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FRATERNAL ORDER OF UTOPIA

ATENEO DE MANILA UNIVERSITY


SCHOOL OF LAW
ARIS S. MANGUERA

PHILIPPINE CORPORATE LAW


Commercial Law Review

OUTLINE 1.2 Advantages and disadvantages of the Corporate


Form
(1) Nature of Corporations
(2) Formation and Organization of Corporations CLV
(3) The Corporate Entity ADVANTAGES DISADVANTAGES
(4) Powers of Corporation (1) Strong Personality (1) Abuse of Corporate
(5) Stockholders (2) Centralized Management
(6) Board of Directors Management (2) Abuse of Limited liability
(7) Officers (3) Limited Liability to the feature
(8) Meetings investors (3) High cost of maintenance
(9) Books and Records (4) Free Transferability of (4) Double Taxation
(10) Mergers and Consolidations Units of Investments (5) Lack of Personal Element
(11) Non-Stock Corporations
(12) Close Corporations
(13) Educational Corporations Sundiang (page 249)
(14) Religious Corporations ADVANTAGES DISADVANTAGES
(15) Dissolution (1) The capacity to act as a (1) More complicated in
(16) Foreign Corporations legal unit; formation and management;
(2) Limitation of, or exemption (2) Higher cost of formation and
from, individual liability of operation;
shareholders; (3) Lack of personal element;
1. NATURE OF CORPORATIONS (3) Continuity of Existence
(4) Transferability of Shares;
(4) Greater governmental control
and regulation;
(5) Centralized management of (5) Management and control are
1.1 Concept of the corporation BoD; and separate from ownership;
(6) Standardized method of Stockholders have little voice in
Sec. 2. Corporation defined. organization, and finance the conduct of business
(Salonga, Phil. Law on Private
A corporation is an artificial being created by operation of law, having Corps, 3rd ed., page 9.)
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.

Advantages:

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1) Strong Legal Personality - CLV: There are ways to circumvent the law to make the
- The corporation has a legal capacity to act and contract as a shareholder liable for more than his actual share (ex. The
distinct unit in its own name; and it has continuity of existence. chairman makes himself joint debtor for a loan)
A corporation’s creation, organization, management and - When a person invest its property in the corporation, he
dissolution are standardized as they are governed by a general abdicates his “jus” of ownership
incorporation law. - One of the advantages of the corporation is the limitation of an
- A corporation is an entity separate and distinct from its investor’s liability to the amount of investment, which flows
stockholder. While not in fact and in reality a person, the law from the legal theory that a corporate entity is separate and
treats the corporation as though it were a person by process of distinct fro its stockholders. (San Juan vs. CA)
fiction or by regarding it as an artificial person distinct and - It is hornbook law that corporate personality is a shield against
separate from its individual stockholders. (Remo vs. IAC) personal liability of its officers- a coporate officer and his
- Stockholders vs. Register of Deeds spouse cannot be personally liable under a trust receipt where
The transfer of corporate assets to the stockholder is not in the he entered into and signed the contract clearly in his official
nature of a partition but is a conveyance from one party to capacity. (Consolidated Bank vs. CA)
another. - Obligations incurred by the corporation acting through its
directors, officers and employees, are its sole liabilities.
2) Centralized Management (Malayang Samahan vs. Ramos)
- A corporation’s management is centralized in the board of CLV Class Notes
director’s. A corporation presents a more stable and efficient Q: Is a corporation in our jurisdiction given the feature of limited liability?
system of governance and dealings with third parties, since A: No. The feature of limited liability is given to the stockholder and not to
management prerogatives are centralized in its board of the corporation.
directors. Q: Is limited liability a normal run of things?
- As can be gleaned from Sec 23 of Corporation Code, it is the A: No. It is only there because it comes with the separate juridical
board of directors or trustees which exercises almost all the personality
corporate powers in a corporation. (Firme vs. Bukal) Q: If limited liability as shown in the corporation setting is good for the
investors, does it mean that delectus personarum is a bad thing?
- The exercise of the corporate powers of the corporation rest in A: No. It is good in a way, since person are bound by the contracts they
the Board of Directors save in those instances where the enter into.
Corporation Code requires stockholder’s approval for certain
specific acts. (Great Asain Sales Center vs. CA) 4) Free Transferability of Units of Investments
- As a general rule, the shares of stocks can be transferred
3) Limited Liability to Investors- The liability in a corporation is limited to their without the consent of other stockholders. This places more
shares. liquidity in the corporate setting and encourages investors to
- Provided by jurisprudence only channel their investments through corporate vehicles.
- Simple division between “naked title” and “beneficial title” gives - Authority granted to corporations to regulate the transfer of its
rise to limited liability. stock does not empower the corporation to restrict the right of
- Peculiar only between the shareholders and a corporation a stockholder to transfer his shares, but merely authorizes the
- Underlying Principle: Principle of Relativity adoption of regulations as to the formalities and procedure to
- CLV’s formula: Strong Juridical Personality + Centralized be followed in effecting transfer (Thomson vs. CA)
Management= Limited Liability
5) Advantages as registered Entity-

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- Corporations enjoy perpetual succession under its corporate 2) PARTNERSHIPS- The most important distinction between a partnership
name and in an artificial form; it has the capacity to take and and a corporation is their legal capacities. A corporation has a stronger legal
grant property, and contract obligations; it can sue and be sued capacity. Enabling it to continue despite death, insolvency or withdrawal of
in its corporate name as a juridical person; it has the capacity any of its stockholders or members. Limited Liability is a main feature in a
to receive and enjoy common grants of privileges and corporate setting, whereas partners are liable personally foe partnership
immunities; and its stockholders or members generally have no debts. Generally, every partner is an agent of the partnership and by his sole
personal liability beyond their shares. act, he can bind the partnership whereas in a corporation, only the Board of
Directors or its agents can bind the corporation.
Disadvantages of Corporate Form Here are the features of a partnership:
1) Abuse of Corporate Management- In a practical sense, investors have Delectus Personarum
very little voice over the conduct of business of the corporation. - Selection of Partners; No outsider can come in without the
consent of all partners
2) Abuse of limited liability feature- Limited liability feature has tended to - Prevents the development of any market for units of ownership
increase transaction cost by the parties being forced to enter into because of no assurance that buyers would be able to become
contractual schemes skirting the limited liability of the corporation when it partners
is a party to a transaction. Limited liability hits innocent people. - Mutual Representation
3) High cost of maintenance- Complicated and Costly Formation and - Power to Dissolve
Maintenance. There is a greater degree of governmental control and Mutual Agency
supervision. - Each partner can legally bind the business enterprise
- Business may be undermined by act of one foolish partner
4) Double Taxation- The profits if the corporation which are already Unlimited Liability
subjected to corporate income tax when declared and distributed as Community of Interest
dividends to the stockholders are again subjected to the further income - Co-ownership of capital or property
tax. Dividends received by individuals from domestic corporations are CLV Class Notes
subject to final 10% tax fro income earned on or after January 1, 1998 Q: How does contractual management of a corporation compare with
(Section 24(B)(2), 1997 NIRC). Inter-corporate dividends between the management of a partnership?
domestic corporations, however, are not subject to any income tax (Sec. A: Every partner, in the absence of a stipulation in the articles of
27 (D)(4), 1997 NIRC). In addition, there is re-imposition of the 10% partnership, binds the partnership as every partner is an agent of the
others. In a corporation, only the Board of Directors and not the
“improperly accumulated earnings tax” for holding companies (Sec 29, stockholders can bind the corporation.
1997 NIRC)
CLV: The principle in constitutional law that delegated power cannot
5) Lack of Personal Element- This has spawned corporate irresponsibility. be delegated further has no application in a corporate setting because
a corporation is not a product of political text- it is a product of
business. A corporate setting is best described as hierarchal and fiat.
Just because the BoD are to be elected by the stockholders does not
1.3 Differentiated from partnerships and other mean that the former derives its power from the latter. The powers of
business organizations the BoD is original, said powers are not delegated by the stockholder.
The powers are vested by law (and Articles of Incorporation). The BoD
sit on the board not as representatives of the stockholders but
because they are directors.
1) SOLE PROPRIETORSHIP- Here, it is the owner who controls the
business while in a corporation, it is the Board of Directors.
Q: What are the 2 types of partnerships?

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A: Regular and joint venture b) Parties who took no part except to subscribe for stock in a proposed
corporation, do not become partners with other subscribers who
Q: Can a corporation be a partner in a regular partnership? engaged in the business under the name of pretended corporation,
A: No, because a partner must be a natural person. It is against public are not liable for action foe settlement of the alleged partnership
policy for corporation to be a partner in a regular partnership. contribution.

Q: Why did the legislature put such limited liability as an attribute of a Q: Why are we taking up Pioneer? Why were not they liable?
corporation? If the feature of limited liability costs money then why not A: Because Pioneer shows us that for a person to be liable as a
take it out? Why not leave it up to the investors who can decide if they partner, he should have actively participated in the conduct of the
want limited liability or not? business, the SC held in this case that to be able to be held liable the
A: Even though limited liability will cost a lot of money, borrowing person should possess powers of management business, the SC held
makes a lot more sense. If I have 100M, it would be foolish to put all in this case this case that to be able to be held liable the person should
my eggs in one basket(if the basket falls, all eggs break). So I merely possess powers of management.
out 10M in one corp and then borrow the 90M while the rest of my
money I put somewhere else. If the corporation fails, I do not lose all Q: In cases where there is a defective attempt to form a corporation,
my 100 M. But if the corps succeeds and I get to pay my creditor, I which is the prevailing rule, a partnership inter se is created or a
retain the 10M plus profits acquired from the 90M paid up loan. This is corporation by estoppel?
the concept of Leveraging, using other people’s money to make a A: It depends wholly on the extent of the participation of the party who
profit for yourself. This is why borrowing is an integral part of corporate claim is being mind. In PIONEER, there was no intent on the other
life and it is up to the creditors to make a diligent appraisal of the credit parties to enter into a partnership but a corporation. As to Cervantes
standing of the corp. and Bormacheco, they cannot be considered to have entered into a
partnership inter se, since there was no intention to do so ans to be
Q: What is the main distinction between a corporation and a held liable as such.
partnership? But if it were Cervantes or Bormacheco, who entered into the contracts
A: A corporation is intermingling of corporation law and contract law. using the corporate name and actively participated in the activities of
Partnership is purely contractual relationship and so every time a the corporation, then they are to be held liable as partners.
partner dies, the contract is actually distinguished. Lim Tong Lim vs. Phil. Fishing Gear Industries
- Q: What is the difference between Pioneer and Lim Tong Lim?
Q: What is a corporation law all about?
A: It is all about jurisprudence actually built around the 4 attributes of a
A: In Pioneer, the SC stopped when it declared that to be
corporation. liable, you have to possess powers of management. In Lim, it
continues its pronouncement by saying that you have
Q: Does a Defective Incorporation result into a Partnership? beneficial ownership over the business, then you are also
A: No. First, both corporate and partnership relationship are liable as a partner
fundamentally contractual relationships created by the co-venturers. CLV: Pioneer caseactors who knew of corporation’s non-
(so, yung intention is controlling)Second, there are important existence are liable as general partners while actors who did
differences between a corporation and the partnership.(i.e. Limited
not know are liable as limited partners, passive investors are
liability, centralized management, easy transferability of units of
ownership) not liable. Lim Even passive investors should be held liable
Summary of the doctrinal pronouncement in PIONEER INSURANCE provided they benefited from such transactions.
case:
a) Parties who intended to participate or actually participate in the 3) BUSINESS TRUST- It is simply a deed of trust which is easier and less
business affairs of the proposed corporation would be considered as expensive to constitute for it is not bound by any legal requirements. It does
partners under a de facto partnership, and would be liable for not have separate juridical personality, and is mainly governed by
partnership obligations.
contractual doctrines and common law principles on trust. Trust relationship

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centered upon properties, and which places naked tile in the trustor and the - It is a duly registered association of persons, with a common
beneficial title in the beneficiary. bond of interest, who have voluntarily joined together to
CLV Class Notes achieve lawful common social or economic end, making
equitable contributions to the capital required and accepting a
Q: What is the difference of a Business Trust and a corporation?
A: The relationship in a business trust is essentially a trust relationship. fair share of the risks and benefits of the undertaking in
The business trust does not have a personality which is apart from the accordance with universally accepted cooperative principles. It
trustor of the trustee/beneficiary. The concept of a separate juridical has a juridical personality distinct from its members and has a
personality is absent from a business trust. limited liability feature. Cooperatives are governed by
principles of democratic control where the members in primary
4) JOINT VENTURES cooperatives have equal voting rights in a one-member-one-
- Its legal concept is of common law origin. It is a form of vote principle. The general assembly in full membership
partnership and should thus be governed by the law of exercises all the rights and performs all the obligations of the
partnerships. cooperative. They are under the supervision and control of the
- Joint venture is an association of persons or companies jointly Cooperative Development Authority. (Primary objective: SELF
undertaking some commercial enterprise; generally, all HELP)
contribute assets and share risks. It requires a community of - Cooperatives are established to provide a strong social and
interest in the performance of the subject matter, a right to economic organization to ensure that the tenant-farmers will
direct and govern policy in connection therewith, and duty, enjoy on a lasting basis the benefits of agrarian reforms.
which may be altered by agreement to share both in profit and (Corpuz vs. Grospe)
losses. (Kilosbayan vs. Guingona)
6) SOCIEDAD ANONIMAS
CLV Class Notes - A sociedad anonima was considered a commercial partnership
where upon the execution of funds and personal property,
Q: What is the difference between a joint venture and a partnership? become a juridical person- an artificial being, invisible,
A: A joint venture is by law a partnership because it follows the same
intangible, and existing only in contemplation of law- with
definition as having two or more persons binding themselves together
under a common fund with the intention of dividing the profits between power to hold, buy, and sell property, and to sue and be sued-
themselves. Therefore, every joint venture is a partnership. The a corporation- not a general co-partnership nor a limited co-
distinction between the two is a joint venture is for a limited purpose partnership… The inscribing of its articles of agreement in the
only while a partnership involves an arrangement or an on-going commercial register was not necessary to make it a juridical
concern. person- a corporation. Such inscription only operated to show
that it partook of the form of a commercial corporation, (Mead
Q: Is it possible for a joint partnership not be a partnership? vs. McCullough)
A: Yes, when the joint venture forms a corporation, it hen becomes a
joint venture corporation. - The sociedades anonimas were introduced in the Philippine
jurisdiction on 1 December 1888 with the extension to
Q: Is the requirement of registration needed in a partnership required Philippine territorial application of Articles 151 to 159 of the
in a joint venture? Spanish Code of Commerce. Those articles contained the
A: No. Only in a partnership is registration required. (Art 1772) features of limited liability and centralized management
granted to a juridical entity. But they were more similar to the
5) COOPERATIVES English joint stock companies than the modern commercial
corporations. (Benguet vs Pineda)

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- Our corporation law recognizes the difference between To organize a corporation that could claim a juridical
sociedades anonimas and corporations and will not apply legal personality of its own and transact business as such, is not a
provisions pertaining to the latter to the former.(Phil Product vs. matter of absolute right but a privilege which may be enjoyed
Primateria Societe Anonyme) only under such terms as the State may deem necessary to
impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry,
7) CUENTAS EN PARTICIPACION 5 SCRA 645 (1962)
- A cuentas en particiapacion as a sort of an accidental “It is a basic postulate that before a corporation may
partnership constituted in such manner that its existence was acquire juridical personality, the State must give its consent
only known to those who had an interest in the same, there either in the form of a special law or a general enabling act,”
being no mutual agreement between the partners, and without and the procedure and conditions provided under the law for
a corporate name indicating to the public in some way that the acquisition of such juridical personality must be complied
there were other people besides the one who ostensibly with. Although the statutory grant to an association of the
managed and conducted the business, governed under Article powers to purchase, sell, lease and encumber property can
239 of the Code of Commerce. Those who contract with the only be construed the grant of a juridical personality to such an
person under whose name the business of such partnership of association . . . nevertheless, the failure to comply with the
cuentas en participacion is conducted, shall have only a right statutory procedure and conditions does not warrant a finding
of action against such person and not against the other person that such association acquired a separate juridical personality,
interested, and the latter, on the other hand, shall have not even when it adopts sets of constitution and by-laws.
right of action against third person who contracted with the International Express Travel & Tour Services, Inc. v. Court of
manager unless such manager formally transfers his rights to Appeals, 343 SCRA 674 (2000).
them. (Bourns vs. Carman)
Since all corporations, big or small, must abide by the
1.4 Government Regulation of Corporations provisions of the Corporation Code, then even a simple family
corporation cannot claim an exemption nor can it have rules
Basis: Section 2 of Corp Code; Theory of Concession and practices other than those established by law. Torres v.
Court of Appeals, 278 SCRA 793 (1997).
Theory of Concession: Looks at a corporation as a creature of the Catindig Class Notes
State within the control of the latter. This theory is essentially Q: How does government regulate corporations?
followed in the Philippines. A: From creation to dissolution
xxx
Homeowner’s HLURB
A corporation is an artificial being created by operation of
Condos SEC
law. It owes it life to the state its birth being purely dependent Cooperative Bureau of Cooperative Development
on its will. Corporate by-laws must yield to judicial orders. As a
matter of fact, a corporation, once it comes into being, comes
more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action
1.5 Kinds of Corporations
to enforce its right. Correlatively, it is not immune from judicial
control in those instances, where a duty under the law as (a) Stock
ascertained in an appropriate legal proceeding is cast upon it. (b) Non-Stock
(Tayag v. Benguet Consolidation) (c) De Facto

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(d) Corporation by estoppel taxation. (CIR v. Club Filipino)


(e) Close
• Mere realization of profits does not make a corporation a
(f) Educational
stock corporation. (Collector v. UV)
(g) Religious; Sole and Aggregate
(h) Special Charter
(i) Foreign (c) De facto
(j) GOCC Sec. 20. De facto corporations
(k) Homeowner’s Association
The due incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise corporate
(a) Stock powers, shall not be inquired into collaterally in any private suit to
Sec. 3. Classes of corporations. which such corporation may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding.
Corporations formed or organized under this Code may be stock or
non-stock corporations. Corporations which have capital stock Nature of the Doctrine
divided into shares and are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on the • De facto corporation is formed also in accordance with law. It
basis of the shares held are stock corporations. All other corporations falls short of the requirements provided by law. Such is
are non-stock corporations. awarded a separate juridical personality, it may thus enter
into contracts, it may sue and be sued. (note: third parties
may sue the corporation, incorporators may sue but the
(b) Non-stock corporation cannot sue) Only the actors will be held liable. In
Sections 3 and 87.
proceeding against such, compliance with due process must
Sec. 87. Definition.
be had.
For the purposes of this Code, a non-stock corporation is one where
no part of its income is distributable as dividends to its • The doctrine of de facto corporation applies as to the first
members, trustees, or officers, subject to the provisions of this level relationship (as between the State and corporations)
Code on dissolution: Provided, That any profit which a non-stock and also to the third level of relationship.
corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the Elements: (Arnold v. Piccio)
purpose or purposes for which the corporation was organized,
subject to the provisions of this Title.
(1) Valid Law under which it is incorporated
(2) Attempt in good faith to incorporate
The provisions governing stock corporation, when pertinent, shall be (3) Assumption of corporate powers
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title. (n)
(1) Valid Law under which it is incorporated
• See page 902 of CLV’s Commercial Law Reviewer (2007).
• If the constitutionality of the statue is raised for the first time
• In spite of the existence of capital stock, a corporation may in an action wherein it is sought to prevent future incurring of
be considered a non-stock corporation for purpose of

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rights and obligations, it will be proper to permit collateral Q: If a member of a public deals with a corporation knowing its defect,
attack; where the constitutionality of the statue is raised for will the de facto doctrine apply?
the first time in litigation seeking enforcement of contracts or A: Yes, because (a) juridical personality cannot be subject to collateral
transaction which have been fully or partially consummated, attack (b) No juridical entity, no separate liability
collateral attack on the juridical personality of the corporation CLV: The de facto doctrine was formulated to safeguard the security of
should not be permitted, since the corporation should be commercial transactions whenever they involve the corporation.
treated as a de facto corporation. Courts, however, through Parties dealing with said corporation are secured by the fact that the
transactions entered into with said corporations may be sued upon and
jurisprudence, arrived at the same result as that upheld by they can recover. That is why aside from the other two requisites there
such minority opinion, holding that a corporation organized must be a set of officers or directors because the principle that a
under a statute subsequently declared unconstitutional may corporation can only act through its officers.
nevertheless be considered a corporation by estoppel, where
there have been previous dealing between the parties on a
corporate basis. Catindig Class Notes

(2) Attempt in good faith to incorporate- colorable compliance. Sir: Once there is a certificate issued, there is no de facto corporation.
So for me the concept is merely historical.
• The Corporation must have filed its Articles of Incorporation
and the SEC duly issued a Certificate of Incorporation. (The (d) Corporation by estoppel
incorporators must have been aware of the issuance of the Sec. 21. Corporation by estoppel
certificate of incorporation by the SEC for such good faith to
All persons who assume to act as a corporation knowing it to be
exist.) (Mere intent is not sufficient) without authority to do so shall be liable as general partners for all
(3) Assumption of corporate powers: Minimum requirement: debts, liabilities and damages incurred or arising as a result thereof:
Election of BoD. Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort
Rationale committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.
• To prevent any party from raising the defect of authority as a
means to avoid fulfillment of a contract or a transaction On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in
entered into.
fact no corporation.
• To protect the enforceability of corporate dealings and CLV Class Notes
contracts, to allow the public to take at reasonable face value Q: What is minimum requirement for a corporation by estoppel to
the authority of the corporation to enter into valid and binding exist?
contracts. A: There must be an innocent party who believes that a corporation
exists (believes in good faith) because of representations.
• The doctrine is meant to apply to extra –corporate dealings
and not to intra-corporate relationship Catindig Class Notes
CLV Class Notes Q: Is a corporation by estoppel a corporation?

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A: No. (See definition in Section 2) corporation for the transportation of its merchandise. Ohta
The parties are the one made liable-ASM. Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).1
Q: How does government regulate corporations?
A: From creation to dissolution
• A person who accepts employment in an unincorporated
charitable association is estopped from alleging its lack of
xxx juridical personality. Christian Children’s Fund v. NLRC, 174
Homeowner’s HLURB SCRA 681 (1989).
Condos SEC
Cooperative Bureau of Cooperative Development • One who deals with an organization which is not duly
incorporated is not estopped to deny its corporate existence
UP Class Notes when his purpose is not to avoid liability. Int’l Express Travel
COMMENT: The doctrine is founded on principles of equity and is
applied n order to prevent injustice and unfairness to third persons vis- v. Court of Appeals, 343 SCRA 674 (2000).
à-vis the corporation (or vice versa as in par. 2 Section 21). In this
case the International Express Travel seeks to enforce a valid contract; • Under the law on estoppel including that under Sec. 21 of
it is the Federation and Henri Kahn who wish to do it injustice by trying Corporation Code, those acting on behalf of an ostensible
to evade responsibility thereon. In the last point, the CA possibly tried corporation and those benefited by it, knowing it to be without
to apply paragraph 2 Section 21, albeit mistakenly.
valid existence, are held liable as general partners. Lim
Tong Lim v. Philippine Fishing Gear Industries, Inc., 317
Nature of Doctrine
SCRA 728 (1999).
• An admission or representation is rendered
conclusive upon the person making it, and cannot be denied Two Levels
or disproved as against the person relying thereon. (1) With Fraud
(2) Without Fraud
• Founded on principles of equity and designed to
prevent injustice and unfairness, the doctrine applies when • When the incorporators represent themselves to be officers
persons assume to form a corporation and exercise of the corporation which was never duly registered with the
corporate functions and enter into business relations with SEC, and engage in the name of the purported corporation in
third persons. Where no third person is involved in the illegal recruitment, they are estopped from claiming that they
conflict, there is no corporation by estoppel. A failed are not liable as corporate officers under Sec. 25 of
consolidation therefore cannot result in a consolidated Corporation Code which provides that all persons who
corporation by estoppel. Lozano v. De Los Santos, 274 assume to act as a corporation knowing it to be without
SCRA 452 (1997) authority to do so shall be liable as general partners for all the
• A party cannot challenge the personality of the plaintiff as a debts, liabilities and damages incurred or arising as a result
duly organized corporation after having acknowledged same 1
when entering into the contract with the plaintiff as such The same principle applied in Compania Agricole de Ultramar v.
Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership
which required registration in the registry under the terms of the Code of
Commerce).

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thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Any corporation may be incorporated as a close corporation, except
Pineda, G.R. No. 117010, 18 April 1997 (unpub). mining or oil companies, stock exchanges, banks, insurance
(1) With Fraud companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
• Actor is liable as a general partner for debts, damages and provisions of this Code.
liabilities incurred. “Corporation” cannot set up as defense
The provisions of this Title shall primarily govern close corporations:
that corp actually does not exist. Provided, That the provisions of other Titles of this Code shall apply
• Veil will be pierced to make corporators liable. suppletorily except insofar as this Title otherwise provides.

• If corporation sues the other party, it cannot resist obligation


by saying that no corp exist. Jack’s Lecture

(2) Without Fraud CLOSE CORPORATIONS


• Actors are liable as limited partner. This is a new title, made in recognition of the fact that the
overwhelming majority of the corporations are family corps. In many family
• Corporation by estoppel applies to save the contract but corporations here, the set-up is such that the husband is the president, the
juridical entity is then broken down to make actors liable. wife is the treasurer, but it is the wife who is actually running the corp. The
husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp.
Note: Both in bad faith: Corporation by estoppel does not apply. Has a technical meaning in the law. For it to be a close corp., the articles
(Pari Delicto Doctrine, or the contract is recissible) must provide that it cannot have more than 20 stockholders. There should
be restrictions on the transfer of the shares, like usually it will be provided
that if a stockholder wants to sell his share, he must first offer it to the other
(e) Close stockholders. Only if they are not willing to buy can he offer it to an outsider.
Or it may also provide that if no stockholder is willing to buy the shares, then
Sec. 96. Definition and applicability of Title. he must offer it to the corporation before offering to an outsider.
A close corporation, within the meaning of this Code, is one whose The corporation shall not be listed in any stock exchange. The law
articles of incorporation provide that: (1) All the corporation's issued says that the mere fact that a corp. is controlled by another corp. does not
stock of all classes, exclusive of treasury shares, shall be held of make it a close corp. The articles must contain the features mentioned in the
record by not more than a specified number of persons, not law. But corps. Engaged in mining, oil companies, stock exchanges, banks,
exceeding twenty (20); (2) all the issued stock of all classes shall be insurance companies, public utilities, schools, and corps. vested with public
subject to one or more specified restrictions on transfer permitted by interest are not allowed to be close corps. Because they're engaged in lines
this Title; and (3) The corporation shall not list in any stock exchange of business vested with public interest and so they should be subject to
or make any public offering of any of its stock of any class. regulation and close scrutiny. The law says the articles may provide for
Notwithstanding the foregoing, a corporation shall not be deemed a classification of shares and qualifications for owning them. For example, you
close corporation when at least two-thirds (2/3) of its voting stock or have three brothers who form a close corp. So they may provide: a) we will
voting rights is owned or controlled by another corporation which is classify these shares into class a, class b, class c. Only the members of the
not a close corporation within the meaning of this Code. family of the first brother can own class a shares. Only members of 2 nd
brother can own class b shares, and class c shares can be owned only by
members of the 3rd brother; b) we will have nine (9) directors, and 3 will be

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elected by holders of class a shares; c) can provide for a greater quorum or defined in the by-laws.
voting requirements. It can be provided that you will need three fourths (3/4)
majority to approve any action by the board, any action by the stockholder. For institutions organized as stock corporations, the number and term
Why? Because each group would want to be protected for otherwise if the of directors shall be governed by the provisions on stock
two groups combine they can get anything approved, like there would be two corporations. (169a)
thirds. And so the third group would want to be protected; d) the articles may
provide that if it's the stockholders and not the board who will manage the • See page 917 of CLV’s Commercial Law Reviewer (2007).
affairs and that there is no need for formal meetings, if the stockholders will
be the directors, then they will be subject to the same liabilities as directors.

• See page 706-736 of CLV’s textbook or page 909 of CLV’s


(g) Religious: sole and aggregate
Commercial Law Reviewer (2007). Sec. 109. Classes of religious corporations

(f) Educational Religious corporations may be incorporated by one or more persons.


Such corporations may be classified into corporations sole and
Sec. 106. Incorporation religious societies.
Educational corporations shall be governed by special laws and by Religious corporations shall be governed by this Chapter and by the
the general provisions of this Code. (n) general provisions on non-stock corporations insofar as they may be
applicable. (n)
Sec. 107. Pre-requisites to incorporation
Sec. 110. Corporation sole
Except upon favorable recommendation of the Ministry of Education
and Culture, the Securities and Exchange Commission shall not For the purpose of administering and managing, as trustee, the
accept or approve the articles of incorporation and by-laws of any affairs, property and temporalities of any religious denomination, sect
educational institution. (168a) or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such
Sec. 108. Board of trustees
religious denomination, sect or church. (154a)
Trustees of educational institutions organized as non-stock
Sec. 111. Articles of incorporation
corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples In order to become a corporation sole, the chief archbishop, bishop,
of five (5). priest, minister, rabbi or presiding elder of any religious
denomination, sect or church must file with the Securities and
Unless otherwise provided in the articles of incorporation on the by-
Exchange Commission articles of incorporation setting forth the
laws, the board of trustees of incorporated schools, colleges, or other
following:
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number 1. That he is the chief archbishop, bishop, priest,
shall expire every year. Trustees thereafter elected to fill vacancies, minister, rabbi or presiding elder of his religious
occurring before the expiration of a particular term, shall hold office denomination, sect or church and that he desires to
only for the unexpired period. Trustees elected thereafter to fill become a corporation sole;
vacancies caused by expiration of term shall hold office for five (5)
2. That the rules, regulations and discipline of his
years. A majority of the trustees shall constitute a quorum for the
religious denomination, sect or church are not
transaction of business. The powers and authority of trustees shall be
inconsistent with his becoming a corporation sole and

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do not forbid it; Any corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational
3. That as such chief archbishop, bishop, priest,
purposes, and may receive bequests or gifts for such purposes. Such
minister, rabbi or presiding elder, he is charged with the
corporation may sell or mortgage real property held by it by obtaining
administration of the temporalities and the management
an order for that purpose from the Court of First Instance of the
of the affairs, estate and properties of his religious
province where the property is situated upon proof made to the
denomination, sect or church within his territorial
satisfaction of the court that notice of the application for leave to sell
jurisdiction, describing such territorial jurisdiction;
or mortgage has been given by publication or otherwise in such
4. The manner in which any vacancy occurring in the manner and for such time as said court may have directed, and that it
office of chief archbishop, bishop, priest, minister, rabbi is to the interest of the corporation that leave to sell or mortgage
of presiding elder is required to be filled, according to should be granted. The application for leave to sell or mortgage must
the rules, regulations or discipline of the religious be made by petition, duly verified, by the chief archbishop, bishop,
denomination, sect or church to which he belongs; and priest, minister, rabbi or presiding elder acting as corporation sole,
and may be opposed by any member of the religious denomination,
5. The place where the principal office of the
sect or church represented by the corporation sole: Provided, That in
corporation sole is to be established and located, which
cases where the rules, regulations and discipline of the religious
place must be within the Philippines.
denomination, sect or church, religious society or order concerned
The articles of incorporation may include any other provision not represented by such corporation sole regulate the method of
contrary to law for the regulation of the affairs of the corporation. (n) acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations and discipline shall control, and the
Sec. 112. Submission of the articles of incorporation
intervention of the courts shall not be necessary. (159a)
The articles of incorporation must be verified, before filing, by affidavit
Sec. 114. Filling of vacancies
or affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of The successors in office of any chief archbishop, bishop, priest,
the commission, certificate of election or letter of appointment of such minister, rabbi or presiding elder in a corporation sole shall become
chief archbishop, bishop, priest, minister, rabbi or presiding elder, the corporation sole on their accession to office and shall be
duly certified to be correct by any notary public. permitted to transact business as such on the filing with the
From and after the filing with the Securities and Exchange Securities and Exchange Commission of a copy of their commission,
Commission of the said articles of incorporation, verified by affidavit certificate of election, or letters of appointment, duly certified by any
or affirmation, and accompanied by the documents mentioned in the notary public.
preceding paragraph, such chief archbishop, bishop, priest, minister, During any vacancy in the office of chief archbishop, bishop, priest,
rabbi or presiding elder shall become a corporation sole and all minister, rabbi or presiding elder of any religious denomination, sect
temporalities, estate and properties of the religious denomination, or church incorporated as a corporation sole, the person or persons
sect or church theretofore administered or managed by him as such authorized and empowered by the rules, regulations or discipline of
chief archbishop, bishop, priest, minister, rabbi or presiding elder the religious denomination, sect or church represented by the
shall be held in trust by him as a corporation sole, for the use, corporation sole to administer the temporalities and manage the
purpose, behalf and sole benefit of his religious denomination, sect or affairs, estate and properties of the corporation sole during the
church, including hospitals, schools, colleges, orphan asylums, vacancy shall exercise all the powers and authority of the corporation
parsonages and cemeteries thereof. (n) sole during such vacancy. (158a)
Sec. 113. Acquisition and alienation of property Sec. 115. Dissolution

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A corporation sole may be dissolved and its affairs settled voluntarily 3. That the incorporation of the religious society or religious order, or
by submitting to the Securities and Exchange Commission a verified diocese, synod, or district organization desiring to incorporate is not
declaration of dissolution. forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
The declaration of dissolution shall set forth:
of which it forms a part;
1. The name of the corporation;
4. That the religious society or religious order, or diocese, synod, or
2. The reason for dissolution and winding up; district organization desires to incorporate for the administration of its
affairs, properties and estate;
3. The authorization for the dissolution of the
corporation by the particular religious denomination, 5. The place where the principal office of the corporation is to be
sect or church; established and located, which place must be within the Philippines;
and
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the
corporation. 6. The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or
Upon approval of such declaration of dissolution by the Securities
district organization to serve for the first year or such other period as
and Exchange Commission, the corporation shall cease to carry on
may be prescribed by the laws of the religious society or religious
its operations except for the purpose of winding up its affairs. (n)
order, or of the diocese, synod, or district organization, the board of
Sec. 116. Religious societies trustees to be not less than five (5) nor more than fifteen (15). (160a)
Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church, • See page 918 of CLV’ Commercial Law Reviewer (2007).
unless forbidden by the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an (h) Special charter
affirmative vote at a meeting called for the purpose of at least two-
thirds (2/3) of its membership, incorporate for the administration of its Sec. 4. Corporations created by special laws or charters
temporalities or for the management of its affairs, properties and Corporations created by special laws or charters shall be governed
estate by filing with the Securities and Exchange Commission, primarily by the provisions of the special law or charter creating them
articles of incorporation verified by the affidavit of the presiding elder, or applicable to them, supplemented by the provisions of this Code,
secretary, or clerk or other member of such religious society or insofar as they are applicable.
religious order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the following: (i) Foreign
1. That the religious society or religious order, or diocese, synod, or
Sec. 123. Definition and rights of foreign corporations
district organization is a religious organization of a religious
denomination, sect or church; For the purposes of this Code, a foreign corporation is one formed,
2. That at least two-thirds (2/3) of its membership have given their organized or existing under any laws other than those of the
written consent or have voted to incorporate, at a duly convened Philippines and whose laws allow Filipino citizens and corporations to
meeting of the body; do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a

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license to transact business in this country in accordance with this artificial bodies of its own creation, are in the same category
Code and a certificate of authority from the appropriate government as ordinary persons. Shipside Inc. v. Court of Appeals, 352
agency. (n) SCRA 334 (2001).
• Although Boy Scouts of the Philippines does not receive any
• See page 799 of CLV’s textbook or page 946 of CLV’s monetary or financial subsidy from the Government, and its
Commercial Law Reviewer. funds and assets are not considered government in nature
(j) GOCC and not subject to audit by the COA, the fact that it received a
special charter from the government, that its governing board
• Government’s majority shares does not make an entity a are appointed by the Government, and that its purpose are of
public corporation. National Coal Co., v. Collector of Internal public character, for they pertain to the educational, civic and
Revenue, 46 Phil. 583 (1924). social development of the youth which constitute a very
• A corporation is created by operation of law under the substantial and important part of the nation, it is not a public
Corporation Code while a government corporation is normally corporation in the same sense that municipal corporation or
created by special law referred to often as a charter. Bliss local governments are public corporation since its does not
Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 govern a portion of the state, but it also does not have
(1994). proprietary functions in the same sense that the functions or
activities of government-owned or controlled corporations, is
• The test to determine whether a corporation is government may still be considered as such, or under the 1987
owned or controlled, or private in nature is simple. Is it Administrative Code as an instrumentality of the Government,
created by its own charter for the exercise of a public and it employees are subject to the Civil Service Law. Boy
function, or by incorporation under the general corporation Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
law? Those with special charters are government
corporations subject to its provisions, and its employees are • But being a GOCC makes it liable for laws and provisions
under the jurisdiction of the Civil Service Commission, and applicable to the Government or its entities and subject to the
are compulsory members of the GSIS. Camparedondo v. control of the Government. Cervantes v. Auditor General, 91
NLRC, 312 SCRA 47 (1999) Phil. 359 (1952).
• While public benefit and public welfare may be attributable to • Beyond cavil, a GOCC has a personality of its own, distinct
the operation of the Bases Conversion and Development and separate from that of the government, and the
Authority (BCDA), yet it is certain that the functions it intervention in a transaction of the Office of the President
performs are basically proprietary in nature—the promotion of through the Executive Secretary does not change the
economic and social development of Central Luzon, independent existence of a government entity as it deals with
particularly, and the country’s goal for enhancement. another government entity. PUP v. Court of Appeals, 368
Therefore, the rule that prescription does not run against the SCRA 691 (2001).
State will not apply to BCDA, it being said that when title of • The doctrine that employees of GOCCs, whether created by
the Republic has been divested, its grantees, although special law or formed as subsidiaries under the general

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corporation law are governed by the Civil Service Law and establish such offices, agencies, subsidiaries, or branches anywhere
not by the Labor Code, has been supplanted by the 1987 in the Philippines as its operations would require and its Board of
Constitution. The present doctrine in determining whether a Directors would determine.
GOCC is subject to the Civil Service Law is the manner of its Section 26. Powers over Homeowners Associations. The powers,
creation, such that government corporations created by authorities and responsibilities vested in the Corporation with respect
special charter are subject the Civil Service Law, while those to homeowners association under Republic Act No. 580, as amended
incorporated under the general corporation law are governed by Executive Order No. 535 is hereby transferred to the Housing and
by the Labor Code. PNOC-Energy Development Corp. v. Land Use Regulatory Board (HLURB).
NLRC, 201 SCRA 487 (1991); Davao City Water District v.
Subject to existing laws, the HLURB is hereby authorized to create
Civil Service Commission, 201 SCRA 593 (1991).
additional positions and augment its present budget as may be
• Section 31 of Corporation Code (Liability of Directors and needed for the operation and maintenance of the newly created unit
Officers) is applicable to corporations which have been or office as a consequence of the transfer of functions and powers.
organized by special charters since Sec. 4 of Corporation Pending the approval of the HLURB Revised Staffing Organizational
Code renders the provisions supplementarily applicable to all Plan and release of budgetary allocations thereof, the Corporation
corporations, including those with special or individual shall extend technical, operational, and administrative assistance to
charters, such as cooperatives organized under P.D. 269, so the HLURB as may be mutually deemed necessary to ensure smooth
long as those provisions are not inconsistent with such turnover of functions. However, such assistance shall not extend
charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 beyond a period of 1 year from the date of effectivity of this Act.
SCRA 55 (1992).
• Water districts can validly exists as corporate entities under • Registration is made before the HLURB.
PD 198, and provided they are government-owned or
controlled, and their board of directors and other personnel 1.6 Cases
are government employees subject to civil service laws and Lozano v. delos Angeles and Anda (June 19, 1997)
anti-graft laws. Feliciano v. Commission on Audit, 419 SCRA • The doctrine of corporation by estoppel cannot override
363 (2004). jurisdictional requirements- jurisdiction is fixed by law and
cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, and neither
(k) Homeowner’s Associations (Section 4 and 26 of can it be conferred by the acquiescence of the court.
RA 8763, March 7, 2000) • Corporation by estoppel is founded on principles of equity
Republic Act No. 8763 (March 7, 2000) and is designed to prevent injustice and unfairness, and
Section 4. Home Guarantee Corporation. The Home Insurance and where there is no third person involved and the conflict arises
Guarantee Corporation is hereby renamed as the Home Guarantee only among those assuming the form of a corporation, who
Corporation, hereinafter refereed to as the Corporation, which shall know that it has not been registered, there is no corporation
have its principal office in Metropolitan Manila and shall exist for a by estoppel.
period of 50 years from December 15, 2000. The Corporation may

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International Express Travel v. CA (October 19, 2000)


(1) The Federation has no juridical personality. Indeed, R.A.
3135 and P.D. No. 604 recognized the juridical existence
of national sports association. This may even be gleaned
from the powers and functions granted to these
association. However, these laws only provided the
manner by which these entities may acquire juridical
personality. The corporate status of these associations
does not automatically take place. These laws actually
requires that before an entity be considered as a
national sports association such must recognized by the
accrediting organization (i.e. PAAF). This fact of
recognition, however the President of the Federation
failed to substantiate.
(2) The President must be held liable in accordance with the
principle that any person acting or purporting to act on
behalf of a corporation which has no valid existence
assumes such privileges and obligations and become
personally liable for contracts entered into or for other
acts performed as such agent.
(3) The doctrine of corporate estoppel is not applicable. It is
only applied to a third party when he tries to escape
liability on a contract from which he has benefited. In the
case at bar, the petitioner is not trying to escape liability
but rather is the one claiming it.

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2. FORMATION AND ORGANIZATION OF must be able to determine who is the promoter. He must be the one
who takes initiative on the founding and organization of the business
venture which eventually ends up as the corporation being organized.
CORPORATIONS Q: At the promoter’s stage there is no juridical personality until SEC
(Page 617 of CLV’s Commercial Law Reviewer)
issues the certificate of Incorporation. Until the certificate is issued, the
stage of the de facto corporation has not yet been reached. Prior to the
2.1 Who may form a corporation? de facto corporation stage, what then is the status of the contract
entered into by a promoter for and in behalf of the person or agent who
Sec. 10. Number and qualifications of incorporators had undertaken the transaction?
Any number of natural persons not less than five (5) but not more A: Unenforceable. It is not binding upon the corporation because it has
than fifteen (15), all of legal age and a majority of whom are residents not given consent to the authority of the person or agent who had
undertaken the transaction.
of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of a stock corporation Q: How can ratification be done?
must own or be a subscriber to at least one (1) share of the capital A: Ratification can be done in two ways:
stock of the corporation. (1)express ratification- a mere board resolution making the corporation
liable by accepting the contract and
(2) implied ratification- by accepting of benefits.
2.2 Steps in formation of a corporation Q: What is the effect of promoter’s contract on the corp and other
contracting parties?
(a) Promotion A: As to the corp, it is voidable, as to other contracting parties, it is
valid and enforceable
CLV Class Notes

PROMOTER’S CONTRACT CORP BY ESTOPPELDE FACTO or Catindig: Promotion is not a necessary stage!
DE JUREDISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the Nature of Pre-incorporation Agreements
essential ingredient of such doctrine?
A: Where there is a representation that a corporation exists when in fact • Under Sec 60 any contract for the acquisition of unissued
there is none and at least one party thought there was a corporation. stock in a corporation still to be formed shall be deemed a
subscription within the meaning of the Corporation Code.
Who are promoters?
• Under Sec 61, a subscription for shares of stock of a
• “Promoter” is a person who, acting alone or with others,
corporation still to be formed shall be irrevocable for a period
takes initiative in founding and organizing the business or
of 6 mos. from the date of subscription, unless all of the other
enterprise of the issuer and receives consideration therefor.
subscriber consent to the revocation, or unless the
(Sec. 3.10, Securities Regulation Code [R.A. 8799])
incorporation of said corporation fails to materialize within
CLV Class Notes
Q: Differentiate a promoter from an incorporator. said period or within a longer period as may be stipulated in
A: A promoter begins or initiates the formation of a corporation while the contract of subscription. However, no pre-incorporation
an incorporator is one of the initial members of the SH’s subscription may be revoked after the submission of the
articles of incorporation to SEC.
CLV: The definition of promoter is important to determine the liability
for promoter’s contract. Before you can make a promoter liable, you

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• Secs 60 and 61 have effectively adopted in our jurisdiction a (a) Corporate Name
fused version of both “contract theory” and the “offer theory” (b) Primary Purpose
in defining the nature of pre-incorporation subscription (c) Secondary Purpose or purposes
agreements. (d) Principal Office
(e) Term
o Offer Theory- construes subscription agreement as only (f) Incorporators
continuing offers to proposed corporations, which offer (g) Incorporating directors
does not ripen into a contract until accepted by the (h) Capital
corporation when organized. The obvious result of the (i) Classification of shares
offer theory is that it allows withdrawal of subscriber at (j) Subscribers
least before the corporation comes into existence and (k) Treasurer-in-trust
accepts the offer. (l) Special provisions
o Contract Theory- A subscription agreement among
(a) Corporate Name
several persons to take shares in a proposed corporation
Sec. 18. Corporate name
becomes a binding contract and is irrevocable from time
of subscription, unless cancelled by all parties before No corporate name may be allowed by the Securities and Exchange
acceptance by the corporation. Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other
• Subscription agreements are “special contracts” in the sense name already protected by law or is patently deceptive, confusing or
that they go beyond what we would term as ordinary contrary to existing laws. When a change in the corporate name is
contracts. Although subscription agreements are contracts approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
between the subscriber and the corporation, they are at the
same time deemed to be contracts among the stockholders of
the corporation. SEC MEMO CIRCULAR NO. 14-2000
Theories on Liabilities for Promoter’s Contracts To: All Concerned
• Without ratification by a corporation after its due
Subject: Revised Guidelines in the Approval of Corporate and Partnership
incorporation, a contract entered into in behalf of a Names
corporation yet to be organized or still in the process of
incorporation is void as against the corporation (Cagayan In implementing Section 18 of the Corporation Code of the Philippines (BP
Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 68), the following revised guidelines in the approval of corporate and
partnership names are hereby adopted for the information and guidelines of all
[1937]) concerned:

1. The corporation name shall contain the word “Corporation” or its


(b) Drafting of Articles of Incorporation abbreviation “Corp.” or “Incorporated” or “Inc.”

What should be contained in the Articles of Incorporation? The partnership name shall contain the word “Company” or “Co.”.
For limited partnerships, the word “Limited” or “Ltd.” shall be

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included. In case of professional partnerships, the word “Company” the different words in the proposed name, unless there is consent
need not be used. from the registered firm or this firm is one of the stockholders of
partners of the entity to be registered
2. Terms descriptive of a business in the name shall be indicative of
the primary purpose. If there are two (2) descriptive terms, the first 11. The name of an internationally known foreign corporation, or one
shall refer to the primary purpose and the second shall refer to one similar to it may not be used by a domestic corporation without the
of the secondary purposes. consent of the former

3. The name shall not be identical, misleading or confusingly similar to 12. The term “Philippines” when used as part of the name of a
one already registered by another corporation or partnership with subsidiary corporation shall be in parenthesis: i.e. “(Philippines)” or
the Commission or a sole proprietorship registered with the “(Phil.)”
Department of Trade and Industry.
13. The following names shall not be used as part of a corporate or
If the proposed name is similar to the name of a registered firm, the partnership name:
proposed name must contain at least one distinctive word different
from the name of the company already registered. a. As provided by special laws:

4. Business or trade name of any firm which is different from its i. “Finance”, “Financing”, of “Finance and Investment”
corporate or partnership name shall be indicated in the articles of by corporations or partnerships not engaged in the
incorporation or partnership of the said firm financing business (R.A. No. 5980, as amended)
ii. “Engineer”, “Engineering”, or “Architects” as part of
5. Trade name or trademark duly registered with the Intellectual the corporate name (R.A. No. 546 and R.A. No.
Property Office cannot be used as part of a corporate or partnership 1582)
name without the consent of the owner of such trademark or trade iii. “Bank”, “Banking”, “Banker”, “Building and Loan
name Association”, “Trust Corporation”, “Trust Company”,
or words of similar import by corporations or
6. If the name or surname of a person is used as part of a corporate associations not engaged in a banking business
or partnership name, the consent of the said person or his heirs (R.A. No. 337, as amended)
must be submitted, except if that person is a stockholder, member, iv. “United Nations” in its full or abbreviated form cannot
or partner of a declared national hero. If such person cannot be be part of a corporate or partnership name (R.A. No.
identified or is non-existent, an explanation for the use of such 226
name shall be required v. “Bonded” for corporations or partnerships with
unlicensed warehouse (R.A. No. 245)
7. The meaning of the initials in the name shall be disclosed in writing
by the registrant b. As a matter or policy:

8. The name containing a term descriptive of a business different from i. “Investments” by corporations or partnerships not
the business or a registered company whose name also bears organized as investment house company or holding
similar terms(s) used by the former may be allowed company

9. The name should not be patently deceptive, confusing, or contrary ii. “National” by all stock corporations and partnerships
to existing laws
iii. “Asean”, “Calabarzon”, and “Philippines 2000”
10. The name which contains a word identical to a word in a registered
name shall not be allowed if such word is coined or has already 14. The name of a dissolved firm shall not be allowed to be used by
been appropriated by a registered firm, regardless of the number of other firms within three (3) years after the approval of the dissolution

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

of the corporation by the Commission, unless allowed by the last corporations. Industrial Refractories Corp. v. Court of
stockholders representing at least a majority of the outstanding Appeals, 390 SCRA 252 (2002); Lyceum of the Philippines v.
capital stock of the dissolved firm
Court of Appeals, 219 SCRA 610, 615 (1993).
15. Registrant corporations or partnerships shall submit al letter of • A corporation has no right to intervene in a suit using a
undertaking to change their corporate or partnership name in case
another person of firm has acquired a prior right to the use of the
name, not even its acronym, other than its registered name,
said name or the name is deceptively or confusingly similar to the as the law requires and not another name which it had not
one already registered, unless his undertaking is already included registered. Laureano Investment and Dev. Corp. v. Court of
as one of the provisions of the articles of incorporation or Appeals, 272 SCRA 253 (1997).
partnership of the registrant
• There would be no denial of due process when a corporation
These guidelines hall take effect fifteen (15) days after publication in a is sued and judgment is rendered against it under its
newspaper of general circulation unregistered trade name, holding that “[a] corporation may be
sued under the name by which it makes itself known to its
• See page 293 of CLV’s book for Guidelines in Corporate workers.” Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279
Name (SEC Memorandum No. 14, series of 2000.) SCRA 312 (1997).
• Parties organizing a corporation must choose a name at • A corporation may change its name by the amendment of its
their peril; and the use of a name similar to one adopted by articles of incorporation, but the same is not effective until
another corporation, whether a business or a nonprofit approved by the SEC. Philippine First Insurance Co. v.
organization, if misleading or likely to injure the exercise of its Hartigan, 34 SCRA 252 (1970).
corporate functions, regardless of intent, may be prevented
• A change in the corporate name does not make a new
by the corporation having a prior right. Ang Mga Kaanib sa
corporation, and has no effect on the identity of the
Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay
corporation, or on its property, rights, or liabilities. Republic
Dristo Jesus, 372 SCRA 171 (2001).
Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).
• Similarity in corporate names between two corporations
would cause confusion to the public especially when the
Jack’s Lecture
purposes stated in their charter are also the same type of
business. Universal Mills Corp. v. Universal Textile Mills Inc., CORPORATE NAME
78 SCRA 62 (1977). No corporation name may be allowed if it is identical or
deceptively or confusingly similar to that of any existing corp. And
• Section 18 of Corporation Code expressly prohibits the use that the way the jurisprudence has developed, the name will not
of a corporate name which is “identical or deceptively or be allowed if it uses a dominant word in the name of another
confusingly similar to that of any existing corporation or to corporation, and they are engaged in the same line of business.
any other name already protected by law or is patently Well, you have, for example, the case of UNIVERSAL TEXTILE
deceptive, confusing or contrary to existing laws.” The policy MILLS and somebody formed another corporation: UNIVERSAL
MILLS. The dominant word is universal, and they both engage in
behind the foregoing prohibition is to avoid fraud upon the the same line of business.
public that will occasion to deal with the entity concerned, the
You know, the Telephone Directory is not owned by PLDT. That is
evasion of legal obligations and duties, and the reduction of prepared by the General Telephone Directory Corporation. PLDT
difficulties of administration and supervision over is the one which merely collects the payment from the advertisers

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Service, Sacrifice, Excellence
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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

in the yellow pages. But they don't own/publish that directory. Warehouse Act says, if you are not a bonded warehouse, you
Now, there was this bunch of swindlers who formed a corporation: cannot use that as part of your name. The SEC issued a memo
GENERAL DIRECTORY. They would start contacting advertisers circular in 1987, it was updated 2002, which says, you cannot use
in the yellow pages: "Ay, binago na ho 'yung set-up. Ngayon ho, certain name as part of your… like engineering, architecture… as
we will collect the payment directly. So, we will send our part of the corporate name because you cannot practice a
collector…" You file a crim case against them for estafa, and profession. Or, it says there you cannot use calabarzon or
they'll say: "NO! We are printing or own directory." And they will national as part of your corporate name. Also you cannot use
show it… and it is a thin directory. We filed a complaint with the Philippines 2000 as part of your corporate name.
SEC and the SEC ordered them to change their name because it Or any which consists of similar words… 'coz you know
is confusingly similar with General Telephone Directory. the records are computerized, when you apply, they will check.
There was this Philippine corporation that wanted the name And the one who verifies will list down all the names which are
"Standard Phillips Corporation". Court said: that is part of the similar to what you have. Now, you could be allowed to use that if
name of Phillips Electrical Lamps, Phillips export. Phillips is the you add your line of business, and you add another word which
dominant word… and both of them manufacture electrical signifies that you are engaged in a different line of business. Like
appliances. for example, you have a Golden Pawnshop Incorporated, and you
have somebody running a restaurant… so, Golden Restaurants
On the other hand, the Court has said that Lyceum of the Phils.
Incorporated. The SEC will allow that.
cannot prevent other schools from using LYCEUM because
lyceum is a generic name. It means a school. Like UNIVERSITY,
UE cannot prevent others from using university as part of their (b) Primary Purpose
name because it's a generic name. So Lyceum of the Phils. Sec. 14. Contents of the articles of incorporation
cannot have an exclusive right to use lyceum because it is a
generic term for schools. All corporations organized under this code shall file with the
The same way Ateneo is a spanish word which means school. Securities and Exchange Commission articles of incorporation in any
But I think what has happened is the reverse… it is a generic term of the official languages duly signed and acknowledged by all of the
that has acquired secondary meaning. You can prevent another incorporators, containing substantially the following matters, except
school from using that. as otherwise prescribed by this Code or by special law:
Well, you have this case of Carlos Valdes, the accountant, a very 1. The name of the corporation;
controversial character (Jack's side-story omitted ). His son left
his company and formed the VALDES CONSULTANTS. Valdes 2. The specific purpose or purposes for which the
objected to that, because it was a confusingly similar name. But corporation is being incorporated. Where a corporation
the SEC said: "Eh, magkaiba naman kayo ng line of business… has more than one stated purpose, the articles of
you are in accounting, your son set up a consultancy firm. And incorporation shall state which is the primary purpose
your clients are sophisticated big men. They know that the two
and which is/are he secondary purpose or purposes:
are different." So the SEC allowed that.
Provided, That a non-stock corporation may not include
Now, the existence of a corporation begins at the time a purpose which would change or contradict its nature
when you get your certification, issued by the SEC. That is when as such;
existence begins.
There are many limitations found in the law. As for
example, you are not a bank, you cannot use bank as part of your
name; you are not a financing company, you cannot use
financing.
And the law prohibits the use of United Nations as part
of the business name of any company. The general Bonded

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FRATERNAL ORDER OF UTOPIA
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SCHOOL OF LAW
ARIS S. MANGUERA

• The best proof of the purpose of a corporation is its articles articles of incorporation may be extended for periods not exceeding
of incorporation and by-laws. The articles of incorporation fifty (50) years in any single instance by an amendment of the articles
must state the primary and secondary purposes of the of incorporation, in accordance with this Code; Provided, That no
corporation, while the by-laws outline the administrative extension can be made earlier than five (5) years prior to the original
organization of the corporation, which, in turn, is supposed to or subsequent expiry date(s) unless there are justifiable reasons for
an earlier extension as may be determined by the Securities and
insure or facilitate the accomplishment of said purpose.”
Exchange Commission.
Therefore, the Court brushed aside the contention that the
corporations were organized to illegally avoid the provisions • Not exceeding 50 years
on land reform and to avoid the payment of estate taxes, as
being prohibited collateral attack. Gala v. Ellice Agro- • No extension of term can be effected once dissolution stage
Industrial Corp., 418 SCRA 431 (2003). has been reached, as it constitutes new business. Alhambra
Cigar v. SEC, 24 SCRA 269 (1968).
(c) Secondary Purpose UP Class Notes
Shall exist for a period not exceeding 50 years from the date of
(d) Principal Office incorporation; may be extended for period not exceeding 50 years by
Sec. 14. Contents of the articles of incorporation an indefinite number of amendments (meaning that the corporation
can virtually live forever); no extension can be made earlier than 5
xxx The place where the principal office of the corporation is to be
years before the expiry date unless there are justifiable reasons for the
located, which must be within the Philippines; xxx earlier extension

• Place of residence of the corporation is the place of its (f) Incorporators


principal office. Clavecilla Radio System v. Antillon, 19 SCRA Sec. 10. Number and qualifications of incorporators.
379 (1967)
Any number of natural persons not less than five (5) but not more
• The residence of its president is not the residence of the than fifteen (15), all of legal age and a majority of whom are residents
corporation because a corporation has a personality separate of the Philippines, may form a private corporation for any lawful
and distinct from that of its officers and stockholders. Sy v. purpose or purposes. Each of the incorporators of a stock corporation
Tyson Enterprises, Inc., 119 SCRA 367 (1982). must own or be a subscriber to at least one (1) share of the capital
UP Class Notes stock of the corporation.
Must be within RP so that service of summons may be easily made;
establishes the residence of the corporation which is important in • Therefore, a member can no longer exist as incorporator in a
determining the venue of actions by or against the corporation (SEC stock corporation.
Circular No. 3 dated February 16, 2006)
(g) Incorporating Directors
(e) Term Sec. 14. Contents of the articles of incorporation
Sec. 11. Corporate term
xxx
A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said 7. The names, nationalities and residences of persons who shall act
period is extended. The corporate term as originally stated in the as directors or trustees until the first regular directors or trustees are

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

the subscription must be paid. You can form a subsidiary where 5


duly elected and qualified in accordance with this Code; individuals will subscribe to 1 share each to qualify for the board
xxx —you must own at least 1 share to be an incorporator, the rest of
the shares will be subscribed by the holding corporation and that
will satisfy the 25-25 rule, because that holding corporation paid
for the subscription. In computing 25-25 rule, subscriptions made
(h) Capital by a corporation will be included. Corporations can be
subscribers, only that they can not be incorporators.
(i) Authorized (Sec. 12) (iii) Paid-up (Sec. 13)
(ii) Subscribed (Sec. 13) (iv) Paid-in surplus
(iii) Paid-up (Sec. 13) • Paid in excess of par value
(iv) Paid-in surplus (v) Outstanding
(v) Outstanding • Owned by parties other than the corporation itself
(vi) Issued (vi) Issued
• Legally, it is synonymous with outstanding shares.
(i) Authorized
Sec. 12. Minimum capital stock required of stock corporations
(i) Classification of Shares
Stock corporations incorporated under this Code shall not be required
to have any minimum authorized capital stock except as otherwise
(i) Common (Sec. 6)
specifically provided for by special law, and subject to the provisions
of the following section. (ii) Preferred (Sec. 6)
(iii) Par Value and No par value shares (Sec. 6)
(ii) Subscribed (iv) Founder’s shares (Sec. 7)
• Contractually enforceable. (v) Redeemable (Sec. 8)
Sec. 13. Amount of capital stock to be subscribed and paid for the (vi) Treasury (Sec. 9)
purposes of incorporation
(vii) Convertible
At least twenty-five percent (25%) of the authorized capital stock as (viii) Participating
stated in the articles of incorporation must be subscribed at the time Sec. 6. Classification of shares
of incorporation, and at least twenty-five (25%) per cent of the total
subscription must be paid upon subscription, the balance to be The shares of stock of stock corporations may be divided into classes
payable on a date or dates fixed in the contract of subscription or series of shares, or both, any of which classes or series of shares
without need of call, or in the absence of a fixed date or dates, upon may have such rights, privileges or restrictions as may be stated in
call for payment by the board of directors: Provided, however, That in the articles of incorporation: Provided, That no share may be
no case shall the paid-up capital be less than five Thousand deprived of voting rights except those classified and issued as
(P5,000.00) pesos. "preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, That there shall always be a class or series
Jack’s Lecture of shares which have complete voting rights. Any or all of the shares
25-25 RULE or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided,
When you form a corporation, at least 25% of the
authorized capital stock must be subscribed and at least 25% of however, That banks, trust companies, insurance companies, public

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ATENEO DE MANILA UNIVERSITY
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ARIS S. MANGUERA

utilities, and building and loan associations shall not be permitted to 6. Merger or consolidation of the corporation with another
issue no-par value shares of stock. corporation or other corporations;
Preferred shares of stock issued by any corporation may be given 7. Investment of corporate funds in another corporation or
preference in the distribution of the assets of the corporation in case business in accordance with this Code; and
of liquidation and in the distribution of dividends, or such other
8. Dissolution of the corporation.
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That Except as provided in the immediately preceding paragraph, the vote
preferred shares of stock may be issued only with a stated par value. necessary to approve a particular corporate act as provided in this
The board of directors, where authorized in the articles of Code shall be deemed to refer only to stocks with voting rights.
incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions (i) Common (Sec. 6)
shall be effective upon the filing of a certificate thereof with the • One which entitles the holder thereof to a pro rata
Securities and Exchange Commission. division of the profits, if there are any, and in its assets
Shares of capital stock issued without par value shall be deemed fully upon dissolution, without any preference or advantage in
paid and non-assessable and the holder of such shares shall not be that respect over other stockholder or class of
liable to the corporation or to its creditors in respect thereto: stockholders except preferred stockholders. (Page 84 of
Provided; That shares without par value may not be issued for a De Leon (2006)
consideration less than the value of five (P5.00) pesos per share: (ii) Preferred (Sec. 6)
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and • One with a stated par value which entitles the holder
shall not be available for distribution as dividends. to certain preferences over the holders of common
stock. Page 84 of De Leon (2006)
A corporation may, furthermore, classify its shares for the purpose of UP Class Notes
insuring compliance with constitutional or legal requirements. Shares that carry a preferential claim either to dividend or assets but
Except as otherwise provided in the articles of incorporation and usually carries no voting rights; only shares that can be deprived of
voting rights
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Jack’s Lecture
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall PREFFERED SHARES
nevertheless be entitled to vote on the following matters: Preferences given to preferred shares should not
violate the law. You can not provide that holder of preferred
1. Amendment of the articles of incorporation; shares will be paid ahead of the creditors of the corporation, and
2. Adoption and amendment of by-laws; you can not issue preferred shares with no par value shares. It
must be noted that preferred shares must have par value. The
3. Sale, lease, exchange, mortgage, pledge or other disposition preferred shares may be given preference in the distribution of
of all or substantially all of the corporate property; dividends. If the profits are not enough to give everybody
dividends, the holders of preferred shares get a first crack before
4. Incurring, creating or increasing bonded indebtedness; the holders of the common shares get anything. Or they may
have preference in the distribution of the assets in case of
5. Increase or decrease of capital stock;
liquidation.

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SCHOOL OF LAW
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P10,000.00 each. So pwedeng magbago-bago ang stated value.


And those shares would be equal irrespective of the difference in
NO PAR VALUE SHARES
the stated value. So, if you hold a stockholder's meeting, the one
There are limitations on the power to classify shares of whose no par value share with stated value of P10,000 will have
stocks. Banks, trust companies, insurance companies, public one(1) vote, same as the one who has a stated value of P5.00. If
utilities, building and loan associations are not allowed to issue no the corporation declares a dividend and says, `we will pay
par value shares. P100.00 per share---the one with stated value of P10,000 will get
When a corporation has no par value shares, no P100, and the one with P5.00 will get the same. They are all
amount will be mentioned. Unlike corporations with par value equal irrespective of the stated value. (jack said this is useful for
shares, for ex., the Authorized Capital Stock (ACS) of the estate planning. Here's a father, he forms a corporation where his
corporation shall be P1M consisting of 10,000 shares with a par children will subscribe to no par value with stated value of P5
value of P100 each, if you have a corporation with no par value each, after that, he transfers all the properties to the corporation -
shares, it will simply be, the ACS of the corporation consists of the children who subscribed with a stated value of P5 each, they
10,000 no par value shares---no amount is mentioned. That's probably own P20,000 each with a stated value of P5. Then , the
why these banks, trust companies, etc. are not allowed to have no father would transfer his properties there and get - say, 10,000
par value shares because these are enterprises which are shares with a stated value of P10,000 each. Suppose you now
required by law to have a minimum paid-up capital - so that you dissolve the corporation and distribute the properties by way of
can easily see right away - has it met the minimum paid-up liquidating dividends. The children will get the bulk of the
capital, because if its shares have no par value - you cannot see if properties. You could keep the properties there. This is the way
it has satisfied the required minimum paid-up capital. the father could dilute his transfer of properties.)
(iii) Par Value and No par value shares (Sec. 6) (iv) Founder’s shares (Sec. 7)
• Par value share is one with a specific money value fixed Sec. 7. Founders' shares
in the articles of incorporation and appearing in the Founders' shares classified as such in the articles of incorporation
certificate stock. may be given certain rights and privileges not enjoyed by the owners
• No par value share is one without any stated value of other stocks, provided that where the exclusive right to vote and be
appearing on the face of the certificate of stock. In other voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the
words, it is a stock which does not state how much
Securities and Exchange Commission. The five-year period shall
money it represents. commence from the date of the aforesaid approval by the Securities
Jack’s Lecture and Exchange Commission.
STATED VALUE (NO PAR VALUE SHARE)
Jack’s Lecture
No par value shares must also have a stated value.
When you form a corporation with no par value shares, the FOUNDER'S SHARES
articles of incorporation states, the authorized capital stock shall They may be given certain rights not enjoyed by the
consist of, for example, 10,000 no par value shares. Those owner of other stocks but if they are given the exclusive right to
shares will also be given a stated value, so the director says, `ok, vote, that will be valid for 5 years only. Like this Baguio Country
the stated value we will issue initially upon incorporation, will be Club, they used to have only 100 shares. They said we should
P5.00. We will have 3,000 shares and that will be subscribed with broaden our membership in order to raise more money to improve
a stated value of P5.00. Now, the business was good, they are the facilities and to expand. The articles were amended and
raking in the money, so the director decided to declare a stock those 100 shares were converted to founder's shares. They
dividend---`we will have a stock dividend with a stated value of created 2,000 common shares which were then sold to the public.
P300.00 each. Business was again good---the director again But this was the scheme: Each owner of 1 founder share
declared stock dividend, this time with a stated value of subscribed to 20 shares, 20 common shares at par value, and

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FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

then he turned around and sold the 5 shares at P60,000 each. to be stated on the certificate o stock. Upon maturity of
The price was computed in such a way that what you will get from redeemable shares, they should be paid by the corporation even
selling 5 shares would be enough to pay for the 20 shares that if the latter has no unrestricted retained earnings.
you have subscribed. So, at the end of exercise, you will have 15
shares without shelling out any money because the price you will
• Redeemable or callable shares, usually preferred, which by
get from selling 5 shares will cover everything. These founder's their terms are redeemable at a fixed date or at the option of
shares, for 5 years, they have exclusive voting rights. After 5 either the issuing corporation or the stockholder or both at a
years, everybody has the same rights. certain redemption price.
• Founders’ shares have been defined as “shares issued to
the organizers and promoters of a corporation in Catindig Class Notes
consideration of some supposed right or property. Such Q: Pedro needs 1M. Juan has 1M. Juan wants to invest with
shares usually share in the profits only after a certain conditions.(a) 5 year period (b) Dividends 10% annually
percentage has been paid upon the common stock, but are What do you do?
often given special privileges over other stocks as to voting A:
(a) Issue redeemable shares
and as to division of profits in excess of a minimum dividend (b) Provide that it will be given at a rate 10% per annum
on the common stock.
UP Class Notes Q: What if Juan wish to be a holder of common stock:
Shares given to the original incorporators; may be given certain rights A: Give him with convertability feature.
and privileges not enjoyed by owners of other classes of shares; Tip: Always indicate conversion ratio.
where the exclusive right to vote and be voted for in the election of
directors is granted, such right to vote shall be for a limited period not Q: What are the special advantages of redeemable shares?
exceeding 5 years subject to the SEC approval A:
(1) Redeemability;
(2)They should be paid by the corporation even if there is no
(v) Redeemable (Sec. 8) unrestricted retained earnings;
Sec. 8. Redeemable shares (3) If the corporation is not liquid, it can borrow for the purpose.
Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be (vi) Treasury (Sec. 9)
purchased or taken up by the corporation upon the expiration of a Sec. 9. Treasury shares
fixed period, regardless of the existence of unrestricted retained Treasury shares are shares of stock which have been issued and
earnings in the books of the corporation, and upon such other terms fully paid for, but subsequently reacquired by the issuing corporation
and conditions as may be stated in the articles of incorporation, which by purchase, redemption, donation or through some other lawful
terms and conditions must also be stated in the certificate of stock means. Such shares may again be disposed of for a reasonable price
representing said shares. fixed by the board of directors.
Jack’s Lecture • Treasury shares are share which have been lawfully issued
by the corporation and fully paid for and later reacquired by
REDEEMABLE SHARES
either purchase, redemption, donation, forfeiture and other
Redeemable shares may be issued by the lawful means.
corporation when it is expressly provided in the articles of
incorporation. Terms and conditions affecting redeemable shares
are required to be provided for in the articles of incorporation and Jack’s Lecture

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SCHOOL OF LAW
ARIS S. MANGUERA

TREASURY SHARES include stock dividends that may be declared. So these shares of
Reese which were acquired by the corporation had these 2
Then you have these treasury shares. These are
features: they could vote and they could receive stock dividends.
shares which have been fully issued and fully paid for but
These are inconsistent with the nature of treasury shares…
subsequently re-acquired by the issuing corporation by purchase,
because a treasury share is not outstanding although it is not
redemption, donation, or some other lawful means. Like for
cancelled for it can be re-issued. The only thing you can do with it
instance if a stockholder (SH) defaulted when a call was made for
is to re-issue it. Now, when the Board re-issued it, they can sell it
SH to pay their unpaid subscription, and SH failed to pay… and
at any reasonable price… because you don't have to sell it for its
so shares sold at public auction and the corporation acquired it.
par value as its minimum, because remember, it is unissued…
Now the SC has said that treasury shares are in remember, when you're going to sell or offer for subscription, part
limbo… they are not outstanding, but neither are they cancelled. of the authorized but unissued share, the corporation must sell at
They have already been issued. Now when the corporation re- least at par value. Otherwise that would be watered stock. But in
acquires them, they are not cancelled, but they are not the case of treasury shares, that has already been paid for by the
outstanding… so in the meantime, they are frozen.. they are in original SH, so the corporation already got the money equivalent
limbo. They cannot vote, they cannot receive dividends. The only to the par value. So when the corporation re-issues that, suppose
thing you can do with them is to re-issue them. That is the only they offer it for sale, they can fix any price. It can even be less
thing you can do. than par value, let's say the book value is less than the par value.
Well, you have this case (sorry! can't understand the Now if the corporation decides to declare that as dividend it will
case title)… There is this law office: Rossell Carascosso Anda not be declared as stock dividend, it will be declared as property
(RCA), used to be the biggest law firm in Asia… it was the dividend. Because that is property owned by the corporation you
retained counsel of all the big companies like Shell, Caltex, SMC, declare stock dividends from the authorized but unissued
Bank of America, Citibank… Now, Reese (I spell it as I hear it ) shares… but these are shares (treasury) which have already
one of the controlling stockholders of the Manila Trading and been issued but acquired by the corp. So they are properties
Supply Company, wanted to transfer the shares to his friends belonging to the corporation. So if the corporation distributes
without any tax consequence. So what was the bright scheme them, as dividends, they will be property dividend, not stock
concocted by this RCA? dividend.

Reese executed a Trust Agreement (TA). He appointed


(vii) Convertible
the Law Office (RCA) as trustee and transferred to the law office • Convertible share is share which is convertible or
his shares of stocks. The TA included stock dividends. Upon the changeable by the stockholder form one class to another
death of Reese the corporation was supposed to buy the shares... class (such as from preferred to common) at a certain price
but in the meanwhile, the trustees would have the right to vote the
shares of stocks… and as I said stock dividends are also covered and within a certain period. (Page 86 of De Leon, 2006)
by that. So what happened? Reese died. The corporation bought (viii) Participating
the shares. The remaining SH were the friends of Reese. Then Catindig Class Notes
the corporation now turns around and declares the shares as Participating shares impinges upon the rights of the common shares
stock dividends of existing SH… stock dividends have no tax to the residual corporate assets—hence, participating shares not
consequence…. So the remaining SH, all friends of Reese would usually issued.
acquire the shares without paying a single centavo… because the
corporation bought the shares, and they said: "treasury shares
yan eh!" So the corporation now declared it as a stock dividend, (j) Subscribers
and so the remaining SH got it — they got the shares of Reese Sec. 14. Contents of the articles of incorporation
without paying anything…
xxx
Now the Court said: "NO! These are not treasury
shares!" why? Because the TA provided that the trustees would 8. If it be a stock corporation, the amount of its authorized
vote the shares and that it also provided that the trust would

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Service, Sacrifice, Excellence
FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

(iii) High quorum and/ or high voting requirements


capital stock in lawful money of the Philippines, the number of
shares into which it is divided, and in case the share are par
Documents accompanying the Articles
value shares, the par value of each, the names, nationalities
(See page 733 of CLV’s Commercial Law Review Book, 2007)
and residences of the original subscribers, and the amount Sec. 15. Forms of Articles of Incorporation
subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be Unless otherwise prescribed by special law, articles of incorporation
stated; of all domestic corporations shall comply substantially with the
following form:
xxx
(k) Treasurer in Trust
• The person elected by the subscribers as Treasurer of the
corporation at the time of the incorporation who is named as
such in the AoI and who has been authorized to receive for
and in the name of the corporation, all subscriptions, fees,
contributions or donations paid of given by the subscribers or
members. (UP Reviewer)
• Not a regular treasurer
• The treasurer who signs the treasurer’s affidavit in Section
15

(l) Special Provisions

(i) Expanded pre-emptive rights


• Pre-emptive right is the stockholder’s right to
SUBSCRIBE to all issues or disposition of shares of
any class in proportion of his stockholdings.
• See Section 39 Pre-emptive right includes re-
issuance of TS.
• See page 832 of CLR (2007)
(ii) Right of First Refusal
• See page 673 of CLV’s Commercial Law Reviewer
Old Edition
Catindig Class Notes
Tip: Right to first refusal should be accompanied by:
(1) time to get approval and
(2) Right to assign.

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Service, Sacrifice, Excellence
FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

ARTICLES OF INCORPORATION xxx

OF .

__________________________ NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the
total subscription as follows:
(Name of Corporation)
Name of Subscriber Amount Subscribed Total Paid-In
KNOW ALL MEN BY THESE PRESENTS:
xxx
The undersigned incorporators, all of legal age and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7,
laws of the Republic of the Philippines; 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state
the amount of capital or money contributed or donated by specified persons, stating the names,
AND WE HEREBY CERTIFY: nationalities and residences of the contributors or donors and the respective amount given by
each.)
FIRST: That the name of said corporation shall be ".............................................., INC. or
CORPORATION"; TENTH: That ............ has been elected by the subscribers as Treasurer of the Corporation to act
as such until his successor is duly elected and qualified in accordance with the by-laws, and that
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is
as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the
more than one purpose, indicate primary and secondary purposes);
corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers
THIRD: That the principal office of the corporation is located in the City/Municipality or members.
of ............................................., Province of .................................................., Philippines;
ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino
FOURTH: That the term for which said corporation is to exist is ................ years from and after the citizens shall provide the following):
date of issuance of the certificate of incorporation;
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than
FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as the required percentage of the capital stock as provided by existing laws shall be allowed or
follows: permitted to recorded in the proper books of the corporation and this restriction shall be indicated
in all stock certificates issued by the corporation."
NAME NATIONALITY RESIDENCE
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation,
xxx this ................... day of .............................., 19 ........... in the City/Municipality
SIXTH: That the number of directors or trustees of the corporation shall be .............; and the of ........................................, Province of ................................................., Republic of the
names, nationalities and residences of the first directors or trustees of the corporation are as Philippines.
follows: ............................................ .............................................
NAME NATIONALITY RESIDENCE ............................................ .............................................
xxx ................................................
SEVENTH: That the authorized capital stock of the corporation is ............ (P......................) (Names and signatures of the incorporators)
PESOS in lawful money of the Philippines, divided into ............... shares with the par value
of ................................... (P.......................) Pesos per share. SIGNED IN THE PRESENCE OF:

(In case all the share are without par value): ............................................ .............................................

That the capital stock of the corporation is ........................... shares without par value. (In case (Notarial Acknowledgment)
some shares have par value and some are without par value): That the capital stock of said
corporation consists of ........................ shares of which ....................... shares are of the par value
of .............................. (P.....................) PESOS each, and of which ................................ shares are
without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has
been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed

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Service, Sacrifice, Excellence
FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

TREASURER'S AFFIDAVIT
3. That the Treasurer's Affidavit concerning the amount
REPUBLIC OF THE PHILIPPINES ) of capital stock subscribed and/or paid if false;
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF ) 4. That the percentage of ownership of the capital stock
I, ...................................., being duly sworn, depose and say: to be owned by citizens of the Philippines has not been
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such complied with as required by existing laws or the
until my successor has been duly elected and qualified in accordance with the by-laws of the Constitution.
corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the
authorized capital stock of the corporation has been subscribed and at least 25% of the total No articles of incorporation or amendment to articles of incorporation
subscription has been paid, and received by me, in cash or property, in the amount of not less than of banks, banking and quasi-banking institutions, building and loan
P5,000.00, in accordance with the Corporation Code. associations, trust companies and other financial intermediaries,
....................................... insurance companies, public utilities, educational institutions, and
(Signature of Treasurer) other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality
of .................................. Province of .........................................., this ............. day recommendation of the appropriate government agency to the effect
of ........................., 19 ........; by ............................................ with Res. Cert. No. ..................... that such articles or amendment is in accordance with law.
issued at ................. on ......................, 19 ..........

NOTARY PUBLIC
(c) Filing of Articles of Incorporation and payment of
My commission expires on ..........................., 19 ........ fees
Doc. No. ...............; UP Class Notes
Page No. ...............;
Book No. ..............; AOI and required attachments must be filed with the SEC; filing fees
Series of 19..... (7a) required here are 10% of 1% of the authorized capital stock

Sec. 17. Grounds when articles of incorporation or amendment


may be rejected or disapproved (d) Examination and Approval or rejection of AoI by
The Securities and Exchange Commission may reject the articles of
SEC (Sec. 17)
incorporation or disapprove any amendment thereto if the same is not • When the proposed articles show that the object is to
in compliance with the requirements of this Code: Provided, That the organize a barrio into a separate corporation for the purpose
Commission shall give the incorporators a reasonable time within of taking possession and having control of all municipal
which to correct or modify the objectionable portions of the articles or property within the incorporated barrio and administer it
amendment. The following are grounds for such rejection or exclusively for the benefit of the residents, the object is
disapproval:
unlawful and the articles can be denied registration. Asuncion
1. That the articles of incorporation or any amendment v. De Yriarte, 28 Phil. 67 (1914).
thereto is not substantially in accordance with the form
prescribed herein; • It is well to note that, if a corporation’s purpose, as stated in
2. That the purpose or purposes of the corporation are the Articles of Incorporation, is lawful, then the SEC has no
patently unconstitutional, illegal, immoral, or contrary to authority to inquire whether the corporation has purposes
government rules and regulations; other than those stated, and mandamus will lie to compel it to

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Service, Sacrifice, Excellence
FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

issue the certificate of incorporation.” Gala v. Ellice Agro-


Industrial Corp., 418 SCRA 431 (2003). J.G. Summit Holdings v. CA
UP Class Notes
• The agreement of co-shareholders to mutually grant the right
Rejection is not preferred; a defective AOI may be returned by the of first refusal to each other, by itself, does not constitute a
SEC which shall give the incorporators a reasonable time to correct or violation of the provisions of the Constitution limiting land
modify the objectionable portions without the necessity of filing the ownership to Filipinos and Filipino corporations;
same again; Grounds for rejection or disapproval:
• If the foreign shareholdings of a landholding corporation
--Not substantially in the form prescribed by the Code exceeds 40%, it is not the foreign stockholder’s ownership of
-- Purposes are patently unconstitutional or are contrary to law, the shares which is adversely affected but the capacity of the
morals, etc. corporation to own land—that is, the corporation becomes
--Treasurer’s affidavit is false
--Percentage of ownership of capital stock has not been complied with disqualified to own land.
-- AOI of banks and other financial institutions must be filed together • See page 833 of CLV’s CLR, 2007
with a recommendation of the appropriate government agency (i.e.
BSP) to the effect that such AOI is in accordance with the law P.C. Javier & Sons v. CA
• A change in the corporate name does not make a new
(e) Issuance of Certificate of Incorporation corporation, whether effected by a special act or under a
When does corporate existence commence? general law.
Sec. 19. Commencement of corporate existence Catindig Class Notes
Catindig: This case (PC Javier) is not entirely correct insofar as it says
A private corporation formed or organized under this Code that there is no law or rule requiring notice for change of name.
commences to have corporate existence and juridical personality and A change in corporate name is reflected in the General Information
is deemed incorporated from the date the Securities and Exchange Sheet.
Commission issues a certificate of incorporation under its official seal;
and thereupon the incorporators, stockholders/members and their Hyatt v. Goldstar
successors shall constitute a body politic and corporate under the
• The residence or domicile of a juridical person is fixed by
name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation “law creating or recognizing” it.
is sooner dissolved in accordance with law.
2.4 Internal Organization of the corporation
2.3 Cases
(a) Adoption and Approval of By-laws
Castillo v. Balinghasay Sec. 46. Adoption of by-laws
• Section 6 of the Corp Code expressly prohibits the
deprivation of voting rights, except as to “preferred” and Every corporation formed under this Code must, within one (1) month
“redeemable” shares. after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a
• Section 148 of the Corp Code expressly provides that it shall code of by-laws for its government not inconsistent with this Code.
apply to corporation in existence at the time of the effectivity For the adoption of by-laws by the corporation the affirmative vote of
of the Code. the stockholders representing at least a majority of the outstanding

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FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

capital stock, or of at least a majority of the members in case of non- trustees, officers and employees;
stock corporations, shall be necessary. The by-laws shall be signed 6. The time for holding the annual election of directors of
by the stockholders or members voting for them and shall be kept in trustees and the mode or manner of giving notice thereof;
the principal office of the corporation, subject to the inspection of the
7. The manner of election or appointment and the term of
stockholders or members during office hours. A copy thereof, duly office of all officers other than directors or trustees;
certified to by a majority of the directors or trustees countersigned by
the secretary of the corporation, shall be filed with the Securities and 8. The penalties for violation of the by-laws;
Exchange Commission which shall be attached to the original articles 9. In the case of stock corporations, the manner of issuing
of incorporation. stock certificates; and
Notwithstanding the provisions of the preceding paragraph, by-laws 10. Such other matters as may be necessary for the proper or
may be adopted and filed prior to incorporation; in such case, such convenient transaction of its corporate business and affairs.
by-laws shall be approved and signed by all the incorporators and (21a)
submitted to the Securities and Exchange Commission, together with Sec. 48. Amendments to by-laws
the articles of incorporation.
The board of directors or trustees, by a majority vote thereof, and the
In all cases, by-laws shall be effective only upon the issuance by the owners of at least a majority of the outstanding capital stock, or at
Securities and Exchange Commission of a certification that the by- least a majority of the members of a non-stock corporation, at a
laws are not inconsistent with this Code. regular or special meeting duly called for the purpose, may amend or
The Securities and Exchange Commission shall not accept for filing repeal any by-laws or adopt new by-laws. The owners of two-thirds
the by-laws or any amendment thereto of any bank, banking (2/3) of the outstanding capital stock or two-thirds (2/3) of the
institution, building and loan association, trust company, insurance members in a non-stock corporation may delegate to the board of
company, public utility, educational institution or other special directors or trustees the power to amend or repeal any by-laws or
corporations governed by special laws, unless accompanied by a adopt new by-laws: Provided, That any power delegated to the board
certificate of the appropriate government agency to the effect that of directors or trustees to amend or repeal any by-laws or adopt new
such by-laws or amendments are in accordance with law. (20a) by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a
Sec. 47. Contents of by-laws majority of the members in non-stock corporations, shall so vote at a
Subject to the provisions of the Constitution, this Code, other special regular or special meeting.
laws, and the articles of incorporation, a private corporation may Whenever any amendment or new by-laws are adopted, such
provide in its by-laws for: amendment or new by-laws shall be attached to the original by-laws
1. The time, place and manner of calling and conducting in the office of the corporation, and a copy thereof, duly certified
regular or special meetings of the directors or trustees; under oath by the corporate secretary and a majority of the directors
2. The time and manner of calling and conducting regular or
or trustees, shall be filed with the Securities and Exchange
special meetings of the stockholders or members; Commission the same to be attached to the original articles of
incorporation and original by-laws.
3. The required quorum in meetings of stockholders or
members and the manner of voting therein; The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
4. The form for proxies of stockholders and members and the
manner of voting them; certification that the same are not inconsistent with this Code. (22a
and 23a)
5. The qualifications, duties and compensation of directors or

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

BY-LAWS • Authority granted to a corporation to regulate the transfer of


• Intramural contract for intra-corporate relationship its stock does not empower the corporation to restrict the right
• Is not binding on extra-corporate parties (except if third of a stockholder to transfer his shares, but merely authorizes
parties have prior notice of the by laws) the adoption of regulations as to the formalities and
• Intended to regulate internal matters procedure to be followed in effecting transfer. Thomson v.
• Cannot contravene the charter or the laws Court of Appeals, 298 SCRA 280 (1998).
• See page 745 of CLV’s CLR, 2007. • By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are
Nature and Functions of By-Laws
always subject to the charter of the corporation. Rural Bank
• As the “rules and regulations or private laws enacted by the of Salinas, Inc. v. CA, 210 SCRA 510 (1992).
corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and (b) Election of Directors
directors and officers with relation thereto and among Sec. 24. Election of directors or trustees
themselves in their relation to it,” by-laws are indispensable to At all elections of directors or trustees, there must be present, either
corporations. These may not be essential to corporate birth in person or by representative authorized to act by written proxy, the
but certainly, these are required by law for an orderly owners of a majority of the outstanding capital stock, or if there be no
governance and management of corporations. Loyola Grand capital stock, a majority of the members entitled to vote. The election
Villas Homeowners v. CA, 276 SCRA 681 (1997). must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have
Common law Limitations on By-Laws the right to vote in person or by proxy the number of shares of stock
(1) By-Laws cannot be contrary to law and charter standing, at the time fixed in the by-laws, in his own name on the
(2) By-Laws cannot be unreasonable or contrary to the nature of By- stock books of the corporation, or where the by-laws are silent, at the
Laws time of the election; and said stockholder may vote such number of
(3) By-Laws cannot discriminate shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his
By-Laws cannot be contrary to law and charter
shares shall equal, or he may distribute them on the same principle
• A by-law provision granting to a stockholder permanent seat among as many candidates as he shall see fit: Provided, That the
in the Board of Directors is contrary to the provision in total number of votes cast by him shall not exceed the number of
Corporation Code requiring all members of the Board to be shares owned by him as shown in the books of the corporation
elected by the stockholders. Even when the members of the multiplied by the whole number of directors to be elected: Provided,
association may have formally adopted the provision, their however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of
action would be of no avail because no provision of the by-
corporations which have no capital stock may cast as many votes as
laws can be adopted if it is contrary to law. Grace Christian there are trustees to be elected but may not cast more than one vote
High School v. Court of Appeals, 281 SCRA 133 (1997). for one candidate. Candidates receiving the highest number of votes
By-Laws cannot be unreasonable or contrary to the nature of By- shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from
Laws

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

time to time but not sine die or indefinitely if, for any reason, no transaction of its businesses or the construction of its works, or to
election is held, or if there not present or represented by proxy, at the continuously operate is due to causes beyond the control of the
meeting, the owners of a majority of the outstanding capital stock, or corporation as may be determined by the Securities and Exchange
if there be no capital stock, a majority of the member entitled to vote. Commission
Sec. 26. Report of election of directors, trustees and officers Catindig Class Notes
Upon issuance of the certificate of incorporation, the corporation must
Within thirty (30) days after the election of the directors, trustees and begin operation by holding organization meeting of the Board. In such
officers of the corporation, the secretary, or any other officer of the meeting the following will be done:
corporation, shall submit to the Securities and Exchange (1) Election of officers
Commission, the names, nationalities and residences of the directors, (2) Adoption of resolution closing “the account”
trustees, and officers elected. Should a director, trustee or officer die, (3) Adoption of resolution opening a new account
resign or in any manner cease to hold office, his heirs in case of his (4) Designating the authorized representative (signatories)
death, the secretary, or any other officer of the corporation, or the
director, trustee or officer himself, shall immediately report such fact Continuous operation
to the Securities and Exchange Commission. General Information Sheet must be file to SEC continuously for five
years and Audited Financial Statements
• The SEC has issued the rule requiring the filing of the
Reconciling par. 1 and par. 2:
General Information Sheet. (Monfort Hermanos Agricultural
Catindig: Deemed dissolved but can be revived if the parties
Dev. Corp v. Monfort III) (incorporators) in good faith ask the SEC to confirm the status of the
• When the names of some of the directors who signed the corporation as not de-registered or in good standing. The parties must
board resolution does not appear in the General Information have a good explanation.
Sheet filed with the SEC, then there is doubt whether they • “Organize” involves the election of officers, providing for
were indeed duly elected members of the Board legally the subscription and payment of the capital stock, the
constituted to bring suit in behalf of the Corporation. (Monfort adoption of by-laws, and such other steps as are
Hermanos Agricultural Dev. Corp v. Monfort III) necessary to endow the legal entity with the capacity to
transact the legitimate business for which the corporation
(c) Commencement of businesss was created. “Organization” relates merely to the
Sec. 22. Effects on non-use of corporate charter and continuous systematization and orderly arrangement of the internal
inoperation of a corporation and managerial affairs and organs of the corporation.
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.
If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two
(2) years from the date of its incorporation, its corporate powers 2.5 Cases
cease and the corporation shall be deemed dissolved. However, if a Loyola Grand Villas Homeowners v. CA
corporation has commenced the transaction of its business but
• By-laws may be necessary for the “government” of the
subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or corporation but these are subordinate to the Articles of
revocation of its corporate franchise or certificate of incorporation. Incorporation as well as the Corporation Code and related
statutes.
This provision shall not apply if the failure to organize, commence the

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• Failure to file the by-laws within the period required by law date of filing for a cause not attributable to the corporation.
by no means tolls the automatic dissolution of a corporation.
Catindig Class Notes Sec. 17. Grounds when articles of incorporation or amendment
The remedy should have been the inclusion of the word “preferred”
may be rejected or disapproved
Sawadjaan v. CA
The Securities and Exchange Commission may reject the articles of
• A corporation which has failed to file its by-laws within the
incorporation or disapprove any amendment thereto if the same is not
prescribed period does not ipso facto lose its powers as such. in compliance with the requirements of this Code: Provided, That the
• Obiter: By its failure to submit its by-laws on time, the AIIBP Commission shall give the incorporators a reasonable time within
may be considered a de facto corporation whose right to which to correct or modify the objectionable portions of the articles or
exercise corporate powers may not be inquired into amendment. The following are grounds for such rejection or
collaterally in any private suit to which such corporations may disapproval:
be a party. 1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
2.6 Amendment of Articles of Incorporation and By-
laws 2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
Sec. 16. Amendment of Articles of Incorporation government rules and regulations;
Unless otherwise prescribed by this Code or by special law, and for 3. That the Treasurer's Affidavit concerning the amount
legitimate purposes, any provision or matter stated in the articles of of capital stock subscribed and/or paid if false;
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the 4. That the percentage of ownership of the capital stock
stockholders representing at least two-thirds (2/3) of the outstanding to be owned by citizens of the Philippines has not been
capital stock, without prejudice to the appraisal right of dissenting complied with as required by existing laws or the
stockholders in accordance with the provisions of this Code, or the Constitution.
vote or written assent of at least two-thirds (2/3) of the members if it No articles of incorporation or amendment to articles of incorporation
be a non-stock corporation. of banks, banking and quasi-banking institutions, building and loan
The original and amended articles together shall contain all associations, trust companies and other financial intermediaries,
provisions required by law to be set out in the articles of insurance companies, public utilities, educational institutions, and
incorporation. Such articles, as amended shall be indicated by other corporations governed by special laws shall be accepted or
underscoring the change or changes made, and a copy thereof duly approved by the Commission unless accompanied by a favorable
certified under oath by the corporate secretary and a majority of the recommendation of the appropriate government agency to the effect
directors or trustees stating the fact that said amendment or that such articles or amendment is in accordance with law.
amendments have been duly approved by the required vote of the Sec. 48. Amendments to by-laws
stockholders or members, shall be submitted to the Securities and
Exchange Commission. The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at
The amendments shall take effect upon their approval by the least a majority of the members of a non-stock corporation, at a
Securities and Exchange Commission or from the date of filing with regular or special meeting duly called for the purpose, may amend or
the said Commission if not acted upon within six (6) months from the

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Service, Sacrifice, Excellence
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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

repeal any by-laws or adopt new by-laws. The owners of two-thirds


(2/3) of the outstanding capital stock or two-thirds (2/3) of the
members in a non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a
majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors
or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code. (22a
and 23a)

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

composing it as well as from any other legal entity to which it


3. THE CORPORATE ENTITY may be related. This separate and distinct personality is,
however, merely a fiction created by law for conveyance and to
promote the ends of justice. LBP v. Court of Appeals, 364
3.1 Distinct Personality SCRA 375 (2001).

- One of the advantages of a corporate form of business


(a) Doctrine of separate juridical personality (Page 677 organization is the limitation of an investor’s liability to the
of CLV’s Commercial Law Review Book, 2007) amount of the investment. This feature flows from the legal
theory that a corporate entity is separate and distinct from its
Catindig Class Notes: stockholders. However, the statutorily granted privilege of a
Q: What are the implications of the doctrine? corporate veil may be used only for legitimate purposes. On
A: (1) Limited Liability equitable considerations, the veil can be disregarded when it is
(2) Contractual Obligation utilized as a shield to commit fraud, illegality or inequity; defeat
(3) Non-liability for crime committed by officers
public convenience; confuse legitimate issues; or serve as a
(4) Liability for Torts
(5) Entitlement for damages (in general) mere alter ego or business conduit of a person or an
(6)Exercise of corporate powers (e.g. power to sue, to acquire instrumentality, agency or adjunct of another corporation.
properties etc) etc. aSan Juan Structural v. Court of Appeals, 296 SCRA 631
(1998).
D. Applications:
MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT
FROM ITS STOCKHOLDERS OR MEMBERS (a) Majority Equity Ownership and Interlocking
Directorship:
A. Sources: Sec. 2 of Corp Code; Article 44, Civil Code
- Ownership of a majority of capital stock and the fact that
B. Purpose: To effectively pursue business endeavors
majority of directors of a corporation are the directors of
C. Importance of Protecting Main Doctrine: another corporation creates no employer-employee
relationship with the latter's employees. aDBP v. NLRC, 186
- The separate juridical personality of the corporation, has SCRA 841 (1990)
features that has made it most attractive to businessmen; right
of succession, limited liability, centralized management, and - Mere ownership by a single stockholder or by another
generally free-transferability of shares of stock. The strong corporation of all or nearly all of the capital stock of a
juridical personality of the corporation facilitates and preserves corporation is not of itself sufficient ground for disregarding the
the “going concern value” of the underlying business separate corporate personality. Sunio v. NLRC , 127 SCRA
enterprise, saves transaction costs, and prevents disruption of 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164
the value because of investors who withdraw or who are (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina
deceased. Undermining the separate juridical personality of the Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996);
corporation, necessarily dilutes any or all of its attributes. Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000).

- A corporation, upon coming into existence, is invested by law - Mere substantial identity of incorporators of two corporations
with a personality separate and distinct from those persons does not necessarily imply fraud, nor warrant the piercing of

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the veil of corporate fiction. In the absence of clear and stakes in the said corporation are secured.” LBP v. Court of
convincing evidence to show that the corporate personalities Appeals, 364 SCRA 375 (2001).
were used to perpetuate fraud, or circumvent the law, the
corporations are to be rightly treated as distinct and separate - Use of a controlling stockholder’s initials in the corporate name
from each other. Laguio v. NLRC, 262 SCRA 715 (1996). is not sufficient reason to pierce the corporate veil, since by
that practice alone does it mean that the said corporation is
- Having interlocking directors, corporate officers and merely a dummy of the individual stockholder. A corporation
shareholders is not enough justification to pierce the veil of may assume any name provided it is lawful, and there is
corporate fiction in the absence of fraud or other public policy nothing illegal in a corporation acquiring the name or as in this
considerations. Velarde v. Lopez, 419 SCRA 422 (2004); case, the initials of one of its shareholders. LBP v. Court of
Sesbreno v. Court of Appeals, 222 SCRA 466 (1993). Appeals, 364 SCRA 375 (2001).
(b) Being Corporate Officer: - The mere fact that a stockholder sells his shares of stock in the
- Being an officer or stockholder of a corporation does not by corporation during the pendency of a collection case against
the corporation, does not make such stockholder personally
itself make one's property also of the corporation, and vice-
liable for the corporate debt, since the disposing stockholder
versa, for they are separate entities, and that shareholders are
has no personal obligation to the creditor, and it is the inherent
in no legal sense the owners of corporate property which is
right of the stockholder to dispose of his shares of stock
owned by the corporation as a distinct legal person. Good
anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405
Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). (The
(1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Shareholders and members are covered by the main doctrine
but the actors (officers) are not. They are covered by agency) - Just because two foreign companies came from the same
- The mere fact that one is president of the corporation does not country and closely worked together on certain projects would
the conclusion arise that one was the conduit of the other, thus
render the property he owns or possesses the property of the
piercing the veil of corporate fiction. Marubeni Corp. v. Lirag,
corporation, since that president, as an individual, and the
362 SCRA 620 (2001).
corporation are separate entities. Cruz v. Dalisay, 152 SCRA
487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). - The creation by DBP as the mother company of the three
- It is hornbook law that corporate personality is a shield against mining corporations to manage and operate the assets
acquired in the foreclosure sale lest they deteriorate from non-
personal liability of its officers—a corporate officer and his
use and lose their value, does not indicate fraud or wrongdoing
spouse cannot be made personally liable under a trust receipt
and will not constitute application of the piercing doctrine. DBP
where he entered into and signed the contract clearly in his
v. Court of Appeals, 363 SCRA 307 (2001).
official capacity. Intestate Estate of Alexander T. Ty v. Court of
Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust - The facts that two corporations may be sister companies, and
Corp. v. Court of Appeals, 356 SCRA 671 (2001).
that they may be sharing personnel and resources, without
(c) Dealings Between Corporation and Stockholders: more, is insufficient to prove that their separate corporate
personalities are being used to defeat public convenience,
- The fact that the majority stockholder had used his own money justify wrong, protect fraud, or defend crime. Padilla v. Court of
to pay part of the loan of the corporation cannot be used as the Appeals, 370 SCRA 208 (2001). [CLV: In past decisions,
basis to pierce. “It is understandable that a shareholder would such situation would generally warrant alter-ego piercing.]
want to help his corporation and in the process, assure that his

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(d) On Privileges Enjoyed: personality. CKH Industrial and Dev. Corp v. Court of Appeals,
272 SCRA 333 (1997).
- The tax exemption clause in the charter of a corporation
cannot be extended to nor enjoyed by even its controlling
Catindig Class Notes
stockholders. Manila Gas Corp. v. Collector of Internal
Q: Do SHs have insurable interest over corporate assets?
Revenue, 62 Phil. 895 (1936). A: None, because corp assets are owned by the corp and not by the
(e) Obligations and Debts: SHs.

- Corporate debt or credit is not the debt or credit of the (b) Piercing the veil of corporate fiction (Page 682 of
stockholder nor is the stockholder's debt or credit that of the
CLV’s Commercial Law Review Book, 2007)
corporation. Traders Royal Bank v. Court of Appeals, 177
Jack’s Lecture
SCRA 789 (1989).
Whenever the law creates a legal device, the objective of
- A corporation has no legal standing to file a suit for recovery of the law is justice and fairness—if you use that device to perpetrate
certain parcels of land owned by its members in their individual fraud---the law will not allow that---so you have the doctrine of
piercing the veil of corporate fiction
capacity, even when the corporation is organized for the
benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 When the separate juridical personality of a corporation is
SCRA 347 (1976). used to defeat public convenience, to justify wrong, to protect fraud,
to commit a crime, its separate juridical personality will be
- Stockholders have no personality to intervene in a collection disregarded.
case covering the loans of the corporation since the interest of A. Source of Incantation
shareholders in corporate property is purely inchoate. Saw v.
CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors The notion of corporate entity will be pierced or disregarded and the
Corp. v. Court of Appeals, 309 SCRA 72 (1999). individuals composing it will be treated as identical if the corporate entity is
being used as a cloak or cover for fraud or illegality; as a justification for a
- The majority stockholder cannot be held personality liable for wrong; or as an alter ego, an adjunct, or a business conduit for the sole
the attorney’s fees charged by a lawyer for representing the benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP
corporation. Laperal Dev. Corp. v. Court of Appeals, 223 v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
SCRA 261 (1993).
B. Nature of Doctrine (aTraders Royal Bank v. Court of Appeals, 269
- Even when the foreclosure on the corporate assets was SCRA 15 [1997])
wrongful done, stockholders have no standing to recover for - Piercing does not mean that corporation is absolved of
themselves moral damages; otherwise, it would amount to the liabilities. Corporation continues to be liable but piercing just
appropriation by, and the distribution to, such stockholders of includes the officers/actors liable.
part of the corporation’s assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. APT - When the legal fiction of separate corporate personality is
v. Court of Appeals, 300 SCRA 579 (1998). abused, such as when the same is used for fraudulent or
wrongful ends, the courts have not hesitated to pierce the
- The obligations of a stockholder in one corporation cannot be corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
offset from the obligation of the stockholder in a second
corporation, since the corporation has a separate juridical

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- Piercing the veil of corporation fiction is warranted only in aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205
cases when the separate legal entity is used to defeat public SCRA 697 (1992). (Umali is a fraud case, Indophil is an alter
convenience, justify wrong, protect fraud, or defend crime, ego case)
such that in the case of two corporations, the law will regard
the corporation as merged into one. Velarde v. Lopez, 419 - Piercing is not available when personal obligations of an
SCRA 422 (2004). individual are to be enforced against the corporation (?)
Robledo v. NLRC, 238 SCRA 52 (1994).
- The legal fiction of separate corporate existence is not at all
times invincible and the same may be pierced when employed - “The rationale behind piercing a corporation’s identity in a
as a means to perpetrate a fraud, confuse legitimate issues, or given case is to remove the barrier between the corporation
used as a vehicle to promote unfair objectives or to shield an from the persons comprising it to thwart the fraudulent and
otherwise blatant violation of the prohibition against forum- illegal schemes of those who use the corporate personality as
shopping. While it is settled that the piercing of the corporate a shield for undertaking certain proscribed activities. However,
veil has to be done with caution, this corporate fiction may be in the case at bar, instead of holding certain individuals or
disregarded when necessary in the interest of justice. Rovels person responsible for an alleged corporate act, the situation
Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). has been reversed. It is the petitioner as a corporation which is
being ordered to answer for the personal liability of certain
(a) Equitable Remedy: individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned
- The doctrine of piercing the corporate veil is an equitable upside down because of its erroneous invocation.”
doctrine developed to address situations where the separate aFrancisco Motors Corp. v Court of Appeals, 309 SCRA 72
corporate personality of a corporation is abused or used for (1999).
wrongful purposes. aPNB v. Ritratto Group, Inc., 362 SCRA
216 (2001). - Piercing doctrine is meant to prevent fraud, and cannot be
employed when the net result would be to perpetrate fraud or a
(b) Remedy of Last Resort:
wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal,
- Piercing the corporate veil is remedy of last resort and is not 91 Phil. 786 (1952).
available when other remedies are still available. aUmali v. - The theory of corporate entity was not meant to promote unfair
Court of Appeals, 189 SCRA 529 (1990). objectives or otherwise, nor to shield them. Villanueva v. Adre,
172 SCRA 876 (1989).
Umali Doctrines:
(d) Basis Must Be Clear Evidence:
(1) Piercing remedy is a last resort
- To disregard the separate juridical personality of a corporation,
(2) Intention must to make the corp officers personally liable it is elementary that the wrongdoing cannot be presumed and
must be clearly and convincingly established. The organization
(c) Purpose of Piercing: of the corporation at the time when the relationship between
the landowner and the developer were still cordial cannot be
- Piercing is not allowed unless the remedy sought is to make used as a basis to hold the corporation liable later on for the
the officer or another corporation pecuniarily liable for obligations of the landowner to the developer under the mere
corporate debts (?). Umali v. CA, 189 SCRA 529 (1990); allegation that the corporation is being used to evade the

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performance of obligation by one of its major stockholders. - The piercing doctrine cannot be availed of to dislodge from
Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 SEC’s jurisdiction a petition for suspension of payments filed
(1999). under P.D. 902-A, on the ground that the petitioning individuals
should be treated as the real petitioners to the exclusion of the
- The mere assertion by a Filipino litigant against the existence
petitioning corporate debtor. “The doctrine of piercing the veil
of a “tandem” between two Japanese corporations cannot be of corporate fiction heavily relied upon by the petitioner is
the basis for piercing, which can only be applied by showing entirely misplaced, as said doctrine only applies when such
wrongdoing by clear and convincing evidence. Marubeni Corp. corporate fiction is used to defeat public convenience, justify
v. Lirag, 362 SCRA 620 (2001). wrong, protect fraud or defend crime.” Union Bank v. Court of
- To disregard the separate juridical personality of a corporation, Appeals, 290 SCRA 198 (1998).
the wrongdoing must be clearly and convincingly established. It (f) Applicable to “Third-Parties”:
cannot be presumed. In this case, the Court finds that the
Remington failed to discharge its burden of proving bad faith - That respondents are not stockholders of the sister
on the part of Marinduque Mining and its transferees in the corporations does not make them non-parties to this case,
mortgage and foreclosure of the subject properties to justify the since it is alleged that the sister corporations are mere alter
piercing of the corporate veil. DBP v. Court of Appeals, 363 egos of the directors-petitioners, and that the sister
SCRA 307 (2001). corporations acquired the properties sought to be reconveyed
to FGSRC in violation of directors-petitioners’ fiduciary duty to
- The party seeking for the piercing of the corporate veil has the FGSRC. The notion of corporate entity will be pierced and the
burden of presenting clear and convincing evidence to justify individuals composing it will be treated as identical if the
the setting aside of the separate corporate personality rule. corporate entity is being used as a cloak or cover for fraud or
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 illegality; as a justification for a wrong; or as an alter ego, an
(2002). adjunct, or a business conduit for the sole benefit of the
stockholders. aGochan v. Young, 354 SCRA 207 (2001).
- Application of the doctrine of piercing the corporate veil should
be done with caution. A court should be mindful of the milieu (g) Piercing is a power belonging to the court and cannot be
where it is to be applied. It must be certain that the corporate assumed improvidently by a sheriff (?). Cruz v. Dalisay,
fiction was misused to such an extent that injustice, fraud, or 152 SCRA 482 (1987).
crime was committed against another, in disregard of its rights.
The wrongdoing must be clearly and convincingly established;
it cannot be presumed. Otherwise, an injustice that was never (i) When applied
unintended may result from an erroneous application. PNB v. Instances when doctrine applied. ((Page 28 of De Leon, 2006)
Andrada Electric & Engineering Co., 381 SCRA 244 (2002). (1) Where a corporation functions for the
benefit of a single person who has
(e) Not Applicable to Theorizing:
complete control over the funds and the
- Piercing of the veil of corporate fiction is not allowed when it is said person is the sole owner thereof.
resorted under a theory of co-ownership to justify continued (2) Where the corporation is merely an
use and possession by stockholders of corporate properties. instrumentality, an adjunct, business
aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). conduit or alter ego of another corporation.

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(3) Where a subsidiary company is created by


a parent company merely as an agency of (1) Control, not mere majority or complete stock control, but
the latter. complete dominion, not only of finances but of policy and
(4) Where it appears that a corporation is business practice in respect to the transaction attacked so that
merely a business conduit of its president. the corporate entity as to this transaction had at the time no
(5) Where a domestic corporation is separate mind, will or existence of its own;
controlled by aliens.* (2) Such control must have been used by the defendant to commit
(6) Where a corporation is dissolved and its fraud or wrong, to perpetuate the violation of a statutory or other
assets are transferred to another positive legal duty, or dishonest and unjust acts in contravention
corporation to avoid a financial liability of of plaintiff’s legal rights; and
the first corporation to its employees, both (3) The aforesaid control and breach of duty must proximately cause
firms being owned and controlled by the the injury or unjust loss complained of. (Heirs of Ramon Durano
same persons with the result that the v. Uy) (See Child Learning Center v. Tagario, 2005)
second corporation should be considered
a continuation and successor of the first. Catindig Class Notes:
(7) Where all the stockholders or members of You don’t apply the control test in all cases. Normally, you would apply
the control test… (di nia tinuloy yung statement)
a corporation acting as individuals instead (Dean Sundiang implies that the control test is used in piercing the
of formal corporate action, enter into an veil of corp fiction on the ground that the corp is a mere alter ego.
illegal, act. (See page 240 of JRS)
(8) Where a corporation is formed by a seller Q: Here are the facts:
of a certificate of public convenience for (1) 100% ownership
(2) Same BoD
the purpose of evading his individual (3) Same officers
contract. (Villa Rey) (4) Same accounting department
(9) Where a corporation is organized by an Is there basis for piercing?
insolvent debtor to defraud his creditors A: None. Facts are insufficient to apply piercing because no misuse of
(10)Where a corporation is organized as a corporate fiction for fraud, crime or injustice.
device in order to evade an outstanding
legal or equitable obligation.
(11)When corporate fiction is used to shield a Factors that will justify the application of the treatment of the
violation of the prohibition against forum doctrine of the piercing of the corporate veil: (Page 696 of CLV’s
shopping or to avoid a judgment credit, or Commercial Law Review Book, 2007)
to avoid payment of higher taxes, or to
avoid inclusion of corporate asserts as (1) The parent corporation owns all or most of
part of the estate of the decedent, or to the capital stock of the subsidiary.
confuse legitimate issues. (2) The parent and subsidiary corporations
have common directors or officers.
Test: (Page 695 of CLV’s Commercial Law Review Book, 2007)

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(3) The parent corporation finances the wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal,
subsidiary. 91 Phil. 786 (1952).
(4) The parent corporation subscribes to all
- Piercing of the veil of corporate fiction is not allowed when it is
the capital stock of the subsidiary or
resorted under a theory of co-ownership to justify continued
otherwise causes its incorporation. use and possession by stockholders of corporate properties.
(5) The subsidiary has grossly inadequate aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
capital.
(6) The subsidiary has substantially no - The piercing doctrine cannot be availed of to dislodge from
business except with the parent SEC’s jurisdiction a petition for suspension of payments filed
corporation or no assets except those under P.D. 902-A, on the ground that the petitioning individuals
conveyed to or by the parent corporation. should be treated as the real petitioners to the exclusion of the
(7) In the papers of the parent corporation or petitioning corporate debtor. “The doctrine of piercing the veil
of corporate fiction heavily relied upon by the petitioner is
in the statements of its officers, the entirely misplaced, as said doctrine only applies when such
subsidiary is described as a department of corporate fiction is used to defeat public convenience, justify
division of the parent corporation, or its wrong, protect fraud or defend crime.” Union Bank v. Court of
business of financial responsibility is Appeals, 290 SCRA 198 (1998).
referred to as the present corporation’s
- Piercing is unavailable to those within the intra-corporate
own.
relationship
(8) The parent corporation uses the property - Piercing is unavailable to a non-victim
of the subsidiary as its own. - See Page 579 of CLV’s Commercial Law Review Book, Old
(9) The directors or executives of the edition)
subsidiary do not act independently in the Catindig Class Notes
interest of the subsidiary but take their Tip:
orders form parent corporation. If the question is a piercing problem, be guided by the following:
(10)The formal legal requirements of the (1) Is there injury?
(2) Is there fraud, injustice?
subsidiary are not observed. (3) Pay attention if it is a labor case. In labor cases, courts
are more lenient in applying the doctrine of piercing the corporate
(ii) When not applied veil because of the policy in favor of labor.
- Piercing is not available when personal obligations of an
individual are to be enforced against the corporation (?) (iii) Consequences when veil is pierced
Robledo v. NLRC, 238 SCRA 52 (1994). • Application of the doctrine to a particular case does not deny the
- Piercing is not allowed unless the remedy sought is to make corporation of legal personality for any and all purposes, but only for
the officer or another corporation pecuniarily liable for the particular transaction or instance, or the particular obligation for
corporate debts which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil.
496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La
- Piercing doctrine is meant to prevent fraud, and cannot be Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738
employed when the net result would be to perpetrate fraud or a (2001).

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o When piercing the corporate fiction is necessary to


AREAS where piercing is allowed achieve justice or equity.
a. Fraud Piercing Rules in Piercing on the ground of:
b. Alter-ego Piercing
Fraud Alter Ego Equity
c. Equity cases
Rundown on Piercing Application: This Court pierced
(1) There must be (1) Even if the -When no fraud or
the corporate veil to ward off a judgment credit, to avoid fraud or evil controlling alter ego
inclusion of corporate assets as part of the estate of the motive. stockholder of circumstances can be
decedent, to escape liability arising for a debt, or to (2) The main action managing officer culled by the Court to
perpetuate fraud and/or confuse legitimate issues either to must seek intends to do no warrant piercing
promote or to shield unfair objectives to cover up an enforcement of evil, the use of -When the corp fiction
otherwise blatant violation of the prohibition against forum pecuniary claims the corporation as is used to confuse
shopping. Only is these and similar instances may the veil pertaining to the an alter ego is in legitimate issues
be pierced and disregarded. PNB v. Andrada Electric &
corporations direct violation of -When the corp fiction
Engineering Co., 381 SCRA 244 (2002).
against the central is used to raise
(i) Fraud Piercing: corporate doctrine. Those technicalities
o When corporate entity used to commit fraud or do a officers or whose acts and (-To warrant
wrong stockholders or actuations directly application of piercing
vice versa violate this central to make corporate
o Most restricted one because the SC has required that (3) The corporate doctrine, make officer or stockholder
allegations of fraud must clearly be proven to make a entity has been themselves liable for the corp
stockholder or officer liable for corporate debts and
used in the personally liable debts or obligations,
that piercing is available only when there is a claim for
recovery against such stockholders or officers.
perpetration of for having evidence must be
the fraud or in themselves cast shown that such offer
the justification away the or stockholder was
(ii) Alter-ego Piercing: of wrong, or to protective responsible for the
escape personal characteristic of corporate act, and the
o When corporate entity merely a farce since the liability limited liability of stage can only cone
corporation is merely the alter ego, business conduit, (* Piercing must be separate juridical during the hearing of
or instrumentality of a person or another entity.
the remedy of last personality. the merits)
o This tend to have a wider leeway in their applications resort)) (2) Others who deal
and even without intending to do malice or just by with the corp may (Corporations which
being practical in costing by taking shortcuts such as treat the interest have been used as
housing together under closely inter-related of both the instruments for
operations two or more corporate businesses. controlling acquisition or as
(iii) Equity Cases: stockholder and being depositaries of
the corp as the products, of ill-gotten
same wealth, need not be

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(3) Piercing in alter impleaded a separate


ego may prevail parties to cases for Pamplona Plantation v. Tinghil (Feb 3, 2005)
even no monetary they are res of the • In this case, the corporations have basically the same
claims are sought action.) incorporators and directors and headed by the same official.
against the Both use only one office and one payroll and are under one
stockholders or management.
officers of the
corporation. Mobilia Products Inc. v. Umezawa (March 4, 2005)
(4) When the • The bare fact that the respondent was the president and
underlying general manager of the petitioner corporation when the
business crimes charged were allegedly committed and was then a
enterprise does stockholder thereof does not itself deprive the court a quo of
not really change its exclusive jurisdiction over the crimes charged. The
and only the property of the corporation is not the property of the
medium is stockholders or members or of its officers who are
changed. stockholders.

3.2 Cases Jardine Davies v. JRB Realty Inc. (July 15, 2005)
• The existence of interlocking directors, corporate officers
De Leon v. NLRC (May 30, 2001) and shareholders is not enough justification to pierce the veil
• When the concept of separate legal entity is used to defeat of corporate fiction, in the absence of fraud and other public
public convenience, justify wrong, protect fraud or defend policy considerations.
crime the law will regard the corporation as an association of
persons, or in cases of two corporations, merge them into Mendoza v. Banco Real Development Bank (September 16,
one. 2005)
• In this case, the Labor Arbiter was correct in applying the • The veil will be lifted when the corporation is used by any of
piercing doctrine to hold the all respondents liable for unfair the directors, officers or employees as a cloak or cover for
labor practice and illegal termination of employment. fraud or illegality or injustice. (Gala v. Ellice Corp)
• (Case digest at page 707 of CLV’s Commercial Law Review • Here, it is found that TVI is Mendoza and Yotoko’s mere
Book) alter ego or business conduit. They control the affairs of TVI.
They transferred the assets to TVI to FGT.
Lipat v. Pacific Banking (April 30, 2003) • Here, the fraud was committed by petitioners to the prejudice
• This is a case of alter ego doctrine or instrumentality rule. of respondent bank.
Catindig Class Notes
Transfer per se is not illegal. IF the transfer is for the purpose of Child Learning Center Inc. v. Tagario (November 25, 2005)
defrauding creditors… Fraudulent transfer of assets refers to the
transfer of substantial assets.

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• The absence of the following elements prevents piercing the - A corporation, being an artificial person and having existence
corporate veil: only in legal contemplation, has no feelings, emotions nor
(1) Control/Complete dominion senses, therefore, it cannot experience physical suffering and
(2) Such control must have been used by the defendant to mental anguish. Mental suffering can be experienced only by
commit fraud or wrong in contravention of the plaintiff’s legal one having a nervous system and it flows from real ills,
right sorrows, and grief of life- all of which cannot be suffered by an
artificial person. (Prime White Cement vs. IAC,1993)
(3) Control and breach of duty must proximately cause the injury
or unjust loss complained of. - The statement in People vs. Manero and Mambulao vs. PNB,
that a corporation may recover moral damages if it “has a good
reputation that is debased, resulting in social humiliation” is an
D.R. CATV Services v. Ramos (December 9, 2005)
obiter dictum. Recovery of a corporation would be under
• Here, the sheriff overstepped his authority when he attaches Articles 19, 20, 21 of the Civil Code, but which requires a clear
the property of a corporation which had not been adjudged a proof of malice or bad faith. (ABS-CBN vs. CA,1999)
debtor. (Even if the judgment-debtor is a stockholder and - An educational corporation’s claim for moral damages arising
president of the corporation.) from libel falls under Article 2219(7) of the Civil Code, which
expressly authorizes the recovery of moral damages in cases
Apex Mining Corporation Inc v. Southeast Mindanao Gold of libel, slander or nay other form of defamation, and does not
Mining Corp (June 23, 2006) qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person can validly complain for libel or
• The doctrine of piercing the veil cannot be used as a vehicle any other form of defamation and claim for moral damages.
to commit prohibited acts because these acts are the ones ( Filipinas Broadcasting Network v. Ago Medical and
which the doctrine seeks to prevent. Educational Center, 448 SCRA 413, 2005)
• In this case, the assignment of the permit in favor of SEM is
utilized to circumvent the condition of non-transferability of 3.4 Corporate Liabilites
the exploration permit. To allow SEM to avail itself of this A Corporation as a person is:
doctrine and to approve the validity of the assignment is Entitled to:
tantamount to sanctioning illegal act which is what the - Equal Protection Clauses
doctrine precisely seeks to forestall. - Unreasonable Searches and Seizure
- Damages under Arts. 19, 20. 21
Not entitled to:
3.3 Is a corporation entitled to moral damages? - Privilege against Self-incrimination
It depends. Generally, NO. If arising from libel, slander, or moral - Moral Damages (except in cases of liblel, slander etc)
defamation, then a claim for damages may be made. Liable for:
- A corporation, being an artificial person, cannot experience - Torts
physical sufferings, mental anguish, fright, serious anxiety, - Civil wrongs
wounded feelings, moral shock or social humiliation which are Not liable for:
the basis for moral damages under Art 2217 of the Civil Code. - Criminal liability
However, a corporation may have good reputation which, if
besmirched, may be a ground for the award of moral damages. (a) Contractual
(Mambulao vs. PNB, APT vs. CA)

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SCHOOL OF LAW
ARIS S. MANGUERA

• The general rule is that obligations incurred by a corporation, - Not every tortuous act committed by an officer can be
acting through its authorized agents are its sole liabilities. ascribed to the corporation as its liability. Only when the
(Page 15 of De Leon, 2006) corporation has expressly directed the commission of
such tortuous act, would the damages resulting
(b) For Torts therefrom be imputable to the corporation. Direction by
YES!!! the corporation is manifested either by the BoD adopting
CLV Class Notes a resolution to such effect, or ratification or estoppel.
Q: When is a corporation liable for tort? - PNB vs. CA
A: When: A corporation is civilly liable in the same manner as natural
(a) the act committed by an officer or agent person for torts, because the rules governing the liability of a
(b)under express direction of authority from the stockholders or principal or master for a tort committed by an agent or servant
members acting as a body or through the BoD. are the same whether the principal or master be a natural
person or a corporation, and whether the servant or agent be a
Q: How can authority given to the agent of the corporation be
determined? natural or artificial person.
A: Either by: (a) such direction by the corporation is manifested, by its CLV Class Notes
BoD adopting a resolution to such effect (b) by having taken
advantage of such tortuous act, the corporation through its board, has CLV: It is clear from the ruling of the Court in this case that not every
expressly or impliedly ratifies such an act or estopped from impugning tortuous act committed by an officer can be ascribed to the corporation
the same. as its liability, for it is reasonable to presume that in granting of
authority by the corporation to its agent, such a grant did not include a
Q: What is a derivative suit? direction to commit tortuous acts against third parties. Only when the
A: Since, the act of the board is essentially that of the corporation and corporation has expressly directed the commission of such tortuous
therefore corporate assets cannot escape enforcement of the award of act would the damages resulting therfrom be ascribable to the
damage to the tort victim. As a remedy, the stockholders may institute corporation. And such a direction by the corporation, is manifested
a derivative suit against the responsible members and officers for the either by its board adopting a resolution to such effect, as in this case,
damages suffered by the corporation as a result of the tort suit. or having taken advantage of such a tortuous act the corporation,
through its board, expressly or impliedly ratifies an act or is estopped
from impugning such an act.
Catindig Class Notes
Q: Pedro uses corp vehicle. He did not go straight home but went to - Our jurisprudence is wanting to the definite scope of “corporate
Marikina to visit friends. On the way home, he collided with another tort”. Essentially, “tort” consists in the violation of a right given
vehicle. Is the corporation liable? or the omission of a duty imposed by law; a breach of legal
A: Corporation cannot be held liable. (under the principle of agency, an duty. The failure of the corporate employer to comply with the
agent acting outside the scope of authority…) law-imposed duty under the Labor Code to grant separation
Tip: pay to employees in case of cessation of operations
Minor deviation  Corp liable constitutes tort and its stockholder who was actively engaged
Major Deviation Corp not liable
in the management or operation of the business should be held
Pag happy happy hour not essential need
personally liable. (Naguiat vs. NLRC)

- The act of the board is essentially that of the corporation


(c) For Crimes
since the board is the embodiment of the very power and
NO!!!
prerogatives of a corporation.

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SCHOOL OF LAW
ARIS S. MANGUERA

- The trust receipts law recognizes the impossibility of imposing CLV Class Notes
the penalty of imprisonment on a corporation, hence, if the
entrustee is a corporation, the law makes the officers or Q: Why be liable for torts but not on crimes?
employees or other persons responsible for the offense liable A: Because in tort, negligence is the basis. And as humans, we are not
perfect; it is reasonable to believe that negligence may probably
to suffer the penalty of imprisonment. (Ong vs. CA)
happen but it is reasonable to believe that malice is [not] committed.
- No criminal suit can lie against an accused that is a
corporation. (Times vs. Reyes)
- When a criminal statue forbids the corporation itself from doing
an act, the prohibition extends to the board of directors, and
each director separately and individually (People vs.
Concepcion)
- While it is true that a criminal case can only be filed against the
officers and not against the corporation itself, it does not follow
that the corporation cannot be a real party-in-interest for the
purpose of bringing a civil action for malicious prosecution for
the damages incurred by the corporation for the criminal
proceedings brought against its officer. (Cometa vs. CA)
- It has been held that the existence of the corporate entity does
not shield from prosecution the corporate agent who knowingly
and intentionally causes the corporation to commit the crime.
The corporation engaged in unlawful business naturally aids
and abets in the carrying on of such business and will be
prosecuted as principal if, with knowledge of the business, its
purpose and effect, he consciously contributes his efforts to its
conduct and promotion (illegal recruitment in this case),
however slight his contribution may be. (Exec. Sec. vs. CA)

Catindig Class Notes


If a particular offense is not made applicable to a corporation, then the
corporation cannot be made liable.
ASM: Parang I remember in CLV class, that this should not be the
reason for non-liability of corporation for crimes.

CLV Class Notes

Corporations cannot be held criminally liable because:


(1) The veil of corporate fiction cannot be used to avoid penalty
imposable for committing an offense
(2) Difficulty if not impossibility of imposing penal sanctions.
(3) Criminal intent as an essential ingredient of a crime would be
missing.

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SCHOOL OF LAW
ARIS S. MANGUERA

o Articles of Incorporation
4. POWERS OF CORPORATIONS (2) Those that are necessary to the exercise of the
(Page 793 of CLV’s Commercial Law Review Book, 2007)
express or incidental powers (Section 236(110, 45) (or
implied)
• Underlying Theory on Power of Corporation. Precisely
(3) Those incidental to its existence (Sections 2, 45)
because the corporation is such a prevalent and dominant
(or inherent)
factor in the business life of the country, the law has to look
carefully into the exercise of powers by these artificial • Implied powers are those powers which are reasonably
persons it has created. (Reynoso v. CA, 2000) necessary to execute the express powers and to accomplish
or carry our the purposes for which the corporation was
formed. [These implied powers are expressly recognized by
• Meaning of powers of a corporation. The term powers of
Section 36(11).] (Nakakalito na ba? Hahaha)
corporation has reference to the corporation’s capacity or
• The purpose or purposes for which for which the corporation
right under its charter and laws to do certain things (De Leon
was created, as stated in its articles of incorporation, by
2006 at 310 citing 6 Fletcher 230)
defining the scope of corporate business or enterprise, in
effect, delimit its implied powers. (De Leon 2006 at 313)
• Distinguished from its “franchise”. Primary franchise is • Classification of implied powers:
the right to exist as an entity for the purpose of doing the
things embraced within its powers and from its secondary
(1) Acts in the usual course of business2
franchise. Secondary franchise is the right granted to an (2) Acts to protect dents owing to a corporation3
existing corporation to use public property for a public use, (3) Embarking in different business
with private profit. (De Leon 2006 at 310 citing 6-A Fletcher (4) Acts in part or wholly to protect or aid employees4
431) (5) Acts to increase business5

• Distinguished from “objects” of a corp. A corporation Express v. Implied Powers


exercises its powers for the purpose of attaining its objects. Expressed Implied
Thus, the power to issue promissory notes is a power and not Have to do largely with the main Have to do largely with the
an object of a corporation. (De Leon 2006 at 310 citing 6-A 2
Fletcher 431) Examples: Borrowing money, making ordinary contracts, executing
promissory notes, acquiring personal property for use in connection with the
• Classification of corporate powers: business etc. Key: All acts necessary to run a business under ordinary
(1) Expressed circumstances.
3
(2) Implied It is generally held that a corporation may temporarily conduct an outside
(3) Inherent business to collect a debt out of its profits. See Section 36(11).
4
See Section 36(10).
(1) Expressly granted or authorized by law 5
A corporation may conduct contests or sponsor radio or television
o Corporation Code (Secs 36, 37-44; see 11,37,16,46- programs, or promote fairs and other gatherings to advertise and increase its
48,62 and 76-81) business.

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SCHOOL OF LAW
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business, objects and purposes means and methods of attaining Every corporation incorporated under this Code has the power and
of the corporation. those objects and purposes. capacity:
Determined by the language of May change according to time,
1. To sue and be sued in its corporate name;
the corporate charter and the place, and surrounding
applicable law. circumstances. 2. Of succession by its corporate name for the period of time
The test is whether the powers The test is whether they are fairly stated in the articles of incorporation and the certificate of
are found in the words of the incidental to the (former) and incorporation;
charter of the law reasonably necessary to carry 3. To adopt and use a corporate seal;
them out in the furtherance of the 4. To amend its articles of incorporation in accordance with the
corporation’s business. provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy,
Incidental or inherent power and to amend or repeal the same in accordance with this
• Powers which a corporation can exercise by the mere fact of Code;
its being a corporation or powers which are necessary to
6. In case of stock corporations, to issue or sell stocks to
corporate existence and are, therefore impliedly granted.
subscribers and to sell stocks to subscribers and to sell
(See Section 36 (11)). treasury stocks in accordance with the provisions of this Code;
• As powers inherent in the corporation as legal entity, they and to admit members to the corporation if it be a non-stock
exist independently of the express powers. (See Section 45) corporation;
• These incidental powers are expressly recognized by 7. To purchase, receive, take or grant, hold, convey, sell, lease,
Sections 2 and 45. pledge, mortgage and otherwise deal with such real and
• Some of the powers enumerated in Section 36 are incidental personal property, including securities and bonds of other
powers which can be exercised by a corporation even in the corporations, as the transaction of the lawful business of the
absence of an express grant. corporation may reasonably and necessarily require, subject to
• Examples of incidental powers are: the power of succession; the limitations prescribed by law and the Constitution;
to sue and be sued; to have a corporate name; to purchase 8. To enter into merger or consolidation with other corporations
and hold real and personal property; to adopt and use a as provided in this Code;
corporate seal; to contract; to make by-laws; etc. 9. To make reasonable donations, including those for the public
• Every corporation has implied or incidental power to welfare or for hospital, charitable, cultural, scientific, civic, or
establish branch offices here or abroad as the need or similar purposes: Provided, That no corporation, domestic or
exigency of the business of the corporation may require. foreign, shall give donations in aid of any political party or
(SEC Opinion, May 17, 1990) candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
4.1 In General 11. To exercise such other powers as may be essential or
Sec. 36. Corporate powers and capacity necessary to carry out its purpose or purposes as stated in the
articles of incorporation.

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ARIS S. MANGUERA

• Section 36 of the Corporation Code enumerates some of the To sue and be sued in its corporate name
express powers of corporations (many of which even if not • This power (Section 36(1)) is an incident to corporate
expressly provided for by law would constitute implied powers existence. . (De Leon 2006 at 319)
of every entity. (Page 794 of CLV’s CLR, 2007) • As a rule, suits are to be brought by or against the
• Section 36 enumerates 10 powers that a corporation enjoys corporation in his own name.
in addition to the special powers that may be provided for in
the purpose clause of the articles of incorporation, which • Corporation de facto may sue or be sued but a corporation
would also constitute express powers. (Page 795 of CLV’s which has been dissolved after the expiration of 3-year
CLR, 2007) winding-up period ceases to exist de jure or de facto.

• Sources of powers of express powers of a corporation: • Under Sec. 36 of Corporation Code, in relation to Sec. 23,
(Page 795 of CLV’s CLR, 2007) where a corporation is an injured party, its power to sue is
lodged with its Board of Directors. A minority stockholder who
(1) Those provided in the law (Corporation Code) is a member of the Board has no such power or authority to
(2) The Purpose clause of the AoI. sue on the corporation’s behalf. Tam Wing Tak v. Makasiar,
• Section 45 recognizes also implied powers of every 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352
corporate entity emanating from its express powers.6 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002);
United Paragon Mining Corp v. CA, 2006)
• The rule is that in each case it is a question of the logical
relation of the act to the corporate purpose expressed in the • Where the corporation is real party-in-interest, neither
charter. IF the act is one which lawful in itself, and not administrator or a project manager could sign the certificate
otherwise, and is reasonably tributary to the promotion of against forum-shopping without being duly authorized by
those end, in a substantial and not in a remote and fanciful resolution of the Board of Directors (Esteban, Jr. v. Vda. de
sense, it may fairly be considered within charter powers. The Onorio, 360 SCRA 230 [2001]), nor the General Manager
test to be applied is whether the act in question is in who has no authority to institute a suit on behalf of the
direct and immediate furtherance of the corporation’s corporation even when the purpose is to protect corporate
business, fairly incidental to the express powers and assets. (Central Cooperative Exchange Inc. v. Enciso, 162
reasonably necessary to their exercise. If so, the SCRA 706 [1988]).
corporation has the power to do it, otherwise, no.
(Montelibano v. Bacolod Murcia Milling Co, 1962 cited in
• When the power to sue is delegated by the by-laws to a
particular officer, such officer may appoint counsel to
(Page 795 of CLV’s CLR, 2007)
represent the corporation in a pre-trial hearing without need
of a formal board resolution. Citibank, N.A. v. Chua, 220
6
SCRA 75 (1993).
No corporation…shall possess or exercise any corporate powers except
those conferred by this Code or by its Articles of Incorporation and except • For counsel to sign the certification for the corporation, he
such as necessary or incidental to the exercise of the powers so must specifically be authorized by the Board of Directors. BPI
conferred.”

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Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles • Property obtained by a corporation which is foreign to the
Shipyard Corp. v. CA, 415 SCRA 573 (2003). Metro Drug purposes for which it was organized is an unlawful
Distribution Inc. v. Narciso, (2006). acquisition. (De Leon 2006 at 324)
Power to adopt and use a corporate seal • The transfer or sale of shares owned by a corporation in
• A seal is a device (as an emblem, symbol, or word) used to another corporation requires approval by the board of
identify or replace the signature of an individual or directors of the seller corporation and while a corporation is
organization and to authenticate (as under common law) expressly empowered by Section 36(&) to dispose corporate
written matter purportedly emanating from such individual or assets, such power is subject to the provisions of Section 40.
organization. It may refer also to the impression of such a (De Leon 2006 at 325)
device on documents like certificates of stocks. . (De Leon • The right or power of private corporations to deal in real as
2006 at 323) well as personal property is also subject to limitations or
• Any seal adopted and used by the corporation may be restrictions prescribed by special laws and the Constitution.
altered by it at pleasure. Where a corporation adopts a seal (De Leon 2006 at 325)
for a special occasion, different from its corporate seal, the
seal adopted is the corporate seal only for that time or Power to acquire shares or securities
occasion. . (De Leon 2006 at 323) • Section 36(7) authorizes a private corporation to acquire
• A seal is not required for the validity of any corporate act. shares or securities of other corporations. Such an act does
Under Section 63, certificates of stock issued by corporations not need the approval of the stockholders if done in
are required to be sealed with the seal of the corporation. pursuance of the purpose or purposes of the corporation as
Nevertheless, the use of a corporate seal in certificates of stated in its articles of incorporation. But when the purpose is
stock must be deemed merely directory rather than done solely for investment, the approval of the stockholders
mandatory. as required by Section 42 is necessary. (De Leon 2006 at
• A corporation may exist even without a seal. 326)
• The presence of a seal establishes, prima facie, that the • Power to acquire shares in other corporation is subject to
instrument to which it is affixed is the act of the corporation. specific limitations established by the Code, special laws and
(18 Am Jur 2d) the Constitution. (De Leon 2006 at 326)
• When a corporation subscribes to the capital stock of
Power to acquire and convey property another corporation, it is required, as a rule, to pay its
• This power (Section 36(7)) which is also expressly conferred subscription in full. This is based upon the fact that while a
under the law has always been regarded as an incident to corporation has an unlimited capacity to contract obligations,
every corporation. A corporation need properties or assets to it has only a limited capacity to pay. (SEC Opinion, July 13,
carry on its business. (De Leon 2006 at 323) 1961)
• The power under Section 36(7) is qualified by the phrase “as • A corporation may purchase its own stock, however, only
the transaction of the lawful business of the corporation may when it has “unrestricted retained earnings” to cover the
reasonably and necessary require.” (De Leon 2006 at 324) shares to be purchased or acquired. (De Leon 2006 at 327)

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considered to be ultra vires to avoid any liability arising from


Sell Land and Other Properties the issuance of resolution granting such gratuity pay. Lopez
• When the corporation’s primary purpose is to market, Realty v. Fontecha, 247 SCRA 183, 192 (1995).
distribute, export and import merchandise, the sale of land is
not within the actual or apparent authority of the corporation Borrow Funds
acting through its officers, much less when acting through the • The power to borrow money is one of those cases where
treasurer. Likewise Articles 1874 and 1878 of Civil Code even a special power of attorney is required under Art. 1878
requires that when land is sold through an agent, the agent’s of Civil Code. There is invariably a need of an enabling act of
authority must be in writing, otherwise the sale is void. San the corporation to be approved by its Board of Directors.
Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & • The argument that the obtaining of loan was in accordance
Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 with the ordinary course of business usages and practices of
(2002); Firme v. Bukal Enterprises and Dev. Corp., 414 the corporation is devoid of merit because the prevailing
SCRA 190 (2003). practice in the corporation was to explicitly authorize an
officer to contract loans in behalf of the corporation. China
Power to contribute to charity Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
• Section 36(9) expressly vests in business corporations the Catindig Class Notes
authority to contribute for purely charitable purposes. Q: What is the catch-all provision as regards powers of corporations?
A: Si Cris vinerbatim yung Section 36(11), haha. Yeah, that’s the right
• Basis: Section 36(9) gives recognition to the growing answer.
tendency to regard charitable gifts as within the scope of
corporate authority. It is based on the modern view that
4.2 Specific Powers
business corporations are not organized solely as profit-
making enterprises but also as economic and social
institutions with corresponding public responsibility to aid in (a) To extend or shorten corporate term (Section 37
the betterment of economic and social conditions in the compare with Section 81)
community in which such corporation are doing business. Sec. 37. Power to extend or shorten corporate term
• Limitations: The limitation under the code is that the A private corporation may extend or shorten its term as stated in the
donations are: (a) the amount thereof must be reasonable; articles of incorporation when approved by a majority vote of the
and (b) the donations must not be in aid of any political party board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding
or candidate or for purposes of partisan political activity.
capital stock or by at least two-thirds (2/3) of the members in case of
non-stock corporations. Written notice of the proposed action and of
Provide Gratuity Pay for Employees the time and place of the meeting shall be addressed to each
• Such powers are expressly permitted by the Code on the stockholder or member at his place of residence as shown on the
theory that such activities promote better relations between books of the corporation and deposited to the addressee in the post
the corporation and its employees. (19 Am Jur 2d) office with postage prepaid, or served personally: Provided, That in
• Providing gratuity pay for employees is an express power of case of extension of corporate term, any dissenting stockholder may
a corporation under the Corporation Code, and cannot be exercise his appraisal right under the conditions provided in this

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code. (n) • CLV: The appraisal right should not be triggered when it
comes to shortening of corporate life, because there is really
Sec. 81. Instances of appraisal right no violation of the original contractual intent since. Therefore,
the inclusion of the case of shortening of corporate life under
Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following Section 81 should not prevail over the specific provision
instances: under Section 37. (Page 237 of CLV’s Textbook)
1. In case any amendment to the articles of incorporation has the • CLV: The exercise of appraisal rights rightly belongs to a
effect of changing or restricting the rights of any stockholder or case of extension of corporate term because extension
class of shares, or of authorizing preferences in any respect actually novates the corporate contract with each
superior to those of outstanding shares of any class, or of shareholder, which now seeks to extend the corporate
extending or shortening the term of corporate existence; relationship beyond the original term provided for in the
2. In case of sale, lease, exchange, transfer, mortgage, pledge or articles of incorporation. (Page 237 of CLV’s Textbook)
other disposition of all or substantially all of the corporate • Note that the appraisal right applies only to a stockholder of
property and assets as provided in the Code; and a stock corporation. (Page 333 of De Leon, 2006)
3. In case of merger or consolidation. (n) • In case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right to have his
Requirements for extending or shortening corporate life: shares bought back at fair value by the corporation. (Page
(1) Majority vote of the BoD/T 236 of CLV’s Textbook)
(2) Ratification in a meeting by 2/3 of outstanding capital stock
or 2/3 of the members, as the case may be. (b) To increase or decrease capital stock (Section 38)
• The extension or shortening of corporate life actually Sec. 38. Power to increase or decrease capital stock; incur,
requires the amendment of the articles of incorporation. create or increase bonded indebtedness
But whereas, in general amendments of the articles can be No corporation shall increase or decrease its capital stock or incur,
made by written assent of the stockholder or members, create or increase any bonded indebtedness unless approved by a
without need of meeting, in the case provided for under majority vote of the board of directors and, at a stockholder's meeting
Section 37, a meeting must be duly called for the purpose. duly called for the purpose, two-thirds (2/3) of the outstanding capital
(Page 816 of CLV’s CLR, 2007) stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written
• De Leon: Section 37 grants appraisal right to a dissenting notice of the proposed increase or diminution of the capital stock or of
stockholder (right of the stockholder in the cases provided by the incurring, creating, or increasing of any bonded indebtedness and
law to demand payment of the fair value of his shares) “in of the time and place of the stockholder's meeting at which the
case of extension of corporate term.” Such right should also proposed increase or diminution of the capital stock or the incurring
be available to a dissenting stockholder if the corporate term or increasing of any bonded indebtedness is to be considered, must
is shortened as it is expressly recognized in Section 81(1). be addressed to each stockholder at his place of residence as shown
(Page 333 of De Leon, 2006) But wait, CLV has a different on the books of the corporation and deposited to the addressee in the
opinion. post office with postage prepaid, or served personally.

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• Nature of Power. The power to increase or decrease capital • A reduction or increase of the capital stock can take place
stock is not an inherent of the corporation, not only because it only in the manner and under the conditions prescribed by
touches item expressly required to be provided for in the law.
articles of incorporation, but also the capital stock of a
corporation is governed by common law doctrines, such as • An over-issued stock is also known as spurious stock. An
the trust fund doctrine and pre-emptive rights. issue of stock by a corporation in excess of the amount
Limitations on the power prescribed or limited by its articles of incorporation is ultra
• As a general rule, a corporation cannot lawfully decrease its vires and the stock so issued Is void even in the hands of a
capital stock if such decrease will have the effect of relieving bona fide purchaser for value. (18 Am Jur 2d 757)
existing subscribers from the obligation of paying for their • Unauthorized increase of capital stock. An attempted
unpaid subscriptions without a valuable consideration for unauthorized increase of capital stock amounts to an over-
such release, as such an act of the corporation constitutes an issue and such stock is absolutely void and cannot be
attempted withdrawal of so much capital upon which validated by application of the doctrine of estoppel.
corporate directors are entitled to rely. (Phil Trust Co. v.
Rivera, 1923)
• No appraisal right in Decrease in Capital Stock. The
decrease to of the capital stock of a corporation should not
• Requirements:
trigger the exercise of the appraisal right for precisely, the
(1) Majority vote of the members of the BoD
decrease of capital stock would result in returning part of the
(2) Ratification by 2/vote of the outstanding capital stock, in a
investments of the stockholders who dissented. (Page 241 of
meeting duly called for that purpose with notice
CLV’s Textbook)
previously given
• The non-granting of appraisal right to dissenting
(3) Certificate of said corporate act shall be signed by
stockholders in case of increase of capital stock may be
majority of the members of the Board and the Chairman
rationalized on two grounds:
and Secretary of the stockholders’ meeting
(1) The increase in capital stock does not
(4) Certificate must be accompanied by the Treasurer’s
prevent any stockholder, including a dissenting
Affidavit certifying compliance with the 25%-25%
stockholder from opting out of the contractual
requirements as to stock corporation. (Page 817 of CLV’s
relationship by simply selling his shares in the
CLR, 2007)
corporation to any interested buyer.
• The corporation must submit proof to the SEC that such
decrease will not prejudice the rights of creditors. (SEC (2) The grant of appraisal right in case of
Opinion no. 05-10, July 12, 2005) increase of capital stock would defeat the very
purpose for which the power is exercised, i.e., to raise
• A corporation cannot issue stock in excess of the amount funds for the operation or even survival of the
limited by its articles of incorporation; such issue is ulra vires corporate business. (Page 241 of CLV’s Textbook)
and the stock so issued is void even in the hands of a bona
fide purchaser for value • Implied Policy under Section 38. The policy embodied in
Section 38 of the Corporation Code therefore, although it
recognizes that an increase in authorized capital stock
redefines the contractual relations in the corporate setting as

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it requires the approval of stockholders owning or phrase to mean the additional amount by which the capital
representing two-thirds (2/3) of the OCS, does not include the stock is increased.
appraisal right on the part of dissenting stockholders, in the • Of such increased capital. It is opined that this refers to the
sense that every stockholder should come into the corporate total subscription (not to individual subscriptions) and
setting fully aware that the expediencies of corporate life may regardless of class. Thus, when the corporation has several
require that eventually, the corporation may need to increase classes of shares, the 25% subscription requirement may be
capitalization to fund its operations or expansions, and needs applied only to one class of shares or it may be applied only
to look primarily into its equity investors to fund the same. to one class of shares or it may distribute it to all classes of
(Page 243 of CLV’s Textbook) shares, equally or unevenly. (SEC Opinon, April 11, 1995)
• Despite the board resolution approving the increase in • No treasurer’s affidavit is required to be attached in case of
capital stock and the receipt of payment on the future issues decrease of capital stock. (Page 341 of De Leon, 2006)
of the shares from the increased capital stock, such funds do • Ways of increasing (decreasing) authorized capital
not constitute part of the capital stock of the corporation until stock:
approval of the increase by SEC. Central Textile Mills, Inc. v. (1) Increasing the number of shares authorized to be
National Wages and Productivity Commission, 260 SCRA368 issued without increasing the par value thereof.
(1996). (2) By increasing the par value of each share without
• A reduction of capital to justify the mass layoff of employees, increasing the number thereof
especially of union members, amounts to nothing but a (3) By increasing both number of shares authorized to be issued
premature and plain distribution of corporate assets to and the par value thereof. (Page 341 of De Leon, 2006)
obviate a just sharing to labor of the vast profits obtained by Increase by way of stock dividends.
its joint efforts with capital through the years, and would • (Stock dividends are ordinarily declared out of the authorized
constitute unfair labor practice. Madrigal & Co. v. Zamora, but unissued shares of the corporation.) (Page 342 of De
151 SCRA 355 (1987). Leon, 2006)
• The Corporation Code contains no prohibition for a • A corporation may increase its capital stock by way of stock
corporation to increase its authorized capital stock even if the dividends without touching its unissued shares as long as
same has not yet been fully subscribed. (Page 336 of De there as long as there are sufficient retained earnings to
Leon, 2006) cover the increase.
• Necessity of new subscription for increase. An increase • (If the proposed stock dividend would result in the issuance
in the authorized capital stock cannot be lawfully of shares of stock in excess of the corporation’s authorized
accomplished without an actual increase in the assets of the capital stock, the over-all issue is null and void. Such dividend
corporation and additional subscriptions except when such declaration may be validly done provided that the corporation
increase is for the purpose of effecting a stock dividend simultaneously increases its capital stock and applies the
previously authorized. (Page 337 of De Leon, 2006) proposed stock dividends as full payment of the subscriptions
• Subscriptions and payments based on additional amount by to the capital stock increase.) (SEC Opinion, July 30, 1969)
which capital is increased. The SEC has construed the Catindig Class Notes
Q: Can the SHs in one meeting do all of these three, done sequentially?

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Item 1: Increase the authorized capital stock? 1M 5M • Particular Requirements of SEC. Under the SEC Interim
Item 2: Decrease ? 5M 2M
Guidelines, an application for registration and issuance of
Item 3: Then Increase again? 2M 5M
A: Yes. There is nothing in the Code which prohibits such action. There is this bonds can only be filed by the issuing corporation which has
decision by Justice Campos, the Citibank case. a minimum net worth of P25M at the time of the filing of the
(1) It must be done sequentially; application, and must have been in operation for 3 years. In
(2) File 3 amended AoI with the SEC and SEC will approved it sequentially. addition, it must fulfill the financial ratios mandated by the
(Alam na nila yun.)
(3) BoD delegated approval of certain transaction to an Executive Committee SEC in the Interim Guidelines. An issuing corporation must
(Deins ko lam relevance nito-ASM) also execute and submit a Trust Indenture with a trustee bank
This process is called RECAPITALIZATION; when the corp is in a deficit and an Underwriting Agreement, together with the printed
situation. prospectus and titles covering the securities for the bonded
indebtedness. (Page 244 of CLV’s Textbook)
(c) To incur, create or increase bonded indebtedness • Note that no appraisal right is granted to dissenting
(Section 38) stockholders when the corporation either validly incurs,
• “Bond” is a security representing denominated units of creates or increases bonded indebtedness since, the granting
indebtedness issued by a corporation to raise money or of such appraisal right under such circumstances would
capital obliging the issuer to pay the maturity value at the end drains the corporation of financial resources contrary to the
of a specified period which should not less than 360 days, purpose for which the power is exercised to raise funds for
where applicable, payment of interest on stipulated dates. corporate affairs. (Page 245 of CLV’s Textbook)
(SEC Interim Guidelines for the Registration of Bonds) (Page
243 of CLV’s Textbook) • Note:
• SEC has limited the term “bonded indebtedness” to cover (1) Where a corporation increases capital stock,
only indebtedness of the corporation which are secured by stockholders are entitled to a pre-emptive right to
mortgage on real or personal property. Debentures are subscribe to a sufficient number of shares in order to
issued on the basis of the general credit of the corporation maintain their previous relative voting power.
and are not secured by collaterals, and therefore do not (2) Dissenting stockholders cannot exercise the right of
constitute bonded indebtedness and will not require approval appraisal in this case. (Page 818 of CLV’s CLR, 2007)
of the stockholders. (Page 243 of CLV’s Textbook) Catindig Class Notes
Q: What are subordinated debts?
• A corporate bond is an obligation to pay a definite sum of A: Debts used as capital
money at a future time at a fixed rate of interest. (Page 347 of
De Leon, 2006)
(d) To deny pre-emptive rights (Section 39)
• Nature of Power: The power to incur or create liabilities is Sec. 39. Power to deny pre-emptive right
an inherent power on the part of business corporations, since
it is presumed that they would need to incur or create All stockholders of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in
liabilities as part of the normal operations of the business and
proportion to their respective shareholdings, unless such right is
the pursuit of the purpose of the corporation. denied by the articles of incorporation or an amendment thereto:

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Provided, That such pre-emptive right shall not extend to shares to monopolies, a corporation may, by a majority vote of its board of
be issued in compliance with laws requiring stock offerings or directors or trustees, sell, lease, exchange, mortgage, pledge or
minimum stock ownership by the public; or to shares to be issued in otherwise dispose of all or substantially all of its property and assets,
good faith with the approval of the stockholders representing two- including its goodwill, upon such terms and conditions and for such
thirds (2/3) of the outstanding capital stock, in exchange for property consideration, which may be money, stocks, bonds or other
needed for corporate purposes or in payment of a previously instruments for the payment of money or other property or
contracted debt. consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
• A pre-emptive right is the shareholder’s right to subscribe to representing at least two-thirds (2/3) of the outstanding capital stock,
all issues or disposition of shares or any class in proportion to or in case of non-stock corporation, by the vote of at least to two-
his present stockholdings, the purpose being to enable the thirds (2/3) of the members, in a stockholder's or member's meeting
shareholder to retain his proportionate control in the duly called for the purpose. Written notice of the proposed action and
corporation and to retain his equity in the retained earnings 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
and also in the net assets in the event of dissolution. (Page
books of the corporation and deposited to the addressee in the post
832 of CLV’s CLR, 2007) office with postage prepaid, or served personally: Provided, That any
• Whenever a capital stock of a corporation is increased and dissenting stockholder may exercise his appraisal right under the
new shares of stocks are issued, the new issue must be conditions provided in this Code.
offered first to the stockholders who are such at the rime the A sale or other disposition shall be deemed to cover substantially all
increase was made in proportion to their existing the corporate property and assets if thereby the corporation would be
shareholdings and on equal terms with other holders of the rendered incapable of continuing the business or accomplishing the
original stocks before subscriptions are received from the purpose for which it was incorporated.
general public. For example, if a stockholder with pre-emptive After such authorization or approval by the stockholders or members,
right owns 20% of the outstanding shares of the corporation, the board of directors or trustees may, nevertheless, in its discretion,
he may subscribe 20% of any shares of stock issued by the abandon such sale, lease, exchange, mortgage, pledge or other
corporation. This principle is known as the right of pre- disposition of property and assets, subject to the rights of third parties
emption or pre-emptive right of stockholders (Page 355 of De under any contract relating thereto, without further action or approval
Leon, 2006) by the stockholders or members.
• The rule [on pre-emption] aims to safeguard the right of Nothing in this section is intended to restrict the power of any
stockholder to preserve unaltered and unimpaired his corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
proportionate influence and interest in the corporation and the
dispose of any of its property and assets if the same is necessary in
relative value of his holdings. (Page 356 of De Leon, 2006) 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
(e) To sell or otherwise dispose of corporate assets be appropriated for the conduct of its remaining business.
(Section 40) In non-stock corporations where there are no members with voting
Sec. 40. Sale or other disposition of assets rights, the vote of at least a majority of the trustees in office will be
Subject to the provisions of existing laws on illegal combinations and sufficient authorization for the corporation to enter into any

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transaction authorized by this section. (28 1/2a) • Disposition of properties in the regular course of the
business does not need approval by or authority of
Jack’s Lecture
stockholders or members. (Page 819 of CLV’s CLR, 2007)
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
• Any disposition of corporate asset or property,
into any transaction authorized by this section. which is not in the usual course of business of the
corporate, would be within the covered transactions
In the sale, lease, exchange, mortgage or disposition of
all or substantially all of the properties or assets of the corpration, under Section 40 which would require stockholders’ or
you need approval not only of the majority of the Board but also of members’ approval, even when practically, the
at least 2/3 of the stockholders. According to the law, the test of corporation is an entity is till capable of pursuing its
whether the sale covers all or substantially all of the assets of the
charter purpose. (Page 250 of CLV’s Textbook)
corporation is this: will the corporation be capable of continuing
its business or accomplishing its purpose. For example, Jollibee Catindig Class Notes
must have more than 400 stores all over the country. If they sell 5 Q: (2 Kats were asked here, hehe) ABC Corp is a Property Devt Corp.
stores, you don’t have to get stockholder approval. It sells property (100 lots) to a manufacturing corporation. Tell whether
You have a case where the assets of a corporation approval of the following will be enough: (a)BoD only’(b)Stockholders
were foreclosed and the only remaining asset of the corporation only (c) Both.
was the right of redemption and they sold it. The Court said you A:
need stockholder approval.
(a) BoD only Yes, if the corporation after the sale decides
I don’t know whatever happened to this but you have or has the intention to continue its business.
that property in Commonwealth Avenue owned by the Islamic
Directorate. The Muslim countries in the Middle East donated (b) SHs only No, because the corp acts thru its BoD
money for the Muslims to acquire that property. When Martial (c) Both Yes, if there is no intention to continue business.
Law was declared, the Board of Trustees fled to the Middle East
and a bunch of people who were not directors sold that property
to Iglesia Ni Cristo. The Supreme Court said the sale was not Note:
valid because the people who sold it were not the elected If the sale is in accordance with the primary purpose of the
directors and secondly, that was the only property of that corporation then only BoD approval is needed. Otherwise, SH
corporation and therefore, stockholder approval was required. approval is necessary. Conisder also the intention to continue the corp
business.
A corporation can acquire its own shares but it is
required that it should have unrestricted retained earnings, as a
rule. Remember that we said the assets of a corporation Nature of Power
constitute a trust fund to answer for its obligations to its creditors. • The exercise of the power to sell or dispose of all or
If you allow a corporation when it has no retained earnings, in substantially all of the assets of the corporation is deemed to
effect, it is returning the investment of its stockholders. Thus, that
will prejudice the creditors. undermine the contractual relationship of the corporation and
its stockholders. (Page 246 of CLV’s Textbook)
• The exercise of such a power really affects the business
• The property of the corporation is not the property of enterprise level of corporate set-up. (Page 246 of CLV’s
the stockholders or members, and as such, may not be sold Textbook)
without the express authority from the board of directors.
(Litonjua v. Eternity Corp, 2006)

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• A sale or other disposition shall be deemed to cover and assets, if thereby the corporation would be rendered
substantially all the corporate property and assets if thereby incapable of continuing the business or accomplishing the
the corporation would be rendered incapable if: purposes for which it was incorporated. Such a sale or
(1) Continuing the business; disposition must be understood as valid only if it does not
(2) Accomplishing the purpose for which it was prejudice the creditors of the assignor, which necessarily
incorporated. implies that the assignee assumes the debts of the assignor.
(Caltex Inc. v. PNOC, 2006)
• A corporation by the action of its board of directors or
trustees supported by the vote of shareholders or members Appraisal Right.
may sell, lease exchange, mortgage, pledge, or otherwise • Any dissenting stockholder may exercise his
dispose of all or substantially all of all of its property, and appraisal right in case of sale of all or substantially all of the
assets including its good will. The requisites for the validity corporate assets or property. (Page 252 of CLV’s Textbook)
of such sale, etc. are as follows:
(2) The sale etc. must be approved by the board of
• The appraisal right is accorded to dissenting
stockholders as a matter of equity and fairness since they
directors or trustees;
should be allowed to plough their investments into ventures
(3) The action of the board of directors or trustees must
they feel they could get a better return rather with a
be authorized by the vote of stockholding representing
corporation that is no longer capable of pursuing the
2/3 of the outstanding capital stock including holders of
business. (Page 252 of CLV’s Textbook)
non-voting shares or 2/3 of the members as the case
may be; and • It should be noted that the exercise of the appraisal
(4) The authorization must be done at a stockholders’ or right of any stockholder is predicate on the “sale or other
members’ meeting duly called for that purpose after disposition of all or substantially all” of the corporate assets.
written notice. Any disposition which does not involve all or substantially all
of the corporate assets, does not require the approval of the
• Aside form the requirements of Section 40 , the sale stockholders or members and would not entitle any
of all or substantially all of the corporate assets of property dissenting stockholder to exercise his appraisal right. (Page
may require compliance with the Bulk Sales Law. (Page 251 366 of De Leon, 2006)
of CLV’s Textbook)

• Effect of non-compliance. Sale by Board of


Trustees of the only corporate property without compliance (f) To acquire own shares (Section 41)
with Sec. 40 of Corporation Code requiring ratification of Sec. 41. Power to acquire own shares
members representing at least two-thirds of the membership, A stock corporation shall have the power to purchase or acquire its
would make the sale null and void. Islamic Directorate v. own shares for a legitimate corporate purpose or purposes, including
Court of Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 but not limited to the following cases: Provided, That the corporation
SCRA 717 (1991). has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
• The disposition of the assets of a corporation shall 1. To eliminate fractional shares arising out of stock
be deemed to cover substantially all the corporate property dividends;

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(1) The corp can exercise its right of first refusal (applies to
2. To collect or compromise an indebtedness to the transferors thru succession)
corporation, arising out of unpaid subscription, in a (2) In the Minutes, to help the widow to liquidate her shares
delinquency sale, and to purchase delinquent shares of stock. (good reputation of the corporation). If all signed the
sold during said sale; and Minutes, no one can complain afterwards.
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the provisions
of this Code. (n)
(g) To invest corporate funds in another corporation
• The enumeration is by no means exclusive since other or business (Section 42)
purposes, which have legitimate business objectives, are Sec. 42. Power to invest corporate funds in another corporation or
acceptable to justify a stock corporation purchasing or business or for any other purpose
acquiring its own shares. (Page 253 of CLV’s Textbook)
Subject to the provisions of this Code, a private corporation may
• A corporation’s right to purchase its shares is subject to the
invest its funds in any other corporation or business or for any
following limitations: purpose other than the primary purpose for which it was organized
(1) That its capital is not thereby impaired when approved by a majority of the board of directors or trustees and
(2) That it be for a legitimate and proper corporate purpose ratified by the stockholders representing at least two-thirds (2/3) of
(3) That thee shall be unrestricted retained earnings to purchase the outstanding capital stock, or by at least two thirds (2/3) of the
the same and its capital is not thereby impaired members in the case of non-stock corporations, at a stockholder's or
(4) That the corporation acts in good faith and without prejudice member's meeting duly called for the purpose. Written notice of the
to the rights of creditors and stockholders proposed investment and the time and place of the meeting shall be
(5) That the conditions of corporate affairs warrant it. (SEC addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the
Opinions)
addressee in the post office with postage prepaid, or served
Catindig Class Notes
personally: Provided, That any dissenting stockholder shall have
Q: Can a corporation acquire its own share?
A: No. the general rule is that the corporation has no right to acquire its appraisal right as provided in this Code: Provided, however, That
own share unless permitted by legitimate corporate purposes. where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
Q: Is acquisition of own shares the only way to eliminate fractional incorporation, the approval of the stockholders or members shall not
shares? be necessary. (17 1/2a)
A: No. The BoD may allow the SH to round-up or to pay the
corporation to get 1 whole share. If the SH refuses to buy, the BoD Jack’s Lecture
may provide that the corporation shall buy the fractional part of the SH. Under Section 42, the corporation can invest its funds
in another corporation but it is with the same purpose, you only
Q: Can redeemable shares once redeemed be revived? need approval by the Board, you don’t need stockholder approval.
A: No. Same is true with regard to convertible shares (e.g. preferred to This is why the Court has said SMC can buy a brewery in Hong
common, preferred disappears) Kong without need of getting stockholder approval because that
Example: There are 5 incorporators. 1 died and survived by his widow. is consistent with the primary purpose of the corporation.
Can the corp buy the shares from the widow? For what good corporate
purpose? In the same way that the Court has said that Mau Sugar
Central could buy a company that manufactures sugar bags. It
doesn’t have to get SH approval because that is related to its

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primary purpose. Because you need sugar bags to pack the the purpose clause of said articles to include the desired
sugar that it is selling. business activity among its secondary purposes.
• Incident to primary purpose. A corporation may invest its
• Rationale of Rule. The law presumes that when funds in another business which is incident or auxiliary to its
stockholders invest, or members join a corporation, it is with primary purpose as stated in its articles of incorporation
the primary expectation that the corporation, through its without the approval of the stockholders or members as
board, will only pursue the primary purpose indicated in the required under Section 42. Even holders of no-voting
articles of incorporation, and if the board feels that it is members, as the case may be, are entitled to vote on the
propitious to pursue a secondary purpose, then it would do so matter. In such a case, a dissenting stockholder shall have no
only if the stockholders or members have had a chance to appraisal right. (Page 376-378 of De Leon, 2006)
evaluate an decide upon such diversion of corporate funds • All corporations, whatever may be their primary purposes,
from the primary business of the corporation. ((Page 256 of are deemed to have the power to invest corporate funds in
CLV’s Textbook) another corporation or business, as a means of obtaining the
• The term “funds” in Section 42 includes any corporate best returns of their investible funds. (Page 257 of CLV’s
property to be used in furtherance of the business. Thus, idle Textbook)
Catindig Class Notes
corporate property may be temporarily leased to make it Q: Can a cement corporation with excess cash put up a power
productive in the absence of express restrictions in the plant/generator? Build a road?
articles of incorporation or by-laws and the leasing is not used A: Yes, if there is insufficient power in the cement factory for that will
as a scheme to prejudice corporate directors, subject to the further the primary business.
requirements of Section 42.
C: Business means your own business. (Can be your secondary
• A non-stock, non-profit foundation may invest its funds in or purpose)
subscribe to shares of another domestic corporation. The
term “funds” as used in Section 42 include “donations” Q: A corporation is engaged in mining. It makes no much money and
received by the corporation from other entities. However, its decides to engage in commercial fishing. What kinds of approval
power to invest is limited by its articles of incorporation. (SEC needed?
Opinion No. 54, Nov. 3 , 2003) A: If within the secondary purpose BoD + SHs
If outside secondary purpose BoD+SHs+ SEC
• A secondary purpose. The other purposes for which funds
may be invested without amending the article of incorporation
must be among those enumerated in the articles of (h) To declare dividends (Section 43)
incorporation. In order to legally engage in any of its Sec. 43. Power to declare dividends
secondary purposes, the corporation must comply with The board of directors of a stock corporation may declare dividends
Section 42. out of the unrestricted retained earnings which shall be payable in
• Not among the secondary purposes. A corporation is not cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends
allowed to engage in a business distinct form those due on delinquent stock shall first be applied to the unpaid balance
enumerated in the articles of incorporation without amending on the subscription plus costs and expenses, while stock dividends

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shall be withheld from the delinquent stockholder until his unpaid • Dividends payable out of unrestricted retained earnings.
subscription is fully paid: Provided, further, That no stock dividend Under the law, dividends other than liquidating dividends
shall be issued without the approval of stockholders representing not (which are not really dividends as they are from caoital) may
less than two-thirds (2/3) of the outstanding capital stock at a regular be declared and paid out “the unrestricted retained earnings”
or special meeting duly called for the purpose. (16a) of the corporation.
Stock corporations are prohibited from retaining surplus profits in • The capital or capital stock which may not be impaired or
excess of one hundred (100%) percent of their paid-in capital stock, depleted by the dividends is not the entire net assets of the
except: (1) when justified by definite corporate expansion projects or corporation; rather, it is the legal capital of the corporation in
programs approved by the board of directors; or (2) when the the strict sense, referring to that portion of the net assets
corporation is prohibited under any loan agreement with any financial
directly or indirectly contributed by the stockholders as
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been consideration for the stocks issued to them upon the basis of
secured; or (3) when it can be clearly shown that such retention is their par or issued value.
necessary under special circumstances obtaining in the corporation, Jack’s Lecture
such as when there is need for special reserve for probable Most common types; cash, property, stock dividends.
contingencies. (n) Only the board approval is needed to declare cash dividends but
the corporation must have retained earnings. Now when the
• A stock corporation exists to make profit and to distribute a corporation declares cash dividends and it has no retained
portion of the profits to its stockholders. earnings this is illegal and SH must return what they received and
in fact directors will be made liable.
• A dividend is that part or portion of the profits of a
You have that Philbanking Corporation case before
corporation set aside, declared and order by the directors to which became bankrupt because it kept declaring dividends at the
be paid ratably to the stockholders on demand or at a fixed time it was incurring losses and the justification: “Eh you see we
time. It is a payment to the stockholders of a corporation as a have always been declaring dividends regularly and if we stop
return upon their investment. It is a characteristic of a now there might be a bank run.” Well you tell me now, katwiran
ba yan ng taong matino? They attacked the CB for closing
dividend that all stockholders of the same class share in it in Philbanking.
proportion to the respective amounts of stock which they Assuming it has retained earnings, once cash dividends
hold. have been declared they cannot be revoked because you can use
• Stock dividend is the amount that the corporation transfers that to manipulate the price. For example they declare that 25%
cash dividend so the price moves up. The directors sell their
from its surplus profit account to its capital account. It is the shares then they revoke the declaration so the price goes down
same amount that can loosely be termed as the “trust fund” of they buy back the shares.
the corporation. NTC v. CA, 311 SCRA 508 (1999). In the case of property dividends you only need board
• The power granted to stockholders to demand from the approval but in the case of stock dividends you need the approval
of the stockholders. Now, a stock dividend has no taxable
Board the declaration of dividends under Section 43 is one for consequence because it is the same pie but you are slicing it into
the few instances under the Code where the stockholders more pieces.
themselves exercise a primary power, instead of the usual For instance, here is somebody whose shares
ratificatory vote on action taken primarily by the board of represent 10% of the net worth of the corp. The corp declared a
directors. (Page 260 of CLV’s Textbook) 100% stock dividend. What will happen? He will still own 10 % of
the net worth of the corporation. The book value of his original

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share plus his stock dividend will be the same. It is only when he development schedule. For instance they will tell you to
sells and makes a profit will there be a taxable consequence. open so many outlets within 5 years so when Dunkin Donuts
And because of that even if a stock dividend has been declared it first opened they were required to open 5 outlets within 5
can still be revoked because it’s the same pie only your slicing it years so the company was not declaring any dividends.
in more pieces so even if you declare it you can revoke as long as Whatever retained earnings they were accruing were being
the stock certificates have not yet been distributed. used to put up other outlets. We have this client who owned
a heavy mix (?) plant and said that the present plant cannot
The SEC has said that paid-in surplus cannot be
cope with our volume of business. We have to put up a
declared as dividends whether stock or cash. For instance, here
bigger plant so they purchased a parcel of land in the
is a corp that made a public offering. The par value of the shares
CALABARZON and they will need 100 million to put up the
is 10 pesos per share but they offer to the public for 16 pesos so
new plant so they are not declaring any dividends. But it has
the buyers will be paying 6 pesos more. Now, that paid in surplus
to be definite in fact, the SEC will ask for copies of the Board
cannot be declared as a stock or cash dividend because
Resolution showing the definite expansion plans. The Board
according to the SEC you can only declare dividends from
Resolution is sufficient of course, you can’t be showing the
earnings from operations. That paid in surplus was not from
same resolution for 5 years in a row. Kung hindi gumagalaw
operations
yung financial statement or hindi gumagalaw yung assets,
Itong si Agbayani sabi it cannot be declared but the ano ba yan? In this case, the SEC must look in. Like this
SEC said it can be declared, subject to certain qualifications. One fellow Henry Ng of Unimart, he doesn’t declare dividends
of the tricks for window dressing the financial statement is when and he’s always saying “expansion” I don’t know how he’s
the value of the corp is negative you have your real property re- getting away with it!
appraised.
2. If the corporation is prohibited by a loan agreement
Now, the appraisal will increase the value of the from declaring dividends without the consent of the creditors
property and that wipes out your negative value that’s why or when the consent has not been obtained. Well, usually if
normally your external auditor will put a footnote in your financial it’s a big loan the creditor will require that as a condition and
statement for several years indicating that there has been a re- they will make sure the corp has enough funds to pay
evaluation. Now, according to Agbayani it cannot be declared
3. Special circumstances there is a need to build up
but the SEC says it can be declared subject to certain conditions.
reserves for contingencies (ex. There is a strike and the
The property must be subject to depreciation so if it is land you
union filed a case for unfair labor practice because many
cannot declare a dividend. It must be subject to depreciation and
employees were terminated so they said if we lose we will be
then you charge depreciation allowance and you have retained
made to pay backwages and that will amount to a hefty
earnings then you can declare that as dividends.
amount so we better start building reserves
1. Treasury shares, if they are declared, should be Now the dividends will be given to the Stockholder (SH)
considered property, not stock dividends. Now the law of record. If the SH sells his shares but the transfer has not been
provides (taken from a decree issued before) that if the recorded in the books of the corporation, it goes to the seller but
surplus profits exceed 100% of the paid-in capital, you must he will have to deliver that to the buyer. That is between him and
declare dividends whether cash or stock otherwise you will the buyer because remember it is the books that are controlling.
be fined by the SEC. That is one of the rackets of SGV. “O, Usually when the corporation declares a dividend it will say
mataas na yung retained earnings nyo, lagpas ng 100% “resolve that the corporation declare a cash div of 25% on Feb 25
mumultahan kayo ng SEC, you have to declare dividends.” to SH of record as of Feb 15 2002 and for this purpose the books
So at the end of the year in your financial statement wala na of the corporation be closed at the end of business hours on Feb
yan and of course because of that, they will have to prepare 15 and will be open again at 8:00 am of Feb 26 2002”.
a long-form report kasi hindi na kasali sa fiscal year and
siyempre tatagain ka for the long-form report.\ Justified by
definite corporate expansion projects approved by the board.
For instance you get a franchise from abroad there will be a

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(i) Cash
• Dividend payable in cash (iii) Property
• As soon as cash dividends are publicly declared, the • It is dividend distributed to the stockholders in the form of
stockholders have the right to their pro rata shares. property, real or personal, such as warehouse receipts, or
• It is the declaration of the dividends which creates both the shares of stock of another corporation.
dividends itself and the right of the stockholders to demand (iv) Interim
Catindig Class Notes
and receive it. (Page 406, De Leon, 2006 citing SEC Opinion, Q: Is this your first time to hear “interim” What do you mean by
October 9, 1992) interim?
• Can be declared by mere Board resolution from unrestricted A: It means “temporary” di ba. Declaration of interim dividends is not
earnings. (Page 246 of CLV’s CLR, 2007) prohibited by law.
(v) Record Date
• Revocable before announcement to the shareholders. (Page
836 of CLV’s CLR, 2007) • Record date is fixed by the board of directors for
Catindig Class Notes determination of stockholders entitled to vote; if it does not do
Q: IN 2006, X Corp has URE of 100T. The amount is not enough to so, such date shall be the date of the notice of meeting.
cover cash dividends to all SHs. Here, no declaration of dividends (Page 484 of De Leon, 2006)
during the 1st quarter. Only in June, the corp acquired 4 M. So
4M+100T income in URE. Could the corp declare a cash dividend of • There is no hard and fast rule describing the interval of time
3.1 M. between the date of the declaration of dividends, the date of
A: No. 3.1 M is stil part of capital or it is not yet par of URE. To issue record of stockholders entitled thereto, and the date of
cash dividends of 3.1M might violate the trust fund doctrine. payment, the same being left to the sound and judicious
discretion of the directors. (SEC Opinion, April 11, 1962)
(ii) Stock • It is customary for the directors to fix the time for payment of
• It is dividend payable in unissued or increased or additional a dividend. But a corporation cannot discriminate among the
shares of the corporation instead of in cash or in property out shareholders as to the time of payment of dividends.
of the unrestricted retained earnings of the corporation. A • If no time is fixed by the resolution declaring a dividend, it is
stock dividend may be declared only to the extent of the payable on demand, and if the resolution declares that it shall
maximum number of shares authorized in the articles of be payable at such time as the board of directors may direct
incorporation. and the board fixes no time, the law implies that it shall be
• Declaration may be revoked prior to actual issuance. (Page paid within a reasonable time.
836 of CLV’s CLR, 2007) Catindig Class Notes
Catindig Class Notes Record date must be a current or prospective date, never a past date.
Q: What are dividends?
A: It refers to return of investment. It is what a SH would want their Q: Why not a past date for record date?
Board to declare. A: Because of the problem of asymmetric information. In sales of
stock, price is the primary consideration. And price is determined by
Q: if a corp has treasury shares, can it decide to give the shares to information. If record date is ante-dated, the seller might be prejudiced
SHs? because in setting the price it did not consider the benefit of dividends.
A: Yep, it could be property dividends being assets of a corporation.
(Si Ina yata nagrecit nito)

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(vi) Limitation on retention of surplus profits (1) Section 43


(2) Tax Code, Section 29
• Stock corporations are prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock except
when justified by any of the reasons mentioned. (Section (i) To enter into management contracts (Section 44)
43(2)) Of the requirement which is mandatory is violated, the Sec. 44. Power to enter into management contract
corporation may be compelled by the SEC to declare No corporation shall conclude a management contract with another
dividends to its stockholders. corporation unless such contract shall have been approved by the
• The prohibition on retention of profits provided in Section 43 board of directors and by stockholders owning at least the majority of
is applicable to all stock corporations. the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation, of both the managing and the
• There may be some question as to whether or not the
managed corporation, at a meeting duly called for the purpose:
retention of profits is justified by the “reasonable needs of the Provided, That (1) where a stockholder or stockholders representing
business”. Suffice it to say that the policy of the law to the same interest of both the managing and the managed
encourage and force the distribution of dividends curtails the corporations own or control more than one-third (1/3) of the total
discretionary power of directors to retain corporate earnings. outstanding capital stock entitled to vote of the managing corporation;
• Section 29 of the Tax Code imposes a 10% surtax on or (2) where a majority of the members of the board of directors of
the managing corporation also constitute a majority of the members
corporations improperly accumulating profits or surplus, in
of the board of directors of the managed corporation, then the
addition to other income taxes imposed on corporations. The management contract must be approved by the stockholders of the
purpose is to prevent individual taxpayer from avoiding the managed corporation owning at least two-thirds (2/3) of the total
progressive rates of income tax by employing the corporate outstanding capital stock entitled to vote, or by at least two-thirds
form for the accumulation of taxable income. (Page 397, De (2/3) of the members in the case of a non-stock corporation. No
Leon, 2006) management contract shall be entered into for a period longer than
• Note: No dividends can be declared out of capital, except five years for any one term.
liquidating dividends distributed at dissolution. (Section 122) The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all
• Note: Dividends (whether cash or stock) can be declared or substantially all of the business of another corporation, whether
only out of the unrestricted retained earnings, although stock such contracts are called service contracts, operating agreements or
dividends may be issued out of premium surplus (since in the otherwise: Provided, however, That such service contracts or
latter case, it is nothing but a book-entry procedure). (Page operating agreements which relate to the exploration, development,
837 of CLV’s CLR, 2007) exploitation or utilization of natural resources may be entered into for
Catindig Class Notes such periods as may be provided by the pertinent laws or regulations.
Q: How does a corporation prove that the exceptions apply to them as (n)
regards retained profits in excess of 100%?
A: BoD issues a RESOLUTION approving corporation expansion (for Jack’s Lecture
example). BoD creates a reserve. Excerpts of MINUTES of the Board A corporation can enter into a management contract.
Resolution may be shown to the SEC. What the law really does here is to regulate management
contracts. Mgt contracts can be necessary at times. Like here is
Q: What are those legal provisions as regards retention of surplus a mining company whose directors and officers don’t know
profits?
A:

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anything about mining. They can enter into a contract with a be approved by at least 2/3 of the stockholders of the managed
corporation which has technical expertise to manage its mines. corporation.
You have that case of Nielson & Co. vs. Lepanto where A management contract should not be valid for more
Lepanto entered into a managment contract with Nielson & Co. to than 5 years for any one term. You can just keep renewing it
manage its mines. When the war broke out, the Japs took over provided, that it is not for more than 5 years at any one time.
the mines of Lepanto. (Yamashita must have been there.) After
the war, Nielson wanted to continue the contract because there
was a stipulation there that if the contract is interrupted, it will be
extended. Lepanto did not agree. Nielson & Co. sued. The • Management Contract is an agreement which a corporation
contract provided that they would be provided a certain delegates the management of its affairs to another
percentage of the gross income as their management fee. In corporation for a certain period of time. (Page 423 of De
addition, Nielson & Co. would get a certain percentage of the Leon, 2006)
stock dividends that will be declared. Lepanto lost in the SC in
December 1966. The award reached about 30 Million pesos. • Rationale for Ratification Requirements on Part of
(That case was handled by Ike Bello (for Lepanto) who was Managed Corporation. The rationale for the ratificatory
devastated by the decision.) Lepanto went to our office which
drafted a motion for reconsideration. One of the arguments
requirement under Section 44 of the managed corporation is
raised was that a management contract is a contract of agency. that such a management contract is a deviation form the
Therefore, it can be terminated at any time. But the Court principle under Section 23 that the corporate affairs shall be
rejected that argument. The Court said that a management managed by the board of directors, and thereby a departure
contract is a contract for lease of services. It does not involve a
representation so you cannot terminate it at any time. The Court,
from such an agreement would require the approval of the
however, eliminated the award for stock dividend. It said that stockholders under the principle that it would vary the
Nielson & Co. was not a stockholder and only a stockholder can contractual corporate arrangements, by allowing basically an
be given stock dividends. outsider to involve itself in the management of corporate
The law tries to regulate management contracts affairs. (Page 263 of CLV’s Textbook)
because it has been used too often to _______ money for the
corporation. When Soriano was still managing PAL, he was a • Rationale for Ratification Requirements on Part of
minority stockholder but he had this compania which had a Managing Corporation. That the management arrangement
management contract. So Soriano & Co. was getting a is a deviation form the principle also that the board of
percentage of the gross income of PAL. Everytime PAL would directors in the managing corporation assumed office with the
buy or sell anything, it had a commission. When Toda(?) took
over PAL, he did the same thing with his Rubicon which had a understanding that they would devote their time and
management contract. That’s why when Mr. Fred Ramos of resources for the affairs of the corporation. (Page 263 of
National Bookstore was questioning this/ was waging a proxy fight CLV’s Textbook)
against Soriano III in Atlas Mines, that was an issue he raised.
He said that Atlas Mining had a management contract with
• The ratificatory procedure should not therefore be applicable
Soriano Compania which was charging a fee based on the gross to a corporation that is organized primarily as a management
income. This was a time when Atlas was incurring losses. In company, and its entering into a management contract is
fact, later, Atlas Mining closed. clearly within the primary purpose of the corporation and in
This is why the laws says that a management contract accordance with the contractual understanding with the
should be approved by majority of the Board, by majority of the stockholders of such managing corporation. (Page 263 of
stockholders, of both the managed and managing corporation.
And if a stockholder of the managed corporation owns more than CLV’s Textbook)
1/3 of the managing corporation, the management contract must

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• Cases not covered by Section 44. When it comes to a Corporation Code. However, in the case of issuance of stock
dividends, the same may be sourced from the corporation’s paid-in
management contract entered into by the managed
surplus because that would only involve a reclassification of one
corporation under the definition of Section 44, not with capital account to another.
another corporation but with a partnership or an
individual, the same would not be covered by and thereby (The declaration of stock dividends from paid-in surplus was allowed
need not comply with the ratificatory requirements of Section taking into consideration that when a corporation converts the
44. (Page 263 of CLV’s Textbook) premium or contributed surplus into capital by issuing to its
• A management contract cannot delegate entire supervision stockholders shares of stock representing their respective
and control over the officers and business of a corporation to participation, it actually parts with nothing but merely transfers the
surplus capital account and issues shares of stock to represent the
another as this will contravene Section 23. The board cannot
same.
surrender or abdicate its power and duty of supervision and It would be different when the property dividend is declared out of
control for otherwise, it becomes a mere instrumentality of the additional paid-in capital. Under this situation, the capital of the
management company. (Ballantine, page 136) corporation represented by the additional paid-in capital is reduced to
Catindig Class Notes the extent of the property dividend declared. This is not allowable
Tip: Large corporation use SPA system of ExeCom for efficiency. since this will involve return of capital to stockholders.)
Other modes: Rule: The capital surplus or additional paid-in capital can only be
(1) SPA system declared as stock dividends but not as cash or property dividends.
(2) Exe Com
(3) Combination of both
(4) Management Contract
4.4 Implied Powers
4.3 Additional material: SEC Opinion No. 51, series of • Section 45 recognizes also implied powers of every
2003 addressed to Atty. Liezl Z. Paras re issuance of corporate entity emanating from its express powers.7
stock dividends out of paid-in surplus
SEC Opinion No. 51 • Implied powers are those powers which are reasonably
Q: May a corporation issue stock dividends to be paid from its paid-in necessary to execute the express powers and to accomplish
surplus?
A: Yes. As a rule in corporate practice, additional paid-in surplus has
two general uses—to wipe off deficits during re-organization and as
payment for issuance of stock dividends.
Basic in corporate law is the rule that paid-in surplus cannot be
issued as cash or property dividends because it would, in effect,
result in a return of capital which is prohibited under Section 43 of the

7
No corporation…shall possess or exercise any corporate powers except
those conferred by this Code or by its Articles of Incorporation and except
such as necessary or incidental to the exercise of the powers so
conferred.”

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or carry our the purposes for which the corporation was them out in the furtherance of the
formed. [These implied powers are expressly recognized by corporation’s business.
Section 36(11).] (Nakakalito na ba? Hahaha)
• The purpose or purposes for which for which the corporation • When the articles expressly provide that the purpose of the
was created, as stated in its articles of incorporation, by corporation was to “engage in the transportation of person by water,”
defining the scope of corporate business or enterprise, in such corporation cannot engage in the business of land
effect, delimit its implied powers. (De Leon 2006 at 313) transportation, which is an entirely different line of business, and, for
• Classification of implied powers: which reason, may not acquire any certificate of public convenience
to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc.,
(6) Acts in the usual course of business8 5 SCRA 809 (1962).
(7) Acts to protect dents owing to a corporation9
(8) Embarking in different business • A corporation whose primary purpose is to generate electric power
(9) Acts in part or wholly to protect or aid employees10 has no authority to undertake stevedoring services to unload coal
into its pier since it is not reasonably necessary for the operation of
(10) Acts to increase business11 its power plant. NPC v. Vera, 170 SCRA 721 (1989).

Express v. Implied Powers • A corporation organized to engage as a lending investor cannot


Expressed Implied engage in pawbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193
Have to do largely with the main Have to do largely with the (2001).
business, objects and purposes means and methods of attaining
of the corporation. those objects and purposes. • A mining company has no power to engage in real estate
development. Heirs of Antonio Pael v. Court of Appeals, 372 SCRA
Determined by the language of May change according to time, 587 (2001).
the corporate charter and the place, and surrounding
applicable law. circumstances. • An officer who is authorized to purchase the stock of another
The test is whether the powers The test is whether they are fairly corporation has implied power to perform all other obligations
are found in the words of the incidental to the (former) and arising therefrom such as payment of the shares of stock. Inter-Asia
charter of the law reasonably necessary to carry Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).

8
4.5 Ultra Vires Acts
Examples: Borrowing money, making ordinary contracts, executing Sec. 45. Ultra vires acts of corporations
promissory notes, acquiring personal property for use in connection with the
business etc. Key: All acts necessary to run a business under ordinary No corporation under this Code shall possess or exercise any
circumstances. corporate powers except those conferred by this Code or by its
9 articles of incorporation and except such as are necessary or
It is generally held that a corporation may temporarily conduct an outside
incidental to the exercise of the powers so conferred. (n)
business to collect a debt out of its profits. See Section 36(11).
10
See Section 36(10).
11
A corporation may conduct contests or sponsor radio or television Ultra vires refers to an act outside or beyond corporate powers, including
programs, or promote fairs and other gatherings to advertise and increase its those that may ostensibly be within such powers but are, by general or
business.

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special laws, prohibited or declared illegal. (Twin Towers Condo v. CA, 2003
cited in CLV’s CLR, 2007) For Acts or contracts which are not per se illegal:
General Rule:
Note: If the contract is ultra vires but has been completely In the absence of an authority from the board of directors, no person, not
performed by both parties, it can no longer be set aside. If even the officers of the corporation, can validly bind the corporation.
it has been performed by one party and the other party Exceptions:
doesn’t comply, if he is sued, he cannot raise the defense (1) Doctrine of Ratification or Estoppel- Acts of contracts which are not
that the contract is ultra vires because having benefited per se illegal can be validated. Even when the contract entered into in
from the performance of that contract, he will be in behalf of the corporation is outside the usual powers of the corporate
estoppel to raise that defense. officer, the corporation’s ratification of the contract and acceptance of
the benefits have made such contract binding upon the corporation.
ULTRA VIRES ACTS: Note: Ratification that would bind the corporation would have to come from
(1) Acts done beyond the powers of the corporation as the board of directors or a properly authorized representative.
provided for in the law or its articles of incorporation; Ratification can never be made on the part of the corporation by the
(2) Acts or contracts entered into in behalf of the same persons who wrongfully assume the power to make the contract,
corporation by persons who have no corporate but the ratification must be by the officers as governing body having
authority to make such contract.
authority; and
(2) Doctrine of Apparent Authority- If a corporation knowingly permits one
(3) Acts or contracts which are per se illegal as being
of its officers, or any other agent to act within the scope of an apparent
contrary to law.
authority, it holds him out to the public possessing the power to do so
those acts; and thus, the corporation will, as against anyone who has in
(1) Acts done beyond the powers of the corporation as provided for in good faith dealt with it through such agent, be estopped from denying
the law or its articles of incorporation; the agent’s authority.
Montelibano Test:
o If the act is one which is lawful in itself Note:
o The act in question is not in direct and immediate Existence of apparent authority must be ascertained through: (a)
furtherance of the corporation’s business, and is not general manner in which the corporation holds out an officer or agent as
fairly incident to the express powers and reasonably having the power to act or in, other words, the apparent authority to act in
necessary to their exercise. general, with which it clothes him; or (b) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether
(2) Acts or contracts entered into in behalf of the corporation by within or beyond of his ordinary powers.
persons who have no corporate authority; and If the corporation desires to set up the defense that the contract
was executed by one not authorized as agent, it must plead such fact.
(3) Acts or contracts which are per se illegal as being contrary to law. (Ramirez Doctrine) However, once the corporation has discharged its
- The act is illegal per se burden under the Ramirez Doctrine, then the burden of proof now shifts to
- Harden Test: the contracting party to show that indeed by previous acts and actuations,
o Even when acts are illegal per se, when only public or the acting officer had been clothed by the corporation with apparent authority
government policy is at stake and no private wrong is for the public to take such authority at face value. (Yao Ka Sin-Timely
committed, the courts will the parties as they are, in Repudiation Doctrine)
accordance with their original contractual
expectations. CLV Class Notes

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Q: Can two corporations form a partnership? A: YES. (Such guarantee will improve the morale of the employees.
A: No. If two corporations try to form a partnership, none would Employees with high-morale are good for the business.)
be created thereby. (Tuason v. Bolanos) The reason behind the
rule that corps cannot validly enter into a partnership is because
in the partnership all the other partner can bind the partners
under the “mutual agency” principle which would be violative of
the principle of of “centralized management” under Section 23 of
Corp Code which provides that only the BoD can bind the
corporation. (Page 801 of CLV’s CLR,2007)

Q: Can 2 corporations enter in a joint venture?


A: Yes. Corporations have legal capacity to form a joint venture,
i.e., one with a limited purpose and duration.

Q: What makes a project or undertaking a “joint venture”?


A: What makes a project or undertaking a joint venture to
authorize the corporation to be a co-venturer therein is the very
nature and essence of the undertaking that limits it to a particular
project which allows the board of directors of the participating
corporation to properly evaluate all the consequences and likely
liabilities to which the corporation would be held liable for.( Page
267 of CLV’s Textbook)

Q: Bakit pede sa joint venture and hindi sa partnership?


A: In a joint venture, being for a particular project undertaking,
when the BoD of a corp evaluate the risks and responsibilities
involved, they can more or less exercise their own business
judgment in determining the extent by which the corp would be
involved in the project and the likely liabilities incurred. Unlike in
an ordinary partnership arrangement which may expose the
corporation to any and various liabilities and risks which cannot
be evaluated and anticipated by the board. (Page 267 of CLV’s
Textbook)
Catindig Class Notes
Q: X corp has several VPs. BoD approved issuance of corporate credit
card to VPs. The credit company required X Corp to guarantee the
card obligation of the VPs. X corp is not in the business of issuing
guaranties or sureties. Can X Corp without violating Section 45
guarantee the card obligations?
Tip: Consider the primary purpose of the corporation. (Try to relate to
the primary purpose of the corp, if you could then there is no ultra
vires)

Q: Employees applied for limited credit facilities with a grocery store


nearby the corp. Can the corp guarantee 50% of the obligations?

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5. STOCKHOLDERS already, in other words, past services. Then, previous debt. So


when debt has been converted into equity. Then amount
transferred from unrestricted retained earnings to capital. That is
what happens when the corporation declares a stock dividend. A
5.1 Subscription to shares bookkeeping entry will be made and the amount corresponding to
the stock dividend will be debited from unrestricted retained
earnings and transferred to capital. Then outstanding shares
(a) How do you acquire shares in a company? exchanged for stocks in the event of reclassification or
In a corporation, a person may become a shareholder: conversion. For instance, a preferred share is given the option to
be exchanged for common shares. When you surrender, you’ll be
(1) By subscription contract with an existing corporation for the given common shares. Or say, the corporation decided to change
acquisition of unissued shares. the par value from P100 to P10. So they say, you know, it’s very
(2) By purchase from the corporation of treasury shares. hard to sell the shares in the stock market because the price is
(3) By transfer from a previous stockholder of the outstanding too high. P100! Stockholders will be asked to surrender their
stock certificates. In return, they will be given new stock
shares or existing subscription. (De Leon p. 510, 2006) certificates with the par value of P10. Or when you have a
• (I’m not sure if isasama dito yung “making a stock dividend” merger, stockholders of the absorbed corporation will surrender
their shares and in exchange they will be given shares in the
and assignment -ASM (p528 of De Leon,2006)) surviving corporation. And also, it is illegal to issue shares where
• Catindig: Remember the modes of acquiring ownership like the consideration is a promissory note. A promise to pay for future
succession. services.
What is a share? Now the stock certificate will be signed by the
• Shares of stock issued by the corporation “are personal President, or in his absence the Vice-President, and
countersigned by the Secretary (§63; Certificate of stock and
property and may be transferred by delivery of the certificate transfer of shares). That’s why in one case…you have this Torres
or certificates indorsed by the owner or his attorney-in-fact or case… a retired Judge who was the controlling stockholder in a
other persons legally authorized to make the transfer.” corporation. And his nephew to whom he had given shares of
stock turned out to be recalcitrant and rambunctious so he
(Section 63) decided to regain control of the corporation by giving shares to
• Shares of Stock therefore are properties and have intrinsic other nephews. And what did he do? He was the president of the
pecuniary value. (page 362 of CLV’s Textbook) corporation and he simply posted entries in the stock and transfer
book. O, one share to this fellow, another share to that… The
Jack’s Lecture
court said that that is not valid. That is not the way to…and
§ 60 [Subscription contract] simply defines what is a besides, he is the president, not the corporate secretary. He is not
subscription agreement and § 61[Pre-incorporation subscription] supposed to handle the stock and transfer book.
says a subscription for shares of stock of a corporation still to be
formed shall be irrevocable for at least 6 months unless all the Catindig Class Notes
subscribers agree or the incorporation fails to materialize. §62 Q: How to become a SH?
[Consideration for stocks] mentions that consideration may be A: (1) Subscribing to new shares
paid… It says here that stock should not be issued for a (2) Purchase of previously issued shares;
consideration less than the par value, or if it is a no-par value (3) Succession
share, less than the stated value and the consideration possible
may be actual cash which is the most common consideration. Or Q: What are the advantages to the corp pf having subscription
property. Payment made in the form of property, the SEC will agreements?
require an appraisal. Usually, the property given will be land so A: The corp can set a date for payment of balance. No need for a call
they will require an appraisal. And then, labor actually rendered in this case.

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Catindig: 99% of the time, subscription does not have subscription


agreement.
• Note: The purpose of removing all contracts dealing with
unissued shares form the coverage of “sale” is to exclude
Tip: For incorporation, it is advisable to pay in cash to avoid delay due them from the operations of ordinary contract principles, such
to valuation. as rescission by reason of breach, waiver, condonation or
mutual withdrawal and the effects of the happening and non-
C: In case of additional issuance of shares (after incorporation), the happening of conditions, to ensure that subscription due
SEC would take the word of the corporation, anyway the transaction thereon will be paid for the protection of corporate creditors
will appear on the Balance Sheet. under the trust fund doctrine. (Page 860 of CLV’s CLR, 2007)
• Nevertheless, a subscription agreement is a species of the
(b) What is subscription? (Section 60) genus sale in that it involved the transfer of ownership to a
Sec. 60. Subscription contract property right (share) for a valuable consideration. (Page 862
Any contract for the acquisition of unissued stock in an existing of CLV’s CLR, 2007)
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract. (n)
(c) What are pre-incorporation subscriptions?
(Section 61)
Sec. 72. Rights of unpaid shares Sec. 61. Pre-incorporation subscription
Holders of subscribed shares not fully paid which are not delinquent A subscription for shares of stock of a corporation still to be formed
shall have all the rights of a stockholder. (n) shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the
• Subscription is an offer to acquire a specified number of revocation, or unless the incorporation of said corporation fails to
unissued shares of an existing corporation or one still to be materialize within said period or within a longer period as may be
formed. (Page 512 of De Leon, 2006) stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the
• Subject Matter. There can be a subscription only with articles of incorporation to the Securities and Exchange Commission.
reference to stock which has never been issued. (Page (n)
511 of De Leon, 2006)
• The Code prohibits the distinction between the sale unissued • When properties were assigned pursuant to a pre-
stock or subscription of such stock; all contracts for the incorporation subscription agreement, but the corporation
subscription or sale of unissued stock shall be governed fails to issue the covered shares, the return of such properties
solely by the rules pertaining to subscription agreement. to the subscriber is a direct consequence of rescission and
(Page 859 of CLV’s CLR, 2007) does not amount to corporate distribution of assets prior to
• However, (a) Transfer for consideration of treasury shares is dissolution.  On Yong v. Tiu, 375 SCRA 614 (2002).
a sale by the corporation; (b) A transfer of fully paid shares by
a shareholder to a third person is a sale. (Page 860 of CLV’s (d) What could be the consideration for stocks?
CLR, 2007) Sec. 62. Considering for stocks

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Stocks shall not be issued for a consideration less than the par or the purpose. (5 and 16)
issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful • The word issue as used in Section 62 refers to the original
purposes at a fair valuation equal to the par or issued value of the issue, that is, when the stock first passes from the corporation
stock issued;
to the hands of stockholder. (Page 528 of De Leon, 2006)
3. Labor performed for or services actually rendered to the • A treasury stock therefore may be sold for reasonable price
corporation; fixed by the BoD even for less than the par or issued value
4. Previously incurred indebtedness of the corporation; thereof. (Section 9)
5. Amounts transferred from unrestricted retained earnings to • When consideration is agreed upon is either cash or
stated capital; and property, it is not necessary for the subscription agreement to
be valid that the same must be delivered at perfection, for a
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
subscription agreement is a consensual (not real) contract,
being a species of genus sale. (Page 863 of CLV’s CLR,
Where the consideration is other than actual cash, or consists of 2007)
intangible property such as patents of copyrights, the valuation
• The terms “actually…paid” and “actually received” in Section
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange 62 is meant to indicate that eventually the consideration must
Commission. be paid and cannot be given as a discount or amount to
watered stock. (Page 863 of CLV’s CLR, 2007)
Shares of stock shall not be issued in exchange for promissory notes
or future service. • Stock dividends are in the nature of shares of stock, the
consideration for which is the amount of unrestricted retained
The same considerations provided for in this section, insofar as they
earnings converted into equity in the corporation’s books.
may be applicable, may be used for the issuance of bonds by the
corporation. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).12
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or in (i) How is the issue price of no-par shares fixed?
the absence thereof, by the stockholders representing at least a (Section 62)
majority of the outstanding capital stock at a meeting duly called for
12
The basis for determining the documentary stamps due on stock dividends
declared would be their book value as indicated in the latest audited
financial statements of the corporation, and not the par value thereof.
Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379
SCRA 423 (2002).

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• The issued price of no-par value shares may be fixed: (ii) If the consideration for shares is other than cash,
(1) In the AoI how is the value thereof determined? (Section 62)
(2) By the BoD pursuant to authority conferred • Where consideration is other than actual cash, or consists of
upon it by the AoI or the by-laws; intangible property such as patents or copyrights, the
(3) In the absence thereof by the stockholders valuation thereof shall initially be determined by the
at a meeting duly called for the purpose representing incorporators or the BoD, subject to the final approval of the
at least a majority of the outstanding capital stock. SEC. (Page 864 of CLV’s CLR, 2007)
• Change in the value of issued shares. The stated value of • If the consideration is other than actual cash, its value must
the issued no par value shares cannot be changed anymore be worth the value of the stocks issued. (True Value Rule)
in view of Section 6 (par 3).(De Leon, p 536, 2006) Hence, the need of the approval of the valuation by the
• Change in the value of unissued shares. Any change in commission.(Page 531 of De Leon, 2006)
value of no par value shares shall apply only to unissued Receivables.
portion of the capital stock of the corporation. (SEC Opinion, • They may be accepted as payment for shares subject to the
July 31, 1979) following conditions:
• See Page 294 of JRS (1) The SEC is able to verify the existence and collectibility of
Catindig Class Notes the receivables;
Q: Difference of Par value and no par value shares (2) The shares to be issued will be held in escrow until actual
Par Value Share No Par Value payment or collection of the receivables. (SEC Opinion No.
Floor Price Par Value Not less than P5 05-11, July 14, 2005)
Ceiling No Ceiling No Ceiling
Property
The corp
normally sells (1) Necessary or proper in carrying pm the corporate business.
them at par The property which a corporation may accept in exchange
value and not at for its stock must be of a kind which the corporation may
book value
In both cases, the Bod has discretion to lawfully acquire and hold in carrying out the purposes of its
sell at prices higher than floor price. incorporation, and which is necessary or proper for it to own
in carrying on its business.
Book Value [Paid up capital + Paid in Surplus + Retained (2) Possesses ascertainable pecuniary value. The property
Earnings] / [total number of Outstanding shares]
must be of substantial nature, having pecuniary value
Book Value ≠ Fair Value capable of ascertainment (at a fair valuation equal to the par
Book value fluctuates because Retained Earnings also changes or issued value of the stock issued), and must be something
real and tangible as distinguished from something
Q: What is the disadvantage of No-par?
A: Its in the record keeping. There are different price for each shares. constructive and speculative.
(3) Capable of being transferred and applied to payment of
debts. It must be of such character that it can be delivered to
the corporation, instead of being merely communicated to its

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officers or employees, and it must be actually transferred to (3) Disposition of treasury shares (Page 832 of CLV’s
the corporation and capable of being transferred by the CLR, 2007)
corporation. It must also be such as is capable of being • Pre-emptive right not available:
applied to the payment of debts and of distribution among (1) Shares to be issued to comply with laws requiring stock
the stockholders. (Page 532 of De Leon, 2006) offering or minimum stock ownership by the public;
Services (2) Shares issued in good faith in exchange for property needed
• A corporation is allowed to receive as payment for its stocks for corporate purposes;
labor performed for or services actually rendered to the (3) Shares issued in payment of previously contracted debts;
corporation provided the transaction is in good faith and no (4) IN case the right is denied in the AoI. (Section 39; (Page 832
fraud is perpetrated upon other stockholders and creditors. of CLV’s CLR, 2007))
Satisfaction of Previously incurred indebtedness • Whenever a capital stock of a corporation is increased and
• Section 62(4) expressly allows the set-off or satisfaction of new shares of stocks are issued, the new issue must be
previously incurred indebtedness of a corporation by the offered first to the stockholders who are such at the rime the
issuance of its shares of stock where conflicting rights of increase was made in proportion to their existing
creditors are not involved. shareholdings and on equal terms with other holders of the
Profits original stocks before subscriptions are received from the
• If stocks are issued in consideration of profits earned by the general public. For example, if a stockholder with pre-emptive
corporation, but not distributed among the stockholders, such right owns 20% of the outstanding shares of the corporation,
issue is called stock dividends. (Page 536 of De Leon, 2006) he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre-
(e) Preemptive right of stockholders emption or pre-emptive right of stockholders (Page 355 of De
Leon, 2006)
• A pre-emptive right is the shareholder’s right to subscribe to
• The rule [on pre-emption] aims to safeguard the right of
all issues or disposition of shares or any class in proportion to
stockholder to preserve unaltered and unimpaired his
his present stockholdings, the purpose being to enable the
proportionate influence and interest in the corporation and the
shareholder to retain his proportionate control in the
relative value of his holdings. (Page 356 of De Leon, 2006)
corporation and to retain his equity in the retained earnings
and also in the net assets in the event of dissolution. (Page
832 of CLV’s CLR, 2007) 5.2 Trust Fund Doctrine
• Stock Transactions covered by right. Section 39 has TRUST FUND DOCTRINE
widened the coverage of pre-emptive right which now Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).
includes re-issuance of treasury shares because of the use of
the words “disposition of shares”, which would cover the
- “The assets of the Corporation to the extent of its capital stock
represent a Trust Fund for the protection of the creditor’s
following instances: claim”
(1) Increase in the Authorized Capital Stock;
(2) Opening for subscription the unissued portion of
existing capital stock; and

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o During the life of the corporation, no assets may be corporation are regarded as equtiy in trust for the payment of
returned to the stockholders when there are corporate creditors. The reason is that creditors of a
outstanding obligations corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of
o Dividends can only be declared out of __restricted assets among the stockholders without first paying corporate
retained earnings creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Boman Environmental
o The corporation is without authority to repurchase its
Dev. Corp. v. CA, 167 SCRA 540 (1988).
own shares of stock, except in instances mandated by
law
o The corporation cannot waive or condone 5.3 Case
subscriptions receivables Philippine Trust Co. v. Rivera (1923)
o The corporation cannot reduce its capital stock to the • The resolution releasing the shareholders from their
prejudice of the creditors. (there are exceptions) obligation to pay 50 per centum of their respective
o Upon insolvency, all subscriptions receivables
subscriptions was an attempted withdrawal of so much capital
automatically become due and payable
from the fund upon which the company’s creditors were
entitled ultimately to rely and, having been effected without
o Upon dissolution, all assets of the corporation shall compliance with the statutory requirements, was wholly
first be applied for the payment of all its obligations ineffectual.
Under the trust fund doctrine, the capital stock, property Catindig Class Notes
Q: A corporation has 5M Unrestricted Retained Earnings, it then
and other assets of the corporation are regarded as equity in
donated 3M to typhoon victims with BoD approval. “A”, a stockholder
trust for the payment of the corporate creditors. Comm. of filed a suit seeking to enjoin or annul the donation. Is the suit valid?
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). A: Yes. The donation is unreasonable.
The “trust fund” doctrine considers the subscribed capital
stock as a trust fund for the payment of the debts of the 5.4 Issuance of Certificate of Stock (Section 64)
corporation, to which the creditors may look for satisfaction.
Until the liquidation of the corporation, no part of the Sec. 64. Issuance of stock certificates
subscribed capital stock may be turned over or released to the No certificate of stock shall be issued to a subscriber until the full
stockholder (except in the redemption of the redeemable amount of his subscription together with interest and expenses (in
shares) without violating this principle. Thus dividends must case of delinquent shares), if any is due, has been paid. (37)
never impair the subscribed capital stock; subscription
commitments cannot be condoned or remitted; nor can the • Certificate of stock is a written evidence of the shares of
corporation buy its own shares using the subscribed capital as stock but it is not the share itself. (Lincoln Philippines Life v.
the consideration therefore. NTC v. Court of Appeals, 311 CA)
SCRA 508 (1999). • See page 864 of CLV’s CLR
The requirement of unrestricted retained earnings to cover Jack’s Lecture
the shares is based on the trust fund doctrine which means It says here (§64; Issuance of stock certificates) that
that the capital stock, property and other assets of a no stock certificate shall be issued until the full amount of the

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subscription has been paid because, it said, a subscription corporation upon demand, as soon as he has complied with
contract is indivisible. So until the entire consideration is paid, the the conditions under Section 64 of the Corp Code (CLV’s
stockholder shall not be entitled to a stock certificate. That’s why
that old Baltazar case is wrong. Where Justice Paredes said
Textbook 404)
that… let’s say you subscribed to 1000 shares and you paid only • A subscriber must first totally pay his subscription before a
25% of the price, the stockholder has the option. He can either certificate of stock covering shares subscribed and paid for
spread out that partial payment equally among the 1000 shares
so each share will be partially paid or he can apply that as full could be issued to him. (CLV’s Textbook 400)
payment for 250 shares and then ask the corporation to issue •
stock certificates to him for 250 shares. That is wrong because
the subscription agreement is indivisible.
(c) Additional material: SEC Opinion No. 05-02 dated
Catindig Class Notes January 31, 2005 re Bearer Certificates.
Q: Is the issuance of Certificate of Stock, in case of transfer
MINISTERIAL? SEC Opinion
A: Yes.
Catindig: Not exactly true.
(1) Tax Code on capital gains tax Payment thereof is
necessary. The Corp Sec must be shown the certificate
authorizing the transfer as issued by the BIR. (Except in case of
nominee (1share; usually, no capital gains tax realized))
(2) Payment of tax due on the transfer of shares
Note: Upon issuance of Certificate of Stock to a NOMINEE always
make a DEED OF TRUST. Prepare Minute first and have it signed
before issuing a Secretary’s Certificate
(3) Section 15, 11th paragraph
(4) Right of First Refusal
(5) Payment of Documentary stamps

Q: Where can you a get a stock certificate?


A: From the National Bookstore. (Haha)
(d) Lost or Stolen Certificates (Section 73)
Sec. 73. Lost or destroyed certificates
(a) Formalities for Issuance The following procedure shall be followed for the issuance by a
• The certificate of stock must be signed by the President or corporation of new certificates of stock in lieu of those which have
Vice-President and countersigned by the corporate secretary been lost, stolen or destroyed:
or the assistant secretary otherwise it is not deemed issued.
1. The registered owner of a certificate of stock in a corporation or
(Bitong v. CA) his legal representative shall file with the corporation an affidavit
• Pay attention to Section 15(11). in triplicate setting forth, if possible, the circumstances as to how
(b) Right of a stockholder to a certificate the certificate was lost, stolen or destroyed, the number of
• Under Section 63 of the Corp Code, every stockholder has a shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the
right to have a proper certificate issued to him by the

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same. He shall also submit such other information and evidence


be an internal matter for the corporation to find measures in
which he may deem necessary; ascertaining who are the real owners of stock for purposes of
liquidation. It is well-settled that unless proven otherwise, the
2. After verifying the affidavit and other information and evidence “stock and transfer book” is the best evidence to establish
with the books of the corporation, said corporation shall publish a
stock ownership. (SEC Opinion, dated 28 January 1999,
notice in a newspaper of general circulation published in the
place where the corporation has its principal office, once a week addressed to Ms. Ma. Cecilia Salazar-Santos).
for three (3) consecutive weeks at the expense of the registered • A corporation may actually not heed the procedure under
owner of the certificate of stock which has been lost, stolen or Section 73 of the Corp Code in accordance with SEC Opinion
destroyed. The notice shall state the name of said corporation, but by doing so, it cannot avail of the “free and harmless”
the name of the registered owner and the serial number of said clause provided in Section 73. (CLV’s textbook at 410)
certificate, and the number of shares represented by such Jack’s Lecture
certificate, and that after the expiration of one (1) year from the
Now if a stock certificate was lost, to get a new one, the
date of the last publication, if no contest has been presented to stockholder must execute an affidavit explaining the
said corporation regarding said certificate of stock, the right to circumstances under which the stock certificate was lost. (§73;
make such contest shall be barred and said corporation shall Lost or destroyed certificates). And then, notice of the loss will
cancel in its books the certificate of stock which has been lost, be published once a week for 3 consecutive weeks in a paper of
stolen or destroyed and issue in lieu thereof new certificate of general circulation. And then after 1 year from the date of the last
stock, unless the registered owner files a bond or other security publication, he can get a new stock certificate. But the stockholder
in lieu thereof as may be required, effective for a period of one might want to get the stock certificate right away. For instance, he
(1) year, for such amount and in such form and with such might be applying for a loan and intends to use the shares of
stock as collateral for the loan. So he cannot wait for a year. He
sureties as may be satisfactory to the board of directors, in which will be allowed to get the stock certificate but he will be required to
case a new certificate may be issued even before the expiration post an indemnity bond equal to the value of the shares listed in
of the one (1) year period provided herein: Provided, That if a the stock market. The stock and transfer agent will say, “Ok, you
contest has been presented to said corporation or if an action is just give a bond equal to the value of the shares in the stock
pending in court regarding the ownership of said certificate of market.” If it is not listed in the stock market, well you can use the
stock which has been lost, stolen or destroyed, the issuance of book value which appears on the latest audited financial
the new certificate of stock in lieu thereof shall be suspended statement.
until the final decision by the court regarding the ownership of Catindig Notes
said certificate of stock which has been lost, stolen or destroyed. Section 73
Q: Is the corporation required to verify the accuracy of all the facts in
Except in case of fraud, bad faith, or negligence on the part of the the affidavit?
corporation and its officers, no action may be brought against any A: No. What is verified is that the SH is indeed a SH and not an
corporation which shall have issued certificate of stock in lieu of those impostor. Check the signature cards.
lost, stolen or destroyed pursuant to the procedure above-described.
(R. A. 201a) Section 73(2)
(1) Verify if the affiant is really the stockholder of record. Use
• While Sec. 73 of Corporation Code appears to be the signature card.
mandatory, the same admits exceptions, such that a (2) Form: Notarial requirements; CTC+ Government issued
ID with picture
corporation may voluntarily issue a new certificate in lieu of (3) Address
the original certificate of stock which has been lost without (4) Prepare the notice. Newspaper of G.C.
complying with the requirements under said section. It would

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(5) Original copy of the publisher’s affidavit. • See page 876 of CLV’s CLR, 2007
Jack’s Lecture
Replacement Certificate
Now the stock certificate will be signed by the
(1) Indicate that it is a replacement certificate; President, or in his absence the Vice-President, and
(2) Same stock number countersigned by the Secretary (§63; Certificate of stock and
transfer of shares). That’s why in one case…you have this Torres
case… a retired Judge who was the controlling stockholder in a
5.5 Transfer of shares (Section 63) corporation. And his nephew to whom he had given shares of
stock turned out to be recalcitrant and rambunctious so he
Sec. 63. Certificate of stock and transfer of shares decided to regain control of the corporation by giving shares to
The capital stock of stock corporations shall be divided into shares for other nephews. And what did he do? He was the president of the
which certificates signed by the president or vice president, corporation and he simply posted entries in the stock and transfer
book. O, one share to this fellow, another share to that… The
countersigned by the secretary or assistant secretary, and sealed
court said that that is not valid. That is not the way to…and
with the seal of the corporation shall be issued in accordance with the besides, he is the president, not the corporate secretary. He is not
by-laws. Shares of stock so issued are personal property and may be supposed to handle the stock and transfer book.
transferred by delivery of the certificate or certificates endorsed by
TRANSFER OF SHARES OF STOCK
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as It says here, shares of stock are personal property and
between the parties, until the transfer is recorded in the books of the they may be transferred by delivery of stock certificates endorsed
by the owner or his attorney in fact. So you need two things: an
corporation showing the names of the parties to the transaction, the
indorsement of the stock certificate plus delivery. That’s why you
date of the transfer, the number of the certificate or certificates and have that case of Razon where Mr. Vicente Chuidian wanted to
the number of shares transferred. regain shares of stock which he claimed belonged to his father in
No shares of stock against which the corporation holds any unpaid E. Razon. And Razon said “No, this does not belong to your
father. It actually belongs to me.” Well, the stock certificates were
claim shall be transferable in the books of the corporation. (35) actually in his possession. The court said there was no
How are shares of stocks transferred? indorsement so he cannot claim that the stock certificate
belonged to him. On the other hand, the court said that where the
• If represented by a certificate, the following must be stock certificate was endorsed but it was not delivered, then the
complied with: shares of stock represented by the stock certificates had not been
(1) Delivery of the certificate transferred to the buyer.
(2) Indorsement by the owner or his agent And the court says it is a ministerial obligation of the
(3) To be valid to third parties, the transfer must corporation to transfer the shares of stock to the name of the
buyer. So even if a case has been filed for the rescission of the
be recorded in the books of the corporation. sale, the corporation still has to transfer the stock certificates.
• If not represented by the certificate (such as when the There was a case where the seller sold the shares of stock and
certificate has not yet been issued or where for some reason he was paid. And a new stock certificate was issued to the buyer.
is not in the possession of the stockholder. And then the corporate secretary says that, “Well, the old stock
certificate has not been endorsed.” So the buyer returned it to the
(1) By means of a deed of assignment seller and told him, “Will you please endorse it so that it can be
(2) Such is duly recorded in the books of cancelled.” But the seller did not and refused to return the stock
corporation. certificate. So the corporation declared it as cancelled. The court
(See page 297 of JRS for illustrative problems) said that the cancellation was valid because actually he has sold
and it and he has been paid. It was just delivered to him for him to

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endorse and he unjustifiably refused to return the stock certificate. that a subscription contract is an indivisible contract. And
And therefore the corporation can consider it as cancelled. therefore the stockholder, if he subscribed to 1000 shares cannot
say, “I will sell 500 and then retain 500.” No. The contract is
Now, no transfer shall be valid except as between the
indivisible. So it must be all or nothing. If he wants to sell, he must
parties until the transfer is recorded in the books of the
sell the entire 1000 shares. Now if he does that, he must get the
corporation. Why? If the selling stockholder has a creditor and in
approval of the board because remember he still owes the
the books of the corporation the shares are still in his name, the
corporation for his unpaid subscription and therefore if he will sell
creditor can attach and levy on the shares.
the shares, in effect he will be substituting somebody for him as
Now, although it has been said that shares of stock are debtor for the unpaid subscription. And when there is substitution
personal property and are quasi-negotiable because to transfer of debtors, that is novation and you need the consent of the
them, the seller can simply sign at the back and deliver it they’re creditor- the corporation. Now you have this case of China Bank
not like negotiable instruments. That’s why if the indorsement of which I mentioned earlier where China Bank foreclosed the
the stockholder was forged even if it was an indorsement in blank, pledge on the proprietary shares of Valley Golf Club. When it
the buyer shall not acquire any right to the share of stock. Now if asked Valley Golf Club to register the shares in its name, Valley
the one who forged it was an employee or officer of the Golf Club refused. It said that this stockholder has unpaid
corporation who was precisely in charge of the stock, the records obligations. He has not paid his monthly dues, he has not paid his
or the stock certificates, then the corporation will be responsible bills and under the by-laws, Valley Golf Club has a lien on the
for his act. Like you know, you are required to be a stockholder of stock certificate for his proprietary share for his unpaid claim. And
PLDT to get a telephone line. Many people do not claim their Valley Golf Club argued under §63 that it can’t be transferred in
stock certificates so they are there in the vault of PLDT. I have the books in the name of China Bank because we have these
one case where an employee there who was in charge of their claims which are not paid. The Court said no. The unpaid claim
custody forged the indorsement of some stock and sold them in mentioned here refers to the subscription price. It does not refer
the stock market. So the buyer would get good title, the to amounts due the corporation arising from other transactions. It
corporation will be liable. So what will happen? The buyer will get only refers to payment due under the subscription agreement.
good title and the seller will also have to be recognized. And it
would be PLDT who would bear the loss. But remember
whenever there will be an over-issuance of the shares, • Under Sec. 63 of Corporation Code, the sale of stocks shall
irrespective of good faith, the buyer cannot acquire title. If there is not be recognized as valid unless registered in the books of
over-issuance, the owner of the shares of stock whose signature
was forged must be recognized as still the owner and the remedy the corporation insofar as third persons, including the
of the buyer would simply be to sue PLDT for damages. Likewise corporation, are concerned—as between the parties to the
if the indorsement was forged… somebody stole the stock sale, the transfer shall be valid even if not recorded in the
certificate, forged the indorsement and because of that, the books of the corporation. Batangas Laguna Tayabas Bus
corporation issued a stock certificate to that forger so he now has
a stock certificate in his name and he goes around and sells that Co. v. Bitanga, 362 SCRA 635 (2001).
to somebody who bought that in good faith, he will be protected
because he has the right to rely on that stock certificate in the • A transferee has no right to intervene as a stockholder in
name of the seller. So what will happen, both the original owner corporate issue on the strength of the transfer of shares
whose stock was stolen and that buyer, para ‘tong Torens title, allegedly executed by a registered stockholder. It is explicit
will be recognized. But again if this will result in over-issuance, it
is the original owner who will be recognized and the remedy of under Sec. 63 that the transfer must be registered to affect
that buyer will be to simply sue the corporation for damages. the corporation and third persons. Magsaysay-Labrador v.
Now the law says no shares of stock against which the CA, 180 SCRA 266 (1989).
corporation holds any unpaid claim shall be transferable in the
books of the corporation. In other words, if there is an unpaid • The purpose of registration is two-fold: to enable the
subscription and there’s a call (?). So first of all, the SEC has said transferee to exercise all the rights of a stockholder, including

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the right to vote and to be voted for, and to inform the limitation in this respect, than the general provisions of law.
corporation of any change in share ownership so that it can Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
ascertain the persons entitled to the rights and subject to the
liabilities of a stockholder. Until challenged in a proper • The only limitation imposed by Sec. 63 is when the
proceeding, a stockholder of record has a right to participate corporation holds any unpaid claim against the shares
in any meeting; his vote can be properly counted to determine intended to be transferred. A corporation, either by its board,
whether a stockholders’ resolution was approved, despite the its by-laws, or the act of its officers, cannot create restrictions
claim of the alleged transferee. On the other hand, a person in stock transfers, because “Restrictions in the traffic of stock
who has purchased stock, and who desires to be recognized must have their source in legislative enactment, as the
as a stockholder for the purpose of voting, must secure such corporation itself cannot create such impediment. By-laws
a standing by having the transfer recorded on the corporate are intended merely for the protection of the corporation, and
books. Until the transfer is registered, the transferee is not a prescribe relation, not restriction; they are always subject to
stockholder but an outsider. Batangas Laguna Tayabas Bus the charter of the corporation.” Rural Bank of Salinas v. CA,
Company, Inc. v. Bitanga, 362 SCRA 635 (2001). 210 SCRA 510 (1992).

• A bona fide transfer of shares, not registered in the


corporate books, is not valid as against a subsequent lawful 5.6 Cases
attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not. All Sunset View Condominium Corporation v. Campos (1981)
transfers not so entered on the books of the corporation are • Ownership of a unit is a sine qua non to being a shareholder
absolutely void; not because they are without notice or in the condominium corporation. It follows that a purchaser of
fraudulent in law or fact, but because they are made so void a unit who is not yet the owner thereof for not having fully
by statute. Garcia v. Jomouad, 323 SCRA 424 (2000). paid the full purchase price is not a shareholder.
• Pursuant to Sec. 63, a transfer of shares of stock not • By necessary implication, the “separate interest” in a
recorded in the stock and transfer book is non-existent as far condominium, which entitles the holder to become
as the corporation is concerned. As between the corporation automatically a shareholder in the condominium corporation,
on the one hand, and its shareholders and third persons on as provided in Section of the Condominium Act, can be no
the other, the corporation looks only into its books for the other than ownership of a unit. This is so because nobody
purpose of determining who its shareholders are. Ponce v. can be a shareholder unless he is the owner of a unit and
Alsons Cement Corp., 393 SCRA 602 (2002). when he ceases to be the owner, he also ceases
automatically to be a shareholder.
• Section 63 contemplates no restriction as to whom the • (The subject matter of this case are under the jurisdiction of
stocks may be transferred. It does not suggest that any the regular courts because the private respondents are “not
discrimination may be created by the corporation in favor of, shareholders” of the condominium corporation.
or against a certain purchaser. The owner of shares, as
owner of personal property, is at liberty, under said section to Razon v. IAC (1992)
dispose them in favor of whomever he pleases, without

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• The indorsement of the certificate of stock is a mandatory corporation…Therefore, that as between the parties to the
requirement of law for an effective transfer of a certificate of sale, the transfer shall be valid even if not recorded in the
stock. books of corporation.
• The assertion that the petitioner did not require an • CLV: I agree with the dissenting opinion of Justice Puno:
indorsement of the certificate of stock in view of his intimate “The rule [Section 63] is intended to protect the interest of the
friendship with Chuidian cannot overcome the failure to follow corporation and theird persons who may be prejudiced by the
the procedure required by law. transfer of the shares of stocks. It follows therefore that as
• Catindig. This question was asked in the bar. But for me this between the parties to the sale, the transfer shall be valid
is not a good case because.. even if not recorded in the books of corporation.”
Rural Bank of Salinas v. CA (1992) • Catindig: I’m not satisfied with the decision because…
• Section 5(b) of PD NO. 902-A grants to the SEC the original • Catindig: to know who are the SH, only look at the STB.
and exclusive jurisdiction to hear and decide cases involving
intracorporate controversies. Rural Bank of Lipa v. CA (2001)
• An intra-corporate controversy has been defined as one • The rule is that the delivery of the stock certificate duly
which arises between a stockholder and the corporation. endorsed by the owner is the operative act of transfer of
There is no distinction, qualification, nor any exception shares from the lawful owner to the transferee.
whatsoever. • Requirements to have a valid transfer of stocks:
• A corporation cannot create restrictions in stock transfer (1) There must be a delivery of stock certificate
• The right of a transferee/assignee to have stocks transferred (2) The certificate must be endorsed by the
to his name is an inherent right. owner or his attorney-in-fact or other persons legally
• Corporation’s obligation to register is ministerial. authorized to make the transfer, and
(3) To be valid against third parties, the transfer
BLTB v. Bitanga, 2001 must be recorded in the books of the corporation.
• A transfer of shares is not valid unless recorded in the books Ponce v. Alsons Cement (2002)
of the corporation. • Pursuant to the Corporation Code, a transfer of shares of
• A person who has purchased stock, and who desires to be stock not recorded in the stock and transfer book of the
recognized as a stockholder for the purpose of voting, must corporation is non-existent as far as the corporation is
secure such a standing by having the transfer recorded on concerned.
the corporate books-until the transfer is registered, the • A corporate secretary may not be compelled to issue stock
transferee is not a stockholder but an outsider. certificates without registration.
• Dissenting Opinion by Panganiban: Under Section 63 of the
Corp Code, the sale of the stocks shall not be recognized as Republic v. Estate of Hans Menzi (2005)
valid unless registered in the books of the corporation, but • A stock certificate is merely a tangible evidence of ownership
only insofar as third persons, including the corporation are of shares of stock-its presence or absence does not affect the
concerned- as between the parties to the sale, the transfer right of the registered owner to dispose of the shares covered
shall be valid even if not recorded in the books of the by the stock certificate

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• The delivery of a duly indorsed stock certificate is sufficient • The registration of shares in a stockholder’s name, the
to transfer ownership of shares of stock in stock corporations; issuance of stock certificates, and the right to receive
The absence of a deed of assignment is not a fatal flaw which dividends fall within the jurisdiction of the SEC.
renders the transfer invalid. • The controversy “among stockholders, partners, associates
themselves” is intracorporate in nature and falls within the
5.7 Could the transfer of shares be restricted jurisdiction of SEC.
(Section 98) • Petitioner’s status as a mere pledge does not, under civil
law, entitle him to ownership of the subject shares
Sec. 98. Validity of restrictions on transfer of shares
• Petitioner’s possession of the stock certificates came about
Restrictions on the right to transfer shares must appear in the articles because they were delivered to him pursuant to the contracts
of incorporation and in the by-laws as well as in the certificate of of pledge. His possession as a pledge cannot ripen into
stock; otherwise, the same shall not be binding on any purchaser
ownership by prescription.
thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with such Roxas v. CA (1992)
reasonable terms, conditions or period stated therein. If upon the • An officers’ power as an agent of the corporation must be
expiration of said period, the existing stockholders or the corporation sought from the statute, charter, the by-laws or in a
fails to exercise the option to purchase, the transferring stockholder delegation of authority of such officer, from the acts of the
may sell his shares to any third person. board of directors, formally expressed or implied from a habit
or custom of doing business.
• (Atty. Catindig talks of right to purchase shares instead of
option to purchase shares)
Garcia v. Jomouad (2000)
Catindig Class Notes • All transfer of shares should be entered on the books of the
Section 98 corporation , and all transfers of shares not so entered are
Tag-along provision invalid as to attaching or execution creditors of the assignors,
e.g. Class A and B shares
One holder of Class A shares wants to sell his shares. All holders of
as well as the corporation and to subsequent purchasers in
Class A shares must also sell for the transaction to push through. good fait, and indeed, as to all persons interested, except the
parties to such transfer.
Mutual Fund Shares • The entry in the minutes of the meeting of the Club’s BoD
(1) Transferability of shares; noting the resignation of a proprietary member does not
(2) Right of holder to sell back the shares to the company at
any time.
constitute compliance with Section 63 of the Corporation
Code.
Settlement Account
-where proceeds, investments are deposited 5.9 Unpaid Subscriptions
Jack’s Lecture
5.8 Cases Now, the unpaid portion of the subscription, as a rule,
Lim Tay v. CA (1998) does not earn interest unless the by-laws provide for interest

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(§66; Interest on unpaid subscription). And if the by-laws for that price will be the one who will win the bid. And as a result
specify what is the interest, that is what will apply. But if it does of that, the subscription will now be fully paid and the rest will be
not state what will be the interest, then it will be the legal rate. given to the delinquent stockholder because he is now fully paid.
If there is no bidder, the corporation can bid. Now, until the
Now, so long as the stockholder is not delinquent, he is
corporation makes a call, the payment of the subscription is not
entitled to exercise all the rights of a stockholder so he can vote
due unless the subscription agreement contains a stipulation as to
his shares and if there are dividends declared, he will receive the
when it is to be paid. That’s why in one case, an employee of a
dividends. (§72; Rights of unpaid shares).
corporation filed a case and got a judgment against the employer
Now when will the payment of the balance fall due? but he was also a stockholder. And the employer argued that it
(§67; Payment of balance of subscription). In two cases. First, should not be ordered to satisfy the judgment because…since this
if the subscription agreement stipulates that he should pay for the employee has an unpaid subscription, the balance of the
balance of the subscription on certain dates. Secondly, if a call subscription should be set-off against the judgment in his favor.
was made. If the director said, “We need more working capital” The court said, “No, for compensation to take place, both debts
and so it made a call. Now a call must be uniform. You must must be due.” And the payment for the subscription is not yet due
make a call on everybody. Otherwise, if you will allow the board to because no call has been made.
single out some stockholders and they want to get rid of some
Now that unpaid portion of the subscription is an asset
stockholder who is questioning so many actions of the board, then
because it is a receivable. And creditors can sue the stockholders
they will make a call for his share only. And then if he does not
for the unpaid subscription if the corporation has no assets. Now
pay, they will sell his shares and get rid of him. It has to be
normally, the plaintiff will sue first the corporation and then if the
uniform. Now, so if a call is made and a stockholder fails to pay,
corporation… and if he gets a judgment and it cannot be
let’s say the directors say, “Ok, we are making a call on 25% of
satisfied…there is a sheriff’s return…unsatisfied…then he can
the subscription” and he fails to pay, the law says the entire
now sue the stockholders for the unpaid amount of their
balance of his subscription will become due. Although the call was
subscription. Now if, at the time the case was being filed against
only for 25%, if he fails to pay, the entire balance including the
the corporation, the corporation is already insolvent and cannot
75% will fall due. And so if within 30 days from the date payment
pay, then the creditor can already include the stockholders as
should have been made, he has still not paid, that is now
defendants in that action. Well, I had a case before, when Miriam
delinquent. And once the shares are delinquent, he will lose the
Defensor was still a judge. Our client was a foreign company
rights of a stockholder. (§71; Effect of delinquency) He cannot
which sold chemicals to a company here. It was a good project
vote his shares, he cannot receive any dividends and if there is
but the problem was they put in too little capital and instead the
any stock dividend, the delivery of the stock certificate will be
borrowed massively and so it was the interest payments that was
withheld and any cash dividend will be applied in payment of his
killing them. Now, our client filed a case and they compromised
subscription.
and agreed to pay in installments over a period of 2 years but
So once the stocks are delinquent, then the corporation then they failed to pay. So now I sued the stockholders for their
will now pass… the board will now pass a new resolution ordering unpaid subscription and the case was assigned to then Judge
that the shares be sold, which should not be less than 30 days or Miriam Defensor Santiago. Defense of stockholders: payment.
more than 60 days from the date the shares became delinquent. They said we have already paid for our subscription. And they
(§68; Delinquency sale) And notice of the sale should be sent to submitted receipts to prove that they had paid for their
the stockholder and that should be published once a week for 2 subscriptions. But you see, when the printing press prints the
weeks in a newspaper of general circulation. So if the stockholder receipts, it must first get approval from the Bureau of Internal
still fails to pay, well, the shares will be sold at public auction. The Revenue. So they will get approval and say we are printing these
auction will be the Dutch method of auction, In other words, the official receipts with these serial numbers and it is only after you
price is fixed. The auctioneer will say, “Gentlemen, we have here get approval that you can print and the number of the permit and
1000 shares which are delinquent and the balance of the the date of its issuance will be printed at the bottom of the
subscription is P75,000. How many shares am I offered for receipts. Now these receipts were obviously forged because they
P75,000?” Somebody says, “7,500”. Somebody else says, “6000.” were dated something like February but the date of the issuance
“5500.” The one who is willing to get the least number of shares of the permit by the BIR for printing was dated June. So they were

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obviously fabricated. That’s why in a moment of lucidity, Judge (3) Collection from cash dividends and withholding of stock
Miriam Defensor Santiago held the defendants liable. dividends.(See page 304 of JRS)
Now if the owner of the shares want to question the
sale, the law requires he must first pay the party who paid for his What does the term unpaid claim mean (for purposes of
shares of stock with legal interest. And he must file the case
within 6 months from the date of the sale. (§69; When sale may declaring the shareholder delinquent)?
be questioned). It refers to any unpaid subscription, and not to any indebtedness
Now the corporation can decide to sue instead on the which a subscriber of stockholder may owe the corporation arising
unpaid subscription. (§70; Court action to recover unpaid from any other transaction.
subscription). Why? Because if, for example, a corporation is
incurring losses, if you sell that at public auction, nobody will buy.
Because the value of the corporation is negative. So if the (i) When is a call necessary? (Section 67)
corporation decides to buy it also, it won’t (?) make sense. So Sec. 67. Payment of balance of subscription
they would probably, in such a case, choose to sue instead the
stockholder for payment of the balance of his subscription. Subject to the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock
(a) Is interest due on unpaid subscriptions? (Section and may collect the same or such percentage thereof, in either case
66) with accrued interest, if any, as it may deem necessary.
Sec. 66. Interest on unpaid subscriptions Payment of any unpaid subscription or any percentage thereof,
Subscribers for stock shall pay to the corporation interest on all together with the interest accrued, if any, shall be made on the date
unpaid subscriptions from the date of subscription, if so required by, specified in the contract of subscription or on the date stated in the
and at the rate of interest fixed in the by-laws. If no rate of interest is call made by the board. Failure to pay on such date shall render the
fixed in the by-laws, such rate shall be deemed to be the legal rate. entire balance due and payable and shall make the stockholder liable
(37) for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is
(b) Do unpaid shares have rights? (Section 72) made, all stocks covered by said subscription shall thereupon
Sec. 72. Rights of unpaid shares become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise. (38)
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (n) • Call is a declaration by the board of directors that the unpaid
subscriptions are due and payable to the corporation. (JRS at
305)
(c) How do you collect unpaid subscriptions? • The word “call” is capable of three meanings, namely: (a) a
What are the remedies of corporations to enforce payment of resolution of the BoD for the payment of unpaid subscriptions;
stocks? (b) notification of such resolution made on the stockholders;
(1) Extra-judicial sale at public auction. or (c) the time when subscriptions become payable. (CLV’s
(2) Judicial Action Textbook 392)

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• A call is necessary if no time to make payment is stated in


the subscription agreement. (JRS at 305) (e) What is the effect of delinquency? (Section 71)
• A call is not necessary if: Sec. 71. Effect of delinquency
(1) there is a time fixed in the agreement for payment No delinquent stock shall be voted for be entitled to vote or to
(2) if the corporation becomes insolvent (JRS at 305) representation at any stockholder's meeting, nor shall the holder
• Notice of call is necessary to bind the stockholders. (JRS at thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code, until
305)
and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any. (50a)
(ii) Could the corporation resort to court action? Effect of Deliquency:
(Section 70) (1) Deprives the stockholder the right:
Sec. 70. Court action to recover unpaid subscription a) To be voted for; or
Nothing in this Code shall prevent the corporation from b) To be entitled to vote; or
collecting by action in a court of proper jurisdiction the amount c) To representation at any stockholders’ meeting
due on any unpaid subscription, with accrued interest, costs (2) Deliquent stockholder shall not be entitled to any of the rights of
and expenses. (49a) a stockholder but he shall still be entitled to receive dividends.
(3) Deliquent stocks shall be subject to delinquency sale
Note: If the delinquent stockholder is a director, he shall continue to
(d) How do shares become delinquent? (Section 67) be a director but he cannot run for re-election. (JRS at 307)
Sec. 67. Payment of balance of subscription
Subject to the provisions of the contract of subscription, the board of (f) What is a delinquency sale and how is it
directors of any stock corporation may at any time declare due and conducted? (Section 68)
payable to the corporation unpaid subscriptions to the capital stock Sec. 68. Delinquency sale
and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary. The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each
Payment of any unpaid subscription or any percentage thereof, subscription plus all accrued interest, and the date, time and place of
together with the interest accrued, if any, shall be made on the date the sale which shall not be less than thirty (30) days nor more than
specified in the contract of subscription or on the date stated in the sixty (60) days from the date the stocks become delinquent.
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder liable Notice of said sale, with a copy of the resolution, shall be sent to
for interest at the legal rate on such balance, unless a different rate of every delinquent stockholder either personally or by registered mail.
interest is provided in the by-laws, computed from such date until full The same shall furthermore be published once a week for two (2)
payment. If within thirty (30) days from the said date no payment is consecutive weeks in a newspaper of general circulation in the
made, all stocks covered by said subscription shall thereupon province or city where the principal office of the corporation is
become delinquent and shall be subject to sale as hereinafter located.
provided, unless the board of directors orders otherwise. (38) Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the

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balance due on his subscription, plus accrued interest, costs of


which shall not be less than 30 days nor more than 60 days
advertisement and expenses of sale, or unless the board of directors form the date the stocks become delinquent.
otherwise orders, said delinquent stock shall be sold at public auction (5) Sale—such number of shares as may be necessary to pay the
to such bidder who shall offer to pay the full amount of the balance on amount due on subscription, plus interest and other amounts
the subscription together with accrued interest, costs of due, will be sold at public auction.
advertisement and expenses of sale, for the smallest number of The highest bidder is the person offering to pay the full amount
shares or fraction of a share. The stock so purchased shall be of the balance on the subscription and other amount that are
transferred to such purchaser in the books of the corporation and a due for the smallest number of shares or fraction of a share.
certificate for such stock shall be issued in his favor. The remaining Catindig Class Notes
shares, if any, shall be credited in favor of the delinquent stockholder The Certificate of Stock representing the stock dividends are
who shall likewise be entitled to the issuance of a certificate of stock considered civil fruits of the delinquent shares. Hence, the buyer of the
covering such shares. Dshares shall own the certificate of stocks representing the stock
dividends.
Should there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the (g) Could a sale of delinquent shares be questioned?
smallest number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the same, and the
(Section 69)
total amount due shall be credited as paid in full in the books of the Sec. 69. When sale may be questioned
corporation. Title to all the shares of stock covered by the No action to recover delinquent stock sold can be sustained upon the
subscription shall be vested in the corporation as treasury shares and ground of irregularity or defect in the notice of sale, or in the sale
may be disposed of by said corporation in accordance with the itself of the delinquent stock, unless the party seeking to maintain
provisions of this Code. such action first pays or tenders to the party holding the stock the
sum for which the same was sold, with interest from the date of
Procedure for collection and delinquency sale:
sale at the legal rate; and no such action shall be maintained unless it
(1) Call whenever required must be made by the Board is commenced by the filing of a complaint within six (6) months from
(2) Notice of call- the stockholders are given notice of the board the date of sale. (47a)
resolution by the corporate secretary, either personally or by
registered mail. Catindig Class Notes
Yes, a sale of delinquent shares may be questioned provided there is
(3) If the stockholders concerned do not pay within thirty (30) days tender…
from the date specified in the contract of subscription or in the
call, all the stocks covered by the subscription shall be 5.10 Case
declared delinquent and shall be subject to sale under Section
68. Apodaca v. NLRC (1989)
(4) Notice of delinquency served on the subscribers either • Unpaid subscriptions are not due and payable until a call is
personally or registered mail and publication in a newspaper of made by the corporation for payment through a board
general circulation in the province or the city where principal resolution.
office is located once a week for two consecutive weeks. • An obligation arising from non-payment of stock
Notice shall state the amount due on each subscription plus subscriptions to a corporation cannot be offset against a
accrued interest, and the date, time and place of the sale money claim of an employee against the employer.

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In case of pledged or mortgaged shares in stock corporations, the


5.11 Voting Rights pledgor or mortgagor shall have the right to attend and vote at
What are the basic rights of shareholders? meetings of stockholders, unless the pledgee or mortgagee is
(1) Direct or indirect participation in management; expressly given by the pledgor or mortgagor such right in writing
which is recorded on the appropriate corporate books. (n)
(2) Voting rights (Section 6)
(3) Right to remove directors (Section 28) • When shares are pledged by means of endorsement in
(4) Proprietary rights: blank and delivery of the covering certificates to a loan, the
(i) right to dividends pledgee does not become the owner thereof simply by the
(ii) appraisal right (Section 81) failure of the registered stockholder to pay his loan.
(iii) right to issuance of stock certificate for fully paid Consequently, without proper foreclosure, the lender cannot
shares (Section 64)
demand that the shares be registered in his name. Lim Tay
(iv) Proportionate participation in distribution of
assets in liquidation (Section 188-119) v. Court of Appeals, 293 SCRA 634 (1998).
(v) Right to transfer of stocks in corporate books
(Section 63) (b) Executors, receivers and administrators (Section
(vi) Pre-emptive right (Section 39)
(5) Right to inspect books and records (Section 74)
55)
Sec. 55. Right to vote of pledgors, mortgagors, and administrators
(6) Right to be furnished with the most recent financial
statement/financial report (Section 74,75) Executors, administrators, receivers, and other legal representatives
(7) Right to recover stocks unlawfully sold for delinquent duly appointed by the court may attend and vote in behalf of the
payment of subscription; stockholders or members without need of any written proxy. (27a)
(8) Right to file individual suit, representative suit, and derivative • Although the Rules of Court, while permitting an executor or
suits.(Page 298 of JRS) administrator to represent or to bring suits on behalf of the
deceased, do no prohibit the heirs from representing the
Manner of Voting deceased. When no administrator has been appointed, there
(1) Directly (in person) is all the more reason to recognize the heirs as the proper
(2) Indirectly, through a representative representatives of the deceased. Gochan v. Young, 354
(a) by means of proxy (Sections 55, 56, 58 and 89 par. 2) SCRA 207 (2001).
(b) by a trustee under a voting trust agreement (Sec 59)
(c) by executors, administrators, receivers, or other legal
representatives duly appointed by the court. (Section (c) Joint owners of stock (Section 56)
Sec. 56. Voting in case of joint ownership of stock
55(2))
*Voting may be either straight or cumulative (See Section 24) In case of shares of stock owned jointly by two or more persons, in
order to vote the same, the consent of all the co-owners shall be
(a) Pledgors and Mortgagors (Section 55) necessary, unless there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any other person to vote
Sec. 55. Right to vote of pledgors, mortgagors, and administrators
such share or shares: Provided, That when the shares are owned in
an "and/or" capacity by the holders thereof, any one of the joint

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owners can vote said shares or appoint a proxy therefor. (n) deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, That there shall always be a class or series
Catindig Class Notes of shares which have complete voting rights. Any or all of the shares
Q: In “AND shares”, can each joined owners vote for half of the total or series of shares may have a par value or have no par value as
shares? may be provided for in the articles of incorporation: Provided,
A: No. however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
Gen. Rule: Consent of all needed is needed in joint ownership.
issue no-par value shares of stock.
xxx
(d) ITF shares
Where the articles of incorporation provide for non-voting shares in
• “In trust for” the cases allowed by this Code, the holders of such shares shall
• Even when it is shown that the registered owner of shares of nevertheless be entitled to vote on the following matters:
stock holds the share in trust for the benefit of the principal, it
1. Amendment of the articles of incorporation;
is necessary nevertheless that the trustee must still endorse
the stock certificate to validate the cancellation of her share 2. Adoption and amendment of by-laws;
and to have the transfer recorded in the books of the 3. Sale, lease, exchange, mortgage, pledge or other disposition
corporation in favor of the principal or another trustee. (Bitong of all or substantially all of the corporate property;
v. CA)
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
(e) And/or shares
• Anyone of the joint owners can vote said shares or appoint a 6. Merger or consolidation of the corporation with another
corporation or other corporations;
proxy therefore.
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
(f) Treasury shares (Section 57)
Sec. 57. Voting right for treasury shares 8. Dissolution of the corporation.

Treasury shares shall have no voting right as long as such shares Except as provided in the immediately preceding paragraph, the vote
remain in the Treasury. (n) necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.

(g) Non-voting shares (Section 6)


Sec. 6. Classification of shares (h) Proxies (Section 58)
Sec. 58. Proxies
The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares Stockholders and members may vote in person or by proxy in all
may have such rights, privileges or restrictions as may be stated in meetings of stockholders or members. Proxies shall in writing, signed
the articles of incorporation: Provided, That no share may be by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy,

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it shall be valid only for the meeting for which it is intended. No proxy One or more stockholders of a stock corporation may create a voting
shall be valid and effective for a period longer than five (5) years at trust for the purpose of conferring upon a trustee or trustees the right
any one time. (n) to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided, That in the case of a
Jack’s Lecture
voting trust specifically required as a condition in a loan agreement,
Now, as I said before, a stockholder can vote by proxy.
But if he gave a later proxy, the later proxy will prevail over the said voting trust may be for a period exceeding five (5) years but shall
earlier proxy. If you cannot tell which one is later because they automatically expire upon full payment of the loan. A voting trust
don’t have dates, well, neither can vote. Or if the stockholder agreement must be in writing and notarized, and shall specify the
personally showed up at the stockholders’ meeting, then he is terms and conditions thereof. A certified copy of such agreement
personally present, then the proxy will lose the right to vote shall be filed with the corporation and with the Securities and
because the proxy is just an agent and agency can be revoked at Exchange Commission; otherwise, said agreement is ineffective and
any time. However if the proxy is coupled with an interest, then it unenforceable. The certificate or certificates of stock covered by the
cannot be revoked. For instance, if you have a bank which loaned
voting trust agreement shall be canceled and new ones shall be
a substantial amount of money and it required this borrower to
pledge his shares of stock as collateral and to give a proxy until issued in the name of the trustee or trustees stating that they are
the loan is fully paid, then he cannot revoke the proxy because it issued pursuant to said agreement. In the books of the corporation, it
is coupled with an interest. shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
• Proxy refers to the formal written authority given by the
owner or holder of the stock, who has a right to vote it, or by a The trustee or trustees shall execute and deliver to the transferors
member, as principal to another person, as agent, to exercise voting trust certificates, which shall be transferable in the same
the voting rights of the former. (Page 490 of De Leon, 2006) manner and with the same effect as certificates of stock.
• The term also refers to the holder of authority or the person The voting trust agreement filed with the corporation shall be subject
authorized by an absent stockholder or member to vote for to examination by any stockholder of the corporation in the same
him at a stockholders’ or members’ meeting. (Page 490 of De manner as any other corporate book or record: Provided, That both
Leon, 2006) the transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.
• Purpose of use of proxy:
(1) Presence of quorum in meetings Any other stockholder may transfer his shares to the same trustee or
(2) Exercise of right to vote though absent trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of
(3) Voting and management control
said agreement.
Catindig Class Notes
Q: Can the Corporate Secretary refuse to recognize a proxy sent thru No voting trust agreement shall be entered into for the purpose of
email? circumventing the law against monopolies and illegal combinations in
A: Yes, unless the corporation adopts a policy to receive proxy email restraint of trade or used for purposes of fraud.
thru internet.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
(i) Voting Trust (Section 59) and the voting trust certificates as well as the certificates of stock in
Sec. 59. Voting trusts the name of the trustee or trustees shall thereby be deemed canceled
and new certificates of stock shall be reissued in the name of the

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transferors.
The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise. (36a) Catindig Class Notes
Q: A,B,C,D, and E entered in pooling agreement so as to elect A,B,
Jack’s Lecture and C as directors. Those elected as directors would then vote for A
A stockholder can create a voting trust. What will happen is that as President of the corporation. A,B, and C were elected. A was not
the share of stock under his name will be cancelled and will be elected President because C voted for another person. Can A or B or
issued in the name of the trustee. The VTA is valid only for 5 other members of the pool file a suit against C for breach of contract?
years. But, if this was imposed as a condition in a loan, it will be A: No. The direction of business belongs to the Board of Directors and
valid for a longer period because the lender imposed that not to the SHs. The stipulation is void if it is meant to control the
condition to protect his interest especially if it is a big exposure. discretion of the Directors.
The bank will want to know what is happening so they will insist
that a bank officer should be given a voting trust and sit in the
Board to find out what’s happening. If the loan is for 10 years it
Distinction between proxy and voting trust
can be for 10 years but if the loan is paid, automatically the VTA Proxy VTA
will lapse even if the 10 year period has not yet expired because Legal Title No legal title Acquires legal title
the voting trust is merely to protect the interest of the bank. Revocability Revocable unless coupled Irrevocable if validly
These are different devices to accumulate votes, the proxies, the with interest. executed BUT such SH
trusts. You can also have a pooling agreement where 2 or more can revoke if there’s a
SH sign an agreement that they will vote their shares together, in breach of fiduciary
the same way.
obligation
(j) Pooling agreement Extent of Can only act at a specified Not limited to any
• Pooling agreement refers to agreement between 2 or more Power SHs’ or members; meeting particular meeting
shareholders to vote their shares in the same way or as a When to vote Absence of the owner Even when the owner is
present
unit. (Page 502 of De Leon, 2006)
Capacity to be Cannot be voted as a Can be voted as a
• See Section 100 a director director unless he is also a director.
UP Class Notes SH of record (owns other Considered as the SH of
Para 1: SH agreements in general. Pre-incorporation agreements
shares) record in the books of the
among SHs remain effective even after incorporation if so intended
and even if not reflected in AOI, except for matter required by the corp
Code to appear in the AOI Subject Matter Voting rights Shares+Voting rights
Duration Usually shorter but cannot Usually longer but cannot
Para 2: Refers to pooling and voting agreements in particular. There is exceed 5 years exceed 5 years except in
no reason for denying the SHs other than those in close corporations loan agreeements
the right to enter into voting or pooling agreements to protect their
interests, as long as no wrong or fraud is committed or is intended to
be committed on other SHs or parties Proxy v. Trustee v. Pooling and Agreements
Proxy Trustee Pooling Agreements

Para 3: gives close corporations freedom to operate as a partnership Based on law on Based on law on trust Based on Contract law
between and among the SHs, but remaining as a corporation insofar agency
as third persons are concerned. Note: SHS who are parties assume Principal-agent Trustee-beneficiary Consensual
liabilities of directors Proxy cannot exceed The only limit to this Merely an agreement to

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delegated authority authority: must be for vote in the same way meetings through teleconferencing and video conferencing may be
benefit of trustee deemed acceptable only when adequate safeguards have been
(fiduciary obligation) accordingly set in place. Meetings of this nature should be properly
Must be in writing Must be in writing and No formalities required recorded and the appropriate tapes and discs properly stored for
notatrized safekeeping.
Copy must be filed with Copy must be file with Merely a contract
the corp secretary the SEC between SH’s Q: How about via e-mail?
Transfer of legal title to A: As it is, voting by e-mail alone is not adequate because a user-
trustee participant’s role in such cases is passive considering that his access
Regular voting rights. Absolute voting rights, Owner still exercises to the entire proceedings is limited to the information in print
Another penson subject only to fiduciary voting rights transmitted through the internet.
exercise voting rights duty. Another person
only for a specific exercises voting rights
meeting (unless continuously. (b) SEC Memo Circular No. 4 series of 2004, March
otherwise provided)
Proxy cannot be a Trustee can be a 17, 2004
director director
Revocable at will, in Irrevocable as long as Revocable by consent SEC Memo Circ No. 4 Series of 2004
any manner no misconduct or fraud or mutual termination. If
xxx
Except when coupled unilateral termination,
with an interest liable for damages (b) Stockholders shall have the right to vote at all stockholders’
Maximum of 5 years at Maximum 5 years at a meetings in person or by proxy. The stockholder may deliver, in
a time time (unless person or by mail, his proxy vote directly to the corporation.
coterminous with loan)
xxx
SEC can pass on validity
(g) If the stockholder intends to designate several proxies, the
number of shares of stock to be represented by each proxy shall be
5.12 Additional Materials specifically indicated in the proxy form. If some of the proxy forms do
(a) SEC Opinion No. 26 to Ms. Jaycel Sato re Voting not indicate the number of shares, the total shareholding of the
stockholder shall be tallied and the balance thereof, if any, shall be
by Trustees through the internet, March 22, 2003 allotted to the holder of the proxy form without the number of shares.
If all are in blank, the stocks shall be distributed equally among the
SEC Opinion No. 26 proxies. The number of persons to be designate as proxies may be
Q: May a trustee vote through the internet? limited by the By-laws.
A: Yes, provided that the internet medium to be used is akin or
similar (i.e., video streaming with voice packet or video over the
internet) to the one being used in video-conferencing or tele- 5.13 Appraisal right
conferencing, where a participant can see or hear the actual
proceedings of a board meeting and actively participate in the • Appraisal right refers to the right to withdraw form the
deliberation of the board. corporation and demand payment of the fair value of his
However, it should be emphasized that participation of directors in

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shares after dissenting from certain corporate acts involving (2) Change in the rights of stockholders, authorize preferences
fundamental changes in corporate structure. (Section 81) superior to those stockholders, or restrict the right of any
• Upon demand, all rights accruing to the shares shall be stockholder (Sections 37 and 81)
suspended. (Section 83) (3) Corporation authorized the board to invest corporate funds in
another business or purpose.
(4) Corporation decides to sell or dispose of all or substantially all
(a) Instances of appraisal right (Section 81 & Section
assets of corporation (Section 81)
37) (5) Merger or consolidation (Section 81)
Sec. 81. Instances of appraisal right
Any stockholder of a corporation shall have the right to dissent and • De Leon: Section 37 grants appraisal right to a dissenting
demand payment of the fair value of his shares in the following stockholder (right of the stockholder in the cases provided by
instances:
law to demand payment of the fair value of his shares) “in
1. In case any amendment to the articles of incorporation has the case of extension of corporate term.” Such right should also
effect of changing or restricting the rights of any stockholder or be available to a dissenting stockholder if the corporate term
class of shares, or of authorizing preferences in any respect is shortened as it is expressly recognized in Section 81(1).
superior to those of outstanding shares of any class, or of
(Page 333 of De Leon, 2006) But wait, CLV has a different
extending or shortening the term of corporate existence;
opinion.
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
• CLV: The appraisal right should not be triggered when it
property and assets as provided in the Code; and comes to shortening of corporate life, because there is really
no violation of the original contractual intent. Therefore, the
3. In case of merger or consolidation. (n) inclusion of the case of shortening of corporate life under
Sec. 37. Power to extend or shorten corporate term Section 81 should not prevail over the specific provision
under Section 37. (Page 237 of CLV’s Textbook)
A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the • CLV: The exercise of appraisal rights rightly belongs to a
board of directors or trustees and ratified at a meeting by the case of extension of corporate term because extension
stockholders representing at least two-thirds (2/3) of the outstanding actually novates the corporate contract with each
capital stock or by at least two-thirds (2/3) of the members in case of shareholder, which now seeks to extend the corporate
non-stock corporations. Written notice of the proposed action and of relationship beyond the original term provided for in the
the time and place of the meeting shall be addressed to each articles of incorporation. (Page 237 of CLV’s Textbook)
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post • Catindig: if the shortening of the corporate term is not
office with postage prepaid, or served personally: Provided, That in intended to dissolving a corporation, Section 81 governs.
case of extension of corporate term, any dissenting stockholder may Otherwise, Section 37 governs because the SH will get more
exercise his appraisal right under the conditions provided in this if he remains a SH until liquidation.
code. (n) Catindig Class Notes

Instances where it may be exercised: (Sundiang)


(1) Extension or reduction of corporate term (Section 37 and 81)*

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Q: X corporation decided to shorten its corporate term (from 50 to 10


years). One of the SHs voted against the reduction of the corporate
payment by the corporation of the agreed or awarded price, the
term. Can the dissenting SH exercise appraisal right? stockholder shall forthwith transfer his shares to the corporation. (n)
A: Yes under Section 81. Sec. 86. Notation on certificates; rights of transferee
Q: X corporation decided to shorten its corporate term (from 50 to
3months). One of the SHs voted against the reduction of the corporate Within ten (10) days after demanding payment for his shares, a
term. Can the dissenting SH exercise appraisal right? dissenting stockholder shall submit the certificates of stock
A: No, Section 37 governs because the SH will get more if he remains representing his shares to the corporation for notation thereon that
a SH until liquidation.
such shares are dissenting shares. His failure to do so shall, at the
Catindig: Shortening of corporate term is a way of dissolving a option of the corporation, terminate his rights under this Title. If
corporation. When the corporation is dissolved and shares are shares represented by the certificates bearing such notation are
common, the said shares have residual rights. After payment of debts, transferred, and the certificates consequently canceled, the rights of
everything left goes to the SHs. The liquidating dividends may be the transferor as a dissenting stockholder under this Title shall cease
greater than the fair value. and the transferee shall have all the rights of a regular stockholder;
and all dividend distributions which would have accrued on such
(b) Requirements for a successful exercise of shares shall be paid to the transferee. (n)

appraisal right (Section 82 and 86) Rules for exercise of appraisal right
Sec. 82. How right is exercised (1) The stockholder must be a dissenting stockholder- he voted
against the proposed action.
The appraisal right may be exercised by any stockholder who shall
have voted against the proposed corporate action, by making a (2) The stockholder must make a written demand on the
written demand on the corporation within thirty (30) days after the corporation within 30 days after the vote was taken.
date on which the vote was taken for payment of the fair value of his (3) The proposed action is any one of the instances enumerated
shares: Provided, That failure to make the demand within such period above (b)
shall be deemed a waiver of the appraisal right. If the proposed (4) The price to be paid is the fair value of the shares on the date
corporate action is implemented or affected, the corporation shall pay before the vote was taken
to such stockholder, upon surrender of the certificate or certificates of (5) The fair value shall be agreed upon but in case there is no
stock representing his shares, the fair value thereof as of the day agreement within 60 days from the date the vote was taken,
prior to the date on which the vote was taken, excluding any
the fair value shall be determined by a majority of the 3
appreciation or depreciation in anticipation of such corporate action.
disinterested persons one of whom shall be named by the
If within a period of sixty (60) days from the date the corporate action stockholder another by the corporation and the third by the two
was approved by the stockholders, the withdrawing stockholder and who were chosen.
the corporation cannot agree on the fair value of the shares, it shall (6) The right of appraisal is extinguished when:
be determined and appraised by three (3) disinterested persons, one
of whom shall be named by the stockholder, another by the
a) He withdraws the demand with corporation’s consent
corporation, and the third by the two thus chosen. The findings of the (consent of the corporation is necessary)
majority of the appraisers shall be final, and their award shall be paid b) The proposal action is abandoned
by the corporation within thirty (30) days after such award is made: c) The SEC disapproves the action (Section 84) (JRS at 304)
Provided, That no payment shall be made to any dissenting Catindig Class Notes
stockholder unless the corporation has unrestricted retained earnings Appraisal
in its books to cover such payment: and Provided, further, That upon Q: Can the corp and SH just appoint one appraiser?

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A: Yep, the Code does not prohibit this.


such shares are dissenting shares. His failure to do so shall, at the
Notation option of the corporation, terminate his rights under this Title. If
Q: Why is there a need for notation? shares represented by the certificates bearing such notation are
A: To avoid a moral hazard… that the SH might sell shares already transferred, and the certificates consequently canceled, the rights of
subject to exercise of appraisal rigts. the transferor as a dissenting stockholder under this Title shall cease
Q: Is one share sufficient to file a derivative suit? and the transferee shall have all the rights of a regular stockholder;
A: Yes provided the other requisites are present. and all dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)
(c) Effect of demand (Section 83)
Sec. 83. Effect of demand and termination of right
From the time of demand for payment of the fair value of a
stockholder's shares until either the abandonment of the corporate 5.14 Derivative Suits
action involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of this
(a) Definition
Code, except the right of such stockholder to receive payment of the • A derivative suit is an action brought by minority
fair value thereof: Provided, That if the dissenting stockholder is not shareholders in the name of the corporation to redress
paid the value of his shares within 30 days after the award, his voting wrongs committed against the corporation, for which the
and dividend rights shall immediately be restored. (n) directors refuse to sue. It is a remedy designed by equity and
has been the principal defense of the minority shareholders
against abuses by the majority.  Western Institute of
(d) Cost of appraisal (Section 85)
Technology, Inc. v. Salas, 278 SCRA 216 (1997).
Sec. 85. Who bears costs of appraisal
• Derivative action- those brought by one or more
The costs and expenses of appraisal shall be borne by the
stockholders/members in the name and on behalf of the
corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have corporation to redress wrongs committed against it, or
offered to pay the stockholder, in which case they shall be borne by protect/vindicate corporate rights whenever the officials of the
the latter. In the case of an action to recover such fair value, all costs corporation refuse to sue, or the ones to be sued has control
and expenses shall be assessed against the corporation, unless the of the corporation.
refusal of the stockholder to receive payment was unjustified. (n)
Requisites of Derivative Actions:
(1) The party bringing suit should be a shareholder as of
(e) Notation on stock certificate(s) of dissenting the time of the act or transaction complained of;
stockholder (Section 86) (2) He has exhausted intra-corporate remedies; and
Sec. 86. Notation on certificates; rights of transferee (3) The cause of action actually devolves on the
Within ten (10) days after demanding payment for his shares, a corporation, the wrongdoing or harm having been
dissenting stockholder shall submit the certificates of stock caused to the corporation and not to the particular
representing his shares to the corporation for notation thereon that stockholder bringing the suit. (JRS at 300)

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(4) Acts must be brought in the name of the corporation. Inquirer but actually she was just a dummy of Juan Ponce Enrile
(Jack) who was the actual owner of the shares. Now the court said that
since she was not really the owner of the shares, she could not
(But wait, just make use of the Requisites provided by file a derivative suit. And moreover, the shares issued in her
the Supreme Court, in 5.14(b) of this reviewer) name were antedated to make it appear that she became a
Jack’s Lecture stockholder before the action she was questioning occurred. The
Now the stockholders are also allowed to file a court said she cannot file a derivative suit questioning those
derivative suit for redress of wrongs committed by the transactions. Then the action must be brought in the name and for
management. There are four requisites for the filing of a derivative the benefit of the corporation because the cause of action you are
suit. First, there must exist a cause of action which calls for this asserting belongs to the corporation, that’s why the plaintiff will be
remedy. Example, the directors are mismanaging the affairs of the the corporation. Well there was this recent case of Atty. Hilda Lim.
corporation. On the other hand, remember you have the business Where she…they had a family corporation and the board passed
judgment rule. The court will not set aside the decisions and a resolution saying that to pay for her legal services to the
actions of the board unless they have acted in bad faith, illegally corporation, she should be given shares of stock from the
or with gross negligence. Even if the decisions may have resulted authorized but unissued as payment for her legal services.
in losses, the court will not second-guess the board. So they must Another stockholder questioned that and claimed that this violated
have committed mismanagement, or fraudulently disposed of their his right to pre-emption. Well, that was his claim. Well, Hilda Lim
properties…Like in one case, you have two families who were argued that he could not file that case because…the SC had
stockholders of this corporation. One family was the one issued a TRO restraining him from acting in behalf of the
managing it and this family was siphoning the funds and corporation and he was filing a derivative suit. The court said no,
transferring it to their own bank account. A derivative suit can be the cause of action he is enforcing is his own right because he
filed. Or the example given in your book is like that Republic Bank claims that he had a right of pre-emption. So this was not a right
case. Republic Bank was being investigated by the Monetary belonging to the corporation so this was not a derivative suit.
Board, so what did it do? It got Caderno, the former governor of Now, this derivative suit is allowed precisely to enable a minority
Central Bank as consultant. It was obvious that the purpose was to protect its rights against a majority. That’s why the majority
to take advantage of his influence. So this is a case of influence cannot dismiss a derivative suit filed by the minority. In the case
peddling and so that contract could be assailed. Or in the old of San Miguel Corporation, the court said it is not the mere fact…
days, when you still have this import control. You cannot import that former dean Eduardo de los Angeles owned only a few
unless you have a dollar allocation. One company sold its dollar shares of San Miguel is not a ground to dismiss the case that he
allocation. You sell your dollar allocation, that’s illegal. You won’t filed because the cause of action he is ascertaining pertains to
get another dollar allocation again. So that could be the basis of a San Miguel Corporation, not to himself. Therefore the fact that he
derivative suit. Then the stockholder must exhaust all remedies only owned a few shares, which are insignificant, is not relevant.
within the corporation by applying for redress from the board or What happened was that Mr. Andres Soriano III bought 2
from the stockholders unless this is excused. Well, the court has corporations. He bought them for himself and he used the funds
said, well, if the directors are mismanaging, to appeal to them of San Miguel Corporation. And since the cause of action a
would be useless since they are the very ones committing the stockholder is ascertaining in a derivative suit pertains to the
wrong you are complaining about. Or the case of San Miguel, corporation, the proceeds of the case should accrue to the
where you have probably around 20,000 stockholders around the corporation. If a court awards damages, that should go to the
world. It would be too unrealistic and too cumbersome to require a corporation, not to the stockholder who filed the derivative suit.
stockholder to appeal first to the stockholders and ask for a And whatever judgment is rendered in that case will be binding on
stockholders’ meeting. Third, the plaintiff must have been such at the corporation. You cannot have another stockholder filing
the time of the act complained of. If he was not yet a stockholder another derivative suit. That’s why the court has to be careful if it
at the time of the act complained of, he cannot sue unless they approves any compromise. And if the stockholder wins, he is
are still being continued after he became a stockholder. That’s entitled to be reimbursed for the expenses and attorney’s fees he
why you have this case of Nora Bitong, she filed a derivative suit incurred in prosecuting that case for the benefit of the corporation.
against Apostol and these other people in the Philippine Daily

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• Under the Corporation Code, where a corporation is an while Filport is the real-party-in-interest. (Filipinas Port
injured party, its power to sue is lodged with its board of Services, Inc. v. Go (2007)
directors or trustees. But an individual stockholder may be • Under Section 36 of the Corporation Code, read in relation to
permitted to institute a derivative suit in behalf of the Section 23, where a corporation is an injured party, its power
corporation in order to protect or vindicate corporate rights to sue is lodged with its board of directors or trustees. An
whenever the officials of the corporation refuse to sue, or individual stockholder is permitted to institute a derivative suit
when a demand upon them to file the necessary action would in behalf of the corporation wherein he holds stocks in order
be futile because they are the ones to be sued, or because to protect to vindicate corporate rights, whenever officials of
they hold control of the corporation. In such actions, the the corporation refuse to sue, or are the ones to be sued, or
corporation is the real-party-in-interest while the suing hold the control of the corporation. In such actions, the suing
stockholder, in behalf of the corporation, is only a nominal stockholder is regarded as a nominal party, with the
party. (Filipinas Port Services, Inc. v. Go (2007) corporation as the real party in interest. (Chua v. CA, 2004)
• The whole purpose of the law authorizing a derivative suit is • In the absence of a special authority from the Board of
to allow the stockholders/member to enforce rights which are Directors to institute a derivative suit for and in behalf of the
derivative (secondary) in nature, i.e., to enforce a corporate corporation, the president or managing director is disqualified
cause of action. (R.N. Symaco Trading Corp. v. Santos by law to sue in her own name. The power to sue and be
(2005) sued in any court by a corporation even as a stockholder is
• Where corporate directors have committed a breach of trust lodged in the Board that exercises its corporate powers and
either by their fraud, ultra vires acts, or negligence, and the not in the president or officer thereof. Bitong v. Court of
corporation is unable or unwilling to institute suit to remedy Appeals, 292 SCRA 503 (1998).
the wrong, a stockholder may sue on behalf of himself and • A minority stockholder and member of the board has no
other stockholders and for the benefit of the corporation, to power or authority to sue on the corporation’s behalf. Nor can
bring about a redress of the wrong done directly to the we uphold this as a derivative suit, since it is required that the
corporation and indirectly to the stockholders. It is a settled is minority stockholder suing for and on behalf of the
the doctrine that in a derivative suit, the corporation is the real corporation must allege in his complaint that he is suing on a
party in interest while the stockholder filing suit for the derivative cause of action on behalf of the corporation and all
corporation’s behalf is only nominal party. The corporation other stockholders similarly situated who may wish to join him
should be included as a party in the suit. Hornilla v. Salunat, in the suit. There is no showing that petitioner has complied
405 SCRA 220 (2003). with the foregoing requisites. Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001).
Who may bring the suit • The relators must be stockholders both at time of occurrence
• Since the ones to be sued are the directors/officers of the of the events constituting the cause of action and at the time
corporation itself, a stockholder, like petitioner Cruz, may of the filing of the derivative suit. Gochan v. Young, 354
validly institute a derivative suit to vindicate the alleged SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911).
corporate injury, in which case Cruz is only a nominal party • A minority stockholder can file a derivative suit against the
president for diverting corporate income to his personal

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accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 • Where corporate directors have committed a breach of trust
(1991). either by their frauds, ultra vires acts or negligence, and the
• A lawyer engaged as counsel for a corporation cannot corporation is unable or unwilling to institute suit to remedy
represent members of the same corporation’s board of the wrong, a stockholder may sue on behalf of himself and
directors in a derivative suit brought against them. To do so other stockholders and for the benefit of the corporation , to
would be tantamount to representing conflicting interests, bring about a redress of the wrong done directly to the
which is prohibited by the Code of Professional corporation and indirectly to the stockholders. This is what is
Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003). known as a derivative suit, and settled is the doctrine that in a
derivative suit, the corporation is the real party in interest
Exhaustion of Intra-corporate remedies. while the stockholder filing for the corporation’s behalf is only
• A derivative suit to question the validity of the foreclosure of nominal party. The corporation should be included as a
the mortgage on corporate assets can be filed without prior party in the suit. (Hornilla v. Salunat, 2003)
demand upon the Board of Directors where the legality of the •
constitution of the Board lies at the center of the issues. DBP
v. Pundogar, 218 SCRA 118 (1993).
(b) Requisites (See Rule 8, Section 1, SC Interim Rules of
Nature of Relief Procedure for Intra-Corporate Controversies effective April 1, 2002)
• In a derivative suit, any monetary benefits under the decision Rule 8, Section 1. Derivative Action
of the court shall pertain to the corporation and not to the A stockholder or member may bring an action in the name of a
stockholders or members. (R.N. Symaco Trading Corp. v. corporation or association , as the case may be provided, that:
Santos, 2005) (1) He was a stockholder or member at the time the acts or
• The allegations of injury to the relators can co-exist with transactions subject of the action occurred and the time the action
those pertaining to the corporation, and does not disqualify was filed;
them from filing a derivative suit on behalf of the corporation. (2) He exerted all reasonable efforts, and alleges the same with
It merely gives rise to an additional cause of action for particularity in the complaint, to exhaust all remedies available
damages against the erring directors. Gochan v. Young, 354 under the articles of incorporation, by-laws, laws or rules
SCRA 207 (2001). governing the corporation or partnership to obtain the relief he
• In a derivative action, the real party in interest is the desires;
corporation itself, not the shareholders who actually instituted (3) No appraisal rights are available for the act or acts complained of;
it. A suit to enforce preemptive rights in a corporation is not a and
derivative suit, and therefore a temporary restraining order
(4) The suit[s] is not a nuisance or harassment suit.
enjoining a person from representing the corporation will not
bar such action, because it is instituted on behalf and for the In case of nuisance of harassment suit, the court shall forthwith
benefit of the shareholder, not the corporation. Lim v. Lim- dismiss the case.
Yu, 352 SCRA 216 (2001). Catindig Class Notes
• Appointment of receiver can be an ancillary remedy in a Q: Is Requisite # 3 a good policy?
C: No.
derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966)

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5.15 Case

Francis Chua v. Ca (2004)


• A derivative action is a suit by a shareholder to enforce a
corporate cause of action; the corporation is necessary party
to the suit.
• Not every suit filed in behalf of the corporation is a derivative
suit.

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record. De Liano v. Court of Appeals, 370 SCRA 349


6. BOARD OF DIRECTORS (2001).
• “The physical acts of the corporation, like the signing of
6.1 Board of Directors (Section 23 et seq) documents, can be performed only by natural persons duly
Sec. 23. The board of directors or trustees authorized for the purpose by corporate by-laws or by a
special act of the board of directors.” Firme v. Bukal
Unless otherwise provided in this Code, the corporate powers of all Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside
corporations formed under this Code shall be exercised, all business Inc. v. Court of Appeals, 352 SCRA 334 (2001).
conducted and all property of such corporations controlled and held
by the board of directors or trustees to be elected from among the • Rationale for Centralized Management Doctrine. The
holders of stocks, or where there is no stock, from among the concentration in the board of the powers of control of
members of the corporation, who shall hold office for one (1) year corporate business and appointment of corporate officers and
until their successors are elected and qualified. managers is necessary for efficiency in large organization.
Every director must own at least one (1) share of the capital stock of (Filipinasl Port Service v. Go, 2007)
the corporation of which he is a director, which share shall stand in • Board Must Act as a Body. A corporation, through its
his name on the books of the corporation. Any director who ceases to Board of Directors, should act in the manner and within the
be the owner of at least one (1) share of the capital stock of the
formalities prescribed by its charter or by the general law.
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members Thus, directors must act as a body in a meeting called
thereof. a majority of the directors or trustees of all corporations pursuant, otherwise, any action taken therein may be
organized under this Code must be residents of the Philippines. questioned by any objecting director or shareholder. Be that
as it may, jurisprudence tells us that an action of the board of
• “Board of Directors” is the body which (1) exercises all directors during a meeting, which was illegal for lack of
powers provided for under the Corporation Code; (2) notice, may be ratified either expressly, by the action of the
conducts all business of the corporation; and (3) controls and directors in subsequent legal meeting, or impliedly, by the
holds all property of the corporation. Its members have been corporation's subsequent course of conduct. Lopez Realty
characterized as trustees or directors clothed with a fiduciary v. Fontecha, 247 SCRA 183 (1995).
character. It is clearly separate and distinct from the • Effect of “Bogus” Board.The acts or contracts effected by
corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 a bogus board would be void pursuant to Art. 1318 of Civil
(2003). Code because of the lack of “consent”. Islamic Directorate of
• A corporation is an artificial being and can only exercise its the Philippines v. Court of Appeals, 272 SCRA 454 (1997).
powers and transact its business through the instrumentalities
of its Board of Directors, and through its officers and agents,
• As can be gleaned form Section 23 of Corporation Code, “it
is the board of directors or trustees which exercises almost all
when authorized by resolution or by its by-laws.
the corporate powers in a corporation” (Firme v. Bukal, 2003)
Consequently, when legal counsel was clothed with authority
Consequently under the doctrine of centralized management,
through formal board resolution, his acts bind the corporation
it cannot be said that the Board act as agents of the
which must be held bound the actuations of its counsel of
stockholders, since their source of power is originally vested

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by law and not delegated by the stockholders. (Page 754 of Director Responsibilities (Corp Gov Reviewer***)
CLV’s CLR, 2007) Duties of Directors
• The exercise of the corporate powers of the corporation • Duty of Obedience (Section 26/31 of Corp Code)
rests in the BoD save in those instances where the • Duty of Diligence (Section 31 of Corp Code)
Corporation Code requires stockholders’ approval for certain • Duty of Loyalty (Section 31 of Corp Code)
specific acts. (Great Asian Sales Center v. CA, 2002)
• Duty of Care
Consequently, there can be no valid contract that can be
• Duty of Disclosure
enforced on behalf of the corporation over an alleged sale of
a parcel land, when there is no showing that there was • Duty of “extra care”
approval of the purchase by the Board of Directors, which
exercise almost all the corporate powers in a corporation. Specific Duties and Responsibilities of a Director (Corp Gov
Firme v. Bukal, 2003) (Page 754 of CLV’s CLR, 2007) Reviewer)
(SEC Code of CG)***
• Principle on delegation of Board Power. Under Section 23 (1) To conduct fair business transactions with the corporation
of the Corporation Code, the power and the responsibility to (2) To devote time and attention necessary
decide whether the corporation should enter into a contract is (3) To act judiciously
lodged in the Board, subject to the articles of incorporation, (4) To exercise judgment
by laws, or relevant provisions of law. However, just as a (5) To have a working knowledge of the law, corp rules and
natural person may authorize another to do certain acts for industry developments.
and on his behalf, the BoD may validly delegate some of its (6) To observe confidentiality
functions and powers to officers, committees or agents. The (7) To keep the company’s control environment
authority of such individuals to bring the corporations is *** (SEC Code of CG is applicable only to __________)
generally derived form law, corporate by-laws or authorization
form the board, either expressly or impliedly by habit, custom (a) Authority (Section 24)
or acquisence in the general course of business. (People’s Sec. 24. Election of directors or trustees
Aircargo v. CA, 1998) (Page 757 of CLV’s CLR, 2007)
At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the
Duties in General: (UP Reviewer)
owners of a majority of the outstanding capital stock, or if there be no
DUTY VIOLATION UNDER Section 31 capital stock, a majority of the members entitled to vote. The election
Obedience Willfully and knowingly vote for or assent to must be by ballot if requested by any voting stockholder or member.
patently unlawful acts of the corporation In stock corporations, every stockholder entitled to vote shall have
Diligence Guilty of gross negligence or bad faith in the right to vote in person or by proxy the number of shares of stock
directing the affairs of the corporation standing, at the time fixed in the by-laws, in his own name on the
Loyalty Acquire any personal or pecuniary interest in stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of
conflict with their duty as such directors or
shares for as many persons as there are directors to be elected or he
trustees may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his

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shares shall equal, or he may distribute them on the same principle


(5) He must possess other qualifications as may be
among as many candidates as he shall see fit: Provided, That the prescribed in the by-laws of the corporation. For
total number of votes cast by him shall not exceed the number of example, the percentage of equity participation of
shares owned by him as shown in the books of the corporation foreigners with respect to nationalized activities must
multiplied by the whole number of directors to be elected: Provided, be complied with or he must not be a director in a
however, That no delinquent stock shall be voted. Unless otherwise competing corporation.
provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote • Peña v. CA, 193 SCRA 717 (1991) - a purported director
for one candidate. Candidates receiving the highest number of votes whose name did not appear in the General Information sheet
shall be declared elected. Any meeting of the stockholders or filed on behalf of the corporation in the SEC was deemed not
members called for an election may adjourn from day to day or from qualified to act as a member of the Board.
time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there not present or represented by proxy, at the • Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979) - The bylaws of
meeting, the owners of a majority of the outstanding capital stock, or the corporation can provide other qualifications and
if there be no capital stock, a majority of the member entitled to vote. disqualifications in addition to those provided in the
Corporation Code.
• See Page 240 of De Leon for Illustration and computation.
• The Board may provide for additional qualifications of a
director (SEC Code of CG)
(b) Requirements for election of director *** (SEC Code of CG is applicable only to __________)
Qualifications of Directors: (JRS p. 276) • It is clearly deducible from Section 23 that only natural
(1) Stock Corp.-must own at least one (1) share capital persons can be elected as directors or trustees and they must
stock of the corporation in his own name; be elected from among the stockholders or members.
Non-stock Corp.-must be a member. However, a corporation which owns shares of stock or is a
He must be a stockholder in his own right. It must be corporate member in another corporation can designate by
a legal title and not beneficial title. Example: the board resolution its officer or representative to sit in the
stockholder-trustor in a voting trust agreement latter’s board and thus qualifying him to be elected as director
cannot be a director because he has beneficial title; or trustee. A contrary rule would create a situation where
the trustee can be elected as director because he there would be no board as where all the stockholders or
has legal title. members are corporation or juridical persons. The
(2) A majority of the directors/trustees must be residents appointment must be recorded in the corporate books. (SEC
of the Philippines. (Sec. 23) Opinion No. 05-06, June 8, 2005)
(3) He must not have been convicted by final judgment
of an offense punishable by imprisonment for a Director Independence (Corp Gov Reviewer)
period exceeding six (6) years or a violation of the • It is vitally important that a number of board be independent
Corporation Code, committed within five (5) years from management (SEC Code of CG, Section II)***
before the date of his election (Section 27)
(4) He must be of legal age.

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• Listed and public companies shall have at least 2 • There is no citizenship requirement demanded of the
independent directors or 20% of the board which ever is members of BoD.
lesser. (SRC Section 38)*** (1) In corporations not organized under the Code, citizenship
requirements are established.
• Independent director shall mean a person other than an
o Thus, in case of domestic banks, the General
officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with Banking Act requires that at least two-thirds of the
the corporation, which would intervene with the exercise of members of the BoD must be citizens of the
independent judgment in carrying out the responsibility of a Philippines. (Section 13 of RA No. 337).
director. (SRC Section 38)*** o For rural banks, registered investment companies
and private development banks, all the members of
Degrees of Removal (Corp Gov Reviewer) the BoD must be citizens of the Philippines. (Section
• Not related by blood or marriage to the controlling 4 of RA 720, as amended by RA 1097; Section 4 of
shareholder RA 4093)
(2) Under the Constitution, aliens may not be elected as directors
• Not related as a fiend or social relation of the controlling
of corporation engaged in business or industries which are
shareholder
totally or partially nationalized business or industries.
• Not a supplier nor engaged in any business transaction with
the company
(iv) Disqualifications (Section 27)
• Does not derive an income as a board director that Sec. 27. Disqualification of directors, trustees or officers
constitutes the majority of his or her income. (see SRC Rule
38.1)*** No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
(i) Qualifying share (Section 24) election or appointment, shall qualify as a director, trustee or officer
• A director must own at least one share of stock. Peña v. CA, of any corporation.
193 SCRA 717 (1991); Detective & Protective Bureau, Inc. v. Disqualifications:
Cloribel, 26 SCRA 255 (1969). Corporation Code
• Beneficial ownership under voting trust arrangement no • must not have been convicted of a crime punishable by
longer qualifies ( Lee v. CA, 205 SCRA 752 [1992]). imprisonment of exceeding six (6) years
• must not have committed any violation of the Corporation
code within five (5) years prior to his election
(ii) Residence (Section 24) General Banking Law of 2000
• A majority of the directors/trustees must be residents of the • Except in rural banks, no appointive or elective public official,
Philippines. (Sec. 23) whether fulltime or part-time shall at the same time serve as
officer of any private bank, save in cases where such service
is incident to financial assistance provided by the government
(iii) Nationality or GOCCs to the bank or unless otherwise provided under

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existing laws bribery, false oath, perjury or other fraudulent act of


SEC Code of CG*** transgressions.
(a) Any person who has been finally convicted by a competent
judicial or administrative body of the following crimes: (d) Any person finally found by SEC or a court or other
(i) Involving purchase or sale of securities; administrative body to have willfully violated, or willfully
(ii) Arising out of the person’s conduct as an underwriter, aided, abetted, counseled, induced or procured the violation
broker, dealer, investment adviser, principal distributor. of, any provision of the Securities and Regulation Code, or
Mutual fund dealer, principal distributor, mutual fund any other law administered by SEC or Corporation Code, or
dealer, futures commission merchant, commodity trading any rule, regulation or order of SEC or BSP, or by a foreign
advisor, floor broker; and court or equivalent financial regulatory of similar acts.
(iii) Arising out of his relationship with a bank, quasi-bank, (e) Any person judicially declared to be insolvent.
trust company, investment house or as an affiliated (f) Any person finally found guilty by a foreign court or equivalent
person of any one of them regulatory authority of acts, violations or misconduct similar
(b) Any person who, by reason of any misconduct, is to any of the acts, violations or misconduct listed in
permanently or temporarily enjoined by order, judgment or paragraphs (a) to (e) hereof.
decree by the SEC or any court or other administrative body (g) Any affiliated person who is ineligible, by reason of
from: paragraphs (a) to (e) hereof to serve or act in the capacities
(i) acting as underwriter, broker, dealer, investment adviser, listed in those paragraphs.
principal distributor, mutual fund dealer, futures (h) Conviction by final judgment of an offense punishable by
commission merchant, commodity trading advisor, or a imprisonment for a period exceeding six (6) years, or a violation of
floor broker; Corporation Code, committed within five (5) years prior to the date of
(ii) acting as a director or officer of a bank, quasi-bank, trust his election or approval.
company, investment house, investment company or an
affiliated person of any of them; (c) How elected (Section 24)
(iii) engaging in or continuing any conduct or practice in Stockholders have the option to adopt any of the following:
connection with any such activity or willfully violating (1) Straight voting- every stockholder “may vote such number
laws governing securities, and banking activities (but of shares for as many persons as there are directors” to be
also includes when covered by an effective interim elected;
order); such person is also disqualified when he is (2) Cumulative Voting for One Candidate- a stockholder is
currently subject to an effective order of a self-regulatory allowed to concentrate his votes and “give one candidate as
organization suspending or expelling him from many votes as the number of directors to be elected
membership or participation or from associating with a multiplied by the number of his shares shall equal”;
member or participant of the organization (3) Cumulative Voting by Distribution- a stockholder may
cumulate his shares by multiplying also the number of
(c) Any person finally convicted judicially or administratively of an directors to be elected and distribute the same among as
offense involving moral turpitude, fraud, embezzlement, many candidates as he shall see fit.
theft, estafa, counterfeiting, misappropriation, forgery,

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Note: Cumulative voting is not available in non-stock the call for the meeting may be addressed directly to the stockholders
corporations. (JRS) or members by any stockholder or member of the corporation signing
the demand. Notice of the time and place of such meeting, as well as
Manner of Election: of the intention to propose such removal, must be given by
(1) In any form; or publication or by written notice prescribed in this Code. Removal may
(2) By ballot when requested by any voting stockholder or be with or without cause: Provided, That removal without cause may
member; not be used to deprive minority stockholders or members of the right
(3) Voting may be in person or by proxy. (Page 764 of CLV’s of representation to which they may be entitled under Section 24 of
this Code.
CLR, 2007)
Catindig Class Notes Requisites for Removal: (Page 278 of JRS)
Q: When is the BoD elected?
A: The general rule is the BoD is elected in an annual meeting except if the cause of
(1) It must be take place either at a regular meeting or special
vacancy is due to removal or if there is no more quorum in the BoD to be able to fill in meeting of the stockholders or members called for the
the vacancy in which case a director may be lected in a special meeting. purpose;
(2) There must be previous notice to the stockholders or
Q: Can the number of the BoD be less than 5?
A: Yep.
members of the intention to remove;
(3) The removal must be by a vote of the stockholders
C: According to the SEC, there can be rounding up. I think there should be no representing 2/3 of Outstanding Capital Stock or 2/3
rounding up because election of foreign BoD is merely a privilege. members.
(4) The director may be removed with or without cause unless he
(d) How removed (Section 28) was elected by the minority, in which case, it is required that
Sec. 28. Removal of directors or trustees there is cause for removal. (Section 28)
Catindig Class Notes
Any director or trustee of a corporation may be removed from office Q: Can directors be removed at anytime?
by a vote of the stockholders holding or representing at least two- A: Yes if with cause and even without cause if the director does not
thirds (2/3) of the outstanding capital stock, or if the corporation be a represent the minority…
non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall take Q: Can the SH who owns 40% and has 2 nominees get rid of the 2
nominees without action from the Board?
place either at a regular meeting of the corporation or at a special
A: Yes, because of agency.
meeting called for the purpose, and in either case, after previous Q: How?
notice to stockholders or members of the corporation of the intention A: Cause the shares to be transferred.
to propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal Q: Are directors entitled to compensation?
of directors or trustees, or any of them, must be called by the A: General rule is they are not entitled to compensation except when
secretary on order of the president or on the written demand of the provided by bylaw or by a vote of SHs representing majority of OCS.
stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should
(e) How vacancy filled (Section 29)
the secretary fail or refuse to call the special meeting upon such Sec. 29. Vacancies in the office of director or trustee
demand or fail or refuse to give the notice, or if there is no secretary, Any vacancy occurring in the board of directors or trustees other than

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by removal by the stockholders or members or by expiration of term,


Director Compensation
may be filled by the vote of at least a majority of the remaining • Corp Code: Section 30
directors or trustees, if still constituting a quorum; otherwise, said • Compensation must be sufficient to attract and retain
vacancies must be filled by the stockholders in a regular or special
directors needed to run the company successfully. (SEC
meeting called for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term of his Code of CG)***
predecessor in office. • Corporations may establish a formal and transparent
A directorship or trusteeship to be filled by reason of an increase in procedure for developing a policy on executive remuneration
the number of directors or trustees shall be filled only by an election and for fixing the remuneration packages of individual
at a regular or at a special meeting of stockholders or members duly directors, if any. (SEC Code of CG)***
called for the purpose, or in the same meeting authorizing the • No director should be involved in deciding his or her own
increase of directors or trustees if so stated in the notice of the
remuneration (SEC Code of CG)***
meeting
• Compensation may be linked with corporation and individual
performance.
Filling of vacancies in the Board: (Page 279 of JRS)
(1) By stockholders or members – if vacancy results because of: (g) Matters requiring Board of Directors’ action
(i) removal;
(ii) expirations of term; • As can be gleaned from Section 23 of Corporation Code, “it
(iii) the ground is other than removal or expiration of term is the board of directors or trustees which exercises almost all
(e.g., death, resignation, abandonment) where the the corporate powers in a corporation” (Firme v. Bukal, 2003)
remaining directors do not constitute a quorum;
(iv) increase in the number of directors. (h) Liability
(2) By board if remaining directors constitute a quorum—case (i) In General (Section 31)
not reserved to stockholders or members. Sec. 31. Liability of directors, trustees or officers
Directors or trustees who willfully and knowingly vote for or assent to
(f) How compensated (Section 30) patently unlawful acts of the corporation or who are guilty of gross
Sec. 30. Compensation of directors negligence or bad faith in directing the affairs of the corporation or
In the absence of any provision in the by-laws fixing their acquire any personal or pecuniary interest in conflict with their duty
compensation, the directors shall not receive any compensation, as as such directors or trustees shall be liable jointly and severally for all
such directors, except for reasonable per diems: Provided, however, damages resulting therefrom suffered by the corporation, its
That any such compensation other than per diems may be granted to stockholders or members and other persons.
directors by the vote of the stockholders representing at least a When a director, trustee or officer attempts to acquire or acquires, in
majority of the outstanding capital stock at a regular or special violation of his duty, any interest adverse to the corporation in respect
stockholders' meeting. In no case shall the total yearly compensation of any matter which has been reposed in him in confidence, as to
of directors, as such directors, exceed ten (10%) percent of the net which equity imposes a disability upon him to deal in his own behalf,
income before income tax of the corporation during the preceding he shall be liable as a trustee for the corporation and must account
year. for the profits which otherwise would have accrued to the corporation.

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A director is liable if he: • Directors and officers who purport to act for the corporation,
(1) Willfully and knowingly vote for and assent to patently keep within the lawful scope of their authority and act in good
unlawful, acts of the corporation; faith, do not become liable, whether civilly or otherwise, for
(2) Is guilty of gross negligence or bad faith in directing the the consequences of their acts, which are properly attributed
affairs of the corporation; or to the corporation alone. Benguet Electric Cooperative, Inc.
(3) Will acquire any personal or pecuniary interest in conflict of v. NLRC, 209 SCRA 55 (1992).
duty. (Secs 31 and 34) • See also Page 774 of CLV’s CLR, 2007
UP Class Notes
Reason for this tile is that nobody would want to be a director if he is
(ii) Business Judgment rule liable for a wrong decision. Not liable for mistakes and errors provided
• BJR: Unless otherwise provided in the Code, all corporate they acted in good faith and with due care and prudence. (UP-Elective
powers and prerogatives are vested directly in the BoD. Class Reviewer at 36)
Consequently, the rule has two consequences: Catindig Class Notes-Ateneo
(1) The resolution, contracts, and transactions of the Q: What matters require BoD action? What are the exceptions?
Board, cannot be overturned or set aside by the A: All corporate powers except such delegated to Executive
stockholders or members and not even by the courts Committee, SPAs etc.
under the principle that business of the corporation Q: Are directors liable for wrong decision resulting to losses to the
has been left to the hands of the Board; and corporation?
(2) Directors and duly authorized officers cannot be held A: No unless…
personally liable for acts or contracts done with the
exercise of their business judgment. (iii) Doctrine of corporate opportunity
Exceptions:
• If there is presented to a corporate officer or director a
(a) When the Corporation Code expressly
business opportunity which:
provides otherwise;
(a) Corporation is financially able to undertake;
(b) When the Directors or officers acted
with fraud, gross negligence or in bad (b) From its nature, is in line with corporation’s business
faith; and and is of practically advantage to it; and
(c) When Directors or officers act against (c) One in which the corporation has an interest or a
the corporation in conflict of interest reasonable expectancy.
situation. (Page 759 of CLV’s CLR, By embracing the opportunity, the self-interest of the officer
2007) or director will be brought into conflict with that of his
corporation. Hence, the law does not permit him to seize the
opportunity even if he will use his own funds in the venture.
• No court can, as an integral part of resolving the issues
between squabbling stockholders, order the corporation to • If he seizes the opportunity thereby obtaining profits to the
undertake certain corporate acts, since it would be in violation expense of the corporation, he must account all the profits by
of the business judgment rule. Ong Yong v. Tiu, 401 SCRA refunding the same to the corporation unless the act has
1 (2003). been ratified by a vote of the stockholders owning or

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representing at least two-thirds (2/3) of the outstanding circumstances; and


capital stock. (Page 279 of JRS’ RCL, 2006)
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
• Sections 31 and 34 contain the doctrine of corporate
opportunity. In case of such conflict-of-interests , and the Where any of the first two conditions set forth in the preceding
director acts against the good of the corporation, he shall be paragraph is absent, in the case of a contract with a director or
accountable for the profits he obtained, even if he had risked trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
his own funds. (Page 783 of CLV’s CLR, 2007)
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
Class Notes the directors or trustees involved is made at such meeting: Provided,
Pedro is a director of X Corporation which is engaged in hog
business. Pedro was sent on a convention abroad. On that trip, Pedro
however, That the contract is fair and reasonable under the
knew about a new breed of hogs available abroad which is more circumstances.
profitable. Pedro proposed to the BoD to buy the new breed of hogs. Class Notes
After one and a half year, the BoD have not made any decision yet
because of the financial condition of the corp. Pedro told Hans about Q: Pedro owns ABC Corp (Manpower services). He proposed to
this and Hands said they would create a new hog corp and import the supply janitors, security guards and clerks at 5% below market
hogs. Could Pedro engage in the same business as the corporation? charges to X Corp of which he is a director. Could X Corp. enter into
Could this business import the new breed of hogs? What would be such contract?
your advice to avoid trouble? Ans: Yes, Pedro is a self-dealing director. To ensure that the contract
Ans: Pedro could not engage in the business of importing the hogs is not voided, the following requirements must concur:
because of his position and he came across the information because (1) The contract must be fair and reasonable;
the corporation sent him to the convention. (2) BoD quorum even without the presence of Pedro;
Alternative Answer: One and a half year is a very long time. You (3) Vote of Pedro is not needed for approval;
could tell Pedro to write a letter to the corporation and disclose that he (4) If X Corp is a bank, there must be a minutes on the meeting and a
would engage in hog business. copy of the minutes must be sent to the BSP.
Note: There should also be full disclosure of the adverse interest.
(iv) Dealings with the corporation (Section 32) Catindig: Actually, you could enter into it but risk that a BoD or
stockholder will contest it. (UP-Elective Class Reviewer at 36)
Sec. 32. Dealings of directors, trustees or officers with the
corporation
A contract of the corporation with one or more of its directors or (v) Contracts between corporation with interlocking
trustees or officers is voidable, at the option of such corporation, directors (Section 33)
unless all the following conditions are present: Sec. 33. Contracts between corporations with interlocking
1. That the presence of such director or trustee in the board directors
meeting in which the contract was approved was not Except in cases of fraud, and provided the contract is fair and
necessary to constitute a quorum for such meeting; reasonable under the circumstances, a contract between two or more
2. That the vote of such director or trustee was not necessary for corporations having interlocking directors shall not be invalidated on
the approval of the contract; that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other
3. That the contract is fair and reasonable under the corporation or corporations is merely nominal, he shall be subject to

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the provisions of the preceding section insofar as the latter


(3) Interlocking directors (Section 33)
corporation or corporations are concerned. (4) Seizing corporate opportunity; Disloyalty (31,34)
(5) Using inside information (SRC Sections 3.8, 23.2, 61, 71.2)
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors. (vii) Watered Stocks (Section 65)
Sec. 65. Liability of directors for watered stocks
• The rule under Sec. 33 of Corporation Code allowing Any director or officer of a corporation consenting to the issuance of
annulment of contracts between corporations with interlocking stocks for a consideration less than its par or issued value or for a
directors resulting in the prejudice to one of the corporation, consideration in any form other than cash, valued in excess of its fair
has no application to cases where fraud is alleged to have value, or who, having knowledge thereof, does not forthwith express
been committed to third parties.  DBP v. Court of Appeals, his objection in writing and file the same with the corporate secretary,
363 SCRA 307 (2001). shall be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued
(vi) Disloyalty (Section 34) value of the same. (n)
Sec. 34. Disloyalty of a director
Jack’s Lecture
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby Now under §65 [Liability of directors for watered
obtaining profits to the prejudice of such corporation, he must stocks], we’ve mentioned this before, an officer or director who
account to the latter for all such profits by refunding the same, unless agrees to the issuance of watered stock or such officer who,
his act has been ratified by a vote of the stockholders owning or having knowledge of it, does not file with the corporate secretary
representing at least two-thirds (2/3) of the outstanding capital stock. his written objection, will be liable if a stock is watered. In other
words, the stockholder paid less than the par value or the stated
This provision shall be applicable, notwithstanding the fact that the value for the shares of stock and then he was issued a stock
director risked his own funds in the venture. certificate. When the corporation receives less consideration than
the par value of a par value share or the stated value if it is a no-
• Relate with Section 31 par value share… that is called watered stock. Because
• Section 34 applies only to a director and not to a trustee or remember, cattle is called stock. And in the old days of the wild,
wild west, when the cowboys would bring their cattle to the market
officer as in the case of Section 31, and the implication is that
to be sold, they will make the cattle eat salt so the cattle will be
only a ratificatory vote of the stockholders would allow a very thirsty. And then along the way, they will pass by a stream.
director who violates his duty of loyalty to keep the profits And so the cattle are very thirsty and so they will drink a lot of
form the venture; while for trustees or officers who violate water. So when they arrive at the market, the cattle will be very
heavy because of the water. So when the cattle is weighed by the
such duties, it is within the business judgment of the Board to
buyer, the cattle is heavy and he will pay the price for that weight
ratify the act. but what he is paying for - water. He is not getting his money’s
worth. That cattle which is full of water which is being sold for a
The following are more common situations involving such heavier weight – watered stock. That’s why shares of stock where
the corporation did not get its money’s worth came to be called
conflict of interest:
watered stock.
(1) Self-dealing director (Section 32)
(2) Fixing compensation of directors and officers (Section 30)

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• Watered stocks are shares issued and fully-paid when in fact the shareholders.
the consideration agreed to and accepted by the directors of
the corporation was something known to be much less than
the par value or issued value of the shares. (Page 882 of • Excutive Committee is a “governing body” which functions as
CLV’s CLR, 2007) the board itself. Thus, membership therein shall be governed
• The term has also been defined as stocks issued by a by the same law/ rules applicable to the board of directors as
corporation for which it has in fact intentionally or knowingly provided in Section 35. (SEC Opinion, June 3, 1998)
received or agreed to receive nothing at all from them or less • Section 35 recognizes an already existing corporate practice
thatn their par value either in money, or in property or in in the Philipoines dictated by necessity owing to the growing
service. (Page 882 of CLV’s CLR, 2007) complexities of modern business, whereby the board of
• Note that the “water” in the stock refers to the difference directors delegates to an executive committee composed of
between the fair market value at the same time of the some members of the board corporate powers to assure
issuance of the stock (not at the time of discovery of the prompt and speedy action and solution to important matters
inadequate consideration or at the time of demand for without the need for a board meeting, especially where such
payment) and the par or issued value of said stock. meetings cannot be readily be held. Thus, the committee
Subsequent in increase in the value of the property used in directly manages the operations of the corporation between
paying the stock does not do away with the “water” in the meetings of the board, thereby reducing the work load of the
stock. The existence of such “water” is determined at the time latter. (Page 305 of De Leon, 2006)
of the issuance of the stock. (Page 882 of CLV’s CLR, 2007)

UP Class Notes 6.3 Cases


All directors are liable for issuance of watered stocks unless the
director files a written objection with the corporate secretary.
Lee v. CA (1992)
• Every director must own at least one share of the capital of
(i) Executive Committee (Section 35) the corporation of which he is a director which share shall
Sec. 35. Executive committee
stand in his name on the books of the corporation.
The by-laws of a corporation may create an executive committee, • Any director which ceases to be the owner of at least one
composed of not less than three members of the board, to be share of the capital stock of the corporation of which he is a
appointed by the board. Said committee may act, by majority vote of director shall thereby cease to be a director.
all its members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a majority • A voting trust agreemen results in the separation of the
vote of the board, except with respect to: (1) approval of any action voting rights of a stockholder from his other rights such as the
for which shareholders' approval is also required; (2) the filing of right to receive dividends and other rights to which a
vacancies in the board; (3) the amendment or repeal of by-laws or stockholder may be entitled until the liquidation of the
the adoption of new by-laws; (4) the amendment or repeal of any corporation.
resolution of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash dividends to Uichico v. NLRC (1997)

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• In labor cases, particularly, corporate directors and officers 6.3 Additional Material: SEC Opinion No/ 31, series of
are solidary liable with the corporation for the termination of 2003, dated May 26, 2003 to Mr.Jose Oscar M. Salazar
employment of corporate employees done with malice or in
bad faith. re who would be elected director in a condominium
corporation.
Western Institute of Technology v. Salas (1997)
• Members of the board may receive compensation, in SEC Opinion
addition to reasonable per diems, when they render services
Summary:
to the corporation in a capacity other than as
directors/trustees. Only those persons under whose names the Condominium certificate
of Titles are issued are considered as members of the condominium
• 2 ways by which members of the board can be granted
corporation.
compensation apart from reasonable per diems:
(1) When there is a provision in the by-laws As a general rule, members of the BoD in a condominium corporation
fixing their compensation; and must be elected form the general stockholders of the said
(2) When the stockholders representing a corporation, who are comprised of unit owners.
majority of the outstanding capital stock at a regular or An exception to this rule is in the case of corporate unit
special stockholders’ meeting agree to give it to them. owner/member of a condominium corporation. An officer or a duly
Catindig Class Notes authorized agent or trustee who has been designated by the
Q: Normally, what are the functions of the Chairman of the Board? corporate unit owner/member of the corporation as its
A: He presides over board meetings. representative for the express purpose of qualifying him as director
may be eligible to be elected as director.
Q: Does he perform functions outside the context of a board meeting?
What are those functions?
A: No, except when the Board ask him to perform other functions.

C: Western case has a failure of analysis. Chairman and Vice- SEC Opinion
Chairman performs functions related to that of the BoD hence should
not ___________. Whole Document
05-26-2003
Litonjua v. Eternity Corp (2006) Mr. Jose Oscar M. Salazar
May 26, 2003
• The general principles of agency govern the relation SEC OPINION NO. 31-03
between the corporation and its officers or agents, subject to
the articles of incorporation, by-laws, or relevant provisions of Mr. Jose Oscar M. Salazar
law. Bormaheco Condominium
Metropolitan Avenue, 1205 Makati City
• Any sale of real property of a corporation by a person
purporting to be an agent thereof but without written authority Dear Mr. Salazar,
form the corporation is null and void.
This pertains to your letter dated May 19, 2003 requesting opinion on the
following queries:

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Similarly, Presidential Decree No. 957 (Regulating the Sale of Subdivision


1.Whether an attorney-in-fact or representative of a unit owner in a Lots and Condominiums, Providing Penalties For Violations Thereof),
condominium corporation qualifies as a director therein especially if such provides:
attorney-in-fact is unanimously elected as director of the corporation; "SECTION 25. Issuance of Title — The owner or developer shall
2. Whether the surviving spouse of a deceased member of a condominium deliver the title of the lot or unit to the buyer upon full payment of the
corporation qualifies as a director therein where there were no judicial lot or unit . . . "(emphasis supplied)
proceedings to settle the estate of the deceased and neither was there an Verily, membership in a condominium corporation is evidenced by the
extra-judicial partition awarding the unit to the surviving spouse; and, Certificate of Title issued upon full payment of the unit. Accordingly, only those
3. What remedy/ies is/are available to prevent the aforementioned persons persons under whose names the Condominium Certificate of Titles (CCTs)
from acting as director if the aforementioned persons are not qualified if the are issued are considered as members of the condominium corporation.
Board of Directors/Officers of the condominium corporation continue to The foregoing is even strengthened by Section 10 of Republic Act No. 4726,
recognize said persons to perform the duties of a director?" otherwise known as the Condominium Act, which provides that:
". . . Membership in a condominium corporation, regardless of whether
[1] Anent your first query, please take note that in this jurisdiction, the it is a stock corporation or non-stock corporation, shall not be
qualifications of directors/trustees, pursuant to the Corporation Code, are as transferable separately from the condominium unit of which it is
follows. appurtenance . . ."
(1) He must own at least one (1) share of the capital stock of the Therefore, as a general rule, members of a board of directors in a
corporation in his own name, and if he ceases to own at least one condominium corporation must be elected from the general stockholders of
share in his own name, he automatically ceases to be a director. For the said corporation, who are comprised of unit owners. In the same light, the
non-stock corporations, only members of the corporation can be by-laws cannot validly provide that even third parties or non-stockholder or
elected to sit in the board of trustees. (Section 23); non-members of the corporation can be elected to the board of
(2) A majority of the directors/trustees must be residents of the Philippines. directors/trustees. By-laws cannot prevail over the express provision of law
(Section 23); requiring members of the board to be stockholders or members of the
(3) He must not have been convicted by final judgment of an offense corporation.
punishable by imprisonment for a period exceeding six (6) years, or a Nevertheless, the aforementioned general rule admits of certain exceptions,
violation of the Corporation Code, committed within five (5) years as in the case of corporate unit owner/member of a condominium corporation.
prior to the date of his election. (Section 27); In one Opinion , the Commission stated that, "in the case of a condominium
(4) He must not have substantial interest in a competing corporation. corporation where all the members thereof are corporate members or juridical
(Gokongwei vs. SEC, SCRA 336); persons, an officer or duly authorized agent or trustee who has been
(5) Only natural persons can be elected directors/trustees; and, designated by a corporate unit owner/member of a condominium corporation
(6) Other qualifications as may be prescribed in the by-laws of the as its representative for the express purpose of qualifying him as director, may
corporation. (Section 47[5]). be eligible to be elected as director. While a corporation cannot act by itself,
being a juridical person, it can act through its officers or authorized agent or
From the foregoing, it is unequivocally required that board members, whether representative who has been duly designated in a Board Resolution.
as directors or trustees, must be elected from among the holders of stock or
from the general membership of the corporation in cases of non-stock [2] Relative to your second query, this Commission previously opined that
corporation. under Articles 74 and 75 of the Family Code, spouses are given the freedom
to choose which property regime may govern them during the marriage. The
Ownership in a condominium corporation is conferred only upon full payment Law provides:
of the purchase price of the unit. We quote the pertinent portion of the "Article 74.The property relations between husband and wife shall be
decision of the Supreme Court, in the case entitled Sunset View Condominium governed in the following order:
vs. Campos, Jr. , which reads as follows: 1. By marriage settlements executed before the marriage;
"The private respondents, therefore, who have not fully paid the 2. By the provisions of this Code; and,
purchase price of their units and consequently not owners of their units 3. By the local customs.
are not members or shareholders of the petitioner condominium Article 75.The future spouse may, in the marriage settlements, agree upon the
corporation." regime of absolute community, conjugal partnership of gains, complete

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separation of property, or any other regime. In the absence of marriage Very truly yours,
settlements, or when the regime agreed upon is void, the system of absolute (SGD.) VERNETTE UMALI-PACO
community of property as established in this Code shall govern." General Counsel
Thus, unless the spouses agree upon a different system of property relations,
the property relations between the husband and the wife shall be governed by
the system of absolute community of property. Assuming therefore, that the
husband and wife failed to agree on what property regime to adopt, the
condominium unit may be deemed as a community property and shall be
governed by the rules on "co-ownership" pursuant to Article 90 of the Family
Code, which provides:
"Section 90. The provisions on co-ownership shall apply to the
absolute community property between the spouses in all matters not
provided for in this Chapter." (emphasis supplied)
Accordingly, the spouses, who are co-owners of a condominium unit, shall be
recorded as one member. However, if the condominium unit is, among the
excluded properties under Section 92 of the Family Code or where the
spouses have chosen a different marriage settlement other than the system of
absolute community property, the law on co-ownership shall not apply.
Therefore, when doubtful and in order to determine true ownership of the
condominium unit, the corporation may inquire into the property regime
governing marriage.

[3] With regard your last query, it should be stressed that most modern
statutes allow the removal of directors by the shareholders/members of a
corporation, with or without cause and irrespective of tenure. Such is the
mandate contained in Section 28 of the Corporation Code when it provides
that "any director or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing two-thirds (2/3) of the
outstanding capital stock, or if a corporation be a non-stock corporation, by a
vote of two-thirds (2/3) of the members entitled to vote: . . ."
Section 23 incorporates the so-called inherent power of "amotion" by a
corporation. "Amotion" is the power to remove directors, officers and trustees
prior to the expiration of their term. The underlying reason for such provision
is that the stockholders/members shall be the ultimate masters, not the
directors to make the corporate government responsible to the owners.
Moreover, the stockholders should feel free to remove directors at anytime
that they have lost their trust and confidence in them, whether or not they can
prove cause of such loss.
Hence, the Corporation Code explicitly allows removal of directors/trustees
without cause, except a removal that would effectively deprive minority
stockholders/members of the right of representation to which they may be
entitled by virtue of the rule on cumulative voting.
However, please be advised that the foregoing cited authorities do not restrain
or preclude judicial interpretation and application of the law on the actual facts,
should the issue raised herein be litigated in the proper court.
Please be guided accordingly.

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7. OFFICERS • The fact that “Comptroller” is not mentioned in the by-laws


does not undermine the appointment to such position since
under Sec. 25 of Corporation Code, the Board of Directors is
7.1 Corporate Officers authorized to appoint such other officers as it may deem
Who are the corporate officers of a corporation? necessary. In this case the by-laws provided “and such other
• The Corporate Officers are: officers as the Board of Directors may from time to time does
o The President (who shall be and director) fit to provide for. Said officers shall be elected by majority
vote of the Board of Directors.” By-laws may and usually do
o Treasurer (who may not be a director)
provide for such other officers, and that where a corporate
o Corporate Secretary (who shall be a resident and
office is not specifically indicated in the roster of corporate
citizen of the Philippines offices in the by-laws of a corporation, the Board of Directors
o And such other officers as may be provided in the by- may also be empowered under the by-laws to create
laws. (page 283 of JRS, 2006) additional officers as may be necessary. Nacpil v.
International Broadcasting Corp., 379 SCRA 653 (2002).
• An officer’s removal is a corporate act, and if such removal
occasions an intra-corporate controversy, its nature is not Coverage of “Corporate Officer” for purpose of determining
altered by the reason or wisdom, or lack thereof, with which extent of business judgment of the Board to fire or hire:
the Board of Directors might have in taking such action. • For purposes of determining who is a corporate “officer”
Perforce, the matter would come within the area of corporate falling within the business judgment power of the Board of
affairs and management, and such a corporate controversy Directors to determine whom to hire and to fire, it should
would call for SEC adjudicative expertise, not that of NLRC. cover only:
De Rossi v. NLRC, 314 SCRA 245 (1999). (1) The officers provided by the corporation law, namely the
• When the by-laws provide for the position of president, treasurer and secretary; and
“Superintendent/ Administrator,” it is clearly a corporate (2) Those provided for in the by-laws of the corporation.
officer position and issues of reinstatement would be within Catindig Class Notes
the jurisdiction of the SEC and not the NLRC. Ongkingco v. Q: Who are the basic set of officers?
A: President, Secretary and Treasurer
NLRC, 270 SCRA 613 (1997).
• When the by-laws provides that one of the powers of the Q: Who are the by-laws officers of a corporation?
Board is “[t]o appoint a Medical Director, A: If the by-laws provides that the BoD may create positions and
Comptroller/Administrator, Chiefs of Services and such other provide for their function. The officers elected to such positions are
bylaws officers. But the by-laws should be amended to reflect the
officers as it may deem necessary and prescribe their powers office created.
and duties,” then such specifically designated positions
should be considered “corporate officers”. The determination Q: Why is the determination whether an officer is a bylaw officer or a
of the rights and the concomitant liability arising from any management officer important?
A: As regards intracorporate dispute. Bylaws officers are under the
ouster from such positions, would be intra-corporate SEC while non-by-laws officers are under the NLRC
controversy subject to SEC’s jurisdiction. Tabang v. NLRC,
266 SCRA 462 (1997). Q: Who are management officers?

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SCHOOL OF LAW
ARIS S. MANGUERA

A: Those not mentioned in the by-laws and not elected by the BoD. (b) Qualifications (Section 25)
Their positions are created by the management.
• The Corporate Officers are:
UP Class Notes
o The President (who shall be a director)
How do you elect Chairman and Vice-Chairman if the bylaws does o Treasurer (who may not be a director)
not provide for it? o Corporate Secretary (who shall be a resident and
(1) By laws must give power to the BoD to create other positions and
provide for their functions;
citizen of the Philippines
(2) Amend the Bylaws if there is no such provision; o And such other officers as may be provided in the by-
laws. (page 283 of JRS, 2006)
What to do if you want to hire a foreigner?
Working Visa and Understudy is more expensive, so you make them • Note: Any two (2) or more positions may be held
officers. concurrently by the same person.
Catindig: If you want get rid of your President, do not elect him as
director or take away his nominal share.
• Except: No one shall act as President and Secretary or as
President and Treasurer, at the same time.
(a) Minimum set of officers (Section 25)
Sec. 25. Corporate officers, quorum (c) Disqualifications (Section 27)
Sec. 27. Disqualification of directors, trustees or officers
Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a No person convicted by final judgment of an offense punishable by
director, a treasurer who may or may not be a director, a secretary imprisonment for a period exceeding six (6) years, or a violation of
who shall be a resident and citizen of the Philippines, and such other this Code committed within five (5) years prior to the date of his
officers as may be provided for in the by-laws. Any two (2) or more election or appointment, shall qualify as a director, trustee or officer
positions may be held concurrently by the same person, except that of any corporation.
no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation. 7.2 Authority
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the Rule on Corporate Officer’s Power to Bind Corporation
transaction of corporate business, and every decision of at least a • An officer’s power as an agent of the corporation must be
majority of the directors or trustees present at a meeting at which sought from the statute, charter, the by-laws or in a
there is a quorum shall be valid as a corporate act, except for the delegation of authority to such officer, from the acts of the
election of officers which shall require the vote of a majority of all the board of directors formally expressed or implied from a habit
members of the board. or custom of doing business. Vicente v. Geraldez, 52 SCRA
Directors or trustees cannot attend or vote by proxy at board 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470
meetings. (1992).
President.

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FRATERNAL ORDER OF UTOPIA
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• People’s Aircargo v. Court of Appeals, 297 SCRA 170 already established. Lim Tay v. Court of Appeals, 293 SCRA
(1998). 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA
• It is the Board of Directors, not the President, that exercises 35 (2001).
corporate powers. It must be emphasized that the basis for • A sale that fails to comply with Sec. 40 of Corporation Code,
agency is representation and a person dealing with an agent cannot be invalidated when the buyer relies upon a
is put upon inquiry and must discover upon his peril the Secretary’s Certificate confirming authority. A secretary’s
authority of the agent. Safic Alcan & Cie v. Imperial certificate which is regular on its face can be relied upon by a
Vegetable Oil Co., Inc., 355 SCRA 559 (2001). third party who does not have to investigate the truths of the
facts contained in such certification; otherwise business
• A corporation may not distance itself from the acts of a
transactions of corporations would become tortuously slow
senior officer: "the dual roles of Romulo F. Sugay should not
and unnecessarily hampered. Esguerra v. Court of Appeals,
be allowed to confuse the facts." R.F. Sugay v. Reyes, 12
267 SCRA 380 (1997).
SCRA 700 (1961).
Corporate Treasurer
• The President is considered as the corporation’s agent, and
• A corporate treasurer’s function have generally been
as such, his knowledge of the repeal of a resolution in
described as “to receive and keeps funds of the corporation,
another juridical person in which his corporation has an
and to disburse them in accordance with the authority given
interest, is ascribed to his principal under the theory of
him by the board or the properly authorized officers.” Unless
imputed knowledge. Rovels Enterprises, Inc. v. Ocampo, 392
duly authorized, a treasurer, whose power are limited, cannot
SCRA 176 (2002).
bind the corporation in a sale of its assets, which obviously is
Corporate Secretary
foreign to a corporate treasurer’s function. San Juan
• In the absence of provisions to the contrary, the corporate
Structural v. Court of Appeals, 296 SCRA 631, 645 (1998).
secretary is the custodian of corporate records—he keeps the
• A corporate treasurer whose negligence in signing a
stock and transfer book and makes proper and necessary
confirmation letter for rediscounting of crossed checks,
entries therein. It is his duty and obligation to register valid
knowing fully well that the checks were strictly endorsed for
transfers of stock in the books of the corporation; and in the
deposit only to the payee’s account and not to be further
event he refuses to comply with such duty, the transferor-
negotiated, may be personally liable for the damaged caused
stockholder may rightfully bring suit to compel performance.
the corporation. Atrium Management Corp. v. Court of
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
Appeals, 353 SCRA 23 (2001).
• Although the corporate secretary’s duty to record transfers of
stock is ministerial, he cannot be compelled to do so when
the transferee’s title to said shares has no prima facie validity Service of Summons on Corporations
or is uncertain. More specifically, a pledgor, prior to Prevailing Rule:
foreclosure and sale, does not acquire ownership rights over
the pledged shares and thus cannot compel the corporate
• Section 11, Rule 14 of the 1997 Rules of Civil Procedure
secretary to record his alleged ownership of such shares on uses the term “general manager” and unlike the old provision
the basis merely of the contract of pledge. Mandamus will not in the Rules of Court, it does not include the term “agent”.
issue to establish a right, but only to enforce one that is Consequently, the enumeration of persons to whom
summons may be served is “restricted, limited and exclusive”

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

following the rule on statutory construction expressio unios officer has by reason of his office, although it may not be
est exclusion alterius. Therefore, the earlier cases that uphold sanctioned by express authority.
service of summons upon a construction project manager;13 a • Express authority of an officer or agent includes every
corporation’s assistant manager;14 ordinary clerk of a power or authority expressly conferred upon him by law and
corporation;15 private secretary of corporate executives;16 the by-laws of the corporation.
retained counsel;17 officials who had charge or control of the
operations of the corporation, like the assistant general
• Implied authority of an officer or agent of a corporation
includes all such incidental authority as is necessary, usual,
manager;18 or the corporation’s Chief Finance and
and proper to effectuate the main authority expressly
Administrative Officer;19 no longer apply since they were
conferred.
decided under the old rule that allows service of summons
upon an agent20 of the corporation. E.B. Villarosa & Partners
Co., Ltd. v. Benito, 312 SCRA 65 (1999). (b) Apparent or ostensible
• Apparent authority is naturally the same as and based
Catindig Class Notes upon the same principle as authority by estoppel.
Q: What are the sources of the powers of officers?
A:
In the absence of an authority from the board of directors, no person,
(1) As provided in the by-laws
not even the officers of the corporation, can validly bind the
(2) Those which the BoD may assign or delegate
(3) Provided by laws corporation.
(4) Those inherent in the position
(5) Customary (with respect to the corporation/industry) Exceptions:
(6) Incidental (1) Doctrine of Ratification or Estoppel- Acts of contracts which are not
per se illegal can be validated. Even when the contract entered into in
behalf of the corporation is outside the usual powers of the corporate
(a) Actual, express or implied officer, the corporation’s ratification of the contract and acceptance of
• Inherent authority or power of an officer or agent is taken to the benefits have made such contract binding upon the corporation.
mean that authority to act and bind the corporation which the Note: Ratification that would bind the corporation would have to come from
the board of directors or a properly authorized representative.
Ratification can never be made on the part of the corporation by the
13
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997). same persons who wrongfully assume the power to make the contract,
14
Gesulgon v. NLRC, 219 SCRA 561 (1993). but the ratification must be by the officers as governing body having
15
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 authority to make such contract.
(1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988). (2) Doctrine of Apparent Authority- If a corporation knowingly permits one
16
Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); also of its officers, or any other agent to act within the scope of an apparent
Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999). authority, it holds him out to the public possessing the power to do so
17
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). those acts; and thus, the corporation will, as against anyone who has in
18
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). good faith dealt with it through such agent, be estopped from denying
19 the agent’s authority.
Far Corporation v. Francisco, 146 SCRA 197 (1986).
20
Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA Note:
86 (1982).

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ARIS S. MANGUERA

Existence of apparent authority must be ascertained through: (a) for the profits which otherwise would have accrued to the corporation.
general manner in which the corporation holds out an officer or agent as
having the power to act or in, other words, the apparent authority to act in
general, with which it clothes him; or (b) the acquiescence in his acts of a • Generally, officers or directors under the old corporate name
particular nature, with actual or constructive knowledge thereof, whether bear no personal liability for acts done or contracts entered
within or beyond of his ordinary powers. into for the corporation, if duly authorized. Republic Planters
If the corporation desires to set up the defense that the contract
was executed by one not authorized as agent, it must plead such fact.
Bank v. Court of Appeals, 216 SCRA 738 (1992).
(Ramirez Doctrine) However, once the corporation has discharged its • Corporate officers who entered into and signed contracts on
burden under the Ramirez Doctrine, then the burden of proof now shifts to behalf of the corporation in their official capacities cannot be
the contracting party to show that indeed by previous acts and actuations, made personally liable thereunder in the absence of
the acting officer had been clothed by the corporation with apparent authority stipulation to that effect, due to the personality of the
for the public to take such authority at face value. (Yao Ka Sin-Timely corporation being separate and distinct from the persons
Repudiation Doctrine) composing it. Western Agro Industrial Corp. v. Court of
UP Class Notes: Pedro went to bank. Ana is the manager of the bank. Appeals, 188 SCRA 709 (1990); Rustan Pulp & Paper Mills,
Ana told Pedro that BSP required higher collateral and told him to
increase his collateral for his loan. SMC shares were given by Pedro to
Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v.
Ana. Ana was about to go to Canada, and before she left, she sold Walter Bull and Co., 84 Phil. 164 (1949).
Pedro’s SMC shares. Could Pedro sue the bank? • A president cannot be held solidarily liable personally with
Ans: Yes. Ana is clothed with authority as officer to act in behalf of the the corporation absent evidence of showing that he acted
bank. (UP-Elective Class Reviewer at 39)
Q: If teller? A: Agency case. (Id.) maliciously or in bad faith. EPG Constructions Co. v. CA, 210
SCRA 230 (1992).
• The finding of solidary liability among the corporation, its
7.3 Liability officers and directors would patently be baseless when the
decision contains no allegation, finding or conclusion
(a) Liability in general (Section 31) regarding particular acts committed by said officers and
Sec. 31. Liability of directors, trustees or officers director that show them to have been individually guilty of
unmistakable malice, bad faith, or ill-motive in their personal
Directors or trustees who willfully and knowingly vote for or assent to
dealings with third parties. When corporate officers and
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or directors are sued merely as nominal parties in their official
acquire any personal or pecuniary interest in conflict with their duty capacities as such, they cannot be held liable personal for the
as such directors or trustees shall be liable jointly and severally for all judgment rendered against the corporation. NPC. v. Court of
damages resulting therefrom suffered by the corporation, its Appeals, 273 SCRA 419 (1997); Emilio Cano Enterprises,
stockholders or members and other persons. Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals,
When a director, trustee or officer attempts to acquire or acquires, in 215 SCRA 120 (1992).
violation of his duty, any interest adverse to the corporation in respect • An officer-stockholder who signs in behalf of the corporation
of any matter which has been reposed in him in confidence, as to to a fraudulent contract cannot claim the benefit of separate
which equity imposes a disability upon him to deal in his own behalf, juridical entity: “Thus, being a party to a simulated contract of
he shall be liable as a trustee for the corporation and must account management, petitioner Uy cannot be permitted to escape

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

liability under the said contract by using the corporate entity direct accountabilities of the corporation they represent. Brent
theory. This is one instance when the veil of corporate entity Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).
has to be pierced to avoid injustice and inequity.” Paradise • In labor cases, corporate directors and officers are solidarily
Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990). liable with the corporation for the termination of employment
• While the limited liability doctrine is intended to protect the of corporate employees done with malice or in bad faith. In
stockholder by immunizing him from personal liability for the this case, it is undisputed that the corporate officers have a
corporate debts, a corporate officer may nevertheless divest direct hand in the illegal dismissal of the employees. They
himself of this protection by voluntarily binding himself to the were the one, who as high-ranking officers and directors of
payment of the corporate debts. Toh v. Solid Bank Corp., the corporation, signed the Board Resolution retrenching the
408 SCRA 544 (2003). employees on the feigned ground of serious business losses
• Labor. Corporate officers cannot be held personally liable that had no basis apart from an unsigned and unaudited
for damages on account of the employees dismissal because Profit and Loss Statement which, to repeat, had no
the employer corporation has a personality separate and evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA
distinct from its officers who merely acted as its agents. 35 (1997).
Malayang Samahan ng mga Mangagagawa sa M. • Since a corporation is an artificial person, it must have an
Greenfields v. Ramos, 357 SCRA 77 (2001). officer who can be presumed to be the employer, being the
“person acting in the interest of the employer”—the
• Only the responsible officer of a corporation who had a hand
corporation, in the technical sense only, is the employer. The
in illegally dismissing an employee should be held personally
manager of the corporation falls within the meaning of an
liable for the corporate obligations arising from such act.
“employer” as contemplated by the Labor code, who may be
Maglutac v. NLRC, 189 SCRA 767 (1990); reiterated in
held jointly and severally liable for the obligation of the
Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182
corporation to its dismissed employees. NYK International
SCRA 353 (1990);  Reahs Corp. v. NLRC, 271 SCRA 247 Knitwear Corp. Phil. V. NLRC, 397 SCRA 607 (2003).
(1997); and for the separate juridical personality of a
corporation to be disregarded as to make the highest
corporate officer personally liable on labor claims, the
wrongdoing must be clearly and convincingly established. Del (b) Dealings with the corporation (Section 32)
Sec. 32. Dealings of directors, trustees or officers with the
Rosario v. NLRC, 187 SCRA 777 (1990).
corporation
• Corporate officers are not personally liable for money claims
of discharged employees unless they acted with evident A contract of the corporation with one or more of its directors or
malice and bad faith in terminating their employment. trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996);
Nicario v. NLRC, 295 SCRA 619 (1998). 1. That the presence of such director or trustee in the board
• A corporation, being a juridical entity, may act only through meeting in which the contract was approved was not
its directors, officers and employees and obligations incurred necessary to constitute a quorum for such meeting;
by them, acting as corporate agents, are not theirs but the 2. That the vote of such director or trustee was not necessary for
the approval of the contract;

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ARIS S. MANGUERA

3. That the contract is fair and reasonable under the • Personal liability of a corporate director, trustee or officer
circumstances; and along (although no necessarily) with the corporation may so
validly attach, as a rule, only when:
4. That in case of an officer, the contract has been previously
(1) He assents:
authorized by the board of directors.
(a) to a patently unlawful act of the corporation, or
Where any of the first two conditions set forth in the preceding (b) for bad faith or gross negligence in directing its
paragraph is absent, in the case of a contract with a director or affairs
trustee, such contract may be ratified by the vote of the stockholders
(c) for conflict of interest, resulting in damages to the
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for corporation, its stockholders or other persons;
the purpose: Provided, That full disclosure of the adverse interest of (2) He consents to the issuance of watered stocks or who,
the directors or trustees involved is made at such meeting: Provided, having knowledge thereof, does not forthwith file with the
however, That the contract is fair and reasonable under the corporate secretary his written objection thereto;
circumstances. (3) He agrees to hold himself personally and solidarily liable with
the corporation; or
(4) He is made, by specific provision of law to personally answer
Catindig Class Notes
Q: Pedro owns ABC Corp (Manpower services). He proposed to
for his corporate action.
supply janitors, security guards and clerks at 10% below market
charges to X Corp of which he is a director. Could X Corp. enter into People’s Aircargo v. CA (1998)
such contract? • Apparent authority is derived not merely from practice. Its
Ans: Yes, Pedro is a self-dealing director. To ensure that the contract
is not voided, the following requirements must concur: existence may be ascertained through:
(1) The contract must be fair and reasonable; (1) The general manner in which the corporation holds out an
(2) BoD quorum even without the presence of Pedro; officer or agent as having the power to act or, other words,
(3) Vote of Pedro is not needed for approval; the apparent authority to act in general, with which it clothes
(4) If X Corp is a bank, there must be a minutes on the meeting and a
copy of the minutes must be sent to the BSP. him; or
Note: There should also be full disclosure of the adverse interest. (2) The acquiescence in his acts of a particular nature, with
Catindig: Actually, you could enter into it but risk that a BoD or actual or constructive knowledge thereof, whether within or
stockholder will contest it beyond the scope of his ordinary powers.
It requires presentation of evidence of similar act(s)
7.4 Cases executed either in its favor or in favor of other parties. It is
not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the
Tramat Mercantile v. CA (1994)
power to bind the corporation.
• It should only be the corporation, not the person acting for
• Even if a certain contract is outside the usual power of the
and its behalf, that property could be made liable under the
president, the corporation’s ratification of the same and
questioned transaction.
acceptance of benefits make it binding.

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

• (Private respondent should not be faulted for believing that


Punsalan’s conformity to the contract in dispute was also
binding on the corporation.
• Catindig: Quantity does not determine if there is apparent
authority. (UP-Elective Class Reviewer at 40)

Rural Bank of Milaor v. Ocfemia (2000)


• A bank is liable to innocent third parties where
representation is made in the course of its normal business
by an agent even though such agent is abusing her authority.
• Concurring opinion by J Vitug: A corporation may be held in
estoppel from denying as against innocent third persons the
authority of its officers or agents who have been clothed by it
with ostensible or apparent authority.

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ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
ARIS S. MANGUERA

Under Section 25, the validity of a corporate act is predicated on the


8. MEETINGS presence of the following requisites:
(1) Meeting of the directors or trustees duly assembled as a
8.1 Meetings of the stockholders and the Board of board, i.e., as a body in a lawful meeting;
(2) Presence of the required quorum;
Directors (3) Decision of the majority of the quorum or, in other cases, a
majority of the entire board; and
(a) Kinds (Section 49) (4) Meeting at the place, time, and manner provided in the by-
Sec. 49. Kinds of meetings laws. (Page 266 De Leon, 2006)
Catindig Class Notes
Meetings of directors, trustees, stockholders, or members may be Q: Where should SH meeting be held?
regular or special. (n) A: In the place where the principal office of the corp is located unless
where all the SHs agree to hold the meeting elsewhere.
Kinds of stockholders’/members’ meeting: SEC New Rule
(1) Regular or those held annually on a date fixed in the by-laws, Principal Office=Principal Place of Business
or if not fixed, on any dare in April of every year as
determined by the BoD or trustees. It is held principally for Q: Why do the SHs hold their meeting at the principal office?
A:
the purpose of electing another set of directors or trustees;
or (1) For Convenience
(2) To prevent mischief by management.
(2) Special or those held at any time deemed necessary or as
provided in the by-laws. Q: Can the SHs not meet at all?
A: No. They are required to meet for the purpose of electing the BoD.
Kinds of directors’/trustees’ meeting: Tip: In making by-laws, do not put specific date for the meeting. You
(1) Regular or those held by the board monthly, unless the by- can place “last Friday of May” and place that if the last Friday is a
holiday, then the meeting shall be held at the next working day.
laws provide otherwise; or
(2) Special or those held by the board at any time upon the call Q: What is the quorum required?
of the president or as provided in the by-laws. A: As what the By-laws provide. (Pede nga less than majority)

Q: Who presides?
Requisites for a valid meeting of stockholders or members: A: Whoever is authorized by the By-laws. If the person authorized is
(1) It must be held at a proper place (Section 51) absent, the SH present may designate any one of them to preside.
(2) It must be held at the stated date and at the appointed time or
at a reasonable time thereafter; (Section 51) (b) When and where held (Sections 50, 51 and 53)
(3) It must be called by the proper person (Section 50) Sec. 50. Regular and special meetings of stockholders or
(4) There must be a previous notice. (Secs 50,51) members
(5) There must be a quorum (Section 52)
Regular meetings of stockholders or members shall be held annually
on a date fixed in the by-laws, or if not so fixed, on any date in April of
Requisites for board meeting:
every year as determined by the board of directors or trustees:
Provided, That written notice of regular meetings shall be sent to all

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stockholders or members of record at least two (2) weeks prior to the Meetings of directors or trustees of corporations may be held
meeting, unless a different period is required by the by-laws. anywhere in or outside of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings stating the date, time
Special meetings of stockholders or members shall be held at any
and place of the meeting must be sent to every director or trustee at
time deemed necessary or as provided in the by-laws: Provided,
least one (1) day prior to the scheduled meeting, unless otherwise
however, That at least one (1) week written notice shall be sent to all
provided by the by-laws. A director or trustee may waive this
stockholders or members, unless otherwise provided in the by-laws.
requirement, either expressly or impliedly. (n)
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member. • See page 468 of De Leon for illustration
Whenever, for any cause, there is no person authorized to call a • If the meeting is held at an unauthorized place or without
meeting, the Secretaries and Exchange Commission, upon petition of proper notice and not all the stockholders or members are
a stockholder or member on a showing of good cause therefor, may present, those who have a right to complain may take steps
issue an order to the petitioning stockholder or member directing him to set aside any action taken at such meetings even though
to call a meeting of the corporation by giving proper notice required majority of the stockholders or members were present in the
by this Code or by the by-laws. The petitioning stockholder or absence of waiver, estoppel, or ratification. (Page 468 of De
member shall preside thereat until at least a majority of the Leon, 2006)
stockholders or members present have been chosen one of their
number as presiding officer. (24, 26)
• The proper place of the holding of stockholders’ or members’
meeting is that provided in Section 51. This is mandatory.
Sec. 51. Place and time of meetings of stockholders or members (Page 467of De Leon, 2006)
Stockholders' or members' meetings, whether regular or special, shall Catindig Class Notes
be held in the city or municipality where the principal office of the Q: “Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
corporation is located, and if practicable in the principal office of the
otherwise.” Is monthly mandatory?
corporation: Provided, That Metro Manila shall, for purposes of this A: No, its directory.
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein. (c) Notice required (Sections 50 and 53)
All proceedings had and any business transacted at any meeting of
• Notice is the writing informing the stockholders or members
the stockholders or members, if within the powers or authority of the of the meeting. (Page 469of De Leon, 2006)
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation Requisites of notice of meeting:
are present or duly represented at the meeting. (24 and 25) (1) It must be issued by one who has authority to issue it;
Sec. 53. Regular and special meetings of directors or trustees (2) It must be in writing;
(3) It must state the date, time and place of the meeting, unless
Regular meetings of the board of directors or trustees of every otherwise provided in the by-laws
corporation shall be held monthly, unless the by-laws provide (4) It must state the business to be transacted thereat;
otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the by-laws.

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(5) It must be sent at a certain time before the scheduled the outstanding capital stock or a majority of the members in the case
meeting as fixed by law, unless a different period is required of non-stock corporations. (n)
by the by-laws.
(6) Further, the notice must comply with any of the other • Quorum is such a number of the membership of a collective
requirements prescribed by the law of the by-laws of the body as is competent to transact its business or do any other
corporation. (See Section 77, 118) corporate act. (Page 268 of De Leon, 2006)
• See page 476 of De Leon for matters in which the law
• The CALL for a meeting is exercised by the person who has requires minimum number of votes.
the power to call the meeting. It may consist of direction to
the secretary of the corporation to notify the stockholders or (e) Who presides (Section 54)
members of the meeting. Sec. 54. Who shall preside at meetings
The president shall preside at all meetings of the directors or trustee
(d) Quorum required (Sections 25 and 52) as well as of the stockholders or members, unless the by-laws
Sec. 25. Corporate officers, quorum provide otherwise. (n)

Immediately after their election, the directors of a corporation must


formally organize by the election of a president, who shall be a (f) Who could attend and vote (Section 25 and 58)
director, a treasurer who may or may not be a director, a secretary
Sec. 25. Corporate officers, quorum
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more Immediately after their election, the directors of a corporation must
positions may be held concurrently by the same person, except that formally organize by the election of a president, who shall be a
no one shall act as president and secretary or as president and director, a treasurer who may or may not be a director, a secretary
treasurer at the same time. who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more
The directors or trustees and officers to be elected shall perform the
positions may be held concurrently by the same person, except that
duties enjoined on them by law and the by-laws of the corporation.
no one shall act as president and secretary or as president and
Unless the articles of incorporation or the by-laws provide for a
treasurer at the same time.
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the The directors or trustees and officers to be elected shall perform the
transaction of corporate business, and every decision of at least a duties enjoined on them by law and the by-laws of the corporation.
majority of the directors or trustees present at a meeting at which Unless the articles of incorporation or the by-laws provide for a
there is a quorum shall be valid as a corporate act, except for the greater majority, a majority of the number of directors or trustees as
election of officers which shall require the vote of a majority of all the fixed in the articles of incorporation shall constitute a quorum for the
members of the board. transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which
Directors or trustees cannot attend or vote by proxy at board
there is a quorum shall be valid as a corporate act, except for the
meetings.
election of officers which shall require the vote of a majority of all the
Sec. 52. Quorum in meetings members of the board.
Unless otherwise provided for in this Code or in the by-laws, a Directors or trustees cannot attend or vote by proxy at board
quorum shall consist of the stockholders representing a majority of

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meetings.
Nevertheless, the foregoing "two-tiered" test does not apply
when the funds that are prima facie public in character or, at
Sec. 58. Proxies least, are affected with public interest. Inasmuch as the
Stockholders and members may vote in person or by proxy in all subject UCPB shares in the present case were undisputably
meetings of stockholders or members. Proxies shall in writing, signed acquired with coco levy funds which are public in character,
by the stockholder or member and filed before the scheduled meeting then the right to vote them shall be exercised by the PCGG.
with the corporate secretary. Unless otherwise provided in the proxy, In sum, the "public character" test, not the "two-tiered" one,
it shall be valid only for the meeting for which it is intended. No proxy applies. Republic v. Cocofed, 372 SCRA 462 (2001).
shall be valid and effective for a period longer than five (5) years at
any one time. (n)
Instances When Stockholders Entitled to Vote:
• In a board meeting, an abstention is presumed to be counted - Election of directors and trustees (Sec. 24).
as an affirmative vote insofar as it may be construed as an
- Amendment of articles of incorporation (Sec. 16).
acquiescence in the action of those who voted affirmatively;
but such presumption, being merely prima facie would not - Investment in another business or corporation
hold in the face of clear evidence to the contrary. Lopez v. (Secs. 36 and 42).
Ericta, 45 SCRA 539 (1972). - Merger and consolidation (Sec. 72).
• Until challenged successfully in proper proceedings, a - Increase and Decrease of capital stock (Sec. 38).
registered stockholder has a right to participate in any - Adoption, amendment and repeal of by-laws (Sec.
meeting, and in the absence of fraud the action of the 48).
stockholders’ meeting cannot be collaterally attacked on - Declaration of stock dividends (Sec. 43).
account of such participation, even if it be shown later on that - Management contracts (Sec. 44).
the shares had been previously sold (but not recorded). Price
and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933). - Fixing of consideration of no par value shares
(Sec. 62).
• The sequestration of shares does not entitle the government
to exercise acts of ownership over the shares; even
sequestered shares may be voted upon by the registered (g) Agenda
stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). • There are certain matters of importance which the law
• The right to vote sequestered shares of stock registered in requires to be taken up at meetings of stockholders or
the names of private individuals or entities and alleged to members called expressly for the purpose. It is, therefore,
have been acquired with ill-gotten wealth shall, as a rule, be necessary that the notice should state the purpose for which
exercised by the registered owner. The PCGG may, however, the meeting is called.
be granted such voting right provided it can (1) show prima • See page 470 of De Leon.
facie evidence that the wealth and/or the shares are indeed Catindig Class Notes
ill-gotten; and (2) demonstrate imminent danger of dissipation If not a regular item in the Agenda, then must specify the matter or
of the assets, thus necessitating their continued sequestration item in the notice
and voting by the government until a decision, ruling with
finality on their ownership, is promulgated by the proper court. When Board Meeting is Unnecessary

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• Unless the bylaws provide otherwise, any action by the


directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
(1) Before or after such action is taken, written consent
thereto is signed by all the directors; or
(2) All the stockholders have actual or implied knowledge of
the action and made no prompt objection thereto in
writing; or
(3) The directors are accustomed to take informal action with
the express or implied acquiescence of al the
stockholders; or
(4) All the directors have express or implied knowledge of
the action in question, and none of them makes prompt
objection thereto in writing.
Note: if a directors’ meeting is held without a proper call
or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with
the Secretary of the corporation after having knowledge
thereof. (Page 915 of CLV’s CLR, 2007)

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inform the director concerned of the contact number/s he will call to join the
meeting. The Secretary shall keep the records of the details, and on the date
of the scheduled meeting, confirm and note such details as part of the minutes
8.2 Additional material: SEC Memo Circ. No. 15 series of the meeting.
2001, Nov. 20, 2001 re: Board meetings through 5. In the absence of an arrangement, it is presumed that the director will
teleconferencing or videoconferencing physically attend the Board meeting.
SEC MEMORANDUM CIRCULAR NO. 15-01
6. At the start of the scheduled meeting, a roll call shall be made by the
TO All Concerned Secretary. Every director and participant shall state, for the record, the
SUBJECT Board Meeting Through Teleconferencing or following:
Videoconferencing (Tele/Video Conferencing) a. Full Name
In relation to Section 16 of the Electronic Commerce Act (R.A. 8792) and b. Location
Section 25 of the Corporation Code of the Philippines (BP68) the following are c.For those attending through tele/videoconferencing, he shall confirm
the guidelines for the conduct of teleconferencing and videoconferencing (i.e. that:
conferences or meetings through electronic medium or telecommunications i. he can completely and clearly hear the others who can clearly hear
where the participants who are not physically present are located at different him at the end of the line
local or international places) of the Board of Directors for the information and Ii state whether he has received the agenda and all the materials for the
guidance of all concerned: meeting
iii. specify type of device used
1.The Secretary of the meeting shall assume the following responsibilities: Thereafter, the Secretary shall confirm and note the contact numbers being
a. to safeguard the integrity of the meeting via tele/videoconferencing used by the directors and participants not physically present. After the roll call,
b. to find good tele/videoconference equipment/facilities the Secretary may certify the existence of a quorum.
c. to record the proceedings and prepare the minutes of the meeting
d. to store for safekeeping and mark the tape recording/s and/or other 7. All participants shall identify themselves for the record, before speaking and
electronic recording mechanism as part of the records of the corporation must clearly hear and/or see each other in the course of the meeting. If a
person fails to identify himself, the Secretary shall quickly state the identity of
2.The Secretary shall send out the notices of the meeting to all directors in the last speaker. If the person speaking is not physically present and the
accordance with the manner of giving notice as stated in the corporate by- Secretary is not certain of the identity of the speaker, the Secretary must
laws. inquire to elicit a confirmation or correction.
If a motion is objected to and there is a need to vote and divide the Board, the
3. The notice shall include the following: Secretary should call the roll and note the vote of each director who should
a. Inquiry on whether the director will attend physically or through identify himself.
tele/videoconferencing; If a statement of a director/participant in the meeting via
b. Contact number/s of the Secretary and office staff whom the director tele/videoconferencing is interrupted or garbled, the Secretary shall request
may call to notify and state whether he shall be physically present or for a repeat or reiteration, and if need be, the Secretary shall repeat what he
attend through tele/videoconferencing; heard the director/participant was saying for confirmation or correction.
c. Agenda of the meeting;
d. All documents to be discussed in the meeting, including attachments, 8. The Secretary shall require all the directors who attended the meeting,
shall be numbered and duly marked by the Secretary in such a way that whether personally or through tele/videoconferencing, to sign the minutes of
all the directors, physically or electronically present, can easily follow, the meeting to dispel all doubts on matters taken up during the meeting.
refer to the documents and participate in the meeting. These guidelines shall take effect fifteen (15) days after publication in two (2)
newspapers of general circulation.
4. If the director chooses tele/videoconferencing, he shall give notice of at
least five days prior to the scheduled meeting to the Secretary. The latter shall Mandaluyong City, Philippines.
be informed of his contact number/s. In the same way, the Secretary shall November 20, 2001.

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SCHOOL OF LAW
ARIS S. MANGUERA

(SGD.) LILIA R. BAUTISTA


Chairperson

• It should be emphasized that participation of directors in meetings


through teleconferencing and video conferencing may be deemed
acceptable only when adequate safeguards have been accordingly
set in place. Meetings of this nature should be properly recorded
and the appropriate tapes and discs properly stored for safekeeping.
(SEC Opinion No. 26, March 22, 2003)
• In the Philippines, teleconferencing and video-conferencing
of members of the BoD of private corporations is a reality in
light of RA 8792. The SEC Memorandum Circular No. 15,
providing the guidelines to be complied with related to such
conferences. (Expertravel & Tours v. CA, 2005)

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9. BOOKS AND RECORDS