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Bar Operations 2008


Bar Operations Head │ Arianne Reyes

Academics Head │ Henry Aguda

Ryan Balisacan

Subject Head │ Henry Aguda

Tere Licaros

Subject Committee │ Lynn Ramos * Johaira Wahab

Ruby Alberto * Dianne Capco

Information Management │ Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya
Committee [Design & Lay-out] * Ludee Pulido [Documentations] * Linus
Madamba * Des Mayoralgo * Jillian De Dumo * Mike
Ocampo * Abel Maglanque * Edan Marri R. Cañete * Carmie
Rome Cargo

Commercial Law

I. Corporation Law 3
II. Negotiable Instruments Law 88
III. Insurance Code 125
IV. Transportation Law 203
V. Code of Commerce 255
VI. Banking Law 275
VII. Intellectual Property Law 327

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is a mere creature of the law, it can exercise only

CORPORATION LAW such powers as the law may choose to grant it,
either expressly or impliedly

THE CORPORATION CODE OF THE 1.3..Advantages of the Corporate

PHILIPPINES Organizations

(BATAS PAMBANSA BLG. 68) 1) Separate juridical personality – personality

separate and distinct from individual
stockholders and members
Chapter I 2) Limited liability to investors – stockholders are
liable only to the extent of their contribution
INTRODUCTION  General rule: Where a corporation buys all
the shares of another corporation, this will
1. The Corporation as a Legal not operate to dissolve the other
corporation and as the two corporations
still maintain their separate corporate
entities, one will not answer for the debts
1.1 Corporation Defined of the other. [Nell v Pacific Farms (15 SCRA
415), Nov. 23, 1965]
A Corporation is an artificial being created by  Exceptions:
operation of law, having the right of succession and o If there is an express assumption of
the powers, attributes, and properties expressly liabilities;
authorized by law or incident to its existence. (§2) o There is a consolidation or merger;
o If the purchase was in fraud of
A corporation is a creature of:
 A general enabling statute (requirements of o If the purchaser becomes a
the law must be complied with); and continuation of the seller;
 The agreement of individuals who seek to o If there are unpaid subscriptions
incorporate (internal contractual (stockholder is liable for the unpaid
arrangements: articles of incorporation and balance).
3) Free transferability of units of ownership –
stockholders hold their shares as personal
1.2 Four attributes of a corporation
property with rights to dispose, assign or
An artificial being: encumber them as they may desire (§63)

1. a juridical person capable of having rights 4) Centralized Management – all corporate powers
and obligations, w/ a personality separate are exercised by the board of directors (§23)
and distinct from its members or
stockholders 1.4 Partnership vs. Corporation
2. hence, stockholders are not personally
liable for corp. obligations and cannot be 1. Extent of Liability—partners are personally
held liable to third persons who have claims liable for the debts of the partnership;
against the corp. beyond their agreed stockholders cannot be made to personally
contribution to the corporate capital (paid- answer to corporate creditors
up capital and unpaid subscriptions) This is 2. Creation—mere agreement of the parties,
known as the doctrine of limited liability. w/c can be composed of just 2 persons,
gives rise to the juridical personality of the
partnership, whether or not registered w/
Created by operation of law: the SEC (Art. 1768, NCC); a corp., w/ a
1. mere consent of the parties to form a corp. minimum of 5 incorporators, derives its
is not sufficient: the State must give its juridical personality from the certificate
consent either through a special law (in the issued by the SEC (§19)
case of a gov’t corp.) or a general law (for 3. Management—In most cases, all the
a private corp.) owners in a partnership actively participate
2. the general law under w/c a private corp. in management, w/ capacity to bind it by
may be formed or organized is the any usual contract (Art. 1818, NCC); in a
Corporation Code corp., management is centralized in the
board of directors w/c has exclusive power
to bind the corp. (§23)
Has the right of succession: 4. Nature of Relationship—partnership is
1. its continued existence during the term based on mutual trust and confidence
stated in its articles of incorp. cannot be (delectus personae) so that its existence is
affected by any change in the members or precarious because of the facility w/ which
stockholders it can be dissolved (i.e. through the death
2. nor is it affected by the transfer of shares or unilateral act of a partner); a corp. has
by a stockholder to a 3rd person more stability as it enjoys the right of
succession and is not affected by the death
or insolvency of a stockholder; also,
Has the powers, attributes and properties expressly dissolution before a corp.’s term requires a
authorized by law or incident to its existence: as it

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2/3rds vote of the stock (Secs. 118 and detrimental to the interest of the public
119, Corp. Code), always subject to SEC and/or of the stockholders, partners or
intervention members of any corporation, partnership,
5. Powers—a corporation has only such or association;
powers as are expressly granted to it and 2. Controversies arising out of intra-
such as are necessary to the exercise of the corporate, partnership, or association
powers so granted or fro the relations, between and among
accomplishment of its purpose(sec.2, 36 stockholders, members or associates; and
(11), and 45); In a partnership, as long as between, any or all of them and the
the parties have agreed to it, the corporation, partnership, or association of
partnership can perform any act as long as which they are stockholders, members or
it does not violate any law or right of associates, respectively;
others. 3. Controversies in the election or
appointment of directors, trustees,
1.5 Government Regulation of Corporations officers, or managers of corporations,
partnerships, or associations;
By the Legislature
4. Derivative suits; and
Basis: police power of the state (Northern Ry Co. v. 5. Inspection of corporate books.
State of Washington, 300 U.S. 154) and the fact
that corporations owe their existence to the state
Morato v CA (2004)
Manner: by amending or repealing the Corp. Code
or any part thereof Petitioners, stockholders of TF Ventures, Inc., filed
a petition with the SEC against private respondents
for the declaration of nullity of stockholders’ and
NDC v Phil Veterans Bank (1990) directors’ meetings and damages. They assail the
validity of the notice and stockholders’ meeting of
PD 1717 ordered the rehabilitation of the Agrix TF Ventures, Inc. and the organizational meeting of
Group of Companies to be administered by NDC. the members of the BOD. The petition was referred
Sec 4(1) provides that all mortgages and liens to the Securities Investigation and Clearing
presently attached be extinguished, and that all Department (SICD) of the SEC for investigation
accrued obligations shall not bear interest. Among and resolution.
those ordered extinguished was a lien in favor of Meanwhile, one of the private respondents
Phil Veterans Bank over prop in LB. NDC filed to (Matsura, Chairman of the BOD), wrote a letter to
foreclose the mortgage. the Examiners and Appraisers Dept of the SEC,
requesting for an examination of the basis for the
HELD: New Agrix was created by special decree capital increase of T.F. Ventures, Inc. from
even if 1973 Consti mandates that Batasang P10,000,000 to P100,000,000, alleging the
Pambansa, cannot, except by general law, provide commission of devices, schemes and criminal acts.
for formation, organization and regulation of The letter was forwarded by the SEC to the
private corps, unless for GOCCs. Prosecution and Enforcement Dept (PED).
NDC was only mandated to extend loan and to Petitioners contended that with the filing of the
manage company. New Agrix was entirely private letter-petition with the PED, Matsura resorted to
and should have been organized under Corp Law. forum shopping.

HELD: Matsura is not guilty of forum shopping.

There is no identity of causes of action or identity
By the SEC of rights asserted by the parties in both cases. In
this case, SEC Case is pending before the SICD,
Basis: Sec. 3, PD 902-A and Sec 5.1(a), RA8799. which has exclusive jurisdiction to investigate and
The Commission shall have absolute jurisdiction, resolve intra-corporate disputes. The respondent’s
supervision and control over all corporations, letter-petition, on the other hand, was referred by
partnerships or associations, who are the grantees the SEC to the PED and is pending before the
of primary franchises and/or licenses or permits Prosecution and Enforcement Department of the
granted by the government, to operate in the SEC.
Philippines; xxx
Section 8 of P.D. No. 902-A, as amended,
Note: Under Sec. 5.2 of RA8799, SEC’s jurisdiction
SECTION 8. The Prosecution and
over all cases enumerated under Sec. 5, PD 902-A
Enforcement Department shall have,
was transferred to the Regional Trial Court which
subject to the Commission’s control and
has jurisdiction over the principal office of the
supervision, the exclusive authority to
corporation, partnership or association concerned.
investigate, on complaint or motu propio,
any act or omission of the Board of
Directors/Trustees of corporations, or of
According to the Interim Rules of Procedure for
partnerships, or other associations, or of
Intra-Corporate Controversies (A.M. No. 01-2-04-
their stockholders, officers or partners,
SC), which took effect on April 1, 2001, the
including any fraudulent devices, schemes
Regional Trial Court has jurisdiction over cases
or representations, in violation of any law
involving the following:
or rules and regulations administered and
1. Devices or schemes employed by, or any enforced by the Commission; to file and
act of, the BOD, business associates, prosecute in accordance with law and
officers or partners, amounting to fraud or rules and regulations issued by the
misrepresentation which may be Commission and in appropriate cases, the

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corresponding criminal or civil case before cease-and-desist orders to prevent fraud or injury
the Commission or the proper court or to the investing public; (g) the compulsion of the
body upon prima facie finding of violation officers of any registered corporation or association
of any laws or rules and regulations to call meetings of stockholders or members
administered and enforced by the thereof under its supervision; and, (h) the exercise
Commission; and to perform such other of such other powers as may be provided by law as
powers and functions as may be provided well as those which may be implied from, or which
by law or duly delegated to it by the are necessary or incidental to the carrying out of,
Commission. the express powers granted the Commission to
achieve the objectives and purposes of these laws.
Prosecution under this Decree or any
Act, Law, Rules and Regulations enforced However, Section 8 of P.D. No. 902-A, as
and administered by the Commission shall amended, has already been repealed, as provided
be without prejudice to any liability for for in Section 76 of RA 8799.
violation of any provision of the Revised
Penal Code. Thus, under the new law, the PED ceased to exist.
However, the SEC retains jurisdiction to continue
Under the said provision, the SEC, through the with its investigation of the letter-petition of
PED, is vested with authority to investigate, either respondent Matsuura.
motu proprio or upon complaint, any act or
omission, fraudulent schemes, devices or When RA 8799 took effect, the SEC case had not
misrepresentations in violation of any law, rules or yet been submitted for decision by the SEC.
regulations, administered and enforced by the SEC, Hence, the said case should be transferred to the
and to file and prosecute appropriate civil or RTC of Makati City, to be raffled to the appropriate
criminal cases upon a prima facie finding of branch thereof assigned to try such cases. Despite
violation of such laws, rules or regulations. The the repeal of Section 8 of P.D. No. 902-A and the
petitioners, in the SEC case, sought the nullification abolition of the PED, the SEC may continue with its
of the Notice for the Annual Stockholders’ Meeting, investigation of the letter-petition of respondent
the stockholders’ meeting and organizational Matsuura.
meeting held on September 22, 1997, on their
claim that the holding of the same was in violation 
of the Corporation Code and the By-Laws of the  The Sandiganbayan has jurisdiction over
petitioner corporation. In his answer to the presidents, directors or trustees, or managers
petition, the respondent asserted the validity of the of government-owned or controlled
said meeting and prayed, by way of counterclaim, corporations organized and incorporated under
for the nullification of the October 20, 1997 the Corporation Code for purposes of the
meeting of the petitioners, and for damages. In provisions of RA 3019, otherwise known as the
contrast, the respondent alleged in his letter- Anti-Graft and Corrupt Practices Act. Basis: Sec
petition in the PED case that the petitioners were 4, RA 8249 (People v Sandiganbayan, 2005)
engaged in fraudulent schemes, devices or Union Bank v. Danilo Concepcion
misrepresentations in violation of the law, and SEC GR No. 160727 June 26, 2007
rules and regulations. The complainant Matsuura EYCO Group of Companies filed a petition for
asked the PED to investigate the complaint and file suspension of payment, appointment of
the corresponding administrative, civil or criminal receiver/committee and approval of
cases before the SEC, the proper court or body, for rehabilitation plan with alternative prayer for
violation of the laws, rules or regulations liquidation and dissolution of corporations.
administered and enforced by the SEC. The fact Suspension was granted by the SEC Hearing
that the SICD has not yet resolved the SEC case Panel. Union Bank became part of the
does not constitute a bar to the resolution of the ManCom which represented the creditor
PED case. The proceedings in the said cases are banks but later on broke away without
independent and separate of each other and may notifying the group. It filed a slew of cases
thus proceed separately. with the Makati RTC and applied for
preliminary attachment. Union Bank filed a
Note that while this case was pending in the SC, RA motion to dismiss the case pending with the
8799, Securities Regulation Code, took effect on SEC, and when the SEC issued an order
August 8, 2000. Section 5.2 of the law provides appointing regular members of the ManCom,
that SEC’s jurisdiction over all cases under Sec 5 of Union Bank filed a petition for certiorari with
PD 902-A is transferred to the RTCs. the CA seeking the nullification of the SEC
Order and again assailing the jurisdiction of
Among the powers and functions of the SEC which
the SEC. It alleged that the jurisdiction over a
were transferred to the RTC include the following:
basic petition for suspension of payments was
(a) jurisdiction and supervision over all
with the RTC under Act No. 1956 (Insolvency
corporations, partnerships or associations who are
Law). The CA and later on the SC ruled that
the grantees of primary franchises and/or a license
the jurisdiction is with the SEC pursuant to PD
or permit issued by the Government; (b) the
902-A. The proceeding in the RTC was thus
approval, rejection, suspension, revocation or
suspended. Concepcion was later appointed as
requirement for registration statements, and
liquidator by the SEC en banc and he filed a
registration and licensing applications; (c) the
motion to intervene and set aside order of
regulation, investigation or supervision of the
attachment in the said RTC case. The SEC en
activities of persons to ensure compliance; (d) the
banc approved of the liquidation plan that
supervision, monitoring, suspension or take over
Concepcion submitted but his motion to
the activities of exchanges, clearing agencies and
intervene with the RTC was denied for lack of
other SROs; (e) the imposition of sanctions for the
standing. The RTC also declared EYCO in
violation of laws and the rules, regulations and
default in the said case, proceeded to receive
orders issued pursuant thereto; (f) the issuance of

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evidence ex parte and later rendered partial case may pursue. Thus, petitioner has no right
judgment ordering EYCO to pay P400M to to be notified of the preliminary report by the
Union Bank. Concepcion appealed the decision Financial Analysis and Audit Division of the
and was sustained by the CA, which modified SEC.
the partial judgment of the RTC. Union Bank
now comes to the SC assailing the CA’s order. Petitioner’s claim that the SEC’s referral of the
petition for rehabilitation to the said division
HELD: Denied. CA Order AFFIRMED. What is violated its right to due process deserves no
being assailed is the validity of the consideration. Petitioner’s right to
appointment of Concepcion as liquidator and administrative due process only entitles it to
his standing to intervene in the RTC case. an opportunity to be heard and to a decision
Albeit jurisdiction over a petition to declare a based on substantial evidence. No more, no
corporation in a state of insolvency strictly lies less.
with regular courts, the SEC possessed,
during the period material, ample power
under P.D. No. 902-A as amended, to declare
a corporation insolvent as an incident of and
Chapter II
in continuation of its already acquired
jurisdiction over the petition to be declared in CLASSIFICATION OF PRIVATE
the state of suspension of payments in the CORPORATIONS
two instances provided in Section 5(d)
Said Section 5(d) vests the SEC with exclusive
1. General Classification under §3:
and original jurisdiction over petitions for
suspension of payments which may either be:
(a) a simple petition for suspension of 1.1 Stock corporation
payments based on the provisions of the
Insolvency Law, i.e., the petitioning  One which has a capital stock divided into
corporation has sufficient assets to cover all shares and is authorized to distribute to the
its debts, but foresees the impossibility of holders of such shares dividends or
meeting the obligations as they fall due, or (b) allotments of the surplus profits (i.e.,
a similar petition filed by an insolvent retained earnings on the basis of the shares
corporation accompanied by a prayer for the held (§3)
creation of a management committee and/or  It is organized for profit.
rehabilitation receiver based on the provisions  The governing body of a stock corporation
of P.D. No. 902-A, as amended by P.D. No. is usually the Board of Directors (Except in
1758. The petition of EYCO in this case was a certain instances for close corporations)
mix of both situations. EYCO’s petition for
suspension for payment was, for all intents
and purposes, still pending with the SEC as of 1.2 Non-stock corporation
June 30, 2000. Accordingly, the SEC’s
jurisdiction thereon, by the express terms of  All other corporations are non-stock
R.A. No. 8999, still subsists “until [the corporations (§3)
suspension of payment case and its incidents  One where no part of the income is
are] finally disposed.” distributable as dividends to its members,
trustees, or officers, subject to the
provisions of the Code on dissolution.
Provided that any profit which a non-stock
Viva Footwear v. SEC
corporation may obtain as an incident to its
GR No. 163235 April 27, 2007
operation shall whenever necessary or
Petitioner Viva Footwear Manufacturing
proper be used for the furtherance of the
Corporation is a domestic corporation engaged
purpose or purposes for which the
in the manufacture of rubber footwear.
corporation was organized. (§87)
Respondents Philippine National Bank (PNB)
 Not organized for profit.
and Philippine Bank of Communications
 Its governing body is usually the Board of
(PBCom) are two of petitioner’s creditors. The
SEC, upon petition by Viva, declared the latter
to be in a state of suspension of payments.
The petition for rehabilitation was eventually CIR vs. Club Filipino, Inc de Cebu (1962)
dismissed because it was not viable to do so
as it was not financially sound. Viva now Club Filipino is a civic corporation organized to
claims that its right to due process was develop and cultivate sport of all class and
violated when the SEC referred the denomination for the healthful recreation and
rehabilitation plan to the Financial Analysis entertainment of its SH and members. Its AOI and
and Audit Division without notice to petitioner. by-laws are silent as to dividends and their
distribution but it was provided that upon its
HELD: NO MERIT. DISMISSED. In dissolution, the Club’s remaining assets after
administrative proceedings, due process paying debts shall be donated to a charitable Phil.
simply means an opportunity to seek a Institution.
reconsideration of the order complained of; it
cannot be fully equated to due process in its HELD: Club Filipino is a non-stock corporation.
strict jurisprudential sense. It is the According to Section 3 of the Corporation Code,
administrative order, not the preliminary there are two elements for a stock corporation to
report, which is the basis of any further exist: 1) capital stock divided into shares, and 2)
remedies the losing party in an administrative an authority to distribute to the holders of such

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shares, dividends or allotments of the surplus 6. Eleemosynary corporation – One organized for
profits on the basis of shares held. Nowhere in a charitable purpose
Club Filipino’s AOI or BL could be found an 7. Domestic corporation – A domestic corporation
authority for the distribution of its dividends or is one formed, organized, or existing under the
surplus profits. laws of the Philippines
8. Foreign corporation – One formed, organized or
existing under any laws other than those of the
Philippines and whose law allows Filipino
2. Other kinds of corporations citizens and corporations to do business in its
own country and state. (§123)
1. Public corporation - One formed or organized 9. Corporation created by special laws or charter
for the government or a particular state. Its (§4)
purpose is for the general good and welfare.  Corporations which are governed primarily
2. Private corporation - One formed for some by the provisions of the special law or
private purpose, benefit, aim or end charter creating them (§4)
3. Close corporation (§96) – One whose Articles  Corporation Code is suppletory in so far as
of Incorporation provide that: they are applicable (Ibid)
a) all of the corporation’s issued stock of all 10. Subsidiary corporation – one in which control,
classes, exclusive of treasury shares, shall usually in the form of ownership of majority of
be held of record by not more that a its shares, is in another corporation (the parent
specified number of persons, not exceeding corporation)
20 11. Parent corporation – its control lies in its power
b) all of the issued stock of all classes shall be to elect the subsidiary’s directors thus
subject to one or more specified restrictions controlling its management policies
on transfer permitted by the Code
c) the corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class
Chapter III
d) at least 2/3 of its voting stock must not be
owned or controlled by another corporation FORMATION AND ORGANIZATION OF
which is not a close CORPORATION
e) must not be a mining or oil company, stock
exchange, bank, insurance company, public 1. Who May Form a Corporation
utility, educational institution or corporation
vested with public interest 1.1 Incorporators
4. Educational corporation (§106) - Those
corporations which are organized for Any number of natural persons not less than five
educational purposes. This type of corporation (5) but not more than fifteen (15), all of legal age
is governed by Section 106 of the Corporation and a majority of whom are residents of the
Code Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the
incorporators of a stock corporation must own or
5. Religious sole and aggregate (§110, 111 (2), be a subscriber to at least one (1) share of capital
123) stock of the corporation. (§10)
 A corporation sole is one formed for the
purpose of administering and managing, as 1) Natural persons
trustee, the affairs, property and  Corporations and partnerships cannot be
temporalities of any religious denomination, incorporators, but may be stockholders.
sect, or church, by the chief archbishop, This prevents “layering” which may harbour
bishop, priest, rabbi, or other presiding elder criminals and will make the corporation a
of such religious denomination, sect or tool for defrauding the public.
church. (§110)  Incorporators are those stockholders or
 The corporation sole is an exception to the members mentioned in the articles as
general rule that at least five (5) members originally forming and composing the
are required for a corporation to exist. corporation and who are signatories
Here, there is only one (1) incorporator. thereof.
This is applicable to religious communities  Corporators are stockholders or members
the regulations of which provide that the who join the corporation after its
community’s properties are to be placed in incorporation.
the name of the head and administered by  Original subscribers are persons whose
him. (§111(2)) names are mentioned in the Articles, but
 A corporation aggregate is a religious not as incorporators. They do not sign the
corporation incorporated by more than one Articles.
2) At least five incorporators but not more than
 They must sign the articles of
 GENUINE INTEREST: Each incorporator
must own or subscribe to at least one
share of stock of the corporation.

3) Majority of the incorporators must be residents

of the Philippines

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 General rule: need not be a citizen  “Promoter” is a person who, acting alone or
 Exceptions: public utilities (Art XII, Sec 11. with others, takes initiative in founding and
Consti), schools (Art XIV, Sec 4(2), Consti), organizing the business or enterprise of the
banks (General Banking Act), retail trade issuer and receives consideration therefor.1
(RA 1180), savings and loan associations
(RA 3799), investment houses (Sec 5, PD 3.2. DRAFTING OF ARTICLES OF
129), and other areas of investment as INCORPORATION
congress may by law provide (Art XII, Sec.
10, Consti). These constitute the charter of the corporation
 Even though there are no legal restrictions
as to alien ownership, where > 40% of the 1. CORPORATE NAME
outstanding capital stock will be owned and  No corporate name may be allowed by
controlled by aliens, must get written the SEC if the proposed name is
authorization from BOI before it can identical or deceptively or confusingly
register with SEC. (purpose is to enable similar to that of any existing
BOI to determine whether such corporation corporation or to any other name
wherein aliens own a substantial number of already protected by law or is patently
shares would contribute to the sound and deceptive, confusing or contrary to
balanced development of the national existing laws. (§18)
economy)  A corporate name is essential to the
corporation’s acquisition of juridical
4) Incorporators must be of legal age personality
 Change of corporate name shall require
the approval of the SEC. SEC will issue
2. Conditions Precedent for Incorporation amended certificate of incorporation
under the amended name (Ibid)
2.1 Consent or agreement of at least 5 natural  A change in corporate name involves
persons with respect to: an amendment of the Articles, which
requires a majority vote of the board
1. Compliance with the Corp Code; and the vote or written assent of
2. Contribution/pooling of resources – stockholders holding 2/3 of the
delivered to and held in trust by a outstanding capital stock (§16) Note:
designated trustee; Does not include the non-voting stock.
3. Governance of:  It is the sole means of identifying the
 Contributions; corporation from its members or
 Distribution of contributions; stockholders, and from other entities
 Division of profits/sharing of and corporations
losses;  Amendment in a corp’s AOI changing
 Pursuit of purpose/objectives; its corporate name does not extinguish
 Corporate combination; and the personality of the original
 Transactions with third parties; corporation. The corp upon such
and change of its name, is in no sense a
4. Continuity or termination of existence. new entity, nor the successor of the
original corp. it is the same corp with a
2.2 Mandatory Requirements of the Code: different name, and its character is not
 changed. Consequently, the “new”
1. Execution of constitutive documents corp is still liable for the debts and
(AOI, By-laws); obligations of the “old” corp (Republic
2. Payment/delivery of contributions – Planters Bank v CA, 1992)
delivered to and held in trust by a  This is essential because through it,
designated trustee; corporation can sue and be sued
3. Submission of constitutive documents  SEC may allow incorporators to reserve
to SEC for review or evaluation; and the name for a particular period
4. SEC action – issuance of certificate of  To distinguish from partnerships and
registration. other business orgs, the law requires
corporations to append the word
Note that once contributions are made before “Corporation” or “Inc” to its chosen
incorporation, such subscriptions are irrevocable for name
a period of 6 months (general rule).  A corporation should transact business
 Exceptions: only through its chosen name
1. When all of the other subscribers consent
to the revocation; or Philips Export BV (PEBV) v CA (1992)
2. When the incorporation fails to materialize
(Sec. 61) PEBV is a foreign corp under the law of
Netherlands, although not engaged in business in
3. Steps in the formation of a the Phils. It is the registered owner of the Philips
corporation trademark, and owns two local companies with the
name Philips also.
PEBV asked the cancellation of the word Philips
 The “promoter” brings together persons from Standard Philips, a local manufacturer,
interested in the business enterprise and
sets in motion the machinery that leads to 1
Sec. 3.10, The Securities Regulation Code (RA 8799)
the formation of the corporation.

100% UP LAW UP BAROPS 2008 Page 8 of 351


alleging infringement of its exclusive right to use entering is one with the general
the same. SEC and CA ruled for Std Philips, saying authority of the management
there was no confusion (unlike in Converse case).  Under Sec 14(2) a corporation can
have as many purposes as it wants
Held: provided:
o AOI specify the corporation’s
Corp’s right to use its corp and trade name is a
primary and secondary purposes
property right, a right in rem.
which need not be related to each
General Rule: Corp must have a name by which it other
is to sue and be sued and do all legal acts. o Corporation for which special
provisions are made can only have
Accdg to Corp Code, no corp name may be allowed
the purpose peculiar to them
1) if complainant corp acquired a prior right o Purposes must be lawful
over name and  If purpose is lawful, SEC is not
2) proposed name is authorized to inquire whether
a) identical or corporation has hidden motives and
b) deceptively or confusingly similar or mandamus will lie to compel it to issue
c) patently deceptive, confusing or certificate
contrary to existing law  PD 902-A, Sec 6(h) gives SEC, after
PEBV’s local companies were incorporated 26 yrs consultation with BOI, NEDA, or other
before Std Philips. appropriate government agency, the
power to refuse or deny the application
TEST OF CONFUSING SIMILARITY IN CORP NAMES: for registration of any corporation if its
Whether similarity is such as to mislead a person establishment, organization, operation
using ordinary care and discrimination will not be consistent with the declared
Philips is the dominant word. No need to prove that national economic policies
there was actual confusion, as long as probable or  A corporation may not be formed for
likely to occur. Std Philips’ purpose, as per its the purpose of practicing a profession
articles of incorp also includes sale and
manufacture of electrical products, which is PEBV’s 3. PRINCIPAL OFFICE
line of business. Even if SEC guidelines mandate  Must be within the Philippines (§14 (3))
that a corp could add 2 other words to proposed  AOI must specify both province or city
name, only one word “Std” was added. “Corp” not or town where it is located
counted.  Important in (1) determining venue in
an action by or against the corporation
Note: A prior user can consent to the use of its (2) determining the province where a
name chattel mortgage of shares should be
registered (Chua Gan v Samahang
2. PURPOSE CLAUSE Magsasaka)
 Where a corporation has more than 1  The statement of the principal office
purpose, the AOI shall state which is establishes the residence of the
the primary purpose and which is corporation
secondary (§14(2))
 A non-stock corporation may not 4. TERM OF EXISTENCE
include those which contradict or  When a corporation is organized, the
change its nature (Ibid) maximum life that can be stipulated in
 SEC can reject or disapprove the AOI if the AOI is 50 years. But during the life
the stated purpose is patently of the corporation, the life or term can
unconstitutional, illegal, immoral, be extended to another 50 years at any
contrary to government rules and one instance (§11)
regulations.(§17 (2))  But such extension of the life a
 Purpose clause confers as well as limits corporation cannot be made earlier
the powers which a corporation may than 5 years before the end of its
exercise original term. Exception: where there
 A corporation only has such powers as are justifiable reasons for an earlier
are expressly granted to it by law and extension as may be determined by the
by its AOI, those which may be SEC. (Ibid)
incidental to such conferred powers  Exception: Condominium corporations
(§45), those reasonably necessary to can be organized for a period of 200
accomplish its purposes (Section 36 years
(11), and those which may be incident  Extension involves an amendment of
to its existence (§2). the AOI. Thus, the requisites under
 Reasons for purpose clause: §16 must be complied with. Any
o so that a stockholder contemplating dissenting stockholder may exercise his
an investment will know what lines appraisal right (§37).
of business his money is to be
o so that management will know NUMBER AND QUALIFICATIONS
what lines of business it is  “Directors” is used for stock
authorized to act corporations, while “trustees” is used
o so that anyone who transacts with for stock corporations.
the corporation may ascertain  GENERAL RULE: not less than 5 but
whether a transaction he is not more than 15

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i) Non-stock corporations – articles or o It is the amount of the capital stock

by-laws may provide for more than subscribed whether fully paid or not. It
15 trustees (§92). connotes an original subscription
 Exception: Educational non- contract for the acquisition by a
stock corporations – trustees subscriber of unissued shares in a
may not exceed 15. However, corporation (§60,61)
the number of trustees shall be o At least 25% of authorized capital stock
in multiples of 5 (§108) must be subscribed (§13)
ii) Merger of banks – new board is o Subscription – mutual agreement of the
allowed to have such number of subscribers to take and pay for the
directors as is equivalent to the stock of a corporation
total number of directors of the o Pre-incorporation subscription –
merging banks, though it may amount which each incorporator or
exceed fifteen (General Banking stockholder agrees to contribute to a
Act, as amended). proposed corporation
 Incorporators and directors of a stock
corporation must own at least one Outstanding capital stock
share of stock of the corporation. In a o It is the portion of the capital stock
non-stock corporation, a trustee must which is issued and held by persons
be a member thereof. other than the corporation itself. Under
 In nationalized industries, aliens may §137, it is the total shares of stock
be directors of a corporation only in issued under the binding subscription
such number as may be proportional to agreements to subscribers or
their allowable ownership of shares,2 stockholders, whether or not fully or
e.g. if the articles provide for 10 partially paid, except treasury shares.
directors, and alien ownership is limited It is thus broader than “subscribed”
to 40% of the capital, then aliens may capital stock
occupy a maximum of 4 board seats. o The terms “subscribed capital stock”
and “issued” or “outstanding” capital
6. CAPITAL STOCK; SUBSCRIPTION; stock are used synonymously since
PAYMENT subscribed capital stock, as
distinguished from the certificate of
Capital stock stock, can be issued even if not fully
o Capital stock is the amount fixed in the paid. But while every subscribed share
AOI, to be subscribed and paid in or (assuming there is a binding
secured to be paid in by the subscription agreement) is
shareholders of a corporation, either in “outstanding,” an issued share may not
money or property, labor or services, at have the status of outstanding share
the organization of the corporation or (as in the case of treasury shares)
afterwards and upon which is to
conduct its operation. (Fletcher) Paid-up capital
o The capital stock limits the maximum o 25% of subscribed capital stock must
amount or number of shares that may be paid-up for the purpose of
be issued by the corporation without incorporation, but in no case shall be
formal amendment of the AOI. It less than P 5000 (§13)
remains the same even though the o Portion of the authorized capital stock
actual value of the shares as which has been subscribed and paid.
determined by the assets of the Not all funds or assets received by the
corporation is diminished or increased. corporation can be considered paid-up
capital, for this term has a technical
Authorized capital stock signification in corporation law. Such
o ACS is synonymous with capital stock must from part of the authorized
where the shares of the corporation capital stock of the corporation,
have par value. If the shares of stock subscribed and then actually paid-up.
have no par value, the corporation has [MSCI-NACUSIP Local Chapter v.
no ACS, but it has capital stock the National Wages and Productivity
amount of which is not specified in the Commission]
AOI as it cannot be determined until all o Must be in the form of (a) cash
the shares have been issued. In this deposited in a bank or (b) property
case, the two terms are not which may be used or actually needed
synonymous (De Leon) by the corporation in its operations
o State the authorized capital stock in o Capital can’t consist or be invested in
lawful money of the Philippines, the money market placement
number of shares into which the ACS is o Corporations with more stringent
divided, and the par value of each par capital requirements:
value shares (§14(8), §15(7))  Insurance corporations – must
o Stock corporations are not required to have paid-up capital stock of at
have any minimum authorized capital least P 5 M (Insurance Code, Sec
stock except when special laws provide 188)
otherwise (§12)  Banks – monetary board fixes
minimum paid-up capital
Subscribed capital stock requirements for the different
classes of banks (Central Bank Act
Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD 716. and General Banking Act).

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a) banks, banking and quasi-banking

Unissued capital stock institutions,
o It is that portion of the capital stock b) building and loan associations,
that is not issued or subscribed. It c) trust companies and other financial
does not vote and draws no dividends intermediaries,
d) insurance companies,
Legal capital e) public utilities,
o It is the amount equal to the aggregate f) educational institutions, and
par vale and/or issued value of the g) other corporations governed by special
outstanding capital stock. When par laws (§17)
value shares are issued above par, the  Non-stock corporations that intend to solicit
premium or excess is not to be gifts, donations, and contributions from the
considered as part of the legal capital public at large for the benefit of an
(Cf§43). In the case of no par value indefinite number of persons must secure a
shares, the entire consideration Certificate of Registration from the
received forms part of legal capital and Insurance Commissioner.
shall not be available for distribution of  Failure to file AOI will prevent due
dividends (§6, par 3) incorporation of the proposed corporation
and will not give rise to its juridical
Capital personality (§19). It will not even be a de
o It is used broadly to indicate the entire facto corporation (§20)
property or assets of the corporation. 1. Unless the certificate of
It includes the amount invested by the incorporation has been issued,
stockholders plus the undistributed there can be no de facto
earnings less losses and expenses. corporation (Hall vs. Piccio, 1950)
o In the strict sense, it refers to that 2. Campos—this statement should not
portion of the net assets paid by the be taken as an absolute principle,
stockholders as consideration for the but in the light of the
shares issued to them, which is utilized circumstances before the court.
for the prosecution of the business of
the corporation (De Leon) 3.4 EXAMINATION OF ARTICLES BY SEC;
The person elected by the subscribers as  The SEC may reject any AOI thereto if the
Treasurer of the corporation at the time of same is not in compliance with the
the incorporation, who is named as such in requirements of this Code (§17)
the AOI and who has been authorized to  The SEC shall give the incorporators a
receive for and in the name and for the reasonable time within which to correct or
benefit of the corporation, all subscriptions, modify the objectionable portions of the
fees, contributions or donations paid or articles or amendment. (§ 17)
given by the subscribers or members

The sworn statement of the Treasurer
elected by the subscribers stating at least 4. Grounds for disapproving articles of
25% of the authorized capital stock of the incorporation (§17)
corporation has been subscribed and that
at least 25% of the total subscription has a) AOI does not substantially the form
been fully paid to him in actual cash and/or prescribed
property, the fair valuation of which is b) Purpose is patently unconstitutional, illegal,
equal to at least 25% of the said immoral, contrary to government rules and
subscription, such paid-up capital being not regulations
less than 5,000.00 (§14) c) Treasurer’s Affidavit concerning the amount
of capital subscribed and or paid is false
9. OTHER MATTERS d) Percentage requirement of ownership of
 Classes of shares, as well as the Filipino citizens as required by the
preferences or restrictions on any such Constitution not complied with.
class (§6)  After consulting with BOI, NEDA,
 Denial or restriction of pre-emptive appropriate government agency, SEC may
right (§39) deny registration of any corporation if its
 Prohibition against transfer of stock establishment will not be consistent with
which would reduce stock ownership to declared national policies
less than the required minimum in the  Certificate of authority required of the
case of a nationalized business or following:
activity (§15(11)) a) Insurance Companies- Insurance
3.3. FILING OF ARTICLES AND PAYMENT OF b) Banks, Building and Loan
FEES Associations, Finance Companies-
Monetary Board
 Corporations governed by special laws have c) Educational Institutions- Secretary
to submit a recommendation from the of Education
appropriate government agency to the d) Public Utilities- Board of Power,
effect that such articles are in accordance Board of Transportation, National
with law.

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Telecommunication Commission, the exercise of its corporate powers are a nullity.

etc.. The existence of EO 386 is an “operative fact which
 Remedy in case of rejection of AOI: by cannot be justly ignored.”
petition for review in accordance with the
Rules of Court (§6, last par., PD 902-A)

ISSUANCE OF CERTIFICATE OF INCORPORATION b) User of corporate powers – there has been

some user of corporate powers, the
 A private corporation formed or organized transaction of business in some way as if it
under this Code commences to have were a corporation
corporate existence and juridical  not necessary that dealings between
personality and is deemed incorporated the parties should have been on a
from the date the Securities and Exchange corporate basis
Commission issues a certificate of  election of directors and officers would
incorporation under its official seal (§19) not be user of corporate powers since
 Thereupon the incorporators, these acts are just indicative of a mere
stockholders/members and their successors association
shall constitute a body politic and corporate  taking subscriptions to and issuing
under the name stated in the articles of shares of stock, buying lot,
incorporation for the period of time constructing, and leasing a building on
mentioned therein, unless said period is it will constitute sufficient user of
extended or the corporation is sooner corporate powers to constitute a de
dissolved in accordance with law. (Ibid) facto corporation
 If incorporators are found guilty of fraud in c) Substantial or Colorable compliance - there
procuring Certificate of Incorporation, SEC has been colorable compliance with legal
may revoke the same after proper notice requirements in GOOD FAITH
and hearing (§6(I), PD 902-A)  while the corporation is still in the
 process of incorporation, it is quite
clear that there can be no substantial
5. Defective Attempts to Incorporate or colorable compliance and therefore it
cannot be at such a stage a de facto
5.1 DE FACTO CORPORATIONS – a corporation corporation
where there exists a flaw in its incorporation  A corporation which has not yet been
issued a certificate of incorporation
Requisites of a de facto corporation cannot claim “in good faith” to be a
(Ballantine as cited in Campos) corporation. Thus, it cannot be a de
facto corporation [Hall v. Piccio 86 Phil
a) Valid statute – there is an apparently valid 603]
statue under which the corporation with its Co
purposes may be formed. There can be no  Compliance with the above conditions
de facto corporation under a statue would make the corporation de facto whose
subsequently declared unconstitutional incorporation cannot be attacked
collaterally. It may only be attacked
directly by the State in a quo warranto
Municipality of Malabang vs. Benito (1969) proceeding (§20)
 De facto doctrine grew out of the necessity
The municipality of Balabagan was created by EO to promote the security of business
386 of President Garcia out of barrios and sitios of transactions and to eliminate quibbling over
Malabang. The petitioners seek to nullify the EO. irregularities
They rely on the Pelaez ruling that the President’s  The de facto doctrine is the exception to
power to create municipalities under Sec. 68 of the the general rule that when there is no corp
Administrative Code is unconstitutional. entity to talk about, it is the natural
Respondents argue that the Pelaez ruling is persons who are liable
inapplicable because Balabagan is a de facto  Where corporations are neither de jure or
corporation. de facto, associates may be held liable as
partners unless estoppel applies (§ 21)
HELD: The Municipality of Balabagan was not a de  No articles and no by-laws: no de facto
facto corporation. The color of authority requisite corp. There’s no colorable compliance at all
to a de facto municipal corporation may be an  De facto corp is like a de jure corp, has all
unconstitutional law, valid on its face, which has the powers and liabilities of de facto corp
either:  THE ONLY DIFF: its incorporation can be
a. Been upheld for a time by the courts; attacked by State in quo warranto action
or Ratio: Only State can give it legal
b. Not yet been declared void; provided existence, so only the State is wronged
that a warrant for its creation can be
found in some other valid law or in the
recognition of its potential existence in 5.2 CORPORATION BY ESTOPPEL
the general constitution of the state.
The mere fact that Balabagan was organized before  It is a status acquired by persons who
the statute was invalidated cannot make it a de assume to act as a corporation knowing it
facto corporation because, independently of the to be without authority. Such persons shall
Administrative Code, there is no other valid statute be liable as general partners for all debts,
to give color of authority to its creation. This liabilities and damages incurred or arising
doesn’t mean that the acts done by Balabagan in as a result thereof. (§21)

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 When such ostensible corporation is sued to:

on any transaction entered by it as a o a third party - a 3rd party who had dealt with
corporation or any tort committed by it as an unincorporated association as a
such, it shall not be allowed to use as a corporation may be precluded from denying
defense as lack of corporate personality its corporate existence on a suit brought by
(§21) the alleged corporation on the contract even if
 One who assumes an obligation to an he did not know of the defective
ostensible corporation as such, cannot incorporation. 3rd party is considered to have
resist performance thereof on the ground admitted the existence of a corporation by the
that there was in fact no corporation (§21) fact that he dealt with it as a corporation
 Note that an unincorporated corporation is o the alleged corporation - when a third person
not barred from transacting business before has entered into a contract with an
the commencement of corporate existence. association which represented itself to be a
Limit: personal liability. Complication: when corporation, the association is estopped from
the corporation did not come about denying its corporate capacity in a suit against
 Against whom will estoppel lie? Who it by such 3rd person. It cannot allege lack of
committed the active misrepresentation? personality to be sued to evade responsibility
 Where a person convinces other parties to on a contract it has entered into and by virtue
invest money for the formation of a of which it has received advantages and
corporation, but which has never duly benefits
incorporated, there can be no resulting o associates as partners - when business
partnership among them, and the mere associates fraudulently misrepresents the
passive investors cannot be held liable to existence of a corporation and the 3rd party
share in the losses suffered by the business contacts with the association as a corporation
enterprise (Pioneer Surety v CA, 1989) without knowing the serious defects in its
 When applicable: incorporation, such 3rd party may sue
1. Persons assuming to act as corp are associates as general partners. Where both
liable as gen partners; the associates and the 3rd party were ignorant
2. 3rd party who had dealt with an of the defective incoroporation, 3rd party cant
unincorporated association as a corp hold the associates liable since they were in
may be precluded from denying its good faith. If 3rd party knew of defects in
corporate existence on a suit brought incorporation and still dealt with the
by the alleged corp – person deemed to corporation, he must be deemed to have
have admitted the existence of the corp chosen to deal with the corporation as such
3. alleged corp that has entered into a and should be limited in his recovery to the
contract by virtue of which it has corporate assets.
received advantages and benefits
 However, if business associates
fraudulently misrepresent the existence of 6. Internal Organization of the
a corp, 3rd party can sue them as gen
partners. 3rd party is not estopped from
asserting their liability because he had
recognized the corporation’s existence.
Ratio: They cannot profit by their own
1. Definition of by-laws
 These are regulations, ordinances, rules
 Hence, if associates did not know of thee
or laws adopted by an association or
defective incorp, they can’t be personally
corporation or the like for its internal
held liable by innocent 3rd party (Cf
governance. By- laws define the rights
Salvaierra v Garlitos, 1958)
and obligations of various officers,
 But if 3rd party knew of defects of incorp,
persons or groups within the corporate
he is estopped from recovering from
structure and provide rules for routine
individual associates, but must recover only
matters such as calling meetings.
from corp assets
 Every corporation under this code shall
have the power and capacity: to adopt
Lozano vs. delos Santos (1997) by-laws not contrary to law, morals, or
public policy, and to amend or repeal
This case involved two incorporated drivers’ the same in accordance with this code
associations that decided to unite and elect one set (§36 (5))
of officers to be given authority to collect the daily  These are subordinate to the AOI, Corp
dues of the drivers who are members of the Code, and other statutes. (Fleischer vs.
consolidated association. Nolasco(1925))
HELD: Doctrine of estoppel applies when persons
assume to form a corporation and exercise 2. When to adopt by-laws (§46)
corporate functions and enter into business  Every corporation formed under this
relations with third persons. Where there are no code must within 1 month after receipt
third persons involved and the conflict arises only of official notice of the issuance of its
among those assuming to form a corporation, who certificate of incorporation by the SEC
therefore know that it has not been registered, adopt a code of by-laws for its
there is no corporation by estoppel. government not inconsistent with this
International Express Travel v. CA (2000)  May be adopted and filed prior to
incorporation, in such case, shall be
The doctrine of corporation by estoppel may apply approved and signed by all

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incorporators submitted to SEC  By-laws are mere internal rules among

together with AOI stockholders and cannot affect or
prejudice 3rd persons who deal with the
Failure to file By-laws on time: corporation unless they have
knowledge of the same (China Banking
Corp v CA, 1997)
Loyola Grand Villas Homeowners Assn v. CA
6. Contents (§47)
 Subject to the provisions of the
Constitution, this Code, other special
The Supreme Court held that although the laws, and the articles of incorporation,
Corporation Code requires the filing of by-laws a private corporation may provide in its
within one month after the issuance of the by-laws for:
Certificate of Incorporation, it does not expressly a) The time, place and manner of
provide for the consequences of non-filing within calling and conducting regular or
the said period. Failure to file the by-laws within special meetings of the directors or
that period does not imply the "demise" of the trustees;
corporation. By-laws may be required by law for an b) The time and manner of calling and
orderly governance and management of conducting regular or special
corporations but they are not essential to corporate meetings of the stockholders or
birth. Therefore, failure to file them within the members;
period required by law by no means tolls the c) The required quorum in meetings of
automatic dissolution of a corporation. stockholders or members and the
manner of voting therein;
d) The form for proxies of
3. How filed (§46) stockholders and members and the
 Must be approved by the affirmative manner of voting them; By laws
vote of the stockholders representing may not prohibit the use of proxies-
the majority of the outstanding capital Peoples’ Home Savings Bank vs.
stock or majority of members (if filed Superior Court, cited in Campos
prior to incorporation, must be e) The qualifications, duties and
approved and signed by all compensation of directors or
incorporators) trustees, officers and employees;
 Must be signed by the stockholders or f) The time for holding the annual
members voting for it election of directors of trustees and
 Must be filed with the SEC certified by the mode or manner of giving
the majority of directors/trustees and notice thereof;
countersigned by the secretary of the g) The manner of election or
corporation which shall be attached to appointment and the term of office
original AOI of all officers other than directors
or trustees;
4. Where kept (§46) h) The penalties for violation of the
 Must be kept in the principal office of by-laws;
the corporation; subject to inspection i) In the case of stock corporations,
of stockholder or member during office the manner of issuing stock
hours (Cf §74) certificates; and
j) Such other matters as may be
5. Effectivity of by-laws necessary for the proper or
 In all cases, the by-laws shall be convenient transaction of its
effective only from the issuance of SEC corporate business and affairs.
of certification that bylaws are not  The contents may be subdivided into
inconsistent with the Code two major headings:
 Cannot bind stockholders or corporation a) Management and control of the
pending approval corporate entity; and
 By-laws or any amendment thereto of b) Rights and obligations of
any bank, banking institution, building stockholders
and loan association, trust company,
insurance company, public utility, 7. Amendment or repeal (§48)
educational institution or other special  Majority vote of the members of the
corporations governed by special laws Board and majority vote of the
must be accompanied by a certificate of outstanding capital stock or majority of
the appropriate gov’t agency to the members, in a meeting duly called for
effect that such by-laws are in the purpose; or
accordance with law  2/3 of the outstanding capital stock or
 By-laws, like AOI are contracts of members may delegate to the BOD the
adhesion. They will bind the power to amend or repeal any by-laws
corporation and stockholders including or adopt new by-laws (such power may
those who vote against as well as those be revoked by majority vote only)
who became members after approval  In all other respects, the procedure for
 Contracts entered into without strict adopting the original by-laws shall be
compliance with by-laws may be the same in amending or repealing by-
binding on the corporation due to long laws or adoption of a new set of by-
acquiescence and usage (Board of laws
Liquidators vs. Kalaw (1967))

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6.2 ELECTION OF DIRECTORS – discussed in Chapter IV

Chapter VII

1. Doctrine of separate juridical

7. Effects of non-use of personality
charter/continuous inoperation (§ 22)
 A corporation has a personality separate and
distinct from that of its stockholders and
1. Non-user for 2 years (non-use of charter)- members and is not affected by the personal
when the corporation does not formally rights, obligations, and transactions of the
organize and commence the transaction of latter. Since corporate property is owned by
its business or the construction of its works the corporation as a juridical person, the
within 2 years from the date of its stockholders have no claim on it as owners, but
incorporation, its corporate powers cease have merely an expectancy or inchoate right to
and the corporation shall be deemed the same should any of it remain upon
dissolved (automatic) dissolution of the corporation after all corporate
 Formal organization – may consist in creditors have been paid. Such right is limited
the election of new board of directors only to their equity interest (doctrine of limited
or trustees and corporate officer liability).
 Commencement of business – may  Although stockholder’s interest in the corp may
take the form of contracting for lease be attached by his personal creditor, corp
or sale of properties to be used as property cannot be used to satisfy his claim
business site of the corporation and (Wise & Co. vs. Man Sun Lung, 1940)
other preparatory acts geared towards  General Rule: Separate personality is vested to
fulfillment of the purpose for which the a corporate entity when it is issued the
corporation was established certificate of incorporation by the SEC. The
2. Non-user for 5 years (continuous exceptions are:
inoperation)- when the corporation has a. de facto corporation
commenced the transaction of its business b. corporation by estoppel
but subsequently becomes continuously  As a separate juridical personality, a
inoperative for a period of at least 5 years. corporation can be held liable for torts
The same shall be a ground for the committed by its officers for corporate purpose
suspension or revocation of its corporate (PNB v CA, 1978)
franchise or Certificate of Incorporation  It can’t be held criminally liable for a crime
(not automatic). Notice and hearing before committed by its officers (People v Tan Boon
SEC is required. Kong, 1930)
3. Exception: cause or non-use or operation  Corporate entities are entitled to the following
was due to causes beyond the control of constitutional rights: due process, equal
the corporation as determined by SEC (ex. protection, and protection against unreasonable
Mineral lands to be developed by the searches and seizures. However, a corp is not
corporation as per its purpose are the entitled to the privilege against self-
object of court litigation and a court incrimination (Bataan Shipyard & Eng’g Co. v
injunction against the corporate activities PCGG, 1987)
has been issued)  A corporation is not entitled to moral damages
(LBC Express, Inc v CA)
ANNUAL FINANCIAL STATEMENTS – filed with SEC  Juridical personality of the corporation ends
annually (SEC Rule, Nov. 20, 1980) when liquidation ends (payment of debts and
distribution of assets) and inchoate rights or
expectancies of stockholders are realized. Until
such conveyance is made, title over the assets
remains with the corporation.

2. Piercing the veil of corporate


2.1 Nature of the piercing doctrine

 Piercing the veil of corporate entity requires

the court to see through the protective
shroud which exempts its stockholders
from liabilities that ordinarily they could be
subject to, or distinguishes one corporation
from a seemingly separate one, were it not
for the existing corporate fiction [Lim v. CA,
2000]. But to do this, the court must be
sure that the corporate fiction was
misused, to such an extent that injustice,
fraud or crime was committed upon
another, disregarding, their, his, her or its

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rights. It is the protection of the interests

of innocent third persons dealing with the
corporate entity which the law seeks to 2.3 Illustrative Cases where piercing the veil
protect by this doctrine. [Traders Royal is allowed
Bank v. CA, 1997]  If done to defraud the government of taxes
 Whether the existence of the corporation due it
should be pierced depends on questions of  If done to evade payment of civil liability
facts, appropriately pleaded. Mere  If done by a corporation which is merely a
allegation that a corporation is the alter conduit or alter ego of another corporation
ego of the individual stockholders is  If done to evade compliance with
insufficient. The presumption is that the contractual obligations
stockholders or officers are distinct entities.  If done to evade financial obligation to its
The burden of proving otherwise is on the employees
party seeking to have the court pierce the
veil of corporate entity. [Ramoso v. VA,
2.4 Parent-subsidiary relationship
 Piercing the veil of corporate entity is
merely an equitable remedy, and may be  The mere fact that a corporation owns all
awarded only in cases when the corporate or substantially all of the stocks of another
fiction is used to defeat public convenience, corporation is not sufficient to justify their
justify wrong, protect fraud or defend crime being treated as one entity. If used to
or where the corporation is a mere alter perform legitimate functions, the
ego or business conduit of a person. subsidiary’s separate existence may be
 When it comes to applying the doctrine, the respected. However, to prevent abuses of
first point to consider is the liability of the separate entity privilege, the court will
obligation of the individual (the one who is pierce the veil of corporate entity and
being sought to be liable). Without such regard the two corporations as one.
liability, everything would have been in  Circumstances which if present in the
compliance with statutes (U.S vs. proper combination renders the subsidiary
Milwaukee, 1905; Umali vs. CA, 1990). an instrumentality:
 In case of wholly-owned corporations, a) The parent corporation owns all or
corporations with common stockholders, or most of the subsidiary’s capital stock
corporations having a parent-subsidiary b) The parent and subsidiary corporations
relationship, the following are the have common directors or officers
“inevitable consequences”: c) The parent corporation finances the
a) Control and management of the subsidiary
corporation; d) The parent corporation subscribes to all
b) Interlocking directors; the capital stock of the subsidiary or
c) Common access to the use of resources, otherwise causes its incorporation
services, and 3rd-party providers; and e) The subsidiary has grossly inadequate
d) Intra-corporate dealings. capital
In the above consequences, there is no f) The parent corporation pays the
necessity for applying the doctrine of piercing salaries and other expenses or losses of
the corporate veil unless there is a particular the subsidiary
act by the corporation, stockholder, or BOD g) The subsidiary has substantially no
that gives rise to a liability. If there’s a liability business except with parent corporation
to speak of, such consequences may be or no assets except those conveyed to
considered as a means of evading such thus or by the parent corporation
the need for the piercing. h) In the papers of the parent corporation
or in the statements of its officers, the
 In applying the doctrine, determine: subsidiary is described as a department
1. the rights and obligations of the or division of the parent corporation or
parties. its business or financial responsibility is
2. the possibility of non-enforcement referred to as the parent corporation’s
of such rights and obligations own
because of the shield or veil. i) The parent corporation uses the
3. look into the circumstances and property of the subsidiary as its own
underlying purpose of putting up j) The directors or executives of the
the corporation subsidiary do not act independently in
the interest of the subsidiary but take
their orders from the parent
2.2 Extent of the legal effects of piercing corporation in the latter’s interest
k) The formal ledger requirements of the
 The application of the piercing doctrine to a subsidiary are not observed (PNB v
particular case does not deny the Ritratto Group, 2001).
corporation of legal personality for any and  The subsidiary cannot be considered a
all purposes, but only for the particular mere instrumentality of the parent
transaction or instance for which the corporation just by the combination of the
doctrine was applied. [Koppel Phil. Inc. v. 11 signs listed above. For the veil of
Yatco] (1946) corporate entity of the subsidiary to be
 Piercing is not allowed unless the remedy pierced so that it is considered just an
sought is to make the officer or another instrumentality, the act questioned must
corporation pecuniarily liable for corporate have an illegal or unfair purpose which

100% UP LAW UP BAROPS 2008 Page 16 of 351


results to prejudice to third persons who  Public Utilities - Sec. 11, Art XII, CONST.
may seek redress from the corporate entity “xxx no franchise, certificate or any other
form of authorization for the operation of a
De Leon vs. NLRC (2001) public utility shall be granted except to
citizens of the Philippines or to corporations
FACTS: FISI contracted with FTC for security or associations organized under the laws of
services. Subsequently, the stockholders of FISI the Philippines at least 60% of whose
sold all their participation in the corporation to a capital is owned by such citizens. “
new set of stockholders which renamed the  War-time Test - If the controlling
corporation MISI. Afterwards, FTC preterminated stockholders are enemies, then the
its contract of security services with MISI causing nationality of the corporation will be base
petitioner security guards to lose their employment on the citizenship of the majority
and file ULP case against FTC, FISI and MISI. stockholders in times of war (Filipinas
HELD: There was ER-EE relationship between FTC Compania de Seguros v Christian Huenfeld,
and petitioners. It was shown that FISI was a 1951) .
mere adjunct of FTC. Records show that FISI and  Investment Test - Sec. 3(a) and (b),
FTC have the same owners and business address, Foreign Investments Act of 1991 (RA7042).
and FISI provided security services only to FTC. It considers for purpose of investment a
The purported sale of the shares of the former “Philippine National” as a corporation
stockholders to a new set of stockholders who organized under the laws of the Philippines
changed the name of the corporation to MISI of which at least 60% of the capital stock
appears to be part of a scheme to terminate the outstanding and entitled to vote is owned
services of FISI's security guards posted at the and held by citizens of the Philippines, or a
premises of FTC and bust their newly-organized trustee of the funds for pension or other
union which was then beginning to become active employee retirement or separation
in demanding the company's compliance with Labor benefits, where the trustee is a Philippine
Standards laws. Under these circumstances, the national and at least 60% of the fund will
Court cannot allow FTC to use its separate accrue to the benefit of Philippine nationals.
corporate personality to shield itself from liability
for illegal acts committed against its employees.
3.3 Grandfather rule
Francisco vs. Mejia (2001) Used to determine the nationality of a
corporation by which the percentage of Filipino
With specific regard to corporate officers, the equity in corporations engaged in nationalized
general rule is that the officer cannot be held and/or partly nationalized areas of activities,
personally liable with the corporation, whether provided for under the constitution and other
civilly or otherwise, for the consequences of his nationalization laws, is computed, in cases
acts, if he acted for and in behalf of the where corporate shareholders are present in
corporation, within the scope of his authority and in the situation, by attributing the nationality of
good faith. In such cases, the officer's acts are the second or even subsequent tier of
properly attributed to the corporation. However, if ownership to determine the nationality of the
it is proven that the officer has used the corporate corporate stockholder. (Villanueva, 2003)
fiction to defraud a third party, or that he has acted
negligently, maliciously or in bad faith, then the
corporate veil shall be lifted and he shall be held  SEC formula: SEC Letter Opinion
personally liable for the particular corporate “Shares belonging to corporations or
obligation involved. partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be
considered as of Philippine nationality, but
if the percentage of Filipino ownership in
the corporation or partnership is less than
3. Nationality of the Corporation 60% only the number of shares
corresponding to such percentage shall be
3.1 The place of incorporation test. considered as of Philippine nationality.”
 The corporation is a national of the country
under whose laws it is organized or
Domestic corporations – organized and
governed under and by Philippine laws
 Foreign corporations – organized under
laws other than those of the Philippines an
can operate only in the territory of the
state under whose laws it was formed.
However, they may be licensed to do
business here.

3.2 Nationality of the Corporation as

determined by the “Control Test”
 Exploitation of Natural Resources - Section
2, Art. XII CONST. “only Filipino Citizens or
Corporations whose capital stock are at
least 60% owed by Filipinos can qualify to
exploit natural resources.”

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Chapter V 1. Promoter takes a continuing OFFER on behalf of

the corp, which if accepted by the corp.
becomes a contract  Promoter does not
INCORPORATION assume any personal liability, whether or not
the offer is accepted by the corp.
1. Functions of Promoters 2. Promoter makes a contract at the time binding
himself with the UNDERSTANDING that if the
corp., once formed, accepts or adopts the
 Organize and establish corporation
contract, the promoter will be relieved of all
 Solicit or pool capital contributions
 Exercise/identify/consummate opportunities responsibilities
 Make available capital 3. Promoter binds himself PERSONALLY &
assumes the responsibility of looking to the
contributions/investments (underwrite)
proposed corp. for reimbursement
 Manage/control
 Note: may be done prior or after incorporation.
Complications arise if performed prior to In the absence of any express or implied
incorporation. For whom was the promoter agreement to the contrary, the 3rd situation will be
acting in behalf of? (no juridical entity yet) presumed and the promoter will be considered
personally liable for the contracts. Thus, the corp.’s
adoption or ratification of the contract will not
2.What are Promoter’s Contracts?
release the promoter from personal liability unless
a novation was intended. (Wells vs. Fay & Egan
 Contracts prior to existence of corporation thus Co., 143 Ga. 732, 87 S.E 873, 1915) Exception:
the corporation could not have been a party to Quaker v Hill case. In this case, Quaker looked to
it. the uincorporated entity when making the contract.
 However, the corporation may make the Thus, the promoter was not liable.(Quaker Hill Inc.
contracts its own and may become bound on vs. Parr, 148 Colo. 45, 364 P. 2d 1056, 1961)
such contracts if after incorporation, it adopts
or ratifies the same, or accepts its benefits with
knowledge of the terms thereof.
 Adoption or ratification need not be by express
5. Compensation of Promoters
resolution of the board and may be implied
Gen rule – the corporation is not liable to pay
from the acts of responsible officers of the
compensation because this would be an imposition
on innocent investors. (Ballantine)

3. Liability of Corporation for Exceptions:

Promoter’s Contracts  if after it is formed, corporation expressly
promises to do so (Ballantine; Indianapolis Blue
Print & Manufacturing Co. v. Kennedy et. al.,
Rules on the liability of the corp. on promoters’ 215 Ind. 409, 19 N.E 2d 554, 1939)
contracts:  Services done partly before and partly after
3.1 General Rule incorporation and the corporation takes the
Corp. is not bound by the contract – Since the benefits thereof
corp. did not yet exist at the time of the contract, it
could not have had an agent who could legally bind The Corp. Code does not contain any provision as
it. to the compensation of promoters. But the
Securities Act authorizes a promotion fee IF it is
3.2 Exception: provided for in the registration statement of the
securities involved.
Corp. may be bound by the contract if it makes the
contract its own: How?
a. Adoption or ratification 6. Fiduciary Relationship between
 By express resolution Corporation & Promoter
 Implied from the acts of responsible
officers of the corp. The promoters, being responsible for the financing
* The corp. cannot adopt only the part of the & organization of the corp., are under duty to
contract which may be beneficial to it & exercise good faith & fairness in all their acts &
then discard the part that is burdensome. transactions.
* The contract to be capable of adoption or
Example: Promoters often have to take options or
ratification, must be one within the powers
title to property in their name but for the benefit of
of the corp. to enter.
the corp. In such cases, they should not make
b. Acceptance of benefits under the contract secret profits in passing title to the corp. If they do,
with knowledge of the terms thereof they would have to account for all such profits to
the corp. when formed. (Old Dominion Mining and
Smelting Corp., 203 Mass. 159, 89 N.E 193, 1909)
4. Personal Liability of Promoter on
Pre-Incorporation Contracts

There are three possible situations intended by the

promoter and the other party in pre-incorp.

100% UP LAW UP BAROPS 2008 Page 18 of 351


Chapter VI a bank; corporations are restricted from

acquiring public lands except by lease of
not more than 1000 hectares)

2. Specific Powers - TCB PDA IDM

1. General powers of corporations (DIP CAB MDT)
 Extend or shorten the corporate Term (§ 37)
a. To sue and be sued in its corporate name;  Increase or decrease Capital stock (§ 38)
b. Succession by its corporate name for the period  Incur, create or increase Bonded indebtedness
of time stated in the articles of incorporation (§ 38)
and the certificate of incorporation;  Deny Preemptive right (§ 39)
c. To adopt and use a corporate seal;  Sell or otherwise Dispose of substantially all its
d. To amend its articles of incorporation in assets
accordance with the provisions of this Code;  Acquire its own shares (§ 41)
e. To adopt by-laws, not contrary to law, morals,  Invest in another corporation or business (§
or public policy, and to amend or repeal the 42)
same in accordance with this Code;  Declare dividends (§ 43)
f. In case of stock corporations, to issue or sell  Enter into Management contracts (§ 44)
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in 3. Implied Powers
accordance with the provisions of this Code;
and to admit members to the corporation if it These implied powers are deemed to exist because
be a non-stock corporation; of the following provisions:
g. To purchase, receive, take or grant, hold, 1. except such as are necessary or incidental to
convey, sell, lease, pledge, mortgage and the exercise of the powers so conferred (§36)
otherwise deal with such real and personal 2. such powers as are essential or necessary to
property, including securities and bonds of carry out its purpose or purposes as stated in
other corporations, as the transaction of the the AOI – catch-all phrase (§45)
lawful business of the corporation may
reasonably and necessarily require, subject to Remember: (Coleman vs. Hotel de France Co., 29
the limitations prescribed by law and the Phil. 323, 1915)
Constitution; 1. A corporation is presumed to act within its
h. To enter into merger or consolidation with powers.
other corporations as provided in this Code; 2. When a contract, entered into by the
i. To make reasonable donations, including those corporation, is not on its face necessarily
for the public welfare or for hospital, charitable, beyond its authority, it will be presumed valid.
cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or
foreign, shall give donations in aid of any
political party or candidate or for purposes of 4. The Ultra Vires
partisan political activity;
To establish pension, retirement, and other
Doctrine (§45)
plans for the benefit of its directors, trustees,
officers and employees; and Definition – These are acts which a corporation is
k. To exercise such other powers as may be not empowered to do or perform because they are
essential or necessary to carry out its purpose not based on the powers conferred by its AOI or
or purposes as stated in the articles of by the Corporation Code on corporations in
incorporation. (in the purpose clause) general, or because they are not necessary or
incidental to the exercise of the powers so
 Sources of express power (Villanueva) conferred.
o Section 36 (Corp Code and other applicable
statutes) Rule – No Corporation under this Code shall
o Purpose clause (AOI, supplemented by by- possess or exercise any corporate powers except
laws) those conferred by this Code or by its articles of
 Sec 38 par 11 grants such power as are incorporation and except such as are necessary or
essential or necessary to carry out its purpose incidental to the exercise of the powers so
or purposes as stated in the AOI. A corporation conferred.
is presumed to act within its powers and when
a contract is not on its face necessarily beyond An ultra vires act, if not illegal, can be remedied
its authority, it will, in the absence of proof to (by ratification)
the contrary, presumed valid
 The general powers are to be exercised by the
BOD. However, the power to amend AOI is to
be exercised by the stockholders or members Atrium v. CA (2001)
 2 general restrictions on the power of the
corporation to acquire and hold properties:
Atrium Management Corporation filed with
o that the property must be reasonably and
RTC an action for collection of the 4
necessarily required by the transactions of
postdated checks issued by the Hi-cement
its lawful business
Corporation, though its signatories de Leon,
o that the power shall be subject to the
treasurer, and delas Alas, chairman of the
limitations prescribed by other special laws
corporation to a certain ET Henry, and Co,
and the constitution (corporation may not
which the latter endorsed to Atrium for
acquire more than 30% of voting stocks of

100% UP LAW UP BAROPS 2008 Page 19 of 351


rediscounting. Pirovano v De la Rama Steamship (1954)

Stocks are owned by Don de la Rama, his 2
HELD: The act of issuing was well within the
daughters, and their EEs with nominal shares.
ambit of a valid corporate act, for it was
One of the daughters was married to the
for securing a loan to finance the
company president, Enrico Pirovano. While
activities of the corporation, hence, not
the business grew, the father distributed his
an ultra vires act. An ultra vires act is
stocks among his 5 daughters and his wife.
distinguished from illegal act, the former
NDC was also represented in the BoD because
being voidable which may be enforced by
the corp had a debt to it. To secure the debt,
performance, ratification, or estoppel,
all assets were mortgaged to NDC. Debt was
while the latter is void and cannot be
later converted to stock, such that NDC now
validated. SC however, held de Leon
held 4 of 9 seats in BoD. Such conversion
released the mortgaged assets.
Enrico Pirovano died, so the BOD passed a
NAPOCOR v Vera (1989) resolution converting insurance proceeds on
his life to stocks for each of his minor
NAPOCOR has a pier at its coal plant in children. Approved by SHs.
Batangas. It did not renew its stevedoring
contract at the plant, but instead, took over However, the other SHs realized that they
the services itself. RTC Judge issued would actually be donating 1.44 M. instead of
preliminary injunction against NAPOCOR, the 400K they intended (since the value of
saying that it was not empowered by its the stocks increased), and that Mrs. Pirovano
Charter to engage in stevedoring and arrastre would now have 2x voting power as her
services. sisters.

Held: BOD later changed donation into cash, but

would be retained by the company as a loan,
Under its Charter, NAPOCOR can exercise and the interest payable to the children, both
powers as may be reasonably necessary to amounts to be paid to the children after debt
carry out its business of constructing, to NDC paid, and later, when company is in
operating and maintaining power plants, or position to meet obligations. Mrs. Pirovano
which, from time to time, may be declared by formally accepted the donation. BOD later
the Board to be necessary, useful, incidental approved release of some funds held in trust
or auxiliary to accomplish said purpose. for Mrs. Pirovano to buy house in NY. SHs
formally ratified the donation.
If act is lawful, and not prohibited, and for the
purpose of serving corporate ends, and SEC later gave opinion that donation was void
reasonably contributes to the promotion of bec it was beyond the scope of the corp’s
those ends in a substantial sense, it may be powers. SHs later voted to revoke the
considered within the corporation’s charter donation to the Pirovano children.
Stevedoring services are incidental and
indispensable to unload the coal shipments. 1) Donation was remunerative- for services
rendered by Enrico Pirovano.
2) Donation was already perfected. Ratified
by SHs, and agreed to by NDC, the only
Republic of the Philippines vs. Acoje
Mining Co. (1963)
3) Donation is within scope of the AOI. It is
provided that corp can invest and deal
Acoje Mining requested the Director of Posts
with moneys not immediately required, in
to open a post office in its mining camp for
such manner as from time to time may be
the benefit of its employee and their families.
determined, and that corp can aid in any
In a resolution, Acoje agreed to be directly
other manner any person of which any
responsible for the “dishonesty, carelessness,
obligation or in which any interest is held
or negligence of the employee it assigns”.
by this corp, or in the affairs of prosperity
Acoje’s employee, Sanchez, was designated
of which this corp has a lawful interest.
as the postmaster but he later disappeared
Corp has given donations to EEs in the
with 13K of post office funds. Acoje denied
past, and to political campaigns.
liability on the ground that the resolution was
ultra vires-BOD had no authority to act on the Assuming donation was ultra vires,
matter. donation was ratified, making the act
valid and enforceable.
HELD: The company is estopped from
denying liability on the ground that the board Ultra vires act: outside scope of powers
resolution is ultra vires. Assuming arguendo granted to it by its articles of incorp. Not
that the resolution is an ultra vires act, the necessarily illegal, because ultra vires
same is not void for it was approved not in acts can become valid by ratification and
contravention of law, customs, public order estoppel.
and public policy. The term ultra vires should
be distinguished from an illegal act for the
General consequences of ultra vires acts
former is merely voidable which may be
1. On corporation itself-Corporation
enforced while the latter is void and cannot
May be dissolved under a quo warranto proceeding
be validated.
but in most cases, the court merely enjoins the

100% UP LAW UP BAROPS 2008 Page 20 of 351


corporation from commission of the ultra vires acts general management of the business
(Campos) affairs of the corporation
-Certificate of Registration may be suspended or  Directors have a fiduciary duty to the
revoked by SEC corp and to the SHs
2. On immediate parties- Parties to the ultra  General Rule: once elected, SHs have
vires contract, if executory on both sides, no right to interfere with the BOD.
neither party can ask for specific Exceptions: removal of director (§28),
performance. Will be left as they are if the amendments of AOI (§16),
contract has been fully executed on both fundamental changes (§6), declaration
sides. If one party has performed his part, of stock dividends (§43), entering into
the contract will be enforced provided it is management contracts (§44), fixing of
not illegal consideration of no-par shares (§62),
- Contract proceeding from an ultra and fixing of compensation of directors
vires act is voidable (Republic v. Acoje Mining (§30)
Co., GR L-18062, Feb. 28, 1963; 7 SCRA 361)  Unless otherwise provided in the Corp
) Code, the Board of Directors control
3. On the rights of stockholders- Any stockholder and exercise:
may bring either an individual or derivative suit o the corporate powers of corporation
to enjoin a threatened ultra vires act or o all business conducted,
contract. If act or contract has already been o all property of such corporation
performed, a derivative suit for damages may (§23)
be filed against the directors, but their liability  The board exercises almost all
will depend on whether they acted in good faith corporate powers, lays down all
and with reasonable diligence in entering into business policies and is responsible for
contracts. When based on tort, cannot set-up the efficiency of management. The
the defense of ultra vires against injured party stockholders have no right to interfere
who had no knowledge that such was ultra with the board’s exercise of its powers
vires and functions except where the law
May become binding by the ratification of all expressly gives them the final say, like
stockholders unless third parties are prejudiced in cases of removal of a director,
thereby or unless the acts are illegal (Pirovano v. amendment of articles of incorporation,
de la Rama Steamship Co. 96 Phil. 335; 1954) and other major changes (Cf §6, 42,
 Limitations on the BOD’s authority or
Chapter VII 1. Action by SHs in order to elect a
CORPORATIONS 2. Certain act of the corp that require
joint action of the SHs and BOD
 Their resolutions on matters other than
the exceptions are legally not effective
1. Allocation of power and control
nor binding and may be treated as
(Campos) merely advisory or may be totally
disregarded. (Ramirez v. Orientalist Co.
3 levels of control in the corporate hierarchy: et. al., 38 Phil. 634; 1918); Wolfson v.
Manila Stock Exchange, 72 Phil. 492;
1. the Board of Directors or Trustees 1941)
- responsible for corporate policies and the  “Unless Otherwise Provided” – may
general management of the business and pertain to instances where a
affairs of the corporation management contract is entered hence
corporate powers are exercised by the
2. the Officers managing company and not the board
- in theory, execute the policies laid down by  Authority of BOD can be delegated to
the board agents/ officers/ committees (AOI,
- in practice, often have wide latitude in statutes, by-laws, resolutions) (YU
determining the course of business Chuck v Kong Li Po, 46 Phil 608).
operations Delegation may be explicit, implicit, or
based on exigencies of the business (cf.
3. The stockholders or members Board of Liquidators v Kalaw)
- have residual power of fundamental  The BOD may delegate its corporate
corporate changes powers to either an executive
committee or officials or contracted
NOTE: BOD can delegate its function to the officers managers. The delegation, except for
and also to committees appointed by it (Executive the executive committee, must be for
Committee, § 35) specific purposes. The delegation
makes the officers agents of the
corporation. For such officers to be
2. Who Exercises Corporate Powers deemed fully clothed by the corporation
to exercise a power of the BOD, the
2.1 BOARD OF DIRECTORS latter must specially authorize them to
do so. (ABS-CBN Broadcasting Corp v
1) Authority; repository of corporate powers CA, 1999)
 The board of directors or trustees are  The directors or trustees shall not act
responsible for corporate policies and individually nor separately but as a

100% UP LAW UP BAROPS 2008 Page 21 of 351


body in a lawful meeting. Contracts that to be a director, what is material is legal title
entered into without a formal board and not beneficial ownership. With the execution of
resolution does not bind the the voting trust agreement, Lee and Lacdao were
corporation except when majority of divested of their legal title to their shares hence
the board has knowledge of the can no longer be directors and are no longer
contract and the contract benefited the corporate officers. Because of this, they are not
corporation. (ratification) authorized to receive summons
 Directors owe their duties to
corporation as a whole rather than to
individual shareholders of classes of  Requirements/Disqualifications:
shareholders o Residence (§23) - a majority of the
 Business Judgment Rule directors or trustees of all
- Sec 23 embodies the essence of the corporations organized under this
“business judgment rule,” that unless Code must be residents of the
otherwise provided in the Code, all corp Philippines
powers and prerogatives are vested o Nationality – no requirement for
directly in the BOD. Consequently, the citizenship of a director or trustee
rule has two consequences: so even an alien may be elected as
 The resolution, contracts and such excepts in business activities
transactions of the BOD, cannot be totally closed to aliens
overturned or set aside by the SHs o Disqualification of directors,
or members and not even by the trustees or officers (§27):
courts under the principle that the  Convicted by final judgment of
business of the corp has been left an offense punishable by
to the hands of the BOD; and imprisonment for a period
 Directors and duly authorized exceeding six (6) years, or
officers cannot be held personally  Violation of this Code
liable for acts or contracts done committed within five (5) years
with the exercise of their business prior to the date of his election
judgment. or appointment
Exceptions:  By-laws may provide for
o When the Corp Code expressly additional
provides otherwise; qualifications/disqualifications
o When the directors or officers as long as such additional
acted with fraud, gross qualifications/disqualifications
negligence or in bad faith; and shall not modify requirements
o When directors or officers act as prescribed in the corporation
against the corp in conflict-of- code or be in conflict with such
interest situation prescribed requirements
1) Requirements o Note: To sit on the BOD is not a
 Qualifying share (§23)- Every director vested right. Ownership of shares
must own at least one (1) share of the does not automatically equate to a
capital stock of the corporation of which seat in the BOD
he is a director, which share shall stand o In widely-held corporations, SEC
in his name on the books of the mandates the presence of at least 2
corporation. Any director who ceases to or 20% of its board size, whichever
be the owner of at least one (1) share is lesser, independent directors
of the capital stock of the corporation (Securities Regulation Code, §38
of which he is a director shall thereby and Guidelines on the Nomination
cease to be a director. and Election of Independent
Directors, Memo Circ No. 16, 2002)
Lee vs. CA (1992)  Term: Directors shall hold office for 1
year. However, incumbent directors
Summons was served upon Lee and Lacdao, shall continue to be directors/trustees
president and vice president of ALFA. The two, until their successors have been elected
however contended that they are no longer and qualified (§23)
corporate officers of the corporation because of the
voting trust agreement executed to DBP, hence, 2) How elected (§24)
not authorized to receive summons. Summons  Manner of election:
must be served upon DBP o There must be present in person or
by representative majority of the
HELD: outstanding capital stock / member
Execution of a voting trust creates a dichotomy o In any form; or must be by ballot
between equitable or beneficial ownership of the when requested by any voting
corporate shares of a stockholder and legal title stock holder or member
thereto. The change from the old code to the new o Voting may be in person or by
code with respect to qualifying shares of directors proxy
is the omission of the phrase “in his own right”  At all elections of directors or trustees,
pertaining to beneficial ownership of shares. In the there must be present owners of a
new corpo code, persons may be directors if they majority of the outstanding capital
are stockholders although not “in their own right” stock, or if there be no capital stock, a
hence includes trustees. There is clear indication

100% UP LAW UP BAROPS 2008 Page 22 of 351


majority of the members entitled to to time but not sine die or indefinitely
vote. if:
 Every stockholder entitled to vote shall o For any reason, no election is held,
have the right to vote the number of or
shares of stock outstanding, at the time o If there are SHs not present or
fixed in the by-laws, in his own name represented by proxy at the
on the stock books of the corporation, meeting, the owners of a majority
or where the by-laws are silent, at the of the outstanding capital stock, or
time of the election if there be no capital stock, a
 Time to determine voting right majority of the member entitled to
o As per share standing in one’s vote.
name at the time fixed by the By-  Since the provision requires presence,
Laws meeting of stockholders is required
o Where By-laws silent, at time of
election 3) How Removed (§28)
 Cumulative voting – A system of voting  Any director or trustee of a corporation
designed to increase the voting power may be removed from office by a vote
of minority stockholders in the election of the stockholders holding or
of corporate directors when more than representing 2/3 of the outstanding
one director is to be elected. capital stock, or if the corporation be a
o A stockholder shall have as many Non-stock Corporation, by a vote of 2/3
votes as he has number of shares of the members entitled to vote (with
times the number of directors up or without cause).
for election  Note: Such removal shall take place
o Cumulative voting is allowed for either at a regular meeting or at a
election of members of the Board in special meeting called for the purpose
a stock corporation. Members of of removal of Directors or Trustees,
the Board in a Non-stock with previous notice of the time and
Corporation shall not be voted place of such meeting, as well as the
cumulatively unless specifically intention to propose such removal. If
provided for in the By-laws. the officers refuse to call a meeting to
o The total number of votes cast by a consider the removal of the Director, it
stockholder shall not exceed the may be called at the instance of any
number of shares owned by him as stockholder or member, but with due
shown in the books of the notice.
corporation multiplied by the whole  Removal without cause may not be
number of directors to be elected used to deprive minority stockholders
o Gives the minority an opportunity or members of the right of
to elect a representative to the representation to which they may be
BOD. Cannot itself give the entitled to under Section 24
minority control of corporate affairs  The board cannot remove a director or
but may affect and limit the extent trustee as member of the board
of majority’s control
o Theoretically, this allows the Roxas v Dela Rosa (1926)
minority block to dominate the
election of BOD. However, the Binalbagan Estate Inc is engaged in the mfg of raw
minority still needs the majority in sugar from canes. Possessors of majority of shares
order to constitute a quorum. formed a voting trust composed of 3 trustees.
o By-laws cannot provide against Trustees now controlled 3,000 out of 5,500 shares.
cumulative voting since this right is
mandated in §24 (mandatory in a Voting trust was able to vote BOD, without
stock corporation – statutory right opposition from minority.
of SHs)
Trustees soon wanted to remove the directors they
o In determining how many shares
had elected, even if their terms had not yet
are needed to vote for the desired
expired. Voting trust caused SEC to issue notice for
# of directors (necessary when one
a special gen mtg to elect a new BOD.
campaigns for proxies), the
following formula may be followed: Held: Under the law, directors can only be removed
[ (outstanding shares) x (desired # by vote of SHs representing at least 2/3 of the
of directors) + 1 ] / [ (total # of subscribed capital stock entitled to vote. When the
directors) + 1 ] purpose is to remove directors, it must be stated in
o Unless otherwise provided in the call for meeting. But vacancies in BOD can be filled
AOI or in the by-laws, members of by mere majority vote.
corporations which have no capital
Trust does not have clear 2/3 majority. Voting trust
stock may cast as many votes as
should have stated in notice that purpose was to
there are trustees to be elected but
remove present BOD. Meeting called by trustees
may not cast more than one vote
for one candidate.
 Candidates receiving the highest In this case, removal was sought to be done by
number of votes shall be declared replacing directors
 Any meeting of the stockholders or BUT can’t remove thru election of new officers bec
members called for an election may directors have fixed term of office
adjourn from day to day or from time

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 Decision of the majority of the quorum

Note: §28 need not be resorted to in all instances. duly assembled (EXCEPTION: Election
If removal is for cause (mismanagement or abuse of directors – requires a vote of
of powers, the remedy of SHs shall be: majority of all the members of the
a) Receivership; board)
b) Injunction if the act has not yet been
done; WHEN? (§53)
c) Dissolution if abuse amounts to a ground  Regular meetings of directors or
for quo warranto but Sol Gen refuses to trustees shall be held monthly, unless
act; the by-laws provide otherwise.
d) Derivative suit or complaint filed with  Special meetings of the board of
the RTC; directors or trustees may be held at
e) Criminal action any time upon the call of the president
or as provided in the by-laws.
4) Vacancies (§29)
Vacancies in the Board of Directors or WHERE? (§53)
Trustees MAY be filled by a vote of at least Meetings of directors or trustees of
a majority of the remaining directors or corporations may be held anywhere in or
trustees; if still constituting a quorum outside of the Philippines, unless the by-
laws provide otherwise.
In the following cases, the stockholders or
members shall fill the vacancy (REAQ): WHO MAY ATTEND?
a. When the remaining directors or The members of the Board themselves;
trustees do not constitute a quorum; directors in Board meetings cannot be
b. If the vacancy is caused by the removal represented or voted by proxies.
of a director or trustee
c. If the vacancy is caused by the WHO PRESIDES? (§54)
expiration of term; and The president shall preside at all meetings
d. In case of increase in the number of of the directors or trustee, unless the by-
directors or trustees as a result of an laws provide otherwise.
amendment of the articles authorizing
such increase NOTICE REQUIREMENTS (§53)
 Notice of regular or special meetings
5) Compensation (§30) stating the date, time and place of the
 In the absence of any provision in the meeting must be sent to every director
By-laws fixing their compensation, the or trustee at least one (1) day prior to
directors shall not receive any the scheduled meeting, unless
compensation, except for reasonable otherwise provided by the by-laws.
per diems.  A director or trustee may waive this
 Any such compensation (other than per requirement, either expressly or
diems) may be granted to the directors impliedly
by the vote of the stockholders
representing at least a majority of the QUORUM REQUIREMENTS (§25)
outstanding capital stock at a regular or Unless the articles of incorporation or the
special stockholder’s meeting. by-laws provide for a greater majority, a
 Limit: In no case shall the total yearly majority of the number of directors or
compensation of directors, as such trustees as fixed in the articles of
directors, exceed 10% of the net incorporation shall constitute a quorum for
income before income tax of the the transaction of corporate business, and
corporation during the preceding year. every decision of at least a majority of the
 directors or trustees present at a meeting
at which there is a quorum shall be valid as
Western Institute of Technology v Salas a corporate act, except for the election of
(1997) officers which shall require the vote of a
majority of all the members of the board.
In a meeting of the Board of Trustees of Western
Institute of Technology, a resolution was passed Filipinas Port Services Inc., represented by
granting monthly compensation to officers stockholders, Eliodoro C. Cruz v. Victoriano S. Go,
respondents who are members of the Board. The et al.
resolution is valid. The prohibition with respect to GR No. 161886
granting compensation to corporate March 16, 2007
directors/trustees under Section 30 of the Cruz, a stockholder of the corporation, filed a
Corporation Code is not violated since the derivative suit against the members of the board
compensation is being given to private respondents
questioning the creation of certain positions. Cruz
in their capacity as officers of WIT and not as board
members. thus prayed that the respondent members of the
board of directors be made to pay Filport, jointly
and severally, the sums of money variedly
6) How corporate powers exercised – Board representing the damages incurred as a result of
must act as a body in a meeting the creation of the offices/positions complained of
and the aggregate amount of the questioned
Requisites of board meetings increased salaries.
 Meeting of the Board duly assembled
 Existence of quorum

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HELD: The board’s creation of the positions of considered inherent in their office but is
Assistant Vice Presidents for Corporate Planning, derived from law, the corporate by-
Operations, Finance and Administration, and those laws or by delegation from the BOD
either expressly or impliedly by habit,
of the Special Assistants to the President and the
custom, or acquiescence in the general
Board Chairman, was in accordance with the regular
course of business
business operations of Filport as it is authorized to  Gen rule: A person dealing with a
do so by the corporation’s by-laws, pursuant to the corporate officer is put on inquiry as to
Corporation Code. Besides, the determination of the scope of the latter’s authority but
the necessity for additional offices and/or positions an innocent person cannot be
in a corporation is a management prerogative prejudiced if he had the right to
which courts are not wont to review in the absence presume under the circumstances the
of any proof that such prerogative was exercised in authority of the acting officers.
bad faith or with malice.

2.2 CORPORATE OFFICERS AND People’s Aircargo vs. CA (1998)

Corporate President Punsalan solicited a proposal
from respondent Sano for the preparation of a
1. Minimum set of officers and Qualification
feasibility study. Sano prepared feasibility study
and was paid for it. Another proposal for the
 Immediately after their election, the
preparation of operations manual was solicited
directors of a corporation must formally
from Sano and was accepted by Punsalan. Manual
organize the election of:
was prepared and approved by Commissioner of
a. A president, who shall be a director
Bureau of Customs, seminar-workshops conducted
b. A treasurer who may or may not be
but payment was not made
a director (SEC opinion that the
treasurer must be a resident and
HELD: Corporation is liable to Sano for services
citizen of the Phil.)
rendered. General rule is that absent the authority
c. A secretary who shall be a resident
from the Board of Directors, no person, not even its
and citizen of the Philippines, and
officers, can bind the corporation. However, acts of
d. Such other officers as may be
person in behalf of the corporation may be ratified.
provided for in the By-laws
When corporation previously allowed First Contract,
 Any two (2) or more positions may be
it gave president apparent authority to execute in
held concurrently by the same person,
its behalf the other contract, and is estopped from
except that no one shall act as
denying such authority. Corporation accepted
president and secretary or as president
operations manual and the seminars and have
and treasurer at the same time.
already benefited from the contract. This ratifies
 Additional qualifications of officers may
the act of the president and makes it binding upon
be provided for in the by-laws (§47(5))
the corporation. President is presumed to have
authority to act within the domain of the general
Ongkingco v. NLRC (1997) objectives of the corporation
Where the By-laws of the condominium corporation
Rural Bank of Milaor vs. Ocfemia (2000)
specifically includes the position of
“Superintendent/Administrator” in a roster of
When a bank, by its acts and failure to act, has
corporate officers, then such position is clearly a
clearly clothed its manager with apparent authority
corporate officer position and issues of
to sell an acquired asset in the normal course of
reinstatement would be within the jurisdiction of
business, it is legally obliged to confirm the
the SEC and not the NLRC.
transaction by issuing a board resolution to enable
Tabaug v. NLRC (1997) the buyers to register the property in their names.
It has a duty to perform necessary and lawful acts
When the By-laws of the corporation provide that to enable the other parties to enjoy all benefits of
one of the powers of the Board of Trustees is “to the contract which it had authorized.
appoint a Medical Director,
Comptroller/Administration, Chief of Services, and
such other officers as it may deem necessary and
prescribe their powers and duties” then such
(SEC opinion-requirin all members must be
specifically designated positions should be
members of the board)
considered “corporate officers” positions….
 The by-laws of a corporation may create an
executive committee, composed of not less
2. Disqualifications (§27) than three members of the board, to be
No person convicted by final judgment of appointed by the board. (§35)
an offense punishable by imprisonment for  Said committee may act, by majority vote
a period exceeding six (6) years, or a of all its members, on such specific matters
violation of this Code committed within five within the competence of the board, as
(5) years prior to the date of his election or may be delegated to it in the by-laws or on
appointment, shall qualify as a director, a majority vote of the board, except with
trustee or officer of any corporation. respect to:
o Approval of any action for which
3. Authority of corporate officers shareholders' approval is also required;
 The authority of corporate officers to o The filling of vacancies in the board;
bind the corporation is usually not

100% UP LAW UP BAROPS 2008 Page 25 of 351


o The amendment or repeal of by-laws or which is recorded on the

the adoption of new by-laws; appropriate corporate books.
o The amendment or repeal of any  Executors, administrators,
resolution of the board which by its receivers, and other legal
express terms is not so amendable or representatives duly appointed by
repealable; and the court may attend and vote in
o A distribution of cash dividends to the behalf of the stockholders or
shareholders. members without need of any
 Cannot go as far as to render the BOD written proxy.
powerless and free from all responsibilities b. Joint owner of stocks (§56)
imposed on it by law (Campos) The consent of all the co-owners shall
 Must be provided in the by-laws and must be necessary in order to vote, UNLESS
be composed of not less than 3 members of there is a written proxy, signed by all
the board the co-owners, authorizing one or some
 Essential the executive committee acts by of them or any other person to vote
majority vote of all the members such share or shares PROVIDED, That
when the shares are owned in an
"and/or" capacity by the holders
2.4 STOCKHOLDERS OR MEMBERS thereof, any one of the joint owners
can vote said shares or appoint a proxy
Stockholders action is needed in major therefor.
changes(§6) in the corporation which would c. Treasury shares (Cf §41, 57. 68)
affect their contract with the corporation and  Definition (§9): These are shares
although such action is usually initiated by the of stock which have been issued
board, it is not sufficient to give them effect. and fully paid for but subsequently
Stockholders or members approval expressed re-acquired by the issuing
in a meeting duly called and held for the corporation by purchase,
purpose is still necessary. Exception: redemption, donation or through
 Corporations may be bound by unanimous some other lawful means. Such
agreement of its stockholders although shares may again be disposed of
expressed elsewhere than at a meeting for a reasonable price fixed by the
7) Requirements of stockholders’ or  Treasury shares shall have no
members meeting (notice and quorum) voting rights as long as such shares
remain in the Treasury. (§57)
WHEN? (§50)
Regular meetings of stockholders or WHO PRESIDES?
members shall be held annually on a date  The president shall preside at all
fixed in the by-laws, or if not so fixed, on meetings of of the stockholders or
any date in April of every year as members, unless the by-laws provide
determined by the board of directors or otherwise. (§ 54)
trustees.  When there is no person authorized to
call a meeting, the SEC, upon petition
WHERE? of a stockholder or member on a
 Stockholder's or member's meetings, showing of good cause therefor, may
whether regular or special, shall be issue an order to the petitioning
held in the city or municipality where stockholder or member directing him to
the principal office of the corporation is call a meeting of the corporation by
located, and if practicable in the giving proper notice required by this
principal office of the corporation: Code or by the by-laws. (§ 50)
Provided, That Metro Manila shall, for  The petitioning stockholder or member
purposes of this section, be considered shall preside thereat until at least a
a city or municipality. (§51) majority of the stockholders or
 Members of non-stock corporations members present have been chosen
may provide in by-laws that meetings one of their number as presiding
may be held any place even outside the officer. (§50)
place where the principal office is
located provided proper notice is sent NOTICE REQUIREMENTS (§50)
and that it is within the Philippines  Written notice of regular meetings shall
(§93) be sent to all stockholders or members
of record at least two (2) weeks prior to
WHO MAY ATTEND AND VOTE? the meeting, unless a different period is
Stockholders may attend and vote in required by the by-laws
person, or by proxy.  Written notice of special meetings shall
a. Pledgors, mortagors, executors, be sent at least one (1) week prior to
receivers and administrators (§55) the meeting, unless otherwise provided
 In case of pledged or mortgaged in the by-laws.
shares in stock corporations, the  Notice of any meeting may be waived,
pledgor or mortgagor shall have the expressly or impliedly, by any
right to attend and vote at stockholder or member
meetings of stockholders  Failure to give notice would render a
o UNLESS, the pledgee or mortgagee is meeting voidable at the instance of an
expressly given by the pledgor or absent stockholder, who was not
mortgagor such right in writing

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notified of the meeting (Board v. Tan, 1) Majority of the board of

105 Phil. 426(1959). directors or trustees and
 Attendance to a meeting despite want 2) Ratified by the stockholders
of notice will be deemed implied representing at least two-thirds
waiver. (Campos) (2/3) of the outstanding capital
 All proceedings had and any business stock, or by at least two thirds
transacted at any meeting of the (2/3) of the members in the
stockholders or members, if within the case of non-stock corporations,
powers or authority of the corporation, at a stockholder's or member's
shall be valid even if the meeting be meeting duly called for the
improperly held or called, provided all purpose.
the stockholders or members of the 3) Written notice of the proposed
corporation are present or duly investment and the time and
represented at the meeting. (§51) place of the meeting shall be
addressed to each stockholder
QUORUM REQUIREMENTS (§52) or member at his place of
 Unless otherwise provided for in the residence as shown on the
Code or in the by-laws, a quorum shall books of the corporation and
consist of the stockholders representing deposited to the addressee in
a majority of the outstanding capital the post office with postage
stock or a majority of the members in prepaid, or served personally
the case of non-stock corporations.  Appraisal right - any dissenting
 By-laws may provide for a greater or stockholder shall have appraisal
lesser quorum (§47(3)) right
 Where quorum is present at the start of  When SH approval not necessary-
a lawful meeting, stockholders present where the investment by the
cannot without justifiable cause break corporation is reasonably necessary
the quorum by walking out from said to accomplish its primary purpose
meeting so as to defeat the validity of as stated in the AOI. Rules in case
any act proposed and approved by the a corporation will invest its funds in
majority (Johnston v Johnston, 1965 another corporation
CA decision) o If it is the same purpose or
incidental or related to its
WHY ATTEND MEETINGS? primary purpose, the board can
 To make substantial changes invest the corporate fund
 To exercise control without the consent of the
 To be apprised of events stockholders. What is required
 To elect BOD is only the vote of the majority
 To confirm actions requiring of the BOD. No appraisal right
confirmation o If the investment is in another
corporation of different
8) Corporate Acts Requiring Approval of business or purpose, the
ALL Stockholders (including non-voting affirmative vote of majority of
shares) the board consented by 2/3 OS
capital stock is required
a. AMENDMENT OF ARTICLES OF o Apparent conflict: §36(7) limits
INCORPORATION – discussed in Chapter corp powers to those
XIV reasonably and necessarily
required. But §42 implies that
b. EXTEND OR SHORTEN CORPORATE can invest in another business
TERM – discussed in Chapter XIV as long as there’s 2/3 vote.
Campos says that §42 should
STOCK – discussed in Chapter XIV o Accdg to Campos, if articles of
incorp provide that can invest
d. INCURRING, CREATING OR INCREASING in another business, only 2/3
BONDED INDEBTEDNESS – discussed in vote needed. Otherwise, should
Chapter XI amend articles first.


CORPORATE ASSETS – discussed in  Voting Requirement: BOD or BOT
Chapter XVII by a majority vote and the owners
of at least a majority of the
f. INVESTMENT OF FUNDS IN ANOTHER outstanding capital stock, or
CORPORATION OR BUSINESS (§42) majority of the members of a non-
 A private corporation may invest its stock corporation, at a regular or
funds in any other corporation or special meeting duly called for the
business or for any purpose other purpose, may amend or repeal any
than the primary purpose for which by-laws or adopt new by-laws
it was organized  Delegation of power to amend the
 Approval, voting and notice BOD: The owners of two-thirds
requirement (2/3) of the outstanding capital
stock or two-thirds (2/3) of the

100% UP LAW UP BAROPS 2008 Page 27 of 351


members in a non-stock more than one-third (1/3) of

corporation may delegate to the the total outstanding capital
board of directors or trustees the stock entitled to vote of the
power to amend or repeal any by- managing corporation; or
laws or adopt new by-laws o Where a majority of the
 Revocation of the delegation of members of the BOD of the
power to amend: Any power managing corporation also
delegated to the board of directors constitute a majority of the
or trustees to amend or repeal any members of the BOD of the
by-laws or adopt new by-laws shall managed corporation
be considered as revoked whenever Term of management contract: not
stockholders owning or longer than five years
representing a majority of the
outstanding capital stock or a c. FIXING CONSIDERATION OF NO-PAR
majority of the members in non- SHARES (§62) – The issued price of no-
stock corporations, shall so vote at par value shares may be fixed in the
a regular or special meeting AOI or by the BOD pursuant to
 Whenever any amendment or new authority conferred upon it by the AOI
by-laws are adopted, such or the by-laws, or in the absence
amendment or new by-laws shall thereof, by the stockholders at a
be attached to the original by-laws meeting duly called for the purpose
in the office of the corporation, and representing at least a majority of the
a copy thereof, duly certified under outstanding capital stock.
oath by the corporate secretary and
a majority of the directors or d. FIXING COMPENSATION OF
trustees, shall be filed with the SEC DIRECTORS (§30) – Any such
the same to be attached to the compensation (other than per diems)
original articles of incorporation and may be granted to the directors by the
original by-laws. vote of the stockholders representing at
 The amended or new by-laws shall least a majority of the outstanding
only be effective upon the issuance capital stock at a regular or special
by the Securities and Exchange stockholder’s meeting.
Commission of a certification that
the same are not inconsistent with 6. Appraisal right
this Code. One of the ways to get out of the corporation.
It is an exception to the trust fund doctrine.
3. MERGER AND CONSOLIDATION – The other way is to sell the shares of stock.
discussed in Chapter XVII
a. Definition (§81)
This is a remedy available to a
discussed in Chapter XVI
stockholder who dissented and voted
against certain extraordinary matters to
5. Other instances requiring
withdraw or get out of the corporation
stockholders’ action (voting shares only)
by demanding payment of the value of
his shares, as provided in the code.
discussed in Chapter XIII
b. Instances of appraisal right (§81)
a) In case any amendment to the
articles of incorporation which has
contract whereby a corporation
the effect of (cf §16):
undertakes to manage or operate all or
- changing or restricting the
substantially all of the business of
rights of any stockholder or
another corporation, whether such
class of shares, or
contracts are called service contracts,
- authorizing preferences in
operating agreements or otherwise
any respect superior to
those of outstanding shares
Approval and Voting Requirement:
of any class, or
- extending or shortening
 Approval by the board of directors,
the term of corporate
existence (cf §37)
 Approval by stockholders owning at
b) In case of sale, lease,
least the majority of the
exchange, transfer, mortgage, pledge
outstanding capital stock, or by at
or other disposition of all or
least a majority of the members of
substantially all of the corporate
both the managing and the
property and assets as provided in the
managed corporation (at meeting
Code (cf §40); and
duly called)
c) In case of merger or consolidation
 2/3 vote required of the managed
d) In case of investment of corporate
corporation when:
funds in another corporation or
o Where a stockholder or
business or for any other purpose
stockholders representing the
same interest of both the
managing and the managed
corporations own or control

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c. What are the requirements for the  No demand for payment may be
successful exercise of appraisal right? withdrawn unless the corporation
(Section 82 and 86) consents thereto.
 By making a written demand on the  Instances when right to payment
corporation within thirty (30) days ceases:
after the date on which the vote 1) If such demand for payment is
was taken for payment of the fair withdrawn with the consent of
value of his shares the corporation
o Failure to make the demand 2) If the proposed corporate
within such period shall be action is abandoned or
deemed a waiver of the rescinded by the corporation
appraisal right. 3) If the proposed corporate
 By surrendering the certificate or action disapproved by the SEC
certificates of stock, the corporation where such approval is
shall pay the fair value thereof as necessary,
of the day prior to the date on 4) If the SEC determines that such
which the vote was taken, stockholder is not entitled to
excluding any appreciation or the appraisal right
depreciation in anticipation of such  In such instances, his status as a
corporate action (provided that the stockholder shall be restored, and
proposed corp action is all dividend distributions which
implemented or affected). would have accrued on his shares
 If within a period of sixty (60) days shall be paid to him.
from the date the corporate action
was approved by the stockholders, f. Who bears costs of appraisal (§85)
the withdrawing stockholder and  Generally, it shall be borne by the
the corporation cannot agree on the corporation
fair value of the shares, it shall be  Exception: by the SH, when the fair
determined and appraised by three value ascertained by the appraisers
(3) disinterested persons is approximately the same as the
o One of whom shall be named price which the corporation may
by the stockholder, another by have offered to pay the SH,
the corporation, and the third  In the case of an action to recover
by the two thus chosen such fair value, all costs and
 The findings of the majority of the expenses shall be assessed against
appraisers shall be final the corporation, unless the refusal
 The award shall be paid by the of the SH to receive payment was
corporation within thirty (30) days unjustified.
after such award is made
 No payment shall be made to any g. Notation on certificates; rights of
dissenting stockholder unless the transferee (§86)
corporation has unrestricted  Within ten (10) days after
retained earnings in its books to demanding payment for his shares,
cover such payment (Cf §41). a dissenting SH shall submit the
Ratio: to protect the creditors and certificates of stock representing
the remaining SHs his shares to the corporation for
 Upon payment by the corporation notation thereon that such shares
of the agreed or awarded price, the are dissenting shares.
stockholder shall forthwith transfer  His failure to do so shall, at the
his shares to the corporation. option of the corporation, terminate
his rights.
d. Effect of demand and termination of  Effect of transfer of certificates
right (§83) bearing notation:
From the time of demand for payment 1) The rights of the transferor as a
of the fair value of a stockholder's dissenting stockholder shall
shares until either (1) the cease;
abandonment of the corporate action 2) The transferee shall have all
involved or (2) the purchase of the said the rights of a regular
shares by the corporation, all rights stockholder; and
accruing to such shares, including 3) All dividend distributions which
voting and dividend rights, shall be would have accrued on such
suspended, shares shall be paid to the
EXCEPT the right of such transferee.
stockholder to receive payment of the
fair value thereof, PROVIDED, if the Note: right to vote is lost only if stock becomes
dissenting stockholder is not paid the delinquent (§71)
value of his shares within 30 days after
the award, his voting and dividend
rights shall immediately be restored. 3. Devices Affecting Control

e. When right to payment of fair value of General Rule: Extent of control is proportional to
the shares ceases (§84) the number of shares owned by the SH
Exceptions: proxy device, voting trust agreements,
pooling and voting agreements, cumulative voting,

100% UP LAW UP BAROPS 2008 Page 29 of 351


classification of shares, restriction on transfer of a. In writing

shares, additional qualifications for directors, b. Notarized
founder’s shares, management contracts, and c. Shall specify the terms and conditions
unusual quorum and voting requirements thereof
d. Certified copy of such agreement shall
3.1 PROXY (§58, cf §20, Sec Regulation Code) be filed with the corporation and with
 Stockholders and members may vote in the SEC
person or by proxy in all meetings of o OTHERWISE, said agreement is
stockholders or members. ineffective and unenforceable
 Requirements of proxies:  Procedure:
a. In writing (oral proxies are not valid) a. The certificate or certificates of stock
b. Signed by the stockholder or member covered by the voting trust agreement
c. Filed before the scheduled meeting with shall be cancelled and new ones shall
the corporate secretary be issued in the name of the trustee or
 By-laws can also impose additional trustees stating that they are issued
requirements (ex. Must be notarized) pursuant to said agreement.
 Unless otherwise provided in the proxy, it b. In the books of the corporation, it shall
shall be valid only for the meeting for which be noted that the transfer in the name
it is intended. No proxy shall be valid and of the trustee or trustees is made
effective for a period longer than five (5) pursuant to said voting trust
years at any one time (continuing proxy). agreement.
 Right of proxy can be waived only for close c. The trustee or trustees shall execute
corporations (§89) and deliver to the transferors voting
 Senses of proxy: trust certificates, which shall be
a. Person duly authorized by stockholder transferable in the same manner and
or member to vote in his behalf in a with the same effect as certificates of
SHs’ or members’ meeting. Proxy is an stock.
agent for a special purpose thus the  Right to inspect VTA: The voting trust
general rules of agency would normally agreement filed with the corporation shall
apply to the relationship created by be subject to examination by any
proxy stockholder in the same manner as any
b. Formal authority given by the holder of other corporate book or record. The
the stock who has the right to vote it to transferor and the trustee or trustees may
another to exercise the voting rights of exercise the right of inspection of all
the former. corporate books and records in accordance
Instrument or document which with the provisions of this Code.
evidences the authority of the agent.  Any other stockholder may transfer his
 Failure to comply with requirements will shares to the same trustee or trustees
render proxy void and ineffective. upon the terms and conditions stated in the
 To what extent does the proxy holder voting trust agreement, and thereupon
exercise his discretion? Extent of authority shall be bound by all the provisions of said
given by the SH agreement.
 Proxy is revocable even when it is  Restriction: No VTA shall be entered into
expressly provided to be irrevocable unless for the purpose of circumventing the law
it is coupled with an interest. The Supreme against monopolies and illegal
Court has held that a proxy in favor of the combinations in restraint of trade or used
pledge of the shares subject of the proxy for purposes of fraud.
as sufficient interest to render such proxy  Automatic expiration of rights under the
irrevocable. (Alejandrino vs. De Leon, VTA: Unless expressly renewed, all rights
1943) granted in a voting trust agreement shall
 Revocation may be made orally, in writing automatically expire at the end of the
or implied: agreed period. The voting trust certificates
a. Appearance of the stockholder at the as well as the certificates of stock in the
meeting will terminate the proxy name of the trustee or trustees shall
b. Death of the stockholder will also thereby be deemed cancelled and new
terminate the proxy certificates of stock shall be reissued in the
name of the transferors.
3.2 VOTING TRUST AGREEMENT(§59)  The voting trustee or trustees may vote by
 Definition: An arrangement created by one proxy unless the agreement provides
or more stockholders for the purpose of otherwise.
conferring upon a trustee or trustees the  Purpose – to make possible a unified
right to vote and other rights pertaining to control of the affairs of the corporation and
the shares for a period not exceeding five consistent policy; to make possible for a
(5) years at any time (Villanueva). The majority group of shareholders to dispose
arrangement is embodied in a document of a beneficial interest in a large proportion
called a voting trust agreement (VTA) of their shares and still retain control of the
 A voting trust, which is specifically required corporation through the voting trustee
as a condition in a loan agreement, may be  Under the prevailing view, a voting trust
for a period exceeding five (5) years but should have a legitimate business purpose
shall automatically expire upon full to promote the best interests of the
payment of the loan corporation, or even to protect the
 Essence: separation of real ownership and legitimate interests of others in the
voting rights corporation (Ballantine, cited in Campos)
 Requirements of a VTA:  No principal-agent relationship

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 The trustee has unlimited authority. The Proxy VTA

only limitation is that he should act for the Revocability Revocable unless Irrevocable if
benefit of the SH (fiduciary obligation) coupled with validly executed
 Voting trust certificates – issued by the interest BUT SH can
trustees (not the corp). These certificates revoke if there’s a
confirm (1) that a trustee has been breach of fiduciary
constituted, (2) the extent of shares, and obligation
Extent of Can only act at a Not limited to any
(3) the participation of the SH in the VTA power
 The trustee can’t dispose of the block of specified particular meeting
stockholder’s or
shares/ receive dividends. Can only vote
 The SH can revoke the VTA on the ground
of breach of fiduciary obligations When to Absence of the Even when owner
 Status of transferee and transferor: vote
owner is present
a. Voting trustee is only a share owner Capacity to Can’t be voted as Can be voted as a
vested with apparent legal title for the be a
a director, unless director.
sole purpose of voting upon stocks that director
he is also a SH of Considered as the
he does not own record (owns SH of record in
b. Transferring stockholder retains the other shares) the books of the
right of inspection of corporate books corp
which he can exercise concurrently with Subject Voting rights Shares + voting
the voting trustee Matter
Duration Usually shorter Usually longer but
 Powers and rights of voting trustees: but can’t exceed 5 can’t exceed 5
a. Right to vote and other rights years years except in
pertaining to the shares in their names loan agreements
subject to terms and conditions of and
for the period specified in the
agreement Natl Investment & Dev’t Corp v Aquino (1988)
b. Vote in person or by proxy unless
agreement provides otherwise Batjak, a Fil-Am corp, owed money to PNB. Its oil
c. Rights of inspection of corporate books mills were also mortgaged to other banks. They
and records further borrowed money from NIDC, a wholly
d. Legal title holder – qualified to be a owned subsidiary of PNB, to pay off the mortgages.
director In return, NIDC got preferred shares, convertible
The clear intent is that in order to into common shares. Batjak executed a 1st
be eligible as director, what is mortgage on all its properties to PNB in exchange
material is the legal title to, not the for a credit facility etc.
beneficial ownership of, the stock Next, a Voting Trust Agreement was executed in
as a[appearing on the books of a favor of NIDC by SHs representing 60% of Batjak.
corporation. Therefore, a director Period of 5 years, irrevocable. During this time, all
who executes a voting trust dividends to be paid to SHs. When Batjak became
agreement over all his shares, insolvent, PNB foreclosed the mortgaged
remains only a beneficial owner, properties. When Batjak failed to redeem, it
and therefore is automatically transferred ownership to NIDC.
disqualified from his directorship. Batjak later sued NIDC, asking for the turn-over of
(Lee v. CA, 1992) all the assets and in the alternative, asked for
 Limitations on voting trust agreements: receivership.
a. should not exceed 5 years except if a Held:
condition in a loan agreement, shall *Receiver is appointed if applicant has interest in
automatically expire upon full payment property. But title of properties is now with NIDC.
of the loan *Batjak did not impugn validity of the foreclosure
b. must not be for purposes of sales. Also, no evidence that prop is in danger of
circumventing the law against loss, removal or material injury if receiver not
monopolies and illegal combinations in appointed.
restraint of trade What was assigned to NIDC was only power to vote
c. must not be used for purposes of fraud shares of stock of Batjak. Such power includes
d. must be in writing, notarized, specify authority to execute any agreement or doc
the terms and conditions thereof necessary to express consent or assent to any
e. certified copy must be filed with matter by SHs.
corporation and SEC otherwise Voting trust did not provide for transfer of assets.
unenforceable What was stipulated to be returned were only
f. agreement is subject to examination by certifs of stock. Voting trust transfers only voting or
stockholder other rights pertaining to shares or control over the
g. shall automatically expire at the end of stock.
the agreed period
h. vote in person or by proxy unless
agreement provides otherwise
 Agreement between 2 or more stockholders
i. rights of inspection of corporate books
to vote their shares in the same way
and records
 There must be a valuable consideration for
each party
Distinction between proxy and voting trust
 Usually relate to election of directors
Proxy VTA  Parties often provide for arbitration in case
Legal title No legal title Acquires legal title of disagreement. Note: arbitrator is not

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like a trustee. The former has no voting Principal – Trustee- Consensual

rights agent beneficiary
 Valid as long as they do not limit the
discretion of the BOD in the management Proxy can’t The only limit to Merely an
of corporate affairs or work any fraud exceed his authority: agreement to
against stockholders not party to the delegated must be for vote in the
contract. Thus, it is void if it provides that authority benefit of same way
directors, once elected, should vote for trustee
certain persons as officers. (McQuade v. (fiduciary
Stoneham, 263 NY 323 (1934)) EXCEPTION: obligation)
Close corps may provide that a VTA can Must be in Must be in No formalities
interfere with discretion of the BOD writing writing and required
 Does not involve a transfer of stocks but is notarized
merely a private agreement
 No transfer of ownership and voting rights Copy must Copy must be Merely a
 Agreements by stockholders in close be filed filed with SEC contract
corporations (§100): with corp between SHs
o Agreements by and among sec
stockholders executed before the
Transfer of legal
formation and organization of a close
title to trustee
corporation, signed by all stockholders,
shall survive the incorporation of such Regular Absolute voting Owner still
corporation and shall continue to be voting rights, subj exercises
valid and binding between and among rights only to voting rights
such stockholders, if such be their fiduciary duty
intent, to the extent that such
person Another person
agreements are not inconsistent with
exercises exercises
the articles of incorporation,
voting voting rights
irrespective of where the provisions of
rights only continuously
such agreements are contained, except
for a
those required by this Title to be
specific mtg
embodied in said articles of
o An agreement between two or more
stockholders, if in writing and signed by
the parties thereto, may provide that in Proxy Trustee can be
exercising any voting rights, the shares cannot be director
held by them shall be voted as therein director
provided, or as they may agree, or as
determined in accordance with a Revocable Irrevocable, as Revocable by
procedure agreed upon by them. at will, in long as no consent or
o No provision in any written agreement any manner misconduct or mutual
signed by the stockholders, relating to fraud termination. If
EXC if
any phase of the corporate affairs, shall unilateral
be invalidated as between the parties termination,
with an
on the ground that its effect is to make liable for
them partners among themselves. damages
o A written agreement among some or all Max of 5 Max of 5 yrs at
of the stockholders in a close yrs at a a time (unless
corporation shall not be invalidated on time coterminus with
the ground that it so relates to the loan)
conduct of the business and affairs of
the corporation as to restrict or SEC can pass on validity
interfere with the discretion or powers
of the board of directors: Provided,
That such agreement shall impose on
the stockholders who are parties
thereto the liabilities for managerial
acts imposed by this Code on directors.
o To the extent that the stockholders are
actively engaged in the management or
operation of the business and affairs of
a close corporation, the stockholders
shall be held to strict fiduciary duties to
each other and among themselves.
Said stockholders shall be personally
liable for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.



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Chapter VIII EXCEPTION: If the contracts are so

DUTIES OF DIRECTORS AND unconscionable & oppressive as to amount to a
CONTROLLING STOCKHOLDERS wanton destruction of the rights of the

Board of Directors has authority to modify the

1. Duties and Liabilities of Directors proposed terms of the contracts of the
corporation for the purpose of making the
1.1 Duties In General terms more acceptable to the other contracting
parties…The test to be applied is whether the
Duty Violation under §31 act in question is the direct and immediate
Obedience - Willfully and knowingly furtherance of the corporation’s business, fairly
vote for or assent to incidental to the express powers and
patently unlawful acts of the reasonably necessary to their exercise. If so,
corporation the corporation has the power to do it;
otherwise not. [Montelibano v. Bacolod Murcia
Diligence - Guilty of gross negligence Milling Co. (1962)]
or bad faith in directing the
affairs of the corporation
Steinberg vs. Velasco
Loyalty - Acquire any personal or
pecuniary interest in conflict Steinberg is the receiver of Sibugay Trading.
with their duty as such Velasco (Pres) and other directors, approved
directors or trustees and authorized unlawful purchases of
company’s stock from Ganzon et al. Accdg to
Steinberg, this diverted funds supposed to be
 Extent of liability: Directors or trustees paid to creditors.
shall be liable jointly and severally for all
damages resulting therefrom suffered by Ganzon et al resigned as directors before the
the corporation, its stockholders, or BoD approved the purchase of stocks from
members and other persons them, worth 3,300. At that time, corp owed
 Directors act as a body in formulating corp 13K. The corp also declared dividends in favor
policies and exercise all powers of of SHs, to be paid in installments so as “not to
management. Hence, they are fiduciaries affect financial condition of the corp.” A/R’s
of the corp. It does not matter who elected which appeared on books were worthless,
them. Once elected, they must represent because receiver could not collect them.
the interests of all SHs and of the corp as a
whole. HELD: If directors dispose of corp prop or pay
 Directors must act only within the corp away its money without authority, they will be
powers. If not, they will be liable for required to make good the loss out of their
damages, unless they acted in GF and with private estates.
due diligence
Directors are not liable for loss to corp from
1.2 Duty of diligence want of knowledge, or for mistakes of
 What are required and expected of judgment, provided they were honest and fairly
directors: within the scope of the powers and discretion
o To possess at least ordinary knowledge confided to mgt.
and skill to enable them to make sound
But acceptance of office of director implies a
business decision
competent knowledge of the duties assumed,
o To attend directors meetings with
and directors cannot excuse imprudence bec of
reasonable regularity
their ignorance or inexperience. If they commit
o To exercise reasonable care in the
error of judgment through mere recklessness or
management of the corporation
want of ordinary prudence or skill, they may be
o To keep themselves sufficiently
held liable for consequences.
informed about the general condition of
the business Creditors of corp have right to assume that so
 The degree of care and diligence required is long as there are outstanding debts and
usually that which men prompted by self- liabilities, BoD will not use assets of corp to
interest, generally exercise in their own purchase its own stock, and that it will not
affairs. In determining whether reasonable declare dividends to SHs when corp is insolvent.
diligence has been exercised, the particular
Directors held liable.
circumstances of each case must be
considered. The nature of the business is  Stock purchases and dividends were
an important factor. funded out of remaining assets. But
assets < liabilities.
Business judgment rule  Ganzon et al were favored bec they
GEN RULE: Directors cannot be held liable for were able to get money ahead of
mistakes or errors in the exercise of their creditors
business judgment if they acted in good faith,  Recipients of dividends can be held
with due care & prudence. Contracts intra vires liable by receiver. Ratio: SHs are
entered into by the board of directors are accessories. Remember, they were
binding upon the corp. & courts will not the ones who chose directors.

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Western Institute of Technology v. Salas

1.3 Duty of loyalty (1997)
The determination as to whether, in a given The position of being chairman and Vice-Chairman,
case, the duty of loyalty has been violated has like that of treasurer and secretary, are not
ultimately to be decided by the court on the considered directorship positions but officership
case’s own merits. The ff. are more common positions that would entitle the occupants to
situations involving such conflict of interests: compensation. Likewise, the limitation placed under
Sect. 30 of the Corporation Code that directors
a. Self-dealing director (§32) cannot receive compensation exceeding 10% of the
 A contract of the corporation with one net income of the corporation would not apply to
or more of its directors or trustees is the compensation given to such positions since it is
voidable, at the option of such being given in their capacity as officers of the
corporation, unless all the following corporation and not a board members.
conditions are present:
o That the presence of such director
or trustee in the board meeting in Barreto v La Previsora Filipina (1932)
which the contract was approved
was not necessary to constitute a Barreto, et al. are directors of La Previsora Filipina,
quorum for such meeting; a mutual building and loan assoc. By-laws provide
o That the vote of such director or compensation of 1% of profits to each director.
trustee was not necessary for the Compensation to apply retroactively.
approval of the contract;
o That the contract is fair and Held: By-laws do not create a legal obl to pay life
reasonable under the gratuity or pension out of its net profits => beyond
circumstances; and powers of mutual bldg and loan assoc.
o That in case of an officer, the
Corp Law authorizes compensation only for future
contract has been previously
services, and cannot authorize continuous
authorized by the board of
compensation to particular directors after their
employment has terminated for past services
 Where any of the first two conditions
rendered gratuitously by them to the corp.
set forth in the preceding paragraph is
absent, in the case of a contract with a Building and loan associations are founded on strict
director or trustee, such contract may mutuality and equality of benefits and obligations.
be ratified by the vote of the Any contract or by-law in contravention of a statute
stockholders representing at least two- is ultra vires and void. There is an implied contract
thirds (2/3) of the outstanding capital with members that it shall not divert funds or
stock or of at least two-thirds (2/3) of powers to purposes other than for which it was
the members in a meeting called for created. All members must participate equally in
the purpose profits and bear losses. Any diversion of funds to
 Full disclosure of the adverse interest of unauthorized purposes violates principle of
the directors or trustees involved must mutuality between members.
be made at such meeting provided,
Also, there was no valid consideration bec the past
however, that the contract is fair and
services were rendered gratuitously.
reasonable under the circumstances
 The contract is voidable whether the
corporation suffered damages or not
c. Interlocking directors (§33)
 The burden of proving fairness is on the
 A contract between two or more
corporations having interlocking
directors shall not be invalidated on
b. Fixing compensation of directors and
that ground alone, except cases of
officers (§30)
 General rule: Directors are only
 The contract is fair and reasonable
entitled to per diems, which are
under the circumstances.
 If the interest of the interlocking
 Exception: When AOI, by-laws, or an
director in one corporation is
advance contract provides for
substantial and his interest in the other
corporation or corporations is merely
 Assuming compensation is intended,
nominal, he shall be subject to the
only SHs can fix the amount. In fact,
provisions of the preceding section
the SHs should approve the granting of
(§32) insofar as the latter corporation
compensation because this entails a
or corporations are concerned.
reduction of the amount that could be
 Stockholdings exceeding twenty (20%)
distributed to them as dividends
percent of the outstanding capital stock
SH’s resolution to grant compensation can only
shall be considered substantial for
refer to future services (Barreto v La Previsora
purposes of interlocking directors.
Filipina (1932))
 Requisites of a valid contract between

the corporation and one or more of its
directors, trustees or officers (§32):
1. That the presence of such director
or trustee in the Board meeting in
which the contract was approved

100% UP LAW UP BAROPS 2008 Page 34 of 351


was not necessary to constitute a  The fiduciary position of insiders3,

quorum for such meeting directors, and officers prohibits them
2. That the vote of such director or from using confidential information
trustee was not necessary for the relating to the business of the
approval of the contract corporation to benefit themselves or
3. That the contract is fair and any competitor corporation in which
reasonable under the they may have a mere substantial
circumstances interest.
4. That in case of an officer, the  The liability of a director or officer
contract with the officer has been guilty of using inside information is to
previously authorized by the Board the corporation and not to any
of Directors individual stockholder
 Since loss and prejudice to the
d. Seizing corporate opportunity; Disloyalty corporation is not a requirement for
(§34) liability, the corporation has a cause of
 Where a director, by virtue of his office, action as long as there is unfair use of
acquires for himself a business inside information
opportunity which should belong to the  It is inside information if it is not
corporation, thereby obtaining profits generally available to others and is
to the prejudice of such corporation, he acquired because of the close
must account to the latter for all such relationship of the director or officer of
profits by refunding the same (§34) the corporation
UNLESS his act has been ratified by a  General rule: (Majority view) Directors
vote of the stockholders owning or owe no fiduciary duty to stockholders
representing at least two-thirds (2/3) but they may deal with them at arm’s
of the outstanding capital stock. length. No duty to disclose facts known
o Hence, a majority SH can actually to the director or officer
compete with the corporation if he  Special facts doctrine (Strong v
owns 2/3 of the OCS Repide, 1909) – Conceding the
o This provision shall be applicable, absence of a fiduciary relationship in
notwithstanding the fact that the the ordinary case, courts nevertheless
director risked his own funds in the hold that where special circumstances o
venture. facts are present which make it
o Requires prejudice. If there’s no inequitable for the director to withhold
prejudice to the corporation, the information from the stockholder, the
director or officer can still be held duty to disclose arises and concealment
liable under §31. is fraud.
o §34 covers only directors.
However, according to Campos, 2. Duties and Liabilities of Officers
officers can be held liable under
§31 (2nd par.).—“When a director, The provisions on seizing corporate opportunity and
trustee or officer attempts to disloyalty (§31¶1 and §34) shall also apply to
acquire or acquires, in violation of corporate officers
his duty, any interest adverse to
the corporation in respect of any Note: Members of the BOD who are also officers
matter which has been reposed in are held to a more stringent liability because they
him in confidence, as to which are in-charge of day-to-day activities (Campos).
equity imposes a liability upon him
to deal in his own behalf, he shall
be liable as a trustee for the
corporation and must account for 3. Duty of controlling interest
the profits which otherwise would  A majority stockholder is subject to the duty of
have accrued to the corporation.” good faith when he acts by voting at a
 The last paragraph of Section 31 and stockholders’ meeting with respect to a matter
Section 34 contain the doctrine of in which he has a personal interest
corporate opportunity. In case of such  Controlling stockholders may dispose of their
conflict of interests, and the director shares at any time and at such price as they
acts against the good of the choose provided they do not pervert these
corporation, he shall be accountable for prerogatives by transferring office to persons
the profits he obtained, even if he had who are known as intending to raid the
risked his own funds. corporate treasury or otherwise improperly
 Corporate right , opportunity or benefit themselves.
expectancy arises only when: (a)
directors were negotiating on behalf of “Insider” means: (a) the issuer; (b) a director or officer (or
the corporation; (b) the corporation person performing similar functions) of, or a person
was in need of the particular business controlling the issuer; (c) a person whose relationship or
opportunity to the knowledge of the former relationship to the issuer gives or gave him access
directors, or (c) the business to material information about the issuer or the security that
opportunity was seized and developed is not generally available to the public; (d) a government
at the expense and with the facilities of employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access
the corporation. (Litwin v Allen)
to material information about an issuer or a security that is
not generally available to the public; or (e) a person who
e. Using inside information (Cf §3.8, 23.2, 27, learns such information by a communication from any of
61, 71.2, Securities Regulation Code) the foregoing insiders (§3.8, Sec Regulations Code)

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 It is fraudulent for a stockholder to buy from

another stockholder without disclosing his
Chapter IX
 Principal stockholders are likewise prohibited THE RIGHT OF INSPECTION
from using inside information in the purchase
and sale of equity security 1. Basis of right

4. Remedies of stockholder in case Reason of the law for granting stockholders the
of mismanagement or abuse of right to inspect the records of the corporation: As
powers the beneficial owners of the business, the
stockholders have the right to know
 Receivership 1. The financial condition of the corporation;
 Injunction if the act has not been done and
 Dissolution if the abuse amounts to a ground 2. How the corporate affairs are being managed
for quo warranto but the Solicitr General by their elected directors.
refuses to act
 Derivative suit a complaint filed with the RTC PURPOSE:

Uichico, et al. vs. NLRC (1997) So that if they find the conditions unsatisfactory,
they may be able to take necessary measures to
The petitioners, who are officers and directors of protect their investment.
Crispa, Inc., assailed the decision of the NLRC
holding them solidarily liable with Crispa for the The right of inspection is
payment of separation pay and backwages to the
private respondents. It was the contention of the 1. Preventive – to a limited extent may serve
petitioners that the award of separation pay and as a deterrent to an ill-intentioned
backwages is a corporate obligation and must management to know that its acts may be
therefore be assumed by Crispa alone. scrutinized

HELD: While the general rule is that obligations 2. Remedial – a dissatisfied stockholder may
incurred by a corporation, acting through its resort to the right of inspection as a
directors, officers and employees, are its sole preliminary step to seeking more direct
liabilities, there are times when solidary liabilities remedies against abuses committed by
may be incurred such as in this case where it is management (removal of directors or a
undisputed that petitioners had a direct hand in the derivative suit).
illegal dismissal of respondent employees. They
were the ones, who as high-ranking officers and The right of inspection goes hand-in-hand with the
directors of Crispa, signed he Board resolution right to vote. Through the former, the SH can
retrenching the private respondents on the feigned gather information on how to vote.
ground of serious business losses that had no basis
apart from an unsigned and unaudited profit and
loss statement which had no evidentiary value 2. What records covered; records
whatsoever. This is indicative of bad faith on the required to be kept by corporation
part of petitioners for which they can be held (§74)
jointly and severally liable with Crispa for all the
money claims of the illegally terminated respondent  Books that record all business transactions of
employees. the corporation which shall include contract,
memoranda, journals, ledgers, etc;
 Minute book for meetings of the SHs/members;
Tramat Mercantile, Inc. vs. CA (1994)  Minute book for meetings of the
Personal liability of a corporate director, trustee or  Stock and transfer book.
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only Minutes of meetings without the signature of the
when: corporate secretary have no probative value (NATU
o He assents (a) to a patently unlawful act of v Sec of Labor, 1981)
the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or What is a stock transfer agent?
(c) for conflict of interest, resulting in o A stock transfer agent is one engaged
damages to the corporation, its principally in the business of registering
stockholders or other persons; transfers of stocks in behalf of a stock
o He consents to the issuance of watered corporation. No stock transfer agent shall
stocks or who, having knowledge thereof, be allowed to operate in the Philippines
does not forthwith file with the corporate unless he secures a license from the SEC
secretary his written objection thereto; and pays a fee as may be fixed by the
o He agrees to hold himself personally and Commission, which shall be renewable
soidarily liable with the corporation; or annually
o He is made, by a specific provision of law, o A stock corporation is not precluded from
to personally answer for his corporate performing or making transfer of its own
action stocks, in which case all the rules and
Reiterated in Atrium Management Corp. v. CA, regulations imposed on stock transfer
2001 agents, except the payment of a license fee
herein provided, shall be applicable.

100% UP LAW UP BAROPS 2008 Page 36 of 351


 Financial statements (§75)

3.2 Limitation as to purpose
o Within ten (10) days from receipt of a
written request of any stockholder or
member, the corporation shall furnish to Is the stockholder’s purpose material? – YES.
him its most recent financial statement, There is however a presumption that his
which shall include a balance sheet as of purpose is a proper one and the corporation
the end of the last taxable year and a profit cannot refuse to grant him the right on its
or loss statement for said taxable year, mere belief that his motive is improper.
showing in reasonable detail its assets and
liabilities and the result of its operations  Otherwise, such refusal may open its
o At the regular meeting of stockholders or guilty officers or directors to liability for
members, the BOD or BOT shall present to damages, UNLESS they can successfully
such stockholders or members a financial prove in their defense:
report of the operations of the corporation o that the stockholder was not
for the preceding year, which shall include acting in good faith
financial statements, duly signed and o that he improperly used the
certified by an independent certified public information obtained in the past
accountant. o that he used the information for
o However, if the paid-up capital of the an illegitimate purpose
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible Gonzales v. PNB (1983)
officer of the corporation.
Section 74 of the Corporation Code has been
interpreted by the Supreme Court as no longer
allowing the unqualified right of inspection of
Torres et al v CA (1997) stockholder of corporate records and that the
person making the demand has to show that he
It is the corporate secretary's duty and obligation is acting in good faith and for a legitimate
to register valid transfers of stocks and if said purpose.
corporate officer refuses to comply, the transferor-
stockholder may rightfully bring suit to compel  Burden of proving that the purpose is
performance. improper or illegal is on corporation and
its officers.
 Good purposes: to investigate acts of
management; to investigate financial
3. Extent of and limitations on right conditions; fix value of shares; mailing
list for proxies; information for litigation
3.1 Limitations as to time and place  Not good and honest purposes: obtain
corporate secrets (e.g., formula);
nuisance suit; to embarrass the company
a. Only at reasonable hours on business days
TEST to determine whether the purpose as
 By-laws cannot limit inspection to
proved by the corporation or as admitted by
merely a few days during the year
the stockholder is a legitimate one or not? – A
chosen by the directors [Pardo vs.
legitimate purpose is one which is germane to
Hercules Lumberm, 1924]
the interests of the stockholder as such and not
 By-laws cannot provide that the
contrary to the interests of the corporation
inspection shall only be upon authority
(Gokongwei v. SEC, 1979).
of the President of the corporation
previously obtained in each case
(Veraguth v. Isabela Sugar Co., 1932) 4. Who may exercise right
 However, inspection should be made in  Director, trustee, stockholder, member,
such a manner as not to impede the personally or through an agent
efficient operations of the corporation o The right to inspect corporate books may
(Duff v. Mutual Brewing Co., NYLJ, Oct. be done with the assistance of technical
3, 1892) men (e.g., lawyers and accountants) and
 By-laws can adopt policies with respect it may be delegated. The right includes
to right to inspect (§47(10)-Such other the right to copy or to take notes. (W.G.
matters as may be necessary for the Philpotts v Phililppine Mfg Co., 1919)
proper or convenient transaction of its  The transferor of shares and the voting trustee,
corporate business and affairs) in accordance with Section 59
 Stockholders of a parent corporation with
b. Inspection shall be done in the place where respect to subsidiary:
the corporation keep all its records, which, o If two are legally separate and independent
as enjoined by law, is in the principal office entity, no right of inspection. However, the
SH of the parent corp can look at the books
 Stockholder cannot demand that he be of the latter with respect to its investments
allowed to take the corporate books to the subsidiary.
outs of the corporation’s principal office o If they are practically one and the same in
for the purpose of inspecting them so far as management and control is
(Veraguth, Supra) concerned, and inspection is demanded
because of gross mismanagement of
subsidiary by the parent’s directors who are

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also directors of subsidiary, who are also Chapter X

directors of the subsidiary, then the latter
will be treated as a mere agent or
instrumentality of the respondent parent
corporation and the latter may be 1. Nature and Definition of a
compelled to open the subsidiary’s books to Derivative Suit
its stockholders (Gokongwei v. SEC, Supra)
5. Remedies available if inspection
Derivative suit – suits of stockholders based on
wrongful or fraudulent acts of directors or other
 Mandamus
o The writ should be directed against
the corporation, but the secretary
Nature and basis/distinguish from other
thereof may be joined as party
defendant since he is customarily
charged with the custody of all
 INDIVIDUAL suit if wrong done is personal to
corporate records and is
presumably the parson against
 CLASS suit if wrong done is to a group of SH
whom the order of the court will be
 DERIVATIVE suit if wrong done is to the
made affective in case mandamus
corporation itself
is granted.
o In a derivative suit, the cause of action
o And even the president of the corp.
belongs to the corporation and not the
may be made respondent if
stockholders but since the directors who
necessary to the effectuation of the
are charged with mismanagement are the
court’s order (Philpotts v. Phil.
ones who will be sued or may not be willing
Manufacturing Co., 1919)
to sue, then the corporation is left without
 Injunction
redress, hence, SH is given the right to sue
 Action for damages – any officer or agent of
on behalf of the corporation
the corporation who shall refuse to allow any
director, trustees, stockholder or member of
the corporation to examine and copy excerpts
2. Requirements relating to
from its records or minutes, in accordance with
the provisions of this Code, shall be liable to
derivative suit
such director, trustee, stockholder or member
for damages 1. The stockholder or member bringing the suit
 File an action to impose a penal offense by fine must have exhausted his remedies within the
and/or imprisonment corporation (Angeles v. Santos, 1937) (ex. He
o Any officer or agent of the corporation who has made a demand on the directors or
shall refuse to allow any director, trustees, trustees and they have failed or refused to act
stockholder or member of the corporation on such demand. Note: demand is not
to examine and copy excerpts from its necessary if it will be futile)
records or minutes, in accordance with the 2. The stockholder or member must have been
provisions of this Code x x x and in one at the time the transaction or act
addition, shall be guilty of an offense which complained of took place, or in the case of a
shall be punishable under Section 144 of stockholder, the shares must have devolved
the Corporation Code upon him since by operation of law, unless
o If such refusal is made pursuant to a such transaction or act continues and is
resolution or order of the board of directors injurious to the stockholder (Pascual v. Orozco,
or trustees, the liability under this section 1911)
for such action shall be imposed upon the Bonafide ownership by stockholder of stock in
directors or trustees who voted for such his own right suffices to invest him with
refusal standing to bring a derivative action for the
o It shall be a defense to any action that the benefit of the corporation. The number of
person demanding to examine and copy shares owned by the SH is immaterial since he
has improperly used any information is not suing in his own behalf or for the
secured through any prior examination of protection or vindication of his own particular
the records, or is not acting in good faith or right or the redress of a wrong committed
for a legitimate purpose in making his against him individually but in behalf and for
demand (§74, par 3) the benefit of the corp. (San Miguel Corp. v.
o Other valid grounds for denying access to Khan, 1989)
books or records: immediately prior to the Heirs of a SH can bring a derivative suit
annual SHs’ meeting; holder of books is provided that the transaction took place during
unavailable; the books are being audited; the lifetime of the SH (Denison v. Berderger,
on-going inventory count; computerization; 1941)
moving out or change of business address 3. Any benefit recovered by the stockholder or
member as a result of bringing the derivative
suit, whether by final judgment, by judicial
compromise or by extra-judicial settlement,
must be accounted for to the corporation, who
is the real party in interest
4. If the suit is successful, the plaintiff is entitled
to reimbursement from the corporation for the
reasonable expenses of litigation, including
attorney’s fees

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the board of directors for the

appropriate relief but the latter has
Bitong v CA (1998)
failed or refused to heed his plea; and
c) the cause of action actually devolves on
In the absence of a special authority from the the corporation, the wrongdoing or
board of directors to institute a derivative suit for harm having been, or being caused to
and in its behalf, the managing officer is the corporation and not to the
disqualified by law to sue in her own name. The particular stockholder bringing the suit.
power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the
BOD that exercises its corporate powers and not in 3. Requirements under the Interim Rules
the president or officer thereof. But where of Procedure for Intra-Corporate
corporate directors are guilty of a breach of trust, Controversies (Rule 8)
not of mere error of judgment or abuse of
discretion, and intra-corporate remedy is futile or 1. He was a stockholder or member at the time
useless, a SH may institute a derivative suit in the acts or transactions subject of the action
behalf of himself and other SHs and for the benefit occurred and the time the action was filed;
of the corporation, to bring about a redress of the 2. He exerted all reasonable efforts, and alleges
wrong inflicted directly upon the corporation and the same with particularity in the complaint, to
indirectly upon the stockholders. exhaust all remedies available under the AOI,
by-laws, laws or rules governing the
corporation or partnership to obtain the relief
Lim vs. Lim-Yu (2001) he desires.
The suit of respondent cannot be characterized as 3. No appraisal rights are available for the act(s)
derivative, because she was complaining only of complained of; and
the violation of her preemptive right under Section 4. The suit is not a nuisance or harassment suit.
39 of the Corporation Code. She was merely
praying that she be allowed to subscribe to the Derivative suits are within the jurisdiction of the
additional issuances of stocks in proportion to her RTC (§5.2, Securities Regulation Code)
shareholdings to enable her to preserve her
percentage of ownership in the corporation. She
was therefore not acting for the benefit of the
corporation. Quite the contrary, she was suing on
her own behalf, out of a desire to protect and Chapter XI
preserve her preemptive rights
Filipinas Port Services Inc., represented
by stockholders, Eliodoro C. Cruz v. CAPITAL STRUCTURE
Victoriano S. Go, et al.
GR No. 161886
March 16, 2007
1. Sources of Financing
Cruz, a stockholder of the corporation, filed a
derivative suit against the members of the 3 main sources:
board questioning the creation of certain 1. Contributions by stockholders (Equity)
positions. Cruz thus prayed that the 2. Loans or advances from creditors (Borrrowing)
respondent members of the board of 3. Profits that the business may earn
directors be made to pay Filport, jointly and
severally, the sums of money variedly
representing the damages incurred as a result 2. Classification of Shares (§6)
of the creation of the offices/positions  Shares of stock of stock corporations may be
complained of and the aggregate amount of divided into classes or series of shares or both
the questioned increased salaries. The RTC  Each class or series of shares may have rights,
found in his favor initially but the CA later privileges, restrictions, stated in the AOI
dismissed the derivative suit.  No share may be deprived of voting rights,
HELD: T his is a valid derivative suit instituted except:
by Cruz. the action below is principally for o Preferred or
damages resulting from alleged o Redeemable shares,
mismanagement of the affairs of Filport by its o unless otherwise provided by the Code
directors/officers, it being alleged that the  There shall always be a class/series of shares
acts of mismanagement are detrimental to the which have a COMPLETE VOTING RIGHTS
interests of Filport. Thus, the injury  EACH SHARE SHALL BE EQUAL IN ALL
complained of primarily pertains to the RESPECTS TO EVERY OTHER SHARE, except as
corporation so that the suit for relief should be otherwise provided in the AOI and as stated in
by the corporation. Besides, the requisites the certificate of stock
before a derivative suit can be filed by a
stockholder are present in this case, to wit: 2.1 Common
 A stockholder, owner of at least one
a) the party bringing suit should be a common share, has the following rights:
shareholder as of the time of the act or o right to vote at meetings
transaction complained of, the number o right to dividends
of his shares not being material; o right to examine corporate books
b) he has tried to exhaust intra-corporate  Most commonly issued
remedies, i.e., has made a demand on

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 Entitles owner to equal pro-rata division of  Par value is minimum issue price of such
profits after preference share in the AOI which must be stated in
the certificate
2.2 Preferred
 Stocks which are given preference by the 2.4 No-par value
issuing corporation in dividends and the  These are shares without a stated value.
distribution of assets of the corporation in The Corporation upon their issuance will set
case of liquidation or such other their value, which shall not be less than P5.
preferences as may be stated in the AOI  Shall be deemed fully paid and non-
which are not violative of the Corporation assessable and the holders of such shares
Code. (§6) shall not be liable to the corporation or to
 Limitations on preferred shares: its creditors in respect thereto (§6)
o Preferred shares can only be issued  Entire consideration received by the
with par value corporation for its no-par value shares shall
o Preferred shares must be: be treated as capital and shall not be
a. Stated in the Articles of available for distribution as dividends (Ibid)
Incorporation and in the certificate  Cannot be issued as Preferred Shares (Ibid)
of stock or  AOI must state the fact that corp issues no-
b. May be fixed by the BOD where par shares and the number of shares
authorized by the AOI, provided:  Three ways of determining value of no par
such terms and conditions shall be value shares (§62):
effective upon filing of a certificate o By majority vote of the outstanding
thereof with the SEC. shares (issued shares) in a meeting
 Entitles holder to some preferences in called for the purpose
dividends, distribution of assets upon o By BOD pursuant to authority conferred
liquidation or both: upon it by the AOI
o preference as to dividends – dividends o By amendment of the AOI
are payable only when profits are  Corporations which cannot issue no-par
earned and as a general rule, even if value shares (§6):
there are existing profits, BOD has o Banks
discretion to declare dividends or not o Insurance Companies
a. Participating – after getting their o Trust Companies
fixed dividend preference ahead of o Building and Loan Associations
CS, they share with the CS the rest o Public utilities
of the dividends
UNLESS expressly provided, they are 2.5 Founder‘s (§7)
non-participating  Those shares, classified as such in the AOI,
b. Cumulative – dividends in arrears which are given certain rights and
accrue, must be paid first before privileges not enjoyed by the owners of
common stock dividends are paid. other stocks. (§7)
c. Non cumulative – contract makes  Where exclusive right to vote and be voted
dividends depend upon existence of for in the election of directors is granted,
profits for the year such right must be for a limited period not
o as to voting rights – usually does not to exceed 5 years subject to approval by
have voting rights; but unless clearly SEC. 5 year period shall commence from
withheld, PS would have right to vote date of approval by SEC. (Ibid)
Note: even if deprived of voting rights,
PS holders are entitled to vote on the 2.6 Redeemable
matters enumerated under §6  Those shares, expressly so provided in the
o preference upon liquidation – in the AOI, which may be purchased or taken up
absence of provision, participate pro by the corporation upon the expiration of a
rata with common stock fixed period regardless of the existence of
o not a creditor; there’s no assurance unrestricted retained earnings in the books
that you will get back investments but of the corporation and upon such terms and
if the corporation profits, you conditions stated in the AOI and in the
participate in the profits certificate of stock (§8)
 Redemption is repurchase, a reacquisition
2.3 Par value of stock by a corporation which issued the
 These are shares with a stated value set stock in exchange for property, whether or
out in the AOI. This remains the same not the acquired stock is cancelled, retired
regardless of the profitability of the or held in the treasury. Essentially, the
corporation. This gives rise to financial corporation gets back some of its stock,
stability and is the reason why banks, trust distributes cash or property to the
corporations, insurance companies and shareholder in payment for the stock, and
building and loan associations must always continues in business as before. The
be organized with par value shares. redemption of stock dividends previously
 One in the certificate of stock of which issued is used as a veil for the constructive
appears an amount in pesos as the nominal distribution of cash dividends. (CIR v CA,
value of the shares 1999)
 Can’t be issued at less than par value.  While redeemable shares may be redeemed
Otherwise, it would become a watered regardless of the existence of unrestricted
stock (§65, discussed in Chapter XII) retained earnings, this is subject to the
condition that the corporation has, after
such redemption, assets in its books to

100% UP LAW UP BAROPS 2008 Page 40 of 351


cover debts and liabilities inclusive of With floating coupon rate With guaranteed
capital stock. Redemption, therefore, may coupon rate
not be made where the corporation is
insolvent or if such redemption will cause D. Convertibles
insolvency or inability of the corporation to
E. Combo of B+C+D
meet its debts as they mature. (Republic
Planters Bank v Agana, 1997)
F. Founder’s shares
2.7 Treasury G. Treasury Shares
 These are shares of stock which have been
issued and fully paid for, but subsequently
re-acquired by the issuing corporation by 3. Nature of Subscription Contract
purchase, redemption, donation or through
some other lawful means. Such shares
may again be disposed of for a reasonable
price fixed by the BOD. (§9)
3.1 Subscription Contract
 Note: delinquent stocks, which are stocks
that have not been fully paid, may become  Any contract for the acquisition of unissued
treasury stocks upon bid of the corporation stock in an existing or a corporation still to
in absence of other bidders (§68) be formed shall be deemed a subscription
 May be sold at less than par, regarded as contract, notwithstanding the fact that the
corporate property parties may refer to it as a purchase or
 In this manner, stocks can be retired some other contract. (§60)
gradually, even those which aren’t  Transfer for consideration of treasury
redeemable shares is a sale by the corporation (not
 No limit as to how many shares can be subscription). A transfer of fully paid
retired shares by a stockholder to a third person is
a sale. But it seems that assignment by a
2.8 Convertible subscriber of his unpaid subscription would
require that the requisites for valid release
A type of preferred stock that the holder can from subscription must be complied with
exchange for a predetermined number of the  Shareholders are not creditors of the
corporation’s common shares at a specified time corporation with respect to their
shareholdings thereto and the principle of
2.9 Non-voting shares (§6) compensation or set-off has no application
 Not necessarily required to be in writing
 Shares which have, generally, no voting  Once subscription contract is perfected, SH
rights; except in the following becomes the debtor of the corporation. He
circumstances: is liable to pay any unpaid portion of the
o Amendment of the AOI subscription. He can also be made
o Adoption and amendment of by-laws personally liable to the creditors of the
o Sale, lease, exchange, other disposition corporation to the extent of his unpaid
of all or substantially all of the subscription
corporate property  General Rule: SH is not liable to pay
o Incurring, creating or increasing interest on his unpaid subscription.
bonded indebtedness Exception: if required by the by-laws (§66)
o Increase or decrease of capital stock
o Merger and consolidation 3.2 Pre-incorporation subscription (§61)
o Investment of corporate funds in  Pre-incorporation subscription is a
another corporation or business subscription for shares of stock of a
o Dissolution of the corporation corporation still to be formed.
 It shall be irrevocable for a period of at
CLASSES OF SHARES least six (6) months from the date of
A. Common  It can only be revoked, when:
o when all of the other subscribers
consent to the revocation, or
No-par Par o when the incorporation of the
corporation fails to materialize within
six (6) months or within a longer period
Multiple par value Single par value as my be stipulated in the contract of
 After the submission of the AOI to the SEC,
B. Preferred
no pre-incorporation subscription may be
Liquidation Dividends

4. Pre-emptive Right to Shares (Cf

Cumulative/non-cumulative Participating/non- §39, 102)

4.1 Definition of pre-emptive rights – option

C. Redeemable
privilege of an existing stockholder to subscribe to
a proportionate part of shares subsequently issued
by the corp before the same can be disposed of in

100% UP LAW UP BAROPS 2008 Page 41 of 351


favor of the others; includes all issues and Obligation to pay:

disposition of shares of any class  Principal + Interest
 All stockholders of a stock corporation shall  Security Interest over Property and Assets
enjoy pre-emptive right to subscribe to all  Preferences vis-à-vis SH
issues or disposition of shares of any class,
in proportion to their respective
shareholdings, unless such right is denied
by the AOI or an amendment thereto
 This is to prevent dilution in shareholding
 Includes not only new shares in pursuance
of an increase of capital stock but would
cover the issue of previously unissued
shares which form part of the existing
capital stock as well as treasury shares
 Where the shares are issued in exchange
for property needed for corporate purposes
or for debt previously granted, SH cannot
demand his pre-emptive right for right may
prejudice corporate interest (§39) (Shares of Stock, Inchoate Rights)

4.2 Limitation to exercise of pre-emptive right Return of Equity Interest:

(§39):  Dividends
a. Such pre-emptive right shall not extend to  Proceeds realized from sale of shares
shares to be issued in compliance with laws  Liquidity dividends
requiring stock offerings or minimum stock
ownership by the public;
b. Not extend to shares to be issued in good
faith with the approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted debt
c. Shall not take effect if denied in the AOI or
4.3 Remedies in case of unwarranted denial:
a. Injunction
b. Mandamus
 in any case, the suit should be individual Chapter XII
and not derivative because the wrong done
is to the stockholders individually CONSIDERATION FOR ISSUANCE OF
c. SEC can cancel shares if the third party is SHARES
not innocent
1. Form of consideration (§62)

CAPITAL CONTRIBUTIONS  Stocks shall not be issued for a consideration

less than the par or issued price thereof.
(Money + Proprietary rights)  Consideration for the issuance of stock may be
any or a combination of any two or more of the
+ following:
a) Actual cash paid to the corporation;
LOAN ACCOMMODATIONS 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 the stock issued
o Valuation of consideration other than
CORPORATION actual cash, or consists of intangible
property such as patents of copyrights
– initially be determined by the
A incorporators or the board of directors,
a subject to approval by the SEC.
o Note: Property should not be
PROPERTY/ASSETS encumbered. Otherwise, it would
impair the consideration
c) Labor performed for or services actually
rendered to the corporation (must be
capable of being valuated);
d) Previously incurred indebtedness of the
LIABILITY: corporation;
e) Amounts transferred from unrestricted
retained earnings to stated capital
(declaration of stock dividends); and

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f) Outstanding shares exchanged for stocks in  Failure to pay on such date shall render
the event of reclassification or conversion. the entire balance due and payable and
 Prohibited consideration: Shares of stock shall shall make the stockholder liable for
not be issued in exchange for promissory notes interest at the legal rate on such
or future service (because realization is balance, unless a different rate of
uncertain) interest is provided in the by-laws,
 Future service may be used as consideration computed from such date until full
provided that certificates of stock will be issued payment.
only after the performance of such services.  If within thirty (30) days from the said
 Same consideration applies for the issuance of date no payment is made, all stocks
bonds by the corporation. covered by said subscription shall
 Fixing of issued price of no-par value shares: thereupon become delinquent and shall
The issued price of no-par value shares may be be subject to sale as hereinafter
fixed: provided, unless the BOD orders
a) in the AOI or otherwise.
b) by the BOD pursuant to authority conferred  Despite the fact that the subscription is
upon it by the AOI or the by-laws, or partially paid, the entire subscription
c) in the absence thereof, by the SHs becomes delinquent
representing at least a majority of the  Subscriber is not barred from paying
outstanding capital stock at a meeting duly the balance plus the expenses incurred
called for the purpose. by the corp before the date of the
 The value of the consideration received must delinquency sale (§68).
be equal to the issue price of the shares of
stocks which in no case shall be less than par b. Procedure for delinquency sale (§68)
 The BOD must make a call by
resolution demanding the payment of
2. Liability on watered stocks the balance of the subscription ("notice
of call").
Watered stock – shares issued as fully paid-up  The notice of call shall be served on
when in fact the consideration agreed to and each stockholder either personally or
accepted by the directors of the corporation was by registered mail. At this point, there
something known to be much less than the par is no need for publication.
value or issued value of the shares.  If the stockholder does not pay the
amount on the date designated in the
Water in stock refers to the difference between the notice, the Board shall issue, by
fair market value at the time of the issuance and resolution, a "notice of delinquency."
the par or issued value of said stock. Subsequent  Notice of delinquency shall be served
increase in the value of the property used in paying on the non-paying subscriber either
the stock does not do away with the water in the personally or by registered mail, PLUS
stock. The existence of such water is determined publication in a newspaper of general
at the time of issuance of the stock. circulation in the province or city where
the principal office of the corporation is
 Evils: deprives corp of needed capital; dilutes located, once a week for two (2)
proportionate interest of existing and future consecutive weeks. The notice shall
SH; injures present and future creditors state the amount due on each
because it reduces value of corp assets subscription plus accrued interest, and
the date, time and place of the sale
 Any director or officer of a corporation which shall not be less than 30 days
consenting to the issuance of stocks or who, nor more than 60 days from the date
having knowledge thereof, does not forthwith the stocks become delinquent.
express his objection in writing and file the  The amount due in the notice must
same with the corporate secretary (§65) include all expenses: publication, legal,
o for a consideration less than its par or etc.
issued value or o Note: the notices are jurisdictional.
o for a consideration in any form other than  In the public auction, the highest
cash, valued in excess of its fair value, bidder is one who is willing to pay the
 shall be solidarily liable with the stockholder balance of the subscription for the least
concerned to the corporation and its creditors number of shares. The corporation will
for the difference between the fair value give the highest bidder the certificate of
received at the time of issuance of the stock stock in the number of his bid; the
and the par or issued value of the same. remaining number will be issued a
certificate of stock in favor of the
subscriber as fully paid. If there are no
3. How Payment of Shares Enforced bidders, the corporation must bid for
the whole number of shares regardless
3.1 Delinquency sale of how much the SH has paid. Such
stocks will pertain to the corporation as
a. How do shares become delinquent (§67) fully paid treasury stocks.
 Payment of any unpaid subscription or
any percentage thereof, together with c. When sale may be questioned (§69)
the interest accrued, if any, shall be
made on the date specified in the  No action to recover delinquent stock
contract of subscription or on the date sold can be sustained upon the ground
stated in the call made by the board. of irregularity or defect in the notice of

100% UP LAW UP BAROPS 2008 Page 43 of 351


sale, or in the sale itself of the o be entitled to vote or to

delinquent stock, unless the party o representation at any stockholder's
seeking to maintain such action first meeting,
pays or tenders to the party holding the o nor shall the holder thereof be entitled to
stock the sum for which the same was any of the rights of a stockholder (§71)
sold, with interest from the date of sale  Except the right to dividends in
at the legal rate; and accordance with the provisions of this
 No such action shall be maintained Code,
unless it is commenced by the filing of  until and unless he pays the amount
a complaint within six (6) months from due on his subscription with accrued
the date of sale. interest, and the costs and expenses of
advertisement, if any.
 Issuance of Certificate – Once full payment  Note that the provision on dividends
for the stocks have been tendered to the pertain to delinquent stock hence a call
corporation in any of the valid forms of must have been made
consideration for the issuance of stocks,  Stock dividends on delinquent shares
the purchaser or the subscribers entitled to are not applied but are included in
be issued the corresponding certificate of delinquency sale wherein it is liquidated
stock which evidences their ownership of
shares in a particular corporation (§64) 5. Rights and Obligations of Holders
of Unpaid But Non-Delinquent Stock
Apocada v NLRC
 Holders of subscribed shares not fully paid
Apocada was employed in Intans Phil wherein he which are not delinquent shall have ALL the
subscribed to 1500 shares. He subsequently rights of a stockholder. (§72)
resigned and instituted a complaint with NLRC  Subscribers for stock shall pay to the
against corporation for payment of unpaid wages, corporation INTEREST on all unpaid
COLA, balance of gasoline and representation subscriptions from the date of subscription, if
expenses, bonus. Corporation applied what is due so required by, and at the rate of interest fixed
to Apocada the balance of his unpaid subscription. in the by-laws. If no rate of interest is fixed in
HELD: Set-off is not proper. Unpaid subscriptions the by-laws, such rate shall be deemed to be
are not yet due and payable. They become due the legal rate. (§66) General rule: unpaid
and payable when a call is made by the subscriptions can not be charged with interest.
corporation. There is no such call yet. Set-off Exception: when required by the by-laws.
against wages is not valid under labor code.  No certificate of stock shall be issued to a
subscriber until the full amount of his
subscription, together with the interest and
3.2 Court Action (§70)
expenses (in case of delinquent shares) if any
is due, has been paid. (§64)
Gen. Rule A valid call is a prerequisite to
 No shares of stock against which the
liability where court action is the remedy
corporation holds any unpaid claim shall be
chosen (Da Silva v. Aboitiz, 1923).
transferable in the books of the corporation
Exceptions: (§63).
1. the subscription contract specifies a date of
 Attributes of a subscription contract:
unconditional (obligation to pay must not be
2. the corp. has become insolvent  all
subject to any contingencies) and indivisible
unpaid subscriptions are immediately
(as to the amount and transferability—Fua Cun
recoverable in a court action by the
v. Summers, 1923)
assignee in insolvency [Velasco vs. Poizat,
As a defense to a court action, the SH may 6. Issuance of Certificate
contend that the subscription was induced by
fraudulent misrepresentation, provided he is
not barred by ratification, or guilty of laches. A certificate of stock is the best evidence of the
rights and status of a SH (although not a condition
Stockholders cannot escape liability on their precedent to the acquisition of such rights), and is
unpaid subscription on the ground that these convenient for the purposes of transfer (Campos).
were induced by an unfulfilled commitment of
the President of the Phil. that the Phil. Contents of a certificate:
government would invest P9.00 for every peso - certifies that the person named is a holder
subscribed (PNB v. Bitulok Sawmill Inc., 1968) or owner of a stated number of shares
- kind of shares issued
- date of issuance
4. Effect of Delinquency - par value, if par value shares
- signed by the proper officer of the corp.
a) Any cash dividends due on delinquent stock (usually the pres., and the sec.)
shall first be applied to the unpaid balance on - bears the corporate seal
the subscription plus costs and expenses, while
stock dividends shall be withheld from the Over-issue of shares occurs when certificates are
delinquent stockholder until his unpaid issued for more than the number of shares
subscription is fully paid. (§43) authorized by the articles. Any share certificate w/c
b) No delinquent stock shall be: represents an over-issue would be void. No rights
o voted for or or liabilities can arise therefrom in favor or against

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the holders and bona fide purchasers would have 1.2 STOCK – a distribution to the stockholders of
the right to damages for misrepresentation against the company’s own stock. The corporate profits are
the corp. but can’t acquire the rights of transferred to capital stock and shares of stock
stockholders. representing the increase in capitalization are
General rule: entire subscription must be paid first
These do not represent income on the part of
before the certificates of stock can be issued.
the SH. Investment and proportional interest
Partial payments are to be applied pro rata to each
in the corp remain the same
share of stock subscribed. (Nava v Peers Mktg
Corp and Fua Cun v Summers). Lincoln Phil. Life v CA (1998)
Stock dividends are in the nature of shares of
stock, the consideration for which is the
Exception: in the Baltazar v Lingayen Gulf Electric
amount of unrestricted retained earnings
Power Co case, it was the practice of the corp to
converted into equity in the corporation’s
issue certificates of stock to its individual SHs for
books. “A stock dividend of a corporation is a
unpaid shares of stock and to give full voting power
dividend paid in shares of stock instead of
to shares fully paid.
cash, and is properly only out of surplus
profits. So, a stock dividend is actually two
7. Lost or Destroyed Certificate (§73) things: (1) a dividend: and (2) the enforced
use of the dividend money to purchase
Procedure for re-issuance in case of loss, stolen or additional shares of stock at par.”
destroyed certificates:
1. The registered owner of certificates of stock or
 Limitation on the issue of stock dividends:
his legal representative shall file with the
o there must be unissued shares of the
corporation an affidvit setting forth as far as
corporation. If there are none, there
must be an increase in capital stock
a) the circumstances as to how the certificates
first, which requires an amendment of
were lost, stolen or destroyed;
the AOI
b) the number of shares represented by each
o there must be unrestricted retained
certificate, the serial numbers of the
o cannot be issued to non-stockholders
c) the name of the corp which issued the same;
even for services rendered (Nielson v.
d) such other information and evidence which he
Lepanto Consolidated Mines, 1968)
may deem necessary.
1.3 PROPERTY – Although the corp. may have a
2. The corp shall publish a notice in a newspaper
big amount of earnings available for dividends,
of general circulation published in the place where
they may not all be in cash.
the corp has its principal office, once a week for 3
consecutive weeks at the expense of the owner of
the certificate of stock, which has been lost, stolen 2. Source of Dividends (§43)
or destroyed.
3. After the expiration of one (1) year from the “Unrestricted retained earnings” (URE) (definition
date of the last publication and if no contest has by the SEC) the undistributed earnings of the corp.
been presented, the corp shall cancel in its books w/c have not been allocated for any managerial,
the certificate of stock and issue in lieu thereof new contractual or legal purposes and which are free for
certificates of stock. The right to make such contest distribution to the SHs as dividends.
shall be barred after the expiration of the one-year  The only fund out of w/c dividends can be legally
period. paid.
4. Even before the one year period expires, the  Should there be any capital deficit, subsequent
new certificates may be issued if the registered profits, if any, during succeeding periods must 1st
owner files a bond or other security, running for a be applied to cover the deficit, and only the profits
period of one (1) year for a sum and in such form remaining after eliminating the deficit, can be
and with such sureties as may be satisfactory to considered as URE.
the BOD. Provided, that if there is a pending
contest regarding the ownership of said certificates, Dividends can not be declared out of increase in
the issuance of new certificates shall be suspended valuation of existing assets. This is subject to
until the final decision of the court regarding the fluctuation and is not yet realized.
ownership of the certificate of stock.
o Note: Except in cases of fraud, bad faith, or 3. Declaration of Dividends
negligence on the part of the corporation and
its officers, no action may be brought against 3.1 How Dividends are declared
the corp which shall have issued certificates of
stock in lieu of those lost, stolen or destroyed Approval & voting requirement:
pursuant to the above procedure. a) Approval of BOD
b) In case of stock dividend: must be approved by
Chapter XIII SHs representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular or
special meeting duly called for the purpose.

3.2 Dividend Declaration Discretionary with

1. Form of Dividends (§43) the Board

1.1 CASH – most common form. Gen. Rule WON there should be a distribution of
dividends to the SHs in any given year & the form

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of such dividends are matters addressed to the in its books to cover the shares to be
business judgment of the BOD purchased or acquired
 Treasury shares are shares of stocks which
Exceptions: have been issued and fully paid for, but
1. When the decision is tainted w/ bad faith, fraud subsequently reacquired by the issuing
or gross negligence corporation by purchase, redemption, donation
2. If the court finds, upon complaint of a SH, that or through some other lawful means (§9)
a surplus was unreasonably accumulated  Treasury shares have no voting rights as long
(profits accumulated in excess of 100% of the as such shares remain in the treasury (§57)
corp’s paid-in capital stock), it may order the  May be issued as property dividends provided
corp. to distribute dividends that the retained earnings has not been
Exceptions to the exception (§43): subsequently impaired by losses
a. when justified by definite corporate  “Trust Fund doctrine” – the requirement of
expansion projects or programs approved unrestricted retained earnings is because
by the board of directors; or subscription to the capital of a corporation
b. when the corporation is prohibited under constitute a fund to which creditors have a
any loan agreement with any financial right to look for the satisfaction of their claims
institution or creditor, whether local or (Phil. Trust Co. v. Rivera, 1923)
foreign, from declaring dividends without  Legitimate purpose includes:
its/his consent, and such consent has not a) To eliminate fractional shares arising out of
yet been secured; or stock dividends;
c. when it can be clearly shown that such b) To collect or compromise an indebtedness
retention is necessary under special to the corporation, arising out of unpaid
circumstances obtaining in the corporation, subscription, in a delinquency sale, and to
such as when there is need for special purchase delinquent shares sold during said
reserve for probable contingencies. sale; and
c) To pay dissenting or withdrawing
stockholders entitled to payment for their
3.3 When Right to Dividends Vests
shares under the provisions of this Code
 General rule: as soon as the same have been (appraisal right, Cf §81).
lawfully declared by the BOD, becomes a debt  Improper purpose includes: raising of price of
owing to the SH. No revocation can be made stock by making it appear that it is being
 Exceptions: actively traded (prohibited under Sec 24 of the
o not yet announced or communicated to the Securities Regulations Code) and preferring
public, revocable before announcement to some SHs to the prejudice of other SHs and
SHs creditors (may be viewed as early liquidation of
o when stock dividends are declared since the investment of some of the SHs)
these are not distributions but merely  Remedies in case of improper purchase:
represent changes in the capital structure, a) Creditors prejudiced by the repurchase can
may be revoked prior to actual issuance go after the selling SHs to recover what
 Rights of transferee to dividends – Right to was paid to them
dividends vests upon declaration so whoever b) Directors who were negligent or in BF for
owns the stock at time or stockholders of approving the repurchase can also be held
record also owns the dividend. Subsequent personally responsible
transfer of stock would not carry with it right to c) Prejudiced SH can also go after BOD who
dividends UNLESS agreed upon by the parties approved purchase (when their dividends
are reduced, remaining assets can’t cover
debts, etc)
3.4 Liability for Illegal Dividends  A corporation must have unrestricted retained
Directors not personally liable  if unintentionally earnings in acquiring own shares except:
declare illegal dividends, such as when the a) shares are acquired in the redemption of
directors, in declaring dividends: redeemable shares (§8)
- rely on financial statements prepared by a b) shares are re-acquired to effect a decrease
dishonest EE whom they had no reason to in capital stock approved by the SEC (§38)
suspect shares are reacquired by a close corporation
- rely on advice of legal counsel that certain pursuant to the order of the SEC acting to arbitrate
proceeds or profits are available for a deadlock (§104)

Directors liable under §31 if found negligent or in

bad faith to the (1) corp; or (2) its creditors, if

4. Purchase by the Corporation of its

Own Shares (§41)

 A stock corporation shall have the power to

purchase or acquire its own shares for a
legitimate corporate purpose or purposes
(treasury shares) provided, that the
corporation has unrestricted retained earnings

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Chapter XIV 2.1 Increase or decrease of capital stock


Approval and Voting Requirement

1. Amendment of the Articles of a) Approved by a majority vote of the board
Incorporation, Generally of directors
b) Two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution
of the capital stock at a meeting duly called
1.1 Procedure for amendment of articles of for the purpose
incorporation (§16)
Certificate of Filing
a) The amendment must be for a legitimate  A certificate in duplicate must be signed by
purpose; and must be approved by a majority a majority of the directors of the
vote of the Board; and vote (in a meeting) or corporation and countersigned by the
mere written assent (no meeting) of 2/3 of the chairman and the secretary of the
outstanding stock, or in case of a non-stock stockholders' meeting, setting forth:
corporation, by the members of the a) That the requirements of voting and
corporation. notice have been complied with;
 Once the amendment is approved, b) The amount of the increase or
dissenting stockholders may exercise their diminution of the capital stock;
rights of appraisal if it involved diminishing c) If an increase of the capital stock, the
of substantial rights previously granted or amount of capital stock or number of
creating a new set of shares with priority shares of no-par stock thereof actually
rights. subscribed, the names, nationalities
b) The original and amended articles together and residences of the persons
shall contain all provisions required by law to subscribing, the amount of capital stock
be set out in the articles of incorporation. Such or number of no-par stock subscribed
articles, as amended shall be indicated by by each, and the amount paid by each
underscoring the change or changes made on his subscription in cash or property,
c) A copy thereof duly certified under oath by the or the amount of capital stock or
corporate secretary and a majority of the number of shares of no-par stock
directors or trustees stating the fact that said allotted to each stock-holder if such
amendment or amendments have been duly increase is for the purpose of making
approved by the required vote of the effective stock dividend therefor
stockholders or members, shall be submitted to authorized;
the Securities and Exchange Commission. d) The amount of stock represented at the
d) The amendment of the Articles of Incorporation meeting; and
will be effective only upon approval of the SEC; e) The vote authorizing the increase or
but should no action be taken by the SEC diminution of the capital stock
within 6 months from the date of filing, then  One of the duplicate certificates shall be
automatically, the amendment is deemed kept on file in the office of the corporation
effective, provided that delay is not attributable and the other shall be filed with the
to the corporation. Securities and Exchange Commission and
attached to the original articles of

1.2 Grounds for disapproving amendment (§17) Approval of SEC

 Any increase or decrease in the capital shall
require prior approval of the Securities and
 The SEC may disapprove any amendment Exchange Commission.
thereto if the same is not in compliance with  Decrease of capital stock: No decrease of
the requirements of this Code the capital stock shall be approved by the
 The SEC shall give the incorporators a Commission if its effect shall prejudice the
reasonable time within which to correct or rights of corporate creditors
modify the objectionable portions of the articles
or amendment. Effectivity
 The following are grounds for such disapproval: From and after approval by the Securities and
a) Amendment is not substantially with the Exchange Commission and the issuance by the
form prescribed Commission of its certificate of filing, the
b) Purpose or purposes is/are patently capital stock shall stand increased or decreased
unconstitutional, illegal, immoral, contrary
to government rules and regulations Treasurer’s Affidavit:
c) Treasurer’s Affidavit concerning the amount The Securities and Exchange Commission shall
of capital stock subscribed and/or paid is not accept for filing any certificate of increase
false of capital stock unless accompanied by the
d) Percentage requirement of ownership by sworn statement of the treasurer of the
Filipino citizens as required by the corporation lawfully holding office at the time of
Constitution not complied with the filing of the certificate, showing that at
least twenty-five (25%) percent of such
increased capital stock (should be understood
2. Special Amendments as proposed increase-Campos) has been
subscribed and that at least twenty-five (25%)

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percent of the amount subscribed has been Chapter XV

paid either in actual cash to the corporation or TRANSFER OF SHARES
that there has been transferred to the
corporation property the valuation of which is
1. Manner and Effectivity of Transfer
equal to twenty-five (25%) percent of the
1.2 Indorsement and delivery
 Shares of stock may be transferred as
Appraisal right (§81¶1)
follows (§63):
Appraisal right may be exercised where the
a) delivery of the certificate or certificates
increase in capital stock results in the creation
of shares with preferences superior to those of
b) indorsed by the owner or his attorney-
existing ones.
in-fact or other person legally
authorized to make the transfer
Note: Proposing amendments is a way of
easing out the minority stockholders because it
compels them to exercise their appraisal rights Rural Bank of Salinas v CA

Clemente, President of Rural Bank of Salinas and

2.2 Reduction of capit al stock owner of shares in said corporation executed a
Special Power of Attorney to his wife Melania giving
- Although the requirements in Section 38 her full power to sell or otherwise dispose of shares
have been met, no reduction of capital of stock of the Bank. Before death of Clemente,
stock will be approved by the SEC if it will Melania, pursuant to said SPA, executed deed of
prejudice the rights of corporate creditors. Assignment of former’s shares. After death of
- There can be no reduction of capital stock Clemente, Melania presented to bank deed of
which will in effect release the stockholders assignment for registration which the bank refused.
from the payment of the balance of their Mandamus filed by Melania to compel bank to
subscription if it will adversely affect the register the transfer.
right of he creditors in collecting their
claims (Phil. Trust Co. vs. Rivera (1923) HELD: Transfer before death valid, stock not yet
- Appraisal Right—Although Section 38 does part of estate. Shares of stock are personal
not grant the appraisal right in case of property and may be transferred by delivery.
reduction of capital stock, when it has the Registration in corporate books is not necessary.
effect of altering the rights of any The transfer effected in this case is valid. The
stockholder or class of stockholders, the corporation may not impose any restriction on such
appraisal right may be exercised under transfer. The right of transferee/assignee to have
section 81 (1) (Campos) stocks transferred to his name is inherent right,
- Except by decrease of capital stock and as duty of the corporation to register the transfer is
otherwise allowed by this Coded, no ministerial.
corporation shall distribute any of he assets
or property except upon lawful dissolution Rural Bank of Lipa v. CA (2001)
and after payment of all its debts and
liabilities. (§122) For the valid transfer of stocks, there must be strict
o Campos—It seems that under the compliance with the mode of transfer prescribed by
exception, a reduction surplus may law, which are:
be distributed as dividends to the a) there must be delivery of the stock certificate;
stockholders, as long as SEC b) the certificate must be endorsed by the owner or
approval has been obtained and the his attorney-in-fact or other persons legally
rights of creditors is not prejudiced. authorized to make the transfer; and
c) to be valid against third parties, the transfer
2.3 Change in corporate term (§37) must be recorded in the books of the corporation.

Approval and Voting Requirement

a) Approved by a majority vote of the board Razon v IAC
of directors or trustees and
b) Ratified at a meeting by the stockholders Chudian was issued 1,500 shares at E Razon Inc
representing at least two-thirds (2/3) of the with the corresponding stock certificate no 3. Said
outstanding capital stock or by at least stock certificates were delivered to Enrique Razon
two-thirds (2/3) of the members in case of allegedly because it was the latter who paid for all
non-stock corporations. the subscription on the shares of stock in defendant
corporation with the understanding that has was
Conflict in the availability of appraisal right the owner of said shares of stock and was to have
YES only for extension of corporate term possession until such time as he was paid by other
(§37) nominal incorporators/stockholders. Later on,
YES for both shortening and extension (§81) parties delivered it for deposit with bank under the
joint custody of the parties. Administrator of the
estate of Chudian filed a complaint against Enrique
Razon et al praying that the said stock certificates
be delivered to estate of Chudian along with all
cash and stock dividends and pre-emptive rights
accruing thereto.

HELD: Chudian is still owner

a) Shares of stock is transferred by delivery

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and endorsement of the stock certificate be made. The shares are thus not
b) Such mode of transfer is not complied with transferable on the corporate books. (§63)
in this case  However, the stockholder can still transfer
c) In the books of the corporation, Chudian is his interest in the corporation by way of a
still the owner of the stocks. He was even deed of assignment.
elected member of the board which proves
that he is a stockholder Sunset View Condominium Corp v Campos
d) One who claims ownership should show
that the same was transferred to him in Sunset View Condominium corporation filed suit
accord with the valid mode of transfer. against Aguilar-Bernares Realty and Lim Siu Leng
This petitioner failed to show for collection of assessments levied on their
Endorsement is a mandatory requirement of law for respective condominium units which they bought
an effective transfer on installments and had not yet fully paid

Tan v SEC (1992) HELD: Respondents not shareholders of

condominium corporation because they are not yet
Alfonso Tan is owner of 400 shares in Visayan fully paid
Educational Supply Corp evidenced by certificate a) Sec 5 Condominium Act – shareholding in a
No. 2. Alfonso transferred 50 shares to Angel. condominium corporation will be conveyed only
Certificate No. 2 was cancelled and Certificate No. in a proper case
6 was issued to Angel and Certificate No. 8 was b) Sec 4 of Condominium Act leaves to Master
issued to Alfonso. However, Alfonso did not make Deed the determination of when shareholding
the proper endorsement and did not make delivery will be transferred to purchaser of a unit
of certificate no. 2. Later on, Alfonso Tan elected c) Master Deed provides that only owner of unit is
to withdraw from the corporation. In exchange for a shareholder and that ownership of unit is
his shares, he received stocks in trade. Certificate acquired by purchaser subject to conditions and
No. 8 was later on cancelled due to above. After terms of the instrument conveying the unit to
several years, Alfonso Tan filed a case with Cebu such purchaser.
SEC questioning the cancellation of his stock d) Deed of Conveyance provide that ownership is
certificates despite non-endorsement and lack of conveyed only upon full payment of purchase
delivery price
e) Sec 10 Condominium Act – Membership in
HELD: Delivery and endorsement under Section 63 Condominium corporation shall not be
of the corporation code is not mandatory because transferable separately from condominium unit
of the use of the word may. Delivery is not of which it is an appurtenance
essential where it appears that the persons sought
to be held as stockholders are officers of the Remedy if registration refused – Transferee
corporation and have custody of the stock book as may petition the court for a writ of mandamus
in this case. To hold that cancellation of certificate to compel the corporation to do so (Price v.
of stock of Alfonso is null and void because of lack Sulu Development Corp., 1933)
of delivery and endorsement of mother certificate
of stock no. 2 which was deliberately withheld is to
prescribe restrictions on the transfer of stock in Rivera v Florendo (1986)
violation of corporation law
Rivera is the registered owner of 4899 shares of
stock of Fujiyama Hotel & Restaurant Inc. It is
1.2 Registration
alleged that one Akasako is the real owner of the
 Purpose of registration
4899 shares under Rivera’s name, and as such
a) enable the transferee to exercise all the
owner he sold 2550 shares to Milagros. Rivera
rights of a stockholder
refused to indorse the certificates to Milagros
b) to inform the corporation of any change
despite the assurance he gave to Milagros before
in share ownership so that it can
the sale was consummated. The other
ascertain the persons (a) entitled to the
incorporators also sold their shares to Milagros and
rights (b) subject to the liabilities of a
one Jureidini. As regards these transfers, the
certificates were properly indorsed by their
c) until registration is accomplished, the
respective owners. Milagros and Jureidini
transfer, though valid between the
attempted to have all the certificates registered in
parties, cannot be effective against the
their names but the corporation refused to do so.
 Effect of lack of registration: HELD: Mandamus will not lie where the shares of
a) transferee cannot vote stock are not even indorsed by the registered
b) transferee cannot be voted for owner Rivera who is specifically resisting the
c) transferee cannot prevail over rights of registration thereof in the books of the corp. Even
a subsequent attaching creditor (Uson the shares of stock sold by the other incorporators
v. Diosomito, 1935) cannot be also the subject of mandamus on the
d) transferee not entitled to dividends strength of the mere indorsement of the supposed
e) stockholder on record has the right to owners of said shares in the absence of express
participate in meetings. instructions from them. The right of the parties will
have to be threshed out in an ordinary action.
No registration of transfer of unpaid shares
 If there is any unpaid balance on the
stockholder’s subscription there can be no
stock certificate on which indorsement can 2. Restrictions on Transfer; Close

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Corporations 3.2 forged transfers – if the corporation should

issue a new certificate pursuant to a forged
transfer, it incurs no liability to the person in whose
2.1 General Rule: Free transferability of favor it issued it and may demand its return for
shares cancellation (Hodges v. Lezama, 1965). It is the
duty of the purchaser to determine that the
Shares are personal property – Shares of stock indorsement was genuine. But with respect to a
so issued are personal property and may be subsequent purchaser in good faith and for value,
transferred (§63) the corporation is estopped from denying the
validity of the newly issued certificate because by
2.2 Exception: In close corporations issuing such, it has represented that the person
named therein is a stockholder of the corporation.
Considering the special circumstances Except where recognition of the original and new
attending a close corporation (e.g. formed by subscriber will result to an overissue of shares.
persons who know each other well, thus they The new SH would now have right to damages
would want to choose the persons who will be against the corporation and the latter against those
allowed in their group), it is justifiable and even who made false representation.
imperative for its stockholders to protect
themselves from future conflicts by placing 4. Collateral Transfers
restrictions on the right of each one of them to
transfer his shares to an outsider (§97 & 98).  Subject to collateral transfers: Shares of
stock being personal property, may be the
subject matter of
Validity of restrictions on transfer of shares a. pledge or
(§98) b. chattel mortgage.
 Registration in corporate books not
 Restrictions on the right to transfer shares
necessary: Such collateral transfers are not
must appear in the articles of incorporation
covered by Sec. 63 of the Code since such
and in the by-laws as well as in the
provision applies only to absolute transfer
certificate of stock; otherwise, the same
(Monserrat v. Ceron, 1933). Thus, the
shall not be binding on any purchaser
registration in the corporate books of
thereof in good faith.
pledges and chattel mortgages of shares
 Restrictions shall not be more onerous than
CANNOT have any legal effect.
granting the existing stockholders or the

corporation the option to purchase the
shares of the transferring stockholder with
such reasonable terms, conditions or period Lim Tay v CA (1998)
stated therein. If upon the expiration of
said period, the existing stockholders or the Sy Guiok and Sy Lim pledged their shares in Go
corporation fails to exercise the option to Fay and Co to Lim Tay. They endorsed their
purchase, the transferring stockholder may respective share in blank and delivered the same to
sell his shares to any third person. Lim Tay. Sy Guiok and Sy Lim failed to pay hence
 Presumptions: Lim Tay went to the corporate secretary to ask the
a. If the stock certificate CONSPICUOUSLY registration of the shares in his name. Corporate
shows the restriction, the purchaser or secretary refused. Lim Tay instituted an action for
transferee is conclusively presumed to mandamus at SEC to compel corporate secretary to
have notice of the restriction, provided register.
this appears in the AOI. He cannot
prove that he acted in good faith. HELD: Corporate’s secretary cannot be compelled
Where a conclusive presumption of to record transfer. The duty of a corporate
notice arises, the corporation may, at secretary to record transfers of stocks is
its option, refuse to register the ministerial. However, he cannot be compelled to
transfer, unless do so when the transferees title to said shares has
no prima facie validity or is uncertain. Mandamus
(1) all the stockholders have consented will not issue to establish a right but only to
to the transfer, or enforce one already established. Lim Tay failed to
(2) the AOI have been properly establish a legal right to have the shares registered
amended to remove the restriction. in his name. Lim Tay failed to establish a legal
b. If it appears in the certificate, but NOT right. He is not owner of the shares without
CONSPICUOUSLY, then although he foreclosure and purchase at auction. He is merely
may be presumed to have notice of the a pledgee.
restriction, he can prove the contrary.

3. Unauthorized Transfers Attachment of shares

3.1 certificates indorsed in blank – where the Garcia vs. Jomouad, (2000)
stockholder indorses his certificate in blank in such
a manner as to clothe whoever may be in FACTS: Dico lost a collection case and the
possession of it with apparent authority to deal Proprietary Ownership Certificate (POC) in the Cebu
with the shares as the latter’s own, he will be Country Club in his name was levied on and
estopped from claiming the shares as against a scheduled for public auction. Garcia claimed
bonafide purchaser. This is called the theory of ownership over the certificate and filed the action
quasi-negotiability (Santamaria v. Hongkong & for injunction to enjoin the auction. Dico had
Shanghai Bank, 1951) executed a Deed of Transfer in favor of petitioner
which was furnished to The Club but the transfer

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was not recorded in the books of the Club because  The Securities and Exchange
petitioner failed to present proof of payment of the Commission shall thereupon issue the
requisite capital gains tax. certificate of dissolution. Thus, except
HELD: The transfer of the subject certificate made for the expiration of its term , no
by Dico to petitioner was not valid as to the dissolution can be effective without
judgment creditors, as the same still stood in the some act of the state (Daguhoy
name of Dico, the judgment debtor, at the time of Enterprises v. Ponce, 1954)
the levy on execution. In addition, as correctly
ruled by the CA, the entry in the minutes of the 1.3 Voluntary dissolution when creditors
meeting of the Club's board of directors noting the are affected (§119)
resignation of Dico as proprietary member thereof  Petition for dissolution shall be filed
does not constitute compliance with Section 63 of with the Securities and Exchange
the Corporation Code. Said provision of law strictly Commission.
requires the recording of the transfer in the books  The petition shall be signed by a
of the corporation, and not elsewhere, to be valid majority of its board of directors or
as against third parties. trustees or other officers having the
management of its affairs, verified by
its president or secretary or one of its
Chapter XVI directors or trustees, and shall set forth
DISSOLUTION all claims and demands against it, and
that its dissolution was resolved upon
by the affirmative vote of the
1. Causes of Dissolution stockholders representing at least two-
thirds (2/3) of the outstanding capital
1.1 Expiration of original, extended or stock or by at least two-thirds (2/3) of
shortened term the members at a meeting of its
 The term within which the corporation stockholders or members called for that
is to exist (which cannot be more than purpose.
50 years) must be stated in its AOI.  If the petition is sufficient in form and
Once such period expires, the substance, the Commission shall, by an
corporation is automatically dissolved order reciting the purpose of the
without any other proceeding and it petition, fix a date on or before which
cannot thereafter be considered a de objections thereto may be filed by any
facto corporation. person, which date shall not be less
 A voluntary dissolution may be effected than thirty (30) days nor more than
by amending the articles of sixty (60) days after the entry of the
incorporation to shorten the corporate order. Before such date, a copy of the
term pursuant to the provisions of the order shall be published at least once a
Code. Upon approval of the amended week for three (3) consecutive weeks
articles of incorporation or the in a newspaper of general circulation
expiration of the shortened term, as published in the municipality or city
the case may be, the corporation shall where the principal office of the
be deemed dissolved without any corporation is situated, or if there be no
further proceedings (§120) such newspaper, then in a newspaper
of general circulation in the Philippines,
1.2 Voluntary dissolution when no and a similar copy shall be posted for
creditors are affected (§118) three (3) consecutive weeks in three
 Dissolution may be effected by majority (3) public places in such municipality or
vote of the board of directors or city.
trustees, and by a resolution duly  Upon five (5) day's notice, given after
adopted by the affirmative vote of the the date on which the right to file
stockholders owning at least two-thirds objections as fixed in the order has
(2/3) of the outstanding capital stock expired, the Commission shall proceed
or of at least two-thirds (2/3) of the to hear the petition and try any issue
members. made by the objections filed; and if no
 Meeting to be held upon call of the such objection is sufficient, and the
directors or trustees after publication of material allegations of the petition are
the notice of time, place and object of true, it shall render judgment
the meeting for three (3) consecutive dissolving the corporation and directing
weeks in a newspaper published in the such disposition of its assets as justice
place where the principal office of said requires, and may appoint a receiver to
corporation is located; and if no collect such assets and pay the debts of
newspaper is published in such place, the corporation
then in a newspaper of general  In this method of dissolution, SEC may
circulation in the Philippines, after direct the manner in which the
sending such notice to each stockholder liquidation of the corporate assets
or member either by registered mail or should be made by assigning this task
by personal delivery at least thirty (30) to the corporation itself, or if it deems
days prior to said meeting. proper, to a receiver appointed by it
 A copy of the resolution authorizing the (Campos).
dissolution shall be certified by a
majority of the board of directors or 1.4 Dissolution by minority in close
trustees and countersigned by the corporations Voluntary dissolution when
secretary of the corporation. creditors are affected (§105)

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Any stockholder of a close corporation may, o Sec. 104 BP 68 – In case of a

by written petition to the Securities and deadlock in a close corporation, and
Exchange Commissions, compel the the SEC deems it proper to order
dissolution of such corporation whenever the dissolution of the corporation as
any of the acts of the directors, officers or the only practical solution to the
those in control of the corporation is illegal, dispute
or fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation or Quo Warranto Proceedings (Sec. 2, Rule 66
any stockholder or whenever corporate ROC)
assets are being misapplied or wasted.  When it has offended against a
provision of an Act for its creation and
1.5 Failure to organize and commence renewal
business; cessation of business for 5 years  When it has forfeited its privileges and
(§22) franchises by nonuser
 Failure to formally organize and  When it has committed or omitted an
commence the transaction of its act which amounts to a surrender of its
business or construction of its works corporate rights, privileges or franchise
within two years its corporate powers  When it has misused a right, privilege,
shall cease and the corporation is or franchise conferred upon it by law or
deemed dissolved when it has exercised a right, privilege
o Transacting business – implies a or franchise in contravention of law
continuity of acts or dealings in the 
accomplishment of the purpose for
which the corporation was formed 2. Effects of Dissolution; Winding-Up
(Mentholatum v. Mangaliman, and Liquidation
o Formally organize includes not only 2.1 Loss of juridical personality
the adoption of the by-laws but  Corporation loses its juridical
also the establishment of the body personality and can no longer lawfully
which will administer the affairs of continue its business except for the
the corporation and exercise its purpose of winding up. For this
powers purpose, it may sue and be sued,
 Commenced transaction of its business although upon the expiration of three
but subsequently becomes continuously years, all pending actions by or against
inoperative for a period of at least five the dissolved corporation abate
years ground for suspension or (National Abaca Corp. vs. Pore, 1961)
revocation of its corporate franchise or  cannot even be a de facto corporation,
certificate of incorporation hence subject to collateral attack
(Buenaflor vs. Camarines Sur Industry
1.6 Involuntary dissolution Corp., 1960)
 cannot enter into new contracts which
Revocation of certificate of registration by would have the effect of continuing the
the SEC (§121) business (Cebu Port Labor Union vs.
 A corporation may be dissolved by the States Marine Co, 1957)
Securities and Exchange Commission
upon filing of a verified complaint and 2.2 Executory contracts
after proper notice and hearing on  No right or remedy in favor of or
grounds provided by existing laws, against any corporation, its
rules and regulations stockholders, members, directors,
 Grounds for revocation (Sec. 6, par i, trustees, or officers, nor any liability
PD 902-A) incurred by any such corporation,
o Fraud in procuring its certificate of stockholders, members, directors,
registration trustees, or officers, shall be removed
o Serious misrepresentation as to or impaired either by the subsequent
what the corporation can or is dissolution of said corporation or by
doing to the great prejudice of or any subsequent amendment or repeal
damage to the general public of this Code or of any part thereof.
o Refusal to comply or defiance of (§145)
any lawful order of the Commission  The prevailing view is that executory
restraining commission of acts contracts are not extinguished.
which would amount to a grave However, some authorities make an
violation of its franchise exception of contracts for personal
o Continuous inoperation for a period services such as employment contracts
of at least five years of officers and employees where the
o Failure to file by-laws within the dissolution is involuntary or the result
required period of merger or consolidation in which
o Failure to file required reports in case the contracts are deemed
appropriate forms as determined by terminated.
the Commission within the
prescribed period 2.3 Winding-Up and Liquidation
 Other grounds  Definition: The winding up and turning
o Sec. 144 BP 68 – Violation by the assets of corporation into cash for
corporation of any provision of the distribution
Corporation Code

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 A liquidation proceeding is a proceeding municipality where such assets are

in rem so that all other interested located.
persons whether known to the parties  Who may undertake the liquidation of a
or not may be bound by such corporate (Methods of Liquidation)?
proceedings (Chua vs. NLRC, 1990) o By the corporation itself through
 For how long may the liquidation of a the board of directors – the board
corporation be undertaken? of directors serve as trustees
o Every corporation whose charter o Conveyance of all corporate assets
expires by its own limitation or is to trustees who will take charge of
annulled by forfeiture or otherwise, the liquidation. From and after any
or whose corporate existence for such conveyance by the corporation
other purposes is terminated in any of its property in trust for the
other manner, shall nevertheless be benefit of its stockholders,
continued as a body corporate for members, creditors and others in
three (3) years after the time when interest, all interest which the
it would have been so dissolved corporation had in the property
o However, in case the corporate terminates, the legal interest vests
assets are conveyed to a trustee or in the trustees, and the beneficial
a receiver appointed by the SEC, interest in the stockholders,
the three year limitation will not members, creditors or other
apply (Sumera v. Valencia, 1939) persons in interest.
o Although the three year period may o Liquidation by a receiver who may
have expired, it does not have been appointed by the SEC
necessarily follow that a creditor upon its decreeing the dissolution
who was unable to collect his claim of the corporation (§119). 3-year
before three years would lose is period does not apply because the
rights. It is still possible for him to corporation is substituted by the
sue the trustee, if there be one, or receiver (Sumera v. Valencia,
if the circumstances so warrant, to Supra). However, the mere
follow the assets in the hands of appointment of a receiver, without
the stockholders who nay have anything more does not result in
received the same as liquidating the dissolution of the corporation
dividends (Tan Tiong Bio v. Comm. nor bar it from the existence of its
of Int. Rev., 1962) corporate rights (Leyte Asphalt &
Mineral Oil Co. Ltd., v. Block
Gelano v. CA (1981) Johnston & Breenbrawn, 1928)
 A corporation cannot distribute any of
Even if no trustee is appointed or designated its assets or property except upon
during the 3-year period of the liquidation of lawful dissolution and only after
the corporation, a suit pending prior to the payment of all its debts and liabilities,
expiration of the period may still be after which the remaining assets must
prosecuted with the counsel of record being be distributed to the stockholders in
considered as the “trustee” required by law. proportion to their interest in the
Debtors of the corporation may not take corporation.
advantage of the failure of the corporation to  Exceptions:
transfer its assets to a trustee; otherwise, it  decrease in c/s resulting in a
would constitute undue enrichment to dismiss surplus which can then be
the case as against the defendant. distributed to stockholders provided
no creditors are prejudiced
 What could and should be done during  as otherwise allowed by the code:
the period of liquidation? o Appraisal right
o For the purpose of prosecuting and o Deadlock in a close corporation
defending suits by or against it and o SH of a close corporation may
enabling it to settle and close its compel corporation to buy his
affairs, to dispose of and convey its shares at fair value
property and to distribute its o Corporation repurchases shares for
assets, but not for the purpose of any legitimate corporate purpose
continuing the business for which it o Corporation validly distributes
was established. dividend
o Except by decrease of capital stock
and as otherwise allowed by this
Code, no corporation shall
distribute any of its assets or CLEMENTE, ET. AL. v. CA (1995):
property except upon lawful
dissolution and after payment of all
its debts and liabilities. The termination of the life of a juridical entity does
 What happens if an asset cannot be not by itself cause the extinction or diminution of
distributed to the person entitled to it? the rights and liabilities of such entity, nor those of
o Upon the winding up of the its owners and creditors. If the three-year
corporate affairs, any asset extended life has expired without a trustee or
distributable to any creditor or receiver having been expressly designated by the
stockholder or member who is corporation within that period, the board of
unknown or cannot be found shall directors (or trustees) itself, may be permitted to
be escheated to the city or so continue as "trustees" by legal implication to

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complete the corporate liquidation. Still in the

absence of a board of directors or trustees, those
having any pecuniary interest in the assets, 1. Merger and Consolidation
including not only the shareholders but likewise the
creditors of the corporation, acting for and in its
behalf, might make proper representation with the
Securities and Exchange Commission, which has 1.1 What is a merger / consolidation?
primary and sufficiently broad jurisdiction in
 Merger
matters of this nature, for working out a final
o One of the constituent corporations
settlement of the corporate concerns.
remains as an existing juridical
person, whereas the other
Dissolved corporation’s capacity to sue: corporation shall cease to exist.
Merger is the disappearance of one
of the corporations with the other
Reburiano vs. CA, GR 102965, Jan 21, 1999
corporation acquiring all the assets,
rights of action, and assuming all
Corporation amended its AoI to shorten its
the liabilities of the disappearing
corporate existence while the case was pending in
court. SEC approved the amendment but the trial
o Of course, there is an arrangement
court was not notified. After the trial court
as to the shares of stocks that will
rendered judgment against corporation, it filed
be issued to the former
motion to quash writ of execution because the
stockholders of the two (2)
corporation lacked juridical personality to sue or be
corporations which were merged.
Said stockholders are now
SC held that it was erroneous to contend that a
stockholders of the corporation
dissolved and non-existing corporation could no
which survives. The proportion
longer be represented by a lawyer and
between the two (2) corporations
concomitantly a lawyer could not appear as counsel
will be the basis of the shares of
for a non-existing judicial person. A corporation
stocks that will be issued to the
that has a pending action and which cannot be
stockholders under the surviving
terminated within the three-year period after its
dissolution is authorized under Sec. 78 [now §122]
 Consolidation
of the Corporation Law to convey all its property to
o If there is consolidation, there will
trustees to enable it to prosecute and defend suits
be disappearance of both the
by or against the corporation beyond the three-
constituent corporations with the
year period. Although private respondent did not
emergence of a new corporate
appoint any trustee, yet the counsel who
entity, called the consolidated
prosecuted and defended the interest of the
corporation, which shall obtain all
corporation in the instant case and who in fact
the assets of the disappearing
appeared in behalf of the corporation may be
corporations, and likewise shall
considered a trustee of the corporation at least with
assume all their liabilities.
respect to the matter in litigation only.
o Also, the number of shares that will
be issued to each of the
Liquidation v. Rehabilitation stockholders under the new
corporation is determined by the
Phil. Veterans Bank v. Employees Union ration between the assets of the
(2001) two (2) corporations.

Liquidation, in corporation law, connotes a

winding up or setting with creditors and 1.2 What is a “constituent corporation”? A
debtors. It is the winding up of a corporation “consolidated corporation”? (§76)
so that assets are distributed to those entitled
to receive them. It is the process of reducing Two or more corporations may merge into
assets to cash, discharging liabilities and a single corporation which shall be one of
dividing surplus or loss. the constituent corporations or may
On the opposite end of the spectrum is consolidate into a new single corporation
rehabilitation which connotes a reopening or which shall be the consolidated corporation.
reorganization. Rehabilitation contemplates a
continuance of corporate life and activities in 1.3 What corporate approvals are
an effort to restore and reinstate the required? (§77)
corporation to its former position of successful 1. Approval by majority vote of each of
operation and solvency. the board of directors or trustees of the
It is crystal clear that the concept of constituent corporations of the plan of
liquidation is diametrically opposed or merger or consolidation.
contrary to the concept of rehabilitation, such 2. Approval by the stockholders or
that both cannot be undertaken at the same members of each of such corporations
time. To allow the liquidation proceedings to in separate meetings. The affirmative
continue would seriously hinder the vote of stockholders representing at
rehabilitation of the subject bank. least two-thirds (2/3) of the
outstanding capital stock of each
corporation in the case of stock
corporations or at least two-thirds (2/3)
Chapter XVII of the members in the case of non-

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stock corporations shall be necessary  The articles of merger or consolidation

for the approval of such plan shall set forth:
3. Notice of such meetings shall be given 1) The plan of the merger or the plan
to all stockholders or members of the of consolidation;
respective corporations, at least two 2) As to stock corporations, the
(2) weeks prior to the date of the number of shares outstanding, or in
meeting, either personally or by the case of non-stock corporations,
registered mail. Said notice shall state the number of members; and
the purpose of the meeting and shall 3) As to each corporation, the number
include a copy or a summary of the of shares or members voting for
plan of merger or consolidation. and against such plan, respectively.
4. Any dissenting stockholder in stock
corporations may exercise his appraisal 1.6 When is the effectivity of merger or
right in accordance with the Code. consolidation? (§79)
Provided, that if after the approval by  Effectivity: Upon issuance by the SEC
the stockholders of such plan, the of the certificate of merger and
board of directors decides to abandon consolidation
the plan, the appraisal right shall be  If the Commission is satisfied that the
extinguished. merger or consolidation of the
5. Amendment to the plan of merger or corporations concerned is not
consolidation may be made by inconsistent with the provisions of this
approved of the majority vote of the Code and existing laws, it shall issue a
respective boards of directors or certificate of merger or of
trustees of all the constituent consolidation, at which time the merger
corporations and ratified by the or consolidation shall be effective.
affirmative vote of stockholders  The articles of merger or of
representing at least two-thirds (2/3) consolidation shall be submitted to the
of the outstanding capital stock or of Securities and Exchange Commission in
two-thirds (2/3) of the members of quadruplicate for its approval.
each of the constituent corporations.  In the case of merger or consolidation
Such plan, together with any of banks or banking institutions,
amendment, shall be considered as the building and loan associations, trust
agreement of merger or consolidation. companies, insurance companies,
public utilities, educational institutions
1.4 What is a plan of merger or and other special corporations
consolidation? (§76) governed by special laws, the favorable
The board of directors or trustees of each recommendation of the appropriate
corporation, party to the merger or government agency shall first be
consolidation, shall approve a plan of obtained.
merger or consolidation setting forth the  If, upon investigation, the Securities
following: and Exchange Commission has reason
 The names of the corporations to believe that the proposed merger or
proposing to merge or consolidate, consolidation is contrary to or
hereinafter referred to as the inconsistent with the provisions of this
constituent corporations; Code or existing laws, it shall set a
 The terms of the merger or hearing to give the corporations
consolidation and the mode of carrying concerned the opportunity to be heard.
the same into effect; Written notice of the date, time and
 A statement of the changes, if any, in place of hearing shall be given to each
the articles of incorporation of the constituent corporation at least two (2)
surviving corporation in case of weeks before said hearing. The
merger; and, with respect to the Commission shall thereafter proceed as
consolidated corporation in case of provided in this Code.
consolidation, all the statements
required to be set forth in the articles 1.7 What are the effects of a merger or
of incorporation for corporations consolidation? (§80)
organized under this Code; and 1) The constituent corporations shall
 Such other provisions with respect to become a single corporation which:
the proposed merger or consolidation  In case of merger, shall be the
as are deemed necessary or desirable. surviving corporation designated in
the plan of merger; and
1.5 What are articles of merger or  In case of consolidation, shall be
consolidation? (§78) the consolidated corporation
 After the approval by the stockholders designated in the plan of
or members, articles of merger or consolidation;
articles of consolidation shall be 2) The separate existence of the
executed by each of the constituent constituent corporations shall cease,
corporations: except that of the surviving or the
1) to be signed by the president or consolidated corporation;
vice-president and 3) The surviving or the consolidated
2) certified by the secretary or corporation shall possess all the rights,
assistant secretary of each privileges, immunities and powers and
corporation shall be subject to all the duties and

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liabilities of a corporation organized  names of corporations involved

under this Code; (constituent corporations)
4) The surviving or the consolidated  terms and mode of carrying it out
corporation shall thereupon and  statement of changes, if any, in the
thereafter possess: present articles of surviving
 all the rights, privileges, immunities corporation; or the articles of the
and franchises of each of the new corporation to be formed in
constituent corporations; and case of consolidation.
 all property, real or personal, and 2) Plan for merger or consolidation shall
all receivables due on whatever be approved by majority vote of each
account, including subscriptions to board of the concerned corporations at
shares and other choses in action, separate meetings.
and all and every other interest of, 3) The same shall be submitted for
or belonging to, or due to each approval by the stockholders or
constituent corporation members of each such corporation at
 these shall be deemed transferred separate corporate meetings duly called
to and vested in such surviving or for the purpose. Notice should be
consolidated corporation without given to all stockholders or members at
further act or deed; and least two (2) weeks prior to date of
5) The surviving or consolidated meeting, either personally or by
corporation shall: registered mail.
 be responsible and liable for all the 4) Affirmative vote of 2/3 of the
liabilities and obligations of each of outstanding capital stock in case of
the constituent corporations in the stock corporations, or 2/3 of the
same manner as if such surviving members of a non-stock corporation
or consolidated corporation had shall be required.
itself incurred such liabilities or 5) Dissenting stockholders may exercise
obligations; and the right of appraisal. But if Board
 any pending claim, action or abandons the plan to merge or
proceeding brought by or against consolidate, such right is extinguished.
any of such constituent 6) Any amendment to the plan must be
corporations may be prosecuted by approved by the same votes of the
or against the surviving or board members of trustees and
consolidated corporation. stockholders or members required for
 The rights of creditors or liens upon the original plan.
the property of any of such 7) After such approval, Articles of Merger
constituent corporations shall not or Articles of Consolidation shall be
be impaired by such merger or executed by each of the constituent
consolidation corporations, signed by president or VP
and certified by secretary or assistant
secretary, setting forth:
 plan of merger or consolidation
Babst v. CA (2001)  in stock corporation, the number of
shares outstanding; in non-stock,
the number of members
It is settled that in the merger of two existing  as to each corporation, number of
corporations, one of the corporations survives and shares or members voting for and
continues the business, while the other is dissolved against such plan, respectively
and all its rights, properties and liabilities are 8) Four copies of the Articles of Merger or
acquired by the surviving corporation. Consolidation shall be submitted to the
SEC for approval. Special corporations
like banks, insurance companies,
ASSOCIATED BANK v. CA (1998) building and loan associations, etc.,
need the prior approval of the
respective government agency
Ordinarily, in the merger of two or more existing concerned.
corporations, one of the combining corporations 9) If SEC is satisfied that the merger or
survives and continues the combined business, consolidation is legal, it shall issue the
while the rest are dissolved and all their rights, Certificate of Merger or the Certificate
properties and liabilities are acquired by the of Incorporation, as the case may be.
surviving corporation. Although there is dissolution 10) If the SEC is not satisfied, it shall set a
of the absorbed corporations, there is no winding hearing, giving due notice to all the
up of their affairs or liquidation of their assets, corporations concerned. (§76-79)
because the surviving corporation automatically
acquires all their rights, privileges and powers, as 1.9 Limitation on the right to merge /
well as their liabilities. consolidate

1) Should not create monopolies

1.8 Procedure for Merger or Consolidation 2) Should not eliminate free and healhty
(Villanueva) competition
1) Board of each corporation shall draw up 3) Act 3518 Sec 20 inhibits illegal
a plan of merger or consolidation, combinations
setting forth:

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1.10 Appraisal right – any dissenting mortgage, pledge or other disposition of

stockholder may exercise his appraisal right property and assets, subject to the rights of
under the conditions provided in the Code third parties under any contract relating
thereto, without further action or approval by
the stockholders or members.
2. Sale of substantially all assets
(§40) 2.6 Compared to merger and consolidation

2.1 Restrictions: Subject to the provisions of Advantage of merger and consolidation

existing laws on illegal combinations and over sale:
monopolies - furnish a short cut to the
accomplishment of various transactions
2.2 Scope of power: To sell, lease, exchange, - may avoid the difficulty, delay and
mortgage, pledge or otherwise dispose of all or expense which usually accompany
substantially all of its property and assets, dissolution, winding up and distribution
including its goodwill, upon such terms and of assets to its SH by a selling corp
conditions and for such consideration, which - automatic assumption of liabilities of
may be money, stocks, bonds or other the absorbed corp (in sale, there must
instruments for the payment of money or other be sufficient funds reserved by the
property or consideration, as its board of absorbed corp to pay its liabilities,
directors or trustees may deem expedient otherwise the sale may be attacked by
 Meaning of disposition of substantially Compared the creditors as a fraudulent
all of the corporate property and conveyance)
assets- if thereby the corporation would - transfer or exchange of shares is
be rendered incapable of continuing the exempt from registration under
business or accomplishing the purpose Securities Act (in sale, registration with
for which it was incorporated. SEC required)

2.3 Approval, voting and notice Advantage of sale of substantially all

requirement: assets: Where the absorbing corp foresees
 Majority vote of its board of directors or problems in securing stockholders’ approval
trustees, and in granting the appraisal right of
 Authorized by the vote of the dissenters, it may decide that its purchase
stockholders representing at least two- of the assets of the absorbed corp would be
thirds (2/3) of the outstanding capital more convenient and practical than merger
stock, or in case of non-stock
corporation, by the vote of at least to
two-thirds (2/3) of the members, in a
stockholder's or member's meeting
duly called for the purpose.
 Written notice of the proposed action
and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the
addressee in the post office with
postage prepaid, or served personally
o When SH approval not necessary -
If disposition is necessary in the
usual and regular course of
business of said corporation or if
the proceeds of the sale or other
disposition of such property and
assets be appropriated for the
conduct of its remaining business.
o In non-stock corporations where
there are no members with voting
rights - the vote of at least a
majority of the trustees in office
will be sufficient authorization for
the corporation to enter into any
transaction authorized by this

2.4 Appraisal right: any dissenting

stockholder may exercise his appraisal right
under the conditions provided in the Code

2.5 Abandonment of the sale, lease… -

After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange,

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 Performing services auxiliary to an

existing contract or sale, which are not
Chapter XVIII
on a continuing basis
Mentholatum Co., Inc., v. Mangaliman
1. Definition (§123)
No general rule or governing principle can be
laid down as to what constitutes “doing” or
Foreign corporation is one formed, organized or
“engaging” in or ‘transacting” business.
existing under any laws other than those of the
Indeed, each case must be judged in the light
Philippines and whose laws allow Filipino
of its peculiar environmental circumstances.
citizens and corporations to do business in its
The true test, however, seems to be whether
own country or state.
the foreign corporation is continuing the body
or substance of the business or enterprise for
which it was organized, or whether it has
2. “Doing business” (Sec. 3(d) RA substantially retired from it and turned it over
7042, Foreign Investments Act of to another. The term implies a continuity of
1991) commercial dealings and arrangements, and
contemplates to that extent the performance
 Soliciting orders of acts or works or the exercise of the
 Service contracts functions normally incident to and in the
 Appointing representatives or distributors progressive prosecution of the purpose and
domiciled in the Philippines or who in any object of its organization.
calendar year stay in the country for a
period or periods totaling 180 days or more Necessity of obtaining a license to do business:
 Opening offices, whether called liason
offices or branches The reason for the license is to subject the
 Establishing a factory, workshop or foreign corporation doing business in the
processing plant Philippines to the jurisdiction of the courts,
 Undertaking building construction or otherwise a foreign corporation illegally doing
erection projects business here may successfully though unfairly
 Opening a store, whether wholesale or plead such neglect or illegal act so as to avoid
retail without prejudice to the provisions of service and thereby impugn the jurisdiction of
the Retail Trade Act the local courts.
 Maintaining or operating a warehouse for
business purposes including the storage, B Van Zuiden Bros. Ltd. V. GTVL Manufacturing
display or delivery of its own products
 Participating in the management, GR No. 147905 May 28, 2007
supervision or control of any domestic Zuiden, a foreign corporation not licensed to do
business, firm, entity or corporation in the
business in the Philippines, filed a complaint for
 Any other act or acts that imply a sum of money with the RTC of Paranaque against
continuity of commercial dealings or GTVL. The latter filed a motion to dismiss on the
arrangements, and contemplate to that ground that petitioner has no legal capacity to sue
extent, performance normally incident to , and this was granted. The CA sustained the RTC
and in progressive prosecution of, ruling that the transactions were not isolated hence
commercial gain or of the purpose and not falling within the exception. It relied on Eriks
object of the business organization Pte. Ltd. V. CA where it held that what is material
 It shall not include: are the proponents to the transaction, as well as
 Mere investment as a shareholder by a
the parties to be benefited and obligated by the
foreign entity in domestic corporations
duly registered to do business and/or transaction.
the exercise of such rights as such HELD: To be doing or “transacting business in the
investor Philippines” for purposes of Section 133 of the
 Having a nominee director or officer to Corporation Code, the foreign corporation must
represent its interests in such actually transact business in the Philippines, that is,
corporations perform specific business transactions within the
 Appointing a representative or Philippine territory on a continuing basis in its own
distributor domiciled in the Philippines
name and for its own account. An essential
which transacts business in its own
name and for its own account
condition to be considered as “doing business” in
 The following acts by themselves shall not the Philippines is the actual performance of specific
be deemed doing business in the Phil: commercial acts within the territory of the
 The publication of a general Philippines for the plain reason that the Philippines
advertisement through newspapers, has no jurisdiction over commercial acts performed
brochures or other publication media or in foreign territories. Here, there is no showing that
through radio or television petitioner performed within the Philippine territory
 Maintaining the stock of goods in the the specific acts of doing business mentioned in
Phil solely for the purpose of having the
Section 3(d) of RA 7042. Petitioner did not also
same processed by another entity in
the Phil. open an office here in the Philippines, appoint a
 Collecting information in the Phil. representative or distributor, or manage, supervise
or control a local business. While petitioner and

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respondent entered into a series of transactions o The names and addresses of the
implying a continuity of commercial dealings, the present directors and officers of the
perfection and consummation of these transactions corporation;
o A statement of its authorized
were done outside the Philippines. The series of
capital stock and the aggregate
transactions between petitioner and respondent
number of shares which the
transpired and were consummated in Hong Kong. corporation has authority to issue,
The SC found no single activity which petitioner itemized by classes, par value of
performed here in the Philippines pursuant to its shares, shares without par value,
purpose and object as a business organization. and series, if any;
Moreover, petitioner’s desire to do business within o A statement of its outstanding
the Philippines is not discernible from the capital stock and the aggregate
allegations of the complaint or from its number of shares which the
corporation has issued, itemized by
classes, par value of shares, shares
Therefore, there is no basis for ruling that petitioner without par value, and series, if
is doing business in the Philippines. The SC any;
categorically stated its disagreement with the Court o A statement of the amount actually
of Appeals’ ruling that the proponents to the paid in; and
transaction determine whether a foreign o Such additional information as may
corporation is doing business in the Philippines, be necessary or appropriate in
regardless of the place of delivery or place where order to enable the Securities and
the transaction took place. To accede to such Exchange Commission to determine
whether such corporation is entitled
theory makes it possible to classify, for instance, a
to a license to transact business in
series of transactions between a Filipino in the the Philippines, and to determine
United States and an American company based in and assess the fees payable.
the United States as “doing business in the  Attached to the application for license
Philippines,” even when these transactions are shall be a duly executed certificate
negotiated and consummated only within the under oath by the authorized official or
United States officials of the jurisdiction of its
incorporation, attesting to the fact that:
o The laws of the country or state of
3. Requirements for the issuance of a
the applicant allow Filipino citizens
and corporations to do business
3.1. Documentary requirements (§125) o The applicant is an existing
 A foreign corporation applying for a corporation in good standing.
license to transact business in the  If such certificate is in a foreign
Philippines shall submit to the SEC: language, a translation thereof in
o Copy of its articles of incorporation English under oath of the translator
and by-laws, certified in accordance shall be attached thereto.
with law  The application shall likewise be
o Their translation to an official accompanied by a statement under
language of the Philippines, if oath of the president or any other
necessary. person authorized by the corporation,
 The application shall be under oath showing to the satisfaction of the SEC
and, unless already stated in its articles and other governmental agency in the
of incorporation, shall specifically set proper cases that the:
forth the following: o Applicant is solvent and in sound
o The date and term of incorporation; financial condition, and
o The address, including the street o Setting forth the assets and
number, of the principal office of liabilities of the corporation as of
the corporation in the country or the date not exceeding one (1)
state of incorporation; year immediately prior to the filing
o The name and address of its of the application.
resident agent authorized to accept  Foreign banking, financial and
summons and process in all legal insurance corporations shall, in addition
proceedings and, pending the to the above requirements, comply with
establishment of a local office, all the provisions of existing laws
notices affecting the corporation; applicable to them.
o The place in the Philippines where  In the case of all other foreign
the corporation intends to operate; corporations, no application for license
o The specific purpose or purposes to transact business in the Philippines
which the corporation intends to shall be accepted by the SEC without
pursue in the transaction of its previous authority from the appropriate
business in the Philippines: government agency, whenever required
Provided, That said purpose or by law.
purposes are those specifically
stated in the certificate of authority 3.2 Deposit requirements (§126)
issued by the appropriate  Upon issuance of the license, such
government agency; foreign corporation may commence to
transact business in the Philippines and
continue to do so for as long as it

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retains its authority to act as a residents, including the Government of

corporation under the laws of the the Republic of the Philippines.
country or state of its incorporation,
unless such license is sooner
surrendered, revoked, suspended or 3.3 Appointment of resident agent (§128)
annulled in accordance with this Code  A resident agent may be either an (§
or other special laws. 127):
 Within sixty (60) days after the o Individual residing in the Philippines
issuance of the license to transact of good moral character and of
business in the Philippines, the license, sound financial standing
except foreign banking or insurance o Domestic corporation lawfully
corporation, shall deposit with the SEC transacting business in the
for the benefit of present and future Philippines:
creditors of the licensee in the  The SEC shall require as a condition
Philippines, securities satisfactory to precedent to the issuance of the license
the SEC, consisting of : to transact business in the Philippines
o Bonds or other evidence of by any foreign corporation that such
indebtedness of the Government of corporation file with the SEC a written
the Philippines, its political power of attorney:
subdivisions and instrumentalities, o Designating some person who must
or of government-owned or be a resident of the Philippines, on
controlled corporations and entities, whom any summons and other
o Shares of stock in "registered legal processes may be served in
enterprises" as this term is defined all actions or other legal
in Republic Act No. 5186, proceedings against such
o Shares of stock in domestic corporation, and
corporations registered in the stock o Consenting that service upon such
exchange, or resident agent shall be admitted
o Shares of stock in domestic and held as valid as if served upon
insurance companies and banks, or the duly authorized officers of the
o Any combination of these kinds of foreign corporation at its home
securities, office.
 With an actual market value of at least  Any such foreign corporation shall
one hundred thousand (P100,000.) likewise execute and file with the SEC
pesos; an agreement or stipulation, executed
 Provided, however, That within six (6) by the proper authorities of said
months after each fiscal year of the corporation, in form and substance as
licensee, the SEC shall require the follows:
licensee to deposit additional securities o "The (name of foreign corporation)
equivalent in actual market value to does hereby stipulate and agree, in
two (2%) percent of the amount by consideration of its being granted
which the licensee's gross income for by the Securities and Exchange
that fiscal year exceeds five million Commission a license to transact
(P5,000,000.00) pesos. business in the Philippines, that if
 The SEC shall also require deposit of at any time said corporation shall
additional securities if the actual cease to transact business in the
market value of the securities on Philippines, or shall be without any
deposit has decreased by at least ten resident agent in the Philippines on
(10%) percent of their actual market whom any summons or other legal
value at the time they were deposited. processes may be served, then in
 The SEC may at its discretion release any action or proceeding arising out
part of the additional securities of any business or transaction
deposited with it if the gross income of which occurred in the Philippines,
the licensee has decreased, or if the service of any summons or other
actual market value of the total legal process may be made upon
securities on deposit has increased, by the SEC and that such service shall
more than ten (10%) percent of the have the same force and effect as if
actual market value of the securities at made upon the duly-authorized
the time they were deposited. officers of the corporation at its
 The SEC may, from time to time, allow home office."
the licensee to substitute other  Whenever such service of summons or
securities for those already on deposit other process shall be made upon the
as long as the licensee is solvent. Such SEC, the Commission shall, within ten
licensee shall be entitled to collect the (10) days thereafter, transmit by mail a
interest or dividends on the securities copy of such summons or other legal
deposited. process to the corporation at its home
 In the event the licensee ceases to do or principal office.
business in the Philippines, the  The sending of such copy by the
securities deposited as aforesaid shall Commission shall be necessary part of
be returned, upon the licensee's and shall complete such service. All
application therefor and upon proof to expenses incurred by the Commission
the satisfaction of the SEC that the for such service shall be paid in
licensee has no liability to Philippine advance by the party at whose instance
the service is made.

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 No foreign corporation transacting business

 In case of a change of address of the in the Philippines without a license, or its
resident agent, it shall be his or its duty successors or assigns, shall be permitted to
to immediately notify in writing the SEC maintain or intervene in any action, suit or
of the new address. proceeding in any court or administrative
agency of the Philippines;
3.4 Summary: Requisites for the Issuance  Such corporation may be sued or
of License proceeded against before Philippine courts
 The SEC will issue a license to the or administrative tribunals on any valid
foreign corporation to do business in cause of action recognized under Philippine
the Philippines, provided the following laws.
conditions are met:  In addition, Sec. 134 makes it a ground for
o Appointment of a Resident Agent: revocation of license when a foreign
 Either a Filipino or domestic corporation transacts business in the
corporation; and Philippines as agent of or acting for and in
 Power of Attorney to SEC to behalf of any foreign corporation or entity
receive process not duly licensed to do business in the
o Must prove that the foreign Philippines.
corporation's country grants  Status of Contracts entered into without
reciprocal rights to Filipinos and the requisite license
Philippine corporation. o The failure to obtain a license by a
o Establish an office in the Philippines foreign corporation doing business in
o Bring in its assets the Philippines does not affect the
o Undertaking that Filipino creditors validity of contracts entered into by
will be preferred in the event of such foreign corporation, but merely
insolvency removes its legal standing to sue in
o Notice of six (6) months should local tribunals. However, the defect
there be desire to terminate may be cured by subsequent
operations registration by the foreign corporation
o Franchise and patents must remain to obtain the necessary license to do
in the Philippine, if this is possible business in the Philippines. [Home
o Must file a bond of P100,000 which Insurance Co. v. Eastern Shipping
may be in the following form: Lines, 123 SCRA 424 (1983)]
 surety bond o Although the law does not declare as
 government securities void or invalid the contracts entered
 securities of political into by a foreign corporation with a
subdivisions local corporation without the former
 shares of stock of registered first securing a license or certificate to
enterprises with the SEC do business in the Philippines, the
 shares of stock of any parties in this case cannot obtain relief
corporation being sold at the on the contracts entered into because
stock exchange they are charged with the knowledge of
o Provided, that within six (6) the existing law at the time they
months after each fiscal year, the entered into such contract and at the
SEC shall require the deposit of time it is to be operative. [Top-Weld
additional securities equivalent to Mfg. v. ECED, S.A., 138 SCRA 118
2% of the amount in excess of (1985)]
P500,000 of the gross income. o However, in the case of Merrill Lynch
[Sec. 125, 126, Corporation Code] Futures, Inc. v. CA, 211 SCRA 824
(1992), the SC held that although the
4. What laws are applicable to foreign corporation has engaged in
foreign corporations licensed to business in the Philippines without a
transact business in the Philippines? license, the dismissal of the suit would
not be proper on the ground that if the
local investors knew that the foreign
corporation had no license to do
business, then they are estopped from
 Any foreign corporation lawfully doing using the lack of license to avoid their
business in the Philippines shall be bound obligations.
by all laws, rules and regulations applicable  Legal standing of foreign corporations to
to domestic corporations of the same class, sue on their corporate names, trade
EXCEPT such only as provide for the: names, and trademarks
o Creation, formation, organization or o A foreign corporation although not
dissolution of corporations or doing business in the Philippines has a
o Those which fix the relations, liabilities, personality to sue to oppose the
responsibilities, or duties of registration of a trademark when it is
stockholders, members, or officers of shown that its products using such
corporations to each other or to the trademark are being imported and sold
corporation. in the Philippines, pursuant to the
terms of RA 166. [General Garments v.
5. What are the consequence of Director of Patents, 41 SCRA 50
doing business in the Philippines (1971)]
without a license? (§133) o A foreign corporation has a right to
maintain an action in Philippine courts

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even if it is not licensed to do business  One or more foreign corporations

and is not actually doing business on its authorized to transact business in the
own therein to protect its corporate and Philippines may merge or consolidate with
trade names, since it is a property right any domestic corporation or corporations if
in rem, which it may assert to protect :
against all the world, in any of the o Such is permitted under Philippine laws
courts of the world--even in jurisdiction and by the law of its incorporation
where it does not transact business-- o The requirements on merger or
just the same as it may protect its consolidation as provided in this Code
tangible property, against trespass or are followed
conversion. This is in consonance with  Whenever a foreign corporation authorized
the Convention of the Union of Paris for to transact business in the Philippines shall
the Protection of Industrial Property to be a party to a merger or consolidation in
which the Phils. is a party. Article 8 its home country or state as permitted by
thereof provides, "A trade name shall the law of its incorporation, such foreign
be protected in all the countries of the corporation shall, within sixty (60) days
Union without the obligation of filing or after such merger or consolidation becomes
registration, whether or not it forms effective, file with the SEC, and in
part of the trademark." The mandate is government agency, a copy of the articles
contained in RA 166, or the Trademark of merger or consolidation duly
Law. [Converse Rubber Corp. v. authenticated by the proper official or
Universal Rubber Products, 147 SCRA officials of the country or state under the
154 (1987)] laws of which merger or consolidation was
6. Application to existing foreign  Provided, however, that if the absorbed
corporations (§148) corporation is the foreign corporation doing
business in the Philippines, the latter shall
 Every foreign corporation which on the date at the same time file a petition for
of the effectivity of the Code is authorized withdrawal of its license.
to do business in the Philippines under a
license issued to it, shall continue to have 10. Revocation of license (§134)
such authority under the terms and
condition of its license, subject to the  Without prejudice to other grounds
provisions of this Code and other special provided by special laws, the license of a
laws. foreign corporation to transact business in
the Philippines may be revoked or
7. Amendments to articles of suspended by the SEC upon any of the
incorporation or by-laws of foreign following grounds:
o Failure to file its annual report or pay
corporations (§130)
any fees as required by this Code;
o Failure to appoint and maintain a
 Within sixty (60) days after the
resident agent in the Philippines as
amendment becomes effective, file with the
required by this Title;
SEC, and in the proper cases with the
o Failure, after change of its resident
appropriate government agency, a duly
agent or of his address, to submit to
authenticated copy of the articles of
the Securities and Exchange
incorporation or by-laws, as amended,
Commission a statement of such
indicating clearly in capital letters or by
change as required by this Title;
underscoring the change or changes made,
o Failure to submit to the Securities and
duly certified by the authorized official or
Exchange Commission an authenticated
officials of the country or state of
copy of any amendment to its articles
of incorporation or by-laws or of any
 The filing thereof shall not of itself enlarge
articles of merger or consolidation
or alter the purpose or purposes for which
within the time prescribed by this Title;
such corporation is authorized to transact
o A misrepresentation of any material
business in the Philippines.
matter in any application, report,
affidavit or other document submitted
8. Amended license (§131) by such corporation pursuant to this
 A foreign corporation authorized to transact o Failure to pay any and all taxes,
business in the Philippines shall obtain an imposts, assessments or penalties, if
amended license in the event it : any, lawfully due to the Philippine
o Changes its corporate name, or Government or any of its agencies or
o Desires to pursue in the Philippines political subdivisions;
other or additional purposes o Transacting business in the Philippines
 By submitting an application therefor to the outside of the purpose or purposes for
SEC, favorably endorsed by the appropriate which such corporation is authorized
government agency in the proper cases. under its license;
o Transacting business in the Philippines
9. Merger or consolidation involving as agent of or acting for and in behalf
a foreign corporation licensed in the of any foreign corporation or entity not
Philippines (§132) duly licensed to do business in the
Philippines; or

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o Any other ground as would render it purposes and language of the pertinent statute or
unfit to transact business in the statutes involved and of the general principles
Philippines. (n) governing the jurisdictional authority of the state
over such corporations
11. Issuance of certificate of CAB, the CA categorized as “doing business”
revocation (§135) petitioner’s participation under the “Assignment
Agreement” and the “Deed of Assignment.” This is
 Upon the revocation of any such license to simply untenable. The expression “doing business”
transact business in the Philippines, the should not be given such a strict and literal
Securities and Exchange Commission shall construction as to make it apply to any corporate
issue a corresponding certificate of dealing. At this early stage and with petitioner’s
revocation, furnishing a copy thereof to the acts or transactions limited to the assignment
appropriate government agency in the contracts, it cannot be said that it had performed
proper cases. acts intended to continue the business for which it
 The Securities and Exchange Commission was organized. It may not be amiss to point out
shall also mail to the corporation at its that the purpose or business for which
registered office in the Philippines a notice petitioner was organized is not discernible in the
of such revocation accompanied by a copy records. No effort was exerted by the CA to
of the certificate of revocation. establish the nexus between petitioner’s business
and the acts supposed to constitute “doing
business.” Thus, whether the assignment contracts
12. Withdrawal by a foreign
were incidental to petitioner’s business or were
corporation (Section 136) continuation thereof is beyond determination.
 If a foreign corporation duly licensed to do
business desires to withdraw, it must file a
petition for withdrawal, and must meet the
following requirements: Chapter XIX
o All claims accrued in the Philippines
o All taxes must be paid
o Petition must be published once a week
1. Close Corporations
for three (3) consecutive weeks. (§136)

Doing business in the Philippines without a license:

Communications Materials vs. CA, (1996)

In determining whether a corporation does

business in the Philippines or not, aside from their 1.1 What is a close corporation? (§96)
activities within the forum, reference may be made  A close corporation is one whose
to the contractual agreements entered into by it articles of incorporation provide that:
with other entities in the country. A scrutiny of the o All the corporation's issued stock of
different contracts and agreements entered into all classes, exclusive of treasury
with various business contacts in the country shares, shall be held of record by
indicate convincingly a purpose to convey to not more than a specified number
customers and the general public that they are of persons, not exceeding twenty
dealing directly with the foreign corporation, and (20);
that foreign corporation is actively engaging in o All the issued stock of all classes
business in the country. These agreements also shall be subject to one or more
contain provisions which are highly restrictive in specified restrictions on transfer
nature, reducing the local signatory to be a mere permitted by this Title; and
extension or instrument of the foreign corporation. o The corporation shall not list in any
Hence, the foreign corporation is deemed to be stock exchange or make any public
doing business in the Philippines without a license. offering of any of its stock of any
Nonetheless, petitioner is estopped from raising class.
this fact to bar the foreign corporation from suing.  A corporation shall not be deemed a
One who has dealt with a corporation of foreign close corporation when at least two-
origin as a corporate entity is estopped to deny its thirds (2/3) of its voting stock or voting
corporate existence and capacity. And the doctrine rights is owned or controlled by another
of estoppel to deny corporate existence applies to a corporation which is not a close
foreign as well as to domestic corporations. The corporation.
principle will be applied to prevent a person
contracting with a foreign corporation from later
taking advantage of its noncompliance with the 1.2 What entities may not be organized as
statutes chiefly in cases where such person has closed corporations?
received the benefits of the contract.  Any corporation may be incorporated
as a close corporation, except:
MR Holdings, Ltd vs. Bajar,( 2002) o Mining
o Oil companies
The question whether or not a foreign o Stock exchanges
corporation is doing business is dependent o Banks
principally upon the facts and circumstances of o Insurance companies
each particular case, considered in the light of the o Public utilities

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o Educational institutions presumed under this section to have,

o Corporations declared to be vested notice either
with public interest in accordance o That he is a person not eligible to
with the provisions of this Code. be a holder of stock of the
corporation, or
o That transfer of stock to him would
1.3 Validity of restrictions on transfer of cause the stock of the corporation
shares (§98) to be held by more than the
 Restrictions on the right to transfer number of persons permitted by its
shares must appear in the: articles of incorporation to hold
o Articles of incorporation stock of the corporation, or
o By-laws o That the transfer of stock is in
o Certificate of stock violation of a restriction on transfer
 OTHERWISE, the same shall not be
of stock, the corporation may, at its
binding on any purchaser in good faith. option, refuse to register the
 Said restrictions shall not be more transfer of stock in the name of the
onerous than granting the existing transferee.
stockholders or the corporation the  The provisions of subsection (4) shall
option to purchase the shares of the not be applicable if the transfer of
transferring stockholder with such stock, though contrary to subsections
reasonable terms, conditions or period (1), (2) or (3), has been consented to
stated therein. by all the stockholders of the close
 If upon the expiration of said period, corporation, or if the close corporation
the existing stockholders or the has amended its articles of
corporation fails to exercise the option incorporation in accordance with this
to purchase, the transferring Title.
stockholder may sell his shares to any  The term "transfer", as used in this
third person. section, is not limited to a transfer for
 The provisions of this section shall not
impair any right which the transferee
1.4 Effects of issuance or transfer of stock
may have to rescind the transfer or to
in breach of qualifying conditions (§99)
recover under any applicable warranty,
 A person is conclusively presumed to express or implied.
have notice of the fact of ineligibility to
be a stockholder:
o If stock of a close corporation is 1.5 Agreements by stockholders (Section
issued or transferred to any person 100)
who is not entitled under any
provision of the articles of 1. Agreements by and among
incorporation to be a holder of stockholders:
record of its stock, and  Executed before the formation and
o If the certificate for such stock organization of a close corporation,
conspicuously shows the  Signed by all stockholders
qualifications of the persons  Shall survive the incorporation of
entitled to be holders of record such corporation and shall continue
thereof to be valid and binding between
 A person to whom stock is issued or and among such stockholders, if
transferred is conclusively presumed to such be their intent,
have notice of these facts:  To the extent that such agreements
o If the articles of incorporation of a are not inconsistent with the
close corporation states the number articles of incorporation,
of persons, not exceeding twenty irrespective of where the provisions
(20), who are entitled to be holders of such agreements are contained,
of record of its stock, and except those required by this Title
o If the certificate for such stock to be embodied in said articles of
conspicuously states such number, incorporation.
and 2. An agreement between two or more
o If the issuance or transfer of stock stockholders, if in writing and signed by
to any person would cause the the parties thereto, may provide that in
stock to be held by more than such exercising any voting rights, the shares
number of persons. held by them shall be voted as therein
 If a stock certificate of any close provided, or as they may agree, or as
corporation conspicuously shows a determined in accordance with a
restriction on transfer of stock of the procedure agreed upon by them.
corporation, the transferee of the stock 3. No provision in any written agreement
is conclusively presumed to have notice signed by the stockholders, relating to
of the fact that he has acquired stock in any phase of the corporate affairs, shall
violation of the restriction, if such be invalidated as between the parties
acquisition violates the restriction. on the ground that its effect is to make
 Whenever any person to whom stock of them partners among themselves.
a close corporation has been issued or 4. A written agreement among some or all
transferred has, or is conclusively of the stockholders in a close
corporation shall not be invalidated on
the ground that it so relates to the

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conduct of the business and affairs of laws, or any stockholder's

the corporation as to restrict or agreement;
interfere with the discretion or powers o Cancelling, altering or enjoining
of the board of directors: any resolution or act of the
 Provided, That such agreement corporation or its board of
shall impose on the stockholders directors, stockholders, or
who are parties thereto the officers;
liabilities for managerial acts o Directing or prohibiting any act
imposed by this Code on directors. of the corporation or its board
5. To the extent that the stockholders are of directors, stockholders,
actively engaged in the management or officers, or other persons part
operation of the business and affairs of to the action;
a close corporation, the stockholders o Requiring the purchase at their
shall be held to strict fiduciary duties to fair value of shares of any
each other and among themselves. stockholder, either by the
Said stockholders shall be personally corporation regardless of the
liable for corporate torts unless the availability of unrestricted
corporation has obtained reasonably retained earnings in its books,
adequate liability insurance. or by the other stockholders;
o Appointing a provisional
1.6 Amendment of articles of o Dissolving the corporation; or
incorporation (§103) o Granting such other relief as
Any amendment to the articles of the circumstances may
incorporation which seeks to delete or warrant.
remove any provision required by this Title
to be contained in the articles of
incorporation or to reduce a quorum or 3. Provisional Director
voting requirement stated in said articles of  An impartial person who is neither
incorporation shall not be valid or effective a stockholder nor a creditor of the
unless approved by the affirmative vote of corporation or of any subsidiary or
at least two-thirds (2/3) of the outstanding affiliate of the corporation, and
capital stock, whether with or without whose further qualifications, if any,
voting rights, or of such greater proportion may be determined by the
of shares as may be specifically provided in Commission.
the articles of incorporation for amending,  A provisional director is not a
deleting or removing any of the aforesaid receiver of the corporation and
provisions, at a meeting duly called for the does not have the title and powers
purpose. of a custodian or receiver.
 A provisional director shall have all
the rights and powers of a duly
elected director of the corporation,
1.7 Deadlocks
including the right to notice of and
to vote at meetings of directors,
1. Deadlocks, Defined: until such time as he shall be
removed by order of the
 Notwithstanding any contrary Commission or by all the
provisions in the articles of stockholders.
incorporation or by-laws or  His compensation shall be
agreement of stockholders of a determined by agreement between
close corporation him and the corporation subject to
 The directors or stockholders are so approval of the Commission, which
divided respecting the management may fix his compensation in the
of the corporation's business and absence of agreement or in the
affairs event of disagreement between the
 The votes required for any provisional director and the
corporate action cannot be obtained corporation.
 The consequence is that the
business and affairs of the
corporation can no longer be
conducted to the advantage of the
stockholders generally

2. Resolution of deadlocks
 The SEC, upon written petition by
any stockholder, shall have the
power to arbitrate the dispute.
 In the exercise of such power, the
Commission shall have authority to
make such order as it deems
appropriate, including an order:
o Cancelling or altering any
provision contained in the
articles of incorporation, by-

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San Juan Structural and Steel Fabricatiors vs.

CA (1998)

Motorich entered into agreement with San Juan for

the transfer of a parcel of Land to latter. San Juan
already paid downpayment. When San Juan was
ready to pay the balance, Motorich refused to sell.
Motorich contend that Nenita Gruenberg’s,
treasurer of Motorich, signature is not sufficient to
bind Motorich, and that the signature of Reynaldo
Gruenberg, president of Motorich is required.
Nenita Gruenberg is the spouse of Reynaldo
Gruenberg and both owns 99.866% of the shares
of stock of the corporation.
HELD: Motorich is not a close corporation. The
mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient
ground for disregarding their separate
personalities. A narrow distribution of ownership
does not of itself make a close corporation. There
are exceptional cases where an action by a director
who is singly is the controlling stockholder may be
considered as a binding corporate act and a board
action is a mere formality. However, Nenita is not
the sole controlling stockholder.


1. Management / Board Authority

 There can be classification of directors into one  There are no classification of board of directors
or more classes, each of whom may be voted
for and elected solely by a particular class of
stock; and
 Corporate Powers devolved upon board of
 The articles of incorporation of a close directors whose powers are executed by officers.
corporation may provide that the business of Cannot provide that it be managed by
the corporation shall be managed by the stockholders
stockholders of the corporation rather than by a
board of directors. So long as this provision
continues in effect:
 Board of directors must be elected in a
1. No meeting of stockholders need be called stockholders meeting
to elect directors
2. Unless the context clearly requires  Stockholders of a corporation are separate and
otherwise, the stockholders of the distinct from directors
corporation shall be deemed to be directors
for the purpose of applying the provisions
of this Code
3. The stockholders of the corporation shall be
subject to all liabilities of directors.  Officers must be elected by the Board of
 The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be elected
or appointed by the stockholders, instead of by
the board of directors.

2. Meetings  The directors or trustees shall not act

individually nor separately but as a body in a
 Unless the by-laws provide otherwise, any lawful meeting. They will act only after
action by the directors of a close corporation discussion and deliberation of matters before
without a meeting shall nevertheless be them. Contracts entered into without a formal
deemed valid if: board resolution does not bind the corporation
except when ratified or when majority of the
1. Before or after such action is taken, written board has knowledge of the contract and the
consent thereto is signed by all the contract benefited the corporation.
directors; or
 Absence of a prompt objection in writing does

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2. All the stockholders have actual or implied not ratify acts done by directors without a valid
knowledge of the action and make no meeting. There must be express or implied
prompt objection thereto in writing; or ratification.

3. The directors are accustomed to take  Express ratification may consist of a Board
informal action with the express or implied Resolution to that effect
acquiescence of all the stockholders; or
 Implied ratification may consist of acceptance of
4. All the directors have express or implied benefits from said unauthorized act while having
knowledge of the action in question and knowledge of said act
none of them makes prompt objection
thereto in writing.  Failure to give notice would render a meeting
 If a director's meeting is held without proper
call or notice, an action taken therein within the  Attendance to a meeting despite want of notice
corporate powers is deemed ratified by a will be deemed implied waiver
director who failed to attend, unless he
promptly files his written objection with the  All proceedings had and any business transacted
secretary of the corporation after having at any meeting of the stockholders or members,
knowledge thereof. if within the powers or authority of the
corporation, shall be valid even if the meeting be
improperly held or called, provided all the
stockholders or members of the corporation are
present or duly represented at the meeting.

3. Voting / Quorum  No share may be deprived of voting rights,

except Preferred or Redeemable shares, unless
 The AOI may provide for a classification of otherwise provided by the Code
directors into one or more classes, each of
which may be voted for and elected solely by a  There shall always be a class/series of shares
particular class of stock. which have a COMPLETE VOTING RIGHTS


TO EVERY OTHER SHARE, except as otherwise
provided in the AOI

 For Board of directors, the by-laws or AOI can

 The AOI may provide for a greater quorum or provide for a greater majority in quorum
voting requirements in meetings of
stockholders or directors than those provided in  For stockholders, the AOI can provide for a
this Code. different percentage in quorum

4. Pre-emptive Right  Limitations on the exercise of pre-emptive right:

 The pre-emptive right of stockholders in close a. Such pre-emptive right shall not extend to
corporations shall extend to all stock to be shares to be issued in compliance with laws
issued, including reissuance of treasury shares, requiring stock offerings or minimum stock
whether for money, property or personal ownership by the public;
services, or in payment of corporate debts,
unless the articles of incorporation provide b. Not extend to shares to be issued in good faith
otherwise. with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed
for corporate purposes or in payment of a
previously contracted debt

c. Shall not take effect if denied in the Articles of

Incorporation or an amendment thereto.

5. Transferability

 Restrictions on the right to transfer shares  Restrictions on the right to transfer not allowed
must appear in the AI and in the by-laws as
well as in the certificate of stock otherwise the
same shall not be binding on any purchaser
thereof in good faith
6. Withdrawal Right

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 Any stockholder of a close corporation may, for  Stockholders may require the corporation to
any reason, compel the said corporation to buy-back their shares at fair value when the
purchase his shares at their fair value, which Corporation has unrestricted Retained Earnings:
shall not be less than their par or issued value, a. In case any amendment to the articles of
when the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive  changing or restricting the rights of
of capital stock any stockholder or class of shares, or
 authorizing preferences in any respect
 Any stockholder of a close corporation may, by superior to those of outstanding shares
written petition to the SEC, compel the of any class, or
dissolution of such corporation whenever:  extending or shortening the term of
Any of acts of the directors, officers or those in corporate existence
control of the corporation is illegal, or b. In case of sale, lease, exchange, transfer,
fraudulent, or dishonest, or oppressive or mortgage, pledge or other disposition of all
unfairly prejudicial to the corporation or or substantially all of the corporate property
any stockholder, or and assets as provided in the Code; and
Corporate assets are being misapplied or c. In case of merger or consolidation
wasted. d. Extension or shortening of the term of the
corporation (§37)
e. Diversion of funds of corporation from
primary purpose to secondary purpose

 The corporation may buy-back shares of

stockholders subject to the following limitations
(Treasury shares):
a. There must be unrestricted retained
b. Must be for a legitimate purpose

2. Educational Corporations b. Stock—The number and erm of directors shall

be governed by the provisions on stock
2.1 Incorporation corporations.

a. Governing Laws: Special Laws and the

Corporation Code (§106) 3. Religious Corporations

b. Pre-requisites to Incorporation: Except upon 3.1 Classes of Religious Corporations (§ 109)

favorable recommendation of the (Ministry of
Education and Culture), the SEC shall not accept a. Corporation Sole
or approve the articles of incorporation and by-
laws of any educational institution (§107) b. Religious Corporations—governed by the
Corporation Code and the general provisions on
2.2 Board of Trustees (§108) non-stock corporations insofar as thye may be
a. Non-stock

1. Composition—not less than 5 nor more than 3.2 Corporation Sole (§ 110)
15 trustees, but always in multiples of five.
Unless otherwise provided in the articles of a. Who may form—The chief archbishop, bishop,
incorporation or the by-laws, the board or priest, minister, rabbi or other presiding elder of
trustees of incorporated schools, colleges, or such religious denomination, sect or church.
other institutions of learning shall: (§110)
a. So classify themselves that the term
of office of one-fifth (1/5) of their b. Filling of Vacancies (§114)
numbers shall expire every year.
b. Trustees thereafter elected to fill 1. The successors in office concerned shall
vacancies, occurring before the become the corporation sole on their
expiration of a particular term shall hold accession to office and shall be permitted
office only for the unexpired period to transact business as such on the filing
c. Trustees elected thereafter to fill with the Securities and Exchange
vacancies caused by expiration of term shall Commission of a copy of their
hold office for five (5) years commission, certificate of election, or
letters of appointment, duly certified by
2. Quorum—Majority of the trustees any notary public.
Powers and Authority of trustees shall be defined
in the by-laws 2. During any vacancy in the office, the
person or persons authorized and
empowered by the rules, regulations or

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discipline of the religious denomination, 1. Such chief archbishop, bishop, priest,

sect or church represented by the minister, rabbi or presiding elder shall
corporation sole to administer the become a corporation sole.
temporalities and manage the affairs,
estate and properties of the corporation 2. All temporalities, estate and
sole during the vacancy shall exercise all properties of the religious
the powers and authority of the denomination, sect or church
corporation sole during such vacancy. theretofore administered or managed
by him as such chief archbishop,
c. Purpose-- For the purpose of administering bishop, priest, minister, rabbi or
and managing, as trustee, the affairs, property presiding elder shall be held in trust
and temporalities of any religious denomination, by him as a corporation sole, for the
sect or church. (§110) use, purpose, behalf and sole benefit
of his religious denomination, sect or
d. The Articles of Incorporation must set forth church, including hospitals, schools,
that (§111): colleges, orphan asylums, parsonages
1. The presiding elder of such religious and cemeteries thereof.
denomination, sect or church is the chief
archbishop, bishop, priest, minister, g. Acquisition and Alienation of Property (§113):
rabbi or presiding elder of his religious 1. Purpose for holding and purchasing the
denomination, sect or church and that real and personal property, or receiving
he desires to become a corporation sole; gifts and bequests—For its church,
charitable, benevolent or educational
2. The rules, regulations and discipline of purposes.
his religious denomination, sect or
church are not inconsistent with his 2. Conditions for sale or mortgage of real
becoming a corporation sole and do not property held by it:
forbid it; i. By obtaining an order for that
purpose from the Court of First
Instance of the province where
3. As such chief archbishop, bishop,
the property is situated upon
priest, minister, rabbi or presiding elder,
proof made to the satisfaction of
he is charged with the administration of
the court that:
the temporalities and the management
*notice of the application
of the affairs, estate and properties of
for leave to sell or
his religious denomination, sect or
mortgage has been given
church within his territorial jurisdiction,
by publication or
describing such territorial jurisdiction;
otherwise in such manner
and for such time as said
4. The manner in which any vacancy court may have directed,
occurring in the office of chief and *that it is to the
archbishop, bishop, priest, minister, interest of the corporation
rabbi of presiding elder is required to be that leave to sell or
filled, according to the rules, regulations mortgage should be
or discipline of the religious granted.
denomination, sect or church to which ii. The application for leave to sell
he belongs; and or mortgage must be made by
petition, duly verified, by the chief
5. The place where the principal office of archbishop, bishop, priest,
the corporation sole is to be established minister, rabbi or presiding elder
and located, which place must be within acting as corporation sole, and
the Philippines. may be opposed by any member
of the religious denomination, sect
The articles of incorporation may include any or church represented by the
other provision not contrary to law for the corporation sole:
regulation of the affairs of the corporation.
3. When the Intervention of the Courts
shall not be necessary—In cases where
e. Filing/submission of the Articles of the rules, regulations and discipline of the
Incorporation (§112): religious denomination, sect or church,
religious society or order concerned
1. Verification before filing, by affidavit represented by such corporation sole
or affirmation of the chief archbishop, regulate the method of acquiring, holding,
bishop, priest, minister, rabbi or selling and mortgaging real estate and
presiding elder, as the case may be, personal property, such rules, regulations
and discipline shall control.
2. Accompanied by a copy of the
commission, certificate of election or h. Dissolution (§115):
letter of appointment of such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to 1. A corporation sole may be dissolved
be correct by any notary public. and its affairs settled voluntarily by
submitting to the Securities and Exchange
f. Effect of the Filing of the Articles (§112): Commission a verified declaration of

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2. The declaration of dissolution shall incorporate is not forbidden by competent

set forth: authority or by the constitution, rules,
regulations or discipline of the religious
a. The name of the corporation; denomination, sect, or church of which it
forms a part;
b. The reason for dissolution and
winding up; d. That the religious society or religious
order, or diocese, synod, or district
organization desires to incorporate for the
c. The authorization for the
administration of its affairs, properties and
dissolution of the corporation by
the particular religious
denomination, sect or church;
e. The place where the principal
office of the corporation is to be
d. The names and addresses of
established and located, which place must
the persons who are to supervise
be within the Philippines; and
the winding up of the affairs of
the corporation.
f. The names, nationalities, and
residences of the trustees elected by the
3. Effect of approval of declaration of religious society or religious order, or the
dissolution by the Securities and diocese, synod, or district organization to
Exchange Commission—the corporation serve for the first year or such other
shall cease to carry on its operations period as may be prescribed by the laws
except for the purpose of winding up its of the religious society or religious order,
affairs. or of the diocese, synod, or district
organization, the board of trustees to be
not less than five (5) nor more than
3.3 Religious Societies (§ 116) fifteen (15).

d. Purpose of incorporation
a. Who may form a Religious Society:
For the administration of its temporalities or for
Any religious society or religious order, or any the management of its affairs, properties and
diocese, synod, or district organization of any estate.
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations,
or discipline of the religious denomination, sect
or church of which it is a part, or by competent

b. Internal Requirement

Upon written consent and/or by an affirmative

vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership,

c. SEC Requirement

1. Filing with the Securities and

Exchange Commission, articles of
incorporation verified by the affidavit of
the presiding elder, secretary, or clerk or
other member of such religious society
or religious order, or diocese, synod, or
district organization of the religious
denomination, sect or church.

2. The Articles must set forth the ff:

a. That the religious society or religious

order, or diocese, synod, or district
organization is a religious organization of
a religious denomination, sect or church;

b. That at least two-thirds (2/3) of its

membership have given their written
consent or have voted to incorporate, at
a duly convened meeting of the body;

c. That the incorporation of the religious

society or religious order, or diocese,
synod, or district organization desiring to

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deliverable grade at a specific date in

b. the future at a specified price.

THE SECURITIES 2.2 Foreign Exchange Market – This

REGULATION CODE market is an over-the-counter market
conducted by international banks and does
not have a central location
(RA 8799)
Security – a forward exchange
Chapter I
2.3 Options Market – It enables an investor
to purchase an option giving him the right to
buy or sell a specific number of shares at a
future date, at a specific price. For this right,
1. Capital Markets the investor either pays or receives money but
(just like in a commodity market) the money
The places to go if you want to raise new involved is only a fraction of the market value
money of the shares concerned.

1.1 Equity Capital – for the investor, the Security – call or put options
stock market provides a variable return
a. Stock Market –
Security – eg, shares of stock Chapter II
1.2 Debt Capital – for the lender, the
money or bond market provides a fixed
1. State Policy (Sec.2)
b. Money Market – for short term
debts, ie, those normally maturing The State shall establish a socially conscious,
within 1 year from date of issuance free market that regulates itself, encourages
– the widest participation of ownership in
enterprises, enhances the democratization of
Security – commercial paper (an wealth, promotes the development of the
unsecured IOU of a company, capital market, protect investors, ensures full
issued on a discount basis, and fair disclosure about securities, minimizes
promising to pay the holder the if not totally eliminates insider trading and
full face value thereof upon other fraudulent or manipulative devices and
redemption) practices which create distortions in the free
c. Bond Market – for long term debts,
ie, those normally maturing after a PSE vs. Court of Appeals (1997)
year from date of issuance
The Securities Act is designed not only to
Security – junk bonds (high yield provide investors with adequate information
bonds having high interest rates upon which to base their decision to buy and
and are issued by lower credit sell securities, but also to protect legitimate
rated companies or companies business seeking o obtain capital through
with no credit rating) honest representation against competition
from crooked promoters and prevent fraud in
sale of securities.
2. Non-Capital Markets
The intended effects of the Securities Act are
The places to go if you want to hedge or chiefly the following:
mitigate the risks attached to holding capital a. Prevention of excesses and fraudulent
assets transactions, merely by requirement
that their details be revealed;
2.1 Commodity Market – The instruments b. Placing the market during the early
traded in this market are not present assets stages of the offering of security a
like shares of stock, commercial papers or body of information, which operating
bonds but future contracts calling for indirectly through investment services
delivery of an asset ; for this reason, a and expert investors, will intend to
commodity market is usually referred to as a produce a more accurate appraisal of
futures market. (eg, agricultural products, a security.
metals and financial instruments)
The Code is self-executory, and failure of SEC to
Security – a futures contract (one issue rules and regulations shall not in any
which entitles the holder to buy or manner affect its self-executroy nature (Sec.
sell a specific amount of the 72.1)
underlying commodity represented
by the contract in a prearranged, 2. Powers and Functions of the SEC
(Sec. 5)

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payments/rehabilitation cases filed as of 30

1. Have jurisdiction and supervision over all June 2000 until finally disposed.
corporations, partnerships or
associations who are the grantees of
primary franchises and/or a license or 3. Definition of Terms
permit issued by the Government;
2. Formulate policies and 3.1 Securities - are shares, participation or
recommendations on issues concerning interests in a corporation or in a commercial
the securities market, advise Congress enterprise or profit-making venture and
and other government agencies on all evidenced by a certificate, contract,
aspects of the securities market instrument, whether written or electronic in
3. Approve, reject, suspend, revoke or character. It includes:
require amendments to registration
statements, and registration and (a) Shares of stock, bonds, debentures,
licensing applications; notes, evidences of indebtedness,
4. Regulate, investigate or supervise the asset-backed securities;
activities of persons to ensure (b) Investment contracts, certificates of
compliance; interest or participation in a profit
5. Supervise, monitor, suspend or take sharing agreement, certificates of
over the activities of exchanges, clearing deposit for a future subscription;
agencies and other SROs; (c) Fractional undivided interests in oil,
6. Impose sanctions for the violation of gas or other mineral rights;
laws, rules, regulations and orders (d) Derivatives like option and warrants;
issued pursuant thereto; (e) Certificates of assignments,
7. Prepare, approve, amend or repeal certificates of participation, trust
rules, regulations and orders, and issue certificates, voting trust certificates or
opinions and provide guidance on and similar instruments;
supervise compliance with such rules, (f) Proprietary or non proprietary
regulations and orders; membership certificates
8. Enlist the aid and support of and/or incorporations; and
deputize any and all enforcement (g) Other instruments as may in the
agencies of the Government civil or future be determined by the
military as well as any private Commission.
institution, corporation, firm, association
or person; 3.2 Issuer - the originator, maker, obligor, or
9. Issue cease and desist orders to prevent creator of the security.
fraud or injury to the investing public;
10. Punish for contempt of the Commission, 3.3 Broker - a person engaged in the
both direct and indirect; business of buying and selling securities for
11. Compel the officers of any registered the account of others.
corporation or association to call
meetings of stockholders or members; 3.4 Dealer - any person who buys and sells
12. Issue subpoena duces tecum and securities for his/her own account in the
summon witnesses to appear, order the ordinary course of business.
examination, search and seizure of all
documents, papers, files and records, 3.5 Associated person of a broker or
tax returns, and books of accounts of dealer - an employee thereof who, directly
any entity or person under investigation, exercises control of supervisory authority, but
subject to the provisions of existing does not include a salesman, or an agent or a
laws; person whose functions are solely clerical or
13. Suspend, or revoke after proper notice ministerial.
and hearing, the franchise or certificate
of registration of corporations, 3.6 Clearing Agency - any person who acts
partnerships or associations, upon any as intermediary in making deliveries upon
of the grounds provided by law; payment to effect settlement in securities
14. Such other powers as may be provided transactions.
by law as well as those which may be
implied from, or which are necessary or 3.7 Exchange - an organized marketplace or
incidental to powers which are expressly facility that brings together buyers and sellers
granted to the Commission. and executes trades of securities and/or
The Commission’s jurisdiction over all cases
enumerated under Sec 5 of PD 902-A is 3.8 Insider –
hereby transferred to the Courts of general (a) the issuer;
jurisdiction or the appropriate Regional Trial (b) a director or officer (or person
Court. performing similar functions) of, or a
person controlling the issuer;
The Commission shall retain jurisdiction over (c) a person whose relationship or former
pending cases involving intra-corporate relationship to the issuer gives or
disputes submitted for final resolution which gave him access to material
should be resolved within 1 year from the information about the issuer or the
enactment of this Code. security that is not generally available
to the public;
The Commission shall retain jurisdiction over (d) a government employee, or director,
pending suspension of or officer of an exchange, clearing

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agency and/or self-regulatory 4.1 Filing of Registration Statement

organization who has access to
material information about an issuer All securities shall be registered through
or a security that is not generally the filing by the issuer in the main office
available to the public; or of the Commission, of a sworn registration
(e) a person who learns such statement. The registration statement
information by a communication shall include any prospectus required or
from any of the foregoing insiders. permitted to be delivered.

3.9 Pre-need plans – are contracts which The information required for registration
provide for the performance of future shall include, among others the effect of
services or the payment of future monetary the securities issue on ownership, on the
consideration at the time of actual need, for mix of ownership, especially foreign and
which planholders pay in cash or installment local ownership.
at stated prices, with or without interest or
insurance coverage and includes life, The registration statement shall be signed
pension, education, interment, and other by
plans which the Commission may from time  the issuer’s executive officer
to time approve.  principal operating officer
 principal financial officer
3.10 Promoter - a person who, acting  comptroller
alone or with others, takes initiative in  principal accounting officer
founding and organizing the business or  corporate secretary or
enterprise of the issuer and receives  persons performing similar
consideration therefor. functions

3.11 Registration statement - is the Accompanied By a duly verified resolution

application for the registration of securities of the board of directors of the issuer
required to be filed with the Commission. coporation.

3.12 Salesman - a natural person, employed as The written consent of the expert named
such or as an agent, by a dealer, issuer or as having certified any part of the
broker to buy and sell securities. registration statement or any document
used in connection therewith shall also be
3.13 Uncertified Security – a security filed.
evidenced by electronic or similar records.
Where the registration statement includes
3.14 Underwriter - a person who guarantees shares to be sold by selling shareholders,
on a firm commitment and/or declared best a written certification by such selling
effort basis the distribution and sale of securities shareholders as to the accuracy of any
of any kind by another company. part of the registration statement
contributed to by such selling
4. Registration of Securities shareholders shall also be filed.

Securities shall not be sold or offered for 4.2 Payment of Fee

sale or distribution within the Philippines,
without a registration statement duly filed The issuer shall pay to the Commission a
with and approved by the Commission. (Sec. fee of not more than 1/10 of 1% of the
8) maximum aggregate price at which such
securities are proposed to be offered. The
PSE vs. Court of Appeals (1997) Commission shall prescribe by rule
diminishing fees in inverse proportion to
Under the policy of ”full material disclosure,” the value of the aggregate price of the
all companies, listed or applying for listing, offering.
are required to divulge truthfully and
accurately, all material information about 4.3 Notice of Filing
themselves, and the securities they sell, for
the protection of the investing public, and Notice of filing shall be immediately
under the pain of administrative, criminal and published by the issuer in 2 newspapers of
civil sanctions. A fact is deemed material if it general circulation in the Philippines, once
tends to induce or otherwise effect the sale or a week for 2 consecutive weeks, or in
purchase or its securities. such other manner as the Commission
shall prescribe, reciting that:
A reading of the grounds give for rejection or
registration reveals the intention of Congress  a registration statement for the sale of
to make the registration and issuance of such security has been filed,
securities dependent, to a certain extent, on  the registration statement, as well as
he merits of the securities themselves, and of the papers attached thereto are open
the issuer, to be determined by the SEC. to inspection,
Consequently, the absolute reliance on the full  copies shall be furnished to interested
disclosure method is the registration of parties at such reasonable charge as
securities is, therefore, untenable. the Commission may prescribe.

Procedure (Sec.12)

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4.4 Withdrawal of Registration Statement for which a registration statement

has been filed;
A registration statement may be o Has been or is engaged or is about
withdrawn by the issuer only with the to engage in fraudulent
consent of the Commission. (Sec. 13) transactions;
o Has made any false or misleading
4.5 Amendments to Registration Statement representation of material facts in
(Sec. 13) any prospectus concerning the
issuer or its securities;
If a registration statement is on its face o Has failed to comply with any
incomplete or inaccurate in any material requirement that the Commission
respect, the Commission shall issue an may impose as a condition for
order directing the amendment of the registration
registration statement. Upon compliance
with such order, the amended  The registration statement is on its
registration statement shall become face incomplete or inaccurate in any
effective upon compliance with the material respect or includes any untrue
procedure in Section 12.6. statement of a material fact or omits to
state a material fact required to be
An amendment filed prior to the stated therein or necessary to make
effective date of the registration the statements therein not misleading;
statement shall recommence the 45 day or
period within which the Commission  The issuer, any officer, director or
shall act on a registration statement. controlling person of the issuer, or
person performing similar functions, or
An amendment filed after the effective any underwriter has been convicted, by
date of the registration statement shall a competent judicial or administrative
become effective only upon such date as body, upon plea of guilty, or otherwise,
determined by the Commission. of an offense involving moral turpitude
and/or fraud or is enjoined or
If any change occurs in the facts set restrained by the Commission or other
forth in a registration statement, the competent judicial or administrative
issuer shall file an amendment thereto body for violations of securities,
setting forth the change. commodities, and other related laws.
 If any issuer shall refuse to permit an
4.6 Acceptance or Rejection by SEC examination to be made by the
Commission, its refusal shall be ground
Within 45 days after the date of filing of for the refusal or revocation of the
the registration statement, or by such registration of its securities.
later date to which the issuer has
consented, the Commission shall declare PSE vs. Court of Appeals (1997)
the registration statement effective or
rejected, unless the applicant is allowed The SEC has no power o overturn the decision
to amend the registration statement. of the PSE Board to deny listing of securities.
Questions of policy and management are left
a) Acceptance to the honest decision of officers an directors
of a corporation, and courts are without
The Commission shall declare the authority o substitute their judgment for
registration statement to be effective judgment of the Board of Directors. The Boad
if it finds that the registration is the business manger of the corporation, and
statement together with all the other as long as it acts in good faith, its orders are
papers and documents attached not reviewable by he courts. Also, as the
thereto, is on its face complete and primary market for securities, the PSE has
that the requirements have been established its name and goodwill, and it has
complied with. the right to protect such goodwill by
maintaining a reasonable standard of
b) Rejection / Revocation (Sec. 13) propriety in the entities who choose to
transact through its facilities. It was
The Commission may reject a reasonable for PSE, therefore, to exercise its
registration statement and refuse judgment in the manner it deems appropriate
registration of the security, or for its business identity, as long as no rights
revoke the effectivity of a are trampled upon and public welfare is
registration statement and the safeguarded.
registration of the security
thereunder after due notice and
hearing if it finds that: 4.7 Oath of Issuer

 The issuer: Upon effectivity of the registration

o Has been judicially declared statement, the issuer shall state under
insolvent; oath in every prospectus that all
o Has violated any of the registration requirements have been met
provisions of this Code, the rules and that all information are true and
promulgated pursuant thereto, correct as represented by the issuer or the
or any order of the Commission one making the statement.
in connection with the offering

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Any untrue statement of fact or omission

to state a material fact required to be (a) Any security issued or guaranteed by
stated or necessary to make the the Government of the Philippines, or
statement therein not misleading shall by any political subdivision or agency
constitute fraud. thereof, or by any person acting as an
instrumentality of said Government.
5. Suspension of Offer and Sale (b) Any security issued or guaranteed by
(Sec. 13) the government of any country with
which the Philippines maintains
 If the Commission deems it necessary, it diplomatic relations, or by any state,
may issue an order suspending the offer province or political subdivision
and sale of the securities pending any thereof on the basis of reciprocity.
investigation. The order shall state the (c) Certificates issued by a receiver or by
grounds for taking such actions, but a trustee in bankruptcy duly approved
such order of suspension although by the proper adjudicatory body.
binding upon persons notified thereof, (d) Any security or its derivatives the sale
shall be deemed confidential, and shall or transfer of which is under the
not be published. supervision and regulation of the
 If, at any time, the Commission finds Office of the Insurance Commission,
that a registration statement contains Housing and Land Use Regulatory
any false statement or omits to state Board, or the Bureau of Internal
any fact required to be stated therein or Revenue.
necessary to make the statements (e) Any security issued by a bank except
therein not misleading, the Commission its own shares of stock.
may conduct an examination, and, after
due notice and hearing, issue an Order Union Bank vs. SEC (2001)
suspending the effectivity of the
registration statement. (Sec. 14) Although the shares of stock of banking
 Failure of the issuer, underwriter, or any institutions are exempt from registration
other person to cooperate, or his requirements, a bank whose shares are listed
obstruction or refusal to undergo an in the stock market is covered by the RSA and
examination, shall be a ground for the the implementing rule on the reportorial
issuance of a suspension order. (Sec. requirements of listed companies. The RSA
14) exempts from registration the securities
 If, at any time, the information issued by banking or financial institutions, but
contained in the registration statement nowhere does its state or even imply that
filed is or has become misleading, bank as a listed corporation is exempt from
incorrect, inadequate or incomplete in complying with reports required by the RS
any material respect, or the sale or IRRs.
offering for sale of the security
registered thereunder may work or tend The Commission may, by rule or regulation
to work a fraud, the Commission may after public hearing, add to the foregoing any
require from the issuer such further class of securities if it finds that the enforcement
information necessary to enable the of this Code with respect to such securities is not
Commission to ascertain whether the necessary in the public interest and for the
registration of such security should be protection of investors.
revoked. The Commission may also
suspend the right to sell and offer for 6.2 Exempt Transactions (Sec. 10)
sale such security pending further
investigation. (Sec. 15) (a) At any judicial sale, or sale by an
 The refusal to furnish information executor, administrator, guardian or
required by the Commission may be a receiver or trustee in insolvency or
ground for the issuance of an order of bankruptcy.
suspension. (Sec. 15) (b) By or for the account of a pledge
holder, or mortgagee or similar lien
The order shall be deemed confidential, and holder selling or offering for sale or
shall not be published. delivery in the ordinary course of
business and not for the purpose of
Upon the issuance of the suspension order, avoiding the provisions of this Code,
no further offer or sale of such security shall to liquidate a bona fide debt, a
be made until the same is lifted or set aside security pledged in good faith as
by the Commission. Otherwise, such sale security for such debt.
shall be void. (c) An isolated transaction in which any
security is sold, offered for sale,
Notice of issuance of such order shall be subscription or delivery is not being
given to the issuer and every dealer and made in the course of repeated and
broker who shall have notified the successive transactions by the owner
Commission of an intention to sell such or his representative and such owner
security. or representative not being the
underwriter of such security.
(d) The distribution by a corporation to its
6. Securities and Transactions from stockholders or other security holders
Registration as a stock dividend or other
distribution out of surplus.
6.1 Exempt Securities (Sec. 9)

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(e) The sale of capital stock of a  Pension fund or retirement plan

corporation to its own stockholders maintained by the Government or
exclusively, where no commission or any political subdivision or
other remuneration is paid or given managed by a bank or other
directly or indirectly in connection persons authorized by the Bangko
with the ale of such capital stock. Sentral to engage in trust
(f) The issuance of bonds or notes functions;
secured by mortgage upon real  Investment company; or
estate or tangible personal property,  Such other person as the
where the entire mortgage together Commission determine as
with all the bonds or notes secured qualified buyers, on the basis of
thereby are sold to a single such factors as financial
purchaser at a single sale. sophistication, net worth,
(g) The issue and delivery of any knowledge, and experience in
security in exchange for any other financial and business matters, or
security of the same issuer pursuant amount of assets under
to a right of conversion: Provided, management.
That the security surrendered has
been registered under this Code or The Commission may exempt other
was, when sold, exempt, and that transactions, if it finds that the
the security delivered in exchange, if requirement of registration is not
sold at the conversion price, would necessary in the public interest or for the
at the time of such conversion fall protection of the investors such as by
within the class of securities entitled reason of the small amount involved or
to registration under this Code. the limited character of the public
Upon such conversion the par value offering.
of the security surrendered in such
exchange shall be deemed the price Any person applying for an exemption of a
at which the securities issued and transaction shall file with the
delivered in such exchange are sold. Commission a notice identifying the
(h) Broker’s transactions, executed upon exemption relied upon on such form and
customer’s orders, on any registered at such time as the Commission by rule
Exchange or other trading market. may prescribe and with such notice shall
(i) Subscriptions for shares of the pay to the Commission a fee equivalent to
capital stock of a corporation prior to 1/10 of 1% of the maximum aggregate
incorporation or in pursuance of an price or issued value of the securities.
increase in its authorized capital
stock, when no expense is incurred,
or no commission, compensation or 7. Tender Offer and Proxy Solicitation
remuneration is paid or given, and
only when the purpose for soliciting, 7.1 Tender Offers (Sec. 19)
giving or taking of such subscriptions
is to comply with the requirements Parties Required to make Tender
of such law as to the percentage of Offer
the capital stock which should be
subscribed before it can be (a) Any person or group of persons
registered and duly incorporated, or acting in concert who intends to
its authorized capital increased. acquire at least 15% of any class
of any equity security of a listed
Nestle Philippines vs. Court of Appeals corporation or of any class of any
(1991) equity security of a corporation
with assets of at least
The language of the RSA exempting from P50,000,000 and having 200 or
registration “issuance o additional capital more stockholders with at least
stock,” must be interpreted to cover only 100 shares each or
issuance of shares of stock as part of and in (b) who intends to acquire at least
the course of increasing he authorized capital 30% of such equity over a period
stock of a corporation. It does not cover of 12 months shall make a tender
issuances of shares from already authorized offer to stockholders by filing with
but still unissued capital stock. the Commission a declaration to
that effect; and furnish the issuer
(j) The exchange of securities by the a statement containing such of the
issuer with its existing security information as the Commission
holders exclusively, where no may prescribe.
commission or other remuneration is
(k) The sale of securities by an issuer to Withdrawal of tender Offer
fewer than 20 persons in the
Securities deposited pursuant to a
Philippines during any twelve-month
tender offer or request or invitation
for tenders may be withdrawn by or
(l) The sale of securities to any of the
on behalf of the depositor at any time
following qualified buyers:
throughout the period that the tender
 Bank;
offer remains open and if the
 Registered investment house;
securities deposited have not been
 Insurance company;
previously accepted for payment, and

100% UP LAW UP BAROPS 2008 Page 76 of 351


at any time after 60 days from the to the Exchange where the security is
date of the original tender offer or traded and to the Commission.
request or invitation, except as the
Commission may otherwise 7.3 Fees for Tender Offers and Certain
prescribe. Proxy Solicitations (Sec. 21)
At the time of filing with the Commission
of any statement required for any tender
Securities offered exceed offer or for proxy or consent solicitation,
required quantity the Commission may require that the
Where the securities offered exceed person making such filing pay a fee of not
that which a person or group of more than 1/10 of 1% of:
persons is bound or willing to take  The proposed aggregate purchase
up and pay for, the securities that price in the case of a transaction
are subject of the tender offer shall under Sections 20 or 72.2; or
be taken up as nearly as may be pro  The proposed payment in cash, and
rata, disregarding fractions, the value of any securities or property
according to the number of to be transferred in the acquisition,
securities deposited by each merger or consolidation, or the cash
depositor. and value of any securities proposed
to be received upon the sale or
The provisions of this subsection disposition of such assets in the case
shall also apply to securities of a solicitation under Section 20.
deposited within 10 days after notice
of an increase in the consideration
offered to security holders is first
published or sent or given to security
holders. 8. Regulation of Transactions of
Directors / Officers / Principal
Variations of Tender Offer Stockholders (Sec. 23)
Where any person varies the terms
of a tender offer or request or 8.1 Filing of Statement
invitation for tenders before the  Every person who is directly or indirectly
expiration thereof by increasing the the beneficial owner of more than 10% of
consideration offered to holders of any class of any equity security or
such securities, such person shall  who is a director or an officer of the
pay the increased consideration to issuer of such security,
each security holder whose
securities are taken up and paid for shall file, at the time either such requirement
whether or not such securities have is first satisfied or within ten days after he
been taken up by such person before becomes such a beneficial owner, director, or
the variation of the tender offer or officer, a statement with the Commission and,
request or invitation. if such security is listed for trading on an
Exchange, also with the Exchange, of the
7.2 Proxy Solicitations (Sec. 20) amount of all equity securities of such issuer
Proxies must be of which he is the beneficial owner, and within
 in writing ten (10) days after the close of each calendar
 signed by the stockholder or his month thereafter, if there has been a change
duly authorized representative in such ownership during such month, shall
and also file a statement indicating his ownership
 filed before the scheduled at the close of the calendar month and such
meeting with the corporate changes as have occurred during such
secretary. calendar month.

Period of Validity 8.2 Recovery of Damages for Unfair Use of

Unless otherwise provided in the proxy,
it shall be valid only for the meeting for a. For the purpose of preventing the unfair use of
which it is intended. No proxy shall be information which may have been obtained by
valid and effective for a period longer such beneficial owner, director, or officer by
than 5 years at one time. reason of his relationship to the issuer

No broker or dealer shall give any proxy,  any profit realized by him from any
consent or authorization to a person purchase and sale, or any sale and
other than the customer, without the purchase, of any equity security of
express written authorization of such such issuer within any period of less
customer. than six (6) months,
o unless such security was acquired
A broker or dealer who holds or acquires in good faith in connection with a
the proxy for at least 10% or such debt previously contracted,
percentage as the Commission may  shall inure to and be recoverable by
prescribe of the outstanding share of the the issuer, irrespective of any
issuer, shall submit a report identifying intention of holding the security
the beneficial owner within 10 days after purchased or of not repurchasing the
such acquisition, for its own account or security sold for a period exceeding 6
customer, to the issuer of the security, months.

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(b) To effect, alone or with others, a

b. Suit to recover such profit may be instituted series of transactions in securities
before the RTC by the issuer, or by the owner of that:
any security of the issuer in the name and in
behalf of the issuer if the issuer shall fail or  Raises their price to induce the
refuse to bring such suit within 60 days after purchase of a security;
request or shall fail diligently to prosecute the  Depresses their price to induce the
same thereafter. But; sale of a security; or
No such suit shall be brought more than  Creates active trading to induce
t2 years after the date such profit was such a purchase or sale through
realized. manipulative devices such as
marking the close, painting the
It shall be unlawful for any beneficial owner, tape, squeezing the float, hype and
director, or officer to sell any equity security dump, boiler room operations and
of such issuer if the person selling the such other similar devices.
security or his principal:
(c) To circulate or disseminate
(a) Does not own the security sold; or information that the price of any
(b) If owning the security, does not security listed in an Exchange will or is
deliver it against such sale within 20 likely to rise or fall because of
days thereafter, or does not within 5 manipulative market operations of any
days after such sale deposit it in the one or more persons conducted for
mails or other usual channels of the purpose of raising or depressing
transportation; the price of the security for the
purpose of inducing the purchase or
But no person shall be deemed to have sale of such security.
violated this subsection if he proves that
notwithstanding the exercise of good faith (d) To make false or misleading
he was unable to make such delivery or statement with respect to any
deposit within such time, or that to do so material fact, which he knew or had
would cause undue inconvenience or reasonable ground to believe was so
expense. false or misleading, for the purpose of
inducing the purchase or sale of any
The provisions of Subsection 23. 2 shall not security listed or traded in an
apply to any purchase and sale, or sale and Exchange.
purchase and the provisions of Subsection
23.3 shall not apply to any sale, of an equity (e) To effect any series of transactions for
security not then or thereafter held by him the purchase and/or sale of any
in an investment account, by a dealer in the security traded in an Exchange for the
ordinary course of his business and incident purpose of pegging, fixing or
to the establishment or maintenance by him stabilizing the price of such security,
of a primary or secondary market, otherwise unless otherwise allowed by this Code
than on an Exchange, for such security. or by rules of the Commission.

9. Prohibitions
9.2 Insider Trading

9.1 Manipulation of Security Prices Parties covered :

 Insider
 insider’s spouse or relatives by affinity
It shall be unlawful for any person acting
or consanguinity within the second
for himself or through a dealer or
degree, legitimate or common-law,
broker, directly or indirectly:
It shall be unlawful for an insider to sell or
(a) To create a false or misleading
buy a security of the issuer, while in
appearance of active trading in any
possession of material information with
listed security traded in an Exchange
respect to the issuer or the security that is
or any other trading market:
not generally available to the public,
unless: (Sec. 27)
 By effecting any transaction in
such security which involves no
(a) The insider proves that the
change in the beneficial
information was not gained from such
ownership thereof;
relationship; or
 By entering an order or orders
(b) If the other party selling to or buying
for the purchase or sale of such
from the insider (or his agent) is
security with the knowledge that
identified, the insider proves:
a simultaneous order or orders of
 that he disclosed the information
substantially the same size, time
to the other party, or
and price, for the sale or
 that he had reason to believe that
purchase of any such security,
the other party otherwise is also in
has or will be entered by or for
possession of the information.
the same or different parties; or
 By performing similar act where
there is no change in beneficial
A purchase or sale of a security of the
issuer shall be presumed to have been
effected while in possession of material

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non-public information if transacted after

such information came into existence 10. Regulation of Market
but prior to dissemination of such Professionals and Other Entities
information to the public and the lapse
of a reasonable time for the market to 10.1 Registration of Brokers, Dealers,
absorb such information Salesmen and Associated Persons

This presumption shall be rebutted upon General Rule :

a showing by the purchaser or seller that o No person shall engage in the
he was not aware of the material non- business of buying or selling
public information at the time of the securities in the Philippines as a
purchase or sale. broker or dealer, or act as a
salesman, or an associated person
of any broker or dealer unless
Material non-public information: registered as such with the
(a) It has not been generally disclosed to o No registered broker or dealer shall
the public and would likely affect the employ any salesman or any
market price of the security after being associated person, and no issuer
disseminated to the public and the lapse shall employ any salesman, who is
of a reasonable time for the market to not registered as such with the
absorb the information; or Commission.

(b) would be considered by a reasonable o Nicolas vs CA (1998):

person important under the
circumstances in determining his course The futility of petitioner's action
of action whether to buy, sell or hold a became more pronounced by the
security. fact that he traded securities for the
account of others without the
Communication of the Information necessary license from the SEC.
It shall be unlawful for any insider to Clearly, such omission was in
communicate material non-public violation of Section 19 of the
information about the issuer or the Revised Securities Act.
security to any person who, by virtue of
the communication, becomes an insider, The purpose of the statute requiring
where the insider communicating the the registration of brokers selling
information knows or has reason to securities and the filing of data
believe that such person will likely buy regarding securities which they
or sell a security of the issuer while in propose to sell, is to protect the
possession of such information. public and strengthen the securities

Insider Trading in Relation to American jurisprudence emphasizes

Tender Offers the principle that:
"an unlicensed person may not
a.) It shall be unlawful where a tender recover compensation for services
offer has commenced or is about to as a broker where a statute or
commence for: ordinance requiring a license is
 Any person (other than the applicable and such statute or
tender offeror) who is in ordinance is of a regulatory nature,
possession of material non-public was enacted in the exercise of the
information relating to such police power for the purpose of
tender offer, to buy or sell the protecting the public, requires a
securities of the issuer that are license as evidence of qualification
sought or to be sought by such and fitness, and expressly precludes
tender offer if such person knows an unlicensed person from
or has reason to believe that recovering compensation by suit, or
o the information is non- at least manifests an intent to
public and prohibit and render unlawful the
o has been acquired transaction of business by an
directly or indirectly from unlicensed person."
the tender offeror, those
acting on its behalf, the We see no reason not to apply the
issuer of the securities, or same rule in our jurisdiction. Stock
any insider of such market trading, a technical and
issuer; and highly specialized institution in the
 Any tender offeror, those acting Philippines, must be entrusted to
on its behalf, the issuer of the individuals with proven integrity,
securities, and any insider to competence and knowledge, who
communicate material non-public have due regard to the
information relating to the tender requirements of the law.
offer to any other person where
such communication is likely to Exception:
result in a violation of subsection The Commission may conditionally
27.4. or unconditionally exempt any

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broker, dealer, salesman, office of the Commission which shall

associated person of any broker or be open to public inspection.
dealer, or any class of the
foregoing, from registration as it 10.4 Continuing Requirements
deems consistent with the public
interest and the protection of o Every person registered shall file
investors. (Sec. 28.3) with the Commission information
necessary to keep the application
for registration current and
Procedure (Sec. 28.5): accurate,.
o Every person registered shall pay to
o A broker or dealer may apply for the Commission an annual fee. Upon
registration by filing with the notice by the Commission that such
Commission a written application. annual fee has not been paid as
o Registration of a salesman or of required, the registration of such
an associated person of a person shall be suspended until
registered broker or dealer may payment has been made.
be made upon written application
filed with the Commission by such 10.5 Termination of Registration of
salesman or associated person. Salesman or Associated Person
For purposes of this action,
salesman shall not include any The registration of a salesman or
employee of an issuer whose associated person shall be automatically
compensation is not determined terminated upon the cessation of his
directly or indirectly on sales of affiliation with said registered broker or
securities of the issuer. dealer, or with an issuer in the case of a
salesman employed, appointed or
10.2 Qualifications of Market authorized by such issuer.
Professionals (Sec. 28.4)
The registered broker or dealer, or
The Commission shall promulgate issuer, as the case may be, shall file
rules and regulations prescribing the with the Commission a notice of
qualifications for registration of each separation of such salesman or
category of applicant, which shall, associated person.
among other things, require as a
condition for registration that: 10.6 Revocation, Refusal or Suspension
of Registration of Brokers, Dealers,
(a) If a natural person, the Salesmen and Associated Persons (Sec.
applicant satisfactorily pass a 29)
written examination as to his
proficiency and knowledge in If, after due notice and hearing, the
the area of activity for which Commission determines the applicant or
registration registrant:
(b) In the case of a broker or
dealer, the applicant satisfy a (a) Has willfully violated any provision
minimum net capital and of this Code, any rule, regulation
provide a bond or other or order made hereunder, or any
security as the Commission other law administered by the
may prescribe Commission, or in the case of a
(c) If located outside of the registered broker, dealer or
Philippines, the applicant files associated person has failed to
a written consent to service of supervise, with a view to
process upon the Commission preventing such violation, another
pursuant to Sec. 65 hereof. person who commits such
10.3 SEC Action (Sec. 28.8) (b) Has willfully made or caused to be
made a materially false or
a. Within 30 days after the filing of any misleading statement in any
application, the Commission shall by application for registration or
order: report filed with the Commission
or a self-regulatory organization,
(a) Grant registration if it or has willfully omitted to state
determines that the any material fact that is required
requirements of this Section to be stated therein;
and the qualifications for (c) Has failed to satisfy the
registration have been qualifications or requirements for
satisfied; or registration and the rules and
(b) Deny said registration. regulations;
(d) Has been convicted by a
b. The names and addresses of all competent judicial or
persons approved for registration administrative authority of an
and all orders of the Commission offense involving moral turpitude,
with respect thereto shall be fraud, embezzlement,
recorded in a Register of Securities counterfeiting, theft, estafa,
Market Professionals kept in the misappropriation, forgery, bribery,
false oath, or perjury, or of a

100% UP LAW UP BAROPS 2008 Page 80 of 351


violation of securities, provide financial safeguards an other

commodities, banking, real standards for the operation o brokers and
estate or insurance laws; dealers.
(e) Is enjoined or restrained by a
competent judicial or
administrative body from 11. Regulation of Exchanges
engaging in securities,
commodities, banking, real 11.1 Nature of Stock Exchanges
estate or insurance activities or
from willfully violating laws Lopez, et. al vs. Court of Appeals (1988)
governing such activities;
(f) Is subject to an order of a An exchange is a voluntary association or
competent judicial or corporation organized for the purpose of
administrative body refusing, furnishing to its members a convenient and
revoking or suspending any suitable place to transact their business of
registration, license or other promoting uniformity in the customs and
permit under this Code, the rules usages of merchants, of inculcating principles
and regulations promulgated of justice and equity in trade, of facilitating
thereunder, any other law the speedy adjustment of business disputes,
administered by the of acquiring and dissemination valuable
Commission; commercial and economic information and
(g) Is subject to an order of a self- generally of securing to its members the
regulatory organization benefits of co-operation in the furtherance of
suspending or expelling him their legitimate pursuits.
from membership or
participation therein or from Carolina Industries vs. CMS Stock
association with a member or Brokerage (1980)
participation thereof;
(h) Has been found by a competent The rules and regulations of the Exchange
judicial or administrative form part of the contract covering securities
authority, to have willfully transacted within the facilities of Exchange.
violated any provisions of
securities, commodities,
banking, real estate or insurance Sec Opinion #11 (2003)
laws, or has willfully aided,
abetted, counseled, commanded,
induced or procured such It is important to stress that the Securities
violation; or Regulation Code (SRC) treats exchanges
(i) Has been judicially declared as a special specie of corporation and
insolvent. subjects them to rules not otherwise
applicable to regular corporations.
29.4. It shall be sufficient cause for refusal,
revocation or suspension of a broker's or The stock exchange performs a function
dealer’s registration, if any associated vital to the national economy, a function
person thereof or any juridical entity vested with public interest. It is said that
controlled by such associated person has the economy moves on the basis of the
committed any act or omission or is subject rise and fall of the stocks traded and thus,
to any disability enumerated earlier. the integrity of the exchange overseeing
these transactions can never be over
Transactions and Responsibility of Brokers and emphasized. It is for this reason that the
Dealers (Sec. 30) SRC provides for stricter rules on
exchange regulation. The SRC devotes a
a. Prohibition against dealing or whole chapter on exchanges and other
otherwise selling or buying, for its securities trading markets, and it is
account of customers, securities listed replete with provisions designed to
on an Exchange issued by any professionalize the exchange, encourage
corporation where any stockholder, greater public participation, ensure
director, associated person or salesman, increased transparency, greater
or authorized clerk of said broker or responsibility and improve corporate
dealer and all the relatives of the governance. These provisions are not
foregoing within the fourth civil degree o found in the Corporation Code and are
consanguinity or affinity, is at the time meant as additional legal requirements
holding office in said issuer corporation applicable only to exchanges.
as a director, president, vice-president,
manager, treasurer, comptroller, It is thus incorrect to argue that the
secretary or any office or trust and provisions of the Corporation Code alone
responsibility, or is a controlling person govern the operation of exchanges. While
of the issuer. the Corporation Code applies to
corporations in general, the SRC is a
b. Prohibition against effecting any special law that primarily governs the
transaction in securities or induce or regulation of exchanges. As between a
attempt to induce the purchase or sale specific statute and a general statute, the
of any security except in compliance former must prevail since it evinces the
with such rules and regulations as the legislative intent more clearly than a
Commission shall prescribe to ensure general statute does.
fair and honest dealings in securities and

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Thus the SEC has the power of application, exempting an applicant

supervision over exchanges. from this prohibition where it finds
Supervision entails overseeing or the that such ownership or control will
power or authority to see that not negatively impact on the
subordinate subject performs its duties. exchange’s ability to effectively
If the latter fails or neglects to fulfill operate in the public interest;
them the former may take such action or (d) The expulsion, suspension, or
step as prescribed by law to make them disciplining of a member and
perform its duties. In this specific persons associated with a member
instance, the SEC can even take over for conduct or proceeding
the management of the exchange as inconsistent with just and equitable
authorized by the SRC. principles of fair trade, and for
violations of provisions of this Code
11.2 Registration Procedure (Sec. 33) or the rules of the Exchange;
(e) A fair procedure for the disciplining
Any Exchange may be registered as such of members and persons associated
with the Commission by filing an with members, the denial of
application for registration in such form membership to any person seeking
and containing such information and to be a member, the barring of any
supporting documents as the person from association with a
Commission by rule shall prescribe, member, and the prohibition or
including the following: limitation of any person from access
to services offered by the Exchange;
(a) An undertaking to comply and (f) That the brokers in the board of the
enforce compliance by its Exchange shall comprise of not
members with the provisions of more than 49% of such board and
this Code, its implementing rules shall proportionately represent the
or regulations and the rules of the Exchange membership in terms of
Exchange; volume/value of trade and paid up
(b) The organizational charts of the capital, and that any natural person
Exchange, rules of procedure, and associated with a juridical entity
a list of its officers and members; that is a member shall himself be
(c) Copies of the rules of the deemed to be a member for this
Exchange; and purpose;
(d) An undertaking that in the event a (g) For the board of the Exchange to
member firm becomes insolvent or include in its composition
when the Exchange shall have (i) the president of the Exchange,
found that the financial condition and
of its member firm has so (ii) no less than 51% of the
deteriorated that it cannot readily remaining members of the board to
meet the demands of its be comprised of 3 independent
customers for the delivery of directors and persons who represent
securities and/or payment of sales the interests of issuers, investors,
proceeds, the Exchange shall take and other market participants, who
over the operation of the insolvent are not associated with any broker
member firm and immediately or dealer or member of the
proceed to settle the member Exchange for a period of 2 years
firm’s liabilities to its customers. prior to his/her appointment.

Registration of an Exchange shall be granted No officer or employee of a member,

upon compliance with the following its subsidiaries or affiliates or
provisions: related interests shall become an
independent director: Provided,
(a) That the applicant is organized as however, That the Commission may
a stock corporation; by rule, regulation, or order upon
(b) That the applicant is engaged application, permit the exchange
solely in the business of operating organized as a stock corporation to
an exchange: Provided, however, use a different governance
That the Commission may, upon structure:
application, exempti an Exchange
organized as a stock corporation Provided, further, That the
and owned and controlled by Commission is satisfied that the
another juridical person from this Exchange is acting in the public
restriction; interest and is able to effectively
(c) Where the Exchange is organized operate as a self-regulatory
as a stock corporation, that no organization under this Code.
person may beneficially own or
control, directly or indirectly, more (h) The president and other
than 5% of the voting rights of the management of the Exchange to
Exchange and no industry or consist only of persons who are not
business group may beneficially members and are not associated in
own or control more than 20% of any capacity, directly or indirectly
the voting rights of the Exchange: with any broker or dealer or
Provided, however, That the member or listed company of the
Commission may adopt rules, Exchange: Provided, That the
regulations or issue an order, upon Exchange may only appoint, and a

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person may only serve, as an to be comprised of (3) independent directors

officer of the exchange if such and persons representing other sectors of the
person has not been a member or market. With respect to independent
affiliated with any broker, dealer, directors, their election in the Board is
or member of the Exchange for a intended to ensure that the Board will
period of at least 2 years prior to faithfully discharge its fiduciary responsibilities
such appointment; to its stockholders.
(i) The transparency of transactions
on the Exchange; These provisions aim for a more
(j) The equitable allocation of representative, democratic, independent
reasonable dues, fees, and other Board of Directors that is autonomous from
charges among members and the control of any sector of the market.
issuers and other persons using
any facility or system which the
Exchange operates or controls; 12. Independent Directors
(k) Prevention of fraudulent and
manipulative acts and practices, Any corporation with
promotion of just and equitable
principles of trade, and, in general,  a class of equity securities listed for
protection of investors and the trading on an Exchange or
public interest; and  with assets in excess of P50,000,000.00
(l) The transparent, prompt and and having 200 or more holders, at least
accurate clearance and settlement of 200 of which are holding at least 100
of transactions effected on the shares of a class of its equity securities or
Exchange. which has sold a class of equity securities
to the public pursuant to an effective
11.3 Segregation and Limitation of registration statement
Functions of Members, Brokers and Dealers
(Sec. 34) Shall have at least 2 independent directors or
such independent directors shall constitute at
It shall be unlawful for any member- least 20% of the members of such board,
broker of an Exchange to effect any whichever is the lesser.
transaction on such Exchange for:
An “independent director” shall mean a person
other than an officer or employee of the
 its own account, corporation, its parent or subsidiaries, or any
 the account of an associated person, other individual having a relationship with the
or corporation, which would interfere with the
 an account with respect to which it exercise of independent judgment in carrying
or an associated person thereof out the responsibilities of a director.
exercises investment discretion
13. Self-Regulatory Organizations
Provided, however, That this section shall
not make unlawful – 13.1 Scope / Definition (Sec. 39)
(a) Any transaction by a member- The Commission shall have the power to
broker acting in the capacity of a register as a self-regulatory organization
market maker; organizations whose operations are
(b) Any transaction reasonably related to or connected with the securities
necessary to carry on an odd-lot market such as but not limited to
(c) Any transaction to offset a  associations of brokers and dealers,
transaction made in error; and  transfer agents,
(d) Any other transaction of a similar  custodians,
nature as may be defined by the  fiscal and paying agents,
Commission.  computer services,
 news disseminating services,
Sec Opinion #11 (2003)  proxy solicitors,
The above-quoted Sec. 33.2. of the SRC is  statistical agencies,
not found in the old Revised Securities Act,  securities rating agencies, and
nor in the Corporation Code. Items (c), (f)  securities information processors
and (g) thereof are all intended to
encourage greater public participation, Which are engaged in the business of:
ensure increased transparency, greater
responsibility and improve corporate (a) Collecting, processing, or preparing
governance. for distribution or publication, or
assisting, participating in, or
Subsection (c) mandates that the ownership coordinating the distribution or
of the stocks of the exchange be broadened publication of, information with
and democratized, thereby ensuring greater respect to transactions in or
public participation. quotations for any security; or
(b) Distributing or publishing on a current
On the other hand, Subsections (f) and (g) and continuing basis, information with
mandate a board composition where no respect to such transactions or
more than 49% of the seats shall be quotations.
occupied by brokers, and no less than 51%

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the denial of membership to

13.2 Registration any person seeking
membership therein, the
An association of brokers and dealers barring of any person from
may be registered as a securities becoming associated with a
association by filing with the Commission member thereof, and the
an application for registration. prohibition or limitation by the
association of any person with
Such association shall not be registered respect to access to services
unless the Commission determines that: offered by the association or a
member thereof.
(a) The association is so organized and
has the capacity to be able to carry
out the purposes of this Code and to 13.3 Denial of Membership / Employment
comply with, and to enforce (Sec. 39.4)
compliance by its members and
persons associated with its members (a) A registered securities association
with the provisions of this Code. shall deny membership to any
(b) The rules of the association, person who is not a registered
notwithstanding anything in the broker or dealer.
Corporation Code to the contrary, (b) A registered securities association
provide that: may deny membership to, or
condition the membership of, a
 Any registered broker or registered broker or dealer if such
dealer may become a broker or dealer:
member of the association;  Does not meet the
 There exist a fair standards of financial
representation of its responsibility, operational
members to serve on the capability, training,
Board of Directors of the experience, or competence
association and in the that are prescribed by the
administration of its affairs, rules of the association; or
and that any natural person  Has engaged, and there is a
associated with a juridical reasonable likelihood it will
entity that is a member shall again engage, in acts or
himself be deemed to be a practices inconsistent with
member for this purpose; just and equitable principles
 The Board of Directors of the of fair trade.
association includes in its (c) A registered securities association
composition: (a) The may deny membership to a
president of the association registered broker or dealer not
and (b) Persons who engaged in a type of business in
represent the interests of which the rules of the association
issuers and public investors require members to be engaged:
and are not associated with Provided, however, That no
any broker or dealer or registered securities association
member of the association; may deny membership to a
that the president and other registered broker or dealer by
management of the reason of the amount of business
association not be a member done by the broker or dealer.
or associated with any (d) A registered securities association
broker, dealer or member of may bar a salesman or person
the association; associated with a broker or dealer
 For the equitable allocation from being employed by a member
of reasonable dues, fees, and or set conditions for the
other charges among employment of a salesman or
members and issuers and associated if such person:
other persons using any  Does not meet the
facility or system which the standards of training,
association operates or experience, or competence
controls; that are prescribed by the
 For the prevention of rules of the association; or
fraudulent and manipulative  Has engaged, and there is a
acts and practices, the reasonable likelihood he will
promotion of just and again engage, in acts or
equitable principles of trade, practices inconsistent with
and the protection of just and equitable principles
investors and the public of fair trade.
 That its members and
persons associated with its 14 Margin Trading
members, be appropriately
disciplined for violation of any 14.1 Margin Requirements (Sec. 48)
provision of this Code;
 That a fair procedure for the
disciplining of members, and

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For the purpose of preventing the o That will permit such securities to
excessive use of credit for the purchase be commingled with the securities
or carrying of securities, the of any person other than a bona
Commission, shall prescribe rules and fide customer; or
regulations with respect to the amount o That will permit such securities to
of credit that may be extended on any be pledged, mortgaged or
security. encumbered, or subjected to any
lien or claim of the pledgee, for a
For the extension of credit, such rules sum in excess of the aggregate
and regulations shall be based upon the indebtedness of such customers in
following standard: respect of such securities.
 To lend or arrange for the lending of
An amount not greater than whichever is any security carried for the account of
the higher of – any customer without the written
consent of such customer or in
(a) 65% of the current market price of contravention of such rules and
the security; or regulations as the Commission shall
(b) 100%)of the lowest market price prescribe.
of the security during the
preceding 36 calendar months, but 14.4 Enforcement of Margin Requirements
not more than 75% of the current and Restrictions on Borrowing (Sec. 50)
market price.
To prevent indirect violations of the
14.2 Prohibited Credit Arrangements (Sec. margin requirements, the broker or dealer
48.2) shall require the customer in non-margin
transactions to pay the price of the
No member of an Exchange or broker or security within such period as the
dealer shall, directly or indirectly, extend Commission may prescribe, which shall in
or maintain credit or arrange for the no case exceed the prescribed settlement
extension or maintenance of credit to or date.
for any customer:
Otherwise, the broker shall sell the
(a) On any security unless such credit security purchased starting on the next
is extended and maintained in trading day but not beyond 10 trading
accordance with the rules and days following the last day for the
regulations which the Commission customer to pay such purchase price,
shall prescribe; unless such sale cannot be effected within
(b) Without collateral or on any said period for justifiable reasons.
collateral other than securities,
except The sale shall be without prejudice to the
 to maintain a credit initially right of the broker or dealer to recover
extended in conformity with any deficiency from the customer. To
the rules and regulations of prevent indirect violation of restrictions on
the Commission; and borrowings under Section 49, the broker
 in cases where the extension shall, unless otherwise directed by the
or maintenance of credit is customer, pay the net sales price of the
not for the purpose of securities sold for a customer within the
purchasing or carrying same period as above prescribed by the
securities or of evading or Commission
circumventing the provisions
of par (a) of this subsection. Provided, That the customer shall be
required to deliver the instruments
14.3 Restrictions on Borrowings by evidencing the securities as a condition for
Members, Brokers, and Dealers (Sec. 49) such payment upon demand by the
It shall be unlawful for any registered
broker or dealer, or member of an 15. Administrative Sanctions and
Exchange, directly or indirectly: Settlement Offers
 To permit in the ordinary course of 15.1 Administrative Sanctions (Sec. 54)
business his aggregate indebtedness
including customers’ credit balances, If, after due notice and hearing, the
to exceed such percentage of the net Commission finds that:
capital (exclusive of fixed assets and
value of Exchange membership) (a) There is a violation of this Code, its
employed in the business, but not rules, or its orders;
exceeding in any case 2,000%, as (b) Any registered broker or dealer,
the Commission may prescribe. associated person thereof has failed
 To pledge, mortgage, or otherwise reasonably to supervise another
encumber any security carried for person subject to supervision, who
the account of any customer under commits any such violation;
circumstances: (c) Any registrant or other person has,
o That will permit the commingling in a registration statement or in
of his securities, without his other reports, applications,
written consent, with the accounts, records or documents
securities of any customer;

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made any untrue statement of a (b) Every person who was a director or
material fact, or omitted to state a partner in the issuer at the time of
any material fact required to be the filing of the registration
stated therein or necessary to statement or any part, supplement
make the statements therein not or amendment thereof;
misleading; (c) Every person who is named in the
(d) or, in the case of an underwriter, registration statement as being or
has failed to conduct an inquiry about to become a director or a
with reasonable diligence to insure partner;
that a registration statement is (d) Every auditor or auditing firm
accurate and complete in all named as having certified any
material respects; or financial statements used in
(e) Any person has refused to permit connection with the registration
any lawful examinations into its statement or prospectus.
affairs, (e) Every person who, with his written
consent has been named as having
The imposition of administrative prepared or certified any part of the
sanctions shall be without prejudice to registration statement, or as having
the filing of criminal charges. prepared or certified any report or
valuation which is used in
15.2 Settlement Offers (Sec. 55) connection with the registration
At any time, during an investigation or (f) Every selling shareholder who
proceeding under this Code, parties contributed to and certified as to the
being investigated and/or charged may accuracy of a portion of the
propose in writing an offer of settlement registration statement.
with the Commission. (g) Every underwriter with respect to
such security.
The Commission may consider the offer
based on timing, the nature of the Possible Defense :
investigation or proceeding, and the
public interest. Such person may allege that at the time
of such acquisition he knew of no such
The Commission may only agree to a untrue statement or omission:
settlement offer based on its findings
that such settlement is in the public 16.2 On Account of Insider Trading (Sec. 61)
interest. Any agreement to settle shall
have no legal effect until publicly Who may be sued?
disclosed. Such decision may be made
without a determination of guilt on the Any insider who violates Subsection 27.1
part of the person making the offer. and any person in the case of a tender
offer who violates Subsection 27.4 (a)(i),
16. Civil Liabilities (Sec. 56) or any rule or regulation thereunder, by
purchasing or selling a security while in
16.1 On Account of False Registration possession of material information not
Statement generally available to the public, shall be
liable in a suit brought by any investor
who, contemporaneously with the
purchase or sale of securities that is the
Who may sue? subject of the violation, purchased or sold
securities of the same class unless such
insider, or such person in the case of a
Any person tender offer, proves that such investor
 acquiring a security, the registration knew the information or would have
statement of which or any part purchased or sold at the same price
thereof contains on its effectivity an regardless of disclosure of the information
untrue statement of a material fact or to him.
omits to state a material fact required An insider who communicates material
to be stated therein or necessary to non-public information, shall be jointly
make such statements not and severally liable with and to the same
misleading, and extent as, the insider, or person in the
 who suffers damage case of a tender offer.

If the person who acquired the security

17. Limitation of Actions (Sec. 62)
did so after the issuer has made
generally available to its security holders
No action shall be maintained to enforce any
an income statement covering a period
liability created under Section 56 (false
of at least 12 months, then the right of
registration statement) or 57 (false
recovery shall be conditioned on proof
prospectus. Communications, reports) unless
that such person acquired the security
brought within 2 years after the discovery of
relying upon such untrue statement.
the untrue statement or the omission.

If the action is to enforce a liability created

Who may be sued?
under Subsection 57.1(a) (registration of
(a) The issuer and every person who
signed the registration statement;

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securities), unless brought within 2 years In no case shall the principal stockholders,
after the violation upon which it is based. directors and other officers, recover their
contribution to the liability from the
In no event shall any such action be brought issuer. However, the right of the issuer to
to enforce a liability created under Section recover from the guilty parties the amount
56 or Subsection 57.1 (a) more than 5 years it has contributed shall not be prejudiced.
after the security was bona fide offered to
the public, or under Subsection 57.1 (b)
(sale based on false prospectus, 19. Non-waiver of Provisions
communications, reports) more than 5 years
after the sale.
Any condition, stipulation, provision binding
No action shall be maintained to enforce any any person to waive compliance with any
liability created under any other provision of provision of this Code or of any rule of an
this Code unless brought: Exchange as well as the waiver itself, shal be
 within 2 years after the discovery
of the facts constituting the cause of
action and
 within 5 years after such cause of
action accrued. 20. Penalties

18. Damages to be Awarded (Sec. Any person who violates any of the provisions
63) of this Code or any person who, in a
registration statement makes any untrue
18.1 Amounts / Kinds of Damages statement of a material fact or omits to state
any material fact required to be stated therein
All suits to recover damages pursuant to or necessary to make the statements therein
Sections 56 (false registration not misleading, shall, upon conviction, suffer
statement), 57 (false prospectus,
communications, reports), 58 (fraud in  a fine of not less than P50,000.00 nor
connection with securities transactions), more than P5,000,000.00 or
59 (manipulation of prices), 60  imprisonment of not less than 7 years
(commodity futures contracts and pre- nor more than 21 years, or
need plans) and 61 (insider trading)  both in the discretion of the court.
shall be brought before the RTC, which
shall have exclusive jurisdiction to hear If the offender is a corporation, partnership or
and decide such suits. association or other juridical entity, the
penalty may be imposed upon such juridical
The Court is hereby authorized to award entity and upon the officer or officers of the
damages in an amount not exceeding corporation, partnership, association or entity
triple the amount of the transaction plus responsible for the violation. If such officer is
actual damages. an alien, he shall in addition to the penalties
prescribed, be deported.
Exemplary damages may also be
awarded in cases of bad faith, fraud,
malevolence or wantonness in the
violation of this Code, and rules and
regulations promulgated hereunder.

The Court is also authorized to award

attorney’s fees not exceeding 30% of
the award.

18.2 Persons liable to pay

The persons specified in Sections 56, 57,

58, 59, 60 and 61 hereof shall be jointly
and severally liable fo he payment of
damages. However, any person who
becomes liable for the payment of such
damages may recover contribution from
any other person who, if sued
separately, would have been liable to
make the same payment, unless the
former was guilty of fraudulent
representation and the latter was not.

All persons, including the issuer, held

liable under the provisions of Sections
56, 57, 58, 59, 60 and 61 shall
contribute equally to the total liability
adjudged herein.

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haphazardly or lightly. Nor should it be brushed

aside in order to meet the necessities in a single
Negotiable Instruments Law case
3. Life of a Negotiable Instrument
(Act No. 2031)
1. issue
2. negotiation
Chapter I. 3. presentment for acceptance in certain bills
INTRODUCTION 4. acceptance
5. dishonor by or acceptance
6. presentment for payment
1. The Negotiable Instrument 7. dishonor by nonpayment
8. notice of dishonor
9. protest in certain cases
 Written contract for the payment of money, by 10. discharge
its form intended as substitute for money and
intended to pass from hand to hand to give the
HDC the right to hold the same and collect the
sum due. 4. Kinds of Negotiable Instruments
 Instruments are negotiable when they conform
to all the requirements prescribed by the NIL 4.1. Promissory note - a promise to pay money
(Act 2031, 03 February 1911).  unconditional promise in writing made by
 Although considered as medium for payment of one person to another signed by the maker
obligations, negotiable instruments are not  engaging to pay on demand, or at a fixed
legal tender (Sec. 60, New Central Bank Act, or determinable future time a sum certain
R.A. 7653); in money to order or to bearer
 Negotiable instruments shall produce the effect  where a note is drawn to the maker’s own
of payment only when they have been order, not complete until indorsed by him
encashed or when through the fault of the (Sec. 184, NIL).
creditor they have been impaired. (Art. 1249,
CC) BUT a CHECK which has been cleared and 4.2. Bill of exchange - an order made by one
credited to the account of the creditor shall be person to another to pay money to a third person.
equivalent to a delivery to the creditor of cash.  unconditional order in writing addressed by
one person to another signed by the
Negotiable Non-negotiable person giving it
 requiring the person to whom it is
Contains all the Does not contain all addressed to pay on demand or at a fixed
requisites of Sec. 1 the requisites of Sec. or determinable future time a sum certain
of the NIL 1 of the NIL in money to order or to bearer (Sec. 126,
Transferred by Transferred by NIL).
negotiation assignment  Check: bill of exchange drawn on a
HDC may have Transferee acquires bank payable on demand.
better rights than rights only of his
transferor transferor
Prior parties Prior parties merely Promissory Note Bill of Exchange
warrant payment warrant legality of Unconditional Unconditional order
title promise
Transferee has Transferee has no Involves 2 parties Involves 3 parties
right of recourse right of recourse
Maker primarily Drawer only
liable secondarily liable
Only 1 presentment Generally 2
- for payment presentments - for
acceptance and for
2. Negotiable Instruments Law

o The NIL applies only to instruments which

5. Parties
conform with the requisites laid down by Sec1
of the law. Should any of said requisites be
5.1. As regards promissory note:
absent, the instrument would not be negotiable
1. Promissor/maker
and would therefore not be governed by the
2. Payee - person to whom the promise to pay
NIL but by the general law on contracts.
is made.
o TIP: It is advised that one memorizes the two
most important provisions of the NIL : Sec. 1
5.2. As regards bill of exchange:
(Forms of negotiable instruments) and Sec. 52
1. Drawer - person who gives the order to
(What constitutes a holder in due course)
2. Drawee - addressee of the order.
3. Payee - person to whom the payment is to
be made.
The Negotiable Instruments Law was enacted for
the purpose of facilitating, not hindering or
 Indorser - the payee of an instrument who
hampering transactions in commercial paper.
transfers it to another by signing it at the back
Thus, the said statute should not be tampered with

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 Indorsee - person to whom the indorser out of which reimbursement is

negotiates the instrument, who, by such to be made, or an indication of
negotiation, becomes the holder of the a particular account to be
instrument. debited with the amount
 “A statement of the transaction which
Chapter II. gives rise to the instrument.
NEGOTIABILITY recital of the transaction or
consideration for which the
1 Requisites of Negotiability4 instrument was issued
 However, the fact that the
1.1. Must be in Writing and Signed by the condition appearing on the
Maker instrument has been fulfilled
1. No person liable on the instrument whose will not convert it into a
signature does not appear thereon. negotiable one.
2. One who signs in a trade or assumed But an order or promise to pay out of a
name liable to same extent as if he had particular fund is not unconditional
signed in his own name. (Sec. 18, NIL)  CONDITIONAL: when
3. Signature of party may be made by duly reference to the fund clearly
authorized agent; no particular form of indicates an intention that such
appointment necessary. (Sec. 19, NIL) fund alone should be the source
4. "In writing" - includes print; written or of payment
5. Signature, binding so long it is intended or METROPOLITAN BANK v. CA (1991)
adopted as the signature of the signer or
made with his authority. The treasury warrants in question are not NIs.
They are payable from a particular fund, to wit,
1.2. Must contain an Unconditional Order or Fund 501. The indication of Fund 501 as the source
Promise to Pay of the payment to be made on the treasury
warrants makes the order or promise to pay "not
1. “ORDER OR PROMISE TO PAY” unconditional" and the warrants themselves non-
a. PROMISSORY NOTE: negotiable.
i. PROMISE TO PAY: should be
express on the face of the
1.3. Sum Payable must be Certain
1. Sec. 2, NIL: The sum payable is a sum
ii. Word "promise" is not absolutely
certain, even if:
necessary. Any expression
a. With interest;
equivalent to a promise is
b. By stated installments;
c. By stated installments with acceleration
iii. Mere acknowledgment of a debt
d. With exchange, whether at a fixed rate
or at the current rate; or
i. Order - command or imperative
e. With costs of collection or attorney's
direction; the instrument, by its
nature, demanding a right.
2. A sum is certain if from the face of the
ii. Words which are equivalent to an
instrument it can be mathematically
order are sufficient.
iii. A mere request or authority to
3. A stipulation to pay a higher rate of interest
pay does not constitute an order.
if the note is not paid or a lower rate if it is
iv. Although the mere use of polite
paid on or before maturity does not render
words like "please" does not of
the instrument non-negotiable.
itself deprive the instrument of its
characteristics as an order, its
1.4. Must be Payable in Money
language must clearly indicate a
1. Capable of being transformed into money.
demand upon the drawee to pay.
2. NON NEGOTIABLE: an instrument which
contains an order or promise to do an act
in addition to the payment of money
a. The promise or order to pay, to be
3. BUT If the order or promise gives the
unconditional, must be unqualified.
holder an election to require something to
b. Sec. 3, NIL: “An unqualified order or
be done in lieu of payment of money, an
promise to pay is unconditional…though
instrument otherwise negotiable would not
coupled with:
be affected thereby. (Sec. 5, NIL)
“An indication of a particular fund out
 But if the option is with the maker
of which reimbursement is to be
or person primarily liable,
made, or a particular account to be
instrument is NOT negotiable.
debited with the amount
4. Kind of current money does not affect
negotiability. Since the value of the note
indication of the particular fund
can by a simple mathematical computation
be expressed in the value of the lawful
Suggested Mnemonics: UP MaSCoT’S PaWN: money of the latter country (Incitti v
Unconditional order and Promise, payable in Money, Ferrante, 1933, US Jur)
Signed by maker, Certainty as to Time, Sum and 5. Obligations in foreign currency may be
Parties, in Writing, include words of Negotiability. discharged in Philippine currency based on

100% UP LAW UP BAROPS 2008 Page 89 of 351


the prevailing rate at the time of payment, control (conditional), still

pursuant to RA 8183 (Asia World NEGOTIABLE.
Recruitment v NLRC, 1999).  If option is unconditional, time of
payment is rendered uncertain,
1.5. Time of Payment must be Certain NOT negotiable.
 Purpose: Informing the holder of the o Other instances where instrument still
instrument of the date when he may NEGOTIABLE:
enforce payment thereof.  When option given to the holder to
 An instrument may be payable: accelerate the maturity of an
installment note upon failure of the
1. on demand (Sec. 7. NIL) maker to pay any installment when
1.) Expressed to be payable on demand, or due.
at sight, or on presentation;  Acceleration, automatic upon
2.) No time for payment is expressed; default.
3.) Where an instrument is issued,  Acceleration by operation of law.
accepted, or indorsed when overdue, it
is, as regards the person so issuing,
5. Provisions extending time of payment
accepting, or indorsing it, payable on
o General rule: Negotiability not
affected. Effect is similar with that of an
acceleration clause at the option of the
Demand instruments: Holder may call
for payment any time; maker has an option
 Negotiability not affected, even if
to pay at any time, and the refusal of the
the holder is given the option to
holder to accept payment will terminate the
extend time of payment by mere
running of interest, if any, but the
inaction or indulgence for an
obligation to pay the note remains.
indefinite time depending on his
will, because with or without this
2. at a fixed time
provision, the holder may always
o Only on the stipulated date, and not
choose to be indulgent.
before, may the holder demand its
o Exception: Where a note with a fixed
maturity provides that the maker has
o Should he fail to demand payment, the
the option to extend time of payment
instrument becomes overdue but
until the happening of contingency,
remains valid and negotiable. It is
instrument NOT negotiable. The time
merely converted to a demand
for payment may never come at all.

3. at a determinable future time 1.6. Must be Payable to Order or to Bearer/

Must contain Words of Negotiability
 words of negotiability - serve as an
o Determinable future time, if
expression of consent that the
expressed to be payable (Sec. 4, NIL):
instrument may be transferred.
o But the instrument need not follow
1.) At a fixed period after date of sight;
the language of the law; any term
2.) On or before a fixed or
which clearly indicates an intention
determinable future time specified
to conform with the legal
requirements is sufficient.
3.) On or at a fixed period after the
occurrence of a specified event
which is certain to happen, though CALTEX V. CA (1992)
the time of happening be uncertain.
The negotiability or non-negotiability of an
o If payable upon a contingency, both instrument is determined from the face of the
negotiable, and the happening of the instrument itself. The duty of the court in such case
event does not cure the defect. is to ascertain, not what the parties may have
secretly intended but what is the meaning of the
4. Effect of acceleration provisions words they have used.
o If option (absolute or conditional) to
accelerate maturity is on the maker, TRADERS ROYAL BANK V. CA (1997)
still NEGOTIABLE. The language of negotiability which characterize a
 Maker may pay earlier than the negotiable paper as a credit instrument is its
date fixed but this option, if freedom to circulate as a substitute for money.
exercised, would be a payment in Hence, freedom of negotiability is the touchtone
advance of a legal liability to pay. relating to the protection of holders in due course,
It is still payable on the date fixed, and the freedom of negotiability is the foundation
and holder has no right to for the protection which the law throws around a
enforce payment against the holder in due course.
maker before such date.
o If option to accelerate is on the  Postal money order, not negotiable,
holder: because it does not contain words of
 If option can be exercised only negotiability.
after the happening of a specified  Where words "or bearer" printed on a
event/act over which he has no check are cancelled by the drawer,
instrument not negotiable.

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 Bearer instrument may be negotiated by 2 Provisions Not Affecting Negotiability,

mere delivery. (Sec. 5)5
o When instrument is payable to bearer
(Sec. 9, NIL): 1. Authorizes sale of collateral securities;
a. Expressed to be so payable - ex: "I 2. Authorizes confession of judgment if instrument
promise to pay the bearer the not paid at maturity;
sum…." 3. Waives the benefit of any law intended for the
b. Payable to a person named therein advantage or protection of the obligor; or
or bearer – ex. "Pay to A or
4. Gives holder election to require something to
be done in lieu of payment of money. (if in
c. Payable to the order of a fictitious
addition to money – not NI)
person or non-existing person, and
 Negotiability affected, when instrument
such fact was known to the person
contains a promise or order to do any
making it so payable - ex: "Pay to
act in addition to the payment of
John Doe or order."
d. Name of payee does not purport to
be the name of any person - ex:
"Pay to cash;" "Pay to sundries." PNB v. MANILA OIL REFINING (1922)
e. Only or last indorsement is an
indorsement in blank.
In this case, the note contains a provision that in
case that it would not be paid at maturity, the
ANG TEK LIAN v. CA (1950)
"maker authorizes any attorney to appear and
confess judgment thereon."
A check drawn payable to the order of cash is The Court ruled that said judgment note is illegal
a check payable to bearer, and the bank may and inoperative as such is against public policy. It
pay it to the person presenting it for payment noted that it is in derogation of the constitutional
without the drawer's indorsement. safeguards (a day in court). Such judgment note
can only be valid if given express legislative
A check payable to bearer is authority for
payment to the holder. Where the check is in
the ordinary form and is payable to bearer,
In common law, two kinds of judgment by
so that no indorsement is required, a bank,
to which it is presented for payment, need
 Judgment by cognovit actionem
not have the holder identified, and is not
 Confession relicta verificatione
negligent in failing to do so.
3. Omissions Not Affecting Negotiability
 Order Instrument, negotiation requires
(Sec. 6)
delivery and indorsement of the transferor.
o When instrument is payable to order:
A. Non-dating of the instrument
Drawn payable to the order of a
B. Non-specification of value given, or that any
specified person or to him or his order
value had been given
(Sec. 8, NIL).
C. Non-specification of place where it is drawn or
o Without the words "to order" or "to the
place where it is payable
order of," the instrument is payable
D. Bears a seal
only to the person designated therein
E. Designation of particular kind of currency in
and is therefore non-negotiable.
which payment is to be made
(Campos, as cited in Consolidated
Plywood Industries v IFC Leasing,
4. Rules of Construction (Sec.17)

1.7. Parties must be designated with Certainty A. Sum expressed in words takes precedence over
a. Maker and drawer sum in numbers; BUT where words are so
 Sign the instrument at the lower ambiguous or uncertain, reference to the
right-hand corner. figures should be made
b. Payee B. Where interest is stipulated, without
 When negotiating, sign at the back; specification of the starting date, the interest
same with indorsers. runs from the date of the instrument, and if
a. Drawee undated, from the issue thereof
 Name usually at the lower left-hand C. An undated instrument is considered dated as
corner, or across the top. of time issued.
 If instrument addressed to drawee, D. Written provisions prevail over printed
he must be named or indicated with provisions
reasonable certainty. E. Where the instrument is ambiguous as to
 If it is not clear in what capacity the person whether it is a note or a bill, the holder may
signed, said person is considered an treat it as either at his election
indorser F. When the capacity of signatory is not clear, he
is to be deemed an indorser

Suggested Mnemonic: WEJy S: Waives, gives
holder Election, confession of Judgment, Sale of

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G. “I promise to pay” when signed by two or more  When an instrument is transferred from one
persons is deemed to be jointly and severally person to another as to constitute the
signed transferee the holder thereof.
 If payable to BEARER, negotiated by delivery; if
EVANGELISTA V. MERCATOR FINANCE (2003) payable to ORDER, negotiated by indorsement
of holder + delivery (Sec.30, NIL)
Where two promissory notes, both employing the
terms “I promise to pay”, were each signed by two
or more persons, a solidary (joint and several) SESBREÑO v. CA (1993)
liability on each note is created on the part of the
signors. A NI may, instead of being negotiated, ALSO be
assigned or transferred. A non-NI may not be
negotiated; but it may be assigned or
transferred, absent an express prohibition
Chapter III. against assignment or transfer written in the face
TRANSFER of the instrument.

1. Delivery and Issuance 3. Indorsement

A. Delivery means transfer of possession of

instrument by the maker or drawer, with  The indorsement must be written on the
intent to transfer title to the payee and instrument itself or on a paper attached thereto
recognize him as holder thereof. (de la (allonge). The signature of the indorser,
Victoria v. Burgos) without additional words, is sufficient
B. NI incomplete and revocable until delivery for indorsement. (Sec.31, NIL)
the purpose of giving effect thereto as  Indorser generally enters into two contracts
between (Sec. 16, NIL): (Implied contracts by Indorser):
1. immediate parties 1. sale or transfer of instrument
2. a remote party other than holder in due 2. to pay instrument in case of default of
course maker
C. delivery, to be effectual, must be made by or  Indorsement must be of entire instrument
under the authority of the party making / (can’t be indorsement of only part of amount
drawing / accepting/indorsing payable, nor can it be to two or more indorsees
D. delivery may be shown to have been severally. But okay to indorse residue of
conditional, or for a special purpose only, and partially paid instrument) (Sec. 32, NIL)
not for the purpose of transferring the property
in the instrument
1. Where the instrument is no longer in the
3.1. Kinds of Indorsements (Sec. 33)
possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the 1. as to manner of future method of
contrary is proved negotiation(Sec. 35, NIL):
2. if it is in the hands of a HDC, the
presumption is conclusive a. special – specifies the person to whom/to
3. Camposes: Should an undelivered whose order the instrument is to be
instrument come into the hands of a holder payable; indorsement of such indorsee is
in due course, the maker is liable to him necessary to further negotiation.
regardless of any proof of the lack of valid  A special indorser is liable to all
delivery. subsequent holders, unless the
F. PRESUMPTION AS TO DATE instrument is an originally bearer
1. Date is not an essential element of instrument, in which case he is liable
negotiability only to those who take title through his
2. An undated instrument is considered to be indorsement (Sec 40, NIL)
dated as of the time it was issued b. blank – specifies no indorsee, instrument
so indorsed is payable to bearer, and may
be negotiated by delivery
 a person who negotiates by mere
GEMPESAW v CA (1993) delivery is liable only to his immediate
Every contract on a negotiable instrument is  the holder may convert a blank
incomplete and revocable until delivery of the indorsement into a special indorsement
instrument to the payee for the purpose of giving by writing over the signature of the
effect thereto. The first delivery of the instrument, indorser in blank any contract
complete in form, to the payee who takes it as a consistent with the character of the
holder, is called issuance of the instrument. indorsement
Without the initial delivery of the instrument from
 An order instrument may be converted into
the drawer of the check to the payee, there can be
a bearer instrument by means of a blank
no valid and binding contract and no liability on the
 But a bearer instrument remains as such
whether it has been indorsed specially or in
blank. It is the liability of the indorser
2. Negotiation
which is affected.

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o Any person to whom an instrument so

indorsed is negotiated will hold the
2. as to kind of title transferred:
same/proceeds subject to rights of
person indorsing conditionally
a. restrictive – such indorsement either:
1) prohibits further negotiation of
b. unconditional
o In this kind of restrictive
indorsement, the prohibition to 5. other classifications:
transfer or negotiate must be
written in express words at the a. Absolute – One by which the indorser binds
back of the instrument, so that any himself to pay, upon no other condition
subsequent party may be forewarned than the failure of prior parties to do so,
that ceases to be negotiable. and of due notice to him of such failure
However, the restrictive indorsee b. Joint - Where instrument payable to the
acquires the right to receive payment order of two or more payees or indorsees
and bring any action thereon as any not partners, all must indorse, unless the
indorser, but he can no longer one indorsing has authority to endorse for
transfer his rights as such indorsee the others (Sec. 41, NIL)
where the form of the indorsement c. Irregular - Where a person, not otherwise a
does not authorize him to do so. party to the instrument, places thereon his
(Gempesaw v CA 1993) signature in blank before delivery, he is
liable as indorser
2) constitutes indorsee as agent of
indorser, or
3.2. Other Rules on Indorsement
3) vests title in indorsee in trust for
o rights of indorsee in restrictive 1. Indorsement by Collecting Bank - holder
ind.: deposits check with a bank other than the
a) receive payment of inst. drawee, would in effect be negotiating the
b) Bring any action thereon check to such bank, since he would have to
that indorser could bring indorse the check before the bank will accept it
c) Transfer his rights as such for deposit. In most cases, the bank is acting
indorsee, but all as a mere collecting agent.
subsequent indorsees
acquire only title of first 2. Negotiation by Joint or Alternative Payees
indorsee under restrictive or Indorsees - all must indorse, unless the
indorsement one indorsing has authority to endorse for the
b. non-restrictive others

3. Unindorsed instruments – Sec 49, NIL

3. as to kind of liability assumed by indorser Where holder of instrument transfers for value
a. qualified without indorsing, transfer vests in transferee:
 constitutes indorser as mere assignor
of title (eg. “without recourse”) (Sec. a. such title as transferor had therein, subject
38, NIL). to defenses and equities available to prior
 But this does not mean that the parties
transferee only has the rights of an o ex: transferee can sue the transferor,
assignee. Transfer remains a though he does not thereby
negotiation and transferee can still be a automatically become a HDC (Furbee
holder capable of acquiring a title free v. Furbee, 1936)
from defenses of prior parties. b. right to have indorsement of transferor,
 It relieves the qualified indorser of his after which, he becomes a holder or
liability to pay the instrument should possibly a HDC
the maker be unable to pay at o For purposes of determining whether or
maturity. not the transferee becomes a HDC after
b. unqualified securing the transferor’s indorsement,
note that Sec. 52 must be met at the
4. as to presence/absence of express limitations time of the negotiation, i.e., when
put by indorser upon primary obligor’s indorsement is actually made.
privileges of paying the holder:
BPI vs CA (2007)

a. conditional – additional condition annexed The transaction [in Sec. 49, NIL] is an equitable
to indorser’s liability. (Sec. 39, NIL) assignment and the transferee acquires the
instrument subject to defenses and equities
o Where an indorsement is conditional, a available among prior parties. Thus, if the
party required to pay the instrument transferor had legal title, the transferee acquires
may disregard the condition, and make such title and, in addition, the right to have the
payment to the indorsee or his indorsement of the transferor and also the right, as
transferee, whether condition has been holder of the legal title, to maintain legal action
fulfilled or not against the maker or acceptor or other party liable
to the transferor. The underlying premise of this

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provision, however, is that a valid transfer of Chapter IV.

ownership of the negotiable instrument in question
has taken place. HOLDER IN DUE COURSE
Transferees in this situation do not enjoy the
presumption of ownership in favor of holders since
1. Holder (Sec. 191)
they are neither payees nor indorsees of such
instruments… Thus, something more than mere  Definition: Payee or indorsee of a bill or
possession by persons who are not payees or note who is in possession of it, or the
indorsers of the instrument is necessary to bearer thereof.
authorize payment to them in the absence of any  RIGHTS OF HOLDER (Sec. 51, NIL)
other facts from which the authority to receive 1.sue thereon in his own name
payment may be inferred. 2.payment to him in due course discharges
4. Cancellation of Indorsements - Holder may
strike out indorsements not necessary to his
title. The endorser whose endorsement was 2. Three Kinds of DUE COURSE Holding
struck out, and all endorsers subsequent to a. HDC under Sec 52
him, are relieved from liability on the b. HDC under Sec 58 : A holder who derives
instrument (Sec. 48, NIL) title to the instrument through a HDC has
all the rights of the latter even though he
5. Indorsement by Agent - agent should make himself satisfies none of the requirements
it plain that he is signing in behalf of a principal of due course holding (Campos & Campos)
otherwise he may be made personally liable c. HDC under Sec 59 (presumption): every
(Sec 20, NIL) holder is deemed prima facie to be a holder
in due course
o The Negotiable Instruments Law provides
that where any person is under obligation
to indorse in a representative capacity, he 3. Requisites to become a holder in due
may indorse in such terms as to negative course (Sec.52)6
personal liability. An agent, when so
signing, should indicate that he is merely
signing in behalf of the principal and must SALAS v. CA (1990)
disclose the name of his principal;
otherwise he shall be held personally liable.
(FRANCISCO v CA, 1990) The indorsee was a HDC, having taken the
instrument under the following conditions: (1) it is
6. Presumption as to Indorsement complete and regular upon its face; (2) it became
o Time (Sec.45, NIL) - Every negotiation the holder thereof before it was overdue; (3) it
deemed prima facie effected before took the same in good faith and for value; and (4)
instrument was overdue, except where when it was negotiated to the indorsee, the latter
indorsement bears date after maturity of had no notice of any infirmity in the instrument or
the instrument. defect in the title of the previous indorser.
o Place (Sec.46, NIL) - Every indorsement is
presumed prima facie made at place where
instrument is dated HDC is one who has taken the instrument under
o Where instrument drawn or indorsed to the following conditions:
person as cashier (Sec.42, NIL) - deemed
prima facie to be payable to the bank or
corporation of which he is such officer; may
3.1. That it is complete and regular upon its
be negotiated by either the indorsement
(1) of the bank or corporation or (2) of the
officer. 1. COMPLETE
o An instrument is complete if it contains
7. Continuation of Negotiable Character - An all the requisites for making it a
NI, although overdue, retains its negotiability negotiable one, even if it may have
unless it has been paid or restrictively indorsed blanks as to non-essentials.
to prevent further negotiation (Sec. 47, NIL) o It is incomplete when it is wanting in
any material particular or particular
8. Indorsement of bearer inst. proper to be inserted in a NI without
o Where an instrument payable to bearer is w/c the same will not be complete.
indorsed specially, it may nevertheless be
further negotiated by delivery
2. Material Particulars
o Person indorsing specially liable as indorser
o What are material particulars? A
to only such holders as make title through
change in the ff. is considered a
his indorsement
material alteration (Sec. 125, NIL):
i. The date;

suggested mnemonics: GROIN: Good faith and
value, complete and Regular, not Overdue, no notice
of Infirmity at time of Negotiation; or GROCI: Good
faith and value, Regular, not Overdue, Complete, no

100% UP LAW UP BAROPS 2008 Page 94 of 351


ii.The sum payable, either for 1. HOLDER FOR VALUE - (a) Where value
principal or interest; has at any time been given for the
iii. The time or place of payment; instrument, the holder is deemed a HFV in
iv. The number or the relations of the respect to all parties who become such
parties; prior to that time (Sec.26, NIL) and (b)
v. The medium or currency in which Where the holder has a lien on the
payment is to be made; instrument, he is deemed a HFV to the
vi. Or which adds a place of payment extent of his lien (Sec.27, NIL).
where no place of payment is a. PRESUMPTION – Every NI is deemed
specified, prima facie issued for valuable
3. Rights of HDC of instrument that has been consideration; and every person whose
materially altered signature appears thereon to have
o enforce payment thereof according to become a party thereto for value (Sec.
its original tenor IF not a party to the 24, NIL)
alteration. (Sec. 124, NIL) i. In actions based upon a negotiable
instrument, it is unnecessary to
3.2. That he became the holder of it before it aver or prove consideration, for
was overdue and without notice that it had consideration is imported and
been previously dishonored, if such was the presumed from the fact that it is a
fact negotiable instrument. The
presumption exists whether the
words "value received" appear on
a. The ff. cannot be HDCs: (Sec. 53,
the instrument or not (Ong v
People, 2000)
i. A holder who became such after
the date of maturity of the
instrument (instrument is BAYANI VS. PEOPLE (2004)
ii. In case of demand instruments, a
holder who negotiates it after an Under Section 28 of the Negotiable Instruments
unreasonable length of time after Law (NIL), absence or failure of consideration is a
its issue matter of defense only as against any person not a
b. Instruments with fixed maturity but holder in due course.
subject to acceleration: ultimate date of
maturity is the date of maturity for the
purpose of determining whether a Moreover, Section 24 of the NIL provides the
purchaser is a HDC presumption of consideration. Such presumption
c. Undated instruments: Prima facie cannot be overcome by the petitioner’s bare denial
presumption that it was negotiated of receipt of the [consideration].
before it was overdue (Sec 45)
d. NOTE: An overdue instrument is still 1) Only evidence of the clearest
negotiable, but it is subject to the and most convincing kind will
defense existing at the time of the suffice for that purpose.
transfer. (Travel-On Inc v CA, 1992)

2. DISHONOR b. VALUE - any consideration sufficient to

a. Non-acceptance support a simple contract. An
i. Occurs when drawee refuses to antecedent or pre-existing debt
accept the order of the drawer as constitutes value, whether the
stated in the bill instrument is payable on demand or at
ii. Applicable only to bills of exchange a future time. (Sec.25, NIL)
iii. May occur before the date of
maturity of the bill MERCHANTS’ NATIONAL BANK OF ST. PAUL v.
b. Non-payment STA. MARIA SUGAR CO. (1914)
i. Occurs when the party primarily
liable fails to pay at the date of
maturity The mere discounting of the note and placing the
ii. Date of Maturity amount of said discount to the credit of the HFV
1) “payable after sight”—date of would not then have constituted a transfer for
presentment value. But if the sum had subsequently been
2) Payable on the occurrence of a checked out, then value would have passed. The
specified event—date is fixed general rule as to the application of payments,
by happening of event there being no special facts to interfere, is that the
3. An instrument is not invalid for the reason first payments apply to the oldest debts. The first
only that it is ANTE-DATED OR POST- debits are to be charged against the first credits. It
DATED provided not done for an illegal or follows therefore, upon the facts as found, that the
fraudulent purpose. The person to whom an bank was a bona fide HFV without notice, and, in
instrument so dated is delivered acquires accordance with the stipulation, judgment should
the title thereto as of the date of delivery. be entered for the plaintiff upon the note.
(Sec.12, NIL) Judgment reversed.

3.3. That he took it in good faith AND for

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Bank credit as value - When the holder of a check Ocampo & Co. v.
deposits it with his bank (assuming it is not the Gatchalian)
drawee bank) and the bank credits it to his o Purchase of an
account, is the bank at this stage a HFV? instrument at a
o Majority View  first money in DISCOUNT does not,
is presumed to be the first of itself, constitute bad
money paid out faith. However, if the
o Minority View  as long as instrument is pruchased
the balance in the depositor’s at a heavy discount,
account equals or exceeds the this fact together with
amount of the instrument other facts, may be
deposited, the latter cannot be taken into account in
considered as withdrawn for the deciding the issue of
purpose of treating the bank as purchase in good faith.
a HFV. (Ham v. Meritt)
o (So far, there has been no
decision by the SC on this
a. Holder must have taken the instrument GATCHALIAN, ET. AL. (1961)
in good faith and that at the time it was
negotiated to him he had no notice of In order to show that the defendant had knowledge
any infirmity in the instrument or of such facts that his action in taking the
defect in the title of the person instrument amounted to bad faith, it is not
negotiating it. necessary to prove that the defendant knew the
b. NOT a Holder in GOOD FAITH exact fraud that was practiced upon the plaintiff by
i. Holder acted in bad faith the defendant’s assignor, it being sufficient to
ii. Holder had NOTICE OF DEFECT show that the defendant had notice that there
1) ACTUAL KNOWLEDGE was something wrong about the assignor’s
 SEC 56. WHAT acquisition of title, although he did not have
CONSTITUTES NOTICE notice of the particular wrong that was committed.
OF DEFECT—To …The fact is that it acquired possession of the
constitute notice of an instrument under circumstances that should have
infirmity in the put it to inquiry as to the title of the holder who
instrument or defect in negotiated the check to it. The burden was,
the title of the person therefore, placed upon it to show that
negotiating the same, notwithstanding the suspicious circumstances, it
the person to whom it acquired the check in actual good faith.
is negotiated must have One line of cases had adopted the test of the
had actual knowledge reasonably prudent man and the other that of
of the infirmity or actual good faith. It would seem that it was the
defect, or knowledge of intent of the Negotiable Instruments Act to
such facts that his harmonize this disagreement by adopting the latter
action in taking the test. Negligence on the part of the plaintiff, or
instrument amounted suspicious circumstances sufficient to put a prudent
to bad faith. man on inquiry, will not of themselves prevent a
 It is therefore sufficient recovery, but are to be considered merely as
that the buyer of a note evidence bearing on the question of bad faith.
had notice or
knowledge that the STATE INVESTMENT HOUSE v. IAC (1989)
note was in some way
tainted with fraud. It is A check with 2 parallel lines in the upper left hand
not necessary that he corner means that it could only be deposited and
should know the may not be converted to cash. Consequently, such
particulars of the fraud. circumstance should put the payee on inquiry and
2) SUSPICIOUS upon him devolves the duty to ascertain the
CIRCUMSTANCES holders’ title to the check or the nature of his
a. BAD FAITH - does not possession. Failing in this respect, the payee is
require actual declared guilty of gross negligence amounting to
knowledge of the exact legal absence of good faith and as such the
fraud that was consensus of authority is to the effect that the
practiced; knowledge holder of the check is not a holder in good faith.
that there was
something wrong about YANG v. CA (2003)
the assignor’s
acquisition of title is Where Mr. A obtained by fraud from Mr. B crossed
sufficient. checks payable to Mr. C, which Mr. C innocently
b. The burden is upon the receives from Mr. A for value, Mr. C is still a holder
defendant to show that in good faith despite the fact that the checks were
notwithstanding the crossed. The crossing of a check does not impair
SUSPICIOUS the negotiability of an instrument nor necessarily
CIRCUMSTANCES, it preclude its holder from being a holder in due
acquired the check in course. The crossing of a check only means that it
actual good faith. (De could only be deposited and may not be converted

100% UP LAW UP BAROPS 2008 Page 96 of 351


into cash. Thus, such should put the holder on

inquiry and upon him devolves the duty to
Salas defaulted in payments for motor vehicle, the
ascertain the holder’s title to the check or nature of
purchase of which was financed by Filinvest. On
his possession.
demand, his defense was that the purchase was
invested with fraud on the seller’s part. Filinvest
The effects are that:
(the financing company) was held to be a holder in
1. The check may not be encashed but only
good faith, despite privity to the allegedly
deposited in the bank.
fraudulent sale. Salas’ defenses were good only
2. The check may be negotiated only once – to one
against the seller-indorser, and where the note was
who has an account with a bank.
negotiable and validly negotiated to Filinvest, the
3. The act of crossing serves as a warning to the
latter was a holder in good faith, and may recover
holder that the check was issued for a definite
from Salas.
purpose so that he must inquire if he has received
the check pursuant to that purpose. Otherwise, he
would not be a holder in due course.
Note: This is the “less protective” doctrine – not so
Where the holder Mr. C, as in this case, did not much favorable to dealers but as compared to
have knowledge of Mr. A’s fraudulent actions on Consolidated, the rule here was actually in the ratio
Mr. B, and the fact that he was the payee in said decidendi and not mere obiter.
check, he was legally warranted to deposit the
instrument in his account with the drawee bank. 3.4. That at time it was negotiated to him, he
Mr. C was a holder in good faith. had no notice of :
o any infirmity in instrument
iii. FINANCING COMPANY o any defect in title of person
1. title DEFECTIVE when (Sec. 55, NIL):
a. instrument / signature obtained by
In installment sales, the buyer usually issues a
fraud, duress, force or fear or other
note payable to the seller to cover the purchase
unlawful means OR for an illegal
consideration; or
b. instrument is negotiated in breach of
faith, or fraudulent circumstances
Many times, pursuant to a previous arrangement
with the seller, a finance company pays the full
price of the property sold and the note is indorsed 2. NOTICE of infirmity or defect –
to it by the seller, subrogating it to the right to a. actual knowledge of the infirmity or
collect the price from the buyer. defect OR knowledge of such facts that
his action in taking the instrument
amounted to bad faith (Sec.56, NIL)
RULE  In such cases, the tendency of the courts b. Notice to an AGENT is chargeable
is to protect the buyer against the finance company against the principal.
in the event that the goods sold turn out to be c. INSUFFICIENT NOTICE
defective. The finance company will be subject to i. CONSTRUCTIVE NOTICE (ex.
the defense of failure of consideration and cannot