a) The date and term of incorporation;
under the laws of another state is necessarily a foreign corporation whether or not the state of its (b) The address, including the street number, of the principal office of the corporation in the
corporation allow Filipino citizens or corporations to do business in that forum. country or State of incorporation;
(c) The name and address of its resident agent authorized to accept summons and process
The said phrase was inserted by framers of the law only as a condition precedent in all legal proceedings and all notices affecting the corporation, pending the
to the grant of a license to do business in the Philippines. establishment of a local office;
(d) The place in the Philippines where the corporation intends to operate;
Note: General Rule: The INCORPORATION TEST is applied in determining whether a corporation is (e) The specific purpose or purposes which the corporation intends to pursue in the
domestic or foreign. If it is incorporated in another state, it is a foreign corporation, while if it is registered transaction of its business in the Philippines: Provided, That said purpose or purposes
under Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the nationality of its are those specifically stated in the certificate of authority issued by the appropriate
stockholders. government agency;
(f) The names and addresses of the present directors and officers of the corporation;
Thus, a corporation registered under the Foreign Investments Act of 1991 (RA No.
(g) A statement of its authorized capital stock and the aggregate number of shares which
7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with 100% foreign equity is
the corporation has authority to issue, itemized by class, par value of shares, shares
considered a Filipino or domestic corporation and not foreign.
without par value, and series, if any;
Exception: In times of war and for purposes of security of the state, however, the “control test” would apply (h) A statement of its outstanding capital stock and the aggregate number of shares which
in determining the corporate nationality, i.e., the citizenship of the controlling stockholders determines the the corporation has issued, itemized by class, par value of shares, shares without par
nationality of the corporation. value, and series, if any;
(i) A statement of the amount actually paid in; and
Note: General Rule: A corporation can have no legal existence outside the boundaries of the sovereign by (j) Such additional information as may be necessary or appropriate in order to enable the
which it is created. Commission to determine whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable.
Exception: By virtue of state comity, a corporation created by laws of one state is usually allowed to
transact business in other states and to sue in the courts of the forum, subject to restrictions and certain Attached to the application for license shall be a certificate under oath duly executed by the
requirements imposed therein. authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the
laws of the country or State of the applicant allow Filipino citizens and corporations to do business
APPLICATION FOR LICENSE therein, and that the applicant is an existing corporation in good standing. If the certificate is in a
foreign language, a translation thereof in English under oath of the translator shall be attached to
Under Sec. 140, a foreign corporation cannot transact business in the Philippines unless it has obtained a the application.
license or permit to do so in accordance with the laws of the country and a certificate of authority from the
appropriate government agency such as the Bangko Sentral ng Pilipinas for banking institutions or the The application for a license to transact business in the Philippines shall likewise be accompanied
Office of the Insurance Commission for insurance companies, etc. by a statement under oath of the president or any other person authorized by the corporation,
showing to the satisfaction of the Commission and when appropriate, other governmental
Note: A certificate of authority from the Board of Investments is no longer required under RA 7042. Said agencies that the applicant is solvent and in sound financial condition, setting forth the assets and
certificate of authority is only necessary for the purpose of availing the incentives granted and allowed liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing
under the Omnibus Investments Code. of the application.
So, the Requisites for a foreign corporation to transact business in the Philippines are:

Foreign banking, financial, and insurance corporations shall, in addition to the above b. setting forth the assets and liabilities of the corporation as of the date not exceeding
requirements, comply with the provisions of existing laws applicable to them. In the case of all one (1) year immediately prior to the filing of the application.
other foreign corporations, no application for license to transact business in the Philippines shall
be accepted by the Commission without previous authority from the appropriate government Note: If the corporation is a Foreign banking, financial, and insurance corporations, in addition to the above
agency, whenever required by law. requirements:
Note: Procedure for application of a license to transact business in the Philippines: 5. Shall comply with the provisions of existing laws applicable to them.
6. In the case of all other foreign corporations, no application for license to transact business in
1. Submit to the Commission a copy of its articles of incorporation and bylaws, which must the Philippines shall be accepted by the Commission without previous authority from the
be: appropriate government agency, whenever required by law.
a. certified in accordance with law; and
b. their translation to an official language of the Philippines, if necessary. Note: Foreign corporations already issued a license to transact business in the Philippine prior to the
2. The application shall be under oath and as a general rule shall specifically set forth the effectivity of the Code continues to have such authority under the terms and conditions of the license. Sec.
following, unless already stated in its articles of incorporation: 141 provides:
(a) The date and term of incorporation;
(Sec. 124) SEC. 141. Application to Existing Foreign Corporations. – Every foreign corporation
(b) The address, including the street number, of the principal office of the corporation
which, on the date of the effectivity of this Code, is authorized to do business in the Philippines
in the country or State of incorporation;
under a license issued to it shall continue to have such authority under the terms and conditions
(c) The name and address of its resident agent authorized to accept summons and
of its license, subject to the provisions of this Code and other special laws.
process in all legal proceedings and all notices affecting the corporation, pending
the establishment of a local office; Upon compliance with the provision of Sec. 140, other special laws and the rules and regulations
(d) The place in the Philippines where the corporation intends to operate; implementing them, the SEC shall thereafter issue the license.
(e) The specific purpose or purposes which the corporation intends to pursue in the
transaction of its business in the Philippines: Provided, That said purpose or Note: Within sixty (60) days after the issuance of the license to transact business in the Philippines, the
purposes are those specifically stated in the certificate of authority issued by the licensee, except foreign banking or insurance corporations, shall deposit with the Commission for the
appropriate government agency; benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the
(f) The names and addresses of the present directors and officers of the corporation; Commission, consisting of:
(g) A statement of its authorized capital stock and the aggregate number of shares
which the corporation has authority to issue, itemized by class, par value of shares, 1. bonds or other evidence of indebtedness of the Government of the Philippines, its political
shares without par value, and series, if any; subdivisions and instrumentalities, or of government-owned or -controlled corporations and
(h) A statement of its outstanding capital stock and the aggregate number of shares entities;
which the corporation has issued, itemized by class, par value of shares, shares 2. shares of stock or debt securities that are registered under Republic Act No. 8799, otherwise
without par value, and series, if any; known as “The Securities Regulation Code”;
(i) A statement of the amount actually paid in; and 3. shares of stock in domestic corporations listed in the stock exchange;
(j) Such additional information as may be necessary or appropriate in order to enable 4. shares of stock in domestic insurance companies and banks,
the Commission to determine whether such corporation is entitled to a license to 5. any financial instrument determined suitable by the Commission, or
transact business in the Philippines, and to determine and assess the fees payable. 6. any combination thereof with an actual market value of at least Five hundred thousand pesos
3. Attached to the application for license shall be a certificate under oath, which must be: (P500,000.00) or such other amount that may be set by the Commission
a. duly executed by the authorized official or officials of the jurisdiction of its
incorporation; The Commission shall also require the deposit of additional securities or financial instruments if the actual
b. attesting to the fact that the laws of the country or State of the applicant allow Filipino market value of the deposited securities or financial instruments has decreased by at least ten percent
citizens and corporations to do business therein, and (10%) of their actual market value at the time they were deposited. Sec. 143 provides:
c. that the applicant is an existing corporation in good standing. (Sec. 126) SEC. 143. Issuance of a License. – If the Commission is satisfied that the applicant has
Note: If the certificate is in a foreign language, a translation thereof in English under complied with all the requirements of this Code and other special laws, rules and regulations, the
oath of the translator shall be attached to the application. Commission shall issue a license to transact business in the Philippines to the applicant for the
4. The application for a license to transact business in the Philippines shall likewise be purpose or purposes specified in such license. Upon issuance of the license, such foreign
accompanied by a statement under oath of the president or any other person authorized by corporation may commence to transact business in the Philippines and continue to do so for as
the corporation, showing to the satisfaction of the Commission and when appropriate, other long as it retains its authority to act as a corporation under the laws of the country or State of its
governmental agencies that: incorporation, unless such license is sooner surrendered, revoked, suspended, or annulled in
a. the applicant is solvent and in sound financial condition, accordance with this Code or other special laws. Within sixty (60) days after the issuance of the

license to transact business in the Philippines, the licensee, except foreign banking or insurance to obtain a charter or organize itself into a domestic corporation under the general laws of the
corporations, shall deposit with the Commission for the benefit of present and future creditors of other state;
the licensee in the Philippines, securities satisfactory to the Commission, consisting of bonds or 4. Regional or Area Headquarters – is an office whose purpose is to act as an administrative
other evidence of indebtedness of the Government of the Philippines, its political subdivisions and branch of a multinational company engaged in international trade which principally serves as a
instrumentalities, or of government-owned or -controlled corporations and entities, shares of stock supervision, communications and coordinating center for its subsidiaries, branches or affiliates
or debt securities that are registered under Republic Act No. 8799, otherwise known as “The in the Asia-Pacific Region and other foreign markets and which does not earn or derive income
Securities Regulation Code”, shares of stock in domestic corporations listed in the stock in the Philippines (Sec. 2(2), RA 8756). It cannot in any manner, participate in the management
exchange, shares of stock in domestic insurance companies and banks, any financial instrument of any subsidiary or branch office in the Philippines nor shall it market goods and services in
determined suitable by the Commission, or any combination thereof with an actual market value behalf of its mother company, branches or affiliates.
of at least Five hundred thousand pesos (P500,000.00) or such other amount that may be set by 5. Regional Operating Headquarters – is a foreign business entity which is allowed to derive
the Commission: Provided, however, That within six (6) months after each fiscal year of the income in the Philippines by performing qualifying services exclusively to its affiliates,
licensee, the Commission shall require the licensee to deposit additional securities or financial subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign
instruments equivalent in actual market value to two percent (2%) of the amount by which the markets (Sec. 2(3), RA 8756).
licensee’s gross income for that fiscal year exceeds Ten million pesos (P10,000,000.00). The
Commission shall also require the deposit of additional securities or financial instruments if the Qualifying services, under RA 8756, include among others: general administration
actual market value of the deposited securities or financial instruments has decreased by at least and planning, business planning and coordination, sourcing or procurement of raw materials
ten percent (10%) of their actual market value at the time they were deposited. The Commission and components, corporate finance advisory services, marketing control and sales promotion,
may, at its discretion, release part of the additional deposit if the gross income of the licensee has training and personnel management, logistic service, research and development services and
decreased, or if the actual market value of the total deposit has increased, by more than ten percent the like.
(10%) of their actual market value at the time they were deposited. The Commission may, from time
The Regional or Area Headquarters and Regional Operating Headquarters are
to time, allow the licensee to make substitute deposits for those already on deposit as long as the
granted certain tax incentives such as exemption from all kinds of local taxes, fees or charges
licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on such
imposed by local government units except real property tax on land improvements; tax and
deposits. In the event the licensee ceases to do business in the Philippines, its deposits shall be
duty-free importation of training materials and equipment; and importation of motor vehicles.
returned, upon the licensee’s application and upon proof to the satisfaction of the Commission
that the licensee has no liability to Philippine residents, including the Government of the Republic 6. Regional Warehouse – one whose activities are limited to serving as supply depot of Regional
of the Philippines. For purposes of computing the securities deposit, the composition of gross or Area Headquarters or Regional Operating Headquarters in the Philippines, after securing a
income and allowable deductions therefrom shall be in accordance with the rules of the license therefor from the Philippine Economic Zone Authority (PEZA) or the concerned ecozone
Commission. authorities. The regional warehouse shall only be used for the storage, deposit and safekeeping
of its spare parts, components, marking, labelling and cutting or altering to customer’s
Note: the objective of license is not to prevent the foreign corporation from performing isolated or single
specifications but shall not directly engage in trade nor solicit business, promote any sale nor
act, but to prevent it from acquiring a domicile for the purpose of pursuing its business without taking steps
enter into contracts for the sale or disposition of goods in the Philippines, except those for
to render it amenable to suit in the local courts. If the foreign corporation transacts business in the
delivery to an authorized distributor in the country.
Philippines without the requisite license, its officers may be subjected to the penal provisions in Title XVI,
7. Joint Venture – is a one-time grouping of two or more persons, natural or juridical, for carrying
INVESTIGATIONS, OFFENSES AND PENALTIES, of the Code.
out a specified undertaking. Under Sec. 1, L of RA 7042, it is combination of property, money,
MODE OF ENTRY OF FOREIGN CORPORATIONS efforts, skill or knowledge to carry out a single business enterprise for profit, which is duly
registered with the SEC as a corporation or partnership. No license to do business is required
1. Branch Office – of a foreign corporation is one which carries out the business activities of the on the part of the foreign corporation entering into such kind of a business venture since mere
foreign corporation itself and derives income from the Philippines (Sec. 1, C, IRR of RA No. investment does not constitute doing business as per the Implementing Rules and Regulations
7042). As such, the juridical entity involved is one and the same; of RA 7042 unless, of course, the foreign corporation actively participates in the management
2. Representative or Liason Office – one which deals directly with the clients of the parent thereof.
company but does not derive income from the host country and is fully subsidized by the head
office. It undertakes activities such as but not limited to information dissemination and RESIDENT AGENT
promotion of the company’s products;
As a condition precedent to the grant of license to do or transact business in the Philippines, the foreign
3. Local Subsidiary – A foreign corporation may form or organize a separate corporation under
corporation is required to designate its resident agent on whom summons and other legal processes may
the Foreign Investment Act (RA 7042) by making at least a majority of the investments therein.
be served in all actions or legal proceedings against such corporation. The code is clear on this matter:
The corporation thus formed becomes known as a local subsidiary of the investing foreign
corporation which becomes a legally independent unit governed by the laws of the Philippines. (Sec. 128) SEC. 145. Resident Agent; Service of Process. – As a condition to the issuance of the
Ballantine calls it “domestication” in the sense that the foreign corporation is granted the right license for a foreign corporation to transact business in the Philippines, such corporation shall file

with the Commission a written power of attorney designating a person who must be a resident of CONTROL TEST vis GRANFATHER RULE
the Philippines, on whom summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and consenting that service upon such resident agent CASE:
shall be admitted and held as valid as if served upon the duly authorized officers of the foreign
Narra Nickel Mining vs Redmont Mines 722 SCRA, April 21 2014 MR. Jan., 28, 2015 (majority
corporation at its home office. Such foreign corporation shall likewise execute and file with the
decisions only)
Commission an agreement or stipulation, executed by the proper authorities of said corporation,
in form and substance as follows:
“The (name of foreign corporation) hereby stipulates and agrees, in consideration of being DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT
granted a license to transact business in the Philippines, that if the corporation shall cease to
transact business in the Philippines, or shall be without any resident agent in the Philippines on A foreign corporation must secure the necessary license before it can transact or do business in the
whom any summons or other legal processes may be served, then service of any summons or Philippines. This is the clear import of Sec. 140 when it states that it shall have the right to transact business
other legal process may be made upon the Commission in any action or proceeding arising out of in the Philippines after it shall have obtained a license. Without such a license, the law provides for certain
any business or transaction which occurred in the Philippines and such service shall have the consequences:
same force and effect as if made upon the duly authorized officers of the corporation at its home
office.” (Sec. 133) SEC. 150. Doing Business Without a License. – No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be permitted to
Whenever such service of summons or other process is made upon the Commission, the maintain or intervene in any action, suit or proceeding in any court or administrative agency of the
Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or Philippines; but such corporation may be sued or proceeded against before Philippine courts or
other legal process to the corporation at its home or principal office. The sending of such copy by administrative tribunals on any valid cause of action recognized under Philippine laws.
the Commission shall be a necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance by the party at whose The responsible officers of a foreign corporation doing business in the Philippines without the requisite
instance the service is made. license may be subject to the penal sanctions provided for in title XVI of the Code which may either be
imprisonment or fine.
It shall be the duty of the resident agent to immediately notify the Commission in writing of any
change in the resident agent’s address. The corporation may not likewise sue or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines while it may be sued or proceeded against before such court or
As to who may be appointed as resident agent, the Revised Corporation Code provides: agency on any valid cause of action recognized under the law.
(Sec. 127) SEC. 144. Who May be a Resident Agent. – A resident agent may be either an individual As to whether a foreign corporation may sue or be sued on the Philippine Courts, the following general
residing in the Philippines or a domestic corporation lawfully transacting business in the rules have evolved in accordance with the rulings laid down by the Supreme Court.
Philippines: Provided, That an individual resident agent must be of good moral character and of
sound financial standing: Provided, further, That in case of a domestic corporation who will act as As to WHETHER OR NOT IT CAN SUE: General Rule:
a resident agent, it must likewise be of sound financial standing and must show proof that it is in
good standing as certified by the Commission. 1. A foreign corporation transacting or doing business in the Philippines with a license can sue
before Philippine Courts;
Note: Culled from the provisions of Sec. 145 is that the necessity of the appointment of a resident agent 2. Subject to certain exceptions, a foreign corporation doing business in the country without a
is only for the purpose of receiving summons and other legal processes in any legal action or proceeding license cannot sue in Philippine Courts; and
against the foreign corporation. And, when a foreign corporation has designated a person to receive 3. If it is not transacting business in the Philippines, even without a license, it can sue before the
summons in judicial proceedings affecting the corporation that designation is exclusive and service of Philippine Courts.
summons is without force and effect unless made on him (Poizat vs. Mogan). Thus, while the law allows
service upon the SEC (Sec. 145), or any of its officers or agents within the Philippines (Sec. 13, Rule 14, Note: “It is not the lack of required license but doing business without a license which bars a foreign
Rules of Civil Procedure), the latter two modes may become effective only if the foreign corporation failed corporation from access to our courts” (Universal Shipping vs. IAC)
or neglected to designate such a person or an agent. In a decision, therefore, rendered by the SC in the Exceptions:
case of General Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd (87 Phil 313), it
was held that “where such foreign corporation actually doing business here has not applied for a license a) Foreign corporations can sue before the Philippine Courts if the act or transaction involved is
to do and has not designated an agent to receive summons, then service of summons on it will be made an “isolated transaction” or the corporation is not seeking to enforce any legal or contractual
pursuant to the provisions of the Rules of Court”. If such foreign corporation has a license to do business, rights arising from, or growing out of, any business which it has transacted in the Philippines
then summons to it will be served on the agent designated by it for the purpose, or otherwise in accordance (Western Equipment Supply vs. Reyes)
with the Corporation Law.

b) Neither is a license required before a foreign corporation may sue before the forum if the CASES:
purpose of the suit is to protect its trademark, trade name, corporate name, reputation or
goodwill; (Western Equipment Supply vs. Reyes) [G.R. No. L-47701; June 27, 1941] THE MENTHOLATUM CO., INC., ET AL., petitioners, vs.
c) Or where it is based on a violation of the Revised Penal Code (Le Chemise Lacoste, SA vs. ANACLETO MANGALIMAN, ET AL., respondents
Fernandez);
ISSUE: Whether petitioner corporation is transacting business in the Philippines?
d) Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
e) Or where a party is estopped to challenge the personality of the corporation by entering into a HELD: No. No general rule or governing principle can be laid down as to what constitutes "doing" or
contract with it (Communications Materials and Design, Inc. vs. CA and ITEC) "engaging in" or "transacting" business. Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be whether the foreign corporation is
As to WHETHER OR NOT IT CAN BE SUED:
continuing the body or substance of the business or enterprise for which it was organized or whether it has
1. A foreign corporation transacting business in the Philippines with the requisite license can be substantially retired from it and turned it over to another. (Traction Cos. v. Collectors of Int. Revenue [C.
sued in Philippine Courts; C. A. Ohio], 223 F. 984, 987.) The term implies a continuity of commercial dealings and arrangements,
2. A foreign corporation transacting business in the Philippines without a license can be sued in and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
Philippine Courts; normally incident to, and in progressive prosecution of, the purpose and object of its organization. (Griffin
3. If it is not doing business in the Philippines, it cannot be sued in Philippine Courts for lack of v. Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank Line Co.,
jurisdiction. 246 P. 851, 852, 118 Okl. 111; Automotive Material Co. v. American Standard Metal Products Corp., 158
N. E. 698, 703, 327 III. 367.)
Note: As to what constitutes “doing business” or “transacting business” which would bar a foreign
corporation from access to our courts, no general rule or governing principle can be laid down. Indeed, In its decision of June 29, 1940, the Court of Appeals concluded that "it is undeniable that the Mentholatum
such case must be judged in the light of its peculiar environmental circumstance. However, the TRUE Co., through its agent, the Philippine-American Drug Co., Inc., has been doing business in the Philippines
TEST seems to be whether the foreign corporation is continuing the body or substance of the business or by selling its products here since the year 1929, at least." This is assailed by petitioners as a pure
enterprise for which it was organized or whether it has substantially retired from it and turned it over to conclusion of law. This finding is predicated upon the testimony of Mr. Roy Springer of the Philippine-
another. The term implies a continuity of commercial dealings and arrangements and contemplates, to the American Drug Co., Inc., and the pleadings filed by petitioners. The complaint filed in the Court of First
extent, the performance of acts or works or the exercise of some functions normally incident to and in Instance of Manila on October 1, 1935, clearly stated that the Philippine-American Drug Co., Inc., is the
progressive prosecution of, the purpose and objects of its organization (Metholatum, Inc. vs. Mangaliman) exclusive distributing agent in the Philippine Islands of the Mentholatum Co., Inc., in the sale and
distribution of its product known as the “Mentholatum" The object of the pleadings being to draw the lines
PRESENT STATE OF LAW AS TO “DOING BUSINESS” under the Foreign Investment Act (Sec. 3, d), of battle between litigants and to indicate fairly the nature of the claims or defenses of both parties, a party
“doing business” would include: cannot subsequently take a position contradictory to, or inconsistent with, his pleadings, as the facts
therein admitted are to be taken as true for the purpose of the action. It follows that whatever transactions
1. Soliciting orders, service contracts; the Philippine-American Drug Co., Inc., had executed in view of the law, the Mentholatum Co., Inc., did it
2. Opening offices, whether called “liaison offices” or branches; itself. And, the Mentholatum Co., Inc., being a foreign corporation doing business in the Philippines without
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar the license required by section 68 of the Corporation Law, it may not prosecute this action for violation of
year stay in the country for a period or periods totaling 180 days or more; trade mark and unfair competition.
4. Participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; The writ prayed for should be, as it hereby is, denied, with costs against the petitioners.
5. Any other act that imply a continuity of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the exercise of functions normally incident [G.R. No. 22015; September 1, 1924] MARSHALL-WELLS COMPANY, plaintiff-appellant, vs. HENRY
to and in progressive prosecution of commercial gain or of the purpose and object of the W. ELSER & CO., INC., defendant-appellee
business organization.
ISSUE: Whether obtaining a license is required before a foreign corporation can maintain any kind of
Provided, however, that the phrase “doing business” shall not be deemed to include mere investment as action in the courts of the Philippine Islands?
a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or exercise
HELD: No. The object of the statute was to subject the foreign corporation doing business in the
of rights as such investor, nor having a nominee director or officer to represent its interest in such
Philippines to the jurisdiction of its courts. The object of the statute was not to prevent the foreign
corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts
corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of
business in its own name and for its own account.
business without taking the steps necessary to render it amenable to suit in the local courts. The implication
Note: An ISOLATED TRANSACTION, however, even if it is pursuant of the usual business does not of the law is that it was never the purpose of the Legislature to exclude a foreign corporation which happens
constitute doing business the doing of which would not bar a foreign corporation from access to Philippine to obtain an isolated order for business from the Philippines, from securing redress in the Philippine courts,
Courts (Facilities Mgt. vs. Dela Osa) and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations. The
effect of the statute preventing foreign corporations from doing business and from bringing actions in the

local courts, except on compliance with elaborate requirements, must not be unduly extended or WHEREFORE, the order of respondent Court dismissing the petitioner's complaint is hereby set aside and
improperly applied. It should not be construed to extend beyond the plain meaning of its terms, considered the case remanded for further proceedings, with costs against private respondent.
in connection with its object, and in connection with the spirit of the entire law.
[G.R. No. L-26332; October 26, 1968] THE SWEDISH EAST ASIA CO., LTD., petitioner, vs. MANILA
The law simply means that no foreign corporation shall be permitted "to transact business in the Philippine PORT SERVICE AND/OR MANILA RAILROAD COMPANY, respondents
Islands," as this phrase is known in corporation law, unless it shall have the license required by law, and,
until it complies with the law, shall not be permitted to maintain any suit in the local courts. A contrary ISSUE: Whether petitioner should be barred from access to our courts?
holding would bring the law to the verge of unconstitutionality, a result which should be and can be easily
HELD: No. The respondents challenge the petitioner's capacity to sue, it being admittedly a foreign
avoided.
corporation without license to engage in business in the Philippines, citing section 69 of the Corporation
The order appealed from shall be set aside and the record shall be returned to the court of origin for further Law. It must be stated however that this section is not applicable to a foreign corporation performing single
proceedings. Without special finding as to costs in this instance, it is so ordered. acts or "isolated transactions." There is nothing in the record to show that the petitioner has been in the
Philippines engaged in continuing business or enterprise for which it was organized, when the sixteen
[G.R. No. L-49695; April 7, 1986] HATHIBHAI BULAKHIDAS, petitioner, vs. THE HONORABLE bundles were erroneously discharged in Manila, for it to be considered as transacting business in the
PEDRO L. NAVARRO, as Presiding Judge of the Court of First Instance of Rizal, Seventh Judicial Philippines. The fact is that the bundles, the value of which is sought to be recovered, were landed not as
District, Pasig, Metro Manila, Branch 11 and DIAMOND SHIPPING CORPORATION, respondent. a result of a business transaction, "isolated" or otherwise, but due to a mistaken belief that they were part
of the shipment of forty similar bundles consigned to persons or entities in the Philippines. There is no
ISSUE: Whether a corporation not engaged in business in the Philippines can institute an action before justification, therefore, for invoking the provisions of section 69 of the Corporation Law.
our courts?
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and another judgment is hereby
HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna Casualty and Surety Co. vs. rendered ordering the respondents, jointly and severally, to pay the petitioner the sum of P2,349.62 with
Pacific Star Lines, 80 SCRA 635, is a case similar to the present one in that the action is also one for interest thereon at the rate of 6% per annum from March 13, 1961, the date of the filing of the complaint,
recovery of damages sustained by cargo shipped on defendants' vessels. Defendants set up the defense until the amount shall have been fully paid, and the sum of P600 as attorney's fees. Costs against the
that plaintiff is a foreign corporation not duly licensed to do business in the Philippines and, therefore, respondents.
without capacity to sue and be sued. In overruling said defense, this Court said:
[G.R. No. L-13525; November 30, 1962] FAR EAST INTERNATIONAL IMPORT and EXPORT
It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not be denied CORPORATION, plaintiff-appellee, vs. NANKAI KOGYO CO. LTD., ET AL., defendants, NANKAI
the right to file an action in Philippine courts for isolated transactions. KOGYO CO., LTD., defendant-appellant
The object of Sections 68 and 69 of the Corporation law was not to prevent the foreign corporation from ISSUE: Whether the trial court acquired jurisdiction over the subject matter and over the person of the
performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking defendant-appellant through the proper service of summons?
the steps necessary to render it amenable to suit in the local courts. It was never the purpose of the
Legislature to exclude a foreign corporation which happens to obtain an isolated order for business from HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to take cognizance of the case
the Philippines, from securing redress in the Philippine courts. because the Nankai is not doing business in the islands; and that while it has entered into the transaction
in question, same, however, does not constitute "doing business", so as to make it amenable to summons
And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this Court held that: and subject it to the Court's jurisdiction. It bolstered this claim by a provision in the contract which provides
that "In case of disputes, Board of Arbitration may be formed in Japan. Decision of the Board of Arbitration
(d) While plaintiff is a foreign corporation without license to transact business in the Philippines, it does not
shall be final and binding on both BUYER and SELLER".
follow that it has no capacity to bring the present action. Such license is not necessary because it is not
engaged in business in the Philippines. In fact, the transaction herein involved is the first business The rule pertinent to the questions in issue provides —
undertaken by plaintiff in the Philippines, although on a previous occasion plaintiff's vessel was chartered
by the National Rice and Corn Corporation to carry rice cargo from abroad to the Philippines. These two SEC. 14. Service upon private foreign corporations. — If the defendant is a foreign corporation, or a non-
isolated transactions do not constitute engaging in business in the Philippines within the purview of resident joint stock company or association, doing business in the Philippines, service may be made on
Sections 68 and 69 of the Corporation Law so as to bar plaintiff from seeking redress in our courts. its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the
(Marshall Wells Co. vs. Henry W. Elser & Co. 49 Phil., 70; Pacific Vegetable Oil Corporation vs. Angle O. government official designated by law to that effect, or on any officer or agent within the Philipines. (Rule
Singson, G.R. No. L-7917, April 29, 1955.) 7).
Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131, 139, following Aetna Casualty The above rule indicates three modes of effecting service of summons upon a private, foreign corporation,
& Surety Co. vs. Pacific Star Line, supra, held a foreign corporation not engaged in business in the viz: (1) by serving upon the agent designated in accordance with law to accept service of summons; (2) if
Philippines is not barred from seeking redress from the courts of the Philippines. there is no resident agent, by service on the government cial designated by law to that effect; and (3) by
serving on any officer or agent of said corporation with Philippines. The plaintiff complied with the third

stated above, for it has been shown that Mr. Ishida, who personally signed the contract for the purchase ISSUE: Whether petitioner, FMC, has been doing business in the Philippines to vest the Philippine court
of the scrap in question in behalf of the Nankai Kogyo, the Trade Manager of said Company, Mr. Tominaga with jurisdiction?
the Chief of the Petroleum Section of the same company and Mr. Yoshida was the man-in-charge of the
Import Section of the company's Tokyo Branch. All these three, including the first two who were served HELD: Yes. From the facts of record, the petitioner may be considered as doing business in the Philippines
with Summons, were officers of the defendant company. within the scope of Section 14, Rule 14 of the Rules of the Court which provide:
Not only did appellant allege non-jurisdictional grounds in its pleadings to have the complaint dismissed, SEC 14. Service upon private foreign corporations. If the defendant is a foreign corporation or a non-
but it also went into trial on the merits and presented evidence destined to resist appellee's claim. Verily, resident joint stock company or association: doing business in the Philippines, service may be made on
there could not be a better situation of acquired jurisdiction based on consent. Consequently, the provision its resident agent designated in accordance with law for that purpose or, if there be no such agent, on the
of the contract wherein it was agreed that disputes should be submitted to a Board of Arbitration which government official designated by law to that effect, or on any of its officers or agents within the Philippines.
may be formed in Japan (in the supposition that it can apply to the matter in dispute - payment of the
Indeed, the petitioner, in compliance with Act 2486 as implemented by Department of Labor Order No. IV
scrap), seems to have been waived with appellant's voluntary submission. Apart from the fact that the
dated May 20, 1968 had to appoint Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC
clause employs the word "may".
with authority to execute Employment Contracts and receive, in behalf of that corporation, legal services
From the proven facts obtaining in this particular case, the appellant's defense of lack of jurisdiction from and be bound by processes of the Philippine Courts of Justice, for as long as he remains an employee
appears unavailing. The case of Pacific Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L- of FMC (Annex 'I', rollo, p. 56). It is a fact that when the summons for the petitioner was served on Jaime
7154, October 23, 1954, relied upon in the Motion to Dismiss and other pleadings presented by defendant- V. Catuira he was still in the employ of the FMC.
appellant, stand on a different footing. Therein, We made the following pronouncements:
In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr. Catuira represented it in this
. . . . And the only act it did here was to secure the services of Luceno Pelingon to act as cook and chief country 'for the purpose of making arrangements for the approval by the Department of Labor of the
steward in one of its vessels authorizing to that effect the Luzon Stevedoring Co., Inc., a domestic employment of Filipinos who are recruited by the Company as its own employees for assignment abroad.'
corporation, and the contract of employment was entered into on July 18, 1951. It further appears that In effect, Mr. Catuira was an officer representing petitioner in the Philippines.
petitioner has never sent its ships to the Philippines nor has it transported nor even solicited the
Under the rules and regulations promulgated by the Board of Investments which took effect Feb. 3, 1969,
transportation passengers and cargoes to and from the Philippines. In words, petitioner engaged the
implementing Rep. Act No. 5455, which took effect Sept. 30, 1968, the phrase 'doing business' has been
services of Pelingon not as part of the operation of its business but merely to employ him as member of
exemption with illustrations, among them being as follows:
the crew in one of its ships. That act apparently is an isolated one, incidental, or casual, and "not of a
character to indicate a purpose to engage in business" within the meaning of the rule. (Emphasis ours.) xxx xxx xxx
ISSUE2: Whether the single act done in this case can be considered as doing business in the Philippines? (f) the performance within the Philippines of any act or combination of acts enumerated in section l(l) of
the Act shall constitute 'doing business' therein. in particular, 'doing business includes:
HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that appellant was doing business
in the Philippines corroborated by no less than Nabuo Yoshida, one of appellant's officers, that he was (1) Soliciting orders, purchases (sales) or service contracts. Concrete and specific solicitations by a foreign
sent to the Philippines by his company to look into the operation of mines, thereby revealing the firm, not acting independently of the foreign firm amounting to negotiation or fixing of the terms and
defendant's desire to continue engaging in business here, after receiving the shipment of the iron under conditions of sales or service contracts, regardless of whether the contracts are actually reduced to writing,
consideration, making the Philippines a base thereof. shall constitute doing business even if the enterprise has no office or fixed place of business in the
Philippines. xxx
The rule stated in the preceding section that the doing of a single act doesnot constitute business within
the meaning of statutes prescribing the conditions to be complied with the foreign corporations must be (2) Appointing a representative or distributor who is domiciled in the Philippines, unless said representative
qualified to this extent, that a single act may bring the corporation. In such a case, the single act of or distributor has an independent status, i.e., it transacts business in its name and for its own account, and
transaction is not merly incidental or casual, but is of such character as distinctly to indicate a purpose on not in the name or for the account of the principal.
the part of the foreign corporation to do other business in the state, and to make the state a basis of
operations for the conduct of a part of corporation's ordinary business. (17 Fletchers Cyc. of Corporations, xxx xxx xxx
sec. 8470, pp. 572-573, and authorities cited therein.) (Emphasis ours.)
(4) Opening offices, whether called 'liaison'offices, agencies or branches, unless proved otherwise.
WHEREFORE, the judgment appealed from is hereby affirmed, with costs against defendant-appellant
Nankai Kogyo. xxx xxx xxx
[G.R. No. L-38649; March 26, 1979] FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and (10) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate
J. V. CATUIRA, petitioners, vs. LEONARDO DE LA OSA AND THE HONORABLE COURT OF to that extent the performance of acts or works, or the exercise of some of the functions normally incident
INDUSTRIAL RELATIONS, respondents to, or in the progressive prosecution of, commercial gain or of the purpose and objective of the business
organization

Indeed, if a foreign corporation, not engaged in business in the Philippines, is not banned from seeking corporation in the Philippines, and any other act or acts that imply a continuity or commercial dealings or
redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being arrangements and contemplate to that extent the performance of acts or works, or the exercise of some
sued in Philippine courts for acts done against a person or persons in the Philippines. of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization.”
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST THE PETITIONERS
Thus, a foreign corporation with a settling agent in the Philippines which issued twelve marine policies
[G.R. No. 102223; August 22, 1996] COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC covering different shipments to the Philippines and a foreign corporation which had been collecting
MULTI-TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and FRANCISCO S. AGUIRRE, premiums on outstanding policies were regarded as doing business here.
petitioners, vs. THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC, INC.,
respondents The same rule was observed relating to a foreign corporation with an "exclusive distributing agent" in the
Philippines, and which has been selling its products here since 1929, and a foreign corporation engaged
ISSUE: Whether private respondents ITEC is an unlicensed corporation doing business in the Philippines, in the business of manufacturing and selling computers worldwide, and had installed at least 26 different
and WON it is barred from invoking the injunctive authority of the courts? products in several corporations in the Philippines, and allowed its registered logo and trademark to be
used and made it known that there exists a designated distributor in the Philippines.
HELD: Yes and No (by estoppel). Generally, a "foreign corporation" has no legal existence within the state
in which it is foreign. This proceeds from the principle that juridical existence of a corporation is confined In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the uninterrupted performance by a foreign
within the territory of the state under whose laws it was incorporated and organized, and it has no legal corporation of acts pursuant to its primary purposes and functions as a regional area headquarters for its
status beyond such territory. Such foreign corporation may be excluded by any other state from doing home office, qualifies such corporation as one doing business in the country.
business within its limits, or conditions may be imposed on the exercise of such privileges. Before a foreign
corporation can transact business in this country, it must first obtain a license to transact business in the These foregoing instances should be distinguished from a single or isolated transaction or occasional,
Philippines, and a certificate from the appropriate government agency. If it transacts business in the incidental, or casual transactions, which do not come within the meaning of the law, for in such case, the
Philippines without such a license, it shall not be permitted to maintain or intervene in any action, suit, or foreign corporation is deemed not engaged in business in the Philippines.
proceeding in any court or administrative agency of the Philippines, but it may be sued on any valid cause
of action recognized under Philippine laws. Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act or transaction constitutes
In a long line of decisions, this Court has not altogether prohibited foreign corporation not licensed to do "doing" or "engaging in" or "transacting" business in the Philippines.
business in the Philippines from suing or maintaining an action in Philippine Courts. What it seeks to
prevent is a foreign corporation doing business in the Philippines without a license from gaining access to In determining whether a corporation does business in the Philippines or not, aside from their activities
Philippine Courts. within the forum, reference may be made to the contractual agreements entered into by it with other entities
in the country. Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND TECHNICAL
The purpose of the law in requiring that foreign corporations doing business in the Philippines be licensed AGREEMENT and DISTRIBUTOR AGREEMENT with their local contacts were made the basis of their
to do so and that they appoint an agent for service of process is to subject the foreign corporation doing being regarded by this Tribunal as corporations doing business in the country. Likewise, in Merill Lynch
business in the Philippines to the jurisdiction of its courts. The object is not to prevent the foreign Futures, Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the petitioner foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of corporation weighed heavily in the court's ruling.
business without taking steps necessary to render it amenable to suit in the local courts. The implication
of the law is that it was never the purpose of the legislature to exclude a foreign corporation which happens With the above-stated precedents in mind, we are persuaded to conclude that private respondent had
to obtain an isolated order for business from the Philippines, and thus, in effect, to permit persons to avoid been "engaged in" or "doing business" in the Philippines for some time now. This is the inevitable result
their contracts made with such foreign corporations. after a scrutiny of the different contracts and agreements entered into by ITEC with its various business
contacts in the country, particularly ASPAC and Telephone Equipment Sales and Services, Inc. (TESSI,
There is no exact rule or governing principle as to what constitutes "doing" or "engaging" or "transacting" for brevity). The latter is a local electronics firm engaged by ITEC to be its local technical representative,
business. Indeed, such case must be judged in the light of its peculiar circumstances, upon its peculiar and to create a service center for ITEC products sold locally. Its arrangements, with these entities indicate
facts and upon the language of the statute applicable. The true test, however, seems to be whether the convincingly ITEC's purpose to bring about the situation among its customers and the general public that
foreign corporation is continuing the body or substance of the business or enterprise for which it was they are dealing directly with ITEC, and that ITEC is actively engaging in business in the country.
organized.
In its Master Service Agreement with TESSI, private respondent required its local technical representative
Article 44 of the Omnibus Investments Code of 1987 defines the phrase to include: to provide the employees of the technical and service center with ITEC identification cards and business
cards, and to correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to answer the
“soliciting orders, purchases, service contracts, opening offices, whether called "liaison" offices or telephone with "ITEC Technical Assistance Center.", such telephone being listed in the telephone book
branches; appointing representatives or distributors who are domiciled in the Philippines or who in any under the heading of ITEC Technical Assistance Center, and all calls being recorded and forwarded to
calendar year stay in the Philippines for a period or periods totalling one hundred eighty (180) days or ITEC on a weekly basis.
more; participating in the management, supervision or control of any domestic business firm, entity or

What is more, TESSI was obliged to provide ITEC with a monthly report detailing the failure and repair of Moreover, a person is presumed to be more knowledgeable about his own state law than his alien or
ITEC products, and to requisition monthly the materials and components needed to replace stock foreign contemporary. In this case, the record shows that, at least, petitioner had actual knowledge of the
consumed in the warranty repairs of the prior month. applicability of R.A. No. 5455 at the time the contract was executed and at all times thereafter. This
conclusion is compelled by the fact that the same statute is now being propounded by the petitioner to
A perusal of the agreements between petitioner ASPAC and the respondents shows that there are bolster its claim. We, therefore sustain the appellate court's view that "it was incumbent upon TOP-WELD
provisions which are highly restrictive in nature, such as to reduce petitioner ASPAC to a mere extension to know whether or not IRTI and ECED were properly authorized to engage in business in the Philippines
or instrument of the private respondent. when they entered into the licensing and distributorship agreements." The very purpose of the law was
circumvented and evaded when the petitioner entered into said agreements despite the prohibition of R.A.
The "No Competing Product" provision of the Representative Agreement between ITEC and ASPAC
No. 5455. The parties in this case being equally guilty of violating R.A. No. 5455, they are in pari delicto,
provides: "The Representative shall not represent or offer for sale within the Territory any product which
in which case it follows as a consequence that petitioner is not entitled to the relief prayed for in this case.
competes with an existing ITEC product or any product which ITEC has under active development."
Likewise pertinent is the following provision: "When acting under this Agreement, REPRESENTATIVE is The doctrine of lack of capacity to sue based on the failure to acquire a local license is based on
authorized to solicit sales within the Territory on ITEC's behalf but is authorized to bind ITEC only in its considerations of sound public policy. The license requirement was imposed to subject the foreign
capacity as Representative and no other, and then only to specific customers and on terms and conditions corporation doing business in the Philippines to the jurisdiction of its courts. It was never intended to favor
expressly authorized by ITEC in writing." domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate
their obligations simply because the latter are not licensed to do business in this country.
When ITEC entered into the disputed contracts with ASPAC and TESSI, they were carrying out the
purposes for which it was created, i.e., to market electronics and communications products. The terms In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our chagrin over this commonly used
and conditions of the contracts as well as ITEC's conduct indicate that they established within our country scheme of defaulting local companies which are being sued by unlicensed foreign companies not engaged
a continuous business, and not merely one of a temporary character. in business in the Philippines to invoke the lack of capacity to sue of such foreign companies. Obviously,
the same ploy is resorted to by ASPAC to prevent the injunctive action filed by ITEC to enjoin petitioner
Notwithstanding such finding that ITEC is doing business in the country, petitioner is nonetheless estopped
from using knowledge possibly acquired in violation of fiduciary arrangements between the parties.
from raising this fact to bar ITEC from instituting this injunction case against it.
By entering into the "Representative Agreement" with ITEC, Petitioner is charged with knowledge that
A foreign corporation doing business in the Philippines may sue in Philippine Courts although not
ITEC was not licensed to engage in business activities in the country, and is thus estopped from raising in
authorized to do business here against a Philippine citizen or entity who had contracted with and benefited
defense such incapacity of ITEC, having chosen to ignore or even presumptively take advantage of the
by said corporation. To put it in another way, a party is estopped to challenge the personality of a
same.
corporation after having acknowledged the same by entering into a contract with it. And the doctrine of
estoppel to deny corporate existence applies to a foreign as well as to domestic corporations. One who In Top-Weld, we ruled that a foreign corporation may be exempted from the license requirement in order
has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate to institute an action in our courts if its representative in the country maintained an independent status
existence and capacity: The principle will be applied to prevent a person contracting with a foreign during the existence of the disputed contract. Petitioner is deemed to have acceded to such independent
corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such character when it entered into the Representative Agreement with ITEC, particularly, provision 6.2 (supra).
person has received the benefits of the contract.
IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby DISMISSED. The decision of
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non habere debet — no the Court of Appeals dated June 7, 1991, upholding the RTC Order dated February 22, 1991, denying the
person ought to derive any advantage of his own wrong. This is as it should be for as mandated by law, petitioners' Motion to Dismiss, and ordering the issuance of the Writ of Preliminary Injunction, is hereby
"every person must in the exercise of his rights and in the performance of his duties, act with justice, give affirmed in toto.
everyone his due, and observe honesty and good faith."
[G.R. No. L-27897 December 2, 1927] WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN
Concededly, corporations act through agents, like directors and officers. Corporate dealings must be ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES, plaintiffs-appellees, vs. FIDEL A.
characterized by utmost good faith and fairness. Corporations cannot just feign ignorance of the legal rules REYES, as Director of the Bureau of Commerce and Industry, HENRY HERMAN, PETER O'BRIEN,
as in most cases, they are manned by sophisticated officers with tried management skills and legal experts MANUEL B. DIAZ, FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants.
with practiced eye on legal problems. Each party to a corporate transaction is expected to act with utmost
candor and fairness and, thereby allow a reasonable proportion between benefits and expected burdens. ISSUE: Whether plaintiff corporation can maintain an action to restraint residents and inhabitants of the
This is a norm which should be observed where one or the other is a foreign entity venturing in a global Philippines from organizing a corporation, when said inhabitants have knowledge of the existence of such
market. foreign corporation?
As observed by this Court in TOP-WELD (supra), viz: HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46 Phil., 70, 76), this court held:
The parties are charged with knowledge of the existing law at the time they enter into a contract and at the The noncompliance of a foreign corporation with the statute may be pleaded as an affirmative defense.
time it is to become operative. (Twiehaus v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Thereafter, it must appear from the evidence, first, that the plaintiff is a foreign corporation, second, that it

is doing business in the Philippines, and third, that it has not obtained the proper license as provided by (Secs. 68 and 69, Corporation Law) was not to prevent the foreign corporation from performing single acts,
the statute. but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary
to render it amenable to suit in the local courts ... the implication of the law (being) that it was never the
If it had been stipulated that the plaintiff, Western Electric Company, Inc., had been doing business in the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for
Philippine Islands without first obtaining a license, another and a very different question would be business from the Philippines, from securing redress in the Philippine Courts. ..." The principle has since
presented. That company is not here seeking to enforce any legal or contract rights arising from, or growing then been applied in a number of other cases.
out of, any business which it has transacted in the Philippine Islands. The sole purpose of the action:
A more or less analogous question arose in Western Equipment & Supply Co. v. Reyes, 51 Phil. 115. The
"Is to protect its reputation, its corporate name, its goodwill, whenever that reputation, corporate name or syllabus of the report, which is a correct statement of the doctrine laid down in the decision, reads as
goodwill have, through the natural development of its trade, established themselves." And it contends that follows:
its rights to the use of its corporate and trade name:
A foreign corporation which has never done ... business in the Philippine Islands and which is unlicensed
Is a property right, a right in rem, which may assert and protect against all the world, in any of the courts and unregistered to do business here, but is widely and favorably known in the Islands through the use
of the world — even in jurisdictions where it does not transact business — just the same as it may protect therein of its products bearing its corporate and trade name has a legal right to maintain an action in the
its tangible property, real or personal, against trespass, or conversion. Citing sec. 10, Nims on Unfair Islands.
Competition and Trade-Marks and cases cited; secs. 21-22, Hopkins on Trade-Marks, Trade Names and
Unfair Competition and cases cited." That point is sustained by the authorities, and is well stated in Parenthetically, it may be stated that the ruling in the Mentholatum case was subsequently derogated
Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in which they syllabus says: when Congress, purposely to "counteract the effects" of said case, enacted Republic Act No. 638, inserting
Section 21-A in the Trademark Law, which allows a foreign corporation or juristic person to bring an action
Since it is the trade and not the mark that is to be protected, a trade-mark acknowledges no territorial in Philippine courts for infringement of a mark or trade-name, for unfair competition, or false designation
boundaries of municipalities or states or nations, but extends to every market where the trader's goods of origin and false description, "whether or not it has been licensed to do business in the Philippines under
have become known and identified by the use of the mark Act Numbered Fourteen hundred and fifty-nine, as amended, otherwise known as the Corporation Law, at
the time it brings complaint."
It is very apparent that the purpose and intent of Herman and his associates in seeking to incorporate
under the name of Western Electric Company, Inc., was to unfairly and unjustly compete in the Philippine Petitioner argues that Section 21-A militates against respondent's capacity to maintain a suit for
Islands with the Western Electric Company, Inc., in articles which are manufactured by, and bear the name cancellation, since it requires, before a foreign corporation may bring an action, that its trademark or
of, that company, all of which is prohibited by Act No. 666, and was made known to the defendant Reyes tradename has been registered under the Trademark Law. The argument misses the essential point in the
by the letter known in the record to the defendant Reyes by the letter known in the record as Exhibit A. said provision, which is that the foreign corporation is allowed there under to sue "whether or not it has
been licensed to do business in the Philippines" pursuant to the Corporation Law (precisely to counteract
The plaintiff, Western Electric Company, Inc., has been in existence as a corporation for over fifty years,
the effects of the decision in the Mentholatum case).
during which time it has established a reputation all over the world including the Philippine Islands, for the
kind and quality of its manufactured articles, and it is very apparent that the whole purpose and intent of In any event, respondent in the present case is not suing for infringement or unfair competition under
Herman and his associates in seeking to incorporate another corporation under the identical name of Section 21-A, but for cancellation under Section 17, on one of the grounds enumerated in Section 4. The
Western Electric Company, Inc., and for the same identical purpose as that of the plaintiff, is to trespass first kind of action, it maybe stated, is cognizable by the Courts of First Instance (Sec. 27); the second
upon and profit by its good name and business reputation. The very fact that Herman and his associates partakes of an administrative proceeding before the Patent Office (Sec. 18, in relation to Sec. 8). And while
have sought the use of that particular name for that identical purpose is conclusive evidence of the a suit under Section 21-A requires that the mark or tradename alleged to have been infringed has been
fraudulent intent with which it is done. "registered or assigned" to the suing foreign corporation, a suit for cancellation of the registration of a mark
or tradename under Section 17 has no such requirement. For such mark or tradename should not have
The judgment of the lower court is affirmed, with costs
been registered in the first place (and consequently may be cancelled if so registered) if it "consists of or
[G.R. No. L-24295; September 30, 1971] GENERAL GARMENTS CORPORATION, petitioner, vs. THE comprises a mark or tradename which so resembles a mark or tradename ... previously used in the
DIRECTOR OF PATENTS and PURITAN SPORTSWEAR CORPORATION, respondents Philippines by another and not abandoned, as to be likely, when applied to or used in connection with
goods, business or services of the applicant, to cause confusion or mistake or to deceive purchasers;
ISSUE: Whether Respondent Puritan Sportswear can maintain the suit? ..."(Sec. 4d).
HELD: Yes. That respondent is a juridical person should be beyond serious dispute. The fact that it may WHEREFORE, the petition is dismissed, and the resolution of the Director of Patents dated August 6,
not transact business in the Philippines unless it has obtained a license for that purpose, nor maintain a 1964 is affirmed, with costs.
suit in Philippine courts for the recovery of any debt, claim or demand without such license (Secs. 68 and
69, Corporation Law) does not make respondent any less a juridical person. Indeed an exception to the [G.R. No. 75067; February 26, 1988] PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G.,
license requirement has been recognized in this jurisdiction, namely, where a foreign corporation sues on petitioner vs. THE INTERMEDIATE APPELLATE COURT and MIL-ORO MANUFACTURING
an isolated transaction. As first enunciated in Marshall-Wells Co. v. Elser & Co. "the object of the statute CORPORATION, respondents

ISSUE: Whether petitioner had capacity to sue? Rights of Foreign Registrants. — Persons who are nationals of, domiciled in, or have a bona fide or
effective business or commercial establishment in any foreign country, which is a party to an international
HELD: Yes. Petitioner maintains that it has substantially complied with the requirements of Section 21-A convention or treaty relating to marks or tradenames on the represssion of unfair competition to which the
of Republic Act R.A. No. 166, as amended. According to the petitioner, its complaint specifically alleged Philippines may be party, shall be entitled to the benefits and subject to the provisions of this Act ...
that it is not doing business in the Philippines and is suing under the said Repulbic Act; that Section 21-A
thereof provides that "the country of which the said corporation or juristic person is a citizen, or in which it Tradenames of persons described in the first paragraph of this section shall be protected without the
is domiciled, by treaty, convention or law, grants a similar privilege to corporate or juristic persons of the obligation of filing or registration whether or not they form part of marks.
Philippines" but does not mandatorily require that such reciprocity between the Federal Republic of
Germany and the Philippines be pleaded; that such reciprocity arrangement is embodied in and supplied We, therefore, hold that the petitioner had the legal capacity to file the action below.
by the Union Convention for the Protection of Industrial Property Paris Convention) to which both the
[G.R. No. L-63796-97; May 2, 1984] LA CHEMISE LACOSTE, S. A., petitioner, vs. HON. OSCAR C.
Philippines and Federal Republic of Germany are signatories and that since the Paris 'Convention is a
FERNANDEZ, Presiding Judge of Branch XLIX, Regional Trial Court, National Capital Judicial
treaty which, pursuant to our Constitution, forms part of the law of the land, our courts are bound to take
Region, Manila and GOBINDRAM HEMANDAS, respondents.
judicial notice of such treaty, and, consequently, this fact need not be averred in the complaint.
[G.R. No. L-65659 May 2l, 1984] GOBINDRAM HEMANDAS SUJANANI, petitioner, vs. HON.
We agree.
ROBERTO V. ONGPIN, in his capacity as Minister of Trade and Industry, and HON. CESAR SAN
In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129 SCRA 373), we ruled: DIEGO, in his capacity as Director of Patents, respondents
But even assuming the truth of the private respondents allegation that the petitioner failed to allege material ISSUE: Whether petitioner, having a representative, is doing business in the Philippines?
facto in its petition relative to capacity to sue, the petitioner may still maintain the present suit against
HELD: No. Respondent states that not only is the petitioner not doing business in the Philippines but it
respondent Hernandes. As early as 1927, this Court was, and it still is, of the view that a foreign corporation
also is not licensed to do business in the Philippines. He also cites the case of Leviton Industries v.
not doing business in the Philippines needs no license to sue before Philippine courts for infringement of
Salvador (114 SCRA 420) to support his contention The Leviton case, however, involved a complaint for
trademark and unfair competition. Thus, in Western Equipment and Supply Co. v. Reyes (51 Phil. 11 5),
unfair competition under Section 21-A of Republic Act No. 166 which provides:
this Court held that a foreign corporation which has never done any business in the Philippines and which
is unlicensed and unregistered to do business here, but is widely and favorably known in the Philippines Sec. 21 — A. Any foreign corporation or juristic person to which a mark or tradename has been registered
through the use therein of its products bearing its corporate and tradename, has a legal right to maintain or assigned under this Act may bring an action hereunder for infringement, for unfair competition, or false
an action in the Philippines to restrain the residents and inhabitants thereof from organizing a corporation designation of origin and false description, whether or not it has been licensed to do business in the
therein bearing the same name as the foreign corporation, when it appears that they have personal Philippines under Act numbered Fourteen Hundred and Fifty-Nine, as amended, otherwise known as the
knowledge of the existence of such a foreign corporation, and it is apparent that the purpose of the Corporation Law, at the time it brings the complaint; Provided, That the country of which the said foreign
proposed domestic corporation is to deal and trade in the same goods as those of the foreign corporation. corporation or juristic person is a citizen, or in which it is domiciled, by treaty, convention or law, grants a
similar privilege to corporate or juristic persons of the Philippines.
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T. Eaton, Co. (234 F. 2d 633), this
Court further said: We held that it was not enough for Leviton, a foreign corporation organized and existing under the laws of
the State of New York, United States of America, to merely allege that it is a foreign corporation. It averred
By the same token, the petitioner should be given the same treatment in the Philippines as we make
in Paragraph 2 of its complaint that its action was being filed under the provisions of Section 21-A of
available to our own citizens. We are obligated to assure to nationals of 'countries of the Union' an effective
Republic Act No. 166, as amended. Compliance with the requirements imposed by the above-cited
protection against unfair competition in the same way that they are obligated to similarly protect Filipino
provision was necessary because Section 21-A of Republic Act No. 166 having explicitly laid down certain
citizens and firms.
conditions in a specific proviso, the same must be expressly averred before a successful prosecution may
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products, Inc. (174 SCRA 165), we ensue. It is therefore, necessary for the foreign corporation to comply with these requirements or aver why
likewise re-aafirmed our adherence to the Paris Convention: it should be exempted from them, if such was the case. The foreign corporation may have the right to sue
before Philippine courts, but our rules on pleadings require that the qualifying circumstances necessary
The ruling in the aforecited case is in consonance with the Convention of Converse Rubber Corporation for the assertion of such right should first be affirmatively pleaded.
v. Universal Rubber Products, Inc. (I 47 SCRA 165), we likewise re-affirmed our adherence to the Paris
Convention: the Union of Paris for the Protection of Industrial Property to which the Philippines became a In contradistinction, the present case involves a complaint for violation of Article 189 of the Revised Penal
party on September 27, 1965. Article 8 thereof provides that 'a trade name [corporation name] shall be Code. The Leviton case is not applicable.
protected in all the countries of the Union without the obligation of filing or registration, whether or not it
Asserting a distinctly different position from the Leviton argument, Hemandas argued in his brief that the
forms part of the trademark.'
petitioner was doing business in the Philippines but was not licensed to do so. To support this argument,
The mandate of the aforementioned Convention finds implementation in Section 37 of RA No. 166, he states that the applicable ruling is the case of Mentholatum Co., Inc. v. Mangaliman: (72 Phil. 524)
otherwise known as the trademark Law: where Mentholatum Co. Inc., a foreign corporation and Philippine-American Drug Co., the former's

exclusive distributing agent in the Philippines filed a complaint for infringement of trademark and unfair (102 Phil. 1), we recognized a right of foreign corporation to sue on isolated transactions. In General
competition against the Mangalimans. Garments Corp. v. Director of Patents (41 SCRA 50), we sustained the right of Puritan Sportswear Corp.,
a foreign corporation not licensed to do and not doing business in the Philippines, to file a petition for
The argument has no merit. The Mentholatum case is distinct from and inapplicable to the case at bar. cancellation of a trademark before the Patent Office.
Philippine American Drug Co., Inc., was admittedly selling products of its principal Mentholatum Co., Inc.,
in the latter's name or for the latter's account. Thus, this Court held that "whatever transactions the More important is the nature of the case which led to this petition. What preceded this petition for certiorari
Philippine-American Drug Co., Inc. had executed in view of the law, the Mentholatum Co., Inc., did it itself. was a letter complaint filed before the NBI charging Hemandas with a criminal offense, i.e., violation of
And, the Mentholatum Co., Inc., being a foreign doing business in the Philippines without the license Article 189 of the Revised Penal Code. If prosecution follows after the completion of the preliminary
required by Section 68 of the Corporation Law, it may not prosecute this action for violation of trademark investigation being conducted by the Special Prosecutor the information shall be in the name of the People
and unfair competition." of the Philippines and no longer the petitioner which is only an aggrieved party since a criminal offense is
essentially an act against the State. It is the latter which is principally the injured party although there is a
In the present case, however, the petitioner is a foreign corporation not doing business in the Philippines. private right violated. Petitioner's capacity to sue would become, therefore, of not much significance in the
The marketing of its products in the Philippines is done through an exclusive distributor, Rustan main case. We cannot snow a possible violator of our criminal statutes to escape prosecution upon a far-
Commercial Corporation. The latter is an independent entity which buys and then markets not only fetched contention that the aggrieved party or victim of a crime has no standing to sue.
products of the petitioner but also many other products bearing equally well-known and established
trademarks and tradenames. In other words, Rustan is not a mere agent or conduit of the petitioner. ISSUE3: Whether petitioner has a right to maintain a suit for infringement of trademarks?
The rules and regulations promulgated by the Board of Investments pursuant to its rule-making power HELD: Yes. We are moreover recognizing our duties and the rights of foreign states under the Paris
under Presidential Decree No. 1789, otherwise known as the Omnibus Investment Code, support a finding Convention for the Protection of Industrial Property to which the Philippines and France are parties. We
that the petitioner is not doing business in the Philippines. Rule I, Sec. 1 (g) of said rules and regulations are simply interpreting and enforcing a solemn international commitment of the Philippines embodied in a
defines "doing business" as one" which includes, inter alia: multilateral treaty to which we are a party and which we entered into because it is in our national interest
to do so.
(1) ... A foreign firm which does business through middlemen acting on their own names, such as indentors,
commercial brokers or commission merchants, shall not be deemed doing business in the Philippines. But The Paris Convention provides in part that: ARTICLE 2 (2) Nationals of each of the countries of the Union
such indentors, commercial brokers or commission merchants shall be the ones deemed to be doing shall as regards the protection of industrial property, enjoy in all the other countries of the Union the
business in the Philippines. advantages that their respective laws now grant, or may hereafter grant, to nationals, without prejudice to
the rights specially provided by the present Convention. Consequently, they shall have the same protection
(2) Appointing a representative or distributor who is domiciled in the Philippines, unless said representative as the latter, and the same legal remedy against any infringement of their rights, provided they observe
or distributor has an independent status, i.e., it transacts business in its name and for its account, and not the conditions and formalities imposed upon nationals.
in the name or for the account of a principal. Thus, where a foreign firm is represented by a person or local
company which does not act in its name but in the name of the foreign firm the latter is doing business in xxx xxx xxx
the Philippines.
ARTICLE 6 (1) The countries of the Union undertake, either administratively if their legislation so permits,
xxx xxx xxx or at the request of an interested party, to refuse or to cancel the registration and to prohibit the use of a
trademark which constitutes a reproduction, imitation or translation, liable to create confusion, of a mark
Applying the above provisions to the facts of this case, we find and conclude that the petitioner is not doing considered by the competent authority of the country of registration or use to be well-known in that country
business in the Philippines. Rustan is actually a middleman acting and transacting business in its own as being already the mark of a person entitled to the benefits of the present Convention and used for
name and or its own account and not in the name or for the account of the petitioner. Identical or similar goods. These provisions shall also apply when the essential part of the mark constitutes
a reproduction of any such well-known mark or an imitation liable to create confusion therewith.
ISSUE2: Whether the criminal case can be maintained even if the foreign corporation is doing business
without a license? xxx xxx xxx
HELD: Yes. But even assuming the truth of the private respondent's allegation that the petitioner failed to ARTICLE 8 A trade name shall be protected in all the countries of the Union without the obligation of filing
allege material facts in its petition relative to capacity to sue, the petitioner may still maintain the present or registration, whether or not it forms part of a trademark.
suit against respondent Hemandas. As early as 1927, this Court was, and it still is, of the view that a
foreign corporation not doing business in the Philippines needs no license to sue before Philippine courts xxx xxx xxx
for infringement of trademark and unfair competition.
ARTICLE 10bis (1) The countries of the Union are bound to assure to persons entitled to the benefits of
Our recognizing the capacity of the petitioner to sue is not by any means novel or precedent setting. Our the Union effective protection against unfair competition
jurisprudence is replete with cases illustrating instances when foreign corporations not doing business in
the Philippines may nonetheless sue in our courts. In East Board Navigation Ltd, v. Ysmael and Co., Inc.

A treaty or convention is not a mere moral obligation to be enforced or not at the whims of an incumbent ISSUE: Whether plaintiff-appellants have the right to sue as to the defects n the pleadings and
head of a Ministry. It creates a legally binding obligation on the parties founded on the generally accepted procedures?
principle of international law of pacta sunt servanda which has been adopted as part of the law of our land.
(Constitution, Art. II, Sec. 3). HELD: No. It should be noted that insofar as the allegations in the complaint have a bearing on appellants'
capacity to sue, all that is averred is that they are both foreign corporations existing under the laws of the
We have carefully gone over the records of all the cases filed in this Court and find more than enough United States. This averment conjures two alternative possibilities: either they are engaged in business in
evidence to sustain a finding that the petitioner is the owner of the trademarks "LACOSTE", "CHEMISE the Philippines or they are not so engaged. If the first, they must have been duly licensed in order to
LACOSTE", the crocodile or alligator device, and the composite mark of LACOSTE and the representation maintain this suit; if the second, if the transaction sued upon is singular and isolated, no such license is
of the crocodile or alligator. Any pretensions of the private respondent that he is the owner are absolutely required. In either case, the qualifying circumstance is an essential part of the element of plaintiffs' capacity
without basis. Any further ventilation of the issue of ownership before the Patent Office will be a superfluity to sue and must be affirmatively pleaded.
and a dilatory tactic.
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to the promulgation of the Revised
The records show that the goodwill and reputation of the petitioner's products bearing the trademark Rules on January 1, 1964, it was not necessary to aver the capacity of a party to sue except to the extent
LACOSTE date back even before 1964 when LACOSTE clothing apparels were first marketed in the required to show jurisdiction of the court. In our opinion, however, such rule does not apply in all situations
Philippines. To allow Hemandas to continue using the trademark Lacoste for the simple reason that he and under all circumstances. The theory behind a similar rule in the United States is "that capacity ... of a
was the first registrant in the Supplemental Register of a trademark used in international commerce and party for purpose of suit is not in dispute in the great bulk of cases, and that pleading and proof can be
not belonging to him is to render nugatory the very essence of the law on trademarks and tradenames. simplified by a rule that an averment of such matter is not necessary, except to show jurisdiction."1 But
where as in the present case, the law denies to a foreign corporation the right to maintain suit unless it
WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED. The order dated April 22, 1983 has previously complied with a certain requirement, then such compliance, or the fact that the suing
of the respondent regional trial court is REVERSED and SET ASIDE. corporation is exempt therefrom, becomes a necessary averment in the complaint. These are matters
peculiarly within the knowledge of appellants alone, and it would be unfair to impose upon appellee the
CAPACITY TO SUE
burden of asserting and proving the contrary. It is enough that foreign corporations are allowed by law to
Note: As a rule, a corporation’s capacity to sue must be affirmatively pleaded in order that it may proceed seek redress in our courts under certain conditions: the interpretation of the law should not go so far as to
and effectively institute a case in Philippine courts. Thus, in the case for instance of a complaint for unfair include, in effect, an inference that those conditions have been met from the mere fact that the party suing
labor competition under Sec. 21-A of RA No. 166, it was held that it is necessary for the foreign corporation is a foreign corporation.
to comply with the provision thereof or aver why it should be exempted from them, if such be the case.
It was indeed in the light of these and other consideration that this Court has seen fit to amend the former
The foreign corporation may have the right to sue before our courts but our rules on pleadings require that
rule by requiring in the Revised Rules (Section 4, Rule 8) that "facts showing the capacity of a party to sue
the qualifying circumstances necessary for the assertion of such right should first be affirmatively pleaded
or be sued or the authority of a party to sue or be sued in a representative capacity or the legal existence
(Leviton Industries vs Salvador).
of an organized association of persons that is made a party, must be averred."
Exceptions:
The orders appealed from are affirmed, with costs against plaintiffs-appellants
1. If the dismissal of the case is based on the failure of the foreign corporation to aver its capacity
[G.R. No. 75631; October 28, 1987] OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and
to sue, would not, however, bar the institution of the same action, dismissal should not be
CALIFORNIA INSURANCE CO., LTD., petitioners, vs. E. RAZON, INC., TOYO LINE, LTD., and SEA
allowed, especially so if it would be an idle, circuitous ceremony considering the absence of
BRIDGE CONTAINER SHIPPING LINES, INC., respondents.
any meritorious substantial defense of the defendant. Technical rules should not be accorded
undue importance to frustrate and defeat a plainly valid claim (Olympia Business Machines vs. ISSUE: Whether the failure of California to aver its capacity to sue is fatal?
E. Razon, Inc.)
2. COMPLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION IS MERELY HELD: The slightest reflection will however immediately make — Tear that between the factual settings of
DEFENDING ITSELF, the averment of capacity to sue is not likewise necessary as laid down the Atlantic Mutual case and the case at bar, there are distinctions of no little significance. In the former,
in the case of Chemise Lacoste vs. Fernandez, or when the foreign corporation is not suing or Atlantic Mutual Insurance Co. and Continental Insurance Co., two (2) American firms, brought suit as
maintaining a suit but is merely defending itself from one filed against it (Times, Inc. vs. Reyes). subrogees of the shipper and/or consignee of the goods ensured without joining the latter. In the case at
hand, the action was instituted by both the subrogee, California Insurance Co., Ltd., and the subrogor, a
CASES: domestic corporation, Olympia (Philippines) about whose capacity to sue no dispute exists. In Atlantic
Mutual, the plaintiffs' lack of capacity to sue was raised by the defendant at the earliest opportunity, through
[G.R. No. L-18961; August 31, 1966] ATLANTIC MUTUAL INSURANCE COMPANY and
a motion to dismiss filed within the reglementary period to answer in accordance with Rule 16 of the Rules
CONTINENTAL INSURANCE COMPANY, plaintiffs and appellants, vs. CEBU STEVEDORING CO.,
of Court. In the case at bar, the defendant was twice declared in default, and the defense of lack of capacity
INC., defendant and appellee
to sue, was not raised until after 'the first declaration of default had been lifted. Moreover, there Is a
pronouncement by the Court of Appeals in the instant case, that the defendant had no meritorious
defenses save that of lack of capacity to sue on the part of the plaintiff.
These circumstances proscribe the application to the controversy at bar of the doctrine in Atlantic Mutual. WHEREFORE, the writs applied for are granted: the respondent Court of First Instance of Rizal is declared
The defendant's conduct in this case strongly indicates the absence of any valid defense on its part against without jurisdiction to take cognizance of its Civil Case No. 10403; and its orders issued in connection
the plaintiffs' claims: the defendant failed to appear for pre-trial despite notice, not once, but twice and was therewith are hereby annulled and set aside,. Respondent court is further commanded to desist from
in consequence twice declared in default. The lack of any meritorious defense on its part was in fact further proceedings in Civil case No. 10403 aforesaid. Costs against private respondents, Antonio J.
confirmed by the declaration of the Court of Appeals, which it has not challenged, that three (3) errors Villegas and Juan Ponce Enrile.
attributed by it to the Trial Court were "unmeritorious except the second," i. e., plaintiff's lack of capacity to
sue. Even assuming incapacity on the part of California, no such incapacity may be attributed to its co- LAWS GOVERNING FOREIGN CORPORATIONS
plaintiff, Olympia Business Machines Co. (Phil.), Inc. And if strictly necessary, the latter could quite easily
A foreign corporation licensed to do business in the Philippine is placed in a similar situation as any other
execute a cancellation of the deed of subrogation or of re-assignment of the right of action from California
domestic corporation of the same class in so far, the applicability of Philippine, law, rule and regulations
back to Olympia. Moreover, the dismissal of the case at this stage, would not bar the institution by
are concerned. The exceptions would normally be those matters which concern its formation, organization
California of the same action, this time alleging in its complaint that it was suing on a single, isolated
or dissolution, or those fixing the relationship, liabilities, responsibilities, or duties of the stockholder,
transaction. But this would be an Idle, circuitous ceremony in the light of the unchallenged declaration by
members or officers of the foreign corporation or their relations to each other. In effect, intra-corporate or
the Court of Appeals of the absence of any meritorious substantial defense on the part of defendant Razon.
internal matters not affecting creditors or the public in general are governed not by PH laws but by the law
This would be to accord undue importance and significance to technical rules, to allow an inflexible,
under which the foreign corporation was formed or organized.
unreasoning adherence to such technical rules to frustrate and defeat a plainly valid claim.
Sec. 129. SEC. 146. Law Applicable. – A foreign corporation lawfully doing business in the
WHEREFORE, the judgment of the Intermediate Appellate Court subject of the appeal is reverse and that
Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations
of the Trial Court, dated February 1, 1980 reinstated and affirmed, with costs against the respondents.
of the same class, except those which provide for the creation, formation, organization or
[G.R. No. L-28882; May 31, 1971] TIME, INC., petitioner, vs. HON. ANDRES REYES, as Judge of the dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of
Court of First Instance of Rizal, ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI, Court of First stockholders, members, or officers of corporations to each other or to the corporation.
Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE ENRILE, respondents.
Note: it is not amiss to state however, that special laws may provide or grant certain restrictions, limitations,
ISSUE: Whether the petition for certiorari and prohibition will prosper? privileges or incentives to a foreign corporation not otherwise applicable or granted to domestic
corporations such as import duties and tax incentives under the Omnibus Investment Code as amended
HELD: The dismissal of the present petition is asked on the ground that the petitioner foreign corporation by Republic Act No, 8756.
failed to allege its capacity to sue in the courts of the Philippines. Respondents rely on section 69 of the
Corporation law, which provides: [G.R. No. L-45144; April 3, 1939] M. E. GREY, plaintiff-appellant, vs. INSULAR LUMBER COMPANY,
defendant-appelle
SEC. 69. No foreign corporation or corporations formed, organized, or existing under any laws other than
those of the Philippines shall be permitted to ... maintain by itself or assignee any suit for the recovery of ISSUE: Whether appellant, as a stockholder, is entitled to inspect and examine the books and records of
any debt, claim, or demand whatever, unless it shall have the license prescribed in the section immediately transactions of appellee?
preceding. ..." ...;
HELD: Under section 77 Stock Corporation Law of New York. Under this law, plaintiff has the right to be
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that no foreign corporation may furnished by the treasurer or other fiscal officer of the corporation with statement of its affairs embracing a
be permitted to maintain any suit in the local courts unless it shall have the license required by the law, particular account of all its assets and liabilities. In the third place, inasmuch as plaintiff, either at the
and the ruling in Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ... the law hearing or in his motion for new trial, did not ask to have the stipulation of facts altered or changed, he
denies to a foreign corporation the right to maintain suit unless it has previously complied with a certain cannot now, for the first time on appeal, raise the question that aside from the right conferred upon him by
requirement, then such compliance or the fact that the suing corporation is exempt therefrom, becomes a section 77 of the Stock Corporation Law of New York, he also entitled under the common law to examine
necessary averment in the complaint." We fail to see how these doctrines can be a propos in the case at and inspect the books and records of the defendant corporation. In the fourth place, neither can this right
bar, since the petitioner is not "maintaining any suit" but is merely defending one against itself; it did not under the common law be granted the defendant in the present case, since the same can only be granted
file any complaint but only a corollary defensive petition to prohibit the lower court from further proceeding at the discretion of the court, under certain conditions, to wit:
with a suit that it had no jurisdiction to entertain.
(a) That the stockholder of a corporation in New York has the right to inspect its books and records if it can
Petitioner's failure to aver its legal capacity to institute the present petition is not fatal, for ... be shown that he seeks information for an honest purpose (14 C. J., 853), or to protect his interest as
stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A., 461 [aff. 31 App. Div., 70; 52 N.
A foreign corporation may, by writ of prohibition, seek relief against the wrongful assumption of jurisdiction. Y. S., 343]).
And a foreign corporation seeking a writ of prohibition against further maintenance of a suit, on the ground
of want of jurisdiction in which jurisdiction is not bound by the ruling of the court in which the suit was (b) That said right to examine and inspect the books of the corporation must be exercised in good faith,
brought, on a motion to quash service of summons, that it has jurisdiction. for a specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. (14
C. J., 854, 855.)

The appellant has made no effort to prove or even allege that the information he desired to obtain through (b) Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
the examination and inspection of defendant's books was necessary to protect his interests as stockholder
of the corporation, or that it was for a specific and honest purpose, and not to gratify curiosity, nor for (c) Failure, after change of its resident agent or address, to submit to the Commission a statement
speculative or vexatious purposes. of such change as required by this Title;
In view of the foregoing, we affirm the judgment of the lower court, with costs against the appellant. (d) Failure to submit to the Commission an authenticated copy of any amendment to its articles of
incorporation or bylaws or of any articles of merger or consolidation within the time prescribed by
AMENDMENTS TO THE ARTICLES OF INCORPROATION this Title;
Sec. 130. SEC. 147. Amendments to Articles of Incorporation or Bylaws of Foreign Corporations. – (e) A misrepresentation of any material matter in any application, report, affidavit or other
Whenever the articles of incorporation or bylaws of a foreign corporation authorized to transact document submitted by such corporation pursuant to this Title;
business in the Philippines are amended, such foreign corporation shall, within sixty (60) days
after the amendment becomes effective, file with the Commission, and in the proper cases, with (f) Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
the appropriate government agency, a duly authenticated copy of the amended articles of Philippine Government or any of its agencies or political subdivisions;
incorporation or bylaws, indicating clearly in capital letters or underscoring the change or changes
(g) Transacting business in the Philippines outside of the purpose or purposes for which such
made, duly certified by the authorized official or officials of the country or State of incorporation.
corporation is authorized under its license;
Such filing shall not in itself enlarge or alter the purpose or purposes for which such corporation
is authorized to transact business in the Philippines. (h) Transacting business in the Philippines as agent of or acting on behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
AMENDMENT OF LICENSE
(i) Any other ground as would render it unfit to transact business in the Philippines.
Sec. 131. SEC. 148. Amended License. – A foreign corporation authorized to transact business in
the Philippines shall obtain an amended license in the event it changes its corporate name, or Note: the last ground is all encompassing, giving the SEC a wide discretion in revoking or suspending the
desires to pursue other or additional purposes in the Philippines, by submitting an application with license of a foreign corporation. Depending on the seriousness of the acts objectionable done by the
the Commission, favorably endorsed by the appropriate government agency in the proper cases.J. foreign corporation.
MERGER/CONSOLIDATION Sec. 135. SEC. 152. Issuance of Certificate of Revocation. – Upon the revocation of the license to
transact business in the Philippines, the Commission shall issue a corresponding certificate of
Sec. 132. SEC. 149. Merger or Consolidation Involving a Foreign Corporation Licensed in the
revocation, furnishing a copy thereof to the appropriate government agency in the proper cases.
Philippines. – One or more foreign corporations authorized to transact business in the Philippines
may merge or consolidate with any domestic corporation or corporations if permitted under The Commission shall also mail the notice and copy of the certificate of revocation to the
Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or corporation, at its registered office in the Philippines.
consolidation as provided in this Code are followed.
WITHDRAWAL OF FOREIGN CORPORATIONS
Whenever a foreign corporation authorized to transact business in the Philippines shall be a party
to a merger or consolidation in its home country or State as permitted by the law authorizing its Sec. 136. SEC. 153. Withdrawal of Foreign Corporations. – Subject to existing laws and regulations,
incorporation, such foreign corporation shall, within sixty (60) days after the effectivity of such a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw
merger or consolidation, file with the Commission, and in proper cases, with the appropriate from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall
government agency, a copy of the articles of merger or consolidation duly authenticated by the be issued by the Commission unless all the following requirements are met:
proper official or officials of the country or State under whose laws the merger or consolidation
was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing (a) All claims which have accrued in the Philippines have been paid, compromised or settled;
business in the Philippines, the latter shall at the same time file a petition for withdrawal of its
license in accordance with this Title. (b) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions, have been paid; and
REVOCATION OF LICENSE
(c) The petition for withdrawal of license has been published once a week for three (3) consecutive
Sec. 134. SEC. 151. Revocation of License. – Without prejudice to other grounds provided under weeks in a newspaper of general circulation in the Philippines.
special laws, the license of a foreign corporation to transact business in the Philippines may be
revoked or suspended by the Commission upon any of the following grounds:
CHAPTER XIX- INVESTIGATIONS, OFFENSES, AND PENALTIES (TITLE XVI)
(a) Failure to file its annual report or pay any fees as required by this Code;

SEC. 154. Investigation and Prosecution of Offenses. – The Commission may investigate an (c) Suspension or revocation of the certificate of incorporation; and
alleged violation of this Code, or of rule, regulation, or order of the Commission.
(d) Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV of
The Commission may publish its findings, orders, opinions, advisories, or information concerning this Code.
any such violation, as may be relevant to the general public or to the parties concerned, subject to
the provisions of Republic Act No. 10173, otherwise known as the “Data Privacy Act of 2012”, and SEC. 159. Unauthorized Use of Corporate Name; Penalties. – The unauthorized use of a corporate
other pertinent laws. name shall be punished with a fine ranging from Ten thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00).
The Commission shall give reasonable notice to and coordinate with the appropriate regulatory
agency prior to any such publication involving companies under their special regulatory SEC. 160. Violation of Disqualification Provision; Penalties. – When, despite the knowledge of the
jurisdiction. existence of a ground for disqualification as provided in Section 26 of this Code, a director, trustee
or officer willfully holds office, or willfully conceals such disqualification, such director, trustee or
SEC. 155. Administration of Oaths, Subpoena of Witnesses and Documents. – The Commission, officer shall be punished with a fine ranging from Ten thousand pesos (P10,000.00) to Two hundred
through its designated officer, may administer oaths and affirmations, issue subpoena and thousand pesos (P200,000.00) at the discretion of the court, and shall be permanently disqualified
subpoena duces tecum, take testimony in any inquiry or investigation, and may perform other acts from being a director, trustee or officer of any corporation. When the violation of this provision is
necessary to the proceedings or to the investigation. injurious or detrimental to the public, the penalty shall be a fine ranging from Twenty thousand
pesos (P20,000.00) to Four hundred thousand pesos (P400,000.00).
SEC. 156. Cease and Desist Orders. – Whenever the Commission has reasonable basis to believe
that a person has violated, or is about to violate this Code, a rule, regulation, or order of the SEC. 161. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction;
Commission, it may direct such person to desist from committing the act constituting the violation. Penalties. – The unjustified failure or refusal by the corporation, or by those responsible for
keeping and maintaining corporate records, to comply with Sections 45, 73, 92, 128, 177 and other
The Commission may issue a cease and desist order ex parte to enjoin an act or practice which is pertinent rules and provisions of this Code on inspection and reproduction of records shall be
fraudulent or can be reasonably expected to cause significant, imminent, and irreparable danger punished with a fine ranging from Ten thousand pesos (P10,000.00) to Two hundred thousand
or injury to public safety or welfare. The ex parte order shall be valid for a maximum period of pesos (P200,000.00), at the discretion of the court, taking into consideration the seriousness of the
twenty (20) days, without prejudice to the order being made permanent after due notice and violation and its implications. When the violation of this provision is injurious or detrimental to the
hearing. public, the penalty is a fine ranging from Twenty thousand pesos (P20,000.00) to Four hundred
thousand pesos (P400,000.00).
Thereafter, the Commission may proceed administratively against such person in accordance with
Section 158 of this Code, and/or transmit evidence to the Department of Justice for preliminary The penalties imposed under this section shall be without prejudice to the Commission’s exercise
investigation or criminal prosecution and/or initiate criminal prosecution for any violation of this of its contempt powers under Section 157 hereof.
Code, rule, or regulation.
SEC. 162. Willful Certification of Incomplete, Inaccurate, False, or Misleading Statements or
SEC. 157. Contempt. – Any person who, without justifiable cause, fails or refuses to comply with Reports; Penalties. – Any person who willfully certifies a report required under this Code, knowing
any lawful order, decision, or subpoena issued by the Commission shall, after due notice and that the same contains incomplete, inaccurate, false, or misleading information or statements,
hearing, be held in contempt and fined in an amount not exceeding Thirty thousand pesos shall be punished with a fine ranging from Twenty thousand pesos (P20,000.00) to Two hundred
(P30,000.00). When the refusal amounts to clear and open defiance of the Commission’s order, thousand pesos (P200,000.00). When the wrongful certification is injurious or detrimental to the
decision, or subpoena, the Commission may impose a daily fine of One thousand pesos (P1,000.00) public, the auditor or the responsible person may also be punished with a fine ranging from Forty
until the order, decision, or subpoena is complied with. thousand pesos (P40,000.00) to Four hundred thousand pesos (P400,000.00).
SEC. 158. Administrative Sanctions. – If, after due notice and hearing, the Commission finds that SEC. 163. Independent Auditor Collusion; Penalties. – An independent auditor who, in collusion
any provision of this Code, rules or regulations, or any of the Commission’s orders has been with the corporation’s directors or representatives, certifies the corporation’s financial statements
violated, the Commission may impose any or all of the following sanctions, taking into despite its incompleteness or inaccuracy, its failure to give a fair and accurate presentation of the
consideration the extent of participation, nature, effects, frequency and seriousness of the corporation’s condition, or despite containing false or misleading statements, shall be punished
violation: with a fine ranging from Eighty thousand pesos (P80,000.00) to Five hundred thousand pesos
(P500,000.00). When the statement or report certified is fraudulent, or has the effect of causing
(a) Imposition of a fine ranging from Five thousand pesos (P5,000.00) to Two million pesos
injury to the general public, the auditor or responsible officer may be punished with a fine ranging
(P2,000,000.00), and not more than One thousand pesos (P1,000.00) for each day of continuing
from One hundred thousand pesos (P100,000.00) to Six hundred thousand pesos (P600,000.00).
violation but in no case to exceed Two million pesos (P2,000,000.00);
SEC. 164. Obtaining Corporate Registration Through Fraud; Penalties. – Those responsible for the
(b) Issuance of a permanent cease and desist order;
formation of a corporation through fraud, or who assisted directly or indirectly therein, shall be
punished with a fine ranging from Two hundred thousand pesos (P200,000.00) to Two million pesos

(P2,000,000.00). When the violation of this provision is injurious or detrimental to the public, the SEC. 171. Liability of Directors, Trustees, Officers, or Other Employees. – If the offender is a
penalty is a fine ranging from Four hundred thousand pesos (P400,000.00) to Five million pesos corporation, the penalty may, at the discretion of the court, be imposed upon such corporation
(P5,000,000.00). and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for
the violation or indispensable to its commission.
SEC. 165. Fraudulent Conduct of Business; Penalties. – A corporation that conducts its business
through fraud shall be punished with a fine ranging from Two hundred thousand pesos SEC. 172. Liability of Aiders and Abettors and Other Secondary Liability. – Anyone who shall aid,
(P200,000.00) to Two million pesos (P2,000,000.00). When the violation of this provision is injurious abet, counsel, command, induce, or cause any violation of this Code, or any rule, regulation, or
or detrimental to the public, the penalty is a fine ranging from Four hundred thousand pesos order of the Commission shall be punished with a fine not exceeding that imposed on the principal
(P400,000.00) to Five million pesos (P5,000,000.00). offenders, at the discretion of the court, after taking into account their participation in the offense.
SEC. 166. Acting as Intermediaries for Graft and Corrupt Practices; Penalties. – A corporation used
for fraud, or for committing or concealing graft and corrupt practices as defined under pertinent
statutes, shall be liable for a fine ranging from One hundred thousand pesos (P100,000.00) to Five CHAPTER XX- MISCELLANEOUS PROVISIONS (TITLE XVII)
million pesos (P5,000,000.00).
Sec. 137 SEC. 173. Outstanding Capital Stock Defined. – The term “outstanding capital stock”, as
When there is a finding that any of its directors, officers, employees, agents, or representatives used in this Code, shall mean the total shares of stock issued under binding subscription contracts
are engaged in graft and corrupt practices, the corporation’s failure to install: (a) safeguards for to subscribers or stockholders, whether fully or partially paid, except treasury shares.
the transparent and lawful delivery of services; and (b) policies, code of ethics, and procedures
Sec. 138. SEC. 174. Designation of Governing Boards. – The provisions of specific provisions of
against graft and corruption shall be prima facie evidence of corporate liability under this section.
this Code to the contrary notwithstanding, nonstock or special corporations may, through their
SEC. 167. Engaging Intermediaries for Graft and Corrupt Practices; Penalties. – A corporation that articles of incorporation or their bylaws, designate their governing boards by any name other than
appoints an intermediary who engages in graft and corrupt practices for the corporation’s benefit as board of trustees.
or interest shall be punished with a fine ranging from One hundred thousand pesos (P100,000.00)
(Sec. 139. Incorporation and other fees. - The Securities and Exchange Commission is hereby
to One million pesos (P1,000,000.00).
authorized to collect and receive fees as authorized by law or by rules and regulations
SEC. 168. Tolerating Graft and Corrupt Practices; Penalties. – A director, trustee, or officer who promulgated by the Commission)
knowingly fails to sanction, report, or file the appropriate action with proper agencies, allows or
SEC. 175. Collection and Use of Registration, Incorporation and Other Fees. – For a more effective
tolerates the graft and corrupt practices or fraudulent acts committed by a corporation’s directors,
implementation of this Code, the Commission is hereby authorized to collect, retain, and use fees,
trustees, officers, or employees shall be punished with a fine ranging from Five hundred thousand
fines, and other charges pursuant to this Code and its rules and regulations. The amount collected
pesos (P500,000.00) to One million pesos (P1,000,000.00).
shall be deposited and maintained in a separate account which shall form a fund for its
SEC. 169. Retaliation Against Whistleblowers. – A whistleblower refers to any person who provides modernization and to augment its operational expenses such as, but not limited to, capital outlay,
truthful information relating to the commission or possible commission of any offense or violation increase in compensation and benefits comparable with prevailing rates in the private sector,
under this Code. Any person who, knowingly and with intent to retaliate, commits acts detrimental reasonable employee allowance, employee health care services, and other insurance, employee
to a whistleblower such as interfering with the lawful employment or livelihood of the career advancement and professionalization, legal assistance, seminars, and other professional
whistleblower, shall, at the discretion of the court, be punished with a fine ranging from One fees.
hundred thousand pesos (P100,000.00) to One million pesos (P1,000,000.00).
Sec. 140. SEC. 176. Stock Ownership in Corporations. – Pursuant to the duties specified by Article
SEC. 170. Other Violations of the Code; Separate Liability. – Violations of any of the other XIV of the Constitution, the National Economic and Development Authority (NEDA) shall, from time
provisions of this Code or its amendments not otherwise specifically penalized therein shall be to time, determine if the corporate vehicle has been used by any corporation, business, or industry
punished by a fine of not less than Ten thousand pesos (P10,000.00) but not more than One million to frustrate the provisions of this Code or applicable laws, and shall submit to Congress, whenever
pesos (P1,000,000.00). If the violation is committed by a corporation, the same may, after notice deemed necessary, a report of its findings, including recommendations for their prevention or
and hearing, be dissolved in appropriate proceedings before the Commission: Provided, That such correction.
dissolution shall not preclude the institution of appropriate action against the director, trustee, or
The Congress of the Philippines may set maximum limits for stock ownership of individuals or
officer of the corporation responsible for said violation: Provided, further, That nothing in this
groups of individuals related to each other by consanguinity, affinity, or by close business
section shall be construed to repeal the other causes for dissolution of a corporation provided in
interests, in corporations declared to be vested with public interest pursuant to the provisions of
this Code.
this section, or whenever necessary to prevent anti-competitive practices as provided in Republic
Liability for any of the foregoing offenses shall be separate from any other administrative, civil, or Act No. 10667, otherwise known as the “Philippine Competition Act”, or to implement national
criminal liability under this Code and other laws. economic policies designed to promote general welfare and economic development, as declared
in laws, rules, and regulations.

In recommending to the Congress which corporations, businesses and industries will be declared confidential, except insofar as the law may require the same to be made public or where such
as vested with public interest, and in formulating proposals for limitations on stock ownership, the interrogatories, answers or results are necessary to be presented as evidence before any
NEDA shall consider the type and nature of the industry, size of the enterprise, economies of scale, court.)
geographic location, extent of Filipino ownership, labor intensity of the activity, export potential,
as well as other factors which are germane to the realization and promotion of business and SEC. 178. Visitorial Power and Confidential Nature of Examination Results. – The Commission shall
industry. exercise visitorial powers over all corporations, which powers shall include the examination and
inspection of records, regulation and supervision of activities, enforcement of compliance, and
(Sec. 141. Annual report or corporations. - Every corporation, domestic or foreign, lawfully imposition of sanctions in accordance with this Code.
doing business in the Philippines shall submit to the Securities and Exchange Commission an
annual report of its operations, together with a financial statement of its assets and liabilities, Should the corporation, without justifiable cause, refuse or obstruct the Commission’s exercise of
certified by any independent certified public accountant in appropriate cases, covering the its visitorial powers, the Commission may revoke its certificate of incorporation, without prejudice
preceding fiscal year and such other requirements as the Securities and Exchange Commission to the imposition of other penalties and sanctions under this Code.
may require. Such report shall be submitted within such period as may be prescribed by the
All interrogatories propounded by the Commission and the answers thereto, as well as the results
Securities and Exchange Commission)
of any examination made by the Commission or by any other official authorized by law to make an
SEC. 177. Reportorial Requirements of Corporations. – Except as otherwise provided in this Code examination of the operations, books, and records of any corporation, shall be kept strictly
or in the rules issued by the Commission, every corporation, domestic or foreign, doing business confidential, except when the law requires the same to be made public, when necessary for the
in the Philippines shall submit to the Commission: Commission to take action to protect the public or to issue orders in the exercise of its powers
under this Code, or where such interrogatories, answers or results are necessary to be presented
(a) Annual financial statements audited by an independent certified public accountant: Provided, as evidence before any court.
That if the total assets or total liabilities of the corporation are less than Six hundred thousand
pesos (P600,000.00), the financial statements shall be certified under oath by the corporation’s (Sec. 143. Rule-making power of the Securities and Exchange Commission. - The Securities
treasurer or chief financial officer; and and Exchange Commission shall have the power and authority to implement the provisions of
this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform
(b) A general information sheet. its duties hereunder, particularly in the prevention of fraud and abuses on the part of the
controlling stockholders, members, directors, trustees or officers.)
Corporations vested with public interest must also submit the following:
SEC. 179. Powers, Functions, and Jurisdiction of the Commission. – The Commission shall have
(1) A director or trustee compensation report; and the power and authority to:
(2) A director or trustee appraisal or performance report and the standards or criteria used to (a) Exercise supervision and jurisdiction over all corporations and persons acting on their behalf,
assess each director or trustee. except as otherwise provided under this Code;
The reportorial requirements shall be submitted annually and within such period as may be (b) Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases involving
prescribed by the Commission. intra-corporate disputes submitted for final resolution. The Commission shall retain jurisdiction
over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally
The Commission may place the corporation under delinquent status in case of failure to submit
disposed;
the reportorial requirements three (3) times, consecutively or intermittently, within a period of five
(5) years. The Commission shall give reasonable notice to and coordinate with the appropriate (c) Impose sanctions for the violation of this Code, its implementing rules and orders of the
regulatory agency prior to placing under delinquent status companies under their special Commission;
regulatory jurisdiction.
(d) Promote corporate governance and the protection of minority investors, through, among
Any person required to file a report with the Commission may redact confidential information from others, the issuance of rules and regulations consistent with international best practices;
such required report: Provided, That such confidential information shall be filed in a supplemental
report prominently labelled “confidential”, together with a request for confidential treatment of the (e) Issue opinions to clarify the application of laws, rules, and regulations;
report and the specific grounds for the grant thereof.
(f) Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public;
(Sec. 142. Confidential nature of examination results. - All interrogatories propounded by the
Securities and Exchange Commission and the answers thereto, as well as the results of any (g) Hold corporations in direct and indirect contempt;
examination made by the Commission or by any other official authorized by law to make an
(h) Issue subpoena duces tecum and summon witnesses to appear in proceedings before the
examination of the operations, books and records of any corporation, shall be kept strictly
Commission;

(i) In appropriate cases, order the examination, search and seizure of documents, papers, files and reservation and registration, incorporation, submission of reports, notices, and documents
records, and books of accounts of any entity or person under investigation as may be necessary required under this Code, and sharing of pertinent information with other government agencies.
for the proper disposition of the cases, subject to the provisions of existing laws;
SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in the articles
(j) Suspend or revoke the certificate of incorporation after proper notice and hearing; of incorporation or bylaws of an unlisted corporation. When such an agreement is in place,
disputes between the corporation, its stockholders or members, which arise from the
(k) Dissolve or impose sanctions on corporations, upon final court order, for committing, aiding in implementation of the articles of incorporation or bylaws, or from intra-corporate relations, shall
the commission of, or in any manner furthering securities violations, smuggling, tax evasion, be referred to arbitration. A dispute shall be nonarbitrable when it involves criminal offenses and
money laundering, graft and corrupt practices, or other fraudulent or illegal acts; interests of third parties.
(l) Issue writs of execution and attachment to enforce payment of fees, administrative fines, and The arbitration agreement shall be binding on the corporation, its directors, trustees, officers, and
other dues collectible under this Code; executives or managers.
(m) Prescribe the number of independent directors and the minimum criteria in determining the To be enforceable, the arbitration agreement should indicate the number of arbitrators and the
independence of a director; procedure for their appointment. The power to appoint the arbitrators forming the arbitral tribunal
shall be granted to a designated independent third party. Should the third party fail to appoint the
(n) Impose or recommend new modes by which a stockholder, member, director, or trustee may
arbitrators in the manner and within the period specified in the arbitration agreement, the parties
attend meetings or cast their votes, as technology may allow, taking into account the company’s
may request the Commission to appoint the arbitrators. In any case, arbitrators must be accredited
scale, number of shareholders or members, structure, and other factors consistent with the basic
or must belong to organizations accredited for the purpose of arbitration.
right of corporate suffrage;
The arbitral tribunal shall have the power to rule on its own jurisdiction and on questions relating
(o) Formulate and enforce standards, guidelines, policies, rules and regulations to carry out the
to the validity of the arbitration agreement. When an intra-corporate dispute is filed with a Regional
provisions of this Code; and
Trial Court, the court shall dismiss the case before the termination of the pretrial conference, if it
(p) Exercise such other powers provided by law or those which may be necessary or incidental to determines that an arbitration agreement is written in the corporation’s articles of incorporation,
carrying out the powers expressly granted to the Commission. bylaws, or in a separate agreement.
In imposing penalties and additional monitoring and supervision requirements, the Commission The arbitral tribunal shall have the power to grant interim measures necessary to ensure
shall take into consideration the size, nature of the business, and capacity of the corporation. enforcement of the award, prevent a miscarriage of justice, or otherwise protect the rights of the
parties.
No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly A final arbitral award under this section shall be executory after the lapse of fifteen (15) days from
or indirectly interferes with the exercise of the powers, duties and responsibilities of the receipt thereof by the parties and shall be stayed only by the filing of a bond or the issuance by
Commission that falls exclusively within its jurisdiction. the appellate court of an injunctive writ.
Sec. 144. Violations of the Code. - Violations of any of the provisions of this Code or its The Commission shall formulate the rules and regulations, which shall govern arbitration under
amendments not otherwise specifically penalized therein shall be punished by a fine of not less this section, subject to existing laws on arbitration.
than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or
SEC. 182. Jurisdiction Over Party-List Organizations. – The powers, authorities, and
by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in
responsibilities of the Commission involving party-list organizations are transferred to the
the discretion of the court. If the violation is committed by a corporation, the same may, after
Commission on Elections (COMELEC).
notice and hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the institution of Within six (6) months after the effectivity of this Act, the monitoring, supervision, and regulation
appropriate action against the director, trustee or officer of the corporation responsible for said of such corporations shall be deemed automatically transferred to the COMELEC.
violation: Provided, further, That nothing in this section shall be construed to repeal the other
causes for dissolution of a corporation provided in this Code. For this purpose, the COMELEC, in coordination with the Commission, shall promulgate the
corresponding implementing rules for the transfer of jurisdiction over the abovementioned
Note: this provision is now expanded under title XVI corporations.
SEC. 180. Development and Implementation of Electronic Filing and Monitoring System. – The SEC. 183. Applicability of the Code. – Nothing in this law shall be construed as amending existing
Commission shall develop and implement an electronic filing and monitoring system. The provisions of special laws governing the registration, regulation, monitoring and supervision of
Commission shall promulgate rules to facilitate and expedite, among others, corporate name special corporations such as banks, nonbank financial institutions and insurance companies.

Notwithstanding any provision to the contrary, regulators such as the Bangko Sentral ng Pilipinas associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to
and the Insurance Commission shall exercise primary authority over special corporations such as the interest of the public and/or of the stockholder, partners, members of associations or organizations
banks, nonbank financial institutions, and insurance companies under their supervision and registered with the SEC.
regulation.
Exception: The complaint is based on the violation of the Revised Penal Code (Ex. Syndicated Estafa)
(Sec. 145) SEC. 184. Effect of Amendment or Repeal of This Code, or the Dissolution of a
Corporation. – No right or remedy in favor of or against any corporation, its stockholders, Even if the action is for recovery of sums of money paid or given to the corporation through devices and
members, directors, trustees, or officers, nor any liability incurred by any such corporation, schemes amounting to fraud or misrepresentation detrimental to the investing public, the same must be
stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the filed, heard and tried by the Special Commercial Courts.
subsequent dissolution of said corporation or by any subsequent amendment or repeal of this
Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction of the
Code or of any part thereof.
Special Commercial Courts:
(Sec. 148) SEC. 185. Applicability to Existing Corporation. – A corporation lawfully existing and
1. Fraud committed by a corporation in failing to pay individual money market placements. (Orosa,
doing business in the Philippines affected by the new requirements of this Code shall be given a
Jr. vs. CA)
period of not more than two (2) years from the effectivity of this Act within which to comply.
2. Corporations act of duping persons into investing money when such corporations authority to
(Sec. 147) SEC. 186. Separability Clause. – If any provision of this Act is declared invalid or issue commercial papers has already expired. (Mangalad vs. Premier Corporation)
unconstitutional, other provisions hereof which are not affected thereby shall continue to be in full 3. Corporate officer’s act of diverting corporate funds and assets for his personal use. (Alleje vs.
force and effect. CA)
4. Pyramiding schemes.
(Sec. 146) SEC. 187. Repealing clause. – Batas Pambansa Blg. 68, otherwise known as “The
Corporation Code of the Philippines”, is hereby repealed. Any law, presidential decree or issuance, The allegation of fraud must be stated with particularity to place the case with the jurisdiction of the Special
executive order, letter of instruction, administrative order, rule or regulation contrary to or Commercial Courts.
inconsistent with any provision of this Act is hereby repealed or modified accordingly.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
(Sec. 149) SEC. 188. Effectivity. – This Act shall take effect upon completion of its publication in
Intra-corporate controversies include those of corporations, partnerships and associations.
the Official Gazette or in at least two (2) newspapers of general circulation..
Elements of intra-corporate controversies:
1. An intra-corporate relationship:
PD 902-A, AS AMENDED
a. Between and among the stockholders, members, associates of a corporation,
The SEC’s quasi-judicial functions under Sec. 5 of PD 902-A, as amended were transferred to the Special partnership or association;
Commercial Courts by RA 8799. b. Between them and the corporation, partnership or association; or
c. Between the corporation, partnership or association and the State.
General Rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over cases 2. The controversy must arise out of said relationship.
falling under Sec. 5 of PD 902-A.
The dispute among the parties must be intrinsically connected with the regulation of the corporation. If the
Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and corporate nature of the controversy involves matters that are purely civil in character necessarily the case does not
rehabilitation filed on or before June 30, 2000. involve an intra-corporate controversy. (Speed Distributing Corp. vs. CA)
Distribution of Special Commercial Courts: The fact that shares of stock were issued to be used as part payment for lease rentals does not convert it
into a intra-corporate controversy. (DMRC Enterprises vs. Este del Sol Mountain Reserve, Inc.)
1. Two in Makati City;
2. Two in Quezon City; Recovery of the control and management of a corporation in the guise of a complaint for rescission of a
3. One in each in other cities in Metro Manila; and memorandum of agreement which vested such control and management is an intra-corporate controversy.
4. One per region. (DPB vs. Ilustre, Jr.)
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a]) If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and is within
the jurisdiction of the Special Commercial Court. (Abejo vs. de la Cruz; Rural Bank of Salinas, Inc. vs. CA)
General Rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear and
decide cases involving devices or schemes employed by or any acts of the board of directors, business

If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name the 1. Simple suspension of payments – mere deferment of payment of debts and it refers to a petition
dispute is not intra-corporate and the ordinary or regular court can assume jurisdiction over the case. which is filed by a corporation which possesses sufficient assets to cover its liabilities but
(Rivera vs. Florendo; Tay vs. CA) foresees the possibility of meeting them when they respectively fall due owing to temporary
liquidity problems.
A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the sale 2. Suspension of payments with the appointment of a receiver with or without a rehabilitation plan.
of shares of a group of stockholders to another group of stockholders is intra-corporate. (Saavedra vs. The rehabilitation plan is a plan under which the corporation will reschedule the payment of its
SEC) debts and liabilities. Either the petitioner corporation will propose the plan or ask for the
appointment of a receiver who will study and make the plan.
Where the conflict involves the enforcement of rights and obligations under the Corporation Code or the
3. Suspension of payments where the corporation has no sufficient assets to cover its debts and
inter and intra-corporate affairs of the corporation, jurisdiction would fall with the Special Commercial
liabilities with or without the appointment of a management committee with or without a
Courts. But if it requires a mere determination of the contractual rights of the parties under an ordinary
rehabilitation plan.
agreement, the ordinary or regular courts can acquire jurisdiction thereto.
EFFECTS OF SUSPENSION OF PAYMENTS
The factor which decides whether the action is within the jurisdiction of the Special Commercial Courts is
that the controversy arose out of an intra-corporate relation between and among the parties. (SEC vs. CA) The proper court may issue an order suspending payments of claims due from a distress corporation.
The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and Upon the appointment of a management committee, rehabilitation receiver, board or body all actions for
concomitant filing of a criminal action before the regular courts; such that, a fraudulent act may give rise claims against the corporation, partnership or association under management or receivership pending
to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as well as before any court, tribunal, board or body shall be suspended accordingly.
criminal liability for violation of the Revised Penal Code cognizable by the regular courts, both charges to
be filed and proceeded independently, and may be simultaneously, with the other. (Fabia vs. CA) The reason for suspension of payments for claims against a distressed corporation is to enable the
management committee to effectively exercise its powers free from judicial or extrajudicial interference
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS AND that might unduly hinder or prevent the „rescue‟ of the debtor company. (PAL vs. Sps. Sadic and
OFFICERS (Sec. 5 [c]) Kurangking)
The Special Commercial Courts have original and exclusive jurisdiction to hear and decide cases involving The suspension of all actions for claims against a corporation embraces all phases of the suit, be it before
controversies in the election or appointment of directors, trustees, officers or managers of corporations, the trial court or any tribunal or before this Court. No other action may be taken, including the rendition of
partnerships or associations. judgment during the state of suspension. It must be stressed that what are automatically stayed or
suspended are the proceedings of a suit and not just the payment of claims during the execution stage
General Rule: A corporate officer’s election, appointment or termination by the board of directors is always
after the case had become final and executory. Once the process of rehabilitation, however, is completed,
a corporate act, and the fact that the officer asks for backwages does not alter the picture. The original
this Court will proceed to complete the proceedings on the suspended actions. Furthermore, the actions
and exclusive jurisdiction rests with the Special Commercial Courts.
that are suspended cover all claims against the corporation whether for damages founded on a breach of
Exception: The main cause of action is for the recovery of unpaid wages and separation pay. (Midland contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature. No exception
Construction Co., Inc. vs. Movilla) in favor of labor claims is mentioned in the law. (PAL vs. Zamora)
The main aspect to be considered is whether the corporate officer asserts his rights as such officer or Claims – refers to debts or demands of pecuniary nature; the assertion of right to have money paid.
questions his removal or ouster. If so, the case would fall within the ambit of the jurisdiction of the Special
Suspended proceedings include extra judicial foreclosures. You cannot even consolidate. All proceedings
Commercial Courts and not the NLRC.
at whatever stage are suspended.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])
Even if the suspension order is issued after a creditor’s action in court has already become final but
Petitions for suspension of payments of corporations, partnerships or associations, and appointment of pending execution, the execution of the decision is likewise suspended. (Filinvest vs. Ejercito)
receivership, management committee, board or body are lodged within the jurisdiction of the Special
Note the words “against the corporation.”
Commercial Courts.
If a corporation secures a loan, and one of its key officers uses his private properties to guarantee the
A corporation, partnership or association, whether or not insolvent, can file a petition for suspension of
loan, corporation files for suspension, the bank want to foreclose on the prop, may the bank foreclose?
payments provided it is placed under a rehabilitation receiver or management committee or rehabilitation
Yes. It is not an action for ac claim against the corporation. Union bank case.
receiver.
Properties of an individual stockholder, director or officer, as surety of corporate liabilities, are not, and will
Three types of suspension of payments:
not be covered by the suspension of payments order issued by the court pursuant to PD 902-A.

Same with regard to criminal proceedings, personal to corporate officer concerned. 2. Paralyzation of its business operations which may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general public. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)
Despite the appointment of a receiver for a corporation under PD 902-A, an action against a corporation
seeking the nullification of corporate documents cannot be suspended by reason thereof, since the civil Danger – a general term, including peril, jeopardy, hazard and risk; refers to exposure or liability to injury.
action does not present a monetary claim against the corporation. (Finasia Investment and Finance
Corporation vs. CA) Imminent – something which is threatening to happen at once, something close at hand, something to
happen upon the instant, close although not yet happening, and on the verge of happening.
The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other
than corporations, partnerships or associations. (Union Bank vs. CA) In the absence of a strong showing of an imminent danger of dissipation, loss, wastage or destruction of
assets or other properties of a corporation and paralysis of its business operations, the mere apprehension
Equality is Equity – during suspension the assets are held in trust for the equal benefit of all creditors to of future misconduct based upon prior mismanagement will not authorize the appointment of a
preclude one from obtaining an advantage or preference over another by the expediency of an attachment, management committee/receiver. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)
execution or otherwise. The creditors should stand on equal footing. Not anyone of them should be given
any preference by paying one of them ahead of the others. (Alemars Sibal and Son, Inc. vs. Elibenas) Mere disagreement among stockholder as to the fairness of the corporation would not in itself suffice as a
ground for the appointment of a management committee. However, where the dissention among the
The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all stockholders is such that the corporation cannot successfully carry on its corporate functions, the
other creditors gains relevance and materiality only upon the appointment of a management committee, appointment of a management committee becomes imperative. (Jacinto vs. First Women’s Credit
rehabilitation receiver, board or body. Suspension of claims against the corporation under rehabilitation is Corporation)
counted or figured up only upon the appointment of a management committee or a rehabilitation receiver.
(RCBC vs. IAC) A management committee shall have the power to take custody of and control all assets and properties
owned and possessed by the entity under management. It shall take the place of the management and
VERY IMPORTANT!!! board of directors of the entity under management, assume their rights and responsibilities, and preserve
the entity’s assets and properties in its possession.
1. All claims against corporations, partnerships or associations that are pending before any court,
tribunal or board, without distinction as to whether or not a creditor is secured or unsecured, The rehabilitation receiver shall not take over the management and control of the debtor but shall closely
shall be suspended effective upon the appointment of a management committee, rehabilitation oversee and monitor the operations of the debtor during the pendency of the proceedings. He shall be
receiver, board or body in accordance with the provisions of PD 902-A. primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such property is reasonably maintained pending the determination of whether or not the debtor should be
preferences is equally suspended upon the appointment of a management committee, rehabilitated, as well as implement the rehabilitation plan after its approval.
rehabilitation receiver, board or body. In the event that the assets of the corporation, partnership
or association are finally liquidated, however, secured or preferred credits under the applicable Venue of actions in intra-corporate controversies – Special Commercial Court which has jurisdiction over
provisions of the Civil Code will definitely have preference over unsecured ones. the principal office of the corporation, partnership or association.
If the rehabilitation of the corporation is not feasible, the court muto propio or the management committee Nature of proceedings is in rem. Jurisdiction acquired upon publication of the proceeding.
may petition the lifting and the preferences will be there again.
Creditors have the personality (at least 25% of the total outstanding liabilities) may file, ex. Bayantel.
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6 [d])
Their compensation is subject to agreement of the parties.
Special Commercial Courts may create or appoint a management committee, board or body upon petition
Actuations of the board, body, committee subject to….
or muto propio to undertake the management of corporations, partnerships or association not supervised
or regulated by other government agencies in appropriate cases where there is imminent danger of Service of pleadings. Sec. 6 rule 1. may be by fax or email. When authorized by the court.
dissipation, loss or wastage or destruction of assets or other properties or paralyzation of business
operations of such corporation or entities which may be prejudicial to the interest of minority stockholders, Service of summons. Sec. 5 rule 2. made upon any of the statutory or corporate officers or their respective
parties-litigant or the general public. secretaries. vs. Eb Villarosa case. (Rule of Court)
It may also create or appoint a management committee, board or body to undertake the management of
corporations, partnerships or other associations supervised or regulated by other government agencies
such as banks and insurance companies, upon the request of the government agency concerned. SECURITIES REGULATION CODE (SRC)
Requisites before a management committee, board or body may be appointed or created: Full disclosure rule – as long as there is full and complete disclosure relative to the issue of securities the
investing public should determine for themselves whether or not to invest.
1. Dissipation, loss, wastage or destruction of assets or other properties; and
Doctrine of primary jurisdiction – courts will not determine a controversy involving a question within the Pyramiding schemes partakes of a nature of an investing contract which cannot be sold to more than 19
jurisdiction of the administrative tribunal, where the question demands the exercise of sound administrative persons without prior approval of the SEC.
discretion requiring the specialized knowledge and expertise of said administrative tribunal to determine
technical and intricate matters of fact. When an investor is relatively uninformed and turns over his money to others, essentially depending upon
their representations and their honesty and skill in managing it, the transaction generally is considered as
A criminal charge for violation of the SRC is a specialized dispute. Hence, it must first be referred to an an investment contract. The touchstone is the presence of an investment in a common venture premised
administrative agency of special competence, i.e., the SEC… The SRC is a special law. Its enforcement on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of
is particularly vested in the SEC. Hence, all complaints for any violation of the Code and its implementing others. (People vs. Petralba)
rules and regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC
shall indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Section Exempt Securities (Sec. 9):
53.1. (Baviera vs. Paglinawan)
1. Any security issued or guaranteed by the Government of the Philippines, or by any political
Securities subdivision or agency thereof, or by any person controlled or supervised by, and acting as an
instrumentality of said Government.
Securities – are shares, participation or interests in a corporation or in a commercial enterprise or profit- 2. Any security issued or guaranteed by the government of any country with which the Philippines
making venture and evidenced by a certificate, contract, instrument, whether written or electronic in maintains diplomatic relations, or by any state, province or political subdivision thereof on the
character. It includes: basis of reciprocity: Provided, That the Commission may require compliance with the form and
content of disclosures the Commission may prescribe.
1. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed 3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
securities; adjudicatory body.
2. Investment contracts, certificates of interest or participation in a profit sharing agreement, 4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and
certificates of deposit for a future subscription; regulation of the Office of the Insurance Commission, HLURB, or BIR.
3. Fractional undivided interests in oil, gas or other mineral rights; 5. Any security issued by a bank except its own shares of stock.
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates Exempt Transactions (Sec. 10):
or similar instruments;
6. Proprietary or non proprietary membership certificates incorporations; and 1. Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
7. Other instruments as may in the future be determined by the Commission. insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling
The definition of securities is extra-ordinarily broad. It is a catch all phrase meant to include all novel or offering for sale or delivery in the ordinary course of business and not for the purpose of
devices which are of the same nature. Investment contracts and golf club shares are included in the avoiding the provisions the SRC, to liquidate a bona fide debt, a security pledged in good faith
definition of securities. as security for such debt.
3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery
General Rule: Securities cannot be sold or offered for sale or distribution to more than 19 persons without by the owner thereof, or by his representative for the owner‟s account, such sale or offer for
a Registration Statement duly filed and approved by the SEC. Once the securities are sold or offered to sale, subscription or delivery not being made in the course of repeated and successive
more than 19 persons, it becomes a public offering requiring prior registration with the SEC. Violation transactions of a like character by such owner, or on his account by such representative and
thereof renders the person administratively, civilly and criminally liable. such owner or representative not being the underwriter of such security.
4. The distribution by a corporation, actively engaged in the business authorized by its articles of
Exception: The securities involved are covered by Sec. 9 (exempt securities) and Sec. 10 (exempt
incorporation, of securities to its stockholders or other security holders as a stock dividend or
transactions).
other distribution out of surplus.
Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, 5. The sale of capital stock of a corporation to its own stockholders exclusively, where no
or acting as a salesman for such entities must be registered and authorized as such by the SEC. commission or other remuneration is paid or given directly or indirectly in connection with the
sale of such capital stock.
Investment contract – a contract or scheme whereby a person invests his money in a common venture 6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal
premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial property, where the entire mortgage together with all the bonds or notes secured thereby are
efforts of others. sold to a single purchaser at a single sale.
7. The issue and delivery of any security in exchange for any other security of the same issuer
Issuance of certificates of participation in a multi-level marketing scheme, solely on the management of pursuant to a right of conversion entitling the holder of the security surrendered in exchange to
others without goods or services is an investment contract and thus a security. (Justee vs. SEC) make such conversion: Provided, That the security so surrendered has been registered under
the SRC or was, when sold, exempt from the provisions of the SRC, and that the security issued

and delivered in exchange, if sold at the conversion price, would at the time of such conversion 2. Signed by the stockholder or his duly authorized representative; and
fall within the class of securities entitled to registration under the SRC. Upon such conversion 3. Filed at a reasonable time before the scheduled meeting with the corporate secretary.
the par value of the security surrendered in such exchange shall be deemed the price at which
the securities issued and delivered in such exchange are sold. General Rule: A proxy shall be valid only for the meeting for which it is intended.
8. Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other
Exception: It is otherwise provided in the proxy.
trading market.
9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof No proxy shall be valid and effective for a period longer than 5 years at one time.
or in pursuance of an increase in its authorized capital stock under the Corporation Code, when
no expense is incurred, or no commission, compensation or remuneration is paid or given in No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for
connection with the sale or disposition of such securities, and only when the purpose for the account of a customer, to a person other than the customer, without the express written authorization
soliciting, giving or taking of such subscriptions is to comply with the requirements of such law of such customer.
as to the percentage of the capital stock of a corporation which should be subscribed before it
can be registered and duly incorporated, or its authorized capital increased. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the Commission
10. The exchange of securities by the issuer with its existing security holders exclusively, where no may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner
commission or other remuneration is paid or given directly or indirectly for soliciting such within 10 days after such acquisition, for its own account or customer, to the issuer of the security, to the
exchange. Exchange where the security is traded and to the Commission.
11. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any twelve-
month period. Independent Director
12. The sale of securities to any number of the following qualified buyers: Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess
a. Bank; of P50M and having 200 or more holders, at least of 200 of which are holding at least 100 shares of a
b. Registered investment house; class of its equity securities or which has sold a class of equity securities to the public pursuant to an
c. Insurance company; effective registration statement shall have at least 2 independent directors or such independent directors
d. Pension fund or retirement plan maintained by the Government of the Philippines or shall constitute at least 20% of the members of such board, whichever is the lesser.
any political subdivision thereof or managed by a bank or other persons authorized
by the Bangko Sentral to engage in trust functions; Independent director – a person other than an officer or employee of the corporation, its parent or
e. Investment company; or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with
f. Such other person as the Commission may by rule determine as qualified buyers, the exercise of independent judgment in carrying out the responsibilities of a director.
on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under The SEC may exempt corporations from the required independent directors as it did in the rehabilitation
management. of Victorias Milling Co. Inc..
Tender Offer Insider Trading
Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of equities of a 1. Insider:
company through open market purchases or private negotiations. 2. The issuer;
3. A director or officer (or person performing similar functions) of, or a person controlling the
A tender offer is required of any person or group of persons acting in concert who intend to acquire: issuer;
4. A person whose relationship or former relationship to the issuer gives or gave him access to
1. At least 15% of any class of any equity security of a listed corporation or of any class of any material information about the issuer or the security that is not generally available to the public;
equity security of a corporation with assets of at least P50M and having 200 or more 5. A government employee, or director, or officer of an exchange, clearing agency and/or self-
stockholders with at least 100 shares each; or regulatory organization who has access to material information about an issuer or a security
2. At least 30% of such equity over a period of 12 months. that is not generally available to the public; or
Proxies 6. A person who learns such information by a communication from any of the foregoing insiders.
Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to General Rule: An insider may not sell or buy a security of the issuer while in possession of material
be issued by the Commission. information with respect to the issuer or the security that is not generally available to the public.
Requisites for proxies: Exceptions:
1. In writing; 1. The insider proves that the information was not gained from such relationship; or

2. The insider disclosed the information to a party reasonably believed by the insider to possess merged entity to relatives and associates who act as nominees of the person or group of
the information. persons employing the device. They would then look for a broker-dealer who would be willing
to make a market relative to the stocks of the newly merged company; then hire a promoter
Material non-public information – has not been generally disclosed to the public and: who would “hype” the virtues of the company, its products and stocks. The broker-dealer then
generates volume and advance bid price. When the market reaches a high price, they would
1. would likely affect the market price of the security after being disseminated to the public and
“dump” their shareholdings and bail out.
the lapse of a reasonable time for the market to absorb the information; or
7. Boiler room operations – involves an intensive selling campaign through numerous salesmen
2. would be considered by a reasonable person important under the circumstances in determining
by telephone or through direct mail offerings for securities of either a certain type or from a
his course of action whether to buy, sell or hold a security.
specific issuer. Investors are induced to purchase through hard-sell techniques based on
An insider may not communicate material non-public information to any person who will likely buy or sell unfounded predictions and mailing of misleading market letters.
a security of the issuer while in possession of such information. 8. Circulating or dissemination information that the price of any security listed in the Exchange will
or is like to rise or fall (illegal)
Trading by persons who have material non-public information about a tender offer is prohibited. 9. Making false or misleading statements with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading for the purpose of inducing the
Registration of Brokers, Dealers, Salesmen and Associated Persons purchase or sale of any security (illegal).
10. Pegging or fixing or stabilizing the price of security effected either alone or with others through
Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, any series of transactions for the purchase or sale thereof (illegal)
or acting as a salesman for such entities must be registered and authorized as such by the SEC. 11. Short sale – sale of securities which the vendor does not own (illegal unless done in accordance
Broker – a person engaged in the business of buying and selling securities for the account of others. with the rules and regulations of the SEC) (T3 rule).
12. Insider trading – the act of an insider of buying or selling securities of the issuer while in
Dealer – any person who buys and sells securities for his/her own account in the ordinary course of possession of material information with respect thereto that is not generally available to the
business. public (illegal unless exempted).
Salesman - a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and Wash sale and matched order is illegal when used as a means to create a false or misleading appearance
sell securities. of active trading in the security concerned.
A stockbrokerage firm can have no other business than that. Marking the close, painting the tape, squeezing the float, hype and dump, and boiler room operations are
illegal when they are effected to:
Purchase of shares should be coursed through a broker. However a private transaction can be made.
1. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly
Fraudulent Transactions and Other Market Manipulations controlled company by others;
2. Depress their price to induce the sale of a security, whether of the same or of a different class,
Fraudulent and manipulative devices: of the same issuer or of a controlling, controlled company, or common controlled company of
others; and
1. Wash sale – any transaction in a security which involves no change in the beneficial ownership
3. Creates active trading to induce such purchase or sale through said devices or schemes.
thereof.
2. Matched order – an order or orders for the purchase or sale of security with the knowledge that Other fraudulent transactions:
a simultaneous order or orders of substantially the same size, time and price for the sale or
purchase of such security has, or will be entered by or for the same or different parties. 1. Employing any device, scheme, or artifice to defraud;
3. Marking the close – place of purchase or sale order, at or near the close of the trading period. 2. Obtaining money or property by means of any untrue statement of a material fact of any
4. Painting the tape – the activity is made during normal trading hours. It involves buying activity omission to state a material fact necessary in order to make the statements made, in the light
among nominee accounts at increasingly higher or lower prices or causing fictitious reports to of the circumstances under which they were made, not misleading; or
appear on the “ticker tape.” 3. Engaging in any act, transaction, practice or course of business which operates or would
5. Squeezing the float – the part or portion of the issue/security which is outstanding but operate as a fraud or deceit upon any person.
intentionally held by dealers or other persons with a view of reselling them later for profit.
6. Hype and dump – the act employed by a person or group of persons of purchasing the Fraud – akin to bad faith which implies a conscious and intentional design to do a wrongful act for a
outstanding capital stock of a dormant public shell company for a nominal amount and merge dishonest purpose or moral obliquity.
it with their privately held company. They would then gain control of the majority of the stocks
of the merged entity. The shares of the Shell Company are often reverse-split four to one or Settlement Offer
more to reduce the number of shares. Stock certificates are often re-issued in the name of the

At any time, during an investigation or proceeding under this Code, parties being investigated and/or
charged may propose in writing an offer of settlement with the Commission.
Upon receipt of such offer of settlement, the Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public interest.
The Commission may only agree to a settlement offer based on its findings that such settlement is in the
public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision
may be made without a determination of guilt on the part of the person making the offer.
Limitation of Actions
SEC. 62. Limitation of Actions. - 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the
untrue statement or the omission, or, if the action is to enforce a liability created under Subsection
57.1(a), unless brought within two (2) years after the violation upon which it is based. In no event
shall any such action be brought to enforce a liability created under Section 56 or Subsection 57.1
(a) more than five (5) years after the security was bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of
this Code unless brought within two (2) years after the discovery of the facts constituting the cause
of action and within five (5) years after such cause of action accrued.
False registration statement - liable civilly - sec. 56
Ceiling as to amount of damages - triple of the amount involved
limitation of actions - not later than 5 years after the cause of action accrues


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1. SOLE PROPRIETORSHIP CHAPTER II- DEFINITION AND ATTRIBUTES

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ISSUE: Whether the extension of corporate term should be allowed

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Exceptions: POWER TO SELL/DISPOSE ASSETS

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25. May they be effectively denied he right to vote? YES

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