The Corporation Code of The Philippines (Final)

THE CORPORATION CODE OF THE PHILIPPINES
CHAPTER 1: INTRODUCTION KINDS OF BUSINESS ORGANIZATION
1.
SOLE PROPRIETORSHIP one conducted for profit by a lone or single individual who owns all assets, personally owes and answers all the liabilities or suffers all the losses and enjoys all the profits to the exclusion of others. ADVANTAGES DISADVANTAGES
E2"E!T3/4 to the rule is when the following conditions are met5 a. The articles of incorporation expressly authori6ed the corporation to enter into contracts of partnership1 b. The agreement or articles of partnership must provide that all the partners will manage the partnership1 and c. The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership
Eliminates the bureaucratic process common in corporations where the board of directors must sit as a body to have a valid transaction. The proprietor makes his own decisions and can act without delay. !roprietor owns all the profits without having to share the same
7. CORPORATION an artificial being created by nlimited personal liability of operation of law, having the right of succession and the powers, attributes and properties expressly the proprietor authori6ed by law or incident to its existence %8ec. 1, "orporation "ode 9"":)
CHAPTER 2: DEFINITION AND ATTRIBUTES
A.
DEFINITION
"apital is limited by Sec. the 2. Cor or!"#o$ De%#$e& & corporation is an artificial being proprietor#s personal resources created by operation of law, having the right of succession and the powers, attributes and properties expressly authori6ed by law or incident to its existence.
$.
PARTNERSHIP a contract where two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves %&rt. 1'(', "ivil "ode). JOINT VENTURE a one+time grouping of two or more persons, natural or juridical, in a specified undertaking. PARTNERSHIP JOINT VENTURE
B. 1.
ATTRIBUTES 'CARP( CREATED B) OPERATION OF LA* the formal re.uirement of the 8tate#s consent through compliance with the re.uirements imposed by law is necessary for its creation such that the mere agreement of the persons composing it or intending to organi6e it does not warrant the grant of its independent existence as a juridical entity1
*.
,as a personality separate and distinct from the partners
-oes not ac.uire a separate $. ARTIFICIAL BEING it has a juridical personality, and distinct personality from separate and distinct from the persons composing it. the venturers
,as for its object a general business of particular kind, although there may be partnership for a single transaction "orporations, generally are not allowed to enter into partnerships0
*. a RIGHT OF SUCCESSION unlike in a partnership, the /bject is an undertaking of death, incapacity or civil interdiction of one or more of particular or single transaction its stockholder does not result in its dissolution1
PO*ERS+ ATTRIBUTES AND PROPERTIES E,PRESSL) AUTDHORIZED B) LA* it can exercise only such powers and can hold only such properties as "orporations may enter joint are granted to it by the enabling statutes unlike ventures natural persons who can do anything as they please. LBC E,PRESS+ INC. VS. COURT OF APPEALS %$*( 8";& (<$ 98ept. $1, 1==7:) !rivate respondent "arloto, incumbent !resident+>anager of private respondent ;ural ?ank of @abason, alleged that he was instructed to go to >anila to follow up on the ?ank#s plan of payment of rediscounting obligations with "entral ?ank#s main office, where he purchased a round trip ticket and phone his sister to send him !1,<<< for his pocket money which @?" failed
7.
*& corporation is generally not allowed to enter into partnerships because %1) the identity of the corporation is lost or merged with that of another1 and %$) the discretion of the officials is placed in other hands other than those permitted by the law in its creation.
1
"esar 4ickolai A. 8oriano Br. &rellano niversity 8chool of @aw $<11+<*<* T,E "/;!/;&T3/4 "/-E /A T,E !,3@3!!34E8 %?atas !ambansa ?ilang (C, as amended) based on the book of &tty ;uben ". @adia
to deliver and eventually "arloto was not able to submit the rediscounting documents and the ?ank was made to pay the "entral ?ank !*$,<<< s penalty interest and alleged that he suffered embarrassment and humiliation. ;espondent ;ural ?ank was later on joined as one of the plaintiff and prayed for the reimbursement of !*$,<<<. "arloto and the ?ank were awarded moral and exemplary damages of !1<,<<< and !D,<<<, respectively. ISSUE5 E/4 ;ural ?ank of @abason, 3nc. being an artificial person should be awarded moral damagesF HELD: 4o. >oral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, oral shock, social humiliation and social injury. & corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses1 therefore, it cannot experience physical suffering and mental anguish. >ental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows and grieves of life all of which cannot be suffered by respondent bank as an artificial person. BEDROCK RULE5 nder &rticle $$1= of the "ivil "ode, for cases of libel, slander and other forms of defamation, a corporation is entitled to moral damages.
are being evolved.
D. 1. $.
DISADVANTAGES To have a valid and binding corporate act, formal proceedings, such as board meetings are re.uired1 The business transactions of a corporation is limited to the 8tate of its incorporation and may not act as such corporation in other jurisdiction unless it has obtained a license or authority from the foreign state1 The shareholders# limited liability tends to limit the credit available to the corporation as a separate legal entity1 Transferability of shares may result to uniting incompatible and conflicting interests1 The minority shareholders have practically no say in the conduct of corporate affairs1 3n large scale enterprises, stockholders# voting rights may become merely fictitious and theoretical because of disinterest in management, wide+scale ownership and inaccessible place of meeting1 G-ouble taxationH may be imposed on corporate income1 and "orporations are subject to governmental regulations, supervision and control including submission of reportorial re.uirements not otherwise imposed in other business form. CORPORATION VS. PARTNERSHIP CORPORATION PARTNERSHIP "reated by mere agreement of the parties %&rt. 1'(', "ivil "ode) >aybe formed by two or more natural persons %&rt. 1'(')
*. 7. D. (.
'. C.
C. 1.
ADVANTAGES OF THE CORPORATE FOR- OF BUSINESS CAPACIT) TO ACT AS A SINGLE UNIT any number of persons may unite in a single enterprise without using their names, without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, and to hold or convey property, in the corporate name1 LI-ITED SHAREHOLDER.S LIABILIT) the limit of his liability since stockholders are not personally liable for the debts of the corporation1 CONTINUIT) OF E,ISTENCE rights and obligations of a corporation are not affected by the death, incapacity or replacement of the individual members1 FEASIBILIT) OF GREATER UNDERTAKING it enables the individuals to cooperate in order to furnish the large amounts of capital necessary to finance large scale enterprises1 TRANSFERABILIT) OF SHARES unless reasonably restricted, shares of stocks, being personal properties, can be transferred by the owner without the consent of the other stockholders1 CENTRALIZED -ANAGE-ENT the vesting of powers of management and appointing officers and agents in board of directors gives to a corporation the benefit of a centrali6ed administration which is a practical business necessity in any large organi6ation1 and STANDARDIZED -ETHOD OF ORGANIZATION+ -ANAGE-ENT AND FINANCE which are provided under a well+drawn general corporation law. The corporation statutes enter into the charter contract and these are constantly being interpreted by courts. &n established system of management and protection of shareholders and creditors# rights has thus been and
E.
"reated by operation of law %8ec. $I7, "orp "ode)
$. *. 7.
There must be at least D incorporations %8ec. 1<), except corporation sole which is incorporated by one single individual %8ec. 11<) "an exercise only such powers and functions expressly granted to it by law and those that are necessary or incidental to its existence %8ec. $, 7D) nless validly delegated expressly or impliedly, a corporation must transact its business through the board of directors %8ec. $*) ;ight of succession, it continues to exist despite the death, withdrawal, incapacity or civil interdiction of the stockholders or members. %8ec. *)
D.
"an do anything by agreement of the parties provided only that it is not contrary to law, morals, good customs or public order. %&rt. 1*<() 3n the absence of an agreement to the contrary, any one of the parties in the partnership form of business may validly bind the partnership %&rt. 1*<C, par. 1) ?ased on mutual rust and the death, incapacity, insolvency, civil interdiction or mere withdrawal of one of the parties would result in its dissolution %&rt. 1C*<, par. ( I ')
(.
'.
$
Transferability of shares without the consent of the other stockholders. %8ec. (*)
@imited liability only to the extent of their subscription or their promised contribution.
& partner cannot transfer his basis of the shares held by each of them. rights or interests in the DISTINCTION: &lthough a non+stock partnership so as to make SIGNIFICANT the corporation exists for purposes other than for profit, it does transferee a partner without the not follow that they cannot make profits as an incident to consent of the other partners their operations. ?ut a significant distinction is that profits %&rt. 1C*<, par. ( I ') obtained by a non+stock corporation cannot be distributed as dividends but are used merely for the furtherance of &ll partners, including industrial their purpose or purposes. ones %except a limited partner) COLLECTOR OF INTERNAL REVENUE VS. CLUB are liable pro rata with all their INC. DE CEBU %D 8";& *1$1 >ay *1, 1=(C) property and after all FILIPINO+ the ,erein respondent "lub operates a clubhouse, a bowling partnership property has been alley, a golf course and a bar restaurant where it sells exhausted, for all partnership wines, li.uors, soft+drinks, meals and short orders to its liability %&rt. 1C1*) members and their guests. The bar and restaurant was a necessary incident to the operation of the "lub and its golf >ay exist for an indefinite course is operated mainly with funds derived from period subject only to membership the fees and dues. Ehatever profits it had were used to defray its overhead expenses and to improve its causes of dissolution provided golf course. 3n 1=D1, as a result of capital surplus arising for by the law of its creation from the revaluation of its real properties, the "lub %&rt. 1C$7) declared stock dividends. 3n 1=D$, the ?3; assessed percentage taxes on the gross receipt of the "lub#s bar and restaurant pursuant to 8ec. 1C$ of the Tax "ode5 Gunless !artners may dissolve their otherwise provided, every person engaging in a business partnership at will or at any time on which the percentage tax is imposed shall pay in full a they deem it fit %&rt. 1C*<, fixed par. annual tax of !1< for each calendar year or a fraction 1%b) and par. $) thereofH and under 8ec. 1=15 Gkeepers of restaurant, refreshment parlors and other eating places shall pay a tax of *J of their gross receiptsH ISSUE: E/4 the "lub is liable for the assessmentF
The term of corporate existence is limited only to fifty years and unless extended by amendment, it shall be considered non+ existent except for the purpose of li.uidation. "annot be dissolved by mere agreement of the stockholders. The consent of the 8tate is necessary for it to cease as a body corporate.
F.
GOVERN-ENT PO*ERS CORPORATIONS
IN
RELATION
TO
The "orporation "ode places all corporations registered under its provision to be under the control and supervision of the 8ecurities and Exchange "ommission %8ec. 1= and 177). 3ts powers and functions are clearly spelled out in !=<$+&, as amended by ;& 4o. C'==, otherwise known as the 8ecurities ;egulation "ode. CHAPTER /: CLASSIFICATION OF CORPORATION
HELD: 4o. 3t has been held that the liability for fixed and percentage taxes does not ipso facto attach by mere reason of the operation of a bar and restaurant. Aor the liability to attach, the operator thereof must be engaged in the business as a bar keeper and restauranteur. ?usiness, in the ordinary sense, is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without .ualification, should be construed in its plain and ordinary meaning1 restricted to activities for profit or livelihood.
The fact that the "lub derived profits from the operation of its bar and restaurant does not necessarily convert it into a &. CLASSES OF CORPORATIONS UNDER THE profit making enterprise. The bar and restaurant are necessary adjunct of the "lub to foster its purpose and the CORPORATION CODE profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the 8ec. *. C0!11e1 o% cor or!"#o$1. + "orporations formed or healthful recreation and entertainment of the stockholders organi6ed under this "ode may be stock or non+stock corporations. "orporations which have capital stock divided into shares andand are members. That a club makes profit does not make it a profit+making club. authori6ed to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares heldISSUE2: are 3s the "lub a stock corporationF stock corporations. &ll other corporations are non+stock corporations. HELD: 4o. The fact that the capital of the "lub is divided into shares does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. Ehat is determinative of whether or not the "lub is engaged in such business is its object or RE2UISITES TO BE CLASSIFIED STOCK purpose as stated in its articles and by+laws. CORPORATIONS:
1. $.
They have a capital stock dividend into shares1 and That they are authori6ed to distribute dividends or allotments as surplus profits to its stockholders on the
>oreover, %or ! 1"oc3 cor or!"#o$ "o e4#1"1+ "5o re67#1#"e1 871" 9e co8 0#e& 5#":5 '1( ! c! #"!0 1"oc3 &#;#&e& #$"o 1:!re11 and '2( !$ !7":or#"< "o &#1"r#97"e
*
"o ":e :o0&er1 o% 17c: 1:!re1+ &#;#&e$&1 or !00o"8e$"1 o% 17r 071 ro%#"1 o$ ":e 9!1#1 o% ":e 1:!re1 :e0&. 3n the case at bar, nowhere it its &/3 or by+ laws could be found an authority for the distribution of its dividends or surplus profits. 8trictly speaking, it cannot therefore, be considered as stock corporation, within the contemplation of the "orporation "ode.
@abor "ode, under the 1='* "onstitution has been supplanted by the present "onstitution. Thus, under the present state of the law, ":e "e1" #$ &e"er8#$#$> 5:e":er ! GOCC #1 179?ec" "o ":e C#;#0 Ser;#ce L!5 #1 ":e 8!$$er o% #"1 cre!"#o$+ 17c: ":!" >o;er$8e$" cor or!"#o$1 cre!"e& 9< 1 ec#!0 c:!r"er !re 179?ec" "o #"1 ro;#1#o$1 5:#0e ":o1e #$cor or!"e& 7$&er ":e Ge$er!0 Cor or!"#o$ L!5 !re $o" 5#":#$ #"1 co;er!>e.
?.
CORPORATIONS CREATED B) SPECIAL LA* OR CHARTER
!4/" has its special charter, but its subsidiary, !4/"+E-", 8ec. 7. Cor or!"#o$1 cre!"e& 9< 1 ec#!0 0!51 or c:!r"er1 having been incorporated under the Keneral "orporation "orporations created by special laws or charters shall be governed @aw was held to be a K/"" whose employees are subject primarily by the provisions of the special law or charter creating to the provisions of the @abor "ode. them or applicable to them, supplemented by the provisions of this "ode, insofar as they are applicable.
".
&mong these corporations created by special law are the !hilippine 4ational /il "ompany, the 4ational -evelopment "ompany, the !hilippine Export and Aoreign @oan Kuarantee "orporation and the K838. &ll these are government owned or controlled, operating under a special law or charter such that registration with the 8E" is not re.uired for them to ac.uire legal and juridical personality. They owe their own existence as such not by virtue of their compliance with the re.uirements of registration under the "orporation "ode but by virtue of the law specially creating them. They are primarily governed by the special law creating them. ?ut unless otherwise provided by such law, they are not immune from suits, it is thus settled that when the government engages in a particular business through the instrumentality of a corporation, it divests itself pro hoc vice of its sovereign character so as to subject itself to the rules governing private corporations %!4? vs. !abolar C$ 8";& D=D) /fficers and employees of K/""s created by special laws are governed by the law of their creation, usually the "ivil 8ervice @aw. Their subsidiaries, organi6ed under the provisions of the "orporation "ode are governed by the @abor "ode. The test in determining whether they are governed by the "ivil 8ervice @aw is the manner of their creation. PNOC=EDC VS. NLRC %$<1 8";& 7C'1 8ept. 11, 1==1) -anilo >ercado, an employee of herein petitioner was dismissed on the ground of dishonesty and violation of company rules and regulations. ,e filed an illegal dismissal complaint before herein respondent 4@;" who ruled on his favour, despite the motion to dismiss of petitioner that the "ivil 8ervice "ommission has jurisdiction over the case. ISSUE: E/4 4@;" has jurisdiction over the caseF HELD: Les. Employees of K/""s, whether created by special law or formed as subsidiaries under the "orporation @aw are governed by the "ivil 8ervice @aw and not the
OTHER CLASSES OF CORPORATIONS PUBLIC AND PRIVATE CORPORATIONS
1.
PUBLIC CORPORATION5 those formed or organi6ed for the government of a portion of the 8tate or any of its political subdivisions and which have for their purpose the general good and welfare. 3t is to be observed, however, that the mere fact that the undertaking in which a corporation is engaged in is one which the 8tate itself might enter into as part of its public work does not make it a public one. 4or is the fact that the 8tate has granted property or special privileges to a corporation render it public. @ikewise, the fact that some or all of the stocks in the corporation are held by the government does not make it a public corporation. The TRUE TEST to determine the nature of a corporation is found in the re0!"#o$ o% ":e 9o&< "o ":e S"!"e. 8trictly speaking, a public corporation is one that is created, formed or organi6ed for political or governmental purposes with political powers to be exercised for purposes connected with the public good in the administration of the civil government. The K/""s are regarded as private corporations despite common misconceptions. NATIONAL COAL CO-PAN) VS. COLLECTOR OF INTERNAL REVENUE %17( !hil. DC*) ,erein plaintiff brought an action for the purpose of recovering a sum of money allegedly paid by it under protest to the herein defendant, a specific tax on some tons of coal. 3t claimed exemption from taxes under 8ec. 17(= of the &dministrative "ode which provides that Gon all coal and coke shall be collected per metric ton, fifty centavosH. /f the *<,<<< shares issued by the corporation, the !hilippine government is the owner of $=,C<= or substantially all of the shares of the company. ISSUE: E/4 corporationF the plaintiff corporation is a public
7
HELD: 4o. The plaintiff is a private corporation. T:e 8ere %!c" ":!" ":e >o;er$8e$" :! e$1 "o 9e ! 8!?or#"< 1"oc3:o0&er &oe1 $o" 8!3e #" ! 790#c cor or!"#o$. &s a private corporation, it has no greater rights, powers and privileges than any other corporation which might be organi6ed for the same purpose under the "orporation @aw, and certainly, it was not the intention of the @egislature to give it a preference or right or privilege over other legitimate private corporation in the mining of coal. PRIVATE CORPORATIONS: those formed for some private purpose, benefit, aim or end. They are created for the immediate benefit and advantage of the individuals or members composing it and their franchise may be considered as privileges conferred by the 8tate to be exercised and enjoyed by them in the form of the corporation.
accept outsiders as stockholders or investors. They are authori6ed and empowered to list in the stock exchange and to offer their shares to the public such that stock ownership can widely be dispersed.
A.
DO-ESTIC AND FOREIGN CORPORATIONS
DO-ESTIC CORPORATIONS: are those organi6ed or created under or by virtue of the !hilippine laws, either by legislative act or under the provisions of the Keneral "orporation @aw. FOREIGN CORPORATIONS: are those formed, organi6ed or existing under any laws other than those of the !hilippines and whose laws allow Ailipino citi6ens and corporations to do business in its own country or state %8ec. 1$*, "orporation "ode). The second part of the definition is, however, somehow misplaced since any corporation for that matter, which is not registered under !hilippine laws is a foreign corporation. 8uch second part was inserted only for the purpose of .ualifying a foreign corporation to secure a license and to do business in the !hilippines.
2.
ECCLESIASTICAL AND LA) CORPORATIONS
ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed exclusively of ecclesiastics organi6ed for spiritual purposes or for administering properties held for religious ones. They are organi6ed to secure public worship or perpetuating the right of a particular religion. LA) CORPORATIONS: are those organi6ed for purposes other than religion. They may further be classified as5 a. ELEE-OS)NAR): created for charitable and benevolent purposes such as those organi6ed for the purpose of maintaining hospitals and houses for the sick, aged or poor. b. CIVIL: organi6ed not for the purpose of public charity but for the benefit, pecuniary or otherwise, of its members.
B.
PARENT OR HOLDING CO-PANIES SUBSIDIARIES AND AFFILIATES
AND
/.
AGGREGATE AND SOLE CORPORATIONS
AGGREGATE CORPORATIONS: are those composed of a number of individuals vested with corporate powers. CORPORATION SOLE5 those consist of one person or individual only and who are made as bodies corporate and politic in order to give them some legal capacity and advantage which, as natural persons, they cannot have. nder the "ode, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder or religious denominations, sects or churches.
PARENT OR HOLDING CO-PAN)5 a corporation who controls another corporation, or several other corporations known as its subsidiaries. ,olding companies have been defined as corporations that confine their activities to owning stock in, and supervising management of other companies. & holding company usually owns a controlling interest %more than D<J of the voting stock) in the companies whose stocks it holds. &s may be differentiated from investment companies which are active in the sale or purchase of shares of stock or securities, parent or holding companies have a passive portfolio and hold the securities merely for purposes of control and management. SUBSIDIAR) CORPORATIONS: those which another corporation owns at least a majority of the shares, and thus have control. & subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence any claim or suit against the latter does not bind the former or vice versa. AFFILIATES: are those corporations which are subject to common control and operated as part of a system. They are sometimes called Gsister companiesH since the stockholdings of a corporation is not substantial enough to control the former. Example5 1DJ of &?"- "ompany is held by & "orp, 1CJ by ? "orp, and another 1DJ by " "orp. &, ? and " are affiliates.
@.
CLOSE AND OPEN CORPORATION
CLOSE CORPORATIONS: are those whose shares of stock are held by a limited number of persons like the family or other closely+knit group. There are no public investors and the shareholders are active in the conduct of the corporate affairs1 recogni6ed under 8ec. =( of the "orporation "ode. OPEN CORPORATIONS5 are those formed to openly
C.
2UASI=PUBLIC CORPORATIONS
D
These are private corporations which have accepted from the state the grant of a franchise or contract involving the performance of public duties. The term is sometimes applied to corporations which are not strictly public in the sense of being organi6ed for governmental purposes, but whose operations contribute to the convenience or welfare of the general public, such as telegraph and telephone companies, water and electric companies. >ore appropriately, they are known as public service corporations.
a. ,e may make a continuing offer on behalf of corporation, which, if accepted after incorporation, become a contract. 3n this case, the promoter does assume any personal liability, whether or not corporation will accept the offer1
the will not the
b. ,e may make a contract at the time binding himself, with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relieved of responsibility1 or c. ,e may bind himself personally and assume responsibility of looking to the proposed corporation, when formed, for reimbursement.
D.
DE JURE+ DE ESTOPPEL
FACTO
AND
CORPORATION
B)
2.
DE JURE CORPORATIONS: are juridical entities created or organi6ed in strict or substantial compliance with statutory re.uirements of incorporation and whose rights to exist as such cannot be successfully attacked even by the 8tate in a .uo warranto proceeding. They are, in effect, incorporated by strict adherence to the provisions of the law of their creation. DE FACTO CORPORATIONS: are those which exist by the virtue of an irregularity or defect in the organi6ation or constitution or from some omission to comply with the conditions precedent by which corporations de jure are created, but there was colorable compliance with the re.uirements of the law under which they might be lawfully incorporated for the purposes and powers assumed, and user of the rights claimed to be conferred by law. 3ts existence can only be attacked by a direct action of .uo warranto proceedings. CORPORATION B) ESTOPPEL: those which are so defectively formed as not to be either de jure or de facto corporations but which are considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement, admission or conduct.
PROCESS OF INCORPORATION
3ncludes the drafting of the &rticles of 3ncorporation, preparation and submission of additional and supporting documents, filing with the 8E", and the subse.uent issuance of the "ertificate of 3ncorporation.
CONTENTS OF THE ARTICLES OF INCORPORATION

Sec. 1@. Co$"e$"1 o% ":e !r"#c0e1 o% #$cor or!"#o$. + &ll corporations organi6ed under this code shall file with the 8ecurities and Exchange "ommission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this "ode or by special law5
1. The name of the corporation1 $. The specific purpose or purposes for which the corporation is being incorporated. Ehere a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which isMare the secondary purpose or purposes5 !rovided, That a non+stock corporation may not include a purpose which would change or contradict its nature as such1 *. The place where the principal office of the corporation is to be located, which must be within the !hilippines1 7. The term for which the corporation is to exist1
CHAPTER @: FOR-ATION AND ORGANIZATIONS OF CORPORATIONS
1.
PRO-OTIONAL STAGE
This is undertaken by the organi6ers or promoters who bring together persons interested in the business venture. They enter into contract either in their own names or in the name of the proposed corporation.
D. The names, nationalities and residences of the incorporators1 (. The number of directors or trustees, which shall not be less than five %D) nor more than fifteen %1D)1 '. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and .ualified in accordance with this "ode1 C. 3f it be a stock corporation, the amount of its authori6ed capital stock in lawful money of the !hilippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the
LIABILIT) OF PRO-OTERS: KE4E;&@ ; @E5 a promoter, although he may assume to act for and on behalf of a projected corporation and not for himself, will be held personally liable on contracts made by him for the benefit of a corporation he intends to organi6e. The personal liability continues even after the formation of the corporation unless there is novation or other agreement to release him from liability. &s such, the promoter may do either of the following options5
(
original subscribers, and the amount subscribed and paid by each since it is through it that it can act and perform all legal on his subscription, and if some or all of the shares are withoutacts. par Each corporation should therefore, have a name by which it is to sue and be sued and do all legal acts. value, such fact must be stated1 =. 3f it be a non+stock corporation, the amount of its capital, & the corporation, once formed, cannot use any other name, names, nationalities and residences of the contributors and unless the it has been amended in accordance with law as this would result in confusion and may open the door to fraud amount contributed by each1 and and evasion as well as difficulties of administration and supervision. 1<. 8uch other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. Thus, the organi6ers must make sure that the name they intend to use as a corporate name is $o" 1#8#0!r or co$%71#$>0< 1#8#0!r to any other name already registered The 8ecurities and Exchange "ommission shall not accept and the protected by law since the 8E" would refuse registration if such be the case. articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty+five %$DJ) percent of8ec. the 1C. Cor or!"e $!8e. + 4o corporate name may be allowed by the 8ecurities and Exchange "ommission if the proposed name is authori6ed capital stock of the corporation has been subscribed, identical or deceptively or confusingly similar to that of any existing and at least twenty+five %$DJ) of the total subscription has been corporation or to any other name already protected by law or is fully paid to him in actual cash andMor in property the fair valuation deceptive, confusing or contrary to existing laws. Ehen a of which is e.ual to at least twenty+five %$DJ) percent of the patently said change in the corporate name is approved, the "ommission shall subscription, such paid+up capital being not less than five thousand issue an amended certificate of incorporation under the amended %!D,<<<.<<) pesos. name.
Sec. 1A. For81 o% Ar"#c0e1 o% I$cor or!"#o$ . + nless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form5
!.
PREFATOR) PARAGRAPH
xxx EKNO* ALL -EN B) THESE PRESENTS: T:e 7$&er1#>$e& #$cor or!"or1+ !00 o% 0e>!0 !>e !$& ! 8!?or#"< o% 5:o8 !re re1#&e$"1 o% ":e P:#0# #$e1+ :!;e ":#1 &!< ;o07$"!r#0< !>ree& "o %or8 ! '1"oc3( '$o$=1"oc3( cor or!"#o$ 7$&er ":e 0!51 o% ":e Re 790#c o% ":e P:#0# #$e1F xxx 3t must specify the nature of the corporation being organi6ed in order to prevent difficulties of administration and supervision. Thus, the corporation should indicate whether it is a stock or a non+stock corporation, a close corporation, corporation sole or a religious corporation.
The 8E", in implementing the above provision on corporate name, thus re.uires that a GVer#%#c!"#o$ S0# H from the ;ecords -ivision of the "ommission be submitted showing that the proposed name is legally permissible. 3f the corporate name is available for use, the 8E" will allow the incorporators to GreserveH it for a nominal fee for a specific period until the &/3 is filed with the 8E". 8E" >emorandum "ircular 4o. 17+$<<< dated /ctober $7, $<<<, provides5 3n implementing 8ection 1C of the "orporation "ode of the !hilippines %?! (C), the following revised guidelines in the approval of corporate and partnership names are hereby adopted for the information and guidelines of all concerned5
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T:e cor or!"#o$ $!8e 1:!00 co$"!#$ ":e 5or& GCor or!"#o$G or #"1 !99re;#!"#o$ GCor .G or GI$cor or!"e&G+ or GI$c.G. The partnership name shall contain the word N"ompanyN or N"o.N. Aor limited partnership, the word N@imitedN or N@td.N shall be included. 3n case of professional partnership, the word N"ompanyN need not be used.
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CORPORATE NA-E
xxx AND *E HEREB) CERTIF): FIRST: T:!" ":e $!8e o% 1!#& cor or!"#o$ 1:!00 9e G..............................................+ INC. or CORPORATIONGH xxx The name of the corporation is essential to its existence
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Terms descriptive of a business in the name shall be indicative of the primary purpose. 3f there are two %$) descriptive terms, the first shall refer to the primary purpose and the second shall refer to one of the secondary purposes. T:e $!8e 1:!00 $o" 9e #&e$"#c!0+ 8#10e!&#$> or co$%71#$>0< 1#8#0!r "o o$e !0re!&< re>#1"ere& 9< !$o":er cor or!"#o$ or partnership with the "ommission or a sole proprietorship registered with the -epartment of Trade and 3ndustry.
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I% ":e ro o1e& $!8e #1 1#8#0!r "o ":e $!8e o% ! re>#1"ere& %#r8+ ":e ro o1e& $!8e 871" co$"!#$ !" 0e!1" o$e &#1"#$c"#;e 5or& &#%%ere$" %ro8 ":e $!8e o% ":e co8 !$< !0re!&< re>#1"ere&. %The ?ook of 8ir @adia, $<<' Edition, provides that there must be two other words different and distinct from the name of the company already registered or protected by law). 7. ?usiness or tradename of any firm which is different from its corporate or partnership name shall be indicated in the articles of incorporation or partnership of said firm. D. Tradename or trademark duly registered with the 3ntellectual !roperty /ffice cannot be used as part of a corporate or partnership name without the consent of the owner of such tradename of trademark. (. I% ":e $!8e or 17r$!8e o% ! er1o$ #1 71e& !1 !r" o% ! cor or!"e or !r"$er1:# $!8e+ ":e co$1e$" o% 1!#& er1o$ or :#1 :e#r1 871" 9e 1798#""e& e4ce " o% ":!" er1o$ #1 ! 1"oc3:o0&er+ 8e89er+ !r"$er o% ! &ec0!re& $!"#o$!0 :ero. I% 17c: er1o$ c!$$o" 9e #&e$"#%#e& or $o$=e4#1"e$"+ !$ e4 0!$!"#o$ %or ":e 71e o% 17c: $!8e 1:!00 9e re67#re&. '. T:e 8e!$#$> o% #$#"#!01 #$ ":e $!8e 1:!00 9e &#1c0o1e& #$ 5r#"#$> 9< ":e re>#1"r!$". C. 4ame containing a term descriptive of a business different from the business of a registered company whose name also bears similar term%s) used by the former may be allowed. =. T:e $!8e 1:o70& $o" 9e !"e$"0< &ece "#;e+ co$%71#$> or co$"r!r< "o e4#1"#$> 0!51. 1<. T:e $!8e 5:#c: co$"!#$1 ! 5or& #&e$"#c!0 "o ! 5or& #$ ! re>#1"ere& $!8e 1:!00 $o" 9e !00o5e& #% 17c: 5or& #1 co#$e& or !0re!&< ! ro r#!"e& 9< ! re>#1"ere& %#r8+ re>!r&0e11 o% ":e $789er o% ":e &#%%ere$" 5or&1 #$ ":e ro o1e& $!8e+ 7$0e11 ":ere #1 co$1e$" %ro8 ":e re>#1"ere& %#r8 o% ":#1 %#r8 #1 o$e o% ":e 1"oc3:o0&er1 o% !r"$er1 o% ":e e$"#"< "o 9e re>#1"ere&. 11. T:e $!8e o% !$ #$"er$!"#o$!00< 3$o5$ %ore#>$ cor or!"#o$ or o$e 1#8#0!r "o #" 8!< $o" 9e 71e& 9< ! &o8e1"#c cor or!"#o$ 5#":o7" ":e co$1e$" o% ":e %or8er. 1$. T:e "er8 GP:#0# #$e1G 5:e$ 71e& !1 !r" o% ":e $!8e o% ! 1791#&#!r< cor or!"#o$ o% ! %ore#>$ cor or!"#o$ 1:!00 9e #$ !re$":e1#1: #.e. G'P:#0# #$e1(G or G'P:#0.(G. 1*. T:e %o00o5#$> 5or&1 1:!00 $o" 9e 71e& !1 !r" o% ! cor or!"e or !r"$er1:# $!8e1: a. &s provided by special laws5
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similar import by corporations or associations not engaged in banking business. %;.&. **', as amended) @. N nited 4ationsN in full or abbreviated form cannot be part of a corporate or partnership name %;.&. $$() A. N?ondedN for corporations or partnerships with unlicensed warehouse %;.&. $7D) &s a matter of policy5
N3nvestment%s)N by corporations or partnership not organi6ed as investment house company or holding company. 2. N4ationalN by all stock corporations and partnership. /. N&seanN, N"alabar6onN and N!hilippines $<<<N. 17. The name of a dissolved firm shall not be allowed to be used by other firms within three %*) years after the approval of the dissolution of the corporation by the "ommission, unless allowed by the last stockholders representing at least majority of the outstanding capital stock of the dissolved firm. 1D. ;egistrant corporations or partnership shall submit a letter undertaking to change their corporate or partnership name in case another person or firm has ac.uired a prior right to the use of the said firm name or the same is deceptively or confusingly similar to one already registered unless this undertaking is already included as one of the provisions of the articles 1 of incorporation or partnership of the registrant. RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. %(< !hil. D7=1 8ept. (, 1=*7) & certificate of public convenience was issued in the name of ;ural Transit "o. by the !ublic 8ervice "ommission despite opposition of herein petitioner+appellant ;ed @ine Transportation "o.. 3t appears that G;ed @ine Transit "o.H is being used as a trade name of ?ahrach >otors "o. ISSUE: Eho is the real party in interest, ;ural Transit "o. which appears in the face of the applicationF /r ?ahrach >otors, 3nc. using the name of the former as a trade nameF HELD: ?ahrach >otors, 3nc.. There is no law that empowers !8" or any court in this jurisdiction to authori6e one corporation to assume the name of another corporation as a trade name. ?oth ;ural Transit and ?ahrach are !hilippine corporations and the very law of their creation and continued existence re.uires each to adopt and certify a distinctive name. The incorporators constitute a body politic and corporate under the name state in the certificate %8ec. 11, &ct. 4o. 17D=). & corporation has the power of succession in its corporate name %8ec. 1*). The name of a corporation is
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NAinanceN, NAinancingN or NAinance and 3nvestmentN by corporations or partnerships not engaged in the financing business %;.&. D=C<, as amended) 2. NEngineerN, NEngineeringN or N&rchitectsN as part of the corporate name %;. &. D7( and ;.&. 1DC$) /. N?ankN, N?ankingN, N?ankerN, ?uilding and @oan &ssociationN, Trust "orporationN, NTrust "ompanyN or words of
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therefore essential to its existence. 3t cannot change its name except in the manner provided by law. ?y that name alone it is authori6ed to transact business. The law gives a corporation on express or implied authority to assume another name that is unappropriated1 still less that of another corporation, which is expressly set apart from it and protected by law. 3f any corporation should assume at pleasure as an unregistered trade name, the name of another corporation, this practice would result in confusion of administration and supervision. The policy of the law as expressed in our corporation statute and the "ode of "ommerce is clearly against such a practice. UNIVERSAL -ILLS CORP. VS. UNIVERSAL TE,TILE -ILLS INC. %'C 8";& ($1 Buly $C, 1='') 3n 1=D*, niversal Textile >ills, 3nc. % T>3) was organi6ed. 3n 1=D7, niversal ,osiery >ills "orporation % ,>") was also organi6ed. ?oth are actually distinct corporations but they engage in the same business %fabrics). 3n 1=(*, ,>" petitioned to change its name to niversal >ills "orporation % >"). The 8ecurities and Exchange "ommission %8E") granted the petition. 8ubse.uently, a warehouse owned by >" was gutted by fire. 4ews about the fire spread and investors of T>3 thought that it was T>3#s warehouse that was destroyed. T>3 had to make clarifications that it was >"#s warehouse that got burned. Eventually, T>3 petitioned that >" should be enjoined from using its name because of the confusion it brought. The 8E" granted T>3#s petition. >" however assailed the order of the 8E" as it averred that their tradename is not deceptive1 that T>3#s tradename is .ualified by the word GTextileH, hence, there can be no confusion, ISSUE: E/4 the 8E" is correctF HELD: Les. There is definitely confusion as it was evident from the facts where the investors of T>3 mistakenly believed that it was T>3#s warehouse that was destroyed. &lthough the corporate names are not really identical, they are indisputably so similar that it can cause, as it already did, confusion. The 8E" did not act in abuse of its discretion when it ordered >" to drop its name because there was factual evidence presented as to the confusion. Aurther, when >" filed its petition for change of corporate name, it made an undertaking that it shall change its name in the event that there is another person, firm or entity who has obtained a prior right to the use of such name or one similar to it. That promise is still binding upon the corporation and its responsible officers L)CEU- OF THE PHILIPPINES VS. COURT OF APPEALS %$1= 8";& (1<1 >arch D, 1==*) + @yceum of the !hilippines 3nc. previously obtained from the 8E" a favourable decision on the exclusive use of G@yceumH against @yceum of ?aguio, 3nc.. such decision assailed by the latter before the 8" which was denied for lack of merit. &rmed with the ;esolution of the 8upreme "ourt, the @yceum of the !hilippines then wrote all the educational institutions it could find using the word N@yceumN as part of their corporate name, and advised them to discontinue such use of N@yceum.N nheeded, @yceum of the !hilippines
instituted before the 8E" an action to enforce what @yceum of the !hilippines claims as its proprietary right to the word N@yceum.N The 8E" rendered a decision sustaining petitionerPs claim to an exclusive right to use the word N@yceum.N The hearing officer relied upon the 8E" ruling in the @yceum of ?aguio, 3nc. case. /n appeal, however, by @yceum /f &parri, @yceum /f "abagan, @yceum /f "amalaniugan, 3nc., @yceum /f @allo, 3nc., @yceum /f Tuao, 3nc., ?uhi @yceum, "entral @yceum /f "atanduanes, @yceum /f 8outhern !hilippines, @yceum /f Eastern >indanao, 3nc. and Eestern !angasinan @yceum, 3nc.,, which are also educational institutions, to the 8E" En ?anc, the decision of the hearing officer was reversed and set aside. The 8E" En ?anc did not consider the word N@yceumN to have become so identified with @yceum of the !hilippines as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. nlike its hearing officer, the 8E" En ?anc held that the attaching of geographical names to the word N@yceumN served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of @yceum of the !hilippines and those of the other @yceums were physically .uite remote from each other. /n appeal, the "& affirmed the decision of the "& en banc, and denied reconsideration. ISSUE: E/4 private respondents can be directed to delete the word GlyceumH from their corporate namesF HELD5 4o. T:e o0#c< 7$&er0<#$> ":e ro:#9#"#o$ in 8ection 1C against the registration of a corporate name which is Nidentical or deceptively or confusingly similarN to that of any existing corporation or which is Npatently deceptiveN or Npatently confusingN or Ncontrary to existing laws,N is the !;o#&!$ce o% %r!7& 7 o$ ":e 790#c 5:#c: 5o70& :!;e occ!1#o$ "o &e!0 5#": ":e e$"#"< co$cer$e&+ ":e e;!1#o$ o% 0e>!0 o90#>!"#o$1 !$& &7"#e1+ !$& ":e re&7c"#o$ o% &#%%#c70"#e1 o% !&8#$#1"r!"#o$ !$& 17 er;#1#o$ o;er cor or!"#o$1 . ,erein, the "ourt does not consider that the corporate names of the academic institutions are Nidentical with, or deceptively or confusingly similarN to that of @yceum of the !hilippines 3nc. True enough, the corporate names of the other schools %defendant institutions) entities all carry the word N@yceumN but confusion and deception are effectively precluded by the appending of geographic names to the word N@yceum.N Thus, the N@yceum of &parriN cannot be mistaken by the general public for the @yceum of the !hilippines, or that the N@yceum of "amalaniuganN would be confused with the @yceum of the !hilippines. Aurther, etymologically, the word N@yceumN is the @atin word for the Kreek lykeion which in turn referred to a locality on the river 3lissius in ancient &thens Ncomprising an enclosure dedicated to &pollo and adorned with fountains and buildings erected by !isistratus, !ericles and @ycurgus fre.uented by the youth for exercise and by the philosopher &ristotle and his followers for teaching.N 3n time, the word N@yceumN became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word N@yceumN generally refers to a school or an institution of learning. 8ince N@yceumN or N@iceoN denotes a school or
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institution of learning, it is not unnatural to use this word to designate an entity which is organi6ed and operating as an educational institution. To determine whether a given corporate name is NidenticalN or Nconfusingly or deceptively similarN with another entityPs corporate name, it is not enough to ascertain the presence of N@yceumN or N@iceoN in both names. /ne must evaluate corporate names in their entirety and when the name of @yceum of the !hilippines is juxtaposed with the names of private respondents, they are not reasonably regarded as NidenticalN or Nconfusingly or deceptively similarN with each other. ISSUE2: E/4 the word G@yceumH has ac.uired secondary meaning although originally genericF a
name, which was denied. /n appeal, the "& affirmed the 8E". ISSUE: E/4 8tandard !hilips should be directed to delete the word !,3@3!8 from its corporate nameF HELD: Les. &s early as Eestern E.uipment and 8upply "o. v. ;eyes, D1 !hil. 11D %1=$'), the "ourt declared that ! cor or!"#o$I1 r#>:" "o 71e #"1 cor or!"e !$& "r!&e $!8e #1 ! ro er"< r#>:"+ ! r#>:" #$ re8+ 5:#c: #" 8!< !11er" !$& ro"ec" !>!#$1" ":e 5or0& #$ ":e 1!8e 8!$$er !1 #" 8!< ro"ec" #"1 "!$>#90e ro er"<+ re!0 or er1o$!0+ !>!#$1" "re1 !11 or co$;er1#o$. I" #1 re>!r&e&+ "o ! cer"!#$ e4"e$"+ !1 ! ro er"< r#>:" !$& o$e 5:#c: c!$$o" 9e #8 !#re& or &e%e!"e& 9< 1791e67e$" ! ro r#!"#o$ 9< !$o":er cor or!"#o$ #$ ":e 1!8e %#e0& %;ed @ine Transportation "o. vs. ;ural Transit "o., 8eptember C, 1=*7, $< !hil D7=). A $!8e #1 ec70#!r0< #8 or"!$" !1 $ece11!r< "o ":e ;er< e4#1"e$ce o% ! cor or!"#o$ %&merican 8teel Aoundries vs. ;obertson, $(= 8 *'$, '< @ ed *1', 7( 8 "t 1(<1 @auman vs. @ebanon Qalley ;. "o., *< !a 7$1 Airst 4ational ?ank vs. ,untington -istilling "o. 7< E Qa D*<, $* 8E '=$). 3ts name is one of its attributes, an element of its existence, and essential to its identity %( Aletcher 9!erm Ed:, pp. *+7). T:e >e$er!0 r70e as to corporations is that e!c: cor or!"#o$ 871" :!;e ! $!8e 9< 5:#c: #" #1 "o 17e !$& 9e 17e& !$& &o !00 0e>!0 !c"1. T:e $!8e o% ! cor or!"#o$ #$ ":#1 re1 ec" &e1#>$!"e1 ":e cor or!"#o$ #$ ":e 1!8e 8!$$er !1 ":e $!8e o% !$ #$&#;#&7!0 &e1#>$!"e1 ":e er1o$ %"incinnati "ooperage "o. vs. ?ate. =( Ry *D(, $( 8E D*C1 4ewport >echanics >fg. "o. vs. 8tarbird. 1< 4, 1$*)1 !$& ":e r#>:" "o 71e #"1 cor or!"e $!8e #1 !1 87c: ! !r" o% ":e cor or!"e %r!$c:#1e !1 !$< o":er r#;#0e>e >r!$"e& %Aederal 8ecur. "o. vs. Aederal 8ecur. "orp., 1$= /r *'D, $'( ! 11<<, (( &@; =*71 !aulino vs. !ortuguese ?eneficial &ssociation, 1C ;3 1(D, $( & *(). & corporation ac.uires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individualPs name is thrust upon him %8ee 8tandard /il "o. of 4ew >exico, 3nc. v. 8tandard /il "o. of "alifornia, D( A $d ='*, =''). A cor or!"#o$ c!$ $o 8ore 71e ! cor or!"e $!8e #$ ;#o0!"#o$ o% ":e r#>:"1 o% o":er1 ":!$ !$ #$&#;#&7!0 c!$ 71e :#1 $!8e 0e>!00< !c67#re& 1o !1 "o 8#10e!& ":e 790#c !$& #$?7re !$o":er %&rmington vs. !almer, $1 ;3 1<=. 7$ & *<C). The statutory prohibition %under 8ec. 1C of the "orporation "ode) cannot be any clearer. To come within its scope, two re.uisites must be proven, namely5 %1) that the complainant corporation ac.uired a prior right over the use of such corporate name1 and %$) the proposed name is either5 %a) identical1 or %b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law1 or %c) patently deceptive, confusing or contrary to existing law. T:e r#>:" "o ":e e4c071#;e 71e o% ! cor or!"e $!8e 5#": %ree&o8 %ro8 #$%r#$>e8e$" 9< 1#8#0!r#"< #1
HELD: 4o. The "ourt of &ppeals recogni6ed this issue and answered it in the negative5 N U$&er ":e &oc"r#$e o% 1eco$&!r< 8e!$#$>+ ! 5or& or :r!1e or#>#$!00< #$c! !90e o% e4c071#;e ! ro r#!"#o$ 5#": re%ere$ce "o !$ !r"#c0e #$ ":e 8!r3e"+ 9ec!71e >eo>r! :#c!0 or o":er5#1e &e1cr# "#;e 8#>:" $e;er":e0e11 :!;e 9ee$ 71e& 1o 0o$> !$& 1o e4c071#;e0< 9< o$e ro&7cer 5#": re%ere$ce "o ":#1 !r"#c0e ":!"+ #$ ":!" "r!&e !$& "o ":!" >ro7 o% ":e 7rc:!1#$> 790#c+ ":e 5or& or :r!1e :!1 co8e "o 8e!$ ":!" ":e !r"#c0e 5!1 :#1 ro&7ce %&na &ng vs. Toribio Teodoro, '7 !hil. D(). T:#1 c#rc781"!$ce :!1 9ee$ re%erre& "o !1 ":e &#1"#$c"#;e$e11 #$"o 5:#c: ":e $!8e or :r!1e :!1 e;o0;e& ":ro7>: ":e 1791"!$"#!0 !$& e4c071#;e 71e o% ":e 1!8e %or ! co$1#&er!90e er#o& o% "#8e . . . . 4o evidence was ever presented in the hearing before the "ommission which sufficiently proved that the word P@yceumP has indeed ac.uired secondary meaning in favor of the appellant. 3f there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. The number alone of the private respondents in the present case suggests strongly that the @yceum of the !hilippinesP use of the word N@yceumN has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. 3t may be noted also that at least one of the private respondents, i.e., the Eestern !angasinan @yceum, 3nc., used the term N@yceumN 1' years before @yceum of the !hilippines registered its own corporate name with the 8E" and began using the word N@yceum.N 3t follows that if any institution had ac.uired an exclusive right to the word N@yceum,N that institution would have been the Eestern !angasinan @yceum, 3nc. rather than @yceum of the !hilippines. ,ence, @yceum of the !hilippines is not entitled to a legally enforceable exclusive right to use the word N@yceumN in its corporate name and that other institutions may use N@yceumN as part of their corporate names. PHILIPS E,PORT B.V. e". !0. VS. COURT OF APPEALS %$<( 8";& 7D'1 Aeb. $1, 1==$) !etitioner is the registered owner of the trademark !,3@3!8 and !,3@3!8 8,3E@E>?@E> issued by the !hilippine !atent /ffice. !hilips Electric @amp 3nc. and !hilips 3ndustrial -evelopment 3nc., also petitioners, are the authori6ed users of such trademark. !etitioner filed a case with 8E" praying for a writ of injunction to prohibit herein respondent 8tandard !hilips "orporation from using the word G!,3@3!8H in its corporate
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&e"er8#$e& 9< r#or#"< o% !&o "#o$. 3n this regard, there is no doubt with respect to !etitionersP prior adoption ofP the name PP!,3@3!8N as part of its corporate name. !etitioners !hilips Electrical and !hilips 3ndustrial were incorporated on $= &ugust 1=D( and $D >ay 1=D(, respectively, while ;espondent 8tandard !hilips was issued a "ertificate of ;egistration on 1$ &pril 1=C$, twenty+six %$() years later. !etitioner !E?Q has also used the trademark N!,3@3!8N on electrical lamps of all types and their accessories since *< 8eptember 1=$$. The second re.uisite no less exists in this case. I$ &e"er8#$#$> ":e e4#1"e$ce o% co$%71#$> 1#8#0!r#"< #$ cor or!"e $!8e1, ":e "e1" #1 5:e":er ":e 1#8#0!r#"< #1 17c: !1 "o 8#10e!& ! er1o$+ 71#$> or&#$!r< c!re !$& &#1cr#8#$!"#o$. 3n so doing, the "ourt must look to the record as well as the names themselves. Ehile the corporate names of !etitioners and !rivate ;espondent are not identical, a reading of !etitionerPs corporate names, to wit5 !,3@3!8 E2!/;T ?.Q., !,3@3!8 E@E"T;3"&@ @&>!8, 34". and !,3@3!8 34- 8T;3&@ -EQE@/!>E4T, 34"., inevitably leads one to conclude that N!,3@3!8N is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, !E?Q, are known in the !hilippines and abroad as the !,3@3!8 Kroup of "ompanies. ;espondents argue that there were no evidence presented that there was actual confusion. 3t is settled, however, that roo% o% !c"7!0 co$%71#o$ $ee& $o" 9e 1:o5$ . I" 17%%#ce1 ":!" co$%71#o$ #1 ro9!90< or 0#3e0< "o occ7r %( Aletcher 9!erm Ed:, pp. 1<'+1<C, enumerating a long line of cases). >oreover, Kiven !rivate ;espondentPs underlined primary purpose in its &/3, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. ?esides, there is showing that !rivate ;espondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, 8tandard !hilips %T84, before the 8E", pp. 17, 1', $D, $(, *'+7$, Bune 17, 1=CD1 pp. 1(+ 1=, Buly $D, 1=CD). &s aptly pointed out by !etitioners, 9p:rivate respondentPs choice of N!,3@3!8N as part of its corporate name 98T&4-&;- !,3@3!8 "/;!/;&T3/4: . . . tends to show said respondentPs intention to ride on the popularity and established goodwill of said petitionerPs business throughout the worldN %;ollo, p. 1*'). The subse.uent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of anotherPs goodwill %&merican Kold 8tar >others, 3nc. v. 4ational Kold 8tar >others, 3nc., et al, C= &pp -" $(=, 1=1 A $d 7CC). 3n allowing !rivate ;espondent the continued use of its corporate name, the 8E" maintains that the corporate names of !etitioners !,3@3!8 E@E"T;3"&@ @&>!8. 34". and !,3@3!8 34- 8T;3&@ -EQE@/!>E4T, 34". contain at least two words different from that of the corporate name of respondent 8T&4-&;- !,3@3!8 "/;!/;&T3/4, which words will readily identify !rivate ;espondent from !etitioners and vice+versa. True, under the Kuidelines in the &pproval of "orporate and !artnership 4ames formulated by the 8E", the proposed name Nshould not be similar to one already used by
another corporation or partnership. 3f the proposed name contains a word already used as part of the firm name or style of a registered company1 ":e ro o1e& $!8e 871" co$"!#$ "5o o":er 5or&1 &#%%ere$" %ro8 ":e co8 !$< !0re!&< re>#1"ere&G %Emphasis ours). 3t is then pointed out that !etitioners !hilips Electrical and !hilips 3ndustrial have two words different from that of !rivate ;espondentPs name. Ehat is lost sight of, however, is that !,3@3!8 is a trademark or trade name which was registered as far back as 1=$$. !etitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A cor or!"#o$ :!1 !$ e4c071#;e r#>:" "o ":e 71e o% #"1 $!8e+ 5:#c: 8!< 9e ro"ec"e& 9< #$?7$c"#o$ 7 o$ ! r#$c# 0e 1#8#0!r "o ":!" 7 o$ 5:#c: er1o$1 !re ro"ec"e& #$ ":e 71e o% "r!&e8!r31 !$& "r!&e$!8e1 %1C ".B.8. D'7). 8uch principle proceeds upon the theory that it is a fraud on the corporation which has ac.uired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name %( Aletcher 9!erm Ed:, pp. *=+7<, citing ?orden 3ce "ream "o. v. ?ordenPs "ondensed >ilk "o., $1< A D1<). 4otably, too, !rivate ;espondentPs name actually contains only a single word, that is, N8T&4-&;-N, different from that of !etitioners inasmuch as the inclusion of the term N"orporationN or N"orp.N merely serves the !urpose of distinguishing the corporation from partnerships and other business organi6ations. The fact that there are other companies engaged in other lines of business using the word N!,3@3!8N as part of their corporate names is no defense and does not warrant the use by !rivate ;espondent of such word which constitutes an essential feature of !etitionersP corporate name previously adopted and registered and+having ac.uired the status of a well+known mark in the !hilippines and internationally as well %?ureau of !atents -ecision 4o. CC+ *D 9T>:, Bune 1', 1=CC, 8E" ;ecords).
c.
PURPOSE CLAUSE
xxx SECOND: T:!" ":e 7r o1e or 7r o1e1 %or 5:#c: 17c: cor or!"#o$ #1 #$cor or!"e& !re: 'I% ":ere #1 8ore ":!$ o$e 7r o1e+ #$&#c!"e r#8!r< !$& 1eco$&!r< 7r o1e1(H xxx The statement of the objects or purpose or powers in the charter results practically in defining the scope of authority of the corporate enterprise or undertaking. This statement both congers and also limits the actual authority of the corporate representatives. The re!1o$1 %or re67#r#$> 7r o1e1 or o9?ec"15 ! 1"!"e8e$" o% ":e
1. 3n order that the 1"oc3:o0&er who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risks1
11
$. 8o that the 9o!r& o% &#rec"or1 !$& 8!$!>e8e$" my now within what lines of business they are authori6ed to act1 and *. 8o that !$<o$e 5:o &e!01 5#": ":e co8 !$< may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management.
may or may not be freely and individually contracted by the parties.H =. 3n the case of "ustoms ?rokerage business, the applicant must submit the license of at least two customs broker connected with the applicant corporation1 1<. Transfer &gents, ?roker and "learing ,ouses must submit the certificate of admission to the profession of the "!& of any officer of the corporation1 11. "arriage of mails cannot be a purpose of a corporation unless a special franchise has been granted to it. 1$. 3f the corporate purpose or objective #$c07&e1 !$< 7r o1e 7$&er ":e 17 er;#1#o$ o% !$o":er >o;er$8e$" !>e$c<+ r#or c0e!r!$ce !$&Jor ! ro;!0 o% ":e co$cer$e& >o;er$8e$" !>e$c#e1 or #$1"r78e$"!0#"#e1 5#00 9e re67#re& pursuant to the last paragraph of 8ec. 1' of the "ode.
SECONDAR) PURPOSE: &lthough the "orporation "ode does not restrict nor limit the number of purpose or purposes which a corporation may have, 8ec. 17 thereof, re.uires that if it has more than one purpose, the primary purpose as well as the secondary ones must be indicated therein. PROHIBITION5 The following are prohibited by special laws for having any other purpose not peculiar to them5 1. Educational, religious, and other non+stock corporations cannot include any other purpose which would change or contradict its nature or to engage in any enterprise to make profits for is members1 $. 3nsurance companies cannot engage in commercial banking at the same time, and vice+versa1 and *. 8tock brokers can have no other line of business not peculiar to them. RESTRICTIONS ANDJOR ADDITIONAL RE2UIRE-ENTS5 1. &s a general rule, the purpose or purposes must be lawful. ,ence, the 8E" is duty bound to determine the legality of the corporate purposeMs before it issues the certificate of registration1 $. & corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy, either directly or indirectly. These are reserved exclusively for professional partnerships1 *. The retail trade, where the corporate capital is less than S$.D>, or its peso e.uivalent are reserved exclusively for Ailipinos, or for corporations or partnerships wholly owned by such citi6en. 7. &s a general rule, corporations with foreign e.uity are not allowed to engage in restaurant business but corporations with such foreign e.uity can purse such undertaking if it is incidental or in connection with hotel or inn+keeping business. D. >anagement consultants, advisers andMor specialists, must submit the personal information sheet of the incorporators and directors in order that the 8E" may be able to find out or determine whether or not the applicant corporation is .ualified to act as such. (. &s a matter of policy, financing companies are re.uired by the 8E" to submit certain additional documents together with their applications for registration to verify compliance with ;& CDD(. '. Aor bonded warehousing companies, an undertaking to comply with the Keneral ?onded Earehousing &ct must be submitted along with the &/3. C. 3n case the applicant proposes to engage in the business of hospital andMor clinic, the purpose clause must contain the following proviso5 G!rovided that purely medical or surgical services in connection therewith shall be performed by duly .ualified physician and surgeon who
GENERAL LI-ITATIONS: 1. The purpose or purposes must be lawful1 $. The purpose must be specific or stated concisely although in broad or general terms1 *. 3f there is more than one purpose, the primary as well as the secondary ones must be specified1 and 7. The purposes must be capable of being lawfully combined.
&.
PRINCIPAL OFFICE xxx
THIRD: T:!" ":e r#$c# !0 o%%#ce o% ":e cor or!"#o$ #1 0oc!"e& #$ ":e C#"<J-7$#c# !0#"< o%............................................+ Pro;#$ce o%.................................................+ P:#0# #$e1 xxx 3t must be located within the !hilippines. The &/3 must not only specify the province, but also the "ity or >unicipality where it is located. 3n this regard, it is to be observed that the principal office may be in one place but the business operations are actually conducted in other areas. The law does not, of course, re.uire a statement of the place of corporate operations and, therefore, may be dispensed with. The principal office serves as the residence of the corporation, and is thus important in5 %1) venue of actions1 %$) registration of chattel mortgage of shares1 %*) validity of meetings of stockholders or members in so far as venue thereof is concerned. CLAVECILLA RADIO S)STE- VS. ANTILLON %1= 8";& *'=1 Aeb. 1C, 1=(') The 4ew "agayan Krocery filed a complaint against ";8 for some irregularities in the transmission of a message which changed the context and purport causing damages. The complaint was filed in the "ity "ourt of "agayan de /ro. ISSUE: E/4 the action will prosperF
1$
HELD: 4o. The action was based on tort and not upon a written contract and as such, under the ;ules of "ourt, it should be filed in the municipality where the defendant or any of the defendants resides or may be served with summons. 8ettled is the principle in corporation law that ":e re1#&e$ce o% ! cor or!"#o$ #1 ":e 0!ce 5:ere ":e r#$c# !0 o%%#ce #1 e1"!90#1:e&. 8ince it is not disputed that ";8 has its principal office in >anila, it follows that the suit against it may properly be filed in the "ity of >anila. The fact that ";8 maintains branch office in some parts of the country does not mean that it can be sued in any of these places. To allow such would create confusion and work untold inconveniences to the corporation.
..................... ....... ..................... .......
............................. ............................. 444
..................... .....................
Sec. A. Cor or!"or1 !$& #$cor or!"or1+ 1"oc3:o0&er1 !$& 8e89er1. + "orporators are those who compose a corporation, whether as stockholders or as members. 3ncorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
e.
TER- OF E,ISTENCE xxx
"orporators in a stock corporation are called stockholders or shareholders. "orporators in a non+stock corporation are called members.
FOURTH: T:!" ":e "er8 %or 5:#c: 1!#& cor or!"#o$ #1 "o e4#1" #1............... <e!r1 %ro8 !$& !%"er ":e &!"e o% #117!$ce o% ":e cer"#%#c!"e o% #$cor or!"#o$H
CORPORATORS apply to all who compose the corporation at any given time and need not be among those who Sec. 11. Cor or!"e "er8. + & corporation shall exist for a period executed the &/3 at the start of its formation or not exceeding fifty %D<) years from the date of incorporation unless organi6ation. sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be INCORPORATORS are those mentioned in the &/3 as extended for periods not exceeding fifty %D<) years in any single originally forming the corporation and who are signatories instance by an amendment of the articles of incorporation, in in the &/3. accordance with this "ode1 !rovided, That no extension can be made earlier than five %D) years prior to the original or subse.uent &n incorporator may be considered as a corporator as long expiry date%s) unless there are justifiable reasons for an earlier as he continues to be a stockholder or a member, but not extension as may be determined by the 8ecurities and Exchange all corporators are incorporators. "ommission
8ec. 1<. N789er !$& 67!0#%#c!"#o$1 o% #$cor or!"or1. + &ny number of natural persons not less than five %D) but not more than fifteen %1D), all of legal age and a majority of whom are residents of the !hilippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one %1) share of the capital stock of the corporation.
xxx
The corporate term is necessary in determining at what point in time the corporation will cease to exist or have lost its juridical personality. /nce it ceases to exist, its legal personality also expires and could not thereafter, act in its own name for the purpose of prosecuting it business.
E,TENSION5 can be made not earlier than D years prior to the expiry date 7$0e11 there are justifiable reasons.
%.
INCORPORATORS
444 FIFTH: T:!" ":e $!8e1+ $!"#o$!0#"#e1 !$& re1#&e$ce1 o% ":e #$cor or!"or1 o% ":e cor or!"#o$ !re !1 %o00o51: NA-E ..................... ....... ..................... ....... ..................... ....... NATIONALIT) ............................. ............................. ............................. RESIDENCE ..................... ..................... .....................
2UALIFICATIONS OF INCORPORATORS5 1. >ust be natural persons. 3t implies that a corporation or a partnership cannot become incorporators. E,CEPTION: %1) cooperatives1 %$) corporations primarily organi6ed to hold e.uities in rural banks and may rightfully become incorporators thereof. 3t must be noted likewise that the law does not preclude firms and other entities from becoming stockholders or subscribers to the shares of a stock corporation. Thus, while they cannot .ualify as incorporators, they can become corporators or stockholders. $. /f @egal &ge. >inors cannot be incorporators. They may, however, become stockholders provided they are legally represented by parents, guardians or administrators.
1*
*. >ust own at least 1 share. 7. >ajority must be residents of the !hilippines. The law does not provide for citi6enship re.uirements. E,CEPT: in certain areas of activity or industry wherein ownership of shares of stock are reserved wholly or partially to Ailipino citi6ens. ,ence, all incorporators may be foreigners provided majority of them are residents. 4ote that the re.uirement is residence and not citi6enship.
organi6ed under this "ode must be residents of the !hilippines.
>.
DIRECTORSJTRUSTEES xxx SI,TH: T:!" ":e $789er o% &#rec"or1 or "r71"ee1 o% ":e cor or!"#o$ 1:!00 9e............H !$& ":e $!8e1+ $!"#o$!0#"#e1 !$& re1#&e$ce1 o% ":e %#r1" &#rec"or1 or "r71"ee1 o% ":e cor or!"#o$ !re !1 %o00o51: NA-E ..................... ....... ..................... ....... ..................... ....... ..................... ....... ..................... ....... NATIONALIT) ............................. ............................. ............................. ............................. ............................. xxx RESIDENCE ..................... ..................... ..................... ..................... .....................
2UALIFICATIONS OF DIRECTORSJTRUSTEES: 1. >ust own at least 1 share in their own names or a member %in the case of trustees)1 $. >ajority must be resident of the !hilippines. Even aliens may be elected as directors, provided that the majority of such directors are residents of the !hilippines. E2"E!T5 in activities exclusively reserved to Ailipino citi6ens like the management of educational institutions and those governed by the ;etail Trade @aw.
8ec. $'. D#167!0#%#c!"#o$ o% &#rec"or1+ "r71"ee1 or o%%#cer1. + 4o person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six %() years, or a violation of this "ode committed within five %D) years prior to the date of his election or appointment, shall .ualify as a director, trustee or officer of any corporation.
DIRECTORS compose the governing board in stock corporations. TRUSTEES refer to non+stock corporations.
There must be at least D but not more than 1D directors in a private corporation. E,CEPTIONS: 1. Educational corporations registered as non+stock corporations whose number of trustees, though not less than D and not more than 1D should be divisible by D. $. 3n close corporations where all stockholders are considered as members of the board of directors %8ec. =') thereby effectively allowing $< members in the board. The by+laws of a corporation may provide for additional .ualifications and dis.ualifications of its members of the board of directors or trustees. ,owever, it may not do away with the minimum dis.ualifications laid down by the "ode. The minimum .ualifications of directors and trustees in a domestic corporation are provided under the $nd par. /f 8ec. $*5 Sec. 2/. T:e 9o!r& o% &#rec"or1 or "r71"ee1 xxx
DIS2UALIFICATIONS: 1. 3mprisonment for a period exceeding ( years1 $. Qiolation of the "orporation "ode within D years prior to the date of election or appointment1 *. 8uch other dis.ualifications that may be provided in the by+laws.
B/,4 K/R/4KEE3, B;., !etitioner, vs. 8E" ;3T3E8 &4- E2",&4KE "/>>3883/4, 8&4 >3K E@ "/;!/;&T3/4, &4-;E8 >. 8/;3&4/, B/8E >. 8/;3&4/, E4;3T E U/?E@, &4T/43/ ;/2&8, E>ETE;3/ ? 4&/, E&@T,;/-E ?. "/4-E, >3K E@ /;T3K&8, E>3K-3/ T&4B &T"/ and E- &;-/ Q38&L&, ;espondents
%K; 4o. @+D$1$=1 &pril $1, 1=C<)

FACTS: !etitioner, stockholder of 8an >iguel "orp. filed a petition with the 8E" for the declaration of nullity of the by+ laws etc. against the majority members of the ?/- and 8an >iguel. The amended by+laws provided for the dis.ualification of competitors from nomination and election in the ?oard of -irectors of 8>". This was denied by the 8E". 388 E5 3s the dis.ualification validF
,E@-5 Les. The "ourt held that a corporation has authority prescribed, by law, the .ualifications of directors. 3t has Every director must own at least one %1) share of the capital stock the inherent power to adopt by+laws for its internal of the corporation of which he is a director, which share shall stand government, and to regulate the conduct and prescribe the in his name on the books of the corporation. &ny director rights who and duties of its members towards itself and among themselves in reference to the management of its affairs. A ceases to be the owner of at least one %1) share of the capital stock cor or!"#o$+ 7$&er ":e Cor or!"#o$ 0!5+ 8!< of the corporation of which he is a director shall thereby cease to be re1cr#9e #$ #"1 9<=0!51 ":e 67!0#%#c!"#o$1+ &7"#e1 a director. Trustees of non+stock corporations must be members !$& co8 e$1!"#o$ o% &#rec"or1+ o%%#cer1+ !$& thereof. a majority of the directors or trustees of all corporations e8 0o<ee1. &ny person who buys stock in a corporation does so with the knowledge that its affairs are dominated
17
by a majority of the stockholders and he impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of incorporation and lawfully enacted by+laws and not forbidden by law. &ny corporation may amend its by+laws by the owners of the majority of the subscribed stock. 3t cannot thus be said that petitioners has the vested right, as a stock holder, to be elected director, in the face of the fact that the law at the time such stockholderPs right was ac.uired contained the prescription that the corporate charter and the by+laws shall be subject to amendment, alteration and modification. A D#rec"or 1"!$&1 #$ ! %#&7c#!r< re0!"#o$ "o ":e cor or!"#o$ !$& #"1 1:!re:o0&er1+ 5:#c: #1 c:!r!c"er#Ke& !1 ! "r71" re0!"#o$1:# . A$ !8e$&8e$" "o ":e cor or!"e 9<=0!51 5:#c: re$&er1 ! 1"oc3:o0&er #$e0#>#90e "o 9e &#rec"or+ #% :e 9e !01o &#rec"or #$ ! cor or!"#o$ 5:o1e 971#$e11 #1 #$ co8 e"#"#o$ 5#": ":!" o% ":e o":er cor or!"#o$+ :!1 9ee$ 171"!#$e& !1 ;!0#&. This is based upon the principle that where the director is employed in the service of a rival company, he cannot serve both, but must betray one or the other. The amendment in this case serves to advance the benefit of the corporation and is good. "orporate officers are also not permitted to use their position of trust and confidence to further their private needs, and the act done in furtherance of private needs is deemed to be for the benefit of the corporation. This is called the doctrine of corporate opportunity.
NINTH: T:!" ":e !9o;e=$!8e& 1791cr#9er1 :!;e !" 0e!1" "5e$"<=%#;e '2AL( erce$" o% ":e "o"!0 1791cr# "#o$ !1 %o00o51: N!8e o% S791cr#9er P!#&=U .............................. ............ .............................. ............ .............................. ............ .............................. ............ .............................. ............ A8o7$" S791cr#9e& .............................. .............................. .............................. .............................. ..............................
!#&
To"!0 ........ ........ ........ ........ ........
'-o&#%< No1. D !$& M #% 1:!re1 !re 5#": $o !r ;!07e. I$ c!1e ":e cor or!"#o$ #1 $o$=1"oc3+ No1. C+ D !$& M o% ":e !9o;e !r"#c0e1 8!< 9e 8o&#%#e& !ccor&#$>0<+ !$& #" #1 17%%#c#e$" #% ":e !r"#c0e1 1"!"e ":e !8o7$" o% c! #"!0 or 8o$e< co$"r#97"e& or &o$!"e& 9< 1 ec#%#e& er1o$1+ 1"!"#$> ":e $!8e1+ $!"#o$!0#"#e1 !$& re1#&e$ce1 o% ":e co$"r#97"or1 or &o$or1 !$& ":e re1 ec"#;e !8o7$" >#;e$ 9< e!c:.( xxx The "orporation "ode re.uires the &/3 to state the authori6ed capital stock, the number of shares andMor kind of shares into which the authori6ed capital is divided, the par value of each share, if there by any, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each. &t least $DJ of the subscribed capital must be paid and in no case may the paid+up capital be less than !D,<<<.
:.
CAPITALIZATION
xxx SEVENTH: T:!" ":e !7":or#Ke& c! #"!0 1"oc3 o% ":e cor or!"#o$ #1................................................ 'P......................( PESOS #$ 0!5%70 8o$e< o% ":e P:#0# #$e1+ &#;#&e& #$"o.............. 1:!re1 5#": ":e !r ;!07e o%.................................. 'P.......................( Pe1o1 er 1:!re. 'I$ c!1e !00 ":e 1:!re !re 5#":o7" !r ;!07e(: T:!" ":e c! #"!0 1"oc3 o% ":e cor or!"#o$ #1.......................... 1:!re1 5#":o7" !r ;!07e. 'I$ c!1e 1o8e 1:!re1 :!;e !r ;!07e !$& 1o8e !re 5#":o7" !r ;!07e(: T:!" ":e c! #"!0 1"oc3 o% 1!#& cor or!"#o$ co$1#1"1 o%....................... 1:!re1 o% 5:#c:...................... 1:!re1 !re o% ":e !r ;!07e o%............................. 'P.....................( PESOS e!c:+ !$& o% 5:#c:............................... 1:!re1 !re 5#":o7" !r ;!07e. EIGHTH: T:!" !" 0e!1" "5e$"< %#;e '2AL( er ce$" o% ":e !7":or#Ke& c! #"!0 1"oc3 !9o;e 1"!"e& :!1 9ee$ 1791cr#9e& !1 %o00o51: N!8e o% S791cr#9er A8o7$" S791cr#9e& ........................ ............... ........................ ............... ........................ ............... ........................ ............... ........................ ............... N!"#o$!0#"< .............. .............. .............. .............. .............. No o% S:!re1
AUTHORIZED CAPITAL signifies the >&23> > amount fixed in the articles to be subscribed and paid+in or secured to be paid by the subscribers. 3t may also refer to the maximum number of shares that a corporation can issue. SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are contracts for their ac.uisition or subscription. 3t is in effect, the stockholder#s e.uity account showing that part of the authori6ed capital stock which has been paid or promised to be paid, or that portion of the authori6ed capital stock which has been subscribed by the subscribers or stockholders. PAID UP CAPITAL STOCK or paid+in capital is the actual amount or value which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon. 3t may be in the form of cash, property or in the form of services actually rendered to the corporation as provided under 8ec. ($ of the "orporation "ode5
Sec. B2. Co$1#&er!"#o$ %or 1"oc31. + 8tocks shall not be issued for a consideration less than the par or issued price thereof. "onsideration for the issuance of stock may be any or a combination of any two or more of the following5
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1D
CERTIFICATE OF STOCK is a document or instrument evidencing the interest of a stockholder in the corporation. $. !roperty, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful Sec. B. C0!11#%#c!"#o$ o% 1:!re1. + The shares of stock of stock purposes at a fair valuation e.ual to the par or issued value ofcorporations the may be divided into classes or series of shares, or stock issued1 both, any of which classes or series of shares may have such rights,
1. &ctual cash paid to the corporation1 privileges or restrictions as may be stated in the articles of *. @abor performed for or services actually rendered to incorporation5 the !rovided, That no share may be deprived of voting corporation1 rights except those classified and issued as NpreferredN or NredeemableN shares, unless otherwise provided in this "ode5 7. !reviously incurred indebtedness of the corporation1 !rovided, further, That there shall always be a class or series of shares which have complete voting rights. &ny or all of the shares D. &mounts transferred from unrestricted retained earnings to or series of shares may have a par value or have no par value as stated capital1 and may be provided for in the articles of incorporation5 !rovided, however, That banks, trust companies, insurance companies, public (. /utstanding shares exchanged for stocks in the event of utilities, and building and loan associations shall not be permitted to reclassification or conversion. issue no+par value shares of stock.
Ehere the consideration is other than actual cash, or consists of !referred shares of stock issued by any corporation may be given intangible property such as patents of copyrights, the valuation preference in the distribution of the assets of the corporation in thereof shall initially be determined by the incorporators or the case of li.uidation and in the distribution of dividends, or such other board of directors, subject to approval by the 8ecurities and preferences as may be stated in the articles of incorporation which Exchange "ommission. are not violative of the provisions of this "ode5 !rovided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authori6ed in the articles of incorporation, may fix the terms and conditions of preferred shares 8hares of stock shall not be issued in exchange for promissory notes of stock or any series thereof5 !rovided, That such terms and or future service. conditions shall be effective upon the filing of a certificate thereof with the 8ecurities and Exchange "ommission. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the 8hares of capital stock issued without par value shall be deemed corporation. fully paid and non+assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto5 !rovided1 That shares without par value may not be issued for a consideration less than the value of five %!D.<<) pesos per share5 The issued price of no+par value shares may be fixed in the articles !rovided, further, That the entire consideration received by the of incorporation or by the board of directors pursuant to authority corporation for its no+par value shares shall be treated as capital conferred upon it by the articles of incorporation or the by+laws, or and in the absence thereof, by the stockholders representing at least a shall not be available for distribution as dividends. majority of the outstanding capital stock at a meeting duly called for the purpose. & corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal re.uirements.
SHARES OF STOCKS AND THEIR CLASSIFICATIONS SHARES OF STOCK designate the units into which the proprietary interest in a corporation is divided. They represent the proportionate integers or units, the sum of which constitutes the capital stock of the corporation. 3t is likewise the interest or right which the owner, called the stockholders or shareholder, has in the management of the corporation, and in the surplus profits and in case of distribution, in all of its assets remaining after the payment of its debts.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be e.ual in all respects to every other share.
Ehere the articles of incorporation provide for non+voting shares in the cases allowed by this "ode, the holders of such shares shall
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nevertheless be entitled to vote on the following matters5
shall be considered to have the right to vote and be voted for.
PREFERRED STOCK is a stock that gives the holder preference over the holder of common stocks with respect to the payment of dividends andMor with respect to distribution of capital upon li.uidation. @3>3T&T3/48 $. &doption and amendment of by+laws1 imposed by the "ode in the issuance of preferred stocks5 %1) They can be issued only with a stated par value1 and %$) *. 8ale, lease, exchange, mortgage, pledge or other disposition of The preference must be stated in the &/3 and in the all or substantially all of the corporate property1 certificate of stock otherwise each share shall be, in all respect, e.ual to every other share. 7. 3ncurring, creating or increasing bonded indebtedness1
1. &mendment of the articles of incorporation1 D. 3ncrease or decrease of capital stock1 a. !;EAE;E4"E &8 T/ -3Q3-E4-8
They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty is not (. >erger or consolidation of the corporation with another absolute so as to create a relation of debtor and creditor corporation or other corporations1 between the corporation and the holders of such stock. The amount of preference is stated in the contract of '. 3nvestment of corporate funds in another corporation or business subscription and is usually a fixed percentage or by in accordance with this "ode1 and specified amount indicated therein. C. -issolution of the corporation.
!articipating and 4on+!articipating !referred 8hares 3f the preferred shares are participating, they are entitled to participate in dividends with the common shareholders their stated preference. 4on+participating preferred Except as provided in the immediately preceding paragraph, beyond the shares on the other hand are entitled to its fixed priority or vote necessary to approve a particular corporate act as provided in preference only. this "ode shall be deemed to refer only to stocks with voting rights. "umulative and 4on+cumulative !reference 8hares "umulative preferred shares are those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid. 3n light of the provision of the "ode stating that all shares are e.ual in all respects unless otherwise stated in the &/3, a preferred share to be considered cumulative, the same must be provided for and specified in the certificate. 4on+cumulative preferred shares are those which grant the holders of such shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. This type may be divided into three groups5 1. -iscretionary dividend type depends on the judgment or discretion of the board of directors. nless there is grave abuse of discretion as to result in oppression, fraud or unfair discrimination, the dividend right of stockholders of a particular year cannot be made up in subse.uent years1 $. >andatory if earned impose a positive duty on directors to declare dividends every year when profits are earned. 3n effect, directors cannot withhold dividends if there are profits. *. Earned cumulative or dividend credit type gives the holder the right to arrears in dividends if there were profits earned during the previous years. 3n effect, their right to receive dividends is merely postponed on a later date. The moment dividends are declared, back dividends earned in previous years but not declared as such must first be paid to this type of preferred shareholders before the common shareholders receive theirs.
PURPOSE OF CLASSIFICATION: 1. To specify and define the rights and privileges of the stockholders1 $. Aor regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. *. &s a management control device. 7. To comply with statutory re.uirements particularly those which provide for certain limitations on foreign ownership. D. To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends andMor distribution of assets in case of li.uidation1 and (. Aor flexibility in price, particularly, no par shares may be issued or sold from time to time at different prices depending on the net worth of the company since they do not purport to represent an actual or fixed value. CO--ON STOCKS are the most commonly issued shares of stock of a corporation. &lthough no clear cut definition can be found, it has been described as one which entitles it owner to an e.ual or pro+rata division of profits, if there are any, but without any preference or advantage in that respect over any other stockholder or class of stockholders.
& common share usually carries with it the right to vote, and fre.uently, the exclusively right to do so. ,owever, where the &/3 is silent, all issued and outstanding shares
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-3AAE;E4"E E3T, " > @&T3QE !;EAE;;E-5 "umulative preferred are entitled to dividends whether or not there are profits. Earned cumulative or dividend credit type is entitled only to arrears if there are profits in those years.
b. Qoting ;ight of !referred 8hares !referred shares, along with redeemable shares, are usually denied voting rights as they are allowed to be denied of such as provided in 8ec. (, but this right must clearly be withheld. ,owever, even if deprived, preferred shareholders have the right to vote in matters enumerated in the penultimate paragraph of 8ec. (. c. !reference pon @i.uidation 8uch preference must also be stated in the contract, accordingly giving them the preference to the distribution of corporate assets upon li.uidation or termination of corporate existence. 3f the preferred shares are cumulative, they have the right to any arrears in arrears in priority to any distribution of assets to the common stockholders. PAR AND NON=PAR VALUE SHARES !ar Qalue 8hares are those whose values are fixed in the &/3. 3ts par value is the minimum subscription or original issue price of the shares and indicates the amount which the original subscribers are supposed to contribute to the capital, which, however, may not reflect the true value of the shares because the same may fluctuate depending on the liability and networth of the enterprise. Eatered 8tocks are those issued at less than par value where the stockholders will remain liable for the difference between what he paid and the actual par value thereof %8ec. (D). 4o !ar Qalue 8hares are those whose issued price are not stated in the certificate of stock but may be fixed in the &/3, or by the ?/- when so authori6ed the articles or the by+laws, or in the absence thereof, the stockholders themselves. They do not purport to represent ay stated proportionate interest in the capital measured by value, but only an ali.uot part of the whole number of shares of the corporation issuing it.
The "ode allows the issuance of no par value shares, subject to the following limitations provided in 8ec. (5 1. 8uch shares once issued, are deemed fully paid and thus, non+assessable1 $. The consideration for its issuance should not be less than !D1 *. The entire consideration constitutes capital, hence, not available for dividend declaration1 7. They cannot be issued as preferred stock1 and D. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loans associations.
&dvantages of no+par value shares5 1. Alexibility in price no par shares may be issued from time to time at different prices with the exception only that it shall not be issued at less than !D1 $. The issuance thereof practically results to the evasion of the danger of liability upon watered stock in case of overvaluation of the consideration paid for it1 *. There is a disappearance of personal liability on the part of the holder for unpaid subscription since they are already deemed fully paid and non+assessable. VOTING AND NON=VOTING SHARES Qoting shares as the name suggests, gives the holder thereof the right to vote and participate in the management of the corporation, through the election of the ?/-, or in any matter re.uiring stockholders# approval.
,owever, voting shares may practically be denied the right to vote where there exist founders# shares.
4on+voting shares do not grant the holder thereof, a voice in the election of directors and some other matter re.uiring stockholders# vote.
/nly preferred and redeemable shares may be denied the right to vote. ?ut, even if denied such right, they may still vote on the following matters5 1. &mendment of the articles of incorporation1 $. &doption and amendment of by+laws1 *. 8ale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property1 7. 3ncurring, creating or increasing bonded indebtedness1 D. 3ncrease or decrease of capital stock1 (. >erger or consolidation of the corporation with another corporation or other corporations1 '. 3nvestment of corporate funds in another corporation or business in accordance with this "ode1 and C. -issolution of the corporation
FOUNDERS. SHARES are shares issued to the founders of the corporation which are granted certain right and privileges such as the exclusive right to vote and be voted for in the election of directors.
8ec. '. Fo7$&er1I 1:!re1. + AoundersP shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five %D) years subject to the approval of the 8ecurities and Exchange "ommission. The five+year period shall commence from the date of the aforesaid approval by the 8ecurities and Exchange "ommission.
The period of D years is non+extendable because it may result in the almost perpetual dis.ualification of other
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stockholders to elect or be elected as members of the ?/resulting to the lack of proper representation thereat.
HELD: 4o. Tre!17r< 1:!re1 !re 1"oc31 #117e& !$& %700< !#& %or !$& re!c67#re& 9< ":e cor or!"#o$ REDEE-ABLE SHARES are those subject to redemption e#":er 9< 7rc:!1e+ &o$!"#o$+ %or%e#"7re or o":er as may be provided in the subscription contract, which are 8e!$1 !$& &o $o" :!;e ":e 1"!"71 o% o7"1"!$&#$> usually attached to preferred shares and other debt 1:!re1. T:e< 8!< 9e re=#117e& or 1o0& !>!#$ !$& securities like bonds. 5:#0e :e0& 9< ":e co8 !$< !r"#c# !"e1 $e#":er #$ &#;#&e$&1+ 9ec!71e &#;#&e$&1 c!$$o" 9e &ec0!re& 9< 8ec. C. Re&ee8!90e 1:!re1. + ;edeemable shares may be issued ":e cor or!"#o$ "o #"1e0%+ $or #$ 8ee"#$> o% ":e cor by the corporation when expressly so provided in the articles of or!"#o$ !1 ;o"#$> 1"oc3 %or o":er5#1e e67!0 o% ;o"#$> o5er1 !8o$> 1"oc3:o0&er1 incorporation. They may be purchased or taken up by &#1"r#97"#o$ the corporation upon the expiration of a fixed period, regardless of5#00 the 9e e%%ec"#;e0< 0o1" !$& ":e &#rec"or1 5#00 9e !90e "o er e"7!"e ":e#r co$"ro0 o% ":e cor or!"#o$+ existence of unrestricted retained earnings in the books of ":o7>: the #" 1"#00 re re1e$" ! !#& %or #$"ere1" #$ ":e corporation, and upon such other terms and conditions as may ro be er"< o% ":e cor or!"#o$. These features of a stated in the articles of incorporation, which terms and conditions treasury stock are lacking in the .uestioned shares. must also be stated in the certificate of stock representing said 3n this case, and under the terms of the trust agreement, shares the shares of stock of ;eese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporate meetings. They were not, therefore, treasury shares. The $7,'<< shares were These types of shares grants the corporation the right to outstanding shares of ;eese#s estate until they were fully repurchase the shares at its option or at the option of the paid. 8uch being the case, their declaration as treasury holder based on the face or issued value plus specified stock dividend was a complete nullity. premium, such redemption may be optional or mandatory at a fixed or future date.
CAPITAL RE2UIRE-ENTS
8uch repurchase may also be made regardless if there are unrestricted retained earnings. %see !ower to &c.uire /wn 8hares)
8ec. 1$. -#$#878 c! #"!0 1"oc3 re67#re& o% 1"oc3 cor or!"#o$1. + 8tock corporations incorporated under this "ode shall not be re.uired to have any minimum authori6ed capital stock TREASUR) SHARES except as otherwise specifically provided for by special law, and subject to the provisions of the following section 8ec. =. Tre!17r< 1:!re1. + Treasury shares are shares of stock which have been issued and fully paid for, but subse.uently reac.uired by the issuing corporation by purchase, redemption, 8ec. 1*. A8o7$" o% c! #"!0 1"oc3 "o 9e 1791cr#9e& !$& !#& donation or through some other lawful means. 8uch shares may %or again be disposed of for a reasonable price fixed by the board of":e 7r o1e1 o% #$cor or!"#o$. + &t least twenty+five percent %$DJ) of the authori6ed capital stock as stated in the articles of directors. incorporation must be subscribed at the time of incorporation, and at least twenty+five %$DJ) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or Treasury shares, as provided in 8ec. =, are reac.uired but dates fixed in the contract of subscription without need of call, or in not retired. They may be issued for a price, even less than the absence of a fixed date or dates, upon call for payment by the par, and the purchaser will not be liable to the creditors of board of directors5 !rovided, however, That in no case shall the the corporation for the difference of the purchase price and paid+up capital be less than five Thousand %!D,<<<.<<) pesos its par value. They may also be declared as dividends since they are properties of the corporation. 8uch shares do not have the right to share in dividends nor the right to vote. CO--ISSIONER OF INTERNAL REVENUE VS. -ANNING %(( 8";& 171 &ug. (, 1='D) Bulius ;eese owned $7,'<< of the $D,<<< authori6ed capital stock of >anta Trading and 8upply "o., the rest are owned by herein respondents. pon ;eese# death, his shares was held in trust by the law firm ;oss, "arrascoso and Banda for the private respondent, who were to continue management of the corporation. These shares considered by the respondents as treasury shares, prior to full payment, were declared as stock dividends. 8uch declaration was assessed by the ?3; as distribution of assets subject to income tax. ISSUE: E/4 the subject shares are treasury sharesF Arom the above provisions, it can be said that there is no minimum capital re.uirement in order that a corporation may be duly incorporated except in special cases and provided that at least !D,<<< should be paid+in, which effectively would make the !D,<<< the minimum capital re.uirement. The $DJ minimum paid+in capital can be paid by any shareholder, meaning that it is not particularly re.uired that each subscriber pay $DJ of their subscription. There are instances where the 8E", by virtue of an existing law, rules and regulations or policies, re.uires the payment of more than the amount provided in the "ode, such as Ainancing "ompanies where the re.uired minimum paid+up capital be !1<,<<<,<<< %within >etro >anila), !D,<<<,<<<
1=
%other cities), and !$,<<<,<<< %municipalities).
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RESTRICTIONS AND PREFERENCES
'N!8e1 !$& 1#>$!"7re1 o% ":e #$cor or!"or1( xxx The signatures are important as the &/3 serves as a contract between the signatories thereof, by and among themselves, with the corporation, and the latter with the 8tate.
"orporations are not re.uired to provide for certain restrictions and preferences regarding the transfer, sale or assignment of shares in the &/3 except in close corporations which would subject their shares to specific restrictions as re.uired in 8ec. =( of the "ode. They are not, however, restrained or prohibited from doing so 3f the corporation desires to grant such options, restrictions andMor preferences, the same must be indicated in the &/3 AND in all of the stock certificates. Aailure to provide the same in the &/3 would not bind the purchasers in good faith despite the fact that the said restriction andMor preference is indicated in the by+laws of the corporation. 3n a close corporation, however, such restrictions and preferences must not only appear in the articles of incorporation and in the stock certificates BUT ALSO be embodied in the by+laws of that close corporation otherwise it may not bind purchasers in good faith.
8. TREASURER.S AFFIDAVIT
TREASURERIS AFFIDAVIT xxx
REPUBLIC OF THE PHILIPPINES ( CIT)J-UNICIPALIT) OF ( S.S. PROVINCE OF ( I+...................................+ 9e#$> &70< 15or$+ &e o1e !$& 1!<: T:!" I :!;e 9ee$ e0ec"e& 9< ":e 1791cr#9er1 o% ":e cor or!"#o$ !1 Tre!17rer ":ereo%+ "o !c" !1 17c: 7$"#0 8< 17cce11or :!1 9ee$ &70< e0ec"e& !$& 67!0#%#e& #$ !ccor&!$ce 5#": ":e 9<=0!51 o% ":e cor or!"#o$+ !$& ":!" !1 17c: Tre!17rer+ I :ere9< cer"#%< 7$&er o!": ":!" !" 0e!1" 2AL o% ":e !7":or#Ke& c! #"!0 1"oc3 o% ":e cor or!"#o$ :!1 9ee$ 1791cr#9e& !$& !" 0e!1" 2AL o% ":e "o"!0 1791cr# "#o$ :!1 9ee$ !#&+ !$& rece#;e& 9< 8e+ #$ c!1: or ro er"<+ #$ ":e !8o7$" o% $o" 0e11 ":!$ PA+NNN.NN+ #$ !ccor&!$ce 5#": ":e Cor or!"#o$ Co&e. ....................................... 'S#>$!"7re o% Tre!17rer( xxx
?.
THE TREASURER
xxx TENTH: T:!"...................................... :!1 9ee$ e0ec"e& 9< ":e 1791cr#9er1 !1 Tre!17rer o% ":e Cor or!"#o$ "o !c" !1 17c: 7$"#0 :#1 17cce11or #1 &70< e0ec"e& !$& 67!0#%#e& #$ !ccor&!$ce 5#": ":e 9<= 0!51+ !$& ":!" !1 17c: Tre!17rer+ :e :!1 9ee$ !7":or#Ke& "o rece#;e %or !$& #$ ":e $!8e !$& %or ":e 9e$e%#" o% ":e cor or!"#o$+ !00 1791cr# "#o$ 'or %ee1( or co$"r#97"#o$1 or &o$!"#o$1 !#& or >#;e$ 9< ":e 1791cr#9er1 or 8e89er1. xxx
$.
3.
NO TRANSFER CLAUSE xxx ELEVENTH: 'Cor or!"#o$1 5:#c: 5#00 e$>!>e #$ !$< 971#$e11 or !c"#;#"< re1er;e& %or F#0# #$o c#"#Ke$1 1:!00 ro;#&e ":e %o00o5#$>(: GNo "r!$1%er o% 1"oc3 or #$"ere1" 5:#c: 1:!00 re&7ce ":e o5$er1:# o% F#0# #$o c#"#Ke$1 "o 0e11 ":!$ ":e re67#re& erce$"!>e o% ":e c! #"!0 1"oc3 !1 ro;#&e& 9< e4#1"#$> 0!51 1:!00 9e !00o5e& or er8#""e& "o recor&e& #$ ":e ro er 9oo31 o% ":e cor or!"#o$ !$& ":#1 re1"r#c"#o$ 1:!00 9e #$&#c!"e& #$ !00 1"oc3 cer"#%#c!"e1 #117e& 9< ":e cor or!"#o$.G xxx This indicates the treasurer who has been elected as such until his successor has been elected and .ualified and who is authori6ed to receive for and in the name of the corporation all subscriptions, contributions or donations paid or given by the subscribers or members.
NOTARIAL ACKNO*LEDG-ENT xxx SUBSCRIBED AND S*ORN "o 9e%ore 8e+ ! No"!r< P790#c+ %or !$& #$ ":e C#"<J-7$#c# !0#"< o%................................. Pro;#$ce o%.........................................+ ":#1............ &!< o%........................+ 1M.......H 9<........................................... 5#": Re1. Cer". No..................... #117e& !"................ o$.....................+ 1M......... PUBLIC NOTAR)
-< co88#11#o$ e4 #re1 o$..........................+ 1M....... Doc. No...............H P!>e No...............H Boo3 No..............H Ser#e1 o% 1M.....
xxx
0.
THE E,ECUTION CLAUSE xxx IN *ITNESS *HEREOF+ 5e :!;e :ere7$"o 1#>$e& ":e1e Ar"#c0e1 o% I$cor or!"#o$+ ":#1..............&!< o%.....................+ 1M.......... #$ ":e C#"<J-7$#c# !0#"< o%.......................................+ Pro;#$ce o%................................................+ Re 790#c o% ":e P:#0# #$e1.
GROUNDS FOR DISAPPROVAL

Sec. 1C. Gro7$&1 5:e$ !r"#c0e1 o% #$cor or!"#o$ or !8e$&8e$" 8!< 9e re?ec"e& or &#1! ro;e&. + The 8ecurities and Exchange "ommission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the re.uirements of this "ode5 !rovided, That the
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"ommission shall give the incorporators a reasonable time within have corporate existence and juridical personality and is deemed which to correct or modify the objectionable portions of the articles incorporated from the date the 8ecurities and Exchange or amendment. The following are grounds for such rejection "ommission or issues a certificate of incorporation under its official disapproval5 seal1 and thereupon the incorporators, stockholdersMmembers and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the 1. That the articles of incorporation or any amendment thereto is corporation is sooner dissolved in accordance with law. not substantially in accordance with the form prescribed herein1 $. That the purpose or purposes of the corporation are patently CAGA)AN FISHING DEVELOP-ENT CO. VS. SANDIKO unconstitutional, illegal, immoral, or contrary to government rules %(D !hil. $**1 -ec. $*, 1=*') /n >ay *1, 1=*<, >anuel and regulations1 Tabora executed a -eed of 8ale where he sold four parcels of land in favor of herein petitioner "agayan Aishing *. That the TreasurerPs &ffidavit concerning the amount of capital -evelopment "o., said to be under the process of stock subscribed andMor paid if false1 incorporation. !laintiff company filed its &/3 with the ?ureau of "ommerce and 3ndustry on /ct. $$, 1=*<. & year 7. That the percentage of ownership of the capital stock tolater, be before the issuance of the certificate of incorporation, the owned by citi6ens of the !hilippines has not been complied with as?- of the company adopted a resolution to sell the four parcels of land to Teodoro 8andiko for !7$,<<<. re.uired by existing laws or the "onstitution. ISSUE: E/4 the subse.uent sale to 8andiko is validF HELD: 4o. & duly organi6ed corporation has the power to 4o articles of incorporation or amendment to articlespurchase of and hold real property as the purpose for which incorporation of banks, banking and .uasi+banking institutions, such corporation was formed may permit and for this building and loan associations, trust companies and other financial purpose may enter into such contract as may be necessary. ?ut 9e%ore ! cor or!"#o$ 8!< 9e 1!#& "o 9e 0!5%700< intermediaries, insurance companies, public utilities, educational or>!$#Ke& 8!$< ":#$> :!;e "o 9e &o$e. A8o$> institutions, and other corporations governed by special laws shall 5:#c:+ ":e 0!5 re67#re1 ":e %#0#$> o% ":e AOI. be accepted or approved by the "ommission unless accompanied by a favorable recommendation of the appropriate government 3t cannot be denied that the plaintiff was not incorporated agency to the effect that such articles or amendment is in it entered into the contract of sale. 3t was not even a when accordance with law. de facto corporation at that time. 4ot being in legal existence then, it did not possess juridical personality to enter into the contract. &fter filing of the &/3, the 8E" will examine and process them to determine compliance with the re.uirements enumerated in 8ec. 17 and if the form prescribed under 8ec. 1D is complied with. O$0< 1791"!$"#!0 !$& $o" 1"r#c" co8 0#!$ce is re.uired. The above grounds are not exclusive. There may be other reasons for rejection or disapproval such as the corporate name is not legally permissible or that the minimum capital re.uirement is not sufficient. "orporations are creatures of the law, and can only come into existence in the manner prescribed by the law. That a corporation should have a full and complete organi6ation and existence as an entity before it can enter into a contract or transact any business, would seem to be self+ evident. & corporation, until organi6ed, has no being, franchises or faculties. 4or do those engaged in bringing it into being have any power to bind it by contract, unless so authori6ed by the charter, there is no corporation, nor does it possess franchise or faculties for it to exercise, until it ac.uires complete existence. 3f the company could not and did not ac.uire the four parcels of and here involved, it follows that it did not have the resultant right to dispose the same to the defendant.
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CO--ENCE-ENT OF CORPORATE E,ISTENCE
"orporate existence is reckoned from the "#8e o% ":e #117!$ce o% #"1 CERTIFICATE OF INCORPORATION or registration. 3t is only from this time that it ac.uires juridical personality and legal existence, E,CEPT: a. "orporations by Estoppel1 b. Those created by special laws1 c. Those organi6ed as "ooperatives covered by ?ureau of "ooperatives and ,ome /wners# &ssociations covered by ,ome 3nsurance Kuaranty "orporation. d. "orporation 8ole which is reckoned from the filing of verified articles. %8ec. 11$)
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DEFECTIVEL) FOR-ED CORPORATIONS
& corporation de jure is one created in strict or substantial compliance to the governing corporation statutes and whose right to exist and act as such could not be attacked in a either collaterally or through a direct proceeding for that purpose even by the 8tate.
1. DE FACTO CORPORATIONS 8ec. 1=. Co88e$ce8e$" o% cor or!"e e4#1"e$ce. + & private corporation formed or organi6ed under this "ode commences to facto corporation is one that is so defectively created & de $1
as not to be a de jure corporation but nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona fide attempt to incorporate under existing statutory authority, coupled with the exercise of corporate powers.
ISSUE: E/4 the >unicipality of ?alabagan is a de facto corporationF HELD: 4o. 3n cases where a de facto municipal corporation was recogni6ed as such despite the fact that the statute creating it was later invalidated, the decision could be fairly made to rest on the consideration that ":ere 5!1 1o8e o":er ;!0#& 0!5 >#;#$> ;!0#&#"< "o ":e or>!$#K!"#o$. ,ence, in the case at bar, the mere fact that ?alabagan was organi6ed at the time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as independently of the &dministrative "ode provision in .uestion, there is no other valid statute to give color of authority for its creation. &n unconstitutional act is not a law1 it confers no rights1 it imposes no duties1 it affords no protection1 it creates no office1 it is, in legal contemplation, as inoperative as though it had never been passed.
RE2UISITES: a. There is a valid statute under which the corporation could have been created as a de jure corporation %or according to some, an apparently valid statute)1 b. &n attempt, in good faith, to form a corporation according to the re.uirements of law which goes far enough to amount to a Gcolourable complianceH with the law1 c. & user of corporate powers, the transaction of business in some way as if it were a corporation1 d. Kood faith in claiming to be and doing business as a corporation.
8ec. $<. De %!c"o cor or!"#o$1. + The due incorporation of any HALL VS. PICCIO %C( !hil (<* Bune $=, 1=D<) !etitioner, corporation claiming in good faith to be a corporation under together this with private respondents signed and "ode, and its right to exercise corporate powers, shall notacknowledged be the &/3 of Aar East @umber and "ommercial in.uired into collaterally in any private suit to which such "o., 3nc., after the execution of which the corporation to do business by adopting its by+laws and corporation may be a party. 8uch in.uiry may be made by proceeded the election of its officers. 8ubse.uently, pending action on the 8olicitor Keneral in a .uo warranto proceeding &/3, the respondents filed with the "A3 alleging the corporation to be an unregistered partnership and praying for its dissolution, which was granted.
ATTACK5 Arom the above provision, the only purpose of determining whether it is a de facto or de jure corporation is the applicability of the rules on collateral and direct attack. 8uch that a de jure is impregnable to either, while a de facto corporation#s existence can only be .uestioned in a direct proceeding by the 8tate through a .uo warranto. & de facto corporation#s corporate existence however cannot be attacked collaterally.
THE -UNICIPALIT) OF -ALABANG+ LANAO DEL SUR+ and &>E; >&"&/;&/ ?&@34-/4K, petitioners, vs. PANGANDAPUN BENITO+ ,&-B3 4/!/-34 >&"&! 4 4K, ,&-B3 ,&8&4 >&"&;&>!&-, A;E-E;3"R Q. - BE;TE >/4-&"/ /4T&@, >&;/48/4K &4-/L, >&"&@&?& 34-&; @&/. ;espondents K; 4o. @+$C11*1 >arch $C, 1=(=) FACTS: The >unicipality of ?alabagan was created from the barrios and sitios of the >unicipality of >alabang by virtue of E/ 4o *C( issued by !resident Karcia by virtue of 8ec. (C of the ;evised &dministrative "ode. Aollowing the decision of the "ourt in !elae6 vs. &uditor Keneral, which declared 8ec. (C unconstitutional and that the !resident had no power to create a municipality, herein petitioners sought to nullify E/ *C( and to restrain the respondents, who are officers of ?alabagan, to vacate said their office and desist from performing their functions. ;espondents argue that it is at least a de facto corporation and the ruling in !elae6 is not applicable to it, having been organi6ed under color of a statute before it was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged corporate functions for the past five years. That as a de facto corporation, its existence cannot be collaterally attacked.
,erein petitioner claims that the corporation is a de facto corporation, that its dissolution may be ordered only in a .uo warranto proceedings instituted by the 8tate. ISSUE: E/4 it is a de facto corporationF HELD: 4o. Airst, not having obtained a certificate of incorporation, the company, even its stockholders, may not probably claim Gin good faithH to be a corporation. 8uch claim is compatible with the existence of errors and irregularities, but not with a total or substantial disregard of the law. nless there has been an evident attempt to comply with the law the claim to be a corporation Gunder this &ctH %8ec. 1=) could not be made in good faith. 8econd, this is not a suit where the corporation is a party. This is a litigation between a stockholder of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the 8tate.
2.
CORPORATION B) ESTOPPEL
& corporation may exist on the ground of estoppel by virtue of the agreement, admission or conduct of the parties such that they will not be permitted to deny the fact of the existence of the corporation. 3t is neither a de jure nor de facto because of serious defects in its incorporation or organi6ation, unlike the de facto doctrine, it does not involve a theory that the irregular corporation has ac.uired a corporate status generally. 3t applies to the conse.uences of some particular transactions or acts done in the corporate name by associates assuming to be a corporation.
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and is designated to prevent injustice and unfairness. 3t Sec. 21. Cor or!"#o$ 9< e1"o e0. + &ll persons who assume applies to when persons assume to form a corporation and exercise corporate functions and enter into business act as a corporation knowing it to be without authority to do so shall relations with third persons. *:ere ":ere #1 $o ":#r& be liable as general partners for all debts, liabilities and damages er1o$ #$;o0;e& !$& ":e co$%0#c" !r#1e1 o$0< !8o$> incurred or arising as a result thereof5 !rovided, however, That when ":o1e !1178#$> "o %or8 ! cor or!"#o$+ 5:o any such ostensible corporation is sued on any transaction entered ":ere%ore 3$o5 ":!" #" :!1 $o" 9ee$ re>#1"ere&+ by it as a corporation or on any tort committed by it as such, it shall ":ere #1 $o cor or!"#o$ 9< e1"o e0. not be allowed to use as a defense its lack of corporate personality. ALBERT VS. UNIVERSIT) PUBLISHING CO.+ INC. %1* 8";& C71 Ban. *<, 1=(D) Bose &ruego, president of defendant niversity !ublishing "o, 3nc. entered into a contract with plaintiff for the publishing of the latter#s /n who assumes an obligation to an ostensible corporation as such, revised commentaries on the ;evised !enal "ode, which cannot resist performance thereof on the ground that there was in the defendant failed to pay the second instalment due. The fact no corporation. "A3 of >anila rendered judgment in favor of plaintiff, such judgment reduced by the 8upreme "ourt to !1D,<<<. Arom the above provision, it is clear that the doctrine of estoppel may apply to the alleged corporation or to a third party transacting with the former. The "A3 issued a writ of execution against &ruego, as the real defendant, stating the discovery that there is no such entity as niversity !ublishing "o., 3nc. ISSUE: E/4 the writ of execution may be effected upon &ruegoF HELD: Les. /n account of non+registration, niversity cannot be considered a corporation, not even a corporation de facto. 3t has therefore, no personality separate from &ruego it cannot be sued independently. The doctrine of corporation by estoppel is inapplicable. &ruego represented a non+existent entity and induced not only the plaintiff but even the court of belief of such representation. ,e signed the contract as G!residentH of niversity and obviously misled plaintiff in to believing that niversity is a Gcorporation duly organi6ed and existing under the laws of the !hilippinesH. O$e 5:o :!1 #$&7ce& !$o":er "o !c" 7 o$ :#1 5#0%70 8#1re re1e$"!"#o$ ":!" ! cor or!"#o$ 5!1 &70< or>!$#Ke& !$& e4#1"#$> 7$&er ":e 0!5+ c!$$o"+ ":ere!%"er+ 1e" 7 !>!#$1" :#1 ;#c"#8 ":e r#$c# 0e o% cor or!"#o$ 9< e1"o e0. SALVATIERRA VS. GARLITOS+ ET AL. %1<* !hil. 'D'1 >ay $*, 1=DC) !etitioner >anuel T. Qda de 8alvatierra, owner of a parcel of land, entered into a contract of lease with !hilippine Aibers !rocessing "o., 3nc., allegedly a corporation. Aor failure to comply with the obligations under the lease, petitioner filed a complaint in the "A3 where the company was declared in default and decision was rendered in favor of petitioner. -efendant ;efuer6o filed a motion claiming that he should not be made personally liable in the decision which was granted by the "ourt. ,ence, this petition. ISSUE: E/4 ;efuer6on can be made personally liableF HELD: Les. Ehile as a >e$er!0 r70e, a person who has contracted or dealt with an association in such a way as to recogni6e its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine 8!< $o" 9e :e0& ! 0#c!90e 5:ere %r!7& "!3e1 !r" in the said transaction. 3n the instant case, on plaintiff#s charge that she was unaware of the fact that the company had no juridical personality, defendant ;efuer6o gave no confirmation or denial and the circumstances surrounding the execution of the contract led to the inescapable
&s to the "orporation the members who purported to be a corporate body cannot deny their purported existence as a corporation in an action against them on the contract, where the third persons were induced to deal with the supposed corporation. They cannot avoid liability on the ground of lack of personality to be sued. &s to third persons they are estopped from denying the existence of the alleged corporation in a suit to enforce a contract. ,owever, the association of persons must have purported or acted, and were treated by the third persons, as corporations. The doctrine also applies when the third person tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.
LOZANO VS. DE LOS SANTOS %$'7 8";& 7D$1 Bune 1=, 1='') !etitioner ;eynaldo @o6ano and respondent &ntonio &nda agreed to consolidate their respective Beepney &ssociations, to which they are presidents. They conducted an election for one set of officers of the consolidated association, where petitioner was the winner. ;espondent, however, refused to abide by the agreement which prompted petitioner to institute an action for damages in the trial court which was denied for being intra+corporate, and was held to be within the jurisdiction of the 8E". ISSUE: E/4 there is corporation by estoppel placing the case within 8E" jurisdictionF HELD: 4one. The unified association was still a proposal and had not been approved by the 8E", neither had its officers and members submitted their &/3. Their respective associations are distinct and separate entities, petitioner and private respondent does not have an intra+corporate relation much less do they have an intra+corporate dispute. The 8E" has no jurisdiction over the complaint. The doctrine of corporation by estoppel advance by private respondent cannot override jurisdictional re.uirements. Burisdiction is fixed by law and is not subject to the agreement of the parties. "orporation by estoppel is founded on principle of e.uity
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conclusion that plaintiff 8alvatierra was really made to believe that such corporation was duly organi6ed in accordance with law. The rule on the separate personality of a corporation is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious 1#$ce !$ or>!$#K!"#o$ 5:#c: 9e%ore ":e 0!5 #1 $o$=e4#1"e$" :!1 $o er1o$!0#"< !$& 5o70& 9e #$co8 e"e$" "o !c" o$ #"1 9e:!0%H ":71+ ":o1e 5:o !c" or 7r or" "o !c" !1 #"1 re re1e$"!"#;e1 or !>e$" &o 1o 5#":o7" !7":or#"< !$& !" ":e#r o5$ r#13. &nd, as is it elementary principle of law that ! er1o$ 5:o !c"1 !1 !$ !>e$" 5#":o7" !7":or#"< or 5#":o7" r#$c# !0 #1 :#81e0% re>!r&e& !1 ":e r#$c# !0+ ! er1o$ !c"#$> or 7r or"#$> "o !c" o$ 9e:!0% o% ! cor or!"#o$ 5:#c: :!1 $o ;!0#& e4#1"e$ce !1178e1 17c: r#;#0e>e1 !$& o90#>!"#o$1 !$& 9eco8e1 er1o$!00< 0#!90e %or co$"r!c"1 e$"ere& #$"o or %or o":er !c"1 er%or8e& !1 17c: !>e$"1. 3n acting on behalf of a corporation which he knew to be unregistered, the president of the unregistered corporation ;efuer6o, assumed the risk of reaping the con the conse.uential damages of resultant right, if any, arising out of such transaction. CHANG KAI SHEK SCHOOL VS. CA %1'$ 8";& *C=1 &pril 1C, 1=C=) !rivate respondent Aaustina /h has been teaching in the herein petitioner 8chool since 1=*$ for a continuous period of ** years until that day that she was told that she had no assignment for the next semester. 8he filed a suit before the "A3 against the school and later on amended her complaint to include certain officials. The "A3 of 8orsogon dismissed the complaint. /n appeal, the "& reversed the decision and held herein petitioner school liable but absolved the other defendants. ISSUE: E/4 the 8chool can be held liableF HELD: Les. Even though the school failed to incorporate as mandated by law, it cannot now invoke such non+ compliance with the law to immuni6e it from the private respondent#s complaint. There should also be no .uestion that having contracted with the private respondent every year for *$ years and thus represented itself possessed of juridical personality to defeat her claim against it. &ccording to &rt. 17*1 of the "ivil "ode5 Gthrough estoppel an admission or representation is rendered conclusive upon the person making it and it cannot be denied as against the person relying on itH. &s the school itself may be sued in its own name, there is no need to apply ;ule *, 8ec. 1D ,under which the persons joined in an association without any juridical personality may be sued with such an association. ?esides, it has been shown that the individual members of the board of trustees are not liable, having been appointed only after the private respondent#s dismissal. ASIA BANKING CORP., plaintiff+appelle VS. STANDARD PRODUCTS CO.+ INC., defendant+appellant %7( !hil. 1771 8ept. 11, 1=$7) This action was brought to recover the balance due of a promissory note executed by herein appellant. The court rendered judgment in favor of the plaintiff.
&t the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error. ISSUE: E/4 parties herein are corporations with juridical personalityF HELD: Les. There is no merit whatever in the appellantPs contention. The general rule is ":!" #$ ":e !91e$ce o% %r!7& ! er1o$ 5:o :!1 co$"r!c"e& or o":er5#1e &e!0" 5#": !$ !11oc#!"#o$ #$ 17c: ! 5!< !1 "o reco>$#Ke !$& #$ e%%ec" !&8#" #"1 0e>!0 e4#1"e$ce !1 ! cor or!"e 9o&< #1 ":ere9< e1"o e& "o &e$< #"1 cor or!"e e4#1"e$ce #$ !$< !c"#o$ 0e!&#$> o7" o% or #$;o0;#$> 17c: co$"r!c" or &e!0#$>+ 7$0e11 #"1 e4#1"e$ce #1 !""!c3e& %or c!71e 5:#c: :!;e !r#1e$ 1#$ce 8!3#$> ":e co$"r!c" or o":er &e!0#$> re0#e& o$ !1 !$ e1"o e0 !$& ":#1 ! 0#e1 "o %ore#>$ !1 5e00 !1 "o &o8e1"#c cor or!"#o$1. %17 ". B., $$'1 "hinese "hamber of "ommerce vs. !ua Te "hing, 17 !hil., $$$.) The defendant having recogni6ed the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiffPs corporate existence. 3t is, of course, also estopped from denying its own corporate existence. nder these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. 3t may be noted that there is no evidence showing circumstances taking the case out of the rules stated. INTERNATIONAL E,PRESS TRAVEL O TOURS SERVICES+ INC. VS. CA %*7* 8";& ('71 /ct. 1=, $<<<) !etitioner 3nternational Express Travel I Tours 8ervices, 3nc. entered into an agreement with the !hilippine Aootball Aederation through its president ,enry Rahn, herein private respondent, where the former supplied tickets for the trips of the athletes to the 8outheast &sian Kames and other various trips. The Aederation failed to pay a balance of !$(D,C=7.** which led petitioner to file a civil case in the ;T" of >anila which decided in its favor and holding ,enry Rahn personally liable. /n appeal, the "& reversed the decision of the ;T" absolving Rahn from personal liability holding that the Aederation had a separate and distinct personality. ISSUE: E/4 ,enry Rahn can be made personally liableF HELD: Les. Ehile we agree with the appellate court that associations may be accorded corporate status, such does not automatically take place by the mere passage of ;& *1*D otherwise known as the ;evised "harter of the !hilippine &mateur &thletic Aederation and !- (<7. 3t is a basic postulate that before a corporation may ac.uire juridical personality, the 8tate must give its consent either in the form of a special law or a general enabling act. 4owhere can it be found in ;& *1*D and !- (<7 any provision creating the !hilippine Aootball Aederation. These laws merely recogni6ed the existence of national sports associations and provided for the manner by which these entities may ac.uire juridical personality.
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The recognition of !hilippine &mateur &thletic Aederation re.uired under ;& *1*D and the -epartment of Louth and 8ports -evelopment under (<7, extended to the !AA was not substantiated by Rahn. &ccordingly, the !AA is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. This being said, it follows that private respondent Rahn should be held liable for the unpaid obligations of the unincorporated !AA. 3t is a settled principle in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agents. Ee cannot subscribe to the position taken by the appellate court that even assuming that the !AA was defectively incorporated, the petitioner cannot deny the corporate existence of the !AA because it had contracted and dealt with the !AA in such a manner as to recogni6e and in effect admits its existence. The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. T:e ! 0#c!"#o$ o% ":e &oc"r#$e ! 0#e1 "o ! ":#r& !r"< o$0< 5:e$ :e "r#e1 "o e1c! e 0#!9#0#"< o$ ! co$"r!c" %ro8 5:#c: :e :!1 9e$e%#"e& o$ ":e #rre0e;!$" >ro7$& o% &e%ec"#;e #$cor or!"#o$. 3n the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract. GEORG GROTJAHN G-BH O CO. VS. ISNANI %$*D 8";& $1(1 &ug. 1<, 1==7) !etitioner is a Kerman company who was granted a license to establish a regional or area head.uarters in the !hilippines. !rivate respondent ;omana @anchinebre was a sales representative of petitioner who made advances totalling !*D,<<< which were left unpaid. !etitioner filed a complaint for the collection of a sum of money which was dismissed by the judge holding, among others, that the license of petitioner does not include the license to do business in the !hilippines. ISSUE: E/4 petitioner has capacity to sueF HELD: Les. !rivate respondent is estopped from assailing the personality of petitioner. GThe rule is that the party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. &nd the doctrine of estoppel to deny corporate existence applies to foreign as well as domestic corporation1 one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its non+ compliance with the statutes chiefly in case where such person has received the benefits of the contractH %>erill @ynch Autures, 3nc. vs. "&). 3n the case of >erill @ynch Autures, the 8" held that a foreign corporation doing business in the !hilippines may sue in !hilippine courts although not authori6ed to do business here against the !hilippine citi6en who had contracted with and been benefited by said corporation.
"iting and applying the doctrine laid down in &sia ?anking "orp. vs. 8tandard !roducts "o., 3nc.
IN SU--AR): it appears that if a corporation by estoppel exist and enters into a contract and transact business with a third party, the latter has three possible remedies5 1. ,e may file a suit against the ostensible corporation to recover from the corporate properties1 $. ,e may file the case directly against the associates personally liable who held out the association as a corporation1 and *. &gainst both the ostensible corporation and persons forming it, jointly and severally. The last two remedies may not, however, be availed of if the third party by his conduct is estopped from denying the existence of the association as a corporation and as such, recovery should be limited only against the corporate assets. INDIVIDUAL LIABILIT) of associates should not be overlooked. 3f the doctrine of corporation by estoppel cannot be applied in their favor because the third party dealing with it has not, in any manner, deemed to have chosen to deal with it as a corporation or in short not, estopped to deny corporate existence, the associates can be held liable either as partners or principals. *HO SHOULD BEAR THE LOSS5 The better view is that those who actively participated in holding out the association as a corporation should be held personally liable by virtue of the express provision of 8ec. $1 which provides that Gall persons who assume to act as a corporation 3$o5#$> #" "o 9e 5#":o7" !7":or#"< "o &o 1o shall be liable as general partners for all debts, liabilities and damages incurred or arisingH therefrom.
7. a.
ORGANIZATION BUSINESS
AND
CO--ENCE-ENT
OF
CORPORATE ORGANIZATION
Sec. 22. E%%ec"1 o$ $o$=71e o% cor or!"e c:!r"er !$& co$"#$7o71 #$o er!"#o$ o% ! cor or!"#o$. + 3f a corporation does not formally organi6e and commence the transaction of its business or the construction of its works within two %$) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. ,owever, if a corporation has commenced the transaction of its business but subse.uently becomes continuously inoperative for a period of at least five %D) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation.
This provision shall not apply if the failure to organi6e, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the 8ecurities and Exchange "ommission.
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/nce the certificate of incorporation has been issued, the corporation > 8T formally organi6e and commence its business.
general law.
NON=USE OF CORPORATE CHARTER: &pparent from the above provision is that the %!#07re o% ":e cor or!"#o$ "o or>!$#Ke 5#":#$ 2 <e!r1 5o70& re170" #$ #" !7"o8!"#c &#11o07"#o$, unless, of course, its failure to do so is due to causes beyond its control. FOR-AL ORGANIZATION5 refers to the process of structuring the corporation to enable it to effectively pursue the purpose for which it was organi6ed. 3t includes5 a. /rgani6ational meeting of the stockholders to elect the ?/-1 b. &doption of by+laws, if not simultaneously filed with the &/3, and its subse.uent filing with the 8E" which must be within 1 month from the issuance of the certificate of incorporation1 c. /rgani6ational meeting of the ?/- to elect the corporate officers, adoption of corporate seal, accepting pre+incorporation subscriptions, establishing the principal office and such other steps necessary to transact the legitimate business for which the corporation was formed.
8trict compliance is not re.uired. 8ubstantial compliance therewith is sufficient. Thus, it has been held in the case of !ere6 vs. ?almaceda that a corporation is deemed to have formally organi6ed if it had a governing board which direct its affairs, as well as a treasurer and a clerk, and that through these instrumentalities, it actually functioned and engaged in the business for which it was organi6ed. 3t cannot be held to have forfeited its charter simply because it has not been shown that is also had a president and a secretary.
THREE=FOLD CONTRACT5 1. ?etween the corporation and the state insofar as it concerns its primary franchise to be and act as a corporation# $. ?etween the corporation and the stockholders or members insofar as it governs their respective rights and obligations1 *. ?etween and among the stockholders or members themselves as far as their relationship with one another is concerned. FRANCHISE: appropriately applies to the right or privilege itself to be and act as a corporation or to do a certain act while charter applies to the instrument by which the state vests such right or privilege. Aranchise may either be5 %1) !rimary nothing more than the right or privilege of being a corporation1 or %$) 8econdary the powers and privileges vested in, and to be exercised by the corporate body as such. Example5 Employment &gencies, primary franchise is the certificate of incorporation from the 8E", the secondary franchise is the license issued by the !/E&.
?.
CORPORATE ENTIT) THEOR)
&s a legal entity, the corporation is possessed with a juridical personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter. The properties it possesses belongs to it exclusively as a separate juridical entity such that the personal creditors of its stockholders or members cannot attach corporate properties to satisfy their claims. /n the other hand, the corporation is not likewise liable for the debts, obligations or liabilities of its stockholders. 4either may it properties be made answerable to satisfy the claim of creditors against its stockholders or member even if the stockholder concerned is its president. SULO NG BA)AN+ INC.+ plaintiff+appellant VS. GREGORIO ARANETA+ INC. ET AL., defendant+appelle %'$ 8";& *7'1 &ug. 1', 1='() !laintiff+appellant 8ulo ng ?ayan, 3nc. instituted a reinvindicatory action for the recovery of $C,<<< s.uare meters of land for and in behalf of its members, who were themselves and their predecessors+in+interest pioneered in the clearing of the land and cultivated the same since the 8panish ;egime and have been in continuous possession of the same. The action was dismissed on the ground that there is no cause of action. /n appeal, the "& certified the case to the 8" for the legal issues involved. ISSUED5 E/4 8ulo ng ?ayan, 3nc. may institute the action for recovery of property of it individual membersF HELD: 4o. 3t is a doctrine well+established and obtains both at law and in e.uity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. The property of a corporation is its property and not that of the stockholders, as owners, although they have e.uities in it. !roperties registered in the name of the corporation are
b.
CO--ENCE-ENT OF BUSINESSJTRANSACTION
This means that the corporation has actually functioned and engaged in business for which it was organi6ed which must be done 5#":#$ "5o <e!r1 %ro8 ":e #117!$ce o% ":e cer"#%#c!"e o% #$cor or!"#o$ 0e1" #" #1 &ee8e& &#11o0;e&. This may take the form of entering into contracts which tend to pursue its business undertaking or other acts related thereto. 3f a corporation has commenced its business but subse.uently becomes #$o er!"#;e co$"#$7o710< %or ! er#o& o% !" 0e!1" A <e!r1+ ":e 1!8e 1:!00 9e 8ere0< ! >ro7$& %or 171 e$1#o$ or re;oc!"#o$ o% #"1 cor or!"e %r!$c:#1e or cer"#%#c!"e o% re>#1"r!"#o$. CHAPTER A: THE CORPORATE CHARTER AND ITS A-END-ENTS
&.
CORPORATE CHARTER
CORPORATE CHARTER signifies an instrument or authority from the sovereign power, bestowing rights or power, and is often used convertibly with the term Gact of incorporationH, where the corporation was formed under a special act of the legislature, and with the Garticles of incorporationH, when the corporation was formed under a
$(
owned by it as an entity separate and distinct from its members. "onversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, Geven in the case of a one+ man corporationH. &bsent any showing of interest, therefore, a corporation, like plaintiff+appellant herein, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. 3t is fundamental that there cannot be a cause of action without an antecedent primary legal right conferred by law upon a person. Evidently, there can be no wrong without a corresponding right, and no breach of duty by one person without a corresponding right belonging to some other person. FER-IN CARA-+ JR. AND ROSA DE CARA- VS. CA AND ALBERTO V. ARELLANO %1D1 8";& *'$1 Bune *<, 1=C') ,erein petitioners were ordered jointly and severally to pay the plaintiff !D<,<<< for the preparation of the project study and his technical services that led to the organi6ation of the defendant corporation. The petitioners .uestioned the order stating that they are mere subse.uent investors in the corporation that was later created, that they should not be held solidarily liable with the Ailipinas /rient &irways, a separate juridical entity, and with co+defendants who were the ones who re.uested the said services from the private respondent. ISSUE: E/4 petitioners can be held personally liable for such expensesF HELD: 4o. !etitioners were not involved in the initial stages of the organi6ation of the airline, which were being directed by ?aretto, respondent, as the main promoter. 3t was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. 8ignificantly, there was no showing that the Ailipinas /rient &irways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioner, as principal stockholder thereof, responsible for its obligations. &s a bona fide corporation, the Ailipinas /rient &irways should alone be liable for its corporate acts as duly authori6ed by its directors and officers. The most that can be said is that they benefited from the services, but that surely is no justification to hold them personally liable therefor. /therwise, all other stockholders of the corporation, including those who came in later, and regardless of the amount of their stockholdings would be e.ually and personally liable also with the petitioners for the claims of the private respondents. !etitioners are not liable under the challenged decision. RUSTAN PULP AND PAPER -ILLS+ INC. VS. IAC %$17 8";& ((D1 /ct. 1=, 1==$) !etitioner ;ustan entered into a contract of sale with respondent @luch which was later on stopped by ;ustan through a letter. @luch sent a letter to clarify whether the letter sent by ;ustan was for the
stoppage of delivery or termination of the contract of sale. nanswered, respondent @luch resumed deliveries and later on filed a complaint for contractual breach which was dismissed. /n appeal, the "& modified the decision of the trial court directing petitioner including Tantoco, president and general manager, and Qergara, resident manager, to pay private respondents. ISSUE: E/4 individual petitioners may be held liableF HELD5 4o. T:e re1#&e$" !$& 8!$!>er o% ! cor or!"#o$+ 5:o e$"ere& #$"o !$& 1#>$e& ! co$"r!c" #$ :#1 o%%#c#!0 c! !c#"<+ c!$$o" 9e 8!&e 0#!90e ":ere7$&er #$ :#1 #$&#;#&7!0 c! !c#"< #$ ":e !91e$ce o% 1"# 70!"#o$ "o ":!" e%%ec" &7e "o ":e er1o$!0#"< o% ! cor or!"#o$ 9e#$> 1e !r!"e !$& &#1"#$c" %ro8 ":e er1o$ co8 o1#$> #". &nd because of this precept, Qergara#s supposed non+participation in the contract of sale although he signed the letter terminating it is completely immaterial. CRUZ VS. DALISA) %1D$ 8";& 7C$1 Buly *1, 1=C') &delio "ru6 charged Tuiterio -alisay, 8enior -eputy 8heriff of >anila, with malfeasance in office, corrupt practices and serious irregularities when the respondent sheriff attached andMor levied the money belonging to complainant "ru6 when he was not himself the judgment debtor in the final judgment of 4@;" sought to be enforced but rather the company known as Tualitrans @imousine 8ervice, 3nc., a duly registered corporation. ISSUE: E/4 the charge against the respondent should be upheld for attaching personal property of the corporate presidentF HELD: Les. The respondent#s action in enforcing judgment against complaint who is not the judgment debtor in the case calls for disciplinary action. "onsidering the ministerial duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a decision ordered or decreed in the dispositive part should be the subject of execution. 4o more, no less. That the title of the case specifically names complaint as one of the respondent is of no moment as execution must conform to that directed in the dispositive portion and not in the title of the case. The tenor of the 4@;" judgment and the implementing writ are clear enough. 3t directed Tualitrans to reinstate the discharged employee and pay the full backwages. ;espondent, however, chose to Gpierce the veil of corporate entityH usurping a power belonging to the court and assumed improvidently that since the complainant is the ownerMpresident, they are one and the same. 3t is well+settled doctrine, both in law and in e.uity that !1 ! 0e>!0 e$"#"<+ ! cor or!"#o$ :!1 ! er1o$!0#"< &#1"#$c" !$& 1e !r!"e %ro8 #"1 #$&#;#&7!0 1"oc3:o0&er1 or 8e89er1. T:e 8ere %!c" ":!" o$e #1 re1#&e$" o% ! cor or!"#o$ &oe1 $o" re$&er ":e ro er"< :e o5$1 or o11e11e1 ":e ro er"< o% ":e cor or!"#o$+ 1#$ce ":e re1#&e$"+ !1 #$&#;#&7!0+ !$& ":e cor or!"#o$ !re 1e !r!"e e$"#"#e1. PALA) INC. VS. CLAVE %1$7 8";& (*C1 8ept. $1, 1=C*) !etitioner !alay, 3nc. through its president &lbert /nstott, executed in favor of respondent 4aario -umpit a "ontract to 8ell a parcel of land which provided for automatic rescission upon default in payment of any monthly amorti6ation without need of notice and forfeiture of all
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instalments paid. ;espondent failed to pay some instalments and later offered to update all his overdue account but was informed that the contract has already been rescinded. ;espondent filed with the 4,& a complaint .uestioning the validity of the rescission which decided in its favor holding !alay, 3nc. and &lberto /nstott, in his capacity as president, jointly and severally liable. ISSUE: E/4 the corporate president is liable to refund the amount state in the 4,& rulingF HELD5 4o. &s a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. ,owever, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice1 or for purposes that could not have been intended by the law that created it1 or to defeat public convenience, justify wrong, protect fraud, or defend crime1 or to perpetuate fraud or confuse legitimate issues1 or to circumvent the law or perpetuate deception1 or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Ee find no badges of fraud on petitioners# part. They had literally relied, albeit mistakenly, on its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to another person. 4o sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. ,e cannot, therefore, be made personally liable just because he Gappears to be the controlling stockholderH. -ere o5$er1:# 9< ! 1#$>0e 1"oc3:o0&er or 9< !$o":er cor or!"#o$ o% !00 or $e!r0< !00 o% ":e c! #"!0 1"oc3 o% ! cor or!"#o$ #1 $o"+ o% #"1e0%+ 17%%#c#e$" >ro7$& %or &#1re>!r&#$> ":e 1e !r!"e cor or!"e er1o$!0#"<. PAULINO SORIANO+ 4E43T& ". E8!E;&4U& and B&4-;/ K. >&"&-&4K-&4K+ petitioners, vs. HON. COURT OF APPEALS 'For8er S#4": D#;#1#o$( and KE;Q&"3/ " + respondents %K; 4o. @+7=C*71 Bune $$, 1=C=) FACTS: !etitioners were held solidarily liable by the appellate court in their personally capacity to the private respondent for non+payment of tobacco under an agreement between them embodied in a receipt which states as follows5 K;EET34K85 EE, the !resident, >anager, Treasurer and -irector ;epresentative of ?acarra %3.4.) Aacoma, 3nc., do hereby execute this document5 That we received from >r. Kervacio "u, a truck load of Qirginia tobacco consisting of /4E , 4-;E- 832TL %1(<) bales of fifty %D<) kilos each bale %sic) the said Qirginia tobacco consists of different grades or class from E to & %sic) the said tobaccos are to be shipped to the redrying plants through the ?acarra Aacoma under Kuia number $*(.
"onditions of the deal between >r. "u and the &ssociation. pon payment of the said tobacco by the !hilippine Qirginia Tobacco &dministration then >r. "u, will collect the corresponding payments as graded by the redrying plant as further stipulated that the check representing the payment shall only be cashed in the presence of >r. "u, or his authori6ed representative. %8ic) This instrument is executed for the protection, guidance and information of the parties concerned. -one this 1<th day of &ugust 1=(7 at ?acarra, 3locos 4orte. %8gd.) !aulino 8oriano !& @34/ 8/;3&4/ !resident %8gd.) 4enita ". Esperan6a 4E43T& ". E8!E;&4U& 8ec. Treasurer by5 %8gd.) Erlinda Q. &costa ?3E4QE43-/ E. &"/8T& -irector, /fficial ;epresentative %8gd.) &. >acadangdang &.K. >&"&-&4K-&4K >anager ISSUE: E/4 petitioners are liableF HELD: 4o. Ee cannot accept the conclusion that the official designations of petitioners were written on the document merely as meaningless and hollow decorations or as mere descripto personae without any relevance to the liability of the corporation these officers obviously represented. 3ndeed, taking in conjunction with the other obtaining circumstances, the receipt discloses the capacity by which the petitioners entered into the GdealH with private respondent. The subject receipt itself states that the conditions contained therein were between the private respondent and the G&ssociationH. The lower court held that the G&ssociationH referred only to the signatories. Ee disagree. 3t is .uite plain and we are convinced that the G&ssociation is none other than the ?acarra %3.4.) Aacoma, 3nc. which is a farmer#s cooperative marketing association. 4ot only that , we cannot find any cogent reason why the petitioners used the word G&ssociationH when they could have more easily and conveniently placed Gthe undersignedH or words to the same effect in its stead. 3n light of the foregoing, it is clear that the liability of the petitioners under the document subject of the instant case is not personal but corporate, and therefore attached to the ?acarra %3.4.) Aacoma, 3nc. which being a corporation, has a personality distinct and separate from that of the petitioners who are only its officers. I" #1 ":e >e$er!0 r70e ":!" ":e ro"ec"#;e 8!$"0e o% ! cor or!"#o$.1 1e !r!"e !$& &#1"#$c" er1o$!0#"< co70& o$0< 9e #erce& !$& 0#!9#0#"< !""!c:e& &#rec"0< "o #"1 o%%#cer1 !$&Jor 8e89er=1"oc3:o0&er1+ 5:e$ ":e 1!8e #1 71e& %or %r!7&70e$"+ 7$%!#r or #00e>!0 7r o1e.
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PIERCING THE VEIL OF CORPORATE FICTION
The notion of corporate legal entity is not, at all ties respected. This is because the applicability of the corporate entity theory is confined to legitimate transactions and is subject to e.uitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to work injustice. Ehile no hard and fast rule exists as to when the corporate fiction may pierced or disregarded, it is a fundamental principle in "orporation law that a corporation is an entity separate and distinct from its stockholders or member and from other corporations to which it may be connected. ?ut when the notion of legal entity is used to defeat public convenience, Bustify wrong, !rotect fraud, -efend crime, the law will regard the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the one being merely regarded as part or instrumentality of the other. The same is true where a corporation is a mere dummy and serves no business purpose and is intended only as a blind, or an alter+ego or business conduit for the sole benefit of the stockholders. 3n cases where the doctrine of piercing the veil of corporate fiction, liability will attach directly to the officers and stockholders, at least, in so far as that particular act is concerned. PALACIO VS. FEL) TRANSPORTATION CO-PAN) %D 8";& 1<111 &ug. *1, 1=($) &lfredo "arillo, a driver of herein respondent corporation, ran over the child of herein petitioner >ario !alacio, and was found guilty of the criminal case filed against him. 3sabelo "alingasan, the employer, was held subsidiarily liable and not the defendant corporation. !laintiffs now contend that the defendant corporation should be made subsidiarily liable for damages in the criminal case because the sale to it of the jeep in .uestion, after the conviction of "arillo was merely an attempt on the part of "alingasan, its president and general manager, to evade his subsidiary civil liability. ISSUE: E/4 the corporation can be held liable for the subsidiary civil liability of 3sabelo "alingasanF HELD: Les. 3t is evident that "alingasan#s main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction of his driver. This conclusion is borne out by the fact that the incorporators of the Aely Transportation are 3sabelo "alingasan, his wife, his son, -r. "alingasan, and his two daughters. Ee believe that this one case where the &e%e$&!$" cor or!"#o$ 1:o70& $o" 9e :e!r& "o 1!< ":!" #" :!1 ! er1o$!0#"< 1e !r!"e !$& &#1"#$c" %ro8 #"1 8e89er1 5:e$ "o !00o5 #" "o &o 1o 5o70& 9e "o 1!$c"#o$ ":e 71e o% ":e %#c"#o$ o% cor or!"e e$"#"< !1 ! 1:#e0& "o %7r":er !$ e$& o% 179;er1#;e o% ?71"#ce . Aurthermore, the failure of the defendant corporation to prove that it has other property other than the jeep strengthens the conviction that its formation was for the purpose above indicated. -ARVEL BUILDING CORPORATION+ e" !0. VS. DAVID %=7 !hil. *'(1 Aeb. $7, 1=D7) !laintiffs, as stockholders of >arvel ?uilding "orporation sought to enjoin the defendant "ollector of 3nternal ;evenue from selling at a public auction properties which were said to be registered in the name of said corporation. 8aid properties were sei6ed and
distrained by defendant to collect war profits taxes against >aria "astro who the former claims to be the sole owner of the said corporation. >aria "astro owns !$D<,<<< of the !1,<$D,<<< capital of the corporation, of the rest of the incorporators were her half+brothers, half+sister and a brother+in+law. ISSUE: E/4 >aria "astro is the sole owner of the "orporationF HELD: Les. "ircumstantial pieces of evidence presented were5 %1) Endorsement in blank of the certificates of stock issued in the name of the incorporators and the possession thereof by >aria "astro1 %$) The other incorporators did not have incomes in such amount, during the time of the organi6ation of the corporation or immediately thereto, as to enable them to pay in full their supposed subscriptions1 and %*) 3t should have been the supposed subscribers who should have come to court to assert that they actually paid for their subscriptions and are not mere dummies. The circumstantial evidence is not only convincing, it is conclusive. 3n addition to the above, the fact that the stockholders or directors never appeared to have ever met to discuss the business of the corporation and the fact that >aria "astro advanced big sums of money to the corporation without any previous arrangements or account, and the fact that the books of accounts were kept as if they belonged to >aria "astro alone these facts are of patent and potent significance. 3n our opinion, the facts and circumstances duly set forth, all of which have been proved to our satisfaction, prove conclusively and beyond reasonable doubt that >aria "astro is the sole and exclusive owner of all the shares of stock of the corporation and that the other partners are her dummies. )UTIVO O SONS CO. VS. CTA %1 8";& 1(<1 Ban. $C, 1=(1) ,erein petitioner Lutivo purchased its cars and trucks from Keneral >otors /verseas "orporation %K>), the latter paying the sales tax once on original sales, Lutivo no longer paid sales tax on its sales to the public. @ater no, K> withdrew from the !hilippines and appointed Lutivo as importer. Lutivo in turn exclusively sold to 8outhern >otors, 3nc. %8>), a corporation where the incorporators are sons of the founders of Lutivo. nder this arrangement, Lutivo paid the sales tax on original sale, while 8> did not subject to sales tax its sales to the public. The "ollector of 3nternal ;evenue assessed Lutivo for deficiency sales taxes which the "T& affirmed. ISSUE: E/4 Lutivo is liable for the deficiency taxesF HELD: 4o. 3t is elementary rule and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. ,owever, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons, or in case of two corporations merge them into one. &nother rule is that, when the corporation is a mere alter+ego or business conduit of a person, it may disregarded.
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The sales tax liability of Lutivo did not arise until it became the importer and simply continued its practice of selling to 8>. The decision, therefore, of the Tax "ourt that 8> was organi6ed purposely as a tax evasion device runs counter to the fact that there was no tax to evade. Ee are, however, inclined to agree with the court below that 8> was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. 3t is not disputed that the petitioner, which is engaged principally in hardware supplies and e.uipment, is completely controlled by the Lutivo, Loung and Lu family. The founders of the corporation are closely related to each other either by blood or affinity and most of its stockholders are members of the Lu %Lutivo or Loung) family. &ccording to the &/3, the amount of !($,D<< was actually advanced by Lutivo. The additional subscriptions to 8> were paid by Lutivo. The shareholders in 8> are mere nominal stockholders holding the share for and in behalf of Lutivo, so even conceding that the original subscribers were bona fide stockholders, Lutivo was at all tie in control of the stock of 8> and that the latter was a mere subsidiary of the former. 8> is under the management control of Lutivo by virtue of the management contract entered into between the two parties. 3n fact, the controlling majority of the ?/- of Lutivo is also the controlling majority of the ?oard of 8>. &t the same time, the principal officers of both corporations are identical. 3n addition, both corporations have a common comptroller. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations would be directed towards common ends. @ikewise, cash or funds of 8>, including those of its branches which are directly remitted to Lutivo, and subject to withdrawal only by Lutivo, 8>#s being under Lutivo#s control, the former#s operations and existence became dependent upon the latter. 8>, being but a mere instrumentality or adjunct of Lutivo, the "T& correctly disregarded the technical defense of separate corporate entity to arrive at the true tax liability of Lutivo. CO--ISSIONER OF INTERNAL REVENUE+ petitioner, vs. NORTON !$& HARRISON CO-PAN)+ respondent. %K; 4o. @+1'(1C1 11 8";& '171 &ug *1, 1=(7) FACTS: ,erein respondent entered into an agreement with Backbilt where the former was made the sole and exclusive distributor of concrete blocks manufactured by Backbilt and accordingly every order of a customer of 4orton was transmitted to Backbilt which delivered the merchandise directly to the customer. !ayment of the goods, however, is made to 4orton, which in turn pays Backbilt the amount charged the customer less a certain amount, as its compensation or profit. -uring the existence of the agreement, 4orton ac.uired by purchase all the outstanding stocks of Backbilt. -ue to this, the "ommissioner of 3nternal ;evenue, assess respondent 4orton for deficiency taxes making the basis of sales tax
the sales of 4orton to the public, which is the higher price compare to the sale of Backbilt to 4orton. The "T& decided in favor of 4orton. ISSE: E/4 the two corporations may be merged into a single corporationF HELD: Les. 3t has been settled that ":e o5$er1:# o% !00 ":e 1"oc31 o% ! cor or!"#o$ 9< !$o":er cor or!"#o$ &oe1 $o" $ece11!r#0< 9ree& !$ #&e$"#"< o% cor or!"e #$"ere1" 9e"5ee$ ":e "5o co8 !$#e1 !$& 9e co$1#&ere& !1 ! 17%%#c#e$" >ro7$& %or &#1re>!r&#$> &#1"#$c" er1o$!0#"#e1. ,owever, in the case at bar, we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. %a) 4orton owned all the outstanding stocks of Backbilt1 %b) 4orton constituted Backbilt#s directors1 %c) 4orton financed the operations of Backbilt1 %d) 4orton treats Backbilt#s employees as its own1 %e) "ompensation given to board members of Backbilt indicate that Backbilt is merely a department of 4orton1 %f) The offices of 4orton and Backbilt are located in the same compound1 %g) !ayments were effected by 4orton of accounts for Backbilt and vice versa1 %h) !ayments were also made to 4orton of accounts due or payable to Backbilt and vice versa. The circumstances presented by the facts of the case, yields to the conclusion that Backbilt is merely an adjunct, business conduit or alter+ego of 4orton and that the fiction of corporate entities, separate and distinct from each other should be disregarded. LA CA-PANA COFFEE FACTOR)+ INC. VS. KAISAHAN NG -GA -ANGGAGA*A SA LA CA-PANA 'KK-( %=* !hil. 1(<1 >ay $D, 1=D*) Tan Tong, one of herein petitioners, is engaged in the buying and selling of guagua under the trade name @a "ampana Kuagua !acking. @ater on, Tong and his family organi6ed a family corporation known as @a "ampana "offee Aactory "o, 3nc. with its principal office located at the same place as that of @a "ampana Kuagua !acking. Tan Tong#s employees later on formed a union %herein respondent) through which they demanded %from both companies) higher salaries and more privileges. &s the demand was not granted and an attempt at a settlement through mediation had given no result, the -epartment of @abor certified the dispute to the "ourt of 3ndustrial ;elations %"3;). !etitioners filled a motion to dismiss which was denied. ,ence, this present petition for certiorari. ISSUE: E/4 the corporate entity of @a "ampana "offee Aactory, 3nc. may be disregardedF HELD: Les. @a "ampana Kuagua !acking and @a "ampana "offee Aactory, 3nc. are operating under on single management, that is, as one business though with two trade names. True, the coffee factory is a corporation and, by legal fiction, an entity existing separate and apart from the person composing it, that Tan Tong and his family. ?ut it is settled that ":#1 %#c"#o$ o% 0!5+ 5:#c: :!1 9ee$ #$"ro&7ce& !1 ! 8!""er o% co$;e$#e$ce !$& "o 1791er;e ":e e$&1 o% ?71"#ce c!$$o" 9e #$;o3e& !1 "o
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%7r":er !$& e$& 179;er1#;e o% ":!"
7r o1e .
3n the present case, Tan Tong appears to be the owner of the guagua factory. &nd the factory, though an incorporated business, is in reality owned exclusively by Tan Tong and his family. &s found by the "3;, one payroll, except after Buly 1', the day the case was certified to the "3;, when the person who was discharging the office of cashier for both branches of the business began preparing separate payrolls for the two. &nd above all, it should not be overlooked that, as also found by the industrial court, the laborers of the guagua factory and the coffee factory were interchangeable. 3n view of all these, the attempt to make the two factories appear as two separate businesses, when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. E-ILIO CANO ENTERPRISES+ INC. VS. COURT OF INDUSTRIAL RELATIONS 'CIR( %1* 8";& $=<1 Aeb. $(, 1=(D) 3n a complaint for unfair labor practice, the "ourt of 3ndustrial ;elations rendered a decision in favor of ,onorata "ru6, ordering Emilio and ;odolfo "ano, officials of herein petitioner corporation, to reinstate "ru6. &n order of execution was issued directed against the properties of herein petitioner. ,ence, this petition. ISSUE: E/4 execution may be had on the properties of the corporationF HELD: Les. Ee should not lose sight of the fact that Emilio "ano Enterprises, 3nc. is a closed family corporation where the incorporators and directors belong to one single family. ,ere is an instance where the corporation and its members are considered as one. &nd "o :o0& 17c: e$"#"< 0#!90e %or ":e !c"1 o% #"1 8e89er1 #1 $o" "o #>$ore ":e 0e>!0 %#c"#o$ 97" 8ere0< "o >#;e 8e!$#$> "o ":e r#$c# 0e ":!" 17c: %#c"#o$ c!$$o" 9e #$;o3e& #% #"1 7r o1e #1 "o 71e #" !1 ! 1:#e0& "o %7r":er !$ e$& 179;er1#;e o% ?71"#ce. &nd so it has been held that 5:#0e ! cor or!"#o$ #1 ! 0e>!0 e$"#"< e4#1"#$> 1e !r!"e !$& ! !r" %ro8 ":e er1o$ co8 o1#$> #"+ ":!" co$ce " c!$$o" 9e e4"e$&e& "o ! o#$" 9e<o$& #" re!1o$ !$& o0#c<+ !$& 5:e$ #$;o3e& #$ 17 or" o% !$ e$& 179;er1#;e o% ":#1 o0#c< #" 1:o70& 9e &#1re>!r&e& 9< ":e co7r"1. Emilio and ;odlfo "ano were indicted in the case, not in their personal capacity, but as president and manager of the corporation. ,aving been sued officially, their connection with the case must be deemed to be impressed with the representation of the corporation. 3n fact, the court#s order is for them to reinstate ,onorata "ru6 to her former position in the corporation and incidentally pay her the wages she had been deprived of during her separation. Qerily, the order against them is in effect against the corporation. 4o benefit can be attained if this case were to be remanded to the court a .uo merely in response to a technical substitution of parties. TELEPHONE ENGINEERING SERVICE CO. VS. *CC %1<7 8";& *D71 >ay 1*, 1=C1) The late !acifico Katus was an employee of tilities >anagement "orporation % >&"/;), a sister company of herein !etitioner TE8"/. ,e was later on detailed with !etitioner "ompany and returned back to >&"/;. ?ut he contracted illness and later on died of Gliver cirrhosis with malignant degenerationH. ,is wife, respondent @eonila Katus filed a 4otice and "laim
for "ompensation with the Eorkmen#s "ompensation "ommission %E"") alleging !acifico to be an employee of TE8"/. &n employer#s report was submitted to E"" where >&"/; was indicated as the employer of the deceased and stated that it would not contravert the claim and admitted that !acifico contracted illness Gin regular occupationH. The sheriff levied on and attached the property of TE8"/ and scheduled the sale of the same at public auction. Thus, the present petition for certiorari with preliminary injunction. ISSUE: E/4 the award may be rendered against TE8"/F HELD: Les. Ee note that it is only in this !etition that petitioner denied, for the first time, the employer+employee relationship. 3n fact, in the letters it submitted to the &cting ;eferee and to the "ommission, petitioner represented and defended itself as the employer of the deceased. !etitioner even admitted that TE8"/ and >&"/; are sister companies operating under one single management and housed in the same building. A0":o7>: re1 ec" %or ":e cor or!"e er1o$!0#"< !1 17c:+ #1 ":e >e$er!0 r70e+ ":ere !re e4ce "#o$1. I$ ! ro r#!"e c!1e1+ ":e ;e#0 o% cor or!"e %#c"#o$ 8!< 9e #erce& !1 5:e$ ":e 1!8e #1 8!&e !1 ! 1:#e0& "o co$%71e ":e 0e>#"#8!"e #117e1. Ehile indeed, jurisdiction cannot be conferred by acts or omission of the parties. TE8"/#s denial at this stage that it is the employer of the deceased is obviously an afterthought, a devise to defeat the law and evade its obligations. This denial also constitutes a change of theory on appeal which is not allowed in this jurisdiction. CLARAPOLS VS. CO--ISSIONER OF INTERNAL REVENUE %Buly *1, 1='D1 (D 8";& (1*) & decision rendered against herein petitioner was rendered on a complaint filed by herein private respondents &llied Eorkers# &ssociation, -emetrio Karlitos and 1< respondent workers who petitioner dismissed from "larapols 8teel and 4ail !lant. ISSUE: E/4 the veil of corporate fiction should be piercedF HELD5 Les. 3t very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skilfully timed to avoid financial liability that already attached to its predecessor, "larapols 8teel and 4ail !lant. %1) ?oth predecessor and successor were owned and controlled by the petitioner Eduardo "larapols1 and %$) there was no break in the succession and continuity in the same business. This avoiding+the+liability scheme is very patent, considering that %*) =<J of the subscribed shares of stock of the second corporation was owned by "larapols himself, and %7) all assets of the dissolved "larapols 8teel and 4ail !lant were turned over to the emerging "larapols 8teel "orporation. 3t is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should be pierced as it was deliberately and maliciously designed to evade its financial obligations to its employees.
*1
NATIONAL FEDERATION OF LABOR UNION 'NAFLU( VS. OPLE %17* 8";& 1$71 Buly $$, 1=C() 4&A@ re.uested for conciliation before the ?ureau of @abor ;elations for certain money claims and refusal of the company to conclude collective agreement and run+away shop undertaken by management. 3n the course of the negotiation, management unilaterally declared a temporary shutdown. ?ut it was discovered that the actual partial shutdown begun a month before and that the machines of @awman were transferred to a different location and the name of the company was changed to @ibra Karments, upon discovery of this, the name was further changed to -/@!,34 garments. Aor failure of the company to resume operations in Banuary 1=C* %as promised) a complaint for unfair labor practice was filed. ISSUE: E/4 the corporate fiction of @3?;& %now -/@!,34) garments should be piercedF HELD: Les. 3t is very obvious from the above findings that the second corporation seeks the protective shield of a corporate fiction to achieve illegal purpose. &s enunciated in "larapols vs. "3;, its view in the present case should, therefore be pierced as it was deliberately and maliciously designed to evade its financial obligations to it employees. 3t is an established principle that when the veil of corporate fictions is made as a shield to perpetrate a fraud or to confuse legitimate issues %here, the relation of employer+ employee), the same should be pierced. &fter finding that @awman 3ndustrial "orporation had transferred business operations to @ibra Karments, which later changed to -olphin Karments, the public respondent cannot deny reinstatement to the petitioners simply because @awman has ceased its operation. &s @ibra Karments is but an alter+ego of the old employer, @awman 3ndustrial, the former must bear the conse.uences of the latter#s unfair act by reinstating petitioners to their former positions without loss of seniority rights. AC RANSO- LABOR UNION=CCLU VS. NLRC %1D< 8";& 7=C >ay $=, 1=C') & decision was rendered by the "3; and affirmed by this "ourt against &" ;ansom for unfair labor practice. Erit of execution were issued successively against ;ansom to no avail. The nion filed an ex+parte motion for a Erit of Execution and Karnishment against the officersMagents of &" ;ansom personally and on their estates, as the case may be, which the @abor &rbiter granted. /n appeal, the 4@;" reversed the @abor &rbiter relieving the officers of personal liability. ISSUE: E/4 the officers may be liableF HELD: Les. The 4@;", on appeal, could not have modified the "3; decision as affirmed by this "ourt, by relieving &" ;ansom#s officers and agent of liability which were held to be jointly and severally liable to the $$ employees for unfair labor practice. This finding does not ignore the legal fiction that a corporation has a personality separate and distinct from its stockholders and members for, as this "ourt had held Gwhere the incorporators belong to a single family, the corporation and its members can be considered as one in order to avoid it being used as an instrument to commit injustice,H or to further an end subversive of justice. 3n the
case of "larapols vs. "3; involving almost similar facts as in this case, it was also held that the shield of corporate fiction should be pierced when it is deliberately and maliciously designed to evade financial obligations to employees. &ggravating &" ;ansom#s clear evasion of payment of its financial obligations is the organi6ation of a Grun+awayH corporation, ;/8&;3/ 3ndustrial "orporation, in 1=(= at the time the unfair labor practice case was proceeding before the "3; by the same person who were the officers and stockholders of &" ;ansom, engaged in the same line of business, producing the same line of product, occupying the same compound, using the same machineries, buildings, factories, bodega and sales and accounts departments used by &" ;ansom, and which is still in existence. ?oth corporations were closed corporations owned and managed by members of the same family. 3ts organi6ation proved to be a convenient instrument to avoid payment of backwages and the reinstatement of $$ workers. This is another instance where the fiction of separate and distinct corporate entities should be disregarded. CONCEPT BUILDERS+ INC. VS. NLRC %$D' 8";& 17=1 >ay $=, 1==() !rivate respondents were employees of petitioner "oncept ?uilders, 3nc., who were served termination letters stating that the project for which they were hired was already completed and that their contracts have already expired. Ainding that the project was not actually completed yet, and that petitioner employed a subcontractor whose employees performed the duties of private respondents, the latter filed a complaint for illegal dismissal with the @abor &rbiter who held that the dismissal was illegal. & writ of execution was issued but was partially satisfied only. The sheriff sought levy upon the properties in the head office of "oncept ?uilders, 3nc. but was not allowed to do so on the ground that it was occupied by ,ydro !ipes !hilippines, 3nc. and not concept builders. nable to remove the personal properties he found thereat, the 8heriff asked for a Gbreak+openH order which was denied by the @abor &rbiter after a third party claim was filed by ,ydro, which was reversed by the 4@;" on appeal. ISSUE: E/4 the break+open order should be issuedF HELD: Les. The conditions under which the juridical entity may be disregarded vary according to the particular facts and circumstances of each case. 4o hard and fast rule can be accurately laid down, but certainly there are some ro9!"#;e %!c"or1 o% #&e$"#"< that will justify the application of the doctrine of piercing the veil of corporate veil, to wit5 1. 8tock ownership by one or common ownership of both corporations1 $. 3dentity of directors and officers1
*. 7.
The manner of keeping corporate books and records1 >ethods of conducting the business.
The 8E" en banc explained the Ginstrumentality ruleH which the courts have applied in disregarding separate juridical personality of corporations as follows5 GEhere on corporation is so organi6ed and controlled and
*$
its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the GinstrumentalityH may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but 17c: &o8#$!"#o$ o% %#$!$ce1+ o0#c#e1+ !$& r!c"#ce1 that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is a business conduit of its principal. 3t must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. >oreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is madeH The "e1" #$ &e"er8#$#$> ":e ! 0#c!9#0#"< o% #erc#$> ":e ;e#0 o% cor or!"e %#c"#o$1 is as follows5 1. "ontrol, not mere majority or complete stock control, but complete domination, not only in finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own1 $. 8uch control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff#s legal rights1 and *. The aforesaid control and breach of duty must proximately cause the injury or unjust los complained of. The absence of one of the elements prevents piercing the corporate veil. 3n applying the GinstrumentalityH or Galter+ egoH doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant#s relationship to that operation. Thus, ":e 67e1"#o$ o% 5:e":er ! cor or!"#o$ #1 8ere !0"er= e>o, a mere sheet of paper corporation, a sham or a subterfuge is 7re0< o$e o% %!c". 3n this case, while petitioner claimed that it ceased on operations on &pril $=, 1=C(, it filed an information sheet with the 8E" on >ay 1D, 1=C' stating that its office address is at *DD >aysan ;oad, Qalen6uela >etro >anila. /n the other hand, third+party claimant ,ydro, on the same day, filed an information sheet with the same address, both information sheets filed by the same Qirgilio /. "asino. ?oth companies have the same president, the same ?/-, the same corporate officers and substantially the same subscribers. "learly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to their former position. ,ydro is obviously a business conduit of petitioner corporation and its emergence was skilfully orchestrated to avoid the financial liability attached to petitioner corporation. -C CONNEL VS. CA %1 8";& '$$1 >arch 1, 1=(1) !etitioners, original incorporators of !ark ;ite "o., 3nc. was ordered to pay the unsatisfied balance of a judgment rendered in favor of lot owners whose property they used in the operations of their parking business without the owners# consent.
ISSUE: E/4 the incorporators may be held liable for obligations of the corporationF HELD: Les. The "ourt has already answered the .uestion in the affirmative wherever the circumstances have shown that the corporate entity is being used as an alter+ego or business conduit for the sole benefit of the stockholders, or else to defeat public convenience, justify wrong, protect fraud, or defend crime. The evidence shows that "irilio !aredes and rsula Tolentino %present stockholders) and >. >c"onnel, E! "ochrane and ;icardo ;odrigue6 %previous stockholders) completely dominated and controlled the corporation and that the functions of the corporation were solely for their benefit, as shown that the other shareholders were merely .ualifying shares. This is strengthened by the fact that the office of "irilio !aredes and that of !ark ;ite "o., 3nc. were located in the same building, in the same floor, and in the same room. This is further shown by the fact that the funds of the corporation were kept by "irilio !aredes in his own name. The corporation itself had no visible assets, as correctly found by the trial court, except perhaps the toll house, the wire fence around the lot and the signs thereon 3t was for this reason that the judgment against it could not be fully satisfied. *:#0e ":e 8ere o5$er1:# o% !00 or $e!r0< !00 o% ":e c! #"!0 1"oc3 o% ! cor or!"#o$ &oe1 $o" $ece11!r#0< 8e!$ ":!" #" #1 ! 8ere 971#$e11 co$&7#" o% ":e 1"oc3:o0&er+ ":!" co$c071#o$ #1 !8 0< 7$?71"#%#e& 5:ere #" #1 1:o5$+ !1 #$ ":#1 c!1e 9e%ore 71+ ":!" ":e o er!"#o$1 o% ":e cor or!"#o$ 5ere 1o 8er>e& 5#": ":e 1"oc3:o0&er1 !1 "o 9e r!c"#c!00< #$&#1"#$>7#1:!90e %ro8 ":e8. To hold the latter liable for the corporation#s obligations is not to ignore the corporation#s separate entity, but merely to apply the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created the separate personality. TAN BOON BEE O CO.+ INC.+ petitioner, vs. THE HONORABLE HILARION U. JARENCIO+ !;E83-34K B -KE /A ?;&4", 2Q333 of the "ourt of Airst 3nstance of >anila, K;&!,3" ! ?@38,34K, 34"., and !,3@3!!34E &>E;3"&4 "&4 -; K "/>!&4L, respondents %K; 4o. @+71**'1 1(* 8";& $<D1 Bune *<, 1=CC) FACTS: Aor failure of private respondent Kraphic !ublishing 3nc. to pay paper products purchased from petitioner %doing business under the name and style &nchor 8upply, 3nc.), petitioner filed a complaint in the "A3 of >anila. & writ of Execution was issued levying a printing machine which private respondent !hilippine &merican -rug "ompany claimed as its own. !&-"/ filed a third party claim and asked the court to nullify the auction sale already conducted, which herein respondent judge granted. ISSUE: E/4 the respondent judge should be upheldF HELD: 4o. 3t is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from that of the persons composing it as well as from any other legal entity to which it may be related. &s a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the members and
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stockholders who compose it is recogni6ed and respected in all cases which are within reason and the law. ,owever, ":#1 1e !r!"e !$& &#1"#$c" er1o$!0#"< #1 8ere0< ! %#c"#o$ cre!"e& 9< 0!5 %or co$;e$#e$ce !$& "o ro8o"e ?71"#ce. Accor&#$>0<+ ":#1 1e !r!"e er1o$!0#"< o% ":e cor or!"#o$ 8!< 9e &#1re>!r&e&+ or ":e ;e#0 o% cor or!"e %#c"#o$ #erce&+ #$ c!1e1 5:ere #" #1 71e& !1 ! c0o!3 or co;er %or %r!7& or #00e>!0#"<+ or "o 5or3 !$ #$?71"#ce+ or 5:ere $ece11!r< "o !c:#e;e e67#"< or 5:e$ $ece11!r< %or ":e ro"ec"#o$ o% cre&#"or1. Cor or!"#o$1 !re co8 o1e& o% $!"7r!0 er1o$1 !$& ":e 0e>!0 %#c"#o$ o% ! 1e !r!"e cor or!"e er1o$!0#"< #1 $o" ! 1:#e0& %or ":e co88#11#o$ o% #$?71"#ce !$& #$e67#"<. L#3e5#1e+ ":#1 #1 "r7e 5:e$ ":e cor or!"#o$ #1 8ere0< !$ !&?7$c"+ 971#$e11 co$&7#" or !0"er=e>o o% !$o":er cor or!"#o$. I$ 17c: c!1e+ ":e %#c"#o$ o% 1e !r!"e !$& &#1"#$c" cor or!"e e$"#"#e1 1:o70& 9e &#1re>!r&e&. 3n the instant case, petitioner#s evidence established that !&-"/ never engaged in the printing business1 that the ?/- and the officers of !&-"/ and Kraphic are the same1 and that !&-"/ holds D<J share of stock of Kraphic. The printing machine in .uestion was in the premises of Kraphic, long before !&-"/ even ac.uired its alleged title from "apitol !ublishing. "onsidering the above, respondent judge should have pierced !&-"/#s veil of corporate identity. CEASE VS. CA %=* 8";& 7C*1 /ct. 1C, 1='=) Aorrest @. "ease is the common predecessor+in+interest of the parties. ,e and other &merican citi6ens organi6ed the Tiaong >illing and !lantation "ompany and in the course of its corporate existence all other incorporators were bought out by "ease and his children. The corporation#s charter expired but there were no records as to its li.uidation. pon "ease#s death, Ernesto, Teresita, "ecilia %* of the D children) and ?onifacia Terante re+incorporated under A@ "ease !lantation "ompany, to the objection of ?enjamin and Alorence who wanted actual division of Aorrest "ease#s shares. The latter two filed a civil case asking to declare the corporation identical to A@ "ease and that its properties be divided among Al "ease#s children as his intestate heirs which was granted by the trial court. ISSUE: E/4 the assets of the corporation are also the properties of Aorrest @. "easeF HELD: Les. 3n sustaining respondent#s theory of Gmerger of Aorrest "ease and the Tiaong >illing as one personalityH, or that Gthe company is only the business conduit and alter+ ego of the deceased A@ "ease and the registered properties of Tiaong >illing are actually properties of A@ "ease and should be divided e.ually among his childrenH, the trial court did aptly apply the familiar exception to the general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding the corporation and the individual members one and the same. 3n shredding the fictitious corporate veil, the trial judge narrated the undisputed factual premise5 GEhile the records show that originally, the incorporators were aliens, friends or third+parties in relation of one to another, in the course of its existence, it developed into a close family corporation. The ?/- and stockholders belong to one family the head of which A@ "ease always retained
the majority and hence, the control and management of its affairs. 3n fact, during the reconstruction of its records before the 8E", only = nominal shares out of *<< appear in the name of his * eldest children then and another person close to them %Ternate). 3t is likewise noteworthy to observe that as his children increase or perhaps become of age, he continued distributing his shares among them adding Alorence, Teresa and >arion until at the time of his death, only 1=< were left to his name. -efinitely, only the members of his family benefited from the corporation. The accounts of the corporation and therefore its operation, as well as that of the family appears to be indistinguishable and apparently joined together. &s admitted by the defendants, the corporation GneverH had any account with any banking institution or if any account was carried in a bank on its behalf, it was in the name of A@ "ease. 3n brief, the operation of the "orporation is merged with those of the majority stockholders, the latter using the former as his instrumentality and for the exclusive benefit of all his family. Arom the foregoing indication, therefore, there is truth in plaintiffs# allegation that the corporation is only a business conduit of his father and an extension of his personality, they are once and the same thing. Thus, the assets of the corporation are also the estate of A@ "ease, the father of the parties herein who are al legitimate children of full bloodH Eere we to sustain petitioners, the legal fiction of separate corporate personality shall have been used to delay and ultimately deprive and defraud the respondents of their successional right to the estate of their deceased father.
-.
*HEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
*HEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
1.
&bsent any of the following circumstances, the courts will not be justified in disregarding the corporate entity1 a. The corporation is used or being used to defeat public convenience1 b. Bustify wrong1
c. d. e. f. g. h. $. *.
!rotect fraud1 -efend crime1 "onfuse legitimate issues1 "ircumvent the law1 !erpetuate deception1 or
&n alter+ego, adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another corporation. The wrong doing must be c0e!r0< !$& co$;#$c#$>0< e1"!90#1:e&. 3t cannot be justified by speculation and can never be presumed. The petitioner must seek to impose a claim against the stockholders or officers directly liable, otherwise piercing the veil of corporate fiction would not be available nor justified.
CRUZ VS. DALISA) %supra) 3t is well+settled doctrine, both in law and in e.uity that !1 ! 0e>!0 e$"#"<+ !
*7
cor or!"#o$ :!1 ! er1o$!0#"< &#1"#$c" !$& 1e !r!"e %ro8 #"1 #$&#;#&7!0 1"oc3:o0&er1 or 8e89er1. T:e 8ere %!c" ":!" o$e #1 re1#&e$" o% ! cor or!"#o$ &oe1 $o" re$&er ":e ro er"< :e o5$1 or o11e11e1 ":e ro er"< o% ":e cor or!"#o$+ 1#$ce ":e re1#&e$"+ !1 #$&#;#&7!0+ !$& ":e cor or!"#o$ !re 1e !r!"e e$"#"#e1 RE-O+ JR. VS. INTER-EDIATE APPELLATE COURT %1'D 8";& 7<D1 &pril 1C, 1=C=) !etitioner Aeliciano "oprada, as president of &kron, purchased 1* trucks from private respondent %E? >archa Transport "o., 3nc.) for and in consideration of !D$D,<<< as evidenced by a deed of absolute sale. 3n a side agreement, the parties agreed on a down payment of !D<,<<< and the balance to be paid within (< days. They further agreed that until the balance is paid, the down payment shall accrue as rentals for the 1* trucks1 and in case of failure to pay the balance shall constitute a chattel mortgage lien1 and the parties may allow *< day extension1 and private respondent may ask for the revocation of the contract and re+conveyance of the said trucks. The obligation is further secured by a promissory note executed by "oprada, where it is stated that the balance shall be paid from the proceeds of a loan from -?! which was never applied for. & complaint was later on filed by private respondent for the recovery of the !D$D, <<< or the return of the 1* trucks against &kron and its officers and directors including herein petitioner which was granted by the "A3 of ;i6al. !etitioner denied any participation the transaction and alleging that &kron has distinct corporate personality. ,e was, however, declared in default for failure to attend pre+trial. ISSUE: E/4 !etitioner ;emo, Br. is jointly and severally liableF HELD: 4o. The facts of the case show that there is no cogent basis to pierce the corporate veil of &kron and hold petitioner personally liable for its obligation to private respondent. Ehile it is true that he is a member of the board at the time the resolution to purchase the trucks were adopted, it does not appear that said resolution was intended to defraud anyone. 3t was "oprada who negotiated with respondent and the one who signed the promissory note. The word GEeH in the said promissory note must refer to the corporation and "oprada and not of its stockholders and directors. !etitioner did not sign such note so he cannot be personally bound thereby. Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was forthcoming loan from the -?! when in fact there as none, it is "oprada who should account for the same and not the petitioner. DEL ROSARIO VS. NLRC %1C$ 8";& '''1 Buly $7, 1==<) + !ursuant to a complaint for money claims which was ultimately decided by the 4@;" against !,3@8& "onstruction and Trading "o. %recruiter) and &rieb Enterprises %employer), a writ of execution was issued by the !/E& which was returned unsatisfied as !,3@8& was no longer operating and was financially incapable of satisfying the judgment. &t the motion of private respondent, an alias writ was issued against the properties of >r. Arancisco del ;osario and if insufficient, against the cash andMor surety bond of the ?onding "ompany concerned.
!etitioner appealed to the 4@;" which was denied together with his >;. ISSUE: E/4 the writ of execution must be upheldF HELD: 4o. nder the law, a corporation is bestowed juridical personality, separate and distinct from its stockholders. ?ut when the juridical personality of the corporation is used to defeat public convenience, Bustify wrong, protect fraud or defend crime, ":e cor or!"#o$ 1:!00 9e co$1#&ere& !1 ! 8ere !11oc#!"#o$ o% er1o$1+ !$& #"1 re1 o$1#90e o%%#cer1 !$&Jor 1"oc3:o0&er1 1:!00 9e :e0& #$&#;#&7!00< 0#!90e. Aor the same reasons, a corporation shall be liable for the obligation of a stockholder or a corporation and its successor+in+interest shall be considered as one and the liability of the former shall attach to the latter. ?ut for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. 3t cannot be presumed. 3n this regard, we find the 4@;" decision wanting. 1. !,3@8& allowed its license to expire so as to evade payment of private respondent#s claim $o" 17 or"e& 9< %!c"1. The license expired in 1=CD, it was delisted in 1=C(, there was no judgment yet in favour of !;. A$ #$"e$" "o e;!&e !<8e$" o% :#1 c0!#81 c!$$o" ":ere%ore 9e #8 0#e& %ro8 ":e e4 #r!"#o$ o% PHILSA.1 0#ce$1e !$& #"1 &e0#1"#$>. $. /rgani6ation of !,3@8& 3nternational !lacemen and 8ervices "orp. and its registration with !/E& implies fraud it was organi6ed and registered in 1=C1, several years before private respondent filed his complaint with the !/E& in 1=CD. T:e cre!"#o$ o% ":e 1eco$& cor or!"#o$ co70& $o" ":ere%ore :!;e 9ee$ #$ !$"#c# !"#o$ o% PR.1 8o$e< c0!#81 !$& ":e co$1e67e$" !&;er1e ?7&>8e$" !>!#$1" PHILSA. *. 8ubstantial identity of the incorporators of the two corporations does not necessarily imply fraud. *D#1"#$>7#1:e& %ro8 o":er c!1e1* LA CA-PANA the two companies were substantially owned by the same person. They had one office, one management, and a single payroll for both businesses. The laborers were also interchangeable. CLARAPOLS ?oth corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. >oreover, all the assets of the old were transferred to the new corporation. AC RANSO- The distinguishing mark of fraud were clearly apparent in &" ;ansom, when such corporation ceased operation after the decision of the "3; and new one replacing it which was owned by the same family, engaging in the same business and operating in the same compound. 3n the present case, $o" o$0< :!1 ":ere 9ee$ %!#07re "o e1"!90#1: %r!7&+ 97" #" :!1 !01o $o" 9ee$ 1:o5$ ":!" e"#"#o$er #1 ":e cor or!"#o$ o%%#cer re1 o$1#90e %or PR.1 re&#c!8e$". 3t must be emphasi6ed that the claims were actually directed against the employer, !,3@8& became liable only because of its undertaking to be jointly and severally bound with the foreign employer, as re.uired by !/E& rules.
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INDOPHIL TE,TILE -ILL *ORKERS UNION VS. CALICA %$<D 8";& (='1 Aeb. *, 1==$) + /n &pril 1=C', petitioner and 3ndophil Textile >ills, 3nc. executed a "?& effective from &pril 1, 1=C' to >arch *1, 1==<. /n 4ovember *, 1=C', 3ndophil &";L@3" >&4 A&"T ;34K "/;! was formed and registered with the 8E" and in 1=CC became operation and hired workers according to its own criteria and standards. 3n 1=C=, the workers of &";L@3" unioni6ed and a "?& was executed. 3n 1==<, petitioner union claimed that the plant facilities build and set up by &";L@3" should be considered an extension or expansion of the facilities of TE2T3@E >3@@8, to make &";L@3" part of the TE2T3@E >3@@8 bargaining unit. !ublic respondent voluntary arbitrator "alica declared that the "?& of petitioner -/E8 4/T extend to employees of &";L@3". ISSUE: E/4 the veil of corporate entity should be piercedF HELD5 4o. nder the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. 3n such cases, ":e cor or!"#o$ 5#00 9e co$1#&ere& !1 ! 8ere !11oc#!"#o$ o% er1o$1. T:e 8e89er1 or 1"oc3:o0&er1 o% ! cor or!"#o$ 5#00 9e co$1#&ere& !1 ":e cor or!"#o$+ ":!" #1+ 0#!9#0#"< 5#00 !""!c: &#rec"0< "o ":e o%%#cer1 !$& 1"oc3:o0&er1. 3n the case at bar, petitioner alleges that the creation of the &";L@3" is a devise to evade the application of the "?& between petitioner and TE2T3@E >3@@. Ehile we do not discount the possibility of the similarities of the businesses of the two corporations, neither are we inclined to apply the doctrine invoked by petitioner. 1. The fact that the business of 3ndophil Textile >ills and 3ndphil &crylic >anufacturing are related1 $. That some of the employees of !; are the same persons manning and providing for auxilliary services to the units of &";3@L", and that1 *. The physical plants, offices and facilities are situated in the same compound. I" #1 o7r co$1#&ere& o #$#o$ ":!" ":e1e %!c"1 !re $o" 17%%#c#e$" "o ?71"#%< #erc#$> ":e cor or!"e ;e#0 o% ACRIL)C. U-ALI VS. CA Gthe legal corporate entity is disregarded only if it#s sought to hold the officers and stockholders directly liable for a corporate debt or obligationH. 3n the instant case, e"#"#o$er &oe1 $o" 1ee3 "o #8 o1e ! c0!#8 !>!#$1" ":e 8e89er1 o% ACRIL)C. PNB VS. RITRATTO GROUP+ INC. ET. AL. %*($ 8";& $1(1 Buly *1, $<<1) + !4? 3nternational Ainance @td. %3A@), a wholly+owned subsidiary of !4?, organi6ed and doing business in ,R, extended a letter of credit in favor of respondent ;3T;&TT/ in the amount of 8S*<<R , later increased to 1.17>, to 1.$=>, to 1.7$D> and decreased to 1,7$1,*1(.1C, secured by a real estate mortgage constituted in 7 parcels of land in >akati "ity.
&s of &pril 1==C, the outstanding obligation of respondents stood at 8S1,7=',$'7.'<. !ursuant to the terms of the mortgages, 3A@, through its attorney+in+fact !4?, notified respondents of the foreclosure of all the real estate mortgages and that the properties would be sold at a public auction. ;espondents filed a complaint for injunction for which a T;/ was issued and later on a writ of preliminary injunction, which petitioner assailed with the "& through petition for certiorari. The "& dismissed the petition. ISSUE5 E/4 disregardedF the corporate entity of 3A@ may be
HELD: 4o. ;espondents, therefore, do not have any cause of action against it. The trial court erred in disregarding the corporate entity by saying that 3A@ is a wholly owned subsidiary of !4? and that it is a mere alter+ego or business conduit of the latter. T:e 8ere %!c" ":!" ! cor or!"#o$ o5$1 !00 o% ":e 1"oc31 o% !$o":er cor or!"#o$+ "!3e$ !0o$e #1 $o" 17%%#c#e$" "o ?71"#%< ":e#r 9e#$> "re!"e& !1 o$e e$"#"<. I% 71e& "o er%or8 0e>#"#8!"e %7$c"#o$1+ ! 1791#&#!r<.1 1e !r!"e e4#1"e$ce 8!< 9e re1 ec"e&+ !$& ":e 0#!9#0#"< o% ":e !re$" cor or!"#o$ !1 5e00 !1 ":e 1791#&#!r< 5#00 9e co$%#$e& "o ":o1e !r#1#$> #$ ":e#r re1 ec"#;e 971#$e11e1. KOPPEL PHIL VS. )ATCO this "ourt disregarded the separate existence of the parent and subsidiary on the ground that the latter was formed merely for the purpose of evading the payment of higher taxes. 3n the case at bar, re1 o$&e$"1 %!#0e& "o 1:o5 !$< co>e$" re!1o$ 5:< ":e 1e !r!"e e$"#"#e1 o% PNB !$& IFL 1:o70& 9e &#1re>!r&e&. Ehile there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation some factors have been identified that will justify the application of the treatment of the doctrine of piercing the corporate veil5 1. &s a general rule, the stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary 7$0e11 ":e 1e !r!"e cor or!"e e4#1"e$ce o% ":e 1791#&#!r< #1 ! 8ere 1:!8+ or 7$0e11 ":e co$"ro0 o% ":e 1791#&#!r< #1 17c: ":!" #" #1 9< !$ #$1"r78e$"!0#"< or !&?7$c" o% ":e &o8#$!$" cor or!"#o$ %Karrett vs. 8outhern ;ailway "o.1 Tennessee 8")1 $. The doctrine of piercing the corporate veil is an e.uitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purpose. T:e &oc"r#$e ! 0#e1 5:e$ ":e cor or!"e %#c"#o$ is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is used as a shield to confuse legitimate issues or 5:ere ":e cor or!"#o$ #1 1o or>!$#Ke& !$& co$"ro00e& !$& #"1 !%%!#r1 !re 1o co$&7c"e& !1 "o 8!3e #" 8ere0< !$ #$1"r78e$"!0#"<+ !>e$c<+ co$&7#" or !&?7$c" o% !$o":er cor or!"#o$ 1
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*. The test in determining the doctrine of piercing the veil of corporation fiction5 a. Co$"ro0, not mere majority of complete control, 97" co8 0e"e &o8#$!"#o$, not only of %#$!$ce1+ but of o0#c< and 971#$e11 r!c"#ce1 in respect to the transaction attacked so that ":e cor or!"e e$"#"< !1 "o ":#1 "r!$1!c"#o$ :!& !" ":e "#8e $o 1e !r!"e 8#$&+ 5#00 or e4#1"e$ce o% #"1 o5$H b. 8uch control 871" :!;e 9ee$ 71e& by the defendant "o co88#" %r!7&+ or 5ro$> "o er e"7!"e ":e ;#o0!"#o$ o% ! 1"!"7"or< or o":er o1#"#;e 0e>!0 &7"<+ or &#1:o$e1" !$& 7$?71" !c" #$ co$"r!;e$"#o$ "o 0!#$"#%%.1 0e>!0 r#>:"11 and c. The aforesaid control and breach of duty 871" ro4#8!"e0< c!71e ":e #$?7r< or 7$?71" 0o11 co8 0!#$e& o%. The absence of any one of these elements prevents Gpiercing the corporate veilH. 3n applying the GinstrumentalityH or Galter+egoH doctrine, the courts are co$cer$e& 5#": re!0#"< !$& $o" %or8+ with :o5 ":e cor or!"#o$ o er!"e& !$& ":e #$&#;#&7!0 &e%e$&!$".1 re0!"#o$1:# "o ":e o er!"#o$. %"oncept ?uilders, 3nc. vs. 4@;") &side from the fact that 3A@ is a wholly owned subsidiary, there is no showing of the indicative factors that the it is a mere instrumentality of !4?. 4either is there a demonstration that !$< o% ":e e;#01 1o7>:" "o 9e re;e$"e& 9< ":e &oc"r#$e o% #erc#$> ":e cor or!"e ;e#0 9!1e& o$ ":e !0"er=e>o or #$1"r78e$"!0#"< &oc"r#$e %#$&1 ! 0#c!"#o$ #$ ":e c!1e !" 9!r. The injunction suit was directed against !4?, as agent of 3A@ and not as parent. & suit against an agent, cannot, without compelling reasons be considered a suit against the principal, for he is not the real party in interest provided under the ;ules of "ourt. )U VS. NLRC+ FERNANDO DURAN+ EDUARDO PALI*AN+ RO2UE ESTOCE AND RODRIGO SANTOS %$7D 8";& 1*7) + !rivate respondents were employees of Tanduay -istillery, 3nc. %T-3). /n >arch $=, 1=CC, $$ employees of T-3, including !;s, received a memorandum from T-3, terminating their services for reasons of retrenchment, because Airst !acific >etro "orporation is buying T-3#s assets, which purchase did not push through. /n Bune 1, 1=CC, after employees had ceased as such, Twin &ce ,oldings, 3nc. took over the business and assumed the name Tanduay -istillers %Tanduay). @abor &rbiter, on a case originally filed in &pril $(, decided in favor of !;s holding the retrenchment illegal, which was affirmed by the 4@;". !etitioners filed an opposition against the motion for execution %which was directed towards them and T-3) contending that Tanduay is a separate entity distinct from T-3, and respondents Bames Lu and Eilson Loung, which was dismissed by the 4@;". ISSUE1: E/4 the order of execution is voidF
HELD5 Les. The decision dated >ay $7, 1=C=, was already final and executory and cannot be amended or corrected except for clerical errors or mistakes. &n examination of the said decision does not in any manner obligate Tanduay or even petitioners Lu and Loung to reinstate !;s. /nly T-3 was held liable up to the time of change of ownership. The order of execution in effect amended the decision. 3t is beyond the power and competence of @abor &rbiter "ueto to amend a final decision. The writ of execution must not go beyond the scope of judgment. ISSUE2: E/4 4@;" committed grave abuse of discretion in holding petitioner Lu and Loung liableF HELD: 3t cannot be said that T-3 and Tanduay are one and the same, as seems to be the impression of respondents when they impleaded petitioners as party+respondents in their complaint.
8uch a stance is not supported by the facts . T:e $!8e o% ":e co8 !$< %or 5:o8 ":e e"#"#o$er1 !re 5or3#$> #1 T5#$ Ace Ho0&#$>1 Cor or!"#o$. &s stated by the 8olKen, Twin &ce is part of the &llied ?anking Kroup although it conducts the rum business under the name of Tanduay -istillers. The use of a similar sounding or almost identical name is an obvious device to capitali6e on the goodwill which Tanduay ;hum has built over the years. T5#$ Ace or T!$&7!< D#1"#00er1 !$& TDI !re &#1"#$c" !$& 1e !r!"e cor or!"#o$1. T:ere #1 $o":#$> "o 17>>e1" ":!" ":e o5$er1 o% TDI+ :!;e !$< co88o$ re0!"#o$1:# !1 "o #&e$"#%< #" 5#": A00#e& B!$3#$> Gro7 5:#c: r7$1 T!$&7!< D#1"#00er<. The genuine nature of the sale to Twin &ce is evidenced by the fact that Twin &ce was only a subse.uent interested buyer. PR1 :!;e $o" re1e$"e& !$< roo% !1 "o co887$!0#"< o% o5$er1:# !$& 8!$!>e8e$" "o 17 or" ":e#r co$"e$"#o$ ":!" ":e "5o co8 !$#e1 !re o$e %#r8 or c0o1e0< re0!"e&. The complaint was filed against T-3 . O$0< 0!"er 5:e$ ":e 8!$7%!c"7re !$& 1!0e o% T!$&7!< ro&7c"1 5!1 "!3e$ o;er 9< T5#$ Ace or T!$&7!< D#1"#00er1 5ere J!8e1 )7 !$& *#01o$ )o7$> #8 0e!&e&. The corporation itself was never made a party to the case . The buyer %Twin &ce) did not buy T-3 as a corporation, only most of its assets, e.uipment and machinery. Thus, T!$&7!< D#1"#00er1 or T5#$=Ace &#& $o" "!3e o;er ":e cor or!"e er1o$!0#"< o% TDI !0":o7>: ":e< 8!$7%!c"7re ":e 1!8e ro&7c" !" ":e 1!8e 0!$" 5#": ":e 1!8e e67# 8e$" !$& 8!c:#$er<. /bviously, the trade name GTanduayH went with the sale because the new firm does business as Tanduay -istillers and its main product of rum is sold as Tanduay ;um. T:ere #1 $o 1:o5#$>+ :o5e;er+ ":!" TDI #"1e0% 5!1 !91or9e& 9< T5#$ Ace or ":!" #" ce!1e& "o e4#1" !1 ! 1e !r!"e cor or!"#o$. 3n point of fact, T-3 is now herein a party respondent represented by its own counsel.
The fiction of separate and distinct corporate entities cannot, in the instant case, be disregarded and brushed aside+ ":ere 9e#$> $o" ":e 0e!1e #$&#c!"#o$ ":!" ":e 1eco$& cor or!"#o$ 5!1 ! &788< or 1er;#ce1 !1 ! c0#e$" o% ":e %#r1" cor or!"e e$"#"<.
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A-END-ENT OF THE CORPORATE CHARTER Sec. /B. Cor or!"e o5er1 !$& c! !c#"<. + Every corporation incorporated under this "ode has the power and capacity5
a.
b.
xxx 7. To amend its articles of incorporation in accordance with the provisions of this "ode1 c.
The original and amended articles together shall contain all the provision re.uired by law to be set out in the articles of incorporation. 8uch articles, as amended, shall be indicated by underscoring the change or changes made1 & copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that such amendments have been approved by the re.uired vote of the stockholders or members1 Aavorable recommendation of the appropriate government agency concerned in the case where the corporation is under its supervision such as banking and insurance companies, etc.
Sec. 1B. A8e$&8e$" o% Ar"#c0e1 o% I$cor or!"#o$. + nless otherwise prescribed by this "ode or by special law, and Ehen for to take effectF %1) pon approval by the 8E"1 or %$) Arom legitimate purposes, any provision or matter stated in the articles of the date of filing if not acted upon within ( months for a cause not attributed to the corporation %does not apply to incorporation may be amended by a majority vote of the board of increasing or decreasing the capital stock or shortening the directors or trustees and the vote or written assent of corporate the term, which shall re.uire the approval of the 8E" stockholders representing at least two+thirds %$M*) of 98ec. the *C and 1$<:) outstanding capital stock, without prejudice to the appraisal right of A-END-ENTS dissenting stockholders in accordance with the provisions of SPECIAL this "ode, or the vote or written assent of at least two+thirds %$M*) of the 8ec. *'.Po5er "o e4"e$& or 1:or"e$ cor or!"e "er8. + & private members if it be a non+stock corporation. corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders at least two+thirds %$M*) of the outstanding capital The original and amended articles together shall containrepresenting all stock provisions re.uired by law to be set out in the articles of or by at least two+thirds %$M*) of the members in case of non+ incorporation. 8uch articles, as amended shall be indicatedstock by corporations. Eritten notice of the proposed action and of the time and place of the meeting shall be addressed to each underscoring the change or changes made, and a copy thereof duly stockholder or member at his place of residence as shown on the certified under oath by the corporate secretary and a majority of books of the corporation and deposited to the addressee in the post the directors or trustees stating the fact that said amendment or amendments have been duly approved by the re.uired vote ofoffice the with postage prepaid, or served personally5 !rovided, That in stockholders or members, shall be submitted to the 8ecurities case and of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in Exchange "ommission. this code.
The amendments shall take effect upon their approval by the Sec. /D. Po5er "o #$cre!1e or &ecre!1e c! #"!0 1"oc3H #$c7r+ 8ecurities and Exchange "ommission or from the date of filing with cre!"e or #$cre!1e 9o$&e& #$&e9"e&$e11. + 4o corporation shall the said "ommission if not acted upon within six %() months from the date of filing for a cause not attributable to the corporation increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholderPs meeting duly called for the purpose, two+thirds %$M*) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the The 1"e 1 to be followed for an effective amendment of the articles of incorporation would thus be5 incurring, creating or increasing of any bonded indebtedness. Eritten notice of the proposed increase or diminution of the capital 1. Re1o07"#o$ by at least a majority of the board of directors or trustees1 stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholderPs $. Vo"e OR *RITTEN ASSENT of the stockholders meeting at which the proposed increase or diminution of the capital representing !" 0e!1" 2J/ of the outstanding capital stocks or members in case of a non+stock corporation. stock or the incurring or increasing of any bonded indebtedness is %4ote5 non+voting shares are considered in determining to be considered, must be addressed to each stockholder at his the voting and .uorum re.uirement in case of place of residence as shown on the books of the corporation and amendments of the articles of incorporation as deposited to the addressee in the post office with postage prepaid, provided in 8ec. ()1 or served personally. *. S798#11#o$ !$& %#0#$> of the amendments with the 8E" as follows5
*C
& certificate in duplicate must be signed by a majority of creditors. the directors of the corporation and countersigned by the chairman and the secretary of the stockholdersP meeting, setting forth5 4on+stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the %1) That the re.uirements of this section have been complied with1 board of trustees and of at least two+thirds %$M*) of the members in a meeting duly called for the purpose. %$) The amount of the increase or diminution of the capital stock1 %*) 3f an increase of the capital stock, the amount of capital stock or number of shares of no+par stock thereof actually subscribed, ?onds the issued by a corporation shall be registered with the 8ecurities names, nationalities and residences of the persons subscribing,and the Exchange "ommission, which shall have the authority to amount of capital stock or number of no+par stock subscribed determine by the sufficiency of the terms thereof. each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no+ par stock allotted to each stock+holder if such increase is for the purpose of making effective stock dividend therefor authori6ed1 SEC. /CO/D ;1. SEC. 1B5 1. 3n the former a meeting of the stockholders would be ;ET 3;E-, unlike in 8ec. 1(, where the Gwritten assentH %7) &ny bonded indebtedness to be incurred, created or increased1 would suffice. $. Aormer re.uires the approval of the 8E". %D) The actual indebtedness of the corporation on the day of the meeting1 NOTE: Ehen the amendment of the corporate charter involves shortening the life of the corporation with the effect of dissolution, 8ec. 1$< would apply, re.uiring %() The amount of stock represented at the meeting1 and approval by the 8E". %') The vote authori6ing the increase or diminution of the capital GROUNDS FOR DISAPPROVAL OF A-END-ENT stock, or the incurring, creating or increasing of any bonded indebtedness. Sec. 1C. Gro7$&1 5:e$ !r"#c0e1 o% #$cor or!"#o$ or !8e$&8e$" 8!< 9e re?ec"e& or &#1! ro;e&. + The 8ecurities and Exchange "ommission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in &ny increase or decrease in the capital stock or the incurring, compliance with the re.uirements of this "ode5 !rovided, That the creating or increasing of any bonded indebtedness shall re.uire "ommission shall give the incorporators a reasonable time within prior approval of the 8ecurities and Exchange "ommission. which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval5 /ne of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the 8ecurities and Exchange "ommission and attached to the original articles of 1. That the articles of incorporation or any amendment thereto is incorporation. Arom and after approval by the 8ecurities and not substantially in accordance with the form prescribed herein1 Exchange "ommission and the issuance by the "ommission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authori6ed, as the certificate of filing may declare5 $. That the purpose or purposes of the corporation are patently !rovided, That the 8ecurities and Exchange "ommission shall unconstitutional, not illegal, immoral, or contrary to government rules accept for filing any certificate of increase of capital stock unless and regulations1 accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty+five %$DJ) percent of such increased capital stock has been subscribed and that at least *. That the TreasurerPs &ffidavit concerning the amount of capital twenty+five %$DJ) percent of the amount subscribed has been paid stock subscribed andMor paid if false1 either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is e.ual to twenty+five %$DJ) percent of the subscription5 !rovided, further, That no decrease of the capital stock shall be approved 7.by That the percentage of ownership of the capital stock to be the "ommission if its effect shall prejudice the rights of corporate owned by citi6ens of the !hilippines has not been complied with as
*=
re.uired by existing laws or the "onstitution.
and Lek Tong are one and the same or that the plaintiff has ac.uired the rights of the latter. "A3 of >anila dismissed the complaint.
4o articles of incorporation or amendment to articles of ISSUE: E/4 the trial court correctly dismissed the caseF incorporation of banks, banking and .uasi+banking institutions, building and loan associations, trust companies and other financial HELD: 4o. 8ec. 1C %4ow 8ec. 1() of the "orporation @aw intermediaries, insurance companies, public utilities, educational %&ct 4o. 17D=) explicitly permits the articles of incorporation to be amended. The law does not only institutions, and other corporations governed by special laws shall authori6e corporations to amend their charter1 it also lays be accepted or approved by the "ommission unless accompanied down the procedure for such amendment1 and, what is by a favorable recommendation of the appropriate government more relevant to the present discussion, it contains agency to the effect that such articles or amendment is in provisos restricting the power to amend when it comes to accordance with law. the term of their existence and the increase or decrease of the capital stock. There is no prohibition therein against the change of name. The inference is clear that such a change is allowed, for if the legislature had intended to enjoin PROVISIONS NOT SUBJECT TO A-END-ENT %fait corporations from changing names, it would have expressly accompli)5 stated so in this section or in any other provision of the law. 1. 4ames of the incorporations and the incorporating 4o doubt, ":e $!8e o% ":e cor or!"#o$ #1 ec70#!r0< directors or trustees1 #8 or"!$" !1 $ece11!r< "o ":e ;er< e4#1"e$ce o% ! $. 4ame of the treasurer originally or first elected by cor or!"#o$. T:e >e$er!0 r70e !1 "o cor or!"#o$ #1 the subscribers or members to act as such1 ":!" e!c: cor or!"#o$ 1:!00 :!;e ! $!8e 9< 5:#c: #" *. 4umber of shares and the amount originally #1 "o 17e !$& 9e 17e& !$& &o !00 0e>!0 !c"1 . The name subscribed and paid out of the original authori6ed of the corporation in this respect designates the capital stock of the corporation1 and corporation in the same manner as the name of an individual designates the person. S#$ce !$ #$&#;#&7!0 :!1 7. -ate and place of execution of the articles of ":e r#>:" "o c:!$>e :#1 $!8e 7$&er cer"!#$ incorporation and the signatories and acknowledgment co$&#"#o$1+ ":ere #1 $o co8 e00#$> re!1o$ 5:< ! thereof. cor or!"#o$ 8!< $o" e$?o< ":e 1!8e r#>:". The sentimental considerations which individuals attach to their CHANGE IN CORPORATE NA-E names are not present in corporations and partnerships. /f course, as in the case of an individual, such change 8!< "hange in corporate name is included in the general power $o" 9e 8!&e e4c071#;e0< 9< ":e cor or!"#o$.1 o5$ to amend and maybe effected with compliance to 8ec. 1(. !c". I" :!1 "o %o00o5 ":e roce&7re re1cr#9e& 9< 0!5 %or ":e 7r o1e, and this is what is important and &ny change in the corporate identity or name does not indispensably prescribed strict adherence to such affect the rights and obligations of the corporation. A 8ere procedure. c:!$>e #$ ":e $!8e o% ":e cor or!"#o$ &oe1 $o" !%%ec" ":e #&e$"#"< o% ! cor or!"#o$ $or #$ !$< 8!$$er !%%ec" ":e r#>:"1+ r#;#0e>e1 !$& o90#>!"#o$1 re;#o710< !c67#re& or #$c7rre& 9< #". RED LINE TRANSPORT VS. RURAL TRANSIT CO. what was held as contrary to public policy is the 8E by one corporation of the name of another corporation as its trade name. Ee are certain no one will disagree that such an act can only result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. S7re0<+ ":e Re& L#$e c!1e 5!1 $o" o$e o% c:!$>e o% $!8e.
PHILIPPINE FIRST INSURANCE CO.+ plaintiff+appellant vs. -ARIA CAR-EN HARTIGAN+ CGH !$& O. ENGKEE , defendants+appellees %K; 4o. @+$(*'<1 '7 8";& $D$1 Buly *1, 1='<) FACTS: !laintiff changed its name from GThe Lek Tong @in Aire and >arine 3nsurance "o., @tdH %Lek Tong). The complaint alleges that under its old name, !A3" signed as co+maker together with ,artigan, a promissory note for !D,<<< in favor of "hina ?anking "orporation %"hinabank). !laintiff agreed to act as such upon application of the defendant, who together with &ntonio "hua and "hang Ra Au, signed an indemnity agreement in favor of the plaintiff. -efendants admitted the execution of the indemnity agreement but argued that it was made in favor of Lek Tong and not !A3". They claim that there was no privity of contract between plaintiff and defendants and conse.uently, the plaintiff has no cause of action against them considering that the plaintiff does not allege that !A3"
The change of name of a corporation -/E8 4/T result in its dissolution. There is unanimity in authorities5 G&n authori6ed change in the name of a corporation :!1 $o 8ore e%%ec" 7 o$ #"1 #&e$"#"< !1 ! cor or!"#o$ ":!$ c:!$>e o% $!8e o% $!"7r!0 er1o$ :!1 7 o$ :#1 #&e$"#"<. I" &oe1 $o" !%%ec" ":e r#>:"1 o% ":e cor or!"#o$ or 0e11e$ or !&& "o #"1 o90#>!"#o$1. A%"er ! cor or!"#o$ :!1 e%%ec"e& ! c:!$>e #$ #"1 $!8e #" 1:o70& 17e !$& 9e 17e& #$ #"1 $e5 $!8eF %1* &m. Bur. $'(+$'')
& mere change in the name of a corporation, either by the legislature or by the corporators or stockholders under legislative authority, &oe1 $o"+ >e$er!00< 1 e!3#$>+ !%%ec" ":e #&e$"#"< o% ":e cor or!"#o$+ $or #$ !$< 5!< !%%ec" ":e r#>:"1+ r#;#0e>e1+ or o90#>!"#o$1 re;#o710< !c67#re& or #$c7rre& 9< #" . 3ndeed, it has
7<
been said that a change of name by a corporation has no more effect upon the identity of the corporation than a change of name by a natural person has upon the identity of such person. T:e cor or!"#o$+ 7 o$ 17c: c:!$>e #$ #"1 $!8e+ #1 #$ $o 1e$1e ! $e5 cor or!"#o$+ $or ":e 17cce11or o% ":e or#>#$!0 o$e+ 97" re8!#$1 !$& co$"#$7e1 "o 9e ":e or#>#$!0 cor or!"#o$. I" #1 ":e 1!8e cor or!"#o$ 5#": ! &#%%ere$" $!8e+ !$& #"1 c:!r!c"er #1 #$ $o re1 ec" c:!$>e&. ... %( Aletcher, "yclopedia of the @aw of !rivate "orporations, $$7+$$D, citing cases). REPUBLIC PLANTERS BANK VS. CA %$1( 8";& '*C1 -ec. *1, 1==$) & change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no effect on the identity of the corporation, or on its property rights or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. A-END-ENT OF THE CORPORATION TERAor purposes of amending the corporate term, the following procedure is to be observed %8ec. *')5 1. A ro;!0 9< ! 8!?or#"< ;o"e of the board of directors or trustees1 $. *r#""e$ $o"#ce of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or by personal service1 *. R!"#%#c!"#o$ by the stockholders or members representing !" 0e!1" 2J/1 7. 3n case of extension of corporate term, it should be for periods not exceeding D< years in any single instance, and provided that no extension can be made earlier than D years r#or to the original or subse.uent expiry date%s) unless there are justifiable reasons for an earlier extension as may be determined by the 8E". D. 3n cases of extension of corporate term, a &#11e$"#$> 1"oc3:o0&er 8!< e4erc#1e ! r!#1!0 r#>:"1 under the conditions prescribes by 8ec. C1 and C$ of the "ode. ALHA-BRA CIGAR O CIGARETTE -ANUFACTURING CO-PAN)+ INC.+ petitioner, vs. SECURITIES O E,CHANGE CO--ISSION+ respondent %K.;. 4o. @+$*(<( Buly $=, 1=(C) FACTS: &"">" was incorporated on Ban. 1D, 1=1$ for a period of D< years which expired on Ban. 1D, 1=($. /n Buly 1D, 1=(*, during the period within which it is to li.uidate, the board of directors resolved to amend its articles of incorporation extending its corporate life for another D< years which was approved by the stockholders but denied by the 8E". ISSUE: E/4 the extension of corporate term should be allowedF HELD: 4o. The privilege of extension is purely statutory. A00 ":e 1"!"7"or< co$&#"#o$1 rece&e$" 871" 9e
co8 0#e& 5#": #$ or&er ":!" ":e e4"e$1#o$ 8!< 9e e%%ec"7!"e&. &nd, generally, these conditions must be complied with, and the steps necessary to effectuate an extension must be taken, &7r#$> ":e 0#%e o% ":e cor or!"#o$+ !$& 9e%ore ":e e4 #r!"#o$ o% ":e "er8 o% e4#1"e$ce as originally fixed by its charter or the general law, since, as a rule, ":e cor or!"#o$ #1 # 1o %!c"o &#11o0;e& !1 1oo$ !1 ":e "#8e e4 #re1. 8o where the extension is by amendment of the articles of incorporation, the amendment must be adopted before that time. The logic of this position is well+expressed in a four s.uare case decided by the "& of Rentucky5 G?ut section D(1 %section $17') provides that, when any corporation expires by the terms of its articles of incorporation, it may be thereafter continued to act for the purpose of closing up its business, but for no other purpose. The corporate life of the ,ome ?uilding &ssociation expired on >ay *, 1=<D. &fter that date, by the mandate of the statute, it could continue to act for the purpose of closing up its business, but for no other purpose. The proposed amendment was not made until Banuary 1(, 1=<C, or nearly three years after the corporation expired by the terms of the articles of incorporation. Ehen the corporate life of the corporation was ended, there was nothing to extend. ,ere it was proposed nearly three years after the corporate life of the association had expired to revivify the dead body, and to make that relate back some two years and eight months. 3n other words, the association for two years and eight months had only existed for the purpose of winding up its business, and, after this length of time, it was proposed to revivify it and make it a live corporation for the two years and eight months daring which it had not been such. The law gives a certain length of time for the filing of records in this court, and provides that the time may be extended by the court, but under this provision it has uniformly been held that when the time was expired, there is nothing to extend, and that the appeal must be dismissed... 8o, when the articles of a corporation have expired, it is too late to adopt an amendment extending the life of a corporation1 for, the corporation having expired, this is in effect to create a new corporation ...N OTHER -ATTERS SUBJECT TO A-END-ENT5 1. !urpose clause by changing, altering or including other purpose or purposes1 $. !rincipal /ffice1
*. 7. D.
4umber of -irectors1 8hares of stock and their classification1 ;estrictions as well as preference1
CHAPTER B: BOARD OF DIRECTORSJTRUSTEES AND OFFICERS
&.
PO*ERS OF THE BOARD
Sec. 2/. T:e 9o!r& o% &#rec"or1 or "r71"ee1. + nless otherwise provided in this "ode, the corporate powers of all corporations formed under this "ode shall be exercised, all business conducted
71
F. RA-IREZ+ plaintiff+appellee, and all property of such corporations controlled and held by J. the vs. board of directors or trustees to be elected from among the holders THE of stocks, or where there is no stock, from among the members of ORIENTALIST CO.+ !$& RA-ON J. FERNANDEZ+ defendants+appellants the corporation, who shall hold office for one %1) year until their %K.;. 4o. 11C=' 8eptember $7, 1=1C) successors are elected and .ualified. FACTS: The ?oard of -irectors were apprised of the fact the plaintiff BA ;amire6, who is based in !aris and represented by his son Bose ;amire6, had control of agencies for two different marks of films, GVclair AilmsH and Every director must own at least one %1) share of the capital stock G>ilano AilmsH. of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. &ny director who 4egotiations began between Bose ;amire6 and the board of ceases to be the owner of at least one %1) share of the capital stock directors of /rientalist "o. where ;amon Aernande6, one of of the corporation of which he is a director shall thereby cease to bemembers of the board and T/"#s treasurer was chiefly the a director. Trustees of non+stock corporations must be members active. thereof. & majority of the directors or trustees of all corporations organi6ed under this "ode must be residents of the !hilippines. 4ear the end of Buly 1=1*, Bose ;amire6 offered to supply from !aris the aforesaid films to T/" through Aernande6. &ccordingly, Aernande6 had an informal conference with the ?/- except one, and with approval of those whom he had communicated, accepted the offer through letters The ?oard of -irectors %or trustees or other designation signed by Aernande6 in his capacity as treasurer. allowed under 8ec. 1*C) is the supreme authority in matter of management of the regular and ordinary business affairs of the corporation. pon arrival of the said films, it turned out that T/" was without funds, so the first drafts, taken in the name of T/" were received and paid by its president, ,ernande6, through his own funds and such films were treated by him as his own property1 and in fact, they never came into the possession of T/" and were rented by ,ernande6 to T/" as they are exhibited in the /riental Theater. /ther films arrived together with their drafts, taken in the name of T/" through its president, which were not paid and gave rise to the present action. T/" was declared the principal debtor and ;amon Aernande6, the guarantor. ISSUE: E/4 the corporation could be held liable for the contractF HELD: Les. The public is not supposed nor re.uired to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. I$ &e!0#$> 5#": cor or!"#o$1+ ":e 790#c !" 0!r>e #1 9o7$& "o re0< "o ! 0!r>e e4"e$" 7 o$ o7"5!r& ! e!r!$ce1 . 3f a man is acting for a corporation with the external indicia of authority, any person not having notice of want of authority may usually rely upon those appearances1 and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had ac.uiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may ever have been granted. The failure of the defendant corporation to make an issue in its answer with regard to the authority of ;amon Aernande6 to bind it, and particularly to deny specifically under oath the genuineness and due execution of the contracts sued upon have the effect of eliminating the .uestion of his authority from the case . 3t is declared under 8ec. $C %now $*) that cor or!"e o5er1 1:!00 9e e4erc#1e&+ !$& !00 cor or!"e 971#$e11 co$&7c"e& 9< ":e 9o!r& o% &#rec"or1+ !$&
,owever, this authority does not extend to the fundamental changes in the corporate charter such as amendments or substantial changes thereof, which belong to the stockholders as a whole. The e67#"!90e r#$c# 0e ":ere%ore #1 ":!" ":e 1"oc3:o0&er1 8!< :!;e !00 ":e ro%#"1 97" 1:!00 "7r$ o;er ":e 8!$!>e8e$" o% ":e e$"er r#1e "o ":e Bo!r& o% D#rec"or1. CLASSIFICATION OF AGENTSJOFFICERS PO*ERS OF CORPORATE
nless the law so provides, cor or!"e o5er1 8!< 9e &e0e>!"e& "o #$&#;#&7!0 &#rec"or1 or o":er o%%#cer1 or !>e$"1. Ehether or not the acts of the individual director, officer or agent would bind the corporation depend on the nature of the agency created or the powers conferred upon such person by the statute, the corporate charter, the by+ laws, the corporate action of the board or stockholders, or whether it is necessary or incidental to one#s office. The >e$er!0 r70e is that ! cor or!"#o$ #1 9o7$& 9< ":e !c"1 o% #"1 cor or!"e o%%#cer1 5:o !c" 5#":#$ ":e 1co e o% ":e A c0!11#%#c!"#o$ o% o5er1 o% cor or!"e !>e$"1+ 5:#c: !re:
1. $.
Those e4 re110< co$%erre& or those granted by the articles of incorporation, corporate by+laws or by the official act of the board of directors1 Those that are #$c#&e$"!0 or those acts as are naturally and ordinarily done which are reasonable and necessary to carry out the corporate purpose or purposes1 Those that are #$:ere$" or acts that go with the office1 Those that are ! !re$" or those acts which although not actually granted, the principal knowingly allows or permits it to be done1 and !owers arising e8er>e$c<. out of c71"o81+ 71!>e or
*. 7. D.
7$
":#1 r#$c# 0e #1 reco>$#Ke& #$ ":e 9<=0!51 o% ":e cor or!"#o$ #$ 67e1"#o$ 5:#c: co$"!#$ ! ro;#1#o$ &ec0!r#$> ":!" ":e o5er "o 8!3e co$"r!c"1 1:!00 9e ;e1"e& #$ ":e 9o!r& o% &#rec"or1. 3t is true that it is also true in the by+laws, that the president shall have the power and it shall be his duty, to sigh contract1 but this has re%ere$ce r!":er "o ":e %or8!0#"< o% re&7c#$> "o ro er %or8 ":e co$"r!c" which are authori6ed by the board and is not intended to confer an independent power to make contract binding on the corporation. The fact that the power to make corporate contracts is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation1 %or ! 9o!r& c!$ cre!"e 0#!9#0#"<+ 0#3e !$ #$&#;#&7!0+ 9< o":er 8e!$1 ":!$ 9< ! %or8!0 e4 re11#o$ o% #"1 5#00.
consistent with but expressly authori6ed by 8ec. $1 of the "orporation @aw. Ee cannot agree with this contention. The authority conferred upon corporations in that section refers only to providing compensation for the future services of directors, officers, and employees thereof after the adoption of the by+law or other provisions in relation thereto, and cannot in any sense be held to authori6e the giving, as in this case, of continuous compensation to particular directors after their employment has terminated for part services rendered gratuitously by them to the corporation. To permit the transaction involved in this case would be to create an obligation unknown to law, and to countenance a misapplication of the funds of the defendant building and loan association to the prejudice of the substantial rights of its shareholders. 3rrespective of the above, the conclusion is the same. The article which the appellees rely upon is merely a by+law provision adopted by the stockholders of the defendant corporation, without any action having been taken in relation thereto by its board of directors. The law is settled that co$"r!c"1 9e"5ee$ ! cor or!"#o$ !$& ":#r& er1o$ 871" 9e 8!&e 9< or 7$&er ":e !7":or#"< o% #"1 9o!r& o% &#rec"or1 !$& $o" 9< #"1 1"oc3:o0&er1. ,ence, the action of the stockholders in such matters is only advisory and not in any wise binding on the corporation. T:ere co70& $o" 9e ! co$"r!c" 5#":o7" 87"7!0 co$1e$"+ !$& #" ! e!r1 ":!" ":e 0!#$"#%%1 &#& $o" co$1e$" "o ":e ro;#1#o$1 o% ":e 9<=0!5 #$ 67e1"#o$+ 97"+ o$ ":e co$"r!r<+ ":e< o9?ec"e& "o !$& ;o"e& !>!#$1" #" #$ ":e 1"oc3:o0&er1. 8ee"#$> #$ 5:#c: #" 5!1 !&o "e&. 2UALIFICATIONS AND DIS2UALIFICATIONS %see discussion under -3;E"T/;8MT; 8TEE8 in chapter 7) RA-ON C. LEE !$& ANTONIO D-. LACDAO+ petitioners, vs. THE HON. COURT OF APPEALS+ SACOBA -ANUFACTURING CORP.+ PABLO GONZALES+ JR. !$& THO-AS GONZALES+ respondents. %K; 4o. =*(=D1 $<D 8";& 'D$1 Aeb. 7, 1==$) FACTS: & complaint for a sum of money was filed by 3nternational "orporate ?ank, 3nc. against the private respondents who, in turn, filed a third+party complaint against &lfa 3ntegrated Textile >ills, 3nc. The trial court ordered the issuance of alias summons upon &lfa through -?!, who is said to be the transferee of &lfa#s management by virtue of a voting trust agreement. -?! declined to receive the summons saying it is not authori6ed, &lfa having a personality separate and distinct. The trial court in turn ordered private respondents to take the appropriate steps to serve the summons to &lfa which they made through the officers and later on, was later on declared to be proper service of summons. &fter the second motion for reconsideration, the trial court reversed itself, saying that the service of summons upon the petitioners were not proper, them not being officers of the corporation anymore. /n appeal, the "& reversed the trial court.
!articipation of the stockholders. The letter accepting the offer was dispatched in a meeting of the board called by ;amon Aernande6, where 7 members, including the president were present. The minutes add that terms of this offer were approved1 but at the suggestion of Aernande6 it was decided to call a special meeting of the stockholders to consider the matter and definite action was postponed. Arom the meeting of the stockholders, it can be inferred that this body was then cogni6ant that the offer had already been accepted. 3t is not, however, necessary to find the judgment of the stockholder proceedings, even if the assumption is that they did not approve of the contract.
?oth upon the principle and authority it is clear that ":e !c"#o$ o% ":e 1"oc3:o0&er1+ 5:!"e;er #"1 c:!r!c"er+ 871" 9e #>$ore&. The theory of a corporation is that ":e 1"oc3:o0&er1 8!< :!;e !00 ":e ro%#"1 97" 1:!00 "7r$ o;er ":e co8 0e"e 8!$!>e8e$" o% ":e e$"er r#1e "o ":e#r re re1e$"!"#;e1 !$& !>e$"1+ c!00e& &#rec"or1. &ccordingly, there is little for the stockholders to do beyond electing directors, making by+laws, and exercising certain other special powers defined by law. 3n conformity with this idea, it is settled that co$"r!c" 9e"5ee$ ! cor or!"#o$ !$& ":#r& er1o$ 871" 9e 8!&e 9< ":e &#rec"or !$& $o" 9< ":e 1"oc3:o0&er1. The corporation, in such matters, is represented by the former and not by the latter. 3t results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board. BARRETO VS. LA PREVISOR) FILIPINA %D' !hil. (7=1 -ec. C, 1=*$) !etitioners, directors of respondent up to >arch 1=$=, sought to recover 1J %to each plaintiff) of the profits of the company for the year 1=$=, under and in accordance with an amendment to the by+laws which was made at the general meeting of the stockholders on Aeb. 1=$=, to which the lower court rendered in their favor. ISSUE: E/4 the amendment has a binding effect as to grant plaintiffs# claimF HELD: 4o. 8ec. $< of the "orporation @aw limits the authority of a corporation to adopt by+laws which are not consistent with the provisions of the law. The appellees contend that the articled in .uestion is merely a provision of the compensation of directors which is not only
7*
ISSUE: E/4 the petitioners can still be authori6ed to receive the summons despite the voting trust agreement with -?!F HELD: 4o. 8ec. D= of the "ode expressly recogni6es QT&s and gives a more definitive meaning. ?y its very nature, a QT& results in the separation of the voting right of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the li.uidation of the corporation. ,owever, in order to distinguish a QT& from proxies and other voting pool and agreements, it must pass three criteria or tests, namely5 %1) the voting rights of the stock are separated from other attributes or ownership1 %$) that the voting right granted are intended to be irrevocable for a definite period of time1 and %*) that the principal purpose of the grant of voting rights is to ac.uire voting control of the corporation. T:e e4ec7"#o$ o% VTA+ ":ere%ore+ 8!< cre!"e ! &#c:o"o8< 9e"5ee$ ":e e67#"!90e !$& 9e$e%#c#!0 o5$er1:# o% ":e cor or!"e 1:!re1 o% 1"oc3:o0&er+ o$ ":e o$e :!$& !$& ":e 0e>!0 "#"0e ":ere"o+ o$ ":e o":er :!$&. ?y virtue of the QT&, the petitioners are no longer directors. nder the old and new "orporation "ode, the most immediate effect of a QT& on the status of a stockholder who is a party to its execution is that he becomes only an e.uitable or beneficial owner, from being the legal titleholder or owner of the shares subject of the QT&. nder the old code, the eligibility of a director, strictly speaking, cannot be adversely affected by a QT& inasmuch as he remains the owner %although beneficial or e.uitable only) of the shares subject of the QT& pursuant to which a transfer of the stockholder#s shares in favor of the trustee is re.uired. 4o dis.ualification arises by virtue of the phrase Gin his own rightH provided under the /ld "ode, which has been omitted. ,ence, this omission re.uires that in order to be eligible as director, what is material is the legal title to, not beneficial ownership, of the stock as appearing on the books of the corporation. The petitioners ceased to be the owners of at least one share standing in their names on the books of &lfa as re.uired under 8ec. $* of the new "ode. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. "onsidering the QT&, -?! as trustee, became the stockholder of record with respect to the said shares of stocks. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL %$( 8";& $D(1 4ov. $=, 1=(C) & complaint was filed by herein petitioner+plaintiff -etective and !rotective ?ureau against defendant+respondent Aausto &lberto, alleging that defendant illegally sei6ed and took control of all the assets as well as the books, records, vouchers and receipt of the corporation from the accountant+cashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same. That on a
meeting, the stockholders removed defendant managing director and elected Bose dela ;osa.
as
&lberto, on the other hand, stated that Bose dela ;osa could not be elected managing director because he did not own any stock in the corporation. ISSUE: E/4 dela ;osa may be elected managing directorF HELD: 4o. There is no record showing that Bose dela ;osa owned a share of stock in the corporation. 3f he did not own any share of stock, certainly he could not be a director pursuant to 8ec. *< of the "orporation @aw and conse.uently he cannot be a managing director by virtue of the by+laws of the corporation that the manager shall be elected by the ?/- among its members. &ccordingly, Aaustino &lberto could not be compelled to vacate his office and cede the same to dela ;osa because the by+laws provide that the -irectors shall serve until the election and .ualification of their duly .ualified successor. ELECTION AND VOTING 8ec. $7. E0ec"#o$ o% &#rec"or1 or "r71"ee1. + &t all elections of directors or trustees, there must be present, either in person or by representative authori6ed to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if re.uested by any voting stockholder or member. 3n stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by+laws, in his own name on the stock books of the corporation, or where the by+laws are silent, at the time of the election1 and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall e.ual, or he may distribute them on the same principle among as many candidates as he shall see fit5 !rovided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected5 !rovided, however, That no delin.uent stock shall be voted. nless otherwise provided in the articles of incorporation or in the by+laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. "andidates receiving the highest number of votes shall be declared elected. &ny meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.
4/TE5
1.
>ajority of the outstanding capital stock, whether in person or by written proxy must be present at the election of the directors1 or majority of members
77
entitled to vote, in the case of a non+stock corporation. 3f the re.uired .uorum is not obtaining, the meeting may be adjourned1 $. /n the re.uest of any voting stockholder or member, the election may be held by ballot otherwise viva+voce would suffice. *. The candidates receiving the highest number of votes shall be elected. CU-ULATIVE VOTING: 1. "umulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall e.ual or he may distribute them among the candidates as he may see fit. $. This is granted by law to each stockholder with voting rights. ,owever, in non+stock corporations, cumulative voting is generally not allowed, 4@E88 allowed by the &/3 or by+laws. *. nder this method, if there are 1< directors to be elected, a holder of 1,<<< shares will have 1<,<<< votes which he may cast in favor of one candidate or may apportion to any number of candidate he may wish1 7. ! ;!/8E5 to allow the minority to have a rightful representation in the board of directors.
xxx 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. nless 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 .uorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a .uorum shall be valid as a corporate act, except for the election of officers which shall re.uire the vote of a majority of all the members of the board.
2UORU-: re.uirement for a valid majority of the number of the board decision of at least a majority of present in a meeting at which there valid corporate act, except5
board meeting is the fixed in the &/3, and a the directorsMtrustees is a .uorum shall be a the
1.
Election of officers, which shall re.uire majority of all the members of the board1 and
nless the &/3 or the by+laws provide for a greater 8ec. $D. Cor or!"e o%%#cer1+ 67or78. + 3mmediately after their $. election, the directors of a corporation must formally organi6e by .uorumMvoting re.uirement. the election of a president, who shall be a director, a treasurer who Every action of the board without a meeting and without may or may not be a director, a secretary who shall be a resident the re.uired voting and .uorum re.uirement will not bind and citi6en of the !hilippines, and such other officers as may be the corporation unless subse.uently ratified, expressly or provided for in the by+laws. &ny two %$) or more positions may be impliedly. held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at 3ndividual the directors, however, can rightfully be considered as agents of the corporation. &nd although they cannot same time. bind the corporation by their individual acts, this is subject to certain E2"E!T3/485 %1) by delegation of authority1 %$) when expressly conferred1 or %*) where the officer or agent is clothed with actual or apparent authority. 4/TE5 1. Except in a close corporation where the corporate )AO KA SIN TRADING VS. CA %$<= 8";& '(*1 Bune 1D, officers may be elected directly by the stockholders, 1==$) "onstacio ?. >alagna, !resident and "hairman of the "ode re.uires the ?/- to elect the said officers1 the ?oard of private respondent !rime Ehite "ement $. The officers that may be elected are the5 "orporation %!E""), sent a letter+offer %Exhibit &) to >r. Lao for the delivery of cement, which was accepted by the a. !resident who must be a director1 latter by delivering a check for !$7*,<<<. b. Treasurer who may or may not be a director1 ISSUE: E/4 the letter+offer sent by >alagna binds the corporationF c. 8ecretary who should be a resident and citi6en of the !hilippines1 HELD: 4o. & corporation can act only through its officers d. 8uch other officers as may be provided and agents, all acts within the powers of said corporation for in the by+laws. may be performed by agents of his selection and except in *. &ny two or more positions may be held so far as limitations or restrictions may be imposed by concurrently by the same person, except5 special charter, by+law or statutory provisions, the same general provision of law which govern the relation of a. The president and the secretary1 agency for natural person govern the officer or agent of a b. The president and the treasurer. corporation, of whatever status or rank, in respect to his power to act for the corporation1 and the agents once ?. VALIDIT) AND BINDING EFFECT OF ACTIONS OF appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of CORPORATE OFFICERS individuals and private persons. Sec. 2A. Cor or!"e o%%#cer1+ 67or78
7D
>oreover, a corporate officer or agent may represent and bind the corporation in transactions with third person to the extent that authority has been conferred upon him, and this includes powers which have been %1) #$"e$"#o$!00< conferred, and %$) also such powers as, in the usual course of business, are #$c#&e$"!0 thereto, or may be implied therefrom, %*) powers added by c71"o8 !$& 71!>e, as usually pertaining to the particular officer or agent, and %7) such ! !re$" powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. Ehile >r. >aglana was an officer, the by+laws do not in any way confer upon the president the authority to enter into contracts for the corporation independently of the ?/-. That power is expressly lodged in the latter. 4evertheless, to expedite or facilitate the execution of the contract, only the !resident shall sign the contact for the corporation. 4o greater power can be implied from such express, but limited delegated authority. 4either can it be logically claimed that any power greater than that expressly conferred is inherent in >r. >aglana#s position as president and chairman of the corporation. &lthough there is authority Nthat if the president is given general control and supervision over the affairs of the corporation, it will be presumed that he has authority to make contract and do acts within the course of its ordinary business,N Ee find such inapplicable in this case. Ee note that ":e r#;!"e cor or!"#o$ :!1 ! >e$er!0 8!$!>er who, under its ?y+@aws has, inter alia, the following powers5 N%a) to have the active and direct management of the business and operation of the corporation, conducting the same accordingly to the order, directives or resolutions of the ?oard of -irectors or of the president.N 3t goes without saying then that >r. >aglana did not have a direct and active and in the management of the business and operations of the corporation. !etitionerPs last refuge then is his alternative proposition, namely, that private respondent had clothed >r. >aglana with the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that GP!Q0":o7>: !$ o%%#cer or !>e$" !c"1 5#":o7"+ or #$ e4ce11 o%+ :#1 !c"7!0 !7":or#"< #% :e !c"1 5#":#$ ":e 1co e o% !$ ! !re$" !7":or#"< 5#": 5:#c: ":e cor or!"#o$ :!1 c0o":e& :#8 9< :o0&#$> :#8 o7" or er8#""#$> :#8 "o ! e!r !1 :!;#$> 17c: !7":or#"<+ ":e cor or!"#o$ #1 9o7$& ":ere9< #$ %!;or o% ! er1o$ 5:o &e!01 5#": :#8 #$ >oo& %!#": #$ re0#!$ce o$ 17c: ! !re$" !7":or#"<+ !1 5:ere !$ o%%#cer #1 !00o5e& "o e4erc#1e ! !r"#c70!r !7":or#"< 5#": re1 ec" "o ":e 971#$e11+ or ! !r"#c70!r 9r!$c: o% #"+ co$"#$7o710< !$& 790#c0<+ %or ! co$1#&er!90e "#8e .N &lso, G#% ! r#;!"e cor or!"#o$ #$"e$"#o$!00< or $e>0#>e$"0< c0o":e1 #"1 o%%#cer1 or !>e$"1 5#": ! !re$" o5er "o er%or8 !c"1 %or #"+ ":e cor or!"#o$ 5#00 9e e1"o e& "o &e$< ":!" 17c: ! !re$" !7":or#"< #$ re!0+ !1 "o #$$oce$" ":#r& er1o$1 &e!0#$> #$ >oo& %!#": 5#": 17c: o%%#cer1 or !>e$"1.G This Napparent authority may result from %1) the general manner, by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or %$) ac.uiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. 3t was incumbent upon the petitioner to prove that indeed the private respondent had clothed >r. >aglana with the apparent power to execute Exhibit N&N or any similar contract. T:#1 co70& :!;e 9ee$ e!1#0< &o$e 9< e;#&e$ce o% 1#8#0!r !c"1 e4ec7"e& e#":er #$ #"1 %!;or or #$ %!;or o% o":er !r"#e1 . !etitioner miserably failed to do that. pon the other hand, private respondentPs evidence overwhelmingly shows that no contract can be signed by the president without first being approved by the ?oard of -irectors1 such approval may only be given after the contract passes through, at least, the comptroller, who is the 43-" representative, and the legal counsel. LOPEZ REALT)+ INC. VS. FOTENCHA %17' 8";& 1C*1 &ug. 11, 1==D) !etitioner corporation approved two resolutions providing for the gratuity pay of its employees. Except for &suncion @ope6+Kon6ales, who was then abroad, the remaining member of the board convened a special meeting and passed a resolution adopting the above+ mentioned resolutions. !rivate respondents re.uested for the full payment of the gratuity pay which was granted. &t that time, however, petitioner &suncion was still abroad, and allegedly sent a cablegram objecting to certain matters taken up by the board in her absence. 4otwithstanding a corporate s.uabble between &suncion and &rturo @ope6, the first two installments of the gratuity pay of private respondents were paid. &lso, petitioner corporation had prepared the cash vouchers and checks for the third installment. Aor some reason, said voucher was cancelled by petitioner &suncion. & complaint was filed before the labor arbiter who decided in favor of private respondents. ISSUE: E/4 the gratuity pay should be paidF HELD5 Les. The general rules is that ! cor or!"#o$+ ":ro7>: #"1 9o!r& o% &#rec"or1+ 1:o70& !c" #$ ":e 8!$$er !$& 5#":#$ ":e %or8!0#"#e1+ #% !$<+ re1cr#9e& 9< #"1 c:!r"er or 9< ":e >e$er!0 0!5. Thus, the directors must act as a body in a meeting called pursuant to the law or the corporation#s by+laws, otherwise, any action taken therein may be .uestioned by any objecting director or shareholder. ?e that as it may, jurisprudence tells us that !$ !c"#o$ o% ":e 9o!r& o% &#rec"or1 &7r#$> ! 8ee"#$>+ 5:#c: 5!1 #00e>!0 %or 0!c3 o% $o"#ce+ 8!< 9e r!"#%#e& e#":er '1( e4 re110<+ 9< ":e !c"#o$ o% ":e &#rec"or1 #$ 1791e67e$" 0e>!0 8ee"#$>+ or '2( #8 0#e&0<+ 9< ":e cor or!"#o$1. 1791e67e$" co$&7c". ;atification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or ac.uiescence. >oreover, the unauthori6ed acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in .uestion. 8uch ratification may be expressed or may be inferred from silence and inaction. 3n the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor
7(
nullifying the board resolution granting gratuity pay to private respondents. 3nstead, they paid the gratuity pay, particularly, the first two installments thereof. -espite lack of notice to &suncion, we can glean from the records that she was aware of the corporation#s obligations under the said resolution. >ore importantly she ac.uiesced thereto by affixing her signature on two cash vouchers. The conduct of petitioners had estopped them from assailing the validity of the said board resolutions. PUA CASI- O CO. VS. NEU-ARK AND CO. %7( !hil. $7$1 /ct. $, 1=$7) E. 4eumark, president of defendant corporation borrowed !1D<<< from plaintiff which was delivered by means of a check in favor of defendant and deposited in ?!3 and the amount of it credited to the corporation#s current account. ISSUE: E/4 the corporation is responsible for the money borrowed by its presidentF HELD: Les. E. 4eumark is the principal stockholder, president and general business manager of the defendant corporation. /n behalf of the corporation, he solicited a loan and was given a check, which was endorsed by him in his capacity as president and deposited to the corporation#s account. 3t may be true that a large part of the amount so deposited was diverted by 4eumark to his own use, but that does not alter that the money was borrowed for the corporation and was placed in its possession. 3t is conceded that 4eumark was not expressly authori6ed by the board of directors to borrow the money in .uestion and the general rule is that a business manager or other officer of a corporation, has no implied power to borrow money on its behalf. ?ut much depends upon the circumstances of each particular case and the rule state is subject to important exceptions. Thus, 5:ere ! >e$er!0 971#$e11 8!$!>er o% ! cor or!"#o$ #1 c0o":e& 5#": ! !re$" !7":or#"< "o 9orro5 8o$e< !$& ":e !8o7$" 9orro5e& &oe1 $o" e4cee& ":e or&#$!r< re67#re8e$"1 o% ":e 971#$e11+ #" :!1 o%"e$ 9ee$ :e0& ":!" ":e !7":or#"< #1 #8 0#e& !$& ":!" ":e cor or!"#o$ #1 9o7$&. )U CHUCK VS. KONG LI PO %7( !hil. (<C1 -ec. *, 1=$7) "" "hen or T" "hen, Keneral >anager of defendant corporation Rong @i !o, entered into an agreement with the plaintiffs by which the latter bound themselves to do the necessary printing for the newspaper. @ater on, the new general manager, Tan Tian ,ong, discharged plaintiffs with no special reasons. &ggrieved, plaintiffs sought to recover full payment of the remaining term of the contract, which was originally for * years, as stated therein. ISSUE: E/4 "hen had the power to bind the corporation under a contract of that characterF HELD: 4o. The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be expressly or impliedly be delegated to other officers or agents of the corporation, and it is well settled that e4ce " 5:ere ":e !7":or#"< o% e8 0o<#$> 1er;!$"1 !$& !>e$"1 #1 e4 re110< ;e1"e& #$ ":e BODJT+ !$ o%%#cer or !>e$" 5:o :!1 >e$er!0 co$"ro0 !$& 8!$!>e8e$" o% ":e
cor or!"#o$.1 971#$e11+ or ! 1 ec#%#c !r" ":ereo%+ 8!< 9#$& ":e cor or!"#o$ !1 !re 717!0 !$& $ece11!r< #$ ":e co$&7c" o% 17c: 971#$e11. B7" ":e co$"r!c"1 o% e8 0o<8e$" 871" 9e re!1o$!90e. "hen, as general manager of Rong @i !o, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs, but we do not think that contract here in .uestion can be so considered. 4ot only is the term of employment usually long, but the conditions are otherwise so onerous to the defendant that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. This fact, in itself was, in our opinion, sufficient to put the plaintiffs upon in.uiry as to the extent of the business manager#s authority1 they had not the right to presume that he or any other single officer or employee of that corporation had implied authority to enter into a contract of employment which might bring about its ruin. TRINIDAD J. FRANCISCO VS. GSIS %' 8";& DD'1 >arch *<, 1=(*) Trinidad Arancisco, in consideration of loan extended by K838, mortgaged her property in T". Aor being in arrears in her installments, K838 extrajudicially foreclosed the mortgage. !laintiff#s father, &tty. Qicente Arancisco sent a letter to ;odolfo &ndal, general manager of K838, offering to redeem the property which was replied to by &ndal through a telegram saying GK838 ?/&;- &!!;/QE- L/ ; ;ET E8T ;E ;E-E>T!3/4 /A A/;E"@/8E- !;/!E;TL /A L/ ; -& K,TE;H @ater, inasmuch as, according to the defendant K838, the remittances made by &tty. Arancisco were allegedly not sufficient to pay off her daughter#s arrears, the one year redemption period has expired, said defendant consolidated title to the property in its name. ISSUE: E/4 the telegram sent by the &ndal binds the corporationF HELD: Les. The terms of the offer were clear and over the signature of &ndnal, plaintiff was informed that the proposal has been accepted. There was nothing in the telegram that hinted at any anomaly, or gave grounds to suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There is no denying that the telegram was within &ndal#s apparent authority, but eh defense is that he did not sign it, but that it was sent by the board secretary in his name and without his knowledge. &ssuming this to be true, how was appellee to know itF Cor or!"e "r!$1!c"#o$1 5o70& 1 ee&#0< co8e "o ! 1"!$&1"#00 5ere e;er< er1o$ &e!0#$> 5#": ! cor or!"#o$ 5ere :e0& &7"<=9o7$& "o &#19e0#e;e e;er< !c" o% #"1 re1 o$1#90e o%%#cer1+ $o 8!""er :o5 re>70!r ":e< 1:o70& ! e!r o$ ":e#r %!ce. 3ndeed, it is well+settled that I% ! r#;!"e cor or!"#o$ #$"e$"#o$!00< or $e>0#>e$"0< c0o":e1 #"1 o%%#cer1 or !>e$"1 5#": ! !re$" o5er "o er%or8 !c"1 %or #"+ ":e cor or!"#o$ 5#00 9e e1"o e& "o &e$< ":!" 17c: ! !re$" !7":or#"< #1 re!0+ !1 "o #$$oce$" ":#r& er1o$1 &e!0#$> #$ >oo& %!#": 5#": 17c: o%%#cer1 or !>e$"1. ,ence, even if it were the board secretary who sent the
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telegram, the corporation could not evade the binding effect produced by the telegram. The error in the wording cannot be taken seriously. &ll the while K838 pocketed the various remittances, and kept silent as to the true facts as it now alleges. This silence, taken together with the unconditional acceptance of three other subse.uent remittances from plaintiff constitutes in itself a binding ratification of the original agreement. THE BOARD OF LI2UIDATORS VS. KALA* %$< 8";& =C'1 &ug. 1<, 1=(D) 4ational "oconut "orporation %4&"/"/) embarked on copra trading activities led by its Keneral >anager >aximo Ralaw and the other defendants as members of the board. -ue to natural calamities, the business of copra became unprofitable. Ralaw made a full disclosure of the situation and apprised the board of the impending losses on the contracts already entered into, but no action was taken. ?ut later on, the contracts were unanimously approved by the ?oard. The buyers threated damage suits, but some were settled. @ouis -reyfus I "o. @td. &ctually sued but was also culminated in an out+of+court settlement. 4&"/"/ now seeks to recover the sum paid to @ouis from general manager and board chairman Ralaw and the other members who approved the contracts. 3t charges Ralaw with negligence and bad faith andMor breach of trust for having approved the contracts, which was dismissed by the trial court. ISSUE: E/4 the contracts executed by Ralaw bind the corporationF HELD: Les. & rule that has gained acceptance through the years is that ! cor or!"e o%%#cer Ee$"r71"e&F 5#": ":e >e$er!0 8!$!>e8e$" !$& co$"ro0 o% #"1 971#$e11+ :!1 #8 0#e& !7":or#"< "o 8!3e !$< co$"r!c" or &o !$< o":er !c" 5:#c: #1 $ece11!r< or ! ro r#!"e "o ":e co$&7c" o% ":e or&#$!r< 971#$e11 o% ":e cor or!"#o$. A1 17c: o%%#cer+ :e 8!<+ 5#":o7" !$< 1 ec#!0 !7":or#"< %ro8 ":e BOD er%or8 !00 !c"1 o% !$ or&#$!r< $!"7re+ 5:#c: 9< 71!>e or $ece11#"< !re #$c#&e$" "o :#1 o%%#ce+ !$& 8!< 9#$& ":e cor or!"#o$ 9< co$"r!c"1 #$ 8!""er1 !r#1#$> #$ ":e 717!0 co7r1e o% 971#$e11. @ong before the disputed contracts came into being, Ralaw contracted by himself alone as general manager for forward sales of copra %which is a necessity in the business) which were profitable. 8o pleased was 4&"/"/1s ?/- that it voted to grant Ralaw special bonus in recognition of the signal achievement rendered by him. These previous contacts, it should be stressed, were signed by Ralaw without prior authority from the board. 8aid contracts were known all along to the board members. 4othing was said by them. The aforesaid contracts stand to prove one thing. /bviously, 4&"/"/#s board met difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of 4&"/"/#s general manager >aximo Ralaw. *:ere 1#8#0!r !c"1 :!;e 9ee$ ! ro;e& 9< ":e &#rec"or1 !1 ! 8!""er o% >e$er!0 r!c"#ce+ c71"o8+ !$& o0#c<+ ":e >e$er!0 8!$!>er 8!< 9#$& ":e
co8 !$< 5#":o7" %or8!0 !7":or#K!"#o$ o% ":e BOD. 3n varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the ?/- has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 3n the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in 4&"/"/#s behalf without prior board approval. 3f the by+laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. ?ut the ?oard itself, by its acts and through ac.uiescence, practically laid aside the by+law re.uirement of prior approval. BUENASEDA VS. BO*EN O CO.+ INC. %11< !hil. 7(71 -ec. $=, 1=(=) &s a conse.uence of !$<<,<<< worth of E"& allocated to the ?owen I "o., 3nc., it re.uired a letter of credit in the amount of !1<<,<<< with the !4?. &s the corporation did not have at the time the necessary funds to put up the re.uired cash marginal deposit of !(<,<<<, its president Keoffrey ?owen, obligating the corporation and himself in his personal capacity, offered to pay Arancisco ?uenaseda *' WJ of the profits to be reali6ed from the sale of the E"& procurement materials, should he be able to obtain and produce the amount necessary to cover the cash marginal deposit which ?uenaseda was able to do. The corporation refused to pay, ?uenaseda filed an action in the "A3 to recover the same. ISSUE: E/4 the agreement was bindingF HELD: Les. 3t is not here pretended that the ?/- of the defendant corporation had no knowledge of the agreement between ?owen and plaintiff. 3ndeed, at the time the said &greement was made, the ?/- of the corporation was composed of ?owen himself, his wife, ?uenaseda and two others, with ?owen and his wife controlling the majority of the stocks of the corporation. The ?oard did not repudiate the agreement but on the contrary, ac.uiesced in and took advantage of the benefits afforded by said agreement. 8uch acts are e.uivalent to an implied ratification of the agreement by the ?/- and bound the corporation even without formal resolution passed and recorded. 3t is agreed by the respondents, defendants below, that the profits of the corporation form part of its assets and payment of a certain percentage of the profits re.uires a declaration of dividends andMor resolution of the ?/-. The agreement is untenable. &lthough the plaintiff is a stockholder of the corporation he does not, however, claim a share of the profits as such stockholder, but under the agreement between him and the president of the corporation which has been impliedly ratified by the ?/-.
IN SU--AR): &n unauthori6ed act, or the act of a single director, officer or agent of a corporation may be ratified either expressly or impliedly. 1. Express ratification is made through a formal board action1 $. 3mplied ratification can either be %a) silence or ac.uiescence1 %b) acceptance andMor retention of benefits, or %c) by recognition or adoption.
7C
appropriate Gcanceling, altering or enjoining any resolution or other act of the corporation or its board of directors or Gdirecting or prohibitingH any act the corporation or the other 8ec. $C. Re8o;!0 o% &#rec"or1 or "r71"ee1. + &ny director or board of directors thereby effectively taking away the rights of the directors to act as manager of the corporation. trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two+thirds %$M*) of VACANC) 5 the outstanding capital stock, or if the corporation be a non+stock 1. 3f a vacancy occurs by virtue of RE-OVAL, 8ec. $C corporation, by a vote of at least two+thirds %$M*) of the members authori6es the filling of the vacancy by the election of entitled to vote5 !rovided, That such removal shall take place either a replacement at the same meeting1 at a regular meeting of the corporation or at a special meeting $. 3f it occurs 4/T by removal, 8ec. $= applies. called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to 2M. V!c!$c#e1 #$ ":e o%%#ce o% &#rec"or or "r71"ee. + &ny Sec. propose such removal at the meeting. & special meeting of vacancy the occurring in the board of directors or trustees other than by stockholders or members of a corporation for the purpose of removal by the stockholders or members or by expiration of term, removal of directors or trustees, or any of them, must be called by be filled by the vote of at least a majority of the remaining may the secretary on order of the president or on the written demand of directors or trustees, if still constituting a .uorum1 otherwise, said the stockholders representing or holding at least a majority ofvacancies the must be filled by the stockholders in a regular or special outstanding capital stock, or, if it be a non+stock corporation, onmeeting the called for that purpose. & director or trustee so elected to written demand of a majority of the members entitled to vote. fill a vacancy shall be elected only or the unexpired term of his 8hould the secretary fail or refuse to call the special meeting upon predecessor in office. such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. 4otice of the time and place of & directorship or trusteeship to be filled by reason of an increase in such meeting, as well as of the intention to propose such removal, the number of directors or trustees shall be filled only by an election must be given by publication or by written notice prescribed in at this a regular or at a special meeting of stockholders or members "ode. ;emoval may be with or without cause5 !rovided, That duly called for the purpose, or in the same meeting authori6ing the removal without cause may not be used to deprive minority increase of directors or trustees if so stated in the notice of the stockholders or members of the right of representation to which meeting. they may be entitled under 8ection $7 of this "ode.
".
RE-OVAL AND FILLING UP OF VACANCIES
4/TE5 1. ?y+laws may provide for causes or grounds for removal of a director1 $. & director representing the minority may not be removed except for those causes1 *. & director 4/T representing the minority may be removed even without a cause. RE2UIRE-ENTS FOR A VALID RE-OVAL: 1. The removal should take place at a general or special meeting duly call for that purpose1 $. The removal must be by the vote of the stockholders holding or representing $M* of the outstanding capital stock or the members entitled to vote in cases of non+ stock corporations1 and *. There must be a previous notice to the stockholders or members of the intention to propose such removal at the meeting either by publication or on written notice to the stockholders or members. JURISDICTION OF THE COURT: The law, as it stands now, grants the proper court, the power and authority to hear and decide cases Ginvolving controversies in the election or appointment of directors, trustees, officers, or managers of such corporation, partnership or association.H DEADLOCK: 3n the case of deadlock in a close corporation, the 8E" is also authori6ed to issue an /rder as it deems
3f the Q&"&4"L is resulting from other than %1) by expiration of term1 or %$) by removal, the ?/&;- /A -3;E"T/;8, if still constituting a .uorum, may fill the vacancy. VALLE VERDE COUNTR) CLUB+ INC.+ E;4E8T/ Q3@@&@ 4&, ;&L K&>?/&, &>&-/ >. 8&4T3&K/, B;., A/;T 4&T/ -EE, & K 8T/ 8 43"/, Q3"T/; 8&@T&, A;&4"38"/ /;T3K&8 333, E;3" ;/2&8, in their capacities as members of the ?oard of -irectors of Qalle Qerde "ountry "lub, 3nc., and B/8E ;&>3;EU, !etitioners Qs. V#c"or A%r#c!, ;espondent %K; 4o. 1D1=(=1 8ept. 7, $<<=)
FACTS: Aebruary $', 1==(5 Ernesto Qillaluna, Baime ". -inglasan %-inglasan), Eduardo >akalintal %>akalintal), Arancisco /rtigas 333, Qictor 8alta, &mado >. 8antiago, Br., Aortunato -ee, &ugusto 8unico, and ;ay Kamboa were elected as ?/- during the &nnual 8tockholders# >eeting of petitioner Qalle Qerde "ountry "lub, 3nc. %QQ""). Arom 1=='+$<<1, the re.uisite .uorum could not be obtained so they continued to act as directors in a hold+over capacity.
/n 8eptember 1, 1==C, -inglasan resigned, ?/still constituting a .uorum elected Eric ;oxas %;oxas) followed by >acalintal.
7=
/n >arch (, $<<1, Bose ;amire6 %;amire6) was elected by the remaining ?/-. ;espondent &frica %&frica), a member of QQ"", .uestioned the election of ;oxas and ;amire6 as members of the QQ"" ?oard with the 8ecurities and Exchange "ommission %8E") and the ;egional Trial "ourt %;T") as contrary to 8ec. $* and $= of the "orporation "ode. The ;T" decided in favor of &frica. ISSUE: E/4 the appointment of ;oxas and ;amire6 made by the remaining members of the ?oard, still constituting a .uorum, were validF HELD: 4o. The resolution of this legal issue is significantly hinged on the determination of what constitutes a director#s term of office.
purpose. To assume as QQ"" does that the vacancy is caused by >akalintal#s resignation in 1==C, not by the expiration of his term in 1==', is both illogical and unreasonable. ,is resignation as a holdover director did not change the nature of the vacancy1 the vacancy due to the expiration of >akalintal#s term had been created long before his resignation.
T:e o5er1 o% ":e cor or!"#o$.1 9o!r& o% &#rec"or1 e8!$!"e %ro8 #"1 1"oc3:o0&er1
This theory of delegated power of the board of directors similarly explains why, under 8ection $= of the "orporation "ode, in cases where the vacancy in the corporation#s board of directors is caused not by the expiration of a member#s term, the successor Gso elected to fill in a vacancy shall be elected o$0< %or ":e 7$e4 #re& "er8 of the his predecessor in office.H The law has authori6ed the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation#s operations1 yet, in recognition of the stockholders# right to elect the members of the board, it limited the period during which the successor shall serve only to the Gunexpired term of his predecessor in office.H 3t also bears noting that the vacancy referred to in 8ection $= contemplates a ;!c!$c< occ7rr#$> 5#":#$ ":e &#rec"or.1 "er8 o% o%%#ce. Ehen a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. ,ence, 8ection $= declares that it shall be the corporation#s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member#s term. CHANGE IN CONSTITUTION OF THE BOARD5 must be reported by the ?/- to the 8E"5 8ec. $(. Re or" o% e0ec"#o$ o% &#rec"or1+ "r71"ee1 !$& o%%#cer1. + Eithin thirty %*<) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the 8ecurities and Exchange "ommission, the names, nationalities and residences of the directors, trustees, and officers elected. 8hould a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the 8ecurities and Exchange "ommission
T:e :o0&o;er er#o& #1 $o" !r" o% ":e "er8 o% o%%#ce o% ! 8e89er o% ":e 9o!r& o% &#rec"or1. The word GtermH has ac.uired a definite meaning in jurisprudence. 3n several cases, we have defined E"er8F as ":e "#8e &7r#$> 5:#c: ":e o%%#cer 8!< c0!#8 "o :o0& ":e o%%#ce !1 o% r#>:"+ and fixes the interval after which the several incumbents shall succeed one another. T:e "er8 o% o%%#ce #1 $o" !%%ec"e& 9< ":e :o0&o;er. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to .ualify.
Term is distinguished from tenure in that an officer#s E"e$7reF re re1e$"1 ":e "er8 &7r#$> 5:#c: ":e #$c789e$" !c"7!00< :o0&1 o%%#ce. The tenure may be shorter %or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. ?ased on the above discussion, when 8ection $* of the "orporation "ode declares that Gthe board of directorsX shall hold office for one %1) year until their successors are elected and .ualified,H we construe the provision to mean that the "er8 o% ":e 8e89er1 o% ":e 9o!r& o% &#rec"or1 1:!00 9e o$0< %or o$e <e!rH their term expires one year after election to the office. The holdover period that time from the lapse of one year from a member#s election to the ?oard and until his successor#s election and .ualification is $o" part of the director#s original term of office, nor is it a new term1 the holdover period, however, constitutes part of his tenure. "orollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that ":e o%%#ce :!1 ! %#4e& "er8+ 5:#c: :!1 e4 #re&+ and the incumbent is holding the succeeding term. &fter the lapse of one year from his election as member of the QQ"" ?oard in 1==(, >akalintal#s term of office is deemed to have already expired. That he continued to serve in the QQ"" ?oard in a holdover capacity cannot be considered as extending his term. This holdover period is not to be considered as part of his term, which, as declared, had already expired. Eith the expiration of >akalintal#s term of office, a vacancy resulted which, by the terms of 8ection $= of the "orporation "ode, must be filled by the stockholders of QQ"" in a regular or special meeting called for the
PURPOSE: to give public information, under sanction of oath responsible officers, of the nature of the business, financial condition and operational status of the company together with information on its key officers or managers so that hose dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation#s financial resources and business responsibilityH
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CO-PENSATION OF DIRECTORS
8ec. *<. Co8 e$1!"#o$ o% &#rec"or1. + 3n the absence of any provision in the by+laws fixing their compensation, the directors
D<
shall not receive any compensation, as such directors, except such for compensation to %1) actual transportation expenses plus %$) per diems of !*< and %*) actual expenses while reasonable per diems5 !rovided, however, That any such waiting. Even without the express prohibition, the directors compensation other than per diems may be granted to directors by are not entitled to compensation for ET:e 0!5 #1 5e00= the vote of the stockholders representing at least a majority of the 1e""0e& ":!" &#rec"or1 o% cor or!"#o$1 re178 "#;e0< outstanding capital stock at a regular or special stockholdersP 1er;e 5#":o7" co8 e$1!"#o$ !$& #$ ":e !91e$ce o% meeting. 3n no case shall the total yearly compensation of directors, !$ e4 re11 !>ree8e$" or ! re1o07"#o$ ":ere"o+ $o as such directors, exceed ten %1<J) percent of the net income c0!#8 c!$ 9e !11er"e& ":ere%or. T:71 #" :!1 9ee$ :e0& before income tax of the corporation during the preceding year. ":!" ":ere c!$ 9e $o reco;er< o% co8 e$1!"#o$+ 7$0e11 e4 re110< ro;#&e& %or+ 5:e$ &#rec"or 1er;e1 !1 re1#&e$" or ;#ce= re1#&e$"+ !1 1ecre"!r< or "re!17rer or c!1:#er+ !1 8e89er o% !$ e4ec7"#;e co88#""ee+ !1 c:!#r8!$ o% ! 97#0&#$> co88#""ee+ or GENERALL): -irectors are not entitled to receive any 1#8#0!r o%%#ce1. compensation, E,CEPT5
1. $. *.
;easonable per diems1 &s provided in the by+laws or upon a majority vote of the stockholders1 and 3f they are performing functions other than that of a director.
Thus, the directors, in assigning themselves additional duties, such as the visitation of A&"/>&8, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as express in the by+laws. *ESTERN INSTITUTE OF TECHNOLOG)+ INC.+ HO-ERO L. VILLASIS+ DI-AS ENRI2UEZ+ PRESTON F. VILLASIS O REGINALD F. VILLASIS+ petitioner, vs. RICARDO T. SALAS+ SALVADOR T. SALAS+ SOLEDAD SALAS=TUBILLEJA+ ANTONIO S. SALAS+ RICHARD S. SALAS O HON. JUDGE PORFIRIO PARIAN+ respondents %K; 4o. 11*<*$1 $'C 8";& $1(1 &ug. $1, 1==') FACTS: 3n a special board meeting, a resolution was passed providing for compensation of officers. & few years later, petitioners ,omero Qillasis, !restod Qillasis, ;eginald Qillasis and -imas Enri.ue6 filed an affidavit+complaint for falsification of public documents %for submission of an income reflecting the resolution as passed on 1=CD, when in fact it was passed in 1=C() and estafa %for the disbursement of funds by effecting payment to the aforesaid salaries) against herein respondents who were members of the ?oard of Trustees who were also officers of the corporation. The trial court ac.uitted respondents in both charges without civil liability. The motion for reconsideration on the civil aspect being denied, petitioners filed this petition. ISSUE: E/4 the resolution granting compensation to /AA3"E;8 of the corporation is validF HELD5 Les. The proscription under 8ec. *<, is against granting compensation to directorsMtrustees of a corporation is not a sweeping rule. Eorthy of note is the clear phraseology of 8ec *< which states GX 9T:he directors shall not receive any compensation, as such directors, XH T:e :r!1e !1 17c: &#rec"or1 #1 $o" 5#":o7" 1#>$#%#c!$ce %or #" &e0#8#"1 ":e 1co e o% ":e ro:#9#"#o$ "o co8 e$1!"#o$ >#;e$ "o ":e8 %or 1er;#ce1 er%or8e& 7re0< #$ ":e#r c! !c#"< !1 &#rec"or1 or "r71"ee1. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation #$ ! c! !c#"< o":er ":!$ !1 &#rec"or1J"r71"ee1. 3n the case at bench, the ;esolution granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as "hairman, Qice+"hairman, Treasurer and 8ecretary of E3T.
%*) above5 8ec. *< is clear on the point when it provides Gas such directorsH. Therefore, special and extraordinary service rendered, outside of the regular duties, may form the basis for a claim of special compensation, such as when a director acts as a general counsel. REASON: the office of a director is usually filled up by those chiefly interested in the welfare of the institution by virtue of their interest in stock or other advantages and such interests are presumed to be the motive for executing duties of the office without compensation. -A) THE COURTS LOOK INTO THE REASONABLENESS OF CO-PENSATIONR The courts will not generally undertake to review the fairness of official salaries, at the suit of a stockholder unless wrongdoing and oppression or possible abuse of fiduciary position are shown. Ehen the recipient does not stand in the &7!0 re0!"#o$ of the %1) one compensated and %$) a participant in fixing his own compensation, it is considered outside the proper judicial function to go into business policy .uestion of the fairness or reasonableness of compensation as fixed by the board. /therwise, it will call for a scrutiny of the reasonableness or fairness of the compensation. @ikewise, even if consented to by the majority of stockholders, the courts may still look into such reasonableness if5 %1) it would amount to giving away corporate funds in the guise of compensation as against the interest of the dissenting minority1 or %$) in fraud of creditors, either amounting to 5!1"!>e o% !11e"1. CENTRAL COOPERATIVE E,CHANGE 'CCE( VS. TIBE+ JR. %** 8";& D=*1 Bune *<, 1='<) This is a complaint filed by herein petitioner ""E for the refund of certain amounts received by respondent when he served as member of the board of directors of ""E, which were said to be per diems and transportation expenses, representation expenses and commutable discretionary funds. ISSUE: E/4 the ?/- had the power to appropriate funds for the expenses claimed by respondentF HELD: 4o. The by+laws expressly reserved unto the stockholders the power to determine the compensation of the members of the ?/-, and the stockholders did restrict
D1
"learly 8ec. *< is not violated. "onse.uently, the last sentence limiting the compensation to 1<J of the net income before income tax does not likewise find application in this case since the compensation is being given to private respondents in their capacity as officers of E3T and not as board members. GOVERN-ENT VS. EL HOGAR FILIPINO %D< !hil. *==1 Buly 17, 1=$') The members of the board of El ,ogar Ailipino receives DJ of the net profit as shown in the balance sheet and is distributed in proportion to their attendance to meetings of the board. & complaint was filed against the, and the sixth cause of action alleged that the directors, instead of serving without pay, or receiving nominal pay or a fixed salary + as the complainant supposes would be proper have been receiving large compensation in varying amounts. ISSUE: E/4 the courts may declare the by+law provision null and voidF HELD: 4o. T:e Cor or!"#o$ L!5 &oe1 $o" 7$&er"!3e "o re1cr#9e ":e r!"e o% co8 e$1!"#o$ %or ":e &#rec"or1 o% cor or!"#o$1. The power to fix the compensation they shall receive, if any, is left to the corporation, to be determined in its by+laws %&ct 4o. 17D=, sec. $1). !ursuant to this authority the compensation for the directors of El ,ogar Ailipino has been fixed in section =$ of its by+laws, as already stated. T:e ?71"#ce !$& ro r#e"< o% ":#1 ro;#1#o$ 5!1 ! ro er 8!""er %or ":e 1:!re:o0&er1 5:e$ ":e 9<=0!51 5ere %r!8e& 1 !$& ":e c#rc781"!$ce ":!"+ 5#": ":e >ro5": o% ":e cor or!"#o$+ ":e !8o7$" !#& !1 co8 e$1!"#o$ "o ":e &#rec"or1 :!1 #$cre!1e& 9e<o$& 5:!" 5o70& ro9!90< 9e $ece11!r< "o 1ec7re !&e67!"e 1er;#ce %ro8 ":e8 #1 8!""er ":!" c!$$o" 9e correc"e& #$ ":#1 !c"#o$1 nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by+laws. 3f a mistake has been made, or the rule adopted in the by+laws has been found to work harmful results, the remedy is in the hands of the stockholders who have the power at any lawful meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our opinion without merit.
ISSUE: E/4 /ng should be held jointly and severally liableF HELD: 4o. 3t was an error to hold -avid /ng jointly and severally liable with T;&>&T to de la "uesta under the .uestioned transaction. /ng had there so acted, not in his personal capacity, but as an officer of a corporation, T;&>&T, with a distinct and separate personality. &s such, it should only be the corporation, not the person acting for and on its behalf that properly could be made liable thereon. Per1o$!0 0#!9#0#"< o% ! cor or!"e &#rec"or+ "r71"ee or o%%#cer !0o$> '!0":o7>: $o" $ece11!r#0<( 5#": ":e cor or!"#o$ 8!< 1o ;!0#&0< !""!c:+ !1 ! r70e+ o$0< 5:e$ S 1. ,e !11e$"1 %a) to a patently unlawful act of the corporation, or %b) for bad faith, or gross negligence in directing its affairs, or %c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons1 $. ,e co$1e$"1 to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto1 *. ,e !>ree1 to hold himself personally and solidarily liable with the corporation1 7. ,e is 8!&e, by a specific provision of law, to personally answer for his corporate action. 3n the case at bench, there is no indication that petitioner -avid /ng could be held personally accountable under any of the abovementioned cases. RICARDO A. LLA-ADO+ petitioner, vs. COURT OF APPEALS !$& PEOPLE OF PHILIPPINES+ respondents %K; 4o. ==<*$1 $'< 8";& 7$*1 >arch $(, 1==')
THE
E.
LIBABILIT) OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides a corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent, or when absent bad faith or malice. TRA-AT -ERCANTILE+ INC. VS. CA %$*C 8";& 171 4ov. ', 1==7) >elchor dela "uesta, doing business under the name Aarmers >achineries, sold a tractor to Tramat >ercantile, 3nc. 3n payment, -avid /ng, Tramat#s president and manager issued a check for !**,D<<. Tramat sold the tractor, together with an attached lawn mower fabricated by it, to 4&E&8&. -avid /ng put a stop payment on the check when 4&E&8& refused to pay on the account that aside from the defects on the lawn mower, the engine %sold by dela "osta) was a reconditioned unit. -e la "osta filed an action for recovery of money which was granted by the court.
FACTS: !rivate complainant @eon Kaw delivered to the accused ;icardo @lamado and Bacinto !ascual the amount of !1C<,<<< which is to be repaid in ( months with 1$J interest. &s security, the accused issued and signed a postdated check which was later on stopped and dishonored for being drawn against insufficient funds. Kaw filed a complaint for violation of ?! ?lg. $$. !ascual remained at large and the trial on the merits against @lamado was conducted. The trial court convicted @lamado. ISSUE: E/4 petitioner, treasurer of !an &sia Ainance "orporation could be held civilly and criminally liableF HELD: Les. !etitioner denies knowledge of the issuance of the check without sufficient funds and involvement in the transaction with private complainant. ,owever, knowledge involves a state of mind difficult to establish. Thus, the statute itself creates a prima facie presumption, i.e., that the drawer had knowledge of the insufficiency of his funds in or credit with the bank at the time of the issuance and on the checkPs presentment for payment. !etitioner failed to rebut the presumption by paying the amount of the
D$
check within five %D) banking days from notice of the dishonor. ,is claim that he signed the check in blank which allegedly is common business practice is hardly a defense. 3f as he claims, he signed the check in blank, he made himself prone to being charged with violation of ?! $$. 3t became incumbent upon him to prove his defenses. &s Treasurer of the corporation who signed the check in his capacity as an officer of the corporation, lack of involvement in the negotiation for the transaction is not a defense. !etitionerPs argument that he should not be held personally liable for the amount of the check because it was a check of the !an &sia Ainance "orporation and he signed the same in his capacity as Treasurer of the corporation, is also untenable. The third paragraph of 8ection 1 of ?! ?lg. $$ states5 G*:ere ":e c:ec3 #1 &r!5$ 9< ! cor or!"#o$+ co8 !$< or e$"#"<+ ":e er1o$ or er1o$1 5:o !c"7!00< 1#>$e& ":e c:ec3 #$ 9e:!0% o% 17c: &r!5er 1:!00 9e 0#!90e 7$&er ":#1 Ac"H ELENA F. UICHICO+ 8&> E@ A@/;/, Q3"T/;3& A. ?&83@3/, petitioners, vs. NATIONAL LABOR RELATIONS CO--ISSION+ @ UQ3>34-& 8&4T/8, 8,3;@EL !/;;&8, "&;>E4 E@3U&;-E, ET. &@., respondents %K; 4o. 1$17*71 $'* 8";& *D1 Bune $, 1==') FACTS: !rivate respondents were employees of "rispa, 3nc. who were dismissed due to alleged retrenchment. They filed an illegal dismissal complaint with the 4@;" against "rispa, 3nc., Qaleriano Aloro %major stockholder, incorporation and director of "rispa) and petitioners, who were high ranking officials and directors of "rispa. The @abor &rbiter dismissed the complaint but ordered petitioners, Aloro and "rispa to pay separation pay. ISSUE: E/4 petitioners can be held liableF HELD5 Les. & corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as in the following cases5 G1. Ehen directors and trustees or, in appropriate cases, the officers of a corporation5 %a) vote for or assent to patently unlawful acts of the corporation1 %b) act in bad faith or with gross negligence in directing the corporate affairs1 %c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons1 $. Ehen a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto1 *. Ehen a director, trustee or officer has
contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation1 or 7. Ehen a director, trustee or officer is made, by specific provision of law, personally liable i for his corporate action.H I$ 0!9or c!1e1+ !r"#c70!r0<+ cor or!"e &#rec"or1 !$& o%%#cer1 !re 1o0#&!r#0< 0#!90e 5#": ":e cor or!"#o$ %or ":e "er8#$!"#o$ o% e8 0o<8e$" o% cor or!"e e8 0o<ee1 &o$e 5#": 8!0#ce or #$ 9!& %!#": . 3n this case, it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They were the ones, who as high+ranking officers and directors of "rispa, 3nc., signed the ?oard ;esolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited !rofit and @oss 8tatement which, to repeat, had no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with "rispa, 3nc. for all the money claims of the illegally terminated respondent employees in this case.
A.
THREE=FOLD DUT) OF DIRECTORS
-irectors owe a three+fold duty to the corporation5 %1) /bedience1 %$) -iligence and %*) @oyalty. Sec. /1. L#!9#0#"< o% &#rec"or1+ "r71"ee1 or o%%#cer1. + -irectors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or ac.uire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.
Ehen a director, trustee or officer attempts to ac.uire or ac.uires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which e.uity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
OBEDIENCE: as stated in the first part of 8ec. *1 refers to the act of voting or assenting, either willfully or knowingly, to patently unlawful acts thereby making the responsible director liable for damages resulting therefrom1 DILIGENCE: nder the second part of 8ec. *1, the directors are re.uired to manage the corporate affairs with reasonable care and prudence. This is because the liability of a corporation is not limited to willful breach of trust or excess of power, but extends also to negligence. Their liability rests upon the common law rule which renders liable every agent who violates his authority or neglects his duty to the damage of his principal.
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The degree of diligence is relative. The more fair and satisfactory rule is that degree of care and diligence which an ordinary prudent director could reasonably be expected to exercise in a like position under similar circumstances.
BUSINESS JUDG-ENT RULE5 &lthough directors are commonly said to be responsible both for reasonable care and also prudence, the formula is continually repeated that they are not liable for losses due to imprudence or honest error of judgment. The business judgment rule in effect states that .uestions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. The directors are business managers and as long as they act in good faith, its actuations are not subject to judicial review.
ALFREDO -ONTELIBANO+ ET AL.+ plaintiffs+appellants, vs. BACOLOD=-URCIA -ILLING CO.+ INC.+ defendant+ appellee. %K; 4o. @+1D<=$1 D 8";& *(1 >ay 1C, 1=($) FACTS: &ppellants have been sugar planter adhered to defendant+appellees sugar central mill under identical milling contracts with a DDJ share of the resulting product. There was a proposal to increase the planter#s share to (<J which was adopted by defendant in an &mended >illing "ontract and conse.uently a ?oard ;esolution. 3n 1=D*, the appellants initiated the present action, contending that three 4egros sugar centrals %@a "arlota, ?inalbagan+3sabela and 8an "arlos), with a total annual production exceeding one+third of the production of all the sugar central mills in the province, had already granted increased participation %of ($.DJ) to their planters, and that under paragraph = of the resolution of &ugust $<, 1=*(, heretofore .uoted, the appellee had become obligated to grant similar concessions to the plaintiffs %appellants herein). The appellee ?acolod+>urcia >illing "o., 3nc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made without consideration1 that the resolution in .uestion was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. The trial court decided in favor of defendant, thus the present appeal. ISSUE: E/4 the resolutions passed by the bard are valid and bindingF HELD: Les. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the &mended >illing "ontract for the purpose of making its terms more acceptable to the other contracting parties. A1 ":e re1o07"#o$ #$ 67e1"#o$ 5!1 !11e& #$ >oo& %!#": 9< ":e 9o!r& o% &#rec"or1+ #" #1 ;!0#& !$& 9#$&#$>+ !$& 5:e":er or $o" #" 5#00 c!71e 0o11e1 or &ecre!1e ":e ro%#"1 o% ":e ce$"r!0+ ":e co7r" :!1 $o !7":or#"< "o re;#e5 ":e8. GThey hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Ehether the
business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. 3t is a well+known rule of law that .uestions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors1 the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. %Aletcher on "orporations, Qol. $, p. *=<).H &nd it appearing undisputed in this appeal that sugar centrals of @a "arlota, ,awaiian !hilippines, 8an "arlos and ?inalbagan %which produce over one+third of the entire annual sugar production in /ccidental 4egros) have granted progressively increasing participations to their adhered planter at an average rate of ($.*** J (7.$J (7.*J (7.DJ (*.DJ for the 1=D1+D$ crop year1 for 1=D$+D*1 for 1=D*+D71 for 1=D7+DD1 and for 1=DD+D(,
the appellee ?acolod+>urcia >illing "ompany is, under the terms of its ;esolution of &ugust $<, 1=*(, duty bound to grant similar increases to plaintiffs+appellants herein.
LIABILIT) OF DIRECTORS FOR ACTS OF THEIR CO= DIRECTORS: Kenerally5 a director is not liable for the acts of their co+ directors, unless5 %1) ,e connives or participates1 or %$) ,e is negligent in not discovering or acting to prevent it. Thus, absent of actual knowledge of the wrongful activities, on the part of the co+directors, the same cannot be imputed to the other director unless in the exercise of reasonable care attending his responsibilities, he should have been aware of suspicious circumstances demanding correlative action.
LO)ALT): refers to the proscription imposed on directors on ac.uiring any personal or pecuniary interest in conflict with their duty as director. Their relationship is regarded as Gfiduciary relationH. &s fiduciaries, they are obliged to act with utmost candor and fair dealing for the interest of the corporation and without selfish motives. 8ec. *7. D#10o<!0"< o% ! &#rec"or. + Ehere a director, by virtue of his office, ac.uires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two+thirds %$M*) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.
&pparent from 8ec. *1 and *7, the duty of loyalty is
D7
violated in the following instances5 1. Ehen a director or trustee Gac.uires any personal or pecuniary interest in conflict with %his) duty as such director or trusteeH1 $. Ehen he Gattempts to ac.uire or ac.uires, in violation of his duty, any interest adverse to the corporation in respect to any matter which has been reposed in him in confidence, as to which e.uity imposes a disability upon him to deal in his own behalfH1 and *. Ehen he, Gby virtue of his office, ac.uires for himself a business opportunity which should belong to the corporation, thereby obtaining profit to the prejudice of such corporationH.
S(,,<7*,$1=.7' in gold for all the friar lands, though owned by different owners. Ehile this state of things existed, and before the final offer had been made by the Kovernor, the defendant, although still holding out for a higher price for the lands, took steps to purchase the C<< shares of stock in his own company from >rs. 8trong, which he knew were in the possession of A. 8tuart Bones, as her agent. The defendant employed Rrauffman and the latter employed >r. 8loan, a broker, to purchase the stock for him. >r. 8loan, the husband, did not know who wanted to buy the shares nor did Bones when he was spoken to. Bones would not have sold at the price he did had he known it was the defendant who was purchasing, because, as he said, it would show increased value, as the defendant would not be likely to purchase ore stock unless the price was going up. ISSUE: E/4 it was the duty of the defendant to disclose to the agent of the plaintiff the facts bearing upon or which might affect the value of the stockF HELD: Les. & director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to ac.uire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in this case. 3n this case, the facts clearly indicate that a director of a corporation owning friar lands in the !hilippine 3slands, and who controlled the action of the corporation, had so concealed his exclusive knowledge of the impending sale to the government from a shareholder from whom he purchased, through an agent, shares in the corporation, that the concealment was in violation of his duty as a director to disclose such knowledge, and amounted to deceit sufficient to avoid the sale1 and, under such circumstances, it was immaterial whether the shareholderPs agent did or did not have power to sell the stock. 3n addition to his ownership of almost three+fourths of the shares of the stock of the company, the defendant was one of the five directors of the company, and was elected by the board the agent and administrator general of such company, Nwith exclusive intervention in the managementN of its general business. "oncealing his identity when procuring the purchase of stock, by his agent, was in itself stock evidence of fraud on the part of the defendant. The concealment was not a mere inadvertent omission but was a studied and intentional omission, to be characteri6ed as part of the deceitful machination to obtain the purchase without giving information whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to, in that way, obtain the same at a lower price.
FORBIDDEN PROFITS5 Aorbidden in the sense that directors and officers are fiduciary representatives of the corporation and as such they are not allowed to obtain any personal profit, commission, bonus or gain for their official actions. This may also refer to those arising from transactions of directors with third persons which may involve misappropriation of corporate opportunities and disloyal diverting of business. -irectors and officers are corporate insiders and cannot, therefore, utili6e their strategic position for their own preferment or use their powers and opportunities for their personal advantage to the exclusion of the interest which they represent. CORPORATE OPPORTUNIT) DOCTRINE: it places a director of a corporation in the position of a fiduciary and prohibits him from sei6ing a business opportunity andMor developing it at the expense and with the facilities of the corporation. ,e cannot appropriate to himself opportunity which in fairness should belong to the corporation. RATIFICATION5 1. The second paragraph of 8ec. *1 which makes a director liable to account for profits if he attempts to ac.uire or ac.uires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which e.uity imposes a disability upon him to deal in his own behalf is $o" 179?ec" "o r!"#%#c!"#o$. $. Ehereas, in 8ec. *7, if a director ac.uires a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owing or representing at least $M* of the outstanding capital stock.
E4!8 0e: &, ?, ", - and E are directors of ;E&@TL "/;!., U wanted to sell his property with a fair market value of !1<<> for !=<>. a. 3f it was offered first to &, and & made a profit of !1<>, this would fall under 8ec. *7 and may be subject to ratification1 & merely ac.uired a business opportunity owing to the corporation. b. 3f it was offered to ;E&@TL "/;!., and &, later on offered to buy it for !=D and sold it making a profit of !D>, it would fall under 8ec. *1 and not subject to ratification, & should return the profits to ;E&@TL "/;!. 3t was a matter reposed in him in confidence. STRONG VS. REPIDE %71 !hil. =7'1 >ay *, 1=<=) the Kovernor of the !hilippine 3slands, on behalf of the government, made an offer of purchase for the total sum of
K.
SELF=DEALING DIRECTORS
The self+dealing director is one who deals or transacts business with his own corporation.
DD
Te would be the exclusive dealer andMor distributor of the Sec. /2. De!0#$>1 o% &#rec"or1+ "r71"ee1 or o%%#cer1 5#": corporation ":e in the entire >indanao. &s a conse.uence, Te entered into different contracts for selling white cement. cor or!"#o$. + & contract of the corporation with one or more of its @aer on, defendant corporation decided to impose certain directors or trustees or officers is voidable, at the option of such conditions upon the dealership agreement. corporation, unless all the following conditions are present5 8everal demands to comply with the agreement were made by Te to the corporation but were refused and Te was constrained to cancel the contracts he entered into. 1. That the presence of such director or trustee in the board -efendant corporation entered into an exclusive dealership meeting in which the contract was approved was not necessary to agreement with 4apoleon "o for the marketing of white constitute a .uorum for such meeting1 cement in >indanao. ,ence, this suit. $. That the vote of such director or trustee was not necessary for ISSUE: E/4 the dealership agreement entered into by Te the approval of the contract1 with his own corporation is valid and bindingF *. That the contract is fair and reasonable under the circumstances1 HELD: 4o. 3n the instant case respondent Te was not an and ordinary stockholder1 he was a member of the ?oard of -irectors and &uditor of the corporation as well. ,e was 7. That in case of an officer, the contract has been previously what is often referred to as a Nself+dealingN director. authori6ed by the board of directors. & director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 3n case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and Ehere any of the first two conditions set forth in the preceding benefit. &s corporate managers, directors are committed to paragraph is absent, in the case of a contract with a director or seek the maximum amount of profits for the corporation. trustee, such contract may be ratified by the vote of the This trust relationship Nis not a matter of statutory or stockholders representing at least two+thirds %$M*) of technical the law. 3t springs from the fact that directors have outstanding capital stock or of at least two+thirds %$M*) of the thecontrol and guidance of corporate affairs and property members in a meeting called for the purpose5 !rovided, Thatand full hence of the property interests of the stockholders. disclosure of the adverse interest of the directors or trustees arguendo that the Ndealership agreementN involved is made at such meeting5 !rovided, however, That Kranting the involved here would be valid and enforceable if entered contract is fair and reasonable under the circumstances. into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a -irector and &uditor of the petitioner corporation changes the whole situation. Airst of all, Ee believe that Kenerally5 & contract entered into by a director with his the contract was neither fair nor reasonable. The own corporation is voidable at the latter#s option, except Ndealership agreementN entered into in Buly, 1=(=, was to when all the conditions laid down in 8ec. *$ are met. /n sell and supply to respondent Te $<,<<< bags of white the other hand, where any of the first two conditions is cement per month, for five years starting 8eptember, absent, the contract becomes voidable subject to the 1='<, at the fixed price of !=.'< per bag. ;espondent Te is ratification of the stockholders representing $M* of the a businessman himself and must have known, or at least outstanding capital stock the re.uirements of which are5 must be presumed to know, that at that time, prices of %1) there must be a meeting called for that purpose1 %$) full commodities in general, and white cement in particular, disclosure of the adverse interest of the director1 and %*) were not stable and were expected to rise. &t the time of the contract is fair and reasonable under the the contract, petitioner corporation had not even circumstances. commenced the manufacture of white cement, the reason why delivery was not to begin until 17 months later. ,e 3f the self+dealing director owns all or substantially all of the must have known that within that period of six years, there shares of stock, thereby making ratification easily possible, would be a considerable rise in the price of white cement. the last sentence of 8ec. *$ should be made to apply by 3n fact, respondent TePs own >emorandum shows that in determining reasonableness of the transaction to which 8eptember, 1='<, the price per bag was !17.D<, and by there is no yardstick. Every case stands upon its own the middle of 1='D, it was already !*'.D< per bag. -espite bottom, and the ultimate .uestion is whether the contract this, no provision was made in the Ndealership agreementN was honest and beneficial which is always a .uestion of to allow for an increase in price mutually acceptable to the fact. parties. 3nstead, the price was pegged at !=.'< per bag for the whole five years of the contract. Aairness on his part as PRI-E *HITE CE-ENT CORPORATION+ petitioner, a director of the corporation from whom he was to buy the vs. cement, would re.uire such a provision. 3n fact, this IAC and &@EB&4-;/ TE+ respondents unfairness in the contract is also a basis which renders a %K; 4o. @+(CDDD1 $$< 8";& 1<*1 >arch 1=, 1==*) contract entered into by the !resident, without authority from the ?oard of -irectors, void or voidable, although it FACTS: ;espondent &lejandro Te, a director of petitioner may have been in the ordinary course of business. Ee corporation, was awarded a dealership agreement whereby believe that the fixed price of !=.'< per bag for a period of
D(
five years was not fair and reasonable. ;espondent Te, himself, when he subse.uently entered into contracts to resell the cement to his Nnew dealersN ,enry Eee and Kaudencio Kalang stipulated as follows5 The price of white cement shall be mutually determined by us but in no case shall the same be less than !17.<< per bag %=7 lbs) &s director, especially since he was the other party in interest, respondent TePs bounden duty was to act in such manner as not to unduly prejudice the corporation. 3n the light of the circumstances of this case, it is to s .uite clear that he was guilty of disloyalty to the corporation1 he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the Ndealership agreementN or that they were fully aware of its provisions. The contract was therefore not valid and this "ourt cannot allow him to reap the fruits of his disloyalty. CHARLES *. -EAD+ plaintiff+appellant, vs. E. C. -cCULLOUGH+ ET AL.+ !$& THE PHILIPPINE ENGINEERING AND CONSTRUCTION CO-PAN)+ defendant+appellants %K; 4o. ($1'1 $1 !hil. =D1 -ec. $(, 1=11) FACTS: ,erein plaintiff+appellant >ead with defendant >c"ullough formed the !hilippine Engineering and "onstruction "ompany, the incorporators being the only stockholders and directors of the company. Ehen >ead left for "hina, the other directors entered into an agreement where all the rights in a Gwrecking contractH with the naval authorities were sold to defendant. The defendant, in turn, sold these rights with ;.E. ?rown, ,-" jones, Bohn >acleod and T, Twentyman, and retaining one sixth interest, formed >anila 8alvage &ssociation. ISSUE: E/4 officers or directors of the corporation may purchase the corporate propertyF HELD: Les. Ehile a corporation remains solvent, we can see no reason why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger. 8o long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to others. ?ut the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest1 and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other creditors. 4evertheless, a director or officer may in good faith and for an ade.uate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority. %?each et al. vs. >iller, supra1 Twin+@ick /il "ompany vs. >arbury, supra1 -rury vs. "ross, ' Eall., $==1 "urran vs. 8tate of &rkansas, 1D ,ow., *<71 ;ichards vs. 4ew ,amphshire 3nsurance "ompany, 7* 4. ,., $(*1 >orawet6 on "orporations %first edition), sec. D'=1 ,aywood vs. @incoln @umber "ompany et al., (7 Eis.,
(*=1 !ort vs. ;ussels, *( 3nd., (<1 @ippincott vs. 8haw "arriage "ompany, $1 Aed. ;ep., D''.) 3n the case of the Twin+@ick /il "ompany vs. >arbury, he court said5 That a director of a joint+stock corporation occupies one of those fiduciary relations where his dealings with the subject+matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and others. %Roehler vs. 3ron., $ ?lack, '1D1 -rury vs. "ross, ' Eall., $==1 ;.;. "o. vs. >agnay, $D ?eav., DC(1 "umberland "o vs. 8herman, *< ?arb., DD*1 ,offman 8. "oal "o. vs. "umberland "o., 1( >d., 7D(.) The general doctrine, however, in regard to contracts of this class, is, not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it. Ee say, this is the general rule1 for there may be cases where such contracts would be void ab initio1 as when an agent to sell buys of himself, and by his power of attorney conveys to himself that which he was authori6ed to sell. ?ut even here, acts which amount to a ratification by the principal may validate the sale The sale or transfer of the corporate property in the case at bar was made by three directors who were at the same time a majority of stockholders. 3f a majority of the stockholders have a clear and a better right to sell the corporate property than a majority of the directors, then it can be said that a majority of the stockholders made this sale or transfer to the defendant >c"ullough. Ehat were the circumstances under which said sale was madeF The corporation had been going from bad to worse. The work of trying to raise the sunken 8panish fleet had been for several months abandoned. The corporation under the management of the plaintiff had entirely failed in this undertaking. 3t had broken its contract with the naval authorities and the S1<,<<< >exican currency deposited had been confiscated. 3t had no money. 3t was considerably in debt. 3t was a losing concern and a financial failure. To continue its operation meant more losses. 8uccess was impossible. The corporation was civilly dead and had passed into the limbo of utter insolvency. The majority of the stockholders or directors sold the assets of this corporation, thereby relieving themselves and the plaintiff of all responsibility. This was only the wise and sensible thing for them to do. They acted in perfectly good faith and for the best interests of all the stockholders. N3t would be a harsh rule that would permit one stockholder, or any minority of stockholders to hold a majority to their investment where a continuation of the business would be at a loss and where there was no prospect or hope that the enterprise would be profitable.N Ee therefore conclude that the sale or transfer made by the .uorum of the board of directors Y a majority of the stockholders Y is valid and binding upon the majority+the plaintiff.
,.
INTERLOCKING DIRECTORS
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&n interlocking director is a director in one corporation who deals or transacts with another corporation of which he is also a director. 3n such case, there may effectively be a dual agency, a divided allegiance where allegiance in one corporation may subordinated to the other. The prevailing view is that these contracts entered into where there is an interlocking director is not voidable merely by reason of conflicting duties or interest as to corporations represented, even when a majority or all of the directors are common to both corporations. 3t is recogni6ed that such will be upheld if there is no bad faith or unfairness or collusion.
remedy a wrong done directly to the corporation and indirectly to stockholders. CANDIDO PASCUAL+ plaintiff+appellant, vs. EUGENIO DEL SAZ OROZCO+ ET AL+ appellees %K; 4o. @+D1'71 1= !hil. C*1 >arch 1', 1=11)
defendants+
FACTS: -uring 1=<*+1=<', the defendant+appellees, without the knowledge and ac.uiescence of the stockholders deducted their compensation from gross income instead of from the net profits of the bank, the same with their predecessors for the years 1C==+1=<$.
Sec. //. Co$"r!c"1 9e"5ee$ cor or!"#o$1 5#": #$"er0oc3#$> !laintiff+appellant brings this action in his own right as a &#rec"or1. %1) E4ce " #$ c!1e1 o% %r!7& , and provided %$) stockholder of the bank, for the benefit of the bank and all the stockholders, in behalf of the corporation, which, even co$"r!c" #1 %!#r !$& re!1o$!90e 7$&er ":e c#rc781"!$ce1 though, nominally a defendant, is to all intents and contract between two or more corporations having interlocking purposes the real plaintiff in this case as shown in the directors 1:!00 $o" 9e #$;!0#&!"e& o$ ":!" >ro7$& !0o$e prayer of the complaint. !rovided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or ISSUE: E/4 plaintiff has capacity to sueF corporations is merely nominal, he shall be subject to the provisions HELD of the preceding section insofar as the latter corporation or 5 Les. 3n suits of this character the corporation itself and not the plaintiff stockholder is the real party in interest. corporations are concerned. The rights of the individual stockholder are merged into that of the corporation. 3t is a universally recogni6ed doctrine that a stockholder in a corporation has no title legal or e.uitable to the corporate property1 that both of 8tockholdings e4cee&#$> twenty %$<J) percent of the outstanding these are in the corporation itself for the benefit of all the capital stock shall be considered substantial for purposes of stockholders. Text writers illustrate this rule by the familiar interlocking directors. example of one person or entity owning all the stock and still having no greater or essentially different title than if he owned but one single share. 8ince, therefore, the stockholder has no title1 it is evident that what he does have, with respect to the corporation and his fellow NOTE: stockholder, are certain rights sui generis. These rights are 1. The contract between corporations with interlocking generally enumerated as being, first, to have a certificate director is valid absent fraud and provided it is or other evidence of his status as stockholder issued to reasonable under the circumstances1 him1 second, to vote at meetings of the corporation1 third, $. 3f the interest of the interlocking director in one to receive his proportionate share of the profits of the corporation e4cee&1 $<J and in the other merely corporation1 and lastly, to participate proportionately in the nominal, the contract becomes voidable at the latter distribution of the corporate assets upon the dissolution or corporation#s option. 3n effect, the director would be winding up. %!urdyPs ?each on !rivate "orporations, sec. treated as a self+dealing director under 8ec. *$1 DD7.) *. 3f the interest in both companies is either both The right of individual stockholders to maintain suits for substantial or both nominal, 8ec. ** will apply. and on behalf of the corporation was denied until within a comparatively short time, but his right is now no longer 3. DERIVATIVE SUIT doubted. &ccordingly, in 1C7*, in the leading case of Aoss vs. ,arbottle, a stockholder brought suit in the name of 3n case of a wrongful or fraudulent act of a director, officer himself and other defrauded stockholders, and for the or agent, stockholders have the following options5 benefit of the corporation, against the directors, for a 1. 3ndividual or !ersonal &ction for direct injury to his breach of their duty to the corporation. This case was rights, such as denial of his right to inspect corporate decided against the complaining stockholder, on the books and records or pre+emptive rights1 ground that the complainant had not proved that the corporation itself was under the control of the guilty $. ;epresentative or "lass 8uit in which one or more parties, and had not proved that it was unable to institute members of a class sue for themselves as a class or suit. The court, however, broadly intimated that a case for all to whom the right was denied, either as an might arise when a suit instituted by defrauded individual action or a derivative suit1 and a stockholders would be entertained by the court and redress *. -erivative 8uit an action based on injury to the given. &cting upon this suggestion, and impelled by the corporation to enforce a corporate right wherein utter inade.uacy of suits instituted by the corporation, the corporation itself is joined as a necessary party, defrauded stockholders continued to institute these suits and recovery is in favor of and for the corporation. 3t is and to urge the courts of e.uity to grant relief. These a suit granted to any stockholder to institute a case to efforts were unsuccessful in clearly establishing the right of
DC
stockholders herein until the cases of &twol against >erriwether, in England, 1C(', and of -odge vs. Eoolsey, in this country, in 1CDD. These two great and leading cases have firmly established the law for England and &merica, that 5:ere cor or!"e &#rec"or1 :!;e co88#""e& ! 9re!c: o% "r71" e#":er 9< ":e#r %r!7&1+ 70"r! ;#re1 !c"1+ or $e>0#>e$ce+ !$& ":e cor or!"#o$ #1 7$!90e or 7$5#00#$> "o #$1"#"7"e 17#" "o re8e&< ":e 5ro$>+ ! 1#$>0e 1"oc3:o0&er 8!< #$1"#"7"e ":!" 17#"+ 17#$> o$ 9e:!0% o% :#81e0% !$& o":er 1"oc3:o0&er1 !$& %or ":e 9e$e%#" o% ":e cor or!"#o$+ "o 9r#$> !9o7" ! re&re11 o% ":e 5ro$> &o$e &#rec"0< "o ":e cor or!"#o$ !$& #$&#rec"0< "o ":e 1"oc3:o0&er1. 8o it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank %corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for what purpose he ac.uired the shares which he now owns. 3n the determination of these .uestions we cannot see how, if it be true that the bank is a .uasi+public institution, it can affect in any way the final result. 3t is alleged that the plaintiff became a stockholder on the 1*th of 4ovember, 1=<*1 that the defendants, as members of the board of directors and board of government, respectively, during each and all the years 1=<*, 1=<7, 1=<D, 1=<(, and 1=<', did fraudulently, and to the great prejudice of the bank and its stockholders, appropriate to their own use from the profits of the bank sums of money amounting approximately to !$<,<<< per annum. 3t is self+evident that the plaintiff in the case at bar was not, before he ac.uired in 8eptember, 1=<*, the shares which he now owns, injured or affected in any manner by the transactions set forth in the second cause of action. ,is vendor could have complained of these transactions, but he did not choose to do so. The discretion whether to sue to set them aside, or to ac.uiesce in and agree to them, is, in our opinion, incapable of transfer. 3f the plaintiff himself had been injured by the acts of defendantsP predecessors that is another matter. ,e ought to take things as he found them when he voluntarily ac.uired his ten shares. 3f he was defrauded in the purchase of these shares he should sue his vendor. %Thus, he may sue for the second half of 1=<* to 1=<' but not for the years 1=C= to the first half of 1=<*.) 8o it seems to be settled by the 8upreme "ourt of the nited 8tates, as a matter of substantive law, that a stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had not devolved upon him since by operation of law, cannot maintain suits of this character, unless such transactions continue and are injurious to the stockholder, or affect him especially and specifically in some other way. HARRIE S. EVERETT+ ";&@ K. "@3AA/;-, E@@38 ,. TE&@ and KE/;KE E. ;/?348/4, plaintiffs+appellants, vs. THE ASIA BANKING CORPORATION+ 43",/@&8 E. > @@E4, E;3" ?&;"@&L, &@A;E- A. RE@@L, B/,4 E. >E&;8 and ",&;@E8 -. >&"34T/8,, defendants+appellees. %K; 4o. @+$D$711 7= !hil. D1$1 4ov. *, 1=$() FACTS: !laintiffs, stockholders %together with ?arclay) of Teal and "ompany %"ompany), entered into a >emorandum of &greement and Qoting Trust &greement
with defendant &sia ?anking "orporation %?ank) with the understanding that it was intended for the protection of all parties thereto from outside creditors, but that they were not intended to be enforced according to the letter thereof, and that they did not contain the true agreement between the ?ank and the "ompany which was to finance the company without interference from the above+named creditors. That shortly after, >ullen caused the removal of the plaintiffs as directors of the "ompany and their replacement. The defendants thereafter gave pledges and mortgages from the "ompany to the ?ank and entered into contracts as directed by the ?ank, and permitted the ?ank to foreclose the same and to sell the property of the "ompany itself and permitted the ?ank to institute suits against the "ompany, in which the "ompany was not represented by anyone having its interest at heart and in which reason the ?ank occupied both plaintiff and defendant and tricked and deluded the courts into giving judgment in which the rights of the real parties were concealed and unknown to the courts. Thereafter, defendants incorporated !hilippine >otors "orporation where all the assets and goodwill of the "ompany were transferred by the ?ank. ISSUE: E/4 the plaintiffs have the legal capacity to bring an actionF HELD: Les. 3nvoking the well+known rule that shareholders cannot ordinarily sue in e.uity to redress wrongs done to the corporation, but that the action must be brought by the ?oard of -irectors, the appellees argue Y and the court below held Y that the corporation Teal and "ompany is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the ?oard to bring the action, are not the proper parties plaintiff. ?ut, like most rules, the rule in .uestion has its exceptions. 3t is alleged in the complaint and, conse.uently, admitted through the demurrer that the corporation Te!0 !$& Co8 !$< #1 7$&er ":e co8 0e"e co$"ro0 o% ":e r#$c# !0 &e%e$&!$"1 #$ ":e c!1e+ !$&+ #$ ":e1e c#rc781"!$ce1+ #" #1 o9;#o71 ":!" ! &e8!$& 7 o$ ":e Bo!r& o% D#rec"or1 "o #$1"#"7"e !$ !c"#o$ !$& ro1ec7"e ":e 1!8e e%%ec"#;e0< 5o70& :!;e 9ee$ 71e0e11+ !$& ":e 0!5 &oe1 $o" re67#re 0#"#>!$"1 "o er%or8 71e0e11 !c"1. %Exchange bank of Eewoka vs. ?ailey, $= /kla., $7(1 Aleming and ,ewins vs. ?lack Earrior "opper "o., 1D &ri6., 11 Eickersham vs. "rittenden, 1<( "al., *$=1 Klenn vs. Rittaning ?rewing "o., $D= !a., D1<1 ,awes vs. "ontra "osta Eater "ompany, 1<7 . 8., 7D<.) The conclusion of the court below that the plaintiffs, not being stockholders in the !hilippine >otors "orporation, had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon a misconception of the character of the action. 3n this proceeding it was necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to the alleged loss of their property and, in making a full disclosure, references to the !hilippine >otors "orporation appear to have been inevitable. 3t is to be noted that the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings. 3n our opinion the plaintiffs state a good cause of action for
D=
e.uitable relief and their complaint is not in any respect fatally defective. The judgment of the court below is therefore reversed, the defendants demurrer is overruled, and it is ordered that the return of the record to the "ourt within ten days from the return of the record to the "ourt of Airst 3nstance. 8o ordered REPUBLIC BANK+ represented in this action by -&>&8/ !. !E;EU, etc., plaintiff+appellant, vs. -IGUEL CUADERNO+ ?3E4QE43-/ -3U/4, !&?@/ ;/>&4, T,E ?/&;- /A -3;E"T/;8 /A T,E ;E! ?@3" ?&4R &4T,E >/4ET&;L ?/&;- /A T,E "E4T;&@ ?&4R /A T,E !,3@3!!34E8, defendants+appellees %K; 4o. @+$$*==1 1= 8";& ('11 >arch *<, 1=(') FACTS: -amaso !ere6, a stockholder of ;epublic ?ank, instituted a derivative suit against defendant !ablo ;oman, then !resident of the ?ank, for granting certain loans to fictitious and non+existing persons and to their close friends, relatives andMor employees, who were in reality their dummies on the basis of fictitious or inflated appraised value of real estate properties, in connivance with other officials. The complaint alleged that >iguel "uaderno, then "entral ?ank Kovernor, acting upon the complaint, and the >onetary ?oard ordered an investigation and found violations of the Keneral ?anking &ct, but no information was filed until his retirement1 that to neutrali6e the impending action against him, !ablo ;oman engaged >iguel "uaderno as technical consultant and selected ?ienvenido -i6on as "hairman of the ?oard of the ?ank1 that such appointment was done in bad faith and without intention to protect the interest of the ?ank but were only prompted to protect !ablo ;oman. The complaint, therefore, prayed for a writ of preliminary injunction against eh >onetary ?oard in confirming such appointments, but was dismissed by the lower court. ISSUE: E/4 the court below erred in dismissing the complaintF HELD: Les. The defendants mainly controvert the right of plaintiff to .uestion the appointment and selection of defendants "uaderno and -i6on, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. 4ormally, this is correct, but !hilippine jurisprudence is settled that !$ #$&#;#&7!0 1"oc3:o0&er #1 er8#""e& "o #$1"#"7"e ! &er#;!"#;e or re re1e$"!"#;e 17#" o$ 9e:!0% o% ":e cor or!"#o$ 5:ere#$ :e :o0&1 1"oc3 #$ or&er "o ro"ec" or ;#$&#c!"e cor or!"e r#>:"1+ 5:e$e;er '1( ":e o%%#c#!01 o% ":e cor or!"#o$ re%71e "o 17e+ or '2( !re ":e o$e1 "o 9e 17e& or '/( :o0& ":e co$"ro0 o% ":e cor or!"#o$. I$ 17c: !c"#o$1+ ":e 17#$> 1"oc3:o0&er #1 re>!r&e& !1 ! $o8#$!0 !r"<+ 5#": ":e cor or!"#o$ !1 ":e re!0 !r"< #$ #$"ere1" %!ascual vs. -el 8a6 /ro6co, 1= !hil. C$, CD1 Everett vs. &sia ?anking "orp., 7D !hil. D1C1 &ngeles vs. 8antos, (7 !hil. (='1 Evangelista vs. 8antos, C( !hil. *CC). !laintiff+appellantPs action here is precisely in conformity, with these principles. He #1 $e#":er !00e>#$> $or ;#$&#c!"#$> :#1 o5$ #$&#;#&7!0 #$"ere1" or re?7&#ce+ 97" ":e #$"ere1" o% ":e Re 790#c B!$3 !$& ":e &!8!>e c!71e& "o #". T:e !c"#o$ :e :!1 9ro7>:" #1 !
&er#;!"#;e o$e+ e4 re110< 8!$#%e1"e& "o 9e %or !$& #$ 9e:!0% o% ":e Re 790#c B!$3+ 9ec!71e #" 5!1 %7"#0e "o &e8!$& !c"#o$ 9< ":e cor or!"#o$+ 1#$ce #"1 D#rec"or1 5ere $o8#$ee1 !$& cre!"7re1 o% &e%e$&!$" P!90o Ro8!$ %"omplaint, p. (). The frauds charged by plaintiff are frauds against the ?ank that redounded to its prejudice. The complaint expressly pleads that the appointment of "uaderno as technical consultant, and of ?ienvenido -i6on to head the ?oard of -irectors of the ;epublic ?ank, were made only to shield !ablo ;oman from criminal prosecution and not to further the interests of the ?ank, and avers that both men are ;omanPs alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank5 if the .uestioned appointments were made solely to protect ;oman from criminal prosecution, by a ?oard composed by ;omanPs creatures and nominees, then the moneys disbursed in favor of "uaderno and -i6on would be an unlawful wastage or diversion of corporate funds, since the ;epublic ?ank would have no interest in shielding ;oman, and the directors in approving the appointments would be committing a breach of trust1 the ?ank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case %&ngeles vs. 8antos, supra.). -efendants urge that the action is improper because the plaintiff was not authori6ed by the corporation to bring suit in its behalf. &ny such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the ;epublic ?ank1 and any demand for intra+corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative suit %Evangelista vs. 8antos, C( !hil. *=7). T:!" $o o":er 1"oc3:o0&er :!1 c:o1e$ "o 8!3e co88o$ c!71e 5#": 0!#$"#%% PereK #1 #rre0e;!$"+ 1#$ce ":e 18!00$e11 o% 0!#$"#%%I1 :o0&#$>1 #1 $o >ro7$& %or &e$<#$> :#8 re0#e% %&shwander vs. TQ&, C< @. Ed. (CC). &t any rate, it is yet too early in the proceedings for the absence of other stockholders to be of any significance, no issues having even been joined. ISSUE2: E/4 the "orporation should be a plaintiff or defendantF HELD2: The English practice is to make the corporation a party plaintiff, while in the nited 8tates, the usage leans in favor of its being joined as party defendant %see Editorial 4ote, D1 @;& 948: 1$*). /bjections can be raised against either method. '1( A91e$ce o% cor or!"e !7":or#"< 5o70& 1ee8 "o 8#0#"!"e !>!#$1" 8!3#$> ":e cor or!"#o$ ! !r"< 0!#$"#%% , while '2( ?o#$#$> #" !1 &e%e$&!$" 0!ce1 ":e e$"#"< #$ ":e !535!r& o1#"#o$ o% re1#1"#$> !$ !c"#o$ #$1"#"7"e& %or #"1 9e$e%#". *:!" #1 #8 or"!$" #1 ":!" ":e cor or!"#o$I 1:o70& 9e 8!&e ! !r"<+ #$ or&er "o 8!3e ":e Co7r"I1 ?7&>8e$" 9#$&#$> 7 o$ #"+ !$& ":71 9!r %7"7re re0#"#>!"#o$ o% ":e #117e1. O$ 5:!" 1#&e ":e cor or!"#o$ ! e!r1 0o1e1 #8 or"!$ce 5:e$ #" #1 co$1#&ere& ":!" #" 0!< 5#":#$ ":e o5er o% ":e "r#!0 co7r" "o &#rec" ":e 8!3#$> o% 17c: !8e$&8e$"1 o% ":e 0e!&#$>1+ 9< !&&#$> or &ro #$> !r"#e1+ !1 8!< 9e re67#re& #$ ":e #$"ere1" o% ?71"#ce %;evised ;ule *, sec. 11). -#1?o#$&er o% !r"#e1 #1 $o" ! >ro7$& "o &#18#11 !$ !c"#o$. %3bid.)
(<
ISSUE/: E/4 the action of the plaintiff amounts to a .uo warranto proceedingF HELD: 4o. !laintiff !ere6 is not claiming title to -i6onPs position as head of the ;epublic ?ankPs board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect !ablo ;oman from criminal prosecution, and not to carry on the corporationPs bank business. Ehether the complaintPs allegations to such effect are true or not must be determined after due hearing. *ESTERN INSTITUTE OF TECHNOLOG)+ INC.+ ;1. SALAS %supra, under "ompensation of -irectors) !etitioners assert that the motion for reconsideration of the civil aspect of the ;T" decision ac.uitting respondents is a derivative suit brought by them as minority stockholders of E3T for and on behalf of the corporation ISSUE: E/4 the appeal may be considered as a derivative actionF HELD: 4o. & &er#;!"#;e 17#" #1 !$ !c"#o$ 9ro7>:" 9< 8#$or#"< 1:!re:o0&er1 #$ ":e $!8e o% ":e cor or!"#o$ "o re&re11 5ro$>1 co88#""e& !>!#$1" #"+ %or 5:#c: ":e &#rec"or1 re%71e "o 17e . I" #1 ! re8e&< &e1#>$e& 9< e67#"< !$& :!1 9ee$ ":e r#$c# !0 &e%e$1e o% ":e 8#$or#"< 1:!re:o0&er1 !>!#$1" !971e1 9< ":e 8!?or#"<. ,ere, however, the case is not a derivative suit but is merely an appeal on the civil aspect of "riminal "ases 4os. *'<=' and *'<=C filed with the ;T" of 3loilo for estafa and falsification of public document. A8o$> ":e 9!1#c re67#re8e$"1 %or ! &er#;!"#;e 17#" "o ro1 er #1 ":!" ":e 8#$or#"< 1:!re:o0&er 5:o #1 17#$> %or !$& o$ 9e:!0% o% ":e cor or!"#o$ 871" !00e>e #$ :#1 co8 0!#$" 9e%ore ":e ro er %or78 ":!" :e #1 17#$> o$ ! &er#;!"#;e c!71e o% !c"#o$ o$ 9e:!0% o% ":e cor or!"#o$ !$& !00 o":er 1:!re:o0&er1 1#8#0!r0< 1#"7!"e& 5:o 5#1: "o ?o#$ . This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or .uasi+judicial body concerned over the subject matter and nature of the action. This was not complied with by the petitioners either in their complaint before the court a .uo nor in the instant petition which, in part, merely states that Nthis is a petition for review on certiorari on pure .uestions of law to set aside a portion of the ;T" decision in "riminal "ases 4os. *'<=' and *'<=CN since the trial courtPs judgment of ac.uittal failed to impose any civil liability against the private respondents. ?y no amount of e.uity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit. Kranting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The ease should have been filed with the 8ecurities and Exchange "ommission %8E") which exercises original and exclusive jurisdiction over derivative suits, they being intra+corporate disputes, per 8ection D %b) of !.-. 4o. =<$+&. SAN -IGUEL CORPORATION, represented by E- &;-/ -E @/8 &4KE@E8, petitioners, vs.
ERNEST KAHN+ &4-;E8 8/;3&4/ 333, ?E43K4/ T/-&, B;., &4T/43/ ;/2&8, &4T/43/ !;3ET/, A;&4"38"/ E3U>E4-3, B;., E- &;-/ 8/;3&4/, ;&@!, R&,4 and ;&>/4 -E@ ;/8&;3/, B;., respondents. %K; 4o. CD**=1 1'( 8";& 77'1 &ug. 11, 1=C=) FACTS: Eduardo de los &ngeles was a director appointed by !"KK who se.uestered the shares of &ndres 8oriano 333 claiming it to belong to Eduardo "onjuangco, a close associate and dummy of then !resident >arcos. -e los &ngeles initiated a derivative suit against herein respondents, in behalf of 8>", for the revocation of a ?oard ;esolution adopted to assume the loans incurred by 4eptunia "orporation, a foreign company, said to be a wholly+owned subsidiary of 8>". The action was dismissed by the 8E" on the grounds that -e los &ngeles does not have ade.uate shares to represent the interest of the stockholders and that his assumed role as a !"KK appointed director is inconsistent with his assumed role as a representative of minority stockholders. ISSUE: E/4 -e @os &ngeles can institute a derivative suitF HELD: Les. The theory that de los &ngeles has no personality to bring suit in behalf of the corporation Y because his stockholding is minuscule, and there is a Nconflict of interestN between him and the !"KK Y cannot be sustained. 3t is claimed that since de los &ngeles $< shares %owned by him since 1='') represent only. <<<<1(77J of the total number of outstanding shares %1 $1,(7D,C(<), he cannot be deemed to fairly and ade.uately represent the interests of the minority stockholders. The implicit argument Y that a stockholder, to be considered as .ualified to bring a derivative suit, must hold a substantial or significant block of stock Y finds no support whatever in the law. The re67#1#"e1 %or ! &er#;!"#;e 17#" are as follows5 a) the party bringing suit 1:o70& 9e ! 1:!re:o0&er as of the time of the act or transaction complained of, ":e $789er o% :#1 1:!re1 $o" 9e#$> 8!"er#!01 b) :e :!1 "r#e& "o e4:!71" #$"r!=cor or!"e re8e&#e1 , i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea1 and c) the c!71e o% !c"#o$ !c"7!00< &e;o0;e1 o$ ":e cor or!"#o$, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. T:e 9o$! %#&e o5$er1:# 9< ! 1"oc3:o0&er o% 1"oc3 #$ :#1 o5$ r#>:" 17%%#ce1 "o #$;e1" :#8 5#": 1"!$&#$> "o 9r#$> ! &er#;!"#;e !c"#o$ %or ":e 9e$e%#" o% ":e cor or!"#o$. T:e $789er o% :#1 1:!re1 #1 #88!"er#!0 1#$ce :e #1 $o" 17#$> #$ :#1 o5$ 9e:!0%+ or %or ":e ro"ec"#o$ or ;#$&#c!"#o$ o% :#1 o5$ !r"#c70!r r#>:"+ or ":e re&re11 o% ! 5ro$> co88#""e& !>!#$1" :#8+ #$&#;#&7!00<+ 97" #$ 9e:!0% !$& %or ":e 9e$e%#" o% ":e cor or!"#o$. 4either can the Nconflict+of+interestN theory be upheld. Arom the conceded premise that de los &ngeles now sits in the 8>" ?oard of -irectors by the grace of the !"KK, it does not follow that he is legally obliged to vote as the !"KK would have him do, that he cannot legitimately take
(1
a position inconsistent with that of the !"KK, or that, not having been elected by the minority stockholders, his vote would necessarily never consider the latterPs interests. The proposition is not only logically indefensible, non se.uitur, but also constitutes an erroneous conception of a directorPs role and function, it being plainly a directorPs duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the company. >oreover, it is undisputed that apart from the .ualifying shares given to him by the !"KK, he owns $< shares in his own right, as regards which he cannot from any aspect be deemed to be NbeholdenN to the !"KK, his ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative suit. ELTON *. CHASE+ as minority 8tockholder and on behalf of other 8tockholders similarly situated and for the benefit of &>E;3"&4 >&",34E;L &4- !&;T8 >&4 A&"T ;34K, 34"., plaintiff+appellant, vs. DR. VICTOR BUENCA-INO+ SR.+ Q3"T/; ? E4"&>34/, B;., B @3/ ?. A;&4"3& and -/@/;E8 &. ? E4"&>34/, respondents. %K; 4o. @+$<*=D1 1*( 8";& *(D1 >ay 1*, 1=CD) FACTS: ,erein plaintiff+appellant Elton "hase, entered into an agreement with -r. ?uencamino and Eilliam "ranker %already business partners) for the establishment of a factory in >anila called &merican >achinery Engineering !arts, 3nc. %&mparts), where chase was to transfer his tractor plant, ship his machineries from his former plant in &merica to >anila, install said machineries at &mparts plant and he is to be the production manager of &mparts. Aor some time the three maintained harmonious relations until "hase tendered his resignation which was accepted by ?uencamino and "ranker. "hase initially filed a case in "alifornia against "ranker for the recovery of the purchase price of his plant, but this died a natural death. Eventually, he filed a case before the "A3 alleging various acts of frauds allegedly committed by the other two. ISSUE: E/4 "hase has capacity to institute a derivative suitF HELD: Les. The evidence of defendants proves very clearly that right from the start, "hase was by them recogni6ed as a stockholder and initial incorporator with (<< paid up shares representing a 1M* interest in &mparts, and that would be enough for "hase to have the correct personality to institute this derivative suit1 the second place, it also appears apparently undenied that "hase did not win in "alifornia so that he did not recover the S1D<,<<<.<< that he had prayed for there against /verseas, which if he had would really in the mind of the "ourt have put him in estoppel to intervene in any manner as incorporator or stockholder of &mparts1 and in the third place and most important it should not be forgotten that "hase has filed the present case not for his personal benefit, but for the benefit of &mparts, so that to the "ourt the argument of estoppel as against him would appear to be out of place1 the estoppel to be valid as a defense must be an estoppel against &mparts itself1 the long and short of it is that the "ourt is impelled and constrained to discard all the other defenses set up by -r. ?uencamino on the principal complaint1 the result of all these would be to sustain so far, the position of "hase that -r. ?uencamino must account
for the !D'<,<<<.<< used to pay the second series of payment on the subscription, the !**<,<<<.<< used in paying the last series on the subscription, plus another sum of !$7D,<<<.<< entered as loan on his favor and against &mparts, for the sum of !7*7,<<<.<< earned in the blackmarketing of the excess of S17<,<<<.<< dollars on the forwarding costs and promotional expenses, for the sum of !*=1,$<<.<< earned in the blackmarketing of the excess of S11',<<<.<< in the transaction with ?ertoni and "otti, and all these would reach a total of !1,='<,$<<.<<1 and as the appropriation of the profits for himself was a .uasi+delict, the liability therefore assuming that it had been done with the cooperation of "ranker would have to be solidary, $1=7 4ew "ivil "ode. CATALINA R. RE)ES+ petitioner, vs. HON. BIENVENIDO A. TAN+ as Budge of the "ourt of Airst 3nstance of >anila, ?ranch 2333 and A;&4"38"& ;. B 8T343&43, respondents. %K; 4o. @+1(=C$1 * 8";& 1=C1 8ept. *<, 1=(1) FACTS: 8everal purchases were made by ;oxas+Ralaw Textile >ills in 4ew Lork for raw materials but were found out to consist of already finished product for which reason the "entral ?ank of the !hilippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralysis of the operations. 3t was alleged that the supplier of the said finished goods was nited "ommercial "ompany of 4ew Lork in which -alamal, appointed by the ?/- of the Textile >ills as co+ manager, had interests and that the letter of credit for said goods were guaranteed by the 3ndian "ommercial "ompany and 3ndian Traders in which -alamal likewise has interests. 3t was further alleged that the sale of the finished products was the business of 3ndian "ommercial "ompany of >anila who cannot obtain dollar allocations for importations of finished goods. &n action for the appointment of a receiver was filed before the trial court after the ?/- refused to proceed against -alamal, which was granted. ISSUE: E/4 Bustiniani may be allowed to institute the case for receivership and damagesF HELD: Les. 3t is not denied by petitioner that the allocation of dollars to the corporation for the importation of raw materials was suspended. 3n the eyes of the court below, as well as in our own, the importation of textiles instead of raw materials, as well as the failure of the ?oard of -irectors to take action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority stockholder on behalf of the corporation. G3t is well settled in this jurisdiction that 5:ere cor or!"e &#rec"or1 !re >7#0"< o% ! 9re!c: o% "r71" S $o" o% 8ere error o% ?7&>8e$" or !971e o% &#1cre"#o$ S !$& #$"r!cor or!"e re8e&< #1 %7"#0e or 71e0e11+ ! 1"oc3:o0&er 8!< #$1"#"7"e ! 17#" #$ 9e:!0% o% :#81e0% !$& o":er 1"oc3:o0&er1 !$& %or ":e 9e$e%#" o% ":e cor or!"#o$+ "o 9r#$> !9o7" ! re&re11 o% ":e 5ro$> #$%0#c"e& &#rec"0< 7 o$ ":e cor or!"#o$ !$& #$&#rec"0< 7 o$ ":e 1"oc3:o0&er1. &n illustration of a suit of this
($
kind is found in the case of !ascual vs. -el 8a6 /ro6co %1= !hil. C$), decided by this "ourt as early as 1=11. 3n that case, the ?anco EspaZol+Ailipino suffered heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was contended, could have been avoided if the president and directors had been more vigilant in the administration of the affairs of the bank. The stockholders constituting the minority brought a suit in behalf of the bank against the directors to recover damages, and this over the objection of the majority of the stockholders and the directors. This court held that the suit could properly be maintained.H %(7 !hil., &ngeles vs. 8antos 9K.;. 4o. @+7*71*, prom. &ugust *1, 1=*': p. (='). The claim that respondent Bustiniani did not take steps to remedy the illegal importation for a period of two years is also without merit. -uring that period of time respondent had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their own wrong doing. /nly after such period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the corporation property and business. Ee are led to agree with the judge below that the appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the "entral ?ank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills. RICARDO L. GA-BOA+ @L-3& ;. K&>?/&, ,/4/;3/ -E 1& ;&>&, E- &;-/ -E @& ;&>&, and the ,E3;8 /A >E;"E-E8 -E @& ;&>&+?/;;/>E/, petitioners, vs. HON. OSCAR R. VICTORIANO as !residing Budge of the "ourt of Airst 3nstance of 4egros /ccidental, ?ranch 33, ?E4B&>34 @/! E, 8;., ?E4B&>34 @/! E, B;., @E/43T/ @/! E, and @ 38& . -&"@E8 respondents. %K; 4o. +7<($<1 =< 8";& 7<1 >ay (, 1='=) FACTS: & writ of preliminary injunction was filed by herein respondents as purchasers of 1,*$C shares of stock of 3nocente -e @a ;ama, inc. after herein petitioners surreptitiously met and authori6ed the sale of C$* shares to forestall the petitioner#s takeover from the previous president and vice+president %sellers of the 1,*$C shares), in violation of their pre+emptive right. The trial court ruled in favor of respondents. @ater on, private respondents entered into a compromise agreement with the recipients for the transfer of the C$* shares, against which the petitioners filed a motion to dismiss which was denied. ISSUE: E/4 a derivative suit is the more proper action that should have been filed by respondentsF HELD: 4o. The petitioners contend that the proper remedy of the plaintiffs would be to institute a derivative suit against the petitioners in the name of the corporation in order to secure a binding relief after exhausting all the possible remedies available within the corporation. &n individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he
holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. 3n such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. I$ ":e c!1e !" 9!r+ :o5e;er+ ":e 0!#$"#%%1 !re !00e>#$> !$& ;#$&#c!"#$> ":e#r o5$ #$&#;#&7!0 #$"ere1"1 or re?7&#ce+ !$& $o" ":!" o% ":e cor or!"#o$. &t any rate, it is yet too early in the proceedings since the issues have not been joined. ?esides, misjoinder of parties is not a ground to dismiss an action. JUAN D. EVANGELISTA+ e". !0.+ plaintiff+appellant VS. RAFAEL SANTOS+ defendant+appelle %C( !hil. *C'1 >ay 1=, 1=D<) Buan -. Evangelista, et. al. are minority stockholders of the Qitali @umber "ompany, 3nc., while ;afael 8antos holds more than D<J of the stocks of said corporation and also is and always has been the president, manager, and treasurer thereof. 8antos, in such triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. Evangelista, et. al. therefore prays for judgment re.uiring 8antos5 %1) to render an account of his administration of the corporate affairs and assets5 %$) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them1 and %*) to pay the costs of suit. Evangelista, et. al. also ask for such other remedy as may be and e.uitable. The trial court dismissed the action on the ground of improper venue and lack of cause of action. ISSUE: E/4 plaintiffs have a right to bring the action for their benefitF HELD: 4o. The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendantPs maladministration has brought about the ruin of the corporation and the conse.uent loss of value of its stocks. The injury complained of is thus primarily to that of the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders %* Aletcher, "yclopedia of "orporation pp. =''+=C<). T:e 1"oc3:o0&er1 8!< $o" &#rec"0< c0!#8 ":o1e &!8!>e1 %or ":e81e0;e1 %or ":!" 5o70& re170" #$ ":e ! ro r#!"#o$ 9<+ !$& ":e &#1"r#97"#o$ !8o$> ":e8 o% !r" o% ":e cor or!"e !11e"1 9e%ore ":e &#11o07"#o$ o% ":e cor or!"#o$ !$& ":e 0#67#&!"#o$ o% #"1 &e9"1 !$& 0#!9#0#"#e1+ 1o8e":#$> 5:#c: c!$$o" 9e 0e>!00< &o$e #$ ;#e5 o% 1ec"#o$ 1B o% ":e Cor or!"#o$ L!5. ?ut while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any one of the stockholders is allowed to bring suit %* AletcherPs "yclopedia of "orporations, pp. =''+=C<). ?ut in that case it is the corporation itself and not the plaintiff stockholder
(*
that is the real property in interest, so that such damages as may be recovered shall pertain to the corporation %!ascual vs. -el 8a6 /rosco, 1= !hil. C$, CD). 3n other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation, which is the real property in interest %1* Aletcher, "yclopedia of "orporations, p. $=D). 3n the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. "learly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 1( of the "orporation @aw. 3t results that plaintiffPs complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on that ground. Ehile plaintiffs ask for remedy to which they are not entitled unless the re.uirement of section 1( of the "orporation @aw be first complied with, we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer. 8uch amendment, however, is not possible now, since the complaint has been filed in the wrong court, so that the same last to be dismissed. The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in which the venue shall be laid in the proper province. &ppellantPs shall pay costs. 8o ordered
7.
D.
o":er 1"oc3:o0&er1 1#8#0!r0< 1#"7!"e&, otherwise, the case is dismissible. This is because the cause of action actually devolves on the corporation and not to a particular stockholder. T:e cor or!"#o$ 1:o70& 9e 8!&e ! !r"< , either as party+plaintiff or defendant, in order to make the court#s judgment binding upon it, and thus, bar future litigation of the same issues. /n what side the corporation appears loses importance when it is considered that it lay within the power of the court to direct the making of amendment of the pleading, by adding or dropping parties, as may be re.uired in the interest of justice. >isjoinder of parties is not a ground to dismiss action1 and, A$< 9e$e%#" or &!8!>e1 reco;ere& 1:!00 er"!#$ "o ":e cor or!"#o$. This is so because in all instances, derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an individual or personal suit to vindicate his personal or individual right. /r, for that matter, representative or class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or individually. E,ECUTIVE CO--ITTEE
B.
IN SU--AR): 1. That ":e !r"< 9r#$>#$> ":e 17#" 1:o70& 9e ! 1"oc3:o0&er as of the time the act or transaction complained of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not apply if such act or transaction continues and is injurious to the stockholder or affect him specifically in some other way.
The $789er o% :#1 1:!re1 #1 #88!"er#!0 since he is not suing in his own behalf or for the protection or vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for the benefit of the corporation. He :!1 "r#e& "o e4:!71" #$"r!=cor or!"e re8e&#e1, he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. De8!$&, however, #1 $o" re67#re& #% ":e co8 !$< #1 7$&er ":e co8 0e"e co$"ro0 o% ":e &#rec"or1 5:o !re ":e ;er< o$e1 "o 9e 17e& %or where it becomes obvious that a demand upon them would have been futile and useless) since the law does not re.uire a litigant to perform useless acts1 The stockholder bringing the suit must !00e>e #$ :#1 co8 0!#$" ":!" :e #1 17#$> o$ ! &er#;!"#;e c!71e o% !c"#o$ o$ 9e:!0% o% ":e cor or!"#o$ !$& !00
8ec. *D. E4ec7"#;e co88#""ee. + The by+laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. 8aid committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by+laws or on a majority vote of the board, except with respect to5 %1) approval of any action for which shareholdersP approval is also re.uired1 %$) the filing of vacancies in the board1 %*) the amendment or repeal of by+laws or the adoption of new by+laws1 %7) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable1 and %D) a distribution of cash dividends to the shareholders
CHAPTER C: CORPORATE PO*ERS AND AUTHORIT) Sec. /B. Cor or!"e o5er1 !$& c! !c#"<. + Every corporation incorporated under this "ode has the power and capacity5 1. To sue and be sued in its corporate name1
$.
$. /f succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation1
*.
*. To adopt and use a corporate seal1
(7
"orporation "ode and those which may be necessary or incidental to tis existence. 7. To amend its articles of incorporation in accordance with the 3n short, corporate authority may be classified as5 provisions of this "ode1 1. Express powers those expressly granted by law inclusive of the corporate charter or &/31 $. 3mplied !owers those impliedly granted as are D. To adopt by+laws, not contrary to law, morals, or public policy, essential or reasonably necessary to the carrying out of the express powers1 and and to amend or repeal the same in accordance with this "ode1 *. 3ncidental !owers those incidental to its existence.
&. PO*ER TO SUE AND BE SUED (. 3n case of stock corporations, to issue or sell stocks to subscribers corporation may sue and be sued in its corporate name and to sell stocks to subscribers and to sell treasury stocks& in just like any other person. accordance with the provisions of this "ode1 and to admit members to the corporation if it be a non+stock corporation1 VENUE: the action filed against it must be instituted at the place of principal office of the corporation.
SERVICE OF SU--ONS5 8ec. 11, ;ule 17 of the ;ules of '. To purchase, receive, take or grant, hold, convey, sell, lease, "ourt provide5 pledge, mortgage and otherwise deal with such real and personal Sec. property, including securities and bonds of other corporations, as 11. Ser;#ce 7 o$ &o8e1"#c r#;!"e ?7r#&#c!0 e$"#"<. Ehen the defendant is a corporation, partnership or association organi6ed the transaction of the lawful business of the corporation may under the laws of the !hilippines with a juridical personality, service reasonably and necessarily re.uire, subject to the limitations may be made on the president, managing partner, general prescribed by law and the "onstitution1 manager, corporate secretary, treasurer, or in+house counsel.
C. To enter into merger or consolidation with other corporations as 8ervice of summons upon persons other than those named provided in this "ode1 under than those named in the above provision is without force and effect. DELTA -OTOR SALES CORPORATION+ petitioner, =. To make reasonable donations, including those for the public vs. welfare or for hospital, charitable, cultural, scientific, civic, or similar HON. JUDGE IGNACIO -ANGOSING+ ?ranch 223Q, "ourt of Airst 3nstance of >anila, T,E "3TL 8,E;3AA /A >&43@&, purposes5 !rovided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate orand for B/8E @ 38 !&>34T &4, respondents %K; 4o. @+71(('1 &pril *<, 1='() purposes of partisan political activity1 FACTS: ,erein respondent !amintuan initiated an action against petitioner -elta >otors for the alleged defective Toyota car sold to him and for failure to fulfill the warranty 1<. To establish pension, retirement, and other plans for the benefit obligation by not repairing the car. of its directors, trustees, officers and employees1 and The summons were served on -ionisia >iranda, employee of the petitioner. -elta >otors failed to answer the complaint and was declared in default and evidence was presented and a decision was rendered against herein 11. To exercise such other powers as may be essential or necessary petitioner. to carry out its purpose or purposes as stated in the articles of incorporation. !etitioner filed a motion to lift the order of default and to set aside the judgment and for new trial, which was denied. ISSUE: E/4 there was proper service of summonsF HELD: 4o. ;ule 17 of the ;evised ;ules of "ourt provides5 8E". 1*. 8ervice upon private domestic corporation or partnership. Y 3f defendant is a corporation organi6ed under the laws of the !hilippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors.
The statement of the objects, purposes or powers in the &/3 results practically in defining the scope of the authori6ed corporate enterprise or undertaking. This statement both confers and also limits the actual authority of the corporation. &long with the powers indicated in the &/3, a corporation can also exercise powers that may be granted by law, particularly those provided under 8ec. *( and 77 of the
(D
For ":e 7r o1e o% rece#;#$> 1er;#ce o% 1788o$1 !$& 9e#$> 9o7$& 9< #"+ ! cor or!"#o$ #1 #&e$"#%#e& 5#": #"1 !>e$" or o%%#cer 5:o 7$&er ":e r70e #1 &e1#>$!"e& "o !cce " 1er;#ce o% roce11. GT:e cor or!"e o5er "o rece#;e !$& !c" o$ 17c: 1er;#ce+ 1o %!r !1 "o 8!3e #" 3$o5$ "o ":e cor or!"#o$+ #1 ":71 ;e1"e& #$ 17c: o%%#cer or !>e$".G %@afayette 3nsurance "o. vs. Arench, 1D @. Ed. 7D1, 7D*). & strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made be one who is named in the statute1 otherwise the service is insufficient. 8o, where the statute re.uired that in the case of a domestic corporation summons should be served on Nthe president or head of the corporation secretary treasurer, cashier or managing agent thereofN, service of summons on the secretaryPs wife did not confer jurisdiction over the corporation in the foreclosure proceeding against it. ,ence, the decree of foreclosure and the deficiency judgment were void and should be vacated. %;eader vs. -istrict "ourt, =7 !acific $nd CDC). T:e 7r o1e #1 "o re$&er #" re!1o$!90< cer"!#$ ":!" ":e cor or!"#o$ 5#00 rece#;e ro8 " !$& ro er $o"#ce #$ !$ !c"#o$ !>!#$1" #" or "o #$17re ":!" ":e 1788o$1 9e 1er;e& o$ ! re re1e$"!"#;e 1o #$"e>r!"e& 5#": ":e cor or!"#o$ ":!" 17c: er1o$ 5#00 3$o5 5:!" "o &o 5#": ":e 0e>!0 ! er1 1er;e& o$ :#8. I$ o":er 5or&1+ G"o 9r#$> :o8e "o ":e cor or!"#o$ $o"#ce o% ":e %#0#$> o% ":e !c"#o$G. %*D& ".B.8. $CC citing Benkins vs. @ykes ?ros. 8.8. "o., 7C A. 8upp. C7C1 >ac"arthy vs. @angston -.". Ala., $* A.;.-. $7=). 3n the instant case the >anila court did not ac.uire jurisdiction over -elta >otor because it was not properly served with summons. The service of summons on -ionisia K. >iranda, who is not among the persons mentioned in section 1* of ;ule 17, was insufficient. 3t did not bind the -elta >otor. "ourts ac.uire jurisdiction over the person of a party defendant and of the subject+matter of the action by vertue of the service of summons in the manner re.uired by law. Ehere there is no service of summons or a voluntary general appearance by the defendant, the court ac.uires no jurisdiction to pronounce a judgment in the cause. %8yllabi 8almon and !acific "ommercial "o. vs. Tan "ueco, *( !hil. DD(). "onse.uently, the order of default, the judgment by default and the execution in "ivil "ase 4o. ='*'* are void and should be set aside. E. B. VILLAROSA O PARTNER CO.+ LTD.+ petitioner, vs. HON. HER-INIO I. BENITO, in his capacity as !residing Budge, ;T", ?ranch 1*$, >akati "ity and 3>!E;3&@ -EQE@/!>E4T "/;!/;&T3/4, respondent. %K; 4o. 1*(7$(1 &ug. (, 1===) FACTS: !etitioner is a limited partnership with principal office address at -avao "ity and with branch offices at !araZa.ue, >etro >anila and @apasan, "agayan de /ro "ity. !etitioner and private respondent executed a -eed of 8ale with -evelopment &greement wherein the former agreed
to develop certain parcels of land located at "agayan de /ro belonging to the latter into a housing subdivision for the construction of low cost housing units. They further agreed that in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper courts of >akati. !rivate respondent, as plaintiff, filed a "omplaint for ?reach of "ontract and -amages against petitioner, as defendant, before the ;T" >akati for failure of the latter to comply with its contractual obligation in that, other than a few unfinished low cost houses, there were no substantial developments therein. 8ummons, together with the complaint, were served upon the defendant, through its ?ranch >anager at the stated address at "agayan de /ro "ity but the 8heriffPs ;eturn of 8ervice stated that the summons was duly served Nupon defendant E.?. Qillarosa I !artner "o., @td. thru its ?ranch >anager Engr. at their new office Qilla Kon6alo, 4a6areth, "agayan de /ro "ity, and evidenced by the signature on the face of the original copy of the summons. -efendant filed a motion to dismiss on the ground of improper service of summons which was denied. ISSUE: E/4 the court ac.uired jurisdictionF HELD: 4o. Earlier cases have uphold service of summons upon a construction project manager1 a corporationPs assistant manager1 ordinary clerk of a corporation1 private secretary of corporate executives1 retained counsel1 officials who had charge or control of the operations of the corporation, like the assistant general manager1 or the corporationPs "hief Ainance and &dministrative /fficer. 3n these cases, these persons were considered as NagentN within the contemplation of the old rule. 4otably, under the new ;ules, service of summons upon an agent of the corporation is no longer authori6ed. The designation of persons or officers who are authori6ed to accept summons for a domestic corporation or partnership is now limited and more clearly specified in 8ection 11, ;ule 17 of the 1==' ;ules of "ivil !rocedure. The rule now states Ngeneral managerN instead of only NmanagerN1 Ncorporate secretaryN instead of NsecretaryN1 and NtreasurerN instead of Ncashier.N The phrase Nagent, or any of its directorsN is conspicuously deleted in the new rule. The particular revision under 8ection 11 of ;ule 17 was explained by retired 8upreme "ourt Bustice Aloren6 ;egalado, thus5 . . . ":e ":e$ Sec. 1/ o% ":#1 R70e !00o5e& 1er;#ce 7 o$ ! &e%e$&!$" cor or!"#o$ "o G9e 8!&e o$ ":e re1#&e$"+ 8!$!>er+ 1ecre"!r<+ c!1:#er+ !>e$" or !$< o% #"1 &#rec"or1.G T:e !%ore1!#& "er81 5ere o9;#o710< !89#>7o71 !$& 171ce "#90e o% 9ro!& !$& 1o8e"#8e1 #00o>#c!0 #$"er re"!"#o$1+ e1 ec#!00< ":e 5or& G!>e$"G o% ":e cor or!"#o$. T:e F#0o#0 c!1e+ #$;o0;#$> ":e 0#"#>!"#o$ 0!5<er o% ":e cor or!"#o$ 5:o rec#1e0< ! e!re& "o c:!00e$>e ":e ;!0#&#"< o% 1er;#ce o% 1788o$1 97" 5:o1e ;er< ! e!r!$ce %or ":!" 7r o1e 5!1 1e#Ke& 7 o$ "o ;!0#&!"e ":e &e%ec"#;e 1er;#ce+ #1 !$ #0071"r!"#o$ o% ":e $ee&
((
%or ":#1 re;#1e& 1ec"#o$ 5#": 0#8#"e& 1co e !$& 1 ec#%#c "er8#$o0o><. T:71 ":e !917r& re170" #$ ":e F#0o#0 c!1e $ece11#"!"e& ":e !8e$&8e$" er8#""#$> 1er;#ce o$0< o$ ":e #$=:o71e co7$1e0 o% ":e cor or!"#o$ 5:o #1 #$ e%%ec" !$ e8 0o<ee o% ":e cor or!"#o$+ !1 &#1"#$>7#1:e& %ro8 !$ #$&e e$&e$" r!c"#"#o$er. %emphasis supplied).
;etired Bustice /scar ,errera, who is also a consultant of the ;ules of "ourt ;evision "ommittee, stated that N%T)he rule must be strictly observed. 8ervice must be made to one named in %the) statute . . . 3t should be noted that even prior to the effectivity of the 1==' ;ules of "ivil !rocedure, strict compliance with the rules has been enjoined. 3n the case of -elta >otor 8ales "orporation vs. >angosing, the "ourt held5 A 1"r#c" co8 0#!$ce 5#": ":e 8o&e o% 1er;#ce #1 $ece11!r< "o co$%er ?7r#1&#c"#o$ o% ":e co7r" o;er ! cor or!"#o$. T:e o%%#cer 7 o$ 5:o8 1er;#ce #1 8!&e 871" 9e o$e 5:o #1 $!8e& #$ ":e 1"!"7"eH o":er5#1e ":e 1er;#ce #1 #$17%%#c#e$". . . . The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. 3n other words, Nto bring home to the corporation notice of the filing of the action.N . . . .
&s far as corporations created by special law are concerned, amendment may 4/T be considered as a matter of right. The law creating it may or may not authori6e or empower the corporation to make any changes in its &/3 or charter. ,owever, whether empowered or not, "ongress may amend or repeal a corporate charter by virtue of its inherent authority to amend or repeal laws under the "onstitution.
E.
PO*ER TO ADOPT B)=LA*S
The "orporation "ode actually ;ET 3;E8 a corporation to adopt by+laws, not contrary to law, morals, or public policy, within 1 month from receipt of official notice of the issuance of the certificate of incorporation or registration %8ec. 7(). &mendment of the by+laws are allowed subject to the procedure and re.uirement provided under 8ec. 7C.
A.
PO*ER TO ISSUE OR SELL STOCKS AND TO AD-IT -E-BERS
The power of a corporation to issue or sell its stocks is an inherent right of any stock corporation except only as it may be regulated by law or by the &/3. &dmission, as well as termination of members is a prerogative granted by law to non+stock corporations and the manner, re.uirements or procedures for such admission or termination may be contained in the &/3 or by+laws.
T:e 0#9er!0 co$1"r7c"#o$ r70e c!$$o" 9e #$;o3e& !$& 7"#0#Ke& !1 ! 1791"#"7"e %or ":e 0!#$ 0e>!0 re67#re8e$"1 !1 "o ":e 8!$$er #$ 5:#c: 1788o$1 1:o70& 9e 1er;e& o$ ! &o8e1"#c cor or!"#o$. . . . . %emphasis supplied).
&ccordingly, we rule that the service of summons upon the branch manager of petitioner at its branch office at "agayan de /ro, instead of upon the general manager at its principal office at -avao "ity is improper. "onse.uently, the trial court did not ac.uire jurisdiction over the person of the petitioner.
K.
PO*ER TO AC2UIRE OR ALIENATE REAL OR PERSONAL PROPERT)
Ehen a corporation is expressly empowered by law to ac.uire or alienate real andMor personal properties, the limitations imposed by 8ec. *( are as follows5 Sec. /B. ,44
?.
PO*ER OF SUCCESSION
This right basically means that the corporation persists to exist despite death, incapacity, civil interdiction, or withdrawal of the stockholders or members thereof.
".
PO*ER TO ADOPT AND USE A CO--ON SEAL
'. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, %1) !1 ":e "r!$1!c"#o$ o% ":e 0!5%70 971#$e11 o% ":e cor or!"#o$ 8!< re!1o$!90< !$& $ece11!r#0< re67#re, %$) 179?ec" "o ":e 0#8#"!"#o$1 re1cr#9e& 9< 0!5 !$& ":e Co$1"#"7"#o$ .
This right has been expressly granted by law. ,owever, it is not mandatory but merely permissive. This is because the corporate seal performs no further or greater function than to impart prima facie evidence of the due execution by the corporation of a written document or obligation.
-.
PO*ER TO A-END INCORPORATION
ITS
ARTICLES
OF
The procedures for the exercise of this right are provided under 8ec. 1(, 8ec. *' and *C as discussed earlier under ",&!TE; D5 "/;!/;&TE ",&;TE; &4- 3T8 &>E4->E4T8.
The first limitation practically sets the limit of the corporate authority to ac.uire, own, hold or alienate property. &s it has been said the purpose clause in the &/3 grants as well as limits the powers which a corporation may exercise. Qerily, E/4 the ac.uisition of such property is within the corporate powers or authority may reasonably be determined from the purpose or purposes indicated in the &/3. LUNETA -OTOR CO-PAN)+ petitioner, vs. A.D. SANTOS+ INC.+ ET AL.+ respondents %Kr 4o. 1''1(1 Buly
('
*1, 1=($) 4icolas "oncepcion executed a chattel mortgage covering a certificate of public convenience granted to him to operate taxicab service of $' units in >anila, in favor of petitioner, to secure a loan evidenced by a promissory note guaranteed by "oncepcion and one !lacid Esteban.
"oncepcion mortgaged the same certificate to cover a second loan with ;ehabilitation Ainance. !etitioner filed an action to foreclose the mortgage. Ehile it was pending, ;A also foreclosed the second chattel mortgage where the certificate was sold at a public auction in favor of &- 8antos who applied for the approval of the sale which was granted by the !ublic 8ervice "ommission. @ater on, the "A3 rendered a judgment in favor of petitioner, where the certificate was sold at a public auction in favor of the petitioner who immediately filed for approval with the "ommission. &- 8antos 3nc., recipient of the certificate from &- 8antos, opposed the application for approval. ISSUE: E/4 !etitioner may ac.uire the certificate of public convenienceF HELD: 4o. !etitioner claims in this regard that its corporate purposes are to carry on a general mercantile and commercial business, etc., and that it is authori6ed in its articles of incorporation to operate and otherwise deal in and concerning automobiles and automobile accessoriesP business in all its multifarious ramification %petitionerPs brief p. ') and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and operate steamship and sailing ships and other floating craft and deal in the same and engage in the !hilippine 3slands and elsewhere in the transportation of persons, merchandise and chattels by water1 all this incidental to the transportation of automobiles %id. pp. '+C and Exhibit ?). Ee find nothing in the legal provision and the provisions of petitionerPs articles of incorporation relied upon that could justify petitionerPs contention in this case. To the contrary, they are precisely the best evidence that it has no authority at all to engage in the business of land transportation and operate a taxicab service. That it may operate and otherwise deal in automobiles and automobile accessories1 that it may engage in the transportation of persons by water does not mean that it may engage in the business of land transportation Y an entirely different line of business. 3f it could not thus engage in the line of business, it follows that it may not ac.uire a certificate of public convenience to operate a taxicab service, such as the one in .uestion, because such ac.uisition would be without purpose and would have no necessary connection with petitionerPs legitimate business. GOVERN-ENT VS. EL HOGAR FILIPINO %supra) the directors of El ,ogar Ailipino erected a modern reinforced concrete office building at the site of its old building. The ac.uisition of the lot and the construction of the new office building thereon is not the subject of the second cause of action for being ultra vires on the part of the corporation. ISSUE: E/4 the erection of the building was reasonableF
HELD: Les. Eith this contention we are unable to agree. nder the "orporation @aw, every corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of the corporation may reasonably and necessarily re.uire. Ehen this property was ac.uired in 1=1(, the business of El ,ogar Ailipino had developed to such an extent, and its prospects for the future were such as to justify its directors in ac.uiring a lot in the financial district of the "ity of >anila and in constructing thereon a suitable building as the site of its offices1 and it cannot be fairly said that the area of the lot Y 1,71* s.uare meters Y was in excess of its reasonable re.uirements. The law expressly declares that corporations may ac.uire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created1 and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was ac.uired. & different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices Y a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. Ee are furthermore of the opinion that, inasmuch as the lot referred to was lawfully ac.uired by the respondent, it is entitled to the full beneficial use thereof. 4o legitimate principle can discovered which would deny to one owner the right to enjoy his %or its) property to the same extent that is conceded to any other owner1 and an intention to discriminate between owners in this respect is not lightly to be imputed to the @egislature. The point here involved has been the subject of consideration in many decisions of &merican courts under statutes even more restrictive than that which prevails in this jurisdiction1 and the conclusion has uniformly been that a corporations whose business may properly be conducted in a populous center may ac.uire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate re.uirements 3t would seem to be unnecessary to extend the opinion by lengthy citations upon the point under consideration, but ?rown vs. 8chleier %11C Aed., =C1), may be cited as being in harmony with the foregoing authorities. 3n dealing with the powers of a national bank the court, in this case, said5 Ehen an occasion arises for an investment in real property for either of the purposes specified in the statute the national bank act permits banking associations to act as any prudent person would act in making an investment in real estate, and to exercise the same measure of judgment and discretion. The act ought not to be construed in such a way as to compel a national bank, when it ac.uires real property for a legitimate purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with such property. &t any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts alleged in the second cause of action to have been done by the respondent in excess of its powers that we refrain from commenting at any length upon said cases. The ground stated in the second cause of action is in our opinion without merit.
(C
THE DIRECTOR OF LANDS+ petitioner, vs. THE HONORABLE COURT OF APPEALS !$& IGLESIA NI CRISTO+ respondents %K; 4o. @D((1*1 >arch 17, 1=CC) FACTS: !rivate respondent 3glesia 4i "risto applied with the "A3 of "avite for registration of a parcel of land which it claimed to have ac.uired by virtue of a -eed of &bsolute 8ale from &.uelina de la "ru6, alleging that the applicant and its predecessors+in+interest have been in actual, continuous, public, peaceful and adverse possession and occupation of the said land for more than *< years, which was opposed by the Kovernment as represented by the -irector of @ands. The "A3 and the "& ruled in favor of 34". ISSUE: E/4 the corporation may ac.uire the land in .uestionF HELD Les. &s observed at the outset, had this case been resolved immediately after it was submitted for decision, the result may have been .uite adverse to private respondent. Aor the rule then prevailing under the case of >anila Electric "ompany v. "astro+?artolome et al., 117 8";& '==, reiterated in ;epublic v. Qillanueva, 117 8";& C'D as well as the other subse.uent cases involving private respondent adverted to aboveP, is that a juridical person, private respondent in particular, is dis.ualified under the 1='* "onstitution from applying for registration in its name alienable public land, as such land ceases to be public land Nonly upon the issuance of title to any Ailipino citi6en claiming it under section 7C9b:N of "ommonwealth &ct 4o. 171, as amended. These are precisely the cases cited by petitioner in support of its theory of dis.ualification. 8ince then, however, this "ourt had occasion to re+examine the rulings in these cases vis+a+vis the earlier cases of "arino v. 3nsular Kovernment, 71 !hil. =*D, 8usi v. ;a6on, 7C !hil. 7$7 and ,erico v. -ar, =D 8";& 7*', among others. Thus, in the recent case of -irector of @ands v. 3ntermediate &ppellate "ourt, 17( 8";& D<=, Ee categorically stated that the majority ruling in >eralco is Nno longer deemed to be binding precedentN, and that N9T:he correct rule, ... is that alienable public land held by a possessor, personally or through his predecessors+in+ interest, openly, continuously and exclusively for the prescribed statutory period 9*< years under the !ublic @and &ct, as amended: is converted to private property by mere lapse or completion of said period, ipso jure.N Ee further reiterated therein the timehonored principle of non+ impairment of vested rights. The crucial factor to be determined therefore is the length of time private respondent and its predecessors+in+interest had been in possession of the land in .uestion prior to the institution of the instant registration proceedings. The land under consideration was ac.uired by private respondent from &.uelina de la "ru6 in 1=7', who, in turn, ac.uired by same by purchase from the ;amos brothers and sisters, namely5 Eusebia, Eulalia, >ercedes, 8antos and &gapito, in 1=*(. nder section 7C9b: of "ommonwealth &ct 4o. 171, as amended, Nthose who by themselves or through their predecessors+in+interest have been in open, continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain, under a bona fide
claim of ac.uisition or ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title except when prevented by war or force majeureN may apply to the "ourt of Airst 3nstance of the province where the land is located for confirmation of their claims, and the issuance of a certificate of title therefor, under the @and ;egistration &ct. 8aid paragraph 9b: further provides that Nthese shall be conclusively presumed to have performed all the conditions essential to a Kovernment grant and shall be entitled to a certificate of title under the provisions of this chapter.N Taking the year 1=*( as the reckoning point, there being no showing as to when the ;amoses first took possession and occupation of the land in .uestion, the *<+year period of open, continuous, exclusive and notorious possession and occupation re.uired by law was completed in 1=((. The completion by private respondent of this statutory *<+ year period has dual significance in the light of 8ection 7C9b: of "ommonwealth &ct 4o. 171, as amended and prevailing jurisprudence5 91: at this point, the land in .uestion ceased by operation of law to be part of the public domain1 and 9$: private respondent could have its title thereto confirmed through the appropriate proceedings as under the "onstitution then in force, private corporations or associations were not prohibited from ac.uiring public lands, but merely prohibited from ac.uiring, holding or leasing such type of land in excess of 1,<$7 hectares. 3f in 1=((, the land in .uestion was converted ipso jure into private land, it remained so in 1='7 when the registration proceedings were commenced. This being the case, the prohibition under the 1='* "onstitution would have no application. /therwise construed, if in 1=((, private respondent could have its title to the land confirmed, then it had ac.uired a vested right thereto, which the 1='* "onstitution can neither impair nor defeat.
,.
PO*ER TO ENTER CONSOLIDATION
INTO
-ERGER
OR
This is an express power granted by the law under the "ode, particularly Title 32 thereof.
3.
PO*ER TO -AKE REASONABLE DONATIONS
/rdinarily, a pure gift of funds or property by a corporation not created for charitable purpose is not authori6ed and would constitute a violation of the rights of its stockholders unless it is empowered by statute. There are circumstances, however, under which a donation by a corporation may be to it benefit as a means of increasing its business or promoting patronage. Thus, 8ec. *( %=) expressly authori6es a corporation to make donations, subject to the following limitations5 1. The donation must be reasonable1
$. *. B.
3t must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose1 and 3t shall not be in aid of political party or candidate, or for purposes of partisan political activity. PO*ER TO ESTABLISH PENSION+ RETIRE-ENT AND OTHER PLANS
(=
3t is now generally recogni6ed in almost all jurisdiction to empower a corporation to establish pension plans, pension trust, profit sharing plans, stock bonus or stock option plans and other incentive plans to directors, officers and employees. 3n fact, the power may include any act to promote convenience, welfare and benefit of the employees or officers. REPUBLIC VS. ACOJE -INING CO-PAN) INC. %' 8";& *(11 Aeb. $C, 1=(*) + & post office branch was opened in herein respondent#s mining camp at 8ta. "ru6 Uambales, at its re.uest, where ,ilario >. 8anche6, an employee of such company, was the postmaster. !rior to the opening the company, at the re.uest of the ?ureau of !osts, adopted a resolution that the former would assume full responsibility for all cash received by the postmaster. /n >ay 11, 1=D7, the postmaster went on a three day leave but never returned. &s a result, an action was brought by the government to recover !1*,C('.$7, the amount of shortage in the accounts of the postmaster, from the company. ISSUE: E/4 the subject resolution is within the powers of the company to adoptF HELD5 Les. The opening of the post office branch was undertaken because of a re.uest submitted by respondent company to promote the convenience and benefit of its employees. The idea did not come from the government and the -irector of !osts was prevailed upon to agree to the re.uest only after studying the necessity for its establishment and after imposing upon the company certain re.uirements intended to safeguard and protect the interest of the government. &ccordingly, the company cannot now be heard to complain of its liability upon the technical plea that the resolution is ultra vires. The least that can be said is that it cannot now go back on its plighted word on the ground of estoppel. The resolution covers a subject which concerns the benefit, convenience and welfare of the company#s employees and their families. There are certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. Thus, it has been held that Galthough not expressly authori6ed to do so a corporation may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its businessH, and here it is undisputed that the establishment of the local post office is a vital improvement in the living condition of its employees and laborers who came to settle in it mining camp which is far removed from the postal facilities or means of communication accorded to people living in a city or municipality. I-PLIED PO*ERS Sec. /B. 2xx
3t is a .uestion, in each case, of the 0o>#c!0 re0!"#o$ o% ":e !c" "o ":e cor or!"e 7r o1e e4 re11e& #$ ":e c:!r"er. For #% ":e !c" #1 o$e 5:#c: #1 0!5%70 #$ #"1e0% !$& $o" o":er5#1e ro:#9#"e&+ !$& #1 &o$e %or ":e 7r o1e o% 1er;#$> cor or!"e e$&1+ !$& re!1o$!90< co$"r#97"e1 "o ":e ro8o"#o$ o% ":o1e e$&1 #$ ! 1791"!$"#!0 !$& $o" #$ ! re8o"e !$& %!$c#%70 1e$1e+ #" 8!< 9e %!#r0< co$1#&ere& 5#":#$ ":e cor or!"#o$.1 c:!r"er o5er1 %>ontelibano vs. ?acolod+>urcia >illing "o., 3nc. as cited in 4!" vs. QE;&)
3.
PO*ER TO E,ERCISE SUCH OTHER PO*ERS ESSENTIAL OR NECESSAR) TO CARR) OUT ITS PURPOSES
TERESA ELECTRIC AND PO*ER CO.+ INC. VS. P.S.C %$1 8";& 1=C1 8ept. $D, 1=(') ;espondent Ailipinas "ement "orporation filed an application with herein respondent !8" for a certificate of public convenience to install, maintain and operate an electric plant in Teresa, ;i6al for the purpose of supplying electric power and light to its cement factory and its employees living within its compound. ,erein petitioner, operating an electric plant in Teresa ;i6al filed an opposition claiming that Ailipinas is not authori6ed to operate the proposed electric plant under its articles of incorporation. !8" decided in favor of Ailipinas. ISSUE: E/4 under its articles of incorporation, Ailipinas is authori6ed to operate and maintain an electric plantF HELD: Les. !aragraph ' of the &/3 of Ailipinas provides for authority to secure from any governmental, state, municipality, or provincial, city or other authority, and to utili6e and dispose of in any lawful manner, rights, powers, privileges, franchises and concessions obviously necessary or at least related to the operation of its cement factory. >oreover, said &/3 also provide that the corporation may generally perform any and all acts connected with the business of manufacturing portland cement or arising therefrom or incidental thereto. 3t cannot be denied that the operation of an electric light, heat and power plant is necessarily connected with the business of manufacturing cement. 3f in the modern world where we live today electricity is virtually a necessity for our daily needs, it is more so in the case of industries like the manufacture of cement. NPC VS. VERA %1'< 8";& '$11 Aeb. $', 1=C=) FACTS: !rivate ;espondent 8ea @ion 3nternational !ort Terminal 8ervices 3nc. filed a complaint for prohibition and mandamus with damages against petitioner 4!" and !hilippine !orts &uthority after 4!" did not renew its "ontract for 8tevedoring 8ervices for coal+handling of 4!"#s plant and in taking over its stevedoring services. ISSUE5 E/4 4!" may embark in stevedoring and arrastre servicesF
HELD: Les. The 4!" was created and empowered not only 11. To exercise such other powers as may be essential or necessary to of construct, operate and maintain power plants, reservois, to carry out its purpose or purposes as stated in the articles transmission lines and other works, but also5 incorporation
Xto exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organi6ed, or which, from time to
'<
time, may be declared by the ?oard to be necessary, useful, incidental or auxiliary to accomplish said purposeX %8ec. *91: of ;& (*=D, as amended)
To determine whether or not the 4!" act falls within the purview of the above provision, the "ourt must decide whether or not ! 0o>#c!0 !$& $ece11!r< re0!"#o$ e4#1"1 9e"5ee$ ":e !c" 67e1"#o$e& !$& ":e cor or!"e 7r o1e e4 re11e& #$ ":e NPC c:!r"er. For #% ":e !c" #1 o$e 5:#c: #1 0!5%70 #$ #"1e0% !$& $o" o":er5#1e ro:#9#"e&+ !$& #1 &o$e %or ":e 7r o1e o% 1er;#$> cor or!"e e$&1+ !$& re!1o$!90< co$"r#97"e1 "o ":e ro8o"#o$ o% ":o1e e$&1 #$ ! 1791"!$"#!0 !$& $o" #$ ! re8o"e !$& %!$c#%70 1e$1e+ #" 8!< 9e %!#r0< co$1#&ere& 5#":#$ ":e cor or!"#o$.1 c:!r"er o5er1 %>ontelibano vs. ?acolod+>urcia >illing "o., 3nc.) 3n the instant case, it is an undisputed fact that the pier owned by 4!", receives various shipment of coal which is used exclusively to fuel the ?atangas "oal+Aired Thermal !ower !lant of the 4!" for the generation of electric power. The stevedoring services which involve the unloading of the coal shipments into the 4!" pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. The "ourt holds that 4!" is empowered under its "harter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. PO*ERS VS. -ARSHALL %1(1 8";& 1'(1 >ay =, 1=CC) FACTS: 17 plaintiffs, all associate members of the 3nternational 8chool, 3nc. brought an action for injunction against 1< members of the ?oard of Trustees, after a letter of -onal >arshall, president of the board, was sent stating that the school would be collecting a Gdevelopment feeH of !$,($D per enrollee for the purpose of constructing new buildings and remodel existing ones to accommodate the increasing enrollment in the school which would need !*D>. The "A3 of >anila dismissed the complaint. ISSUE: E/4 the imposition of the development fee is within the powers of the schoolF HELD: Les. 8ection $%b) of !- 4o. '*$ granting certain rights to the sch<ol, expressly authori6ed the ?oard of Trustees Gupon consultation with the 8ecretary of Education and "ultureH to determine the amount of fees and assessments which may be reasonably imposed upon its students, to maintain or conform to the school#s standard of education. 8uch consultation complied with and the 8ecretary expressed his conformity with the reasonableness of the assessment. The lower court observed that5 2xx the expansion of the school facilities, which is to be done by improving old buildings andMor constructing new ones, is an ordinary business transaction well within the competence of the ?oard of Trustees to act upon. 2xx ?eing directly related to the purpose of elevating and maintaining the school#s standard of instruction, which is ordained in fact by !- '*$, the expansion cannot result in any radical or fundamental change in the kind of activity being conducted by the school that might re.uire the consent of the members composing it.
TERThis has been discussed in "hapter D5 "/;!/;&TE ",&;TE; &4- 3T8 &>E4->E4T8. 8ec. *'. Po5er "o e4"e$& or 1:or"e$ cor or!"e "er8. + & private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two+thirds %$M*) of the outstanding capital stock or by at least two+thirds %$M*) of the members in case of non+stock corporations. Eritten notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally5 !rovided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
Arom the above+provision and jurisprudence, the re.uirements and procedure for extending or shortening the corporate term are as follows5
1. $.
&pproval by the majority vote of the ?/-MT1 ;atification by the stockholders representing at least $M* of the outstanding capital stock %including non+ voting shares) or $M* of the members in case of non+ stock corporations1 The ratification must be made at a meeting duly called for that purpose1 !rior written notice of the proposal to extend or shorten the corporate term must be made stating the time and place of meeting addressed to each stockholder or member at his place of residence, either by mail or personal service1 3n case of extension, the same cannot be made earlier than D years prior to the original or subse.uent expiry date unless there are justifiable reasons for an earlier extension1 3n case of extension, the same must be made during the lifetime of the corporation1 &ny dissenting stockholder may exercise his appraisal right1 8ubmission of the amended articles with the 8E"1 and &pproval thereof by the 8E" %as re.uired under 8ec. *' for extension, and 8ec. 1$< for shortening the term with the effect of dissolution)
*. 7.
D.
(. '. C. =.
;E&-5 &lhambra "igar and "igarette >anufacturing, 3nc. vs. 8E"
R.
PO*ER TO INCREASE OR DECREASE CAPITAL STOCKH INCUR+ CREATE OR INCREASE BONDED INDEBTEDNESS
B.
PO*ER TO E,TEND OR SHORTEN CORPORATE
Sec. /D. Po5er "o #$cre!1e or &ecre!1e c! #"!0 1"oc3H #$c7r+ cre!"e or #$cre!1e 9o$&e& #$&e9"e&$e11. + 4o corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the
'1
board of directors and, at a stockholderPs meeting duly calledcertificate for of filing, the capital stock shall stand increased or the purpose, two+thirds %$M*) of the outstanding capital stock shall decreased and the incurring, creating or increasing of any bonded favor the increase or diminution of the capital stock, or indebtedness the authori6ed, as the certificate of filing may declare5 incurring, creating or increasing of any bonded indebtedness. !rovided, That the 8ecurities and Exchange "ommission shall not Eritten notice of the proposed increase or diminution of the capital accept for filing any certificate of increase of capital stock unless stock or of the incurring, creating, or increasing of any bonded accompanied by the sworn statement of the treasurer of the indebtedness and of the time and place of the stockholderPs corporation lawfully holding office at the time of the filing of the meeting at which the proposed increase or diminution of the capital certificate, showing that at least twenty+five %$DJ) percent of such stock or the incurring or increasing of any bonded indebtedness increased is capital stock has been subscribed and that at least to be considered, must be addressed to each stockholder attwenty+five his %$DJ) percent of the amount subscribed has been paid place of residence as shown on the books of the corporation either and in actual cash to the corporation or that there has been deposited to the addressee in the post office with postage prepaid, transferred to the corporation property the valuation of which is or served personally. e.ual to twenty+five %$DJ) percent of the subscription5 !rovided, further, That no decrease of the capital stock shall be approved by the "ommission if its effect shall prejudice the rights of corporate creditors. & certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholdersP meeting, setting forth5 4on+stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two+thirds %$M*) of the members in %1) That the re.uirements of this section have been complied with1 a meeting duly called for the purpose. %$) The amount of the increase or diminution of the capital stock1 %*) 3f an increase of the capital stock, the amount of capital stock or issued by a corporation shall be registered with the 8ecurities ?onds number of shares of no+par stock thereof actually subscribed, and the Exchange "ommission, which shall have the authority to names, nationalities and residences of the persons subscribing,determine the the sufficiency of the terms thereof. amount of capital stock or number of no+par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no+ par stock allotted to each stock+holder if such increase is for The the following re.uirements or procedure should be purpose of making effective stock dividend therefor authori6ed1 complied with5 1. &pproval by the majority vote of the ?/-MT1 %7) &ny bonded indebtedness to be incurred, created or increased1 $. ;atification by the stockholders representing at least $M* of the outstanding capital stock %including non+ %D) The actual indebtedness of the corporation on the day of the voting shares) or $M* of the members in case of non+ stock corporations at a meeting duly called for that meeting1 purpose1 *. !rior written notice of the proposal to extend or %() The amount of stock represented at the meeting1 and shorten the corporate term must be made stating the %') The vote authori6ing the increase or diminution of the capital time and place of meeting addressed to each stockholder or member at his place of residence, stock, or the incurring, creating or increasing of any bonded either by mail or personal service1 indebtedness. 7. & certificate in duplicate must be signed by a majority of the directors of the corporation, countersigned by the chairman and the secretary of the stockholders meeting, setting forth the matters contained in A$< #$cre!1e or &ecre!1e #$ ":e c! #"!0 1"oc3 or ":e subsection 1 to ' of 8ec. *C1 #$c7rr#$>+ cre!"#$> or #$cre!1#$> o% !$< 9o$&e& D. 3n case of increase in capital stock, $DJ of such #$&e9"e&$e11 1:!00 re67#re r#or ! ro;!0 o% ":e Sec7r#"#e1 increased capital must be subscribed and that at least !$& E4c:!$>e Co88#11#o$. $DJ of the amount subscribed must be paid either in cash or property1 (. 3n case of decrease of capital stock, the same must not prejudice the right of the creditors1 /ne of the duplicate certificates shall be kept on file in the office of '. Ailing of the certificate of increase and amended &/3 the corporation and the other shall be filed with the 8ecurities and with the 8E"1 and Exchange "ommission and attached to the original articles of C. &pproval thereof by the 8E". incorporation. Arom and after approval by the 8ecurities and Exchange "ommission and the issuance by the "ommission of its
'$
-ETHODS OF INCREASING CAPITAL STOCK5 1. 3ncrease the par value of the existing number of shares without increasing the number of shares1 $. 3ncrease the number of existing shares without increasing the par value thereof1 *. 3ncreasing the number of shares and at the same time increasing the par value of the shares REASONSJPURPOSE FOR THE INCREASE: 1. Expansion1
the &/3. >oreover, strict compliance with the statutory regulations is necessary. 3n the case before us, the resolution releasing the shareholders from their obligation to pay D<J of their respective subscriptions was an attempted withdrawals of so much capital from the fund upon which the company#s creditors were entitled ultimately to rely and, having been effected without compliance with the statutory re.uirements, was wholly ineffectual. -ADRIGAL O CO-PAN) VS. ZA-ORA %1D1 8";& *DD1 Bune *<, 1=C') + The >adrigal "entral /ffice Employees nion sought for the renewal of its "?&, proposing a !$<< wage increase and an allowance of !1<< a month. !etitioner company re.uested for the deferment of its negotiation. >eanwhile, the company effected two reductions of its capital stock by issuing marketable securities owned by petitioner in exchange for shareholders# shares. &fter the petitioner#s failure to sit down with the respondent union, the latter commenced a case with the 4@;" for unfair labor practice. 3n due time, petitioner filed its position paper, alleging operating losses. The @abor respondent &rbiter nion. rendered a decision in favor of
$. *.
!ayment of -ebt /bligations1 To ac.uire additional assets such as providing cars to employees to distribute the goods1
04othing in law prohibits increase of capital stock
REASONS FOR DECREASE: 1. To reduce or wipe out existing deficit where no creditors would thereby by affected1 $. Ehen the capital is more than what is necessary to procreate the business or reduction of capital surplus1 *. To write down the value of its fixed assets to reflect their present actual value in case where there is a decline in the value of the fixed assets of the corporation. TRUST FUND DOCTRINE: The subscriptions to capital stock of the corporation constitute a fund which the creditors have a right to look up for the satisfaction of their claims. &ccordingly, if the decrease would affect the rights of creditors, the same would not be approved by the 8E".
PHILIPPINE TRUST CO-PAN) VS. RIVERA %77 !hil. 7(=1 Ban. $=, 1=$*) + 8hortly after its incorporation, the stockholders of "ooperativa 4aval Ailipina, adopted a resolution to the effect that the capital should be reduced by D<J and the subscribers be released from the obligation to pay their unpaid balance. 3n the course of time, the company became insolvent and went into the hands of !hilippine Trust "ompany %!hiltrust), as assignee in bankruptcy, and by it this action was instituted to recover W of the stock subscription of herein defendant who subscribed to 7D< of the 1,<<< authori6ed capital stock. 3t does not appear that the formalities under the "orporation "ode for the reduction of capital stock were observed and in particular it does not appear that any certificate was at any time filed in the ?ureau of "ommerce and 3ndustry, showing such reduction. ;espondent judge ruled in favor of !hiltrust and directed respondent to pay W of the subscription price of his shares. ISSUE: E/4 the reduction is valid and properF HELD: 4o. & corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release1 and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or
ISSUE: E/4 the decrease in capital stock is valid and bindingF HELD: 4o. Ehat clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increase, decided to evade its responsibility towards the employees by a devised capital reduction. Ehile the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. 3n the face of the petitioner company#s piling profits, the unionists had the right to demand for such salary adjustments. That the petitioner made .uite handsome profits is clear from the records. This court is convinced that the petitioner#s capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and conse.uently, to justify the mass layoff in it employee ranks, especially the union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. 8urely, we can neither countenance nor condone this. 3t is an unfair labor practice.
@.
PO*ER TO DEN) PRE=E-PTIVE RIGHT
PRE=E-PTIVE RIGHT is a right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective holdings, subject only to the limitation imposed under 8ec. *=, which provides5 8ec. *=. Po5er "o &e$<
re=e8 "#;e r#>:". + &ll stockholders of a
'*
stock corporation shall enjoy pre+emptive right to subscribe to stockholders# all meeting is necessary to consider it because such issuance does not need approval of stockholders. issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto5 !rovided, That such The pre+ general rule is that pre+emptive right is recogni6ed only with respect to new issue of shares, and not with emptive right shall not extend to shares to be issued in compliance respect to additional issues of originally authori6ed shares. with laws re.uiring stock offerings or minimum stock ownership by is on theory that when a corporation, at its inception This the public1 or to shares to be issued in good faith with the approval offers its first shares, it is presumed to have offered all of those which it is authori6ed to issue. &n original subscriber of the stockholders representing two+thirds %$M*) of the outstanding is deemed to have taken his shares knowing that they form capital stock, in exchange for property needed for corporate a definite proportionate part of the whole number of purposes or in payment of a previously contracted debt. authori6ed shares. Ehen the shares left unsubscribed are reoffered, he cannot therefore claim a dilution of interest.
BASIS OF RIGHT5 The grant of this right is preservation, unimpaired and undiluted, of stockholders# relative and proportionate voting and control, that is, the existing ratio of their interest and voting power in the corporation.
for the the old strength property
E,CEPTIONS % nder 8ec. *=)5 1. Ehen shares to be issued is in compliance with laws re.uiring stock offerings or minimum stock ownership by the public1 or $. 8hares to be issued in good faith with the approval of the stockholders representing $M* of the outstanding capital stock either5 a. 3n exchange for property needed for corporate purpose1 or b. 3n payment of a previously contracted debt.
The exceptions will not apply to stockholders of close corporation whose pre+emptive right, is broader if not absolute. 8ee 8ec. 1<$. The right may likewise be lost by waiver, express or implied or inability or failure to exercise it having been notified of the proposed disposition of shares. BENITO VS. SEC %1$* 8";& '$$1 Buly $D, 1=C*) + ;espondent Bamiatul !hilippines &l 3slamia, 3nc. was incorporated with !$,<<<,<<< authori6ed capital stock divided into $<,<<< shares, of which 7(< belong to herein petitioner. 3n a stockholders meeting, an increase of the authori6ed capital stock to !1,<<<,<<< was approved, where the previously unissued shares were all issued. !etitioner -atu Tagoranao ?enito filed a petition with herein respondent 8E" alleging that the additional issue of previously unissued shares was made in violation of his pre+emptive right and that the increase of capital stock was illegal considering that the stockholders on record were not notified, and that such issuance be cancelled. 8E" ;uling5 ?enito is not entitled to pre+emptive right with respect to the original unsubscribed shares, but can exercise such right with regards the increase capitali6ation. ISSUE: E/4 the above ruling is correctF HELD: Les. The issuance of the unsubscribed portion of the capital stock or !11<,=C< is valid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no
Eith respect to the claim that the increase in the authori6ed capital stock was without consent, expressed or implied, of the stockholder, it was the finding of the "ommission that a meeting was called for the purpose. The petitioner had not sufficiently overcome the evidence of respondent that such meeting was in fact held. Ehat petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time, attending the >ecca pilgrimage. &nother thing that petitioner was able to disprove was the allegation that all stockholders who did not subscribe to the increase have waived their pre+emptive right. &s far as petitioner is concerned, he had not waived his pre+emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. 4ot having waived such right and for reasons of e.uity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings.
>.
PO*ER TO SELL OR DISPOSE OF ASSETS
Sec. @N. S!0e or o":er &#1 o1#"#o$ o% !11e"1. + 8ubject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authori6ed by the vote of the stockholders representing at least two+thirds %$M*) of the outstanding capital stock, or in case of non+stock corporation, by the vote of at least to two+thirds %$M*) of the members, in a stockholderPs or memberPs meeting duly called for the purpose. Eritten notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally5 !rovided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this "ode.
A 1!0e or o":er &#1 o1#"#o$ 1:!00 9e &ee8e& "o co;er 1791"!$"#!00< !00 ":e cor or!"e ro er"< !$& !11e"1 #% ":ere9< ":e cor or!"#o$ 5o70& 9e re$&ere& #$c! !90e o%
'7
co$"#$7#$> ":e 971#$e11 or !cco8 0#1:#$> ":e 5:#c: #" 5!1 #$cor or!"e&.
7r o1e %or ISLA-IC DIRECTORATE OF THE PHILIPPINES VS. CA %$'$ 8";& 7D71 >ay 7, 1==') The 3slamic -irectorate of the !hilippines received two parcels of land from the @ibyan government for the purpose of putting up a >os.ue, >adrasah %arabic school) and other religious &fter such authori6ation or approval by the stockholdersinfrastructures. or 3n 1='$, >artial @aw was declared, most of members, the board of directors or trustees may, nevertheless, in members of the ?oard of Trustees, together with the its discretion, abandon such sale, lease, exchange, mortgage, petitioner 8en. >amintal Tamano, fled to the middle+east to political prosecution. pledge or other disposition of property and assets, subject to escape the rights of third parties under any contract relating thereto, without Thereafter, two >uslim groups sprung claiming to be the further action or approval by the stockholders or members. legitimate 3-!. /ne headed by Engr. Aarouk "apri6o, not having been properly elected as new members of the ?oard of Trustees caused to be sold, through a resolution of 3-!, the two lots to respondent 3glesia 4i "risto. 4othing in this section is intended to restrict the power of any corporation, without the authori6ation by the stockholders or 1='1 ?oard of Trustees now filed a petition to declare The the sale null and void. members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is ISSUE: E/4 the sale is validF $ece11!r< #$ ":e 717!0 !$& re>70!r co7r1e o% 971#$e11 o% 1!#& cor or!"#o$ or '2( #% ":e rocee&1 o% ":e 1!0e or o":er HELD: 4o. The "apri6o Kroup is a fake board of trustees. &#1 o1#"#o$ o% 17c: ro er"< !$& !11e"1 9e ! ro r#!"e&3-! %or never gave its consent through a legitimate ?oard of ":e co$&7c" o% #"1 re8!#$#$> 971#$e11. Trustees. Therefore, this is not a case of vitiated consent, but one where consent on the part of one of the contracting parties is totally wanting. 3neluctably, the subject sale is void and produces no effect whatsoever. 3n non+stock corporations where there are no members with voting The rights, the vote of at least a majority of the trustees in office will be "apri6o group+34" sale is further deemed null and void ab initio because of the "apri6o Kroup#s failure to comply sufficient authori6ation for the corporation to enter into any with 8ec. 7< of the "orporation "ode pertaining to transaction authori6ed by this section. the disposition of all or substantially all assets of the corporation. The Tandang 8ora property, it appears from the records, constitutes the only property of the 3-!. ,ence, its sale to a third+party is a sale or disposition of all the corporate property and assets of 3-! falling s.uarely within the contemplation of 8ec. 7<. Aor the sale to be valid, the majority vote of the legitimate ?oard of Trustees, concurred in by vote of at least $M* of the bona fide members of the corporation should have been obtained. These twin re.uirements were not met as the "apri6o Kroups which voted to sell the property was a fake ?oard and those whose names and signatures were affixed by the "apri6o Kroup together with the sham ?oard ;esolution authori6ing negotiation for the sale were, from all indications, not bona fide members of the 3-! as they were made to appear to be. ED*ARD J. NELL CO. VS. PACIFIC FAR-S+ INC. %1D 8";& 71D1 4ov. $=, 1=(D) + The appellant secured in a civil case against 3nsular Aamrs, 3nc. a judgment for the balance of the price of a pump sold by the former to the latter. & writ of execution was issued but was returned unsatisfied, saying that 3nsular Aarms had no leviable property. 8oon after appellant filed with the same >unicipal "ourt the present action against !acific Aarms claiming it to be an alter ego of 3nsular Aarms, which the court denied. /n appeal, the "A3 and "& also denied the petition. ISSUE: E/4 !acific Aarms should answer for the liability of 3nsular AarmsF HELD: 4o. 3t appears on record that the appellee purchase 1,<<< shares of stock of 3nsular Aarms, and thereupon sold
The conditions for the valid exercise of this power are thus as follows5 1. ;esolution by a majority of the ?/-MT1
$. *. 7.
D. (.
&uthori6ation from the stockholders representing at least $M* of the outstanding capital stock or $M* of the members1 The ratification of the stockholders or member must be made at a meeting duly called for that purpose1 !rior written notice of the proposed action and of the time and place of meeting must be made addressed to all stockholders of record, either by mail or personal service1 The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies1 and &ny dissenting stockholder shall have the option to exercise his appraisal right.
The above re.uirements will not apply5 1. 3n case the sale is 4/T covering all or substantially all of the assets of a corporation !1 "o re$&er #" #$c! !90e o% co$"#$7#$> ":e 971#$e11 or !cco8 0#1:#$> ":e 7r o1e %or 5:#c: #" 5!1 #$cor or!"e&1 or if the proceeds are to be used to continue the conduct of the remaining business of the company1 $. 3f the sale is in the usual and regular course of business of the company.
'D
said shares of stock to certain individuals, who forthwith reorgani6ed said corporation and that the board of directors thereof, as reorgani6ed, then caused its assets, including its leasehold right over a public land in !angasinan to be sold to herein appellee. These facts do not prove that the appellee is an alter ego of 3nsular Aarms, or is liable for its debts. Kenerally where on corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except5 %1) where the purchaser expressly or impliedly agrees to assumes such debts1 %$) where the transaction amounts to a consolidation or merger of the corporations1 %*) where the purchasing corporation is merely a continuation of the selling corporation1 and %7) where the transaction is entered into fraudulently in order to escape liability for such debts. 3n the case at bar, there is neither proof nor allegation of the foregoing exceptions. 3n fact, these sales took place not only over ( months before the rendition of the judgment sought to be collected in the present action, but also, appellee purchase the shares of stock of 3nsular Aarms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for the obligation of 3nsular Aarms in favor of said bank.
shares and while they remain so, they have no voting rights and dividend rights. The corporation may %1) re+issue them even below par1 %$) issue them as stock dividends1 %*) retire or cancel them and thereby remove from issue effectively reducing the number of shares issued stated in the &/3. STEINBERG VS. VELASCO %D$ !hil =D*1 >arch 1$, 1=$=) + the ?oard of -irectors of Trading "ompany approved and authori6ed the purchases of the capital stock of the company from its various stockholder, herein respondents, at par value amounting to !*,*<<. !etitioner assails the recovery of the amount paid to such stockholders and the !*,<<< dividends declared which were claimed to be made to the injury and in fraud of its creditors. The complaint was dismissed. ISSUE: E/4 recovery can be madeF HELD: Les. The ?oard of -irectors acted on the assumption that it had accounts receivable of the face value of !1=,1$(.<$ but there was no stipulation as to the value of such accounts and !1$,D1$.7' of which had but little, if any value. The purchase of the stocks and the dividend declaration further decreased the assets of the corporation. The profits amounted only to !*,*17.'$. 3n other words, that the corporation did not then have actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would Gaffect the financial condition of the corporationH.
4.
PO*ER TO AC2UIRE O*N SHARES
3t is indeed peculiar that the action of the board in the Sec. @1. Po5er "o !c67#re o5$ 1:!re1. + & stock corporation assailed acts was all done at the same meeting of the shall have the power to purchase or ac.uire its own shares for a board of directors, and it appears that the stockholders, legitimate corporate purpose or purposes, including but not limited whose shares were purchased, were former directors and to the following cases5 !rovided, That the corporation resigned has before the board approved the purchase and unrestricted retained earnings in its books to cover the shares to be declaration of dividends. 3n other words, the directors were permitted to resign so that they could sell their stock to the purchased or ac.uired5 corporation. 3n this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. 1. To eliminate fractional shares arising out of stock dividends1 "reditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the $. To collect or compromise an indebtedness to the corporation, board of directors will not use the assets of the corporation arising out of unpaid subscription, in a delin.uency sale, and to to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is purchase delin.uent shares sold during said sale1 and insolvent. *. To pay dissenting or withdrawing stockholders entitled to The amount involved in this case is not large, but the legal payment for their shares under the provisions of this "ode. principles are important and we have given them consideration which they deserve. The limitation that the corporation must at all times have Gunrestricted retained earningsH is a condition for the exercise of this power, E2"E!T5 1. ;edemption of redeemable shares under 8ec. C1
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PO*ER TO INVEST FUNDS
$.
*.
Exercise of stockholders right to compel a close corporation to purchase his shares for any reason under 8ec. 1<D when the corporation has sufficient assets in its book to cover its debts and liabilities exclusive of capital stock1 3n case of deadlocks under 8ec. 1<7.
/nce purchased, the shares are considered as treasury
8ec. 7$. Po5er "o #$;e1" cor or!"e %7$&1 #$ !$o":er cor or!"#o$ or 971#$e11 or %or !$< o":er 7r o1e. + 8ubject to the provisions of this "ode, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organi6ed when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two+thirds %$M*) of the outstanding capital stock, or by at least two thirds %$M*) of the members in the case of non+stock corporations, at a stockholderPs or memberPs meeting duly called for the purpose. Eritten notice of
'(
the proposed investment and the time and place of the meeting Gj. !ower to ac.uire or dispose of shares or securities. & corporation, in order to accomplish it purpose as shall be addressed to each stockholder or member at his place private of stated in its articles of incorporation, and imposed by the residence as shown on the books of the corporation and deposited "orporation @aw, has the power to ac.uire, hold, to the addressee in the post office with postage prepaid, or served mortgage, pledge or dispose of shares, bonds, securities, personally5 !rovided, That any dissenting stockholder shall have and other evidences of indebtedness of any domestic or appraisal right as provided in this "ode5 !rovided, however, That foreign corporation. S7c: !$ !c"+ #% &o$e #$ where the investment by the corporation is reasonably necessary to 7r17!$ce o% ":e cor or!"e 7r o1e+ &oe1 $o" ":e ! ro;!0 o% ":e 1"oc3:o0&er1H 97" 5:e$ accomplish its primary purpose as stated in the articles $ee& of ":e 7rc:!1e o% 1:!re1 o% !$o":er cor or!"#o$ #1 incorporation, the approval of the stockholders or members shall &o$e 1o0e0< %or #$;e1"8e$" !$& $o" "o !cco8 0#1: not be necessary. ":e 7r o1e o% #"1 #$cor or!"#o$+ ":e ;o"e o% ! ro;!0 o% ":e 1"oc3:o0&er1 #1 $ece11!r<H E-A) INVEST FUNDSF has been held by the 8E" to mean an investment in the form of money, stock, bonds and other li.uid assets and does not include real properties or other fixed assets, otherwise the law would have phrased 8ec. 7$ to include GassetsH rather than Gto invest fundsH. G7<. !ower to invest corporate funds. & private corporation has the power to invest its corporate funds in any other corporation or business, or for any other purpose other than the main purpose for which it was organi6ed, provided that its board of directors has been authori6ed in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two+thirds of the voting power on such a proposal at a stockholders# meeting called for that purpose. Ehen the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation, the approval of the stockholders is not necessaryH Ee agree with !rofessor Kuevarra. Ee therefore agree with the finding of the lower court that the investment in .uestion does not fall under the purview of 8ec. 1' W of the "orporation @aw. JOHN GOKONG*EI+ JR.+ petitioner, vs. SECURITIES AND E,CHANGE CO--ISSION+ &4-;E8 >. 8/;3&4/, B/8E >. 8/;3&4/, E4;3T E U/?E@, &4T/43/ ;/2&8, E>ETE;3/ ? 4&/, E&@T,;/-E ?. "/4-E, >3K E@ /;T3K&8, &4T/43/ !;3ET/, 8&4 >3K E@ "/;!/;&T3/4, E>3K-3/ T&4B &T"/, 8;., and E- &;-/ ;. Q38&L&, respondents. %K; 4o. @+7D=111 &pril 11, 1='=) FACTS: !etitioner Bohn Kokongwei alleged that the respondent corporation has been investing corporate funds in other corporations or business outside of its primary purpose in violation of 8ec. 1' W of the "orporation @aw. ;espondents sent notices of the annual stockholders# meeting including in the agenda thereof the re+affirmation of the authori6ation of the ?/- by the stockholders at the meeting to invest corporate funds in other companies or businesses or for purposes other than the main purpose. &n injunction was prayed for by petitioner, but the date of hearing originally set was cancelled. 4o action was taken up to the date of the filing of the instant petition. ISSUE: E/4 respondent 8E" committed grave abuse of discretion in allowing the above agenda to be taken up in the stockholders# meetingF HELD: 4o. 8ection 1'+1M$ of the "orporation @aw allows a corporation to Ninvest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organi6edN provided that its ?oard of -irectors has been so authori6ed by the affirmative vote of stockholders holding shares entitling them to exercise at
SECONDAR) PURPOSE: the law uses the phrase Gfor any purpose other than the primary purposeH signifying that even if the business or undertaking is allowed or authori6ed in the secondary purpose or purposes of the corporation, the provision of 8ec. 7$ would apply. RE2UIRE-ENTS FOR A VALID INVEST-ENT CORPORATE FUNDS: 1. ;esolution by a majority of the ?/-MT1 OF
$. *. 7.
;atification by the stockholders representing $M* of the outstanding capital stock %or $M* of members)1 The ratification must be made at a meeting duly called for that purpose1 !rior written notice of the proposed investment and the time and place of the meeting shall be made, addressed to each stockholder or member by mail or by personal service1 and &ny dissenting stockholder shall have the option to exercise his appraisal right.
D.
RATIFICATION: as a re.uirement, applies only to investments that are beyond the corporation#s primary purpose, or outside the express or implied powers of the investing corporation. Thus, if the investment is reasonably necessary to accomplish its primary purpose, the approval of the stockholders or members is not re.uired.
DELA RA-A VS. -A=AO SUGAR CENTRAL CO.+ INC. %$' 8";& $7'1 Aeb. $C, 1=(=) = -efendant >a+ao 8ugar "entral "o, 3nc., engaged in the manufacture of sugar, invested !(DD,<<< in shares of stock of !hilippine Aiber !rocessing "o., 3nc., which is engaged in the manufacture of sugar bags. The sale, though not previously authori6ed, was ratified by the $M* vote of the stockholders. "laiming the business of defendant is not related to that of !hilippine Aiber, such sale was attacked but the trial court decided on its legality. ISSUE: E/4 the investment by >a+ao 8ugar constitutes a violation of 8ec. 1'+1M$ of the "orporation @awF HELD: Les. 3n his work entitled GThe !hilippine "orporation @awH, !rofessor 8ulpicio 8. Kuevarra of the ! "ollege of @aw, reconciled par. %=) and %1<) of 8ec. 1*, as follows5
''
least two+thirds of the voting power. I% ":e #$;e1"8e$" #1 8!&e #$ 7r17!$ce o% ":e cor or!"e 7r o1e+ #" &oe1 $o" $ee& ":e ! ro;!0 o% ":e 1"oc3:o0&er1. I" #1 o$0< 5:e$ ":e 7rc:!1e o% 1:!re1 #1 &o$e 1o0e0< %or #$;e1"8e$" !$& $o" "o !cco8 0#1: ":e 7r o1e o% #"1 #$cor or!"#o$ ":!" ":e ;o"e o% ! ro;!0 o% ":e 1"oc3:o0&er1 :o0&#$> 1:!re1 e$"#"0#$> ":e8 "o e4erc#1e !" 0e!1" "5o=":#r&1 o% ":e ;o"#$> o5er #1 $ece11!r<. &s stated by respondent corporation, the purchase of beer manufacturing facilities by 8>" was an investment in the same business stated as its main purpose in its &rticles of 3ncorporation, which is to manufacture and market beer. 3t appears that the original investment was made in 1=7'+ 1=7C, when 8>", then 8an >iguel ?rewery, 3nc., purchased a beer brewery in ,ongkong %,ongkong ?rewery I -istillery, @td.) for the manufacture and marketing of 8an >iguel beer thereat. ;estructuring of the investment was made in 1='<+1='1 thru the organi6ation of 8>3 in ?ermuda as a tax free reorgani6ation. nder these circumstances, the ruling in -e la ;ama v. >anao 8ugar "entral "o., 3nc., supra, appears relevant. 3n said case, one of the issues was the legality of an investment made by >anao 8ugar "entral "o., 3nc., without prior resolution approved by the affirmative vote of $M* of the stockholdersP voting power, in the !hilippine Aiber !rocessing "o., 3nc., a company engaged in the manufacture of sugar bags. The lower court said that G":ere #1 8ore 0o>#c #$ ":e 1"!$& ":!" #% ":e #$;e1"8e$" #1 8!&e #$ ! cor or!"#o$ 5:o1e 971#$e11 #1 #8 or"!$" "o ":e #$;e1"#$> cor or!"#o$ !$& 5o70& !#& #" #$ #"1 7r o1e+ "o re67#re !7":or#"< o% ":e 1"oc3:o0&er1 5o70& 9e "o 7$&70< c7r"!#0 ":e o5er o% ":e Bo!r& o% D#rec"or1.F &ssuming arguendo that the ?oard of -irectors of 8>" had no authority to make the assailed investment, there is no .uestion that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthori6ed acts of its officers or other agents. This is true because the .uestioned investment is neither contrary to law, morals, public order or public policy. 3t is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. re.uirement of the law that the investment must be authori6ed by the affirmative vote of the stockholders holding two+thirds of the voting power. This re.uirement is for the benefit of the stockholders. The stockholders for whose benefit the re.uirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. G-ere 70"r! ;#re1 !c"1G+ 1!#& ":#1 Co7r" #$ P#ro;!$o+ Gor ":o1e 5:#c: !re $o" #00e>!0 !$& ;o#& !9 #$#"#o+ 97" !re $o" 8ere0< 5#":#$ ":e 1co e o% ":e !r"#c0e1 o% #$cor or!"#o$+ !re 8ere0< ;o#&!90e !$& 8!< 9eco8e 9#$&#$> !$& e$%orce!90e 5:e$ r!"#%#e& 9< ":e 1"oc3:o0&er1. ?esides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of >ay 1<, 1='' cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.
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PO*ER TO DECLARE DIVIDENDS
DIVIDENDS are corporate profits set aside, declared and ordered by the ?/- to be paid to the stockholders. 3t is a fruit of investment, the recurrent return, analogous to interest and rent upon other forms of invested capital.
Sec. @/. Po5er "o &ec0!re &#;#&e$&1. + The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them5 !rovided, That any cash dividends due on delin.uent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delin.uent stockholder until his unpaid subscription is fully paid5 !rovided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two+thirds %$M*) of the outstanding capital stock at a regular or special meeting duly called for the purpose. %1(a)
8tock corporations are prohibited from retaining surplus profits in excess of one hundred %1<<J) percent of their paid+in capital stock, except5 %1) when justified by definite corporate expansion projects or programs approved by the board of directors1 or %$) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without itsMhis consent, and such consent has not yet been secured1 or %*) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.
UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends. T)PES OF DIVIDENDS: 1. "ash dividends payable in lawful money or currency1
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!roperty dividends + those paid in the form property %e.g., bonds, notes, shares in another corporation)1 8tock dividends corporation#s own shares of stock out of the remaining unissued shares which would re.uire the approval of the stockholders representing $M* of the outstanding capital stock at a regular or special meeting duly called for that purpose. This is to be valued at par value or issue price.
"ash and property dividends have the effect of reducing corporate assets to the extent of the dividends declared. 3n stock dividends, it would generally not increase the proportionate interest of the stockholders of the
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corporation although it will have the effect of increasing the subscribed and paid+up capital %exception is when the stock dividend declaration would result in fractional shares like when 1 share is declared as dividend for every = shares held)
ISSUE: E/4 4ielson I "o. is entitled to receive stock dividendsF HELD: 4o. The considerations for which shares of stock may be issued are5 %1) cash1 %$) property1 and %*) undistributed profits. 8hares of stock are given the special name Nstock dividendsN only if they are issued in lieu of undistributed profits. 3f shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of Nstock dividendsN. & corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. & share of stock issued to pay for services rendered is e.uivalent to a stock issued in exchange of property, because services is e.uivalent to property. @ikewise a share of stock issued in payment of indebtedness is e.uivalent to issuing a stock in exchange for cash. ?ut a share of stock thus issued should be part of the original capital stock of the corporation upon its organi6ation, or part of the stocks issued when the increase of the capitali6ation of a corporation is properly authori6ed. 3n other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property1 that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitali6ation or from the increased capitali6ation. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. ?ut a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. A G1"oc3 &#;#&e$&G #1 !$< &#;#&e$& !<!90e #$ 1:!re1 o% 1"oc3 o% ":e cor or!"#o$ &ec0!r#$> or !7":or#K#$> 17c: &#;#&e$&. 3t is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. & stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits. 8o, ! 1"oc3 &#;#&e$& #1 !c"7!00< "5o ":#$>1: '1( ! &#;#&e$&+ !$& '2( ":e e$%orce& 71e o% ":e &#;#&e$& 8o$e< "o 7rc:!1e !&&#"#o$!0 1:!re1 o% 1"oc3 !" !r. *:e$ ! cor or!"#o$ #117e1 1"oc3 &#;#&e$&1+ #" 1:o51 ":!" ":e cor or!"#o$I1 !cc7870!"e& ro%#"1 :!;e 9ee$ c! #"!0#Ke& #$1"e!& o% &#1"r#97"e& "o ":e 1"oc3:o0&er1 or re"!#$e& !1 17r 071 !;!#0!90e %or &#1"r#97"#o$+ #$ 8o$e< or 3#$&+ 1:o70& o or"7$#"< o%%er. Aar from being a reali6ation of profits for the stockholder, it tends rather to postpone said reali6ation, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution. T:71+ #" #1 ! !re$" ":!" 1"oc3 &#;#&e$&1 !re #117e& o$0< "o 1"oc3:o0&er1. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. & stock dividend really adds nothing to the interest of the stockholder1 the proportional interest of each stockholder remains the same. I% ! 1"oc3:o0&er #1 &e r#;e& o% :#1 1"oc3 &#;#&e$&1 = !$& ":#1 :! e$1 #% ":e 1:!re1 o% 1"oc3 %or8#$> !r" o% ":e 1"oc3 &#;#&e$&1 !re #117e& "o ! $o$=1"oc3:o0&er S ":e$ ":e ro or"#o$ o% ":e 1"oc3:o0&erI1 #$"ere1" c:!$>e1 r!&#c!00<. S"oc3 &#;#&e$&1 !re c#;#0 %r7#"1 o% ":e or#>#$!0 #$;e1"8e$"+
OVERISSUANCE OF SHARES: happens when a corporation issues shares beyond its authori6ed capital stock, even in the form of stock dividends. DELIN2UENC): is a re.uirement for the application of the second part of the first paragraph of 8ec. 7*. 8uch that, cash dividends declared are first applied on the unpaid balance on the subscription plus costs and expenses and stock dividends are withheld until the subscription is fully paid. *HO CAN DECLARE DIVIDENDSR The ?/-. They cannot be compelled to declare dividends, except5 %1) Ehen the unrestricted retained earnings is in excess of 1<<J of the paid+up capital1 and %$) 3n the case of >andatory 3f Earned !reference 8hares.
The judgment of the ?/- is conclusive, E2"E!T5 %1) when they act in bad faith1 %$) for a dishonest purpose1 %*) they act fraudulently, oppressively, unreasonably or unjustly1 or %7) abuse of discretion can be shown as to impair the rights of the complaining shareholders. The TE8T of bad faith is to determine if the policy of the directors is dictated by their personal interest rather than the corporate welfare.
*HEN DIVIDENDS RIGHTS VEST 5 3t has been succinctly said that the right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally declared by the ?/-. 3t is not revocable unless5 %1) it has not been officially communicated to the stockholders1 or %$) it is in the form of stock dividends which is revocable any time prior to distribution because this does not result in the distribution of assets but merely the division of existing shares of a stockholder into smaller units or integers. TRANSFER OF SHARES: The dividends already declared belong to the owner at the time of declaration. sually, however, the dividends are payable to stockholders of record on a specific future date and as far as the corporation is concerned, the registered owner is the one entitled to dividends. &s against his transferor, however, the transferee has presumably the right to such dividends and is oftentimes taken into account in entering effecting the transfer of shares.
NIELSON O CO-PAN)+ INC.+ plaintiff+appellant, vs. LEPANTO CONSOLIDATED -INING CO-PAN)+ defendant+appellee %K; 4o. @+$1(<11 -ec. $C, 1=(C) FACTS: This is a motion for reconsideration filed by respondent @epanto contending that the order of the 8" to pay 4ielson 1<J of the stock dividends, declared by @epanto during the extension of the contract, as compensation for services under a management contract is in violation of the "orporation @aw and that it could not be the intention of the parties that the services of 4ielson should be paid in stock dividends.
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!$& "o ":e o5$er1 o% ":e 1:!re1 9e0o$> ":e c#;#0 %r7#"1. The term NdividendN both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. 3t means the fund actually set aside, and declared by the directors of the corporation as dividends and duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests. 3t is /ur considered view, therefore, that under 8ection 1( of the "orporation @aw stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. &nd so, in the case at bar 4ielson can not be paid in shares of stock which form part of the stock dividends of @epanto for services it rendered under the management contract. Ee sustain the contention of @epanto that the understanding between @epanto and 4ielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to 4ielson, in the proportion of 1<J of the cash value of the stock dividends declared. &nd this conclusion of /urs finds support in the record.
laws or regulations.
This provision was inserted to assure not only technical competence but continuity in management policy in running corporate affairs which can be achieved through a management contract.
RE2UIRE-ENTS OF A CONTRACT: 1. ;esolution of the ?/-1
VALID
-ANAGE-ENT
&pproval by the stockholders representing a majority of the outstanding capital stock or majority of the members of both the managing and the managed corporation1 *. The approval of the stockholders or members must be made at the meeting called for that purpose1 and 7. The contract shall not be for a period longer than D years for any one term, except those which relate to exploration, development or utili6ation of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations1 D. $M* of the stockholders or members would be re.uired, where5 a. The stockholders representing the same interest T. PO*ER TO ENTER INTO -ANAGE-ENT of both the managing and the managed CONTRACT corporation own or control more than 1M* of the total outstanding capital stock of the managing Sec. @@. Po5er "o e$"er #$"o 8!$!>e8e$" co$"r!c". corporation1 corporation shall conclude a management contract with another b. & majority of the members of the ?/- of the corporation unless such contract shall have been approved by the managing corporation also constitute a majority of the directors of the managed corporation1 board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the c. The contract would constitute the management or members in the case of a non+stock corporation, of both the operation of all or substantially all of the business of another corporation, whether such contracts managing and the managed corporation, at a meeting duly called are called service contracts. 3f it will not constitute for the purpose5 !rovided, That %1) where a stockholder or the management of all or substantially all of the stockholders representing the same interest of both the managing business of another corporation, the first and the managed corporations own or control more than one+third paragraph of 8ec. 77 will apply and not that of the %1M*) of the total outstanding capital stock entitled to vote of the second, that is, only the vote of the majority is managing corporation1 or %$) where a majority of the members of re.uired. the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed ;. ULTRA VIRES ACTS corporation, then the management contract must be approved by 8ec. 7D. U0"r! ;#re1 !c"1 o% cor or!"#o$1. + 4o corporation under the stockholders of the managed corporation owning at least two+ this thirds %$M*) of the total outstanding capital stock entitled to vote, or "ode shall possess or exercise any corporate powers except those conferred by this "ode or by its articles of incorporation and by at least two+thirds %$M*) of the members in the case of a non+ such as are necessary or incidental to the exercise of the stock corporation. 4o management contract shall be entered except into powers so conferred. for a period longer than five years for any one term.
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VIRES ACTS are those which cannot be executed The provisions of the next preceding paragraph shall apply to ULTRA any or performed by a corporation because they are not within contract whereby a corporation undertakes to manage or operate its express, inherent, or implied powers as defined by its all or substantially all of the business of another corporation, charter or &/3. &ccordingly, it may be subject to a collateral whether such contracts are called service contracts, operating attack .uestioning the authority of the corporation to agreements or otherwise5 !rovided, however, That such service engage in such particular endeavor. contracts or operating agreements which relate to the exploration, CONSE2UENCES: development, exploitation or utili6ation of natural resources may be 1. /n the "orporation itself5 The proper forum may entered into for such periods as may be provided by the pertinent
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suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public. /n the rights of the 8tockholders5 & stockholder may bring either an individual or derivative suit to enjoin a threatened ultra+vires act or contract. 3f already performed, a derivative suit against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract. /n the immediate parties5
manner as from time to time may be determinedH and %$) Gto aid in any manner any person association, or corporation or in the affairs of the property of which this corporation has lawful interestH. The donation in .uestion undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds were not immediately re.uired when they were given away. *e &o$." 1ee 87c: &#1"#$c"#o$ 9e"5ee$ ":e !c"1 o% >e$ero1#"< o% ":e 9e$e;o0e$ce e4"e$&e& "o 1o8e e8 0o<ee1 o% ":e cor or!"#o$+ !$& e;e$ "o 1o8e #$ 5:o8 ":e cor or!"#o$ 5!1 8ere0< #$"ere1"e& 9ec!71e o% cer"!#$ 8or!0 or o0#"#c!0 co$1#&er!"#o$ , and ":e &o$!"#o$1 5:#c: ":e cor or!"#o$ :!1 1ee$ %#" "o >#;e ":e c:#0&re$ o% ":e 0!"e E$r#co Pr#;!$o from the point of view of the power of the corporation as expressed in the &/3. &nd if the former had been sanctioned and had been valid and intra+vires, we see no plausible reasons why the latter should now be deemed ultra+vires. 3t may perhaps be argued that the donation given to the children of the late Enrico !rivano is so large and disproportionate that it can hardly be considered a pension or gratuity that can be placed on par with the instances above+mentioned, but this argument overlooks one consideration5 the gratuity here given was not merely motivated by pure liberality or act of generosity, but by a deep sense of recognition of the valuable services rendered by the late Enrico !rivano which had immensely contributed to the growth of the corporation to the extent that from its humble capitali6ation it blossomed into a multi+million corporation that it is today. Gr!$"#$> ":!" #" 5!1 70"r!=;#re1+ #" 8!< 9e 1!#& ":!" ":e 1!8e c!$$o" 9e #$;!0#&!"e&+ or &ec0!re& 0e>!00< #$e%%ec"#;e %or ":!" re!1o$ !0o$e+ #" ! e!r#$> ":!" ":e &o$!"#o$ re re1e$"1 $o" o$0< ":e !c" o% ":e BOD 97" o% ":e 1"oc3:o0&er1 ":e81e0;e1 !1 1:o5$ 9< ":e %!c" ":e 1!8e :!1 9ee$ e4 re110< r!"#%#e& #$ ! re1o07"#o$ &70< ! ro;e& 9< ":e 0!""er. B< ":#1 r!"#%#c!"#o$+ ":e #$%#r8#"< o% ":e cor or!"e !c"+ #% !$< :!1 9ee$ o90#"er!"e& ":ere9< 8!3#$> ":e !c" er%ec"0< ;!0#& !$& e$%orce!90e. This is specially so if the donation is not merely executory but executed and consummated and no creditors are prejudiced, or if there are creditors affected, the latter has expressly given their conformity. ISSUE2: Ehat is the difference between an illegal act and that which is ultra+viresF HELD: The former contemplates the doing of an act which is contrary to law, morals, or public order or contravene some rules of public policy or public duty, and are, like similar transactions between the individuals, void. They cannot serve as basis of a court action, nor ac.uire validity by performance, ratification or estoppel. -ere 70"r!=;#re1 !c"1+ o$ ":e o":er :!$&+ or ":o1e 5:#c: !re $o" #00e>!0 !$& ;o#& !9 #$#"#o+ 97" !re 8ere0< 9e<o$& ":e 1co e o% ":e AOI+ !re 8ere0< ;o#&!90e !$& 8!< 9eco8e 9#$&#$> !$& e$%orce!90e 5:e$ r!"#%#e& 9< ":e 1"oc3:o0&er1. 8ince it is not contended that the donation under consideration is illegal, or contrary to any of the express provisions of the &/3, nor prejudicial to the creditors of the defendant corporation, we cannot but logically conclude
a.
b. c.
3f the contract is fully executed in both sides, the contract is effective and the courts will not interfere to deprive either party of what has been ac.uired under it1 3f the contract is executory on both sides, as a rule, neither party can maintain an action for its non+performance1 and Ehere the contract is executory on one side only, and has been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. >ajority of the courts, however, hold that the party who has received benefits from the performance is GestoppedH to set up that the contract is ultra vires to defeat an action on the contract.
;E&- &K&345 Kovernment vs. E@ ,ogar and ;epublic vs. &coje >ining %both in this chapter)
PRIVANO+ ET AL. VS. DE LA RA-A STEA-SHIP CO. %=( !hil. **D1 -ec. $=, 1=D7) + The ?oard of directors of defendant company adopted a resolution wherein the proceeds of the insurance taken on the life of its previous !resident and Keneral >anager Enrico !rivano be set aside and used to purchase 7,<<< shares to be given to !rivano#s heirs, which was approved by the stockholders in a meeting duly called for the purpose. The donation of the shares was later on modified to transfer all the proceeds directly to the heirs which would become a loan of the company with DJ interest per annum and payable after the settlement of its bonded indebtedness, and still later, modified to be payable Gwhenever the company is in a position to meet said obligationH. /n an opinion by the 8E", sought by the !resident of the corporation, 8ergio /smena, Br., it was opined by the 8E" that the donation was void for being ultra vires. The ?oard planned to adopt a different resolution to effect the donation but failed to act on it. The heirs, through >rs. Estefania ;. !rivano, acting as guardian, demanded the settlement of the obligation. ISSUE: E/4 the donation was an ultra vires actF HELD: 4o. &fter a careful perusal of the &/3, we find that the corporation was given broad and almost unlimited powers to carry out the purposes for which it was organi6ed among them, %1) Gto invest and deal with the money of the company not immediately re.uired, in such
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":!" 1!#& &o$!"#o$+ e;e$ #% 70"r! ;#re1 #$ ":e 17 o1#"#o$ 5e :!;e !&;er"e& "o+ #1 $o" ;o#&+ !$& #% ;o#&!90e #"1 #$%#r8#"< :!1 9ee$ c7re& 9< r!"#%#c!"#o$ !$& 1791e67e$" !c"1 o% ":e &e%e$&!$" cor or!"#o$ . The corporation is now prevented or estopped from contesting the validity of the donation. IRINEO CARLOS+ plaintiff+appellant VS. -INDORO SUGAR CO.+ ET AL., defendant+appellees %D' !hil. *7*1 /ct. $(, 1=*$) + >indoro 8ugar "ompany %>8") transferred all of its property to !hilippine Trust "ompany %!T") in consideration of the bonds it had issued to the value of !*,<<<,<<<, each bond being S1,<<<, which par value, with interest at CJ per annum, !T" guaranteed to the holders. !T" paid ;amon -ia6 upon presentation of the coupons, the stipulated interest from the date of maturity until Buly 1, 1=$C, when its stopped payments, alleging that it did not deem itself bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. The "A3 of >anila absolved the defendants from the complaint except >8" which was sentenced to pay the value of the bond. ISSUE: E/4 !T"#s act was ultra+viresF HELD: 4o. Airstly, !T" although secondarily engaged in banking, was primarily organi6ed as a trust corporation with full power to ac.uire personal property such as the bonds in .uestion according to both sec. 1* %par. D) of the "orporation @aw and its duly registered by+laws and &/31 8econdly, that being thus authori6ed to ac.uire the bonds, it was given implied power to guarantee them in order to place them upon the market under better, more advantageous conditions, and thereby secure the profit derived from their sale. GI" #1 $o"+ :o5e;er+ 70"r! ;#re1 %or ! cor or!"#o$ "o e$"er #$"o co$"r!c"1 o% >7!r!$"< 5:ere #" &oe1 1o #$ ":e 0e>#"#8!"e %7r":er!$ce o% #"1 7r o1e1 !$& 971#$e11. &nd it is well settled that where a corporation ac.uires commercial papers or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale, it may in order to make them more readily marketable, indorse or guarantee their payment.H Even if !T" did not ac.uire the bonds in .uestion, but only guaranteed them, it would at any rate, be valid and the said corporation is bound to pay the appellant their value with the accrued interest in view of the fact that they become due on account of the lapse of (< days, without the accrued interest due having been paid1 and the reason is that it is estopped from denying the validity of its guarantee. The doctrine of ultra vires as a defense, is by some courts regarded as an ungracious and odious one, to be sustained only where the most persuasive consideration of public policy are involved, and there are numerous decisions and dicta to the effect that the plea should not as a general rule prevail whether interposed for or against the corporation, where it will not advance justice but on the contrary will accomplish a legal wrong.
Ehen a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. "orporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong. JAPANESE *AR NOTES CLAI-ANTS ASSOC.+ INC. VS. SEC %1<1 !hil D7<1 >ay $*, 1=D') + The 8E" issued an order re.uiring petitioner herein and its !resident &lfredo &bcede to show cause why it should not be proceeded against for making misrepresentations to the public about the need of registering and depositing war notes, with a view of probable redemption as contemplated in 8enate ?ill 4o. 1(* and in 8enate "oncurrent ;esolution 4o. 17, for otherwise they would be valueless. !etitioner contended that the statement was made in good faith as !resident >agsaysay would soon make representations to the 8 to have the war notes redeemed. ;espondent 8E" found that according to its &/3, the petitioner has the privilege to work for the redemption of the war notes of its members alone, but that it cannot offer its services to the public for a valuable consideration, because there is nothing definite and tangible about the redemption of the war notes and its success is speculative that any authority given to offer services can easily degenerate into a racket1 that under its &/3 the petitioner is a civic and non+stock corporation and upon should not engage in business for profit1 that it has received war notes for deposit, upon payment of fees, without authority in its articles to do so1 that it had previously been rendered to desist from collecting from those registering the war notes, but notwithstanding this prohibition it has done so in the guise of service fees. ,ence the "ommission ordered to stop receiving war notes, receiving same for deposit and charging fees therefore. ISSUE: E/4 the 8E" erred in issuing the .uestioned orderF HELD: 4o. The articles authori6e collection of fees from members1 but they do not authori6e the corporation to engage in the business of registering and accepting war notes for deposit and collecting fees from such services. This was the ruling of the "ommission and this we find to be correct. 4either do we find any merit in the third contention that the association has authority to accept and collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers of the association as embodied in its articles and has absolutely no relation to the avowed purpose of the association to work for the redemption of war notes. ERNESTINA CRISOLOGO=JOSE VS. CA %K; 4o. C<D==1 8ept. 1D, 1=C=) + The Qice+president of >over Enterprises, 3nc. issued a check drawn against Traders ;oyal ?ank, payable to petitioner Ernestina "risologo+Bose, for the accommodation of his client. !etitioner+payee was charged with the knowledge that the check was issued at the instance and for the personal account of the !resident who merely prevailed upon respondent vice+president to act as
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co+signatory in accordance with the arrangement of the corporation with its depository bank. Ehile it was the corporationPs check which was issued to petitioner for the amount involved, petitioner actually had no transaction directly with said corporation. ISSUE5 E/4 private respondent, one of the signatories of the check issued under the account of >over Enterprises, 3nc., is an accommodation party under 43@ and a debtor of petitioner to the extent of the amount of said checkF HELD5 Les. The liability of an accommodation party to a holder for value, although such holder does not include nor apply to corporations which are accommodation parties. This is because ":e #117e or #$&or1e8e$" o% $e>o"#!90e ! er 9< ! cor or!"#o$ 5#":o7" co$1#&er!"#o$ !$& %or ":e !cco88o&!"#o$ o% !$o":er #1 70"r! ;#re1 . /ne who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. ?y way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authori6ed to do so. "orollarily, corporate officers, such as the president and vice+president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. 8ince such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the signatories thereof %president and vice+president) shall be personally liable therefor, as well as the conse.uences arising from their acts in connection therewith. CHAPTER D: B)=LA*S B)=LA*S are rules and ordinances made by a corporation for its own government1 to regulate the conduct and define the duties of the stockholders or members towards the corporation and among themselves. They are the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and tis stockholder or members and directors and officers with relation thereto and among themselves in their relation to it.
attached to the original articles of incorporation.
4otwithstanding the provisions of the preceding paragraph, by+laws may be adopted and filed prior to incorporation1 in such case, such by+laws shall be approved and signed by all the incorporators and submitted to the 8ecurities and Exchange "ommission, together with the articles of incorporation.
3n all cases, by+laws shall be effective only upon the issuance by the 8ecurities and Exchange "ommission of a certification that the by+ laws are not inconsistent with this "ode.
The 8ecurities and Exchange "ommission shall not accept for filing the by+laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by+laws or amendments are in accordance with law.
EFFECTIVIT)5 &fter approval of the 8E". B)=LA*S PRIOR TO INCORPORATION: it must be signed by all the incorporators without the need of the affirmative vote of the majority of the outstanding capital stock or the members provided it is submitted together with the &/3. AFTER INCPORPORATION: >ust be submitted one month after the issuance of the certificate of incorporation and must be approved by a majority of the outstanding capital stock or members and signed by such stockholders or members voting for them. Aailure to file within 1 month may result to suspension or revocation of corporate franchise.
THIRD PERSONS5 are generally not bound, affected or prejudiced the by+laws, it being merely internal rules of the corporation, E2"E!T5 if they have knowledge of its existence and contents. Sec. @B. A&o "#o$ o% 9<=0!51. + Every corporation formed under this "ode must, within one %1) month after receipt of official notice CONTENTS: of the issuance of its certificate of incorporation by the 8ecurities and Exchange "ommission, !&o " ! co&e o% 9<=0!51 %orSec. #"1 @C. Co$"e$"1 o% 9<=0!51. + 8ubject to the provisions of the "onstitution, this "ode, other special laws, and the articles of >o;er$8e$" $o" #$co$1#1"e$" 5#": ":#1 Co&e . Aor the adoption a private corporation may provide in its by+laws for5 of by+laws by the corporation the affirmative vote of incorporation, the stockholders representing at least a 8!?or#"< of the outstanding capital stock, or of at least a majority of the members in case of non+stock corporations, shall be necessary. The by+laws shall be 1.be The time, place and manner of calling and conducting regular or signed by the stockholders or members voting for them and shall 8ee"#$>1 o% ":e &#rec"or1 or "r71"ee11 kept in the principal office of the corporation, subject to special the inspection of the stockholders or members during office hours. & $. or The time and manner of calling and conducting regular or special copy thereof, duly certified to by a majority of the directors 8ee"#$>1 o% ":e 1"oc3:o0&er1 or 8e89er11 trustees countersigned by the secretary of the corporation, shall be filed with the 8ecurities and Exchange "ommission which shall be
C*
*. The re67#re& 67or78 in meetings of stockholders or members T*O -ODES OF A-END-ENT: and the manner of voting therein1 1. ?y a majority vote of the directors or trustees and the 7. The %or8 %or ro4#e1 of stockholders and members and the majority vote of the outstanding capital stock or members, at a regular or special meeting called for manner of voting them1 that purpose1 or $.or ?y the board of directors alone when delegated by D. The 67!0#%#c!"#o$1+ &7"#e1 !$& co8 e$1!"#o$ of directors stockholders owning $M* of the outstanding capital trustees, officers and employees1 stock or $M* of the members. This power, however, is (. The "#8e %or :o0&#$> ":e !$$7!0 e0ec"#o$ of directors of considered revoked, when so voted by a majority of the outstanding capital stock or members in a regular trustees and the mode or manner of giving notice thereof1 or special meeting. '. The 8!$$er o% e0ec"#o$ or ! o#$"8e$" !$& ":e "er8 o% LO)OLA GRAND VILLAS HO-EO*NERS 'SOUTH( o%%#ce of all officers other than directors or trustees1 ASSOCIATION+ INC.+ petitioner, vs. HON. COURT OF APPEALS+ ,/>E 348 ;&4"E &4C. The e$!0"#e1 %or ;#o0!"#o$ of the by+laws1 K &;&4TL "/;!/;&T3/4, E>-E4 E4"&;4&"3/4 and ,/;&T3/ &L"&;-/, respondents. =. 3n the case of stock corporations, the 8!$$er o% #117#$> 1"oc3 %K; 4o. 11'1CC1 &ug. ', 1==') cer"#%#c!"e11 and FACTS: !etitioner &ssociation was organi6ed on Aeb. C, 1<. 8uch o":er 8!""er1 as may be necessary for the proper or but for some reason failed to file its corporate by+ 1=C*, convenient transaction of its corporate business and affairs. laws. Qictorio 8oliven, himslef the owner and developer of the subdivision was the first president of the &ssociation. @ater on, asking on the status of petitioner, 8oliven discovered that the said association was already dissolved A-END-ENT: %according to the head of the legal department of ,3K"), and accordingly caused the registration of ,3K" as the Sec. @D. A8e$&8e$"1 "o 9<=0!51. + The board of directors or association covering !hases Eest 3, East 3 and East 33 of the subdivision. trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of ISSUE: E/4 the &ssociation can be considered dissolved the members of a non+stock corporation, at a regular or special for non+adoption of by+lawsF meeting duly called for the purpose, may amend or repeal any by+ laws or adopt new by+laws. The owners of two+thirds %$M*) of the HELD5 Les. &s correctly postulated by the petitioner, outstanding capital stock or two+thirds %$M*) of the members interpretation in a of this provision of 8ec. 7( begins with the non+stock corporation may delegate to the board of directors or determination of the meaning and import of the word trustees the power to amend or repeal any by+laws or adopt new NmustN in this section. /rdinarily, the word NmustN connotes anof imperative act or operates to impose a duty which may by+laws5 !rovided, That any power delegated to the board be enforced. 3t is synonymous with NoughtN which connotes directors or trustees to amend or repeal any by+laws or adopt new compulsion or mandatoriness. ,owever, the word NmustN by+laws shall be considered as revoked whenever stockholders in a statute, like Nshall,N is not always imperative. 3t may be owning or representing a majority of the outstanding capital stock consistent with an exercise of discretion. 3n this jurisdiction, or a majority of the members in non+stock corporations, shall sotendency has been to interpret NshallN as the context or the vote at a regular or special meeting. a reasonable construction of the statute in which it is used demands or re.uires. This is e.ually true as regards the word Nmust.N Thus, if the languages of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words Ehenever any amendment or new by+laws are adopted, such NshallN and NmustN to be directory, they should be given amendment or new by+laws shall be attached to the original by+laws that meaning. in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the 3n this respect, the following portions of the deliberations of directors or trustees, shall be filed with the 8ecurities and Exchange the ?atasang !ambansa 4o. (C are illuminating5 "ommission the same to be attached to the original articles of incorporation and original by+laws. >;. A E4TE?E@@&. Thank you, >r. 8peaker. /n page *7, referring to the adoption of by+laws, are we made to understand here, >r. 8peaker, that by+ laws must immediately be filed within one month after The amended or new by+laws shall only be effective upon the the issuanceF 3n other words, would this be mandatory issuance by the 8ecurities and Exchange "ommission of a or directory in characterF certification that the same are not inconsistent with this "ode. >;. >E4-/U&. This is mandatory.
C7
>;. A E4TE?E@@&. 3t being mandatory, >r. 8peaker, what would be the effect of the failure of the corporation to file these by+laws within one monthF >;. >E4-/U&. There is a provision in the latter part of the "ode which identifies and describes the conse.uences of violations of any provision of this "ode. /ne such conse.uences is the dissolution of the corporation for its inability, or perhaps, incurring certain penalties. >;. A E4TE?E@@&. ?ut it will not automatically amount to a dissolution of the corporation by merely failing to file the by+laws within one month. 8upposing the corporation was late, say, five days, what would be the mandatory penaltyF >;. >E4-/U&. 3 do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation. !erhaps, as in the case, as you suggested, in the case of El ,ogar Ailipino where a .uo warranto action is brought, one takes into account the gravity of the violation committed. 3f the by+laws were late Y the filing of the by+laws were late by, perhaps, a day or two, 3 would suppose that might be a tolerable delay, but if they are delayed over a period of months Y as is happening now Y because of the absence of a clear re.uirement that by+laws must be completed within a specified period of time, the corporation must suffer certain conse.uences. This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by+ laws on time was never the intention of the legislature. >oreover, even without resorting to the records of deliberations of the ?atasang !ambansa, the law itself provides the answer to the issue propounded by petitioner. Taken as a whole and under the principle that the best interpreter of a statute is the statute itself % optima statuli interpretatix est ipsum statutum), 8ection 7( afore.uoted reveals the legislative intent to attach a directory, and not mandatory, meaning for the word NmustN in the first sentence thereof. No"e 1:o70& 9e "!3e$ o% ":e 1eco$& !r!>r! : o% ":e 0!5 5:#c: !00o51 ":e %#0#$> o% ":e 9<=0!51 e;e$ r#or "o #$cor or!"#o$. T:#1 ro;#1#o$ #$ ":e 1!8e 1ec"#o$ o% ":e Co&e r70e1 o7" 8!$&!"or< co8 0#!$ce 5#": ":e re67#re8e$" o% %#0#$> ":e 9<= 0!51 G5#":#$ o$e '1( 8o$": !%"er rece# " o% o%%#c#!0 $o"#ce o% ":e #117!$ce o% #"1 cer"#%#c!"e o% #$cor or!"#o$ 9< ":e Sec7r#"#e1 !$& E4c:!$>e Co88#11#o$.G I" $ece11!r#0< %o00o51 ":!" %!#07re "o %#0e ":e 9<=0!51 5#":#$ ":!" er#o& &oe1 $o" #8 0< ":e G&e8#1eG o% ":e cor or!"#o$. ?y+laws may be necessary for the NgovernmentN of the corporation but these are subordinate to the articles of incorporation as well as to the "orporation "ode and related statutes. There are in fact cases where by+laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus5 3n the absence of charter or statutory provisions to the contrary, by+laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body1 and even where the
governing statute in express terms confers upon the corporation the power to adopt by+laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid. %Emphasis supplied.) &s Aletcher aptly puts it5 3t has been said that the by+laws of a corporation are the rule of its life, and that until by+laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by+laws. V#e5e& #$ ":#1 0#>:"+ ":e !&o "#o$ o% 9<=0!51 #1 ! 8!""er o% r!c"#c!0+ #% $o" o$e o% 0e>!0+ $ece11#"<. >oreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by+laws, as in the case of a close corporation organi6ed for specific purposes. &nd the statute or general laws from which the corporation derives its corporate existence may expressly re.uire it to make and adopt by+laws and specify to some extent what they shall contain and the manner of their adoption. T:e 8ere %!c"+ :o5e;er+ o% ":e e4#1"e$ce o% o5er #$ ":e cor or!"#o$ "o !&o " 9<=0!51 &oe1 $o" or&#$!r#0< !$& o% $ece11#"< 8!3e ":e e4erc#1e o% 17c: o5er e11e$"#!0 "o #"1 cor or!"e 0#%e+ or "o ":e ;!0#&#"< o% !$< o% #"1 !c"1 . &lthough the "orporation "ode re.uires the filing of by+ laws, it does not expressly provide for the conse.uences of the non+filing of the same within the period provided for in 8ection 7(. ,owever, such omission has been rectified by !residential -ecree 4o. =<$+&, the pertinent provisions on the jurisdiction of the 8E" of which state5 8ec. (. 3n order to effectively exercise such jurisdiction, the "ommission shall possess the following powers5 xxx xxx xxx %1) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following5 xxx xxx xxx Aailure to file by+laws within the re.uired period. E;e$ 7$&er ":e %ore>o#$> e4 re11 >r!$" o% o5er !$& !7":or#"<+ ":ere c!$ 9e $o !7"o8!"#c cor or!"e &#11o07"#o$ 1#8 0< 9ec!71e ":e #$cor or!"or1 %!#0e& "o !9#&e 9< ":e re67#re& %#0#$> o% 9<=0!51 e89o&#e& #$ Sec"#o$ @B o% ":e Cor or!"#o$ Co&e. T:ere #1 $o o7"r#>:" G&e8#1eG o% cor or!"e e4#1"e$ce. Pro er $o"#ce !$& :e!r#$> !re c!r&#$!0 co8 o$e$"1 o% &7e roce11 #$ !$< &e8ocr!"#c #$1"#"7"#o$+ !>e$c< or 1oc#e"<. I$ o":er 5or&1+ ":e #$cor or!"or1 871" 9e >#;e$ ":e c:!$ce "o e4 0!#$ ":e#r $e>0ec" or o8#11#o$ !$& re8e&< ":e 1!8e. That the failure to file by+laws is not provided for by the "orporation "ode but in another law is of no moment. !.-. 4o. =<$+&, which took effect immediately after its promulgation on >arch 11, 1='(, is very much apposite to the "ode.
CD
&ccordingly, the provisions above.uoted supply the law governing the situation in the case at bar, inasmuch as the "orporation "ode and !.-. 4o. =<$+& are statutes in pari materia. 3nterpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmoni6ed with other statutes as to form a uniform system of jurisprudence. &s the Nrules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,N by+laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are re.uired by law for an orderly governance and management of corporations. 4onetheless, failure to file them within the period re.uired by law by no means tolls the automatic dissolution of a corporation. 3n this regard, private respondents are correct in relying on the pronouncements of this "ourt in "hung Ra ?io v. 3ntermediate &ppellate "ourt, as follows5 GNo$=%#0#$> o% ":e 9<=0!51 5#00 $o" re170" #$ !7"o8!"#c &#11o07"#o$ o% ":e cor or!"#o$ . nder 8ection (%3) of !- =<$+&, the 8E" is empowered to Nsuspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporationN on the ground inter alia of Nfailure to file by+laws within the re.uired period.N 3t is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. 3n fact, under the rules and regulations of the 8E", failure to file the by+laws on time may be penali6ed merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.H HENR) FLEISCHER+ plaintiff+appellee, vs. BOTICA NOLASCO CO.+ INC.+ defendant+appellant. %K; 4o. @+$*$711 >arch 17 ,1=$D) FACTS: >anuel Kon6ales, the original owner of D shares of stock in .uestion of -efendant "ompany, assigned and transferred to herein plaintiff Aleischer. Two days after, -r. >iciano, secretary+treasurer of the company, offered to buy from Aleischer the said shares in behalf of the corporation, contending that &rt. 1$ of the by+laws grants the company preferential right to buy Kon6ales# shares. !laintiff refused and re.uested -r. >iciano to register said shares in his name, and the latter refused to do so. ISSUE: E/4 Aleischer is bound by the provisions of the corporation#s by+lawsF HELD: 4o. 8ection 1*, paragraph ' %of &ct 17D=), empowers a corporation to make by+laws, not inconsistent with any existing law, for the transferring of its stock . 3t follows from said provision, that a by+law adopted by a corporation relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found in section *D of &ct 4o. 17D=. 8aid section specifically provides that the shares of
stock Nare personal property and may be transferred by delivery of the certificate indorsed by the owner, etc.N 8aid section *D defines the nature, character and transferability of shares of stock. nder said section they are personal property and may be transferred as therein provided. 8aid section contemplates no restriction as to whom they may be transferred or sold. 3t does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. T:e :o0&er o% 1:!re1+ !1 o5$er o% er1o$!0 ro er"<+ #1 !" 0#9er"<+ 7$&er 1!#& 1ec"#o$+ "o &#1 o1e o% ":e8 #$ %!;or o% 5:o81oe;er :e 0e!1e1+ 5#":o7" !$< o":er 0#8#"!"#o$ #$ ":#1 re1 ec"+ ":!$ ":e >e$er!0 ro;#1#o$1 o% 0!5. Therefore, a stock corporation in adopting a by+law governing transfer of shares of stock should take into consideration the specific provisions of section *D of &ct 4o. 17D=, and said by+law should be made to harmoni6e with said provisions. 3t should not be inconsistent therewith. &s a general rule, the by+laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. %8upreme "ommandery of the Rnights of the Kolden ;ule vs. &insworth, '1 &la., 7*(1 7( &m. ;ep., **$.) /n the other hand, it is e.ually well settled that by+laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. %7( &m. ;ep., **$.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. %!eoplePs ,ome 8avings ?ank vs. 8uperior "ourt, 1<7 "al., (7=1 7* &m. 8t. ;ep., 17'1 3reland vs. Klobe >illing "o., '= &m. 8t. ;ep., '(=.) The validity of the by+law of a corporation is purely a .uestion of law. %8outh Alorida ;ailroad "o. vs. ;hodes, $D Ala., 7<.)
GThe power to enact by+laws restraining the sale and transfer of stock must be found in the governing statute or the charter. ;estrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. ?y+ laws are intended merely for the protection of the corporation, and prescribe regulation and not restriction1 they are always subject to the charter of the corporation. T:e cor or!"#o$+ #$ ":e !91e$ce o% 17c: ! o5er+ c!$$o" or&#$!r#0< #$67#re #$"o or !11 7 o$ ":e 0e>!0#"< o% ":e "r!$1!c"#o$ 9< 5:#c: #"1 1"oc3 !11e1 %ro8 o$e er1o$ "o !$o":er+ $or c!$ #" 67e1"#o$ ":e co$1#&er!"#o$ 7 o$ 5:#c: ! 1!0e #1 9!1e&. A 9<=0!5 c!$$o" "!3e !5!< or !9r#&>e ":e 1791"!$"#!0 r#>:"1 o% 1"oc3:o0&er. nder a statute authori6ing by+ laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale . %7 Thompson on "orporations, sec. 71*', p. ('7.
C(
The jus disponendi, being an incident of the ownership of property, the general rule %subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to alien them which attaches to the ownership of any other species of property. & shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits. %1< "yc., p. D''.) 3t follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that 9<=0!51 or o":er re>70!"#o$1 re1"r!#$#$> 17c: "r!$1%er1+ 7$0e11 &er#;e& %ro8 !7":or#"< e4 re110< >r!$"e& 9< ":e 0e>#10!"7re+ 5o70& 9e re>!r&e& !1 #8 o1#"#o$1 #$ re1"r!#$" o% "r!&e. %1< "yc., p. D'C.) The foregoing authorities go farther than the stand we are taking on this .uestion. They hold that ":e o5er o% ! cor or!"#o$ "o e$!c" 9<=0!51 re1"r!#$#$> ":e 1!0e !$& "r!$1%er o% 1:!re1+ 1:o70& $o" o$0< 9e #$ :!r8o$< 5#": ":e 0!5 or c:!r"er o% ":e cor or!"#o$+ 97" 17c: o5er 1:o70& 9e e4 re110< >r!$"e& #$ 1!#& 0!5 or c:!r"er. The only restraint imposed by the "orporation @aw upon transfer of shares is found in section *D of &ct 4o. 17D=, .uoted above, as follows5 N4o transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.N This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by+law now in .uestion, is ultra vires, violative of the property rights of shareholders, and in restraint of trade &nd moreover, the by+laws now in .uestion cannot have any effect on the appellee. ,e had no knowledge of such by+law when the shares were assigned to him. ,e obtained them in good faith and for a valuable consideration. ,e was not a privy to the contract created by said by+law between the shareholder >anuel Kon6ale6 and the ?otica 4olasco, 3nc. 8aid by+law cannot operate to defeat his rights as a purchaser. GOVERN-ENT VS. EL HOGAR %supra) + Aourth cause of action. Y 3t appears that among the by+laws of the association there is an article %4o. 1<) which reads as follows5 GThe board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the li.uidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.H
ISSUE: E/4 the above provision is validF HELD: 4o. T:#1 9<=0!5 #1 o% co7r1e ! !"e$" $700#"<+ 1#$ce #" #1 #$ &#rec" co$%0#c" 5#": ":e 0!""er !r" o% 1ec"#o$ 1DC o% ":e Cor or!"#o$ L!5+ 5:#c: e4 re110< &ec0!re1 ":!" ":e 9o!r& o% &#rec"or1 1:!00 $o" :!;e ":e o5er "o %orce ":e 17rre$&er !$& 5#":&r!5!0 o% 7$8!"7re& 1"oc3 e4ce " #$ c!1e o% 0#67#&!"#o$ o% ":e cor or!"#o$ or o% %or%e#"7re o% ":e 1"oc3 %or &e0#$67e$c<. 3t is agreed that this provision of the by+laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. 3n 4ovember, 1=$*, the &cting 3nsular Treasurer addressed a letter to El ,ogar Ailipino, calling attention to article 1< of its by+laws and expressing the view that said article was invalid. 3t was therefore suggested that the article in .uestion should be eliminated from the by+laws. &t the next meeting of the board of directors the matter was called to their attention and it was resolved to recommend to the shareholders that in their next annual meeting the article in .uestion be abrogated. 3t appears, however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a .uorum, with the result that the provision referred to has not been eliminated from the by+laws, and it still stands among the by+laws of the association, notwithstanding its patent conflict with the law. 3t is supposed, in the fourth cause of action, that the existence of this article among the by+laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. 3n this view we are unable to concur. The obnoxious by+law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by+ laws of a corporation1 and if there were such, the ha6ards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action. ISSUE2: /wing to the failure of a .uorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article '1 of the by+laws, which reads as follows5 G&;T. '1. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meetingH E/4 &rt. '1 is validF HELD: Les. Ee are unable to see the slightest merit in the charge. 4o fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings1 and their non+attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. pon failure of a .uorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and .ualified. U$0e11 ":e 0!5 or ":e c:!r"er o% !
C'
cor or!"#o$ e4 re110< ro;#&e1 ":!" !$ o%%#ce 1:!00 9eco8e ;!c!$" !" ":e e4 #r!"#o$ o% ":e "er8 o% o%%#ce %or 5:#c: ":e o%%#cer 5!1 e0ec"e&+ ":e >e$er!0 r70e #1 "o !00o5 ":e o%%#cer "o :o0&o;er 7$"#0 :#1 17cce11or #1 &70< 67!0#%#e&. -ere %!#07re o% ! cor or!"#o$ "o e0ec" o%%#cer1 &oe1 $o" "er8#$!"e ":e "er81 o% e4#1"#$> o%%#cer1 $or &#11o0;e ":e cor or!"#o$ %Tuitman /il "ompany vs. !eacock, 17 Ka. &pp., DD<1 Benkins vs. ?axter, 1(< !a. 8tate, 1==1 4ew Lork ?. I E. ;y. "o. vs. >otil, C1 "onn., 7((1 ,atch vs. @ucky ?ill >ining "ompany, '1 !ac., C(D1 Louree vs. ,ome Town >atual 3ns. "ompany, 1C< >issouri, 1D*1 "assell vs. @exington, ,. and !. Turnpike ;oad "o., 1< Ry. @. ;., 7C(). The doctrine above stated finds expressions in article (( of the by+laws of the respondent which declares in so many words that directors shall hold office Nfor the term of one year on until their successors shall have been elected and taken possession of their offices.N 3t result that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. 4or can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. "ertainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not dis.ualify a man for filling positions of responsibility in corporate affairs.
would not be warranted in substituting its judgment instead of the judgment of those who are authori6ed to make by+laws and who have exercised their authority. 3t is a settled state law in the nited 8tates, according to Aletcher, that corporations have the power to make by+laws declaring a person employed in the service of a rival company to be ineligible for the corporationPs ?oard of -irectors. ... %&)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid.N This is based upon the principle that 5:ere ":e &#rec"or #1 1o e8 0o<e& #$ ":e 1er;#ce o% ! r#;!0 co8 !$<+ :e c!$$o" 1er;e 9o":+ 97" 871" 9e"r!< o$e or ":e o":er . S7c: !$ !8e$&8e$" G!&;!$ce1 ":e 9e$e%#" o% ":e cor or!"#o$ !$& #1 >oo&.G &n exception exists in 4ew Bersey, where the 8upreme "ourt held that the "orporation @aw in 4ew Bersey prescribed the only .ualification, and therefore the corporation was not empowered to add additional .ualifications. This is the exact opposite of the situation in the !hilippines because as stated heretofore, section $1 of the "orporation @aw expressly provides that a corporation may make by+laws for the .ualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utili6ing information he has received as such officer, under Nthe established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. 3t is also well established that corporate officers Nare not permitted to use their position of trust and confidence to further their private interests.N 3n a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firmPs products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that e.uity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a Nfaultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. The doctrine of Ncorporate opportunityN is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 3t is not denied that a member of the ?oard of -irectors of the 8an >iguel "orporation has access to sensitive and highly confidential information, such as5 %a) marketing strategies and pricing structure1 %b) budget for expansion and diversification1 %c) research and development1 and %d) sources of funding, availability of personnel, proposals of mergers or tie+ups with other firms. 3t is obviously to prevent the creation of an opportunity for an officer or director of 8an >iguel "orporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he ac.uires as
;E&- &K&345 %",&!TE; ()
?&;;ET/
Q8. @& !;EQ38/;&
A3@3!34&
GOKONG*EI VS. SEC %supra) + &s additional causes of action, it was alleged that corporations have no inherent power to dis.ualify a stockholder from being elected as a director and, therefore, the .uestioned act is ultra vires and void1 that &ndres >. 8oriano, Br. andMor Bose >. 8oriano, while representing other corporations, entered into contracts %specifically a management contract) with respondent corporation, which was allowed because the .uestioned amendment gave the ?oard itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business1 that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the ?oard may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void1 and that the portion of the amended by+laws which re.uires that Nall nominations for election of directors ... shall be submitted in writing to the ?oard of -irectors at least five %D) working days before the date of the &nnual >eetingN is likewise unreasonable and oppressive. ISSUE: E/4 the amended by+laws of 8>" dis.ualifying a competitor from nomination or election to the ?/- are valid and reasonableF HELD: Les. The validity or reasonableness of a by+law of a corporation in purely a .uestion of law. Ehether the by+law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a .uestion of law. This rule is subject, however, to the limitation that where the reasonableness of a by+law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court
CC
director to promote his individual or corporate interests to the prejudice of 8an >iguel "orporation and its stockholders, that the .uestioned amendment of the by+ laws was made. "ertainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. 8ound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well re.uire that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. 3t would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. 3ndeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of 8an >iguel "orporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utili6e such knowledge to his advantage. 4either are Ee persuaded by the claim that the by+law was 3ntended to prevent the candidacy of petitioner for election to the ?oard. 3f the by+law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by+law was being applied in a discriminatory manner. ,owever, the by law, by its terms, applies to all stockholders. The e.ual protection clause of the "onstitution re.uires only that the by+law operate e.ually upon all persons of a class. ?esides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the dis.ualification. 8ound principles of public policy and management, therefore, support the view that a by+law which dis.ualifies a competition from election to the ?oard of -irectors of another corporation is valid and reasonable. ISSUE2: E/4 the "orporation has the power to prescribe .ualificationsF HELD2: Les. !rivate respondents contend that the disputed amended by laws were adopted by the ?oard of -irectors of 8an >iguel "orporation a+, a measure of self+ defense to protect the corporation from the clear and present danger that the election of a business competitor to the ?oard may cause upon the corporation and the other stockholders inseparable prejudice. 8ubmitted for resolution, therefore, is the issue Y whether or not respondent 8an >iguel "orporation could, as a measure of self+ protection, dis.ualify a competitor from nomination and election to its ?oard of -irectors. 3t is recogni6ed by an authorities that Pevery corporation has the inherent power to adopt by+laws Pfor its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. &t common law, the rule was Nthat the power to make and adopt by+laws was inherent in every corporation as one of its necessary and inseparable legal incidents. &nd it is settled throughout the nited 8tates that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self+government being essential to enable the corporation to accomplish the purposes of its creation. 3n this jurisdiction, under section $1 of the "orporation @aw, a corporation may prescribe in its by+laws Nthe .ualifications, duties and compensation of directors, officers and employees ... N This must necessarily refer to a .ualification in addition to that specified by section *< of the "orporation @aw, which provides that Nevery director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... N 3n Kovernment v. El ,ogar, the "ourt sustained the validity of a provision in the corporate by+law re.uiring that persons elected to the ?oard of -irectors must be holders of shares of the paid up value of !D,<<<.<<, which shall be held as security for their action, on the ground that section $1 of the "orporation @aw expressly gives the power to the corporation to provide in its by+laws for the .ualifications of directors and is Nhighly prudent and in conformity with good practice ISSUE/: E/4 stockholders have the vested right to be elected a directorF HELD: 4o. &ny person Nwho buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by+laws and not forbidden by law.N To this extent, therefore, the stockholder may be considered to have Nparted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... 3t cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authori6ed by a majority ... .N nder section $$ of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by+law or adopt new by+laws. 3t cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was ac.uired contained the prescription that the corporate charter and the by+law shall be subject to amendment, alteration and modification. 3t being settled that the corporation has the power to provide for the .ualifications of its directors, it has also been settled that the dis.ualification of a competitor from being elected to the ?oard of -irectors is a reasonable exercise of corporate authority. CHAPTER M: -EETINGS -ee"#$>1 applies to every duly convened assembly either
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of stockholders, members, directors or trustees, managers, etc. for any legal purpose or the transaction of business of common interest.
necessary or as provided for in the by+laws.
RE2UIRE-ENTS FOR A VALID STOCKHOLDERS. -EETING: 8ec. 7=. K#$&1 o% 8ee"#$>1. + >eetings of directors, trustees, 1. I" -71" Be He0& O$ T:e D!"e F#4e& I$ T:e B<= stockholders, or members may be regular or special. L!51 Or I$ Accor&!$ce *#": T:e L!5. The date re.uired, as previously discussed, admits of an exception, as when the annual meeting cannot be held on the appointed time for some valid and meritorious reasons.
&.
STOCKHOLDERS. -EETING
Sec. AN. Re>70!r !$& 1 ec#!0 8ee"#$>1 o% 1"oc3:o0&er1 or 2. 8e89er1. + ;egular meetings of stockholders or members shall be Pr#or No"#ce -71" Be G#;e$ held annually on a date fixed in the by+laws, or if not so fixed, on any date in &pril of every year as determined by the board of 8ec D< and D1 re.uires that written notice of regular meeting shall be sent at least $ weeks prior to the directors or trustees5 !rovided, That written notice of regular meeting, whereas, 1 week prior notice is re.uired for meetings shall be sent to all stockholders or members of record at special meetings. least two %$) weeks prior to the meeting, unless a different period is re.uired by the by+laws. E2"E!T3/485 %a) 3f the by+laws provide for a different period for sending out notice for regular or special meetings %failure to comply would render the resolutions adopted at the option of the stockholder 8pecial meetings of stockholders or members shall be held at any who was not notified)1 %b) Eaiver, either express or implied. time deemed necessary or as provided in the by+laws5 !rovided, however, That at least one %1) week written notice shall be sent to The 4otice must contain the agenda or business all stockholders or members, unless otherwise provided in the by+ matterMs that may be taken up before the meeting laws. otherwise it may become voidable at the instance of any objecting stockholder or member. THE BOARD OF DIRECTORS AND ELECTION CO--ITTEE OF THE S-B *ORKERS SAVINGS AND 4otice of any meeting may be waived, expressly or impliedly, by LOAN ASSOCIATION+ INC.+ ET AL.+ petitioners, any stockholder or member. vs. HON. BIENVENIDO A. TAN+ ETC.+ ET AL.+ respondents. %K; 4o. @+1$$C$1 >arch *1, 1=D=) Ehenever, for any cause, there is no person authori6ed to call a FACTS: & meeting electing the ?/- of herein petitioner was meeting, the 8ecurities and Exchange "ommission, upon petition of declared null and void by the "ourt in a suit filed by Bohn "astillo, et. al. a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing 3n compliance with the order, another election was him to call a meeting of the corporation by giving proper notice scheduled on >arch $C at D5*<. /n >arch $', the plaintiff re.uired by this "ode or by the by+laws. The petitioning stockholder filed an ex+parte motion alleging that the meeting is or member shall preside thereat until at least a majority of composed the of the same people that had conducted and stockholders or members present have been chosen one of their supervised the previously nullified meeting1 that the election to be conducted did not comply with the D day number as presiding officer. notice re.uirement re.uired by the by+laws and the constitution of the association, since the notice was posted and sent out only on >arch $( and the election was to be held on >arch $C. The stockholders have no power to act as or for the corporation except at a corporate meeting called and ISSUE: E/4 the notice re.uirement is complied withF conducted according to law. This rule arises from the need to protect the stockholder by providing them with notice of HELD: 4o. 8ection *, article 333, of the constitution and by+ meeting and giving them opportunity to attend the laws the association provides5 meeting, discuss the issues and vote %an exception would be an ordinary amendment where Gwritten assetH is acceptable). G4otice of the time and place of holding of any annual meeting, or any special meeting, the members, shall be DATE OF REGULAR -EETING: The date so fixed in the given either by posting the same in a postage prepaid by+laws, if not fixed, on any date of &pril of very year as the envelope, addressed to each member on the record at ?/-MT may determine. &pril, because this is the time the the address left by such member with the 8ecretary of &udited Ainancial 8tatements are already available. the &ssociation, or at his known post+office address or by delivering the same person at least %D) days before the DATE OF SPECIAL -EETING: &t any time deemed date set for such meeting. . . . 3n lieu of addressing or
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!once, which was to be filed with the appropriate authorities. 3t was found out that instead of filing the petition, Kapol filed a complaint in the "A3 for the accounting of the funds and assets of the corporation, and to reimburse it the amounts expended for the purchase of a parcel of land, a loan extended to the wife of !once, and an amount spent by !once in a trip to the 8. Kapol 4otice of a special meeting of the members should be contends that such amount, taken from the corporation, given at least five days before the date of the meeting. was misapplied, misappropriated and misspent by !once to Therefore, the five days previous notice re.uired would not his own use and benefit, thus he prayed for the removal of be complied with. !once as a member of the board of directors. 8uch removal was rejected by the court, but Kapol#s petition for the calling of a stockholders# meeting, was granted. &t said meeting, a new set of board of directors was elected. !once /. I" -71" Be He0& !" ":e Pro er P0!ce filed a petition in the lower court seeking to set aside its Sec. A1. P0!ce !$& "#8e o% 8ee"#$>1 o% 1"oc3:o0&er1order, or but the same was denied. Thus, they filed for an appeal to the 8". 8e89er1. + 8tockholdersP or membersP meetings, whether regular or special, shall be held in the city or municipality where ISSUE: the E/4 the "ourt may issue such order directing a principal office of the corporation is located, and if practicable instockholder the to call a meeting of the stockholders of a principal office of the corporation5 !rovided, That >etro >anila shall, corporationF for purposes of this section, be considered a city or municipality. HELD: Les. The corporation law provides that Gwhenever, from any cause, there is no person authori6ed to call a meeting, or when the officer authori6ed to do so refuses, fails or neglects to call a meeting, any judge of a "A3 on the 4otice of meetings shall be in writing, and the time and place showing of a good cause therefore, may issue an order to thereof stated therein. any stockholder or member of a corporation, directing him to call a meeting of the corporation by giving the proper notice re.uiredH. Thus, o$ ":e 1:o5#$> o% >oo& c!71e ":ere%ore+ ":e co7r" 8!< !7":or#Ke ! 1"oc3:o0&er "o c!00 re1#&e ":ere!" 7$"#0 ":e &ll proceedings had and any business transacted at any meeting of ! 8ee"#$> !$& "o 8!?or#"< 1"oc3:o0&er1 re re1e$"#$> ! 8!?or#"< o% ":e the stockholders or members, if within the powers or authority of 1"oc3 re1e$" !$& er8#""e& "o 9e ;o"e& 1:!00 :!;e the corporation, shall be valid even if the meeting be improperly c:o1e$ o$e !8o$> ":e8 "o re1#&e. T:#1 1:o5#$> o% held or called, provided all the stockholders or members of the >oo& c!71e e4#1"1 5:e$ ":e co7r" #1 ! r#1e& o% ":e corporation are present or duly represented at the meeting. %!c" ":!" ":e 9<=0!51 o% ":e cor or!"#o$ re67#re ":e c!00#$> o% ! >e$er!0 8ee"#$> o% ":e 1"oc3:o0&er1 "o e0ec" ":e 9o!r& o% &#rec"or1 97" ":e c!00 o% ":e 8ee"#$> :!1 $o" 9ee$ &o$e. There is no need to issue a >eeting must, at all times, be held in the city or notice of hearing, nor is there any necessity to hold a municipality where the principal office is located, or if hearing, upon the board of directors. The court here found practicable at the principal office of the corporation. Aor good cause in calling the meeting for the election of a new this purpose, >etro >anila is considered as one city or board, because the chairman of the board of directors who municipality. is so authori6ed to call such meeting, failed, neglected or refused to perform his duty. ,aving the authority to grant Ehile there is no law allowing a 8T/"R corporation to hold such relief, the lower court did not exceed its jurisdiction a meeting outside the city or municipality where the nor did it abuse its discretion in granting it. principal office is located, 4/4+8T/"R corporations are allowed to provide a provision in its by+laws any place of NOTE5 3n a case decided by the 8E", it rules that under the members# meeting provided there is proper notice %8ec. present state of law, the !once case will apply /4@L Gwhere =*) there is no person authori6ed to call the meeting5, thus an ex+parte proceeding may be allowed as obviously there is no person to summon and no person whose right to due @. I" -71" Be C!00e& 9< ":e Pro er P!r"< process will be violated. ,owever, where there is an officer authori6ed to call the meeting and that officer refuses, fails DO-INGO PONCE AND BUHA) L. PONCE+ petitioners, or neglects to call a meeting then the !once case E3@@ 4/T vs. &!!@L. This is so, because the phrase Gor when the officer DE-ETRIO B. ENCARNACION+ Budge of the "ourt of Airst authori6ed to do so refuses, or fails, or neglects to call a 3nstance of >anila, ?ranch 3, !$& POTENCIANO GAPOL, meetingH has been deliberately omitted in 8ec. D< of the respondents "orporation "ode. %K; 4o. @+DCC*1 4ov. $C, 1=D*) FACTS: 3t was agreed by the stockholders of -aguhoy Enterprises at a stockholder#s meeting that the said corporation shall be voluntarily dissolved, and was placed under the receivership of Kapol, the largest stockholder. & petition for voluntary dissolution was drafted and signed by @ikewise, in the same ruling of the 8E", the !once case likened the .uestioned order to a writ of preliminary injunction which may be issued ex parte, the said !3 can no longer be issued without notice and hearing under 8ec. D of ;ule DC of the ;ules of "ourt. >andamus is the proper
serving personal notices to the members, notice of the members, notice of a regular annual meeting or of a special meeting of the members may be given by posting copies of said notice at the different departments and plants of the 8an >iguel ?rewery 3nc., not less than five %D) days prior to the date of the meeting. %&nnex R.)H
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remedy.
IN SU--AR): The following are authori6ed to call a meeting5 a. The person or persons authori6ed under the by+laws1
b. c.
d. A.
&bsent any provision in the by+laws, it may be called by the !resident1 ?y the secretary on order of the president or on written demand of the stockholders representing at least a majority of the outstanding capital stock or majority of the members entitled to vote, or the stockholder or member making the demand if there is no secretary or he refuses to do so, under 8ec. $C1 and & stockholder as empowered by the proper forum pursuant to 8ec. D< 27or78 !$& Vo"#$> Re67#re8e$" -71" Be -e"
>eetings of directors or trustees of corporations may be held anywhere in or outside of the !hilippines, unless the by+laws provide otherwise. 4otice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one %1) day prior to the scheduled meeting, unless otherwise provided by the by+laws. & director or trustee may waive this re.uirement, either expressly or impliedly.
REGULAR -EETINGS: those held monthly or as the by+ laws may provide1 SPECIAL -EETINGS: those that are held at any time upon call of the !resident or the person authori6ed to do so as may be provided in the by+laws.
PLACE: nlike the meeting of stockholders, the meetings of directorsMtrustees may be held anywhere, within or even outside the !hilippines, except when the by+laws provide 8ec. D$. 27or78 #$ 8ee"#$>1. + nless otherwise provided for in otherwise. this "ode or in the by+laws, a .uorum shall consist of the NOTICE RE2UIRE-ENT: is necessary for the purpose of stockholders representing a majority of the outstanding capital determining the legality of and binding effect of the stock or a majority of the members in the case of non+stock resolutionMs passed, E2"E!T5 corporations. 1. Ehen subse.uently ratified1
$.
& by+law provision may provide for a higher .uorum re.uirement than that prescribed in the "ode, but not less. /therwise, the by+law provision providing for a lesser .uorum re.uirement have no force and effect since a by+ law provision is subordinate to the statute and could not defeat the re.uirements of the law. The same goes for a by+law provision providing for a voting re.uirement less than that provided in the "ode. 3f the voting re.uirement is met, any resolution passed in the meeting, even if improperly held or called will be valid if &@@ the stockholders or members are present or duly represented thereat, as provided under the last paragraph of 8ec. D15
*.
3n close corporations where a director may bid the corporation even without a meeting1 Ehen the right to a notice is waived.
The 8E" has ruled that a special meeting conducted in the absence of some of the directors and without any notice to them is illegal and the action at such meeting although by a majority of the directors is invalid, unless ratified. ,owever, if all the directors are present, their presence at the meeting waives the want of notice. PRESIDING OFFICER: provide, the president. nless the by+laws otherwise
&ll proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting.
8ec. D7. *:o 1:!00 re1#&e !" 8ee"#$>1. + The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by+laws provide otherwise.
2UORU-: nless the &/3 or by+laws provide for a greater majority, a majority of the members of the ?/-MT as fixed in the &/3 will constitute a .uorum for the transaction of ?. DIRECTORS.JTRUSTEES. -EETING corporate business and the decision of the majority of Sec. A/. Re>70!r !$& 1 ec#!0 8ee"#$>1 o% &#rec"or1 those or present shall be valid as a corporate act. E2"E!T5 election of corporate officers as provided under 8ec. $D "r71"ee1. + ;egular meetings of the board of directors or trustees of which re.uired the vote of a majority of all the members of every corporation shall be held monthly, unless the by+laws provide the board. otherwise. PRO,) VOTING5 is not allowed for a director or trustee, since he was supposedly elected because of his expertise in management or his business acumen such that he is expected to personally attend and vote on matters brought 8pecial meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in thebefore by+ the meeting. laws. ". STOCKHOLDERS. RIGHT TO VOTE AND -ANNER OF VOTING
=$
?eing a property right, a stockholder can vote his share the way he pleases except in the following5 1. 4on+voting shares are not entitled to vote except in those instances provided in the penultimate paragraph of 8ec. ( of the "ode1 $. Treasury shares have no voting rights while they remain in the treasury %8ec. D')1 *. 8hares of stock declared delin.uent are not entitled to vote at any meeting1 and 7. nregistered transferee of shares of stock. PRO,) VOTING: is allowed or through a voting trust agreement, or by the executor, administrator, receiver or other legal representative appointed by the court. PLEDGED OR -ORTGAGED SHARES: the pledgor or mortgagor is entitled to vote in the absence of an agreement to the contrary5
8ec. DC. Pro4#e1. + 8tockholders and members may vote in person or by proxy in all meetings of stockholders or members. !roxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. nless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. 4o proxy shall be valid and effective for a period longer than five %D) years at any one time.
PRO,) VOTING: is a right granted by law to all stockholders entitled to vote in stock corporations and cannot, therefore, be denied. E2"E!T5 3n a non+stock corporation with by+laws providing for a prohibition on the use of proxies %8ec. C=). RE2UIRE-ENTS: 3n the absence of a by+law provision regulating the form and execution of proxy, 8ec. DC re.uires5 1. The proxy must be in writing1 !$&
Sec. AA. R#>:" "o ;o"e o% 0e&>or1+ 8or">!>or1+ !&8#$#1"r!"or1. + 3n case of pledged or mortgaged shares in stock $. 3t is signed by the stockholder or member or his duly corporations, the pledgor or mortgagor shall have the right to authori6ed representative1 and attend and vote at meetings of stockholders, unless the pledgee or 3t is filed on or before the schedule meeting with the *. mortgagee is expressly given by the pledgor or mortgagor such corporate secretary. right in writing which is recorded on the appropriate corporate 3t is to be noted, however, that publicly listed companies books. are re.uired to observe and comply with 8E" >emorandum "ircular 4o. D +1==(.
T)PES OF PRO,IES: Executors, administrators, receivers, and other legal 1. Keneral gives a general discretionary power of representatives duly appointed by the court may attend and vote in attorney to vote for directors and all ordinary matters behalf of the stockholders or members without need of any written that my properly come before a meeting. 3t is not an proxy. authority, however, to vote for fundamental changes in the corporate charter or for other unusual transactions, unless so specified1 $. 8pecial restricts the authority to vote on specified SHARES O*NED B) T*O OR -ORE PERSONS matters only and may direct the manner in which the JOINTL): vote will be cast. 8ec. D(. Vo"#$> #$ c!1e o% ?o#$" o5$er1:# o% 1"oc3. + 3n case of DURATION: >ay be fixed by the proxy#s own terms but it shares of stock owned jointly by two or more persons, in order to cannot exceed D years and for not more than D years for vote the same, the consent of all the co+owners shall be necessary, each renewal. /therwise, it expires after the meeting for unless there is a written proxy, signed by all the co+owners, which it was given. authori6ing one or some of them or any other person to vote such VOTING TRUST: is one created by an agreement between share or shares5 !rovided, That when the shares are owned in an a group of stockholders of a corporation and a trustee, or a NandMorN capacity by the holders thereof, any one of the joint group of identical agreements between individual owners can vote said shares or appoint a proxy therefor. stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, shall be lodged -. PRO,) AND OTHER REPRESENTATIVE VOTING in the trustee, either with or without reservation to the owners or persons designated by them the power to direct how such control shall be issued. PRO,): is a species of absentee voting by mail by a one way ballot for the slate or proposals suggested by the Sec. AM. Vo"#$> "r71"1. + /ne or more stockholders of a stock management or even perhaps, the solicitor thereof. 3t is the authority given by the stockholder or member to another to corporation may create a voting trust for the purpose of conferring vote for him at a stockholders# or members# meeting. The upon a trustee or trustees the right to vote and other rights term is also used to refer to the instrument or paper which pertaining to the shares for a period not exceeding five %D) years at is evidence of the authority of an agent or the holder any time5 !rovided, That in the case of a voting trust specifically thereof to vote for and in behalf of the stockholder or re.uired as a condition in a loan agreement, said voting trust may member. be for a period exceeding five %D) years but shall automatically
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expire upon full payment of the loan. & voting trust agreement must The beneficial owner of the be in writing and notari6ed, and shall specify the terms shares and ceased to be stockholder conditions thereof. & certified copy of such agreement shall be filed of record of the corporation with the corporation and with the 8ecurities and Exchange since the shares are transferred "ommission1 otherwise, said agreement is ineffective to and the trustee unenforceable. The certificate or certificates of stock covered by the Trustee votes as owner of the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that theyshares are issued pursuant to said agreement. 3n the books of the corporation, The beneficial owner is it shall be noted that the transfer in the name of the trustee or dis.ualified to be a director trustees is made pursuant to said voting trust agreement. !urpose is to ac.uire voting control of the corporation The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. 3rrevocable The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation inThe the trustee can act and vote at same manner as any other corporate book or record5 !rovided, That any meeting during the duration both the transferor and the trustee or trustees may exercise of the the QT& right of inspection of all corporate books and records in accordance with the provisions of this "ode. Trustee may vote in person or by proxy -uration may exceed five years &ny other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust QT& agreement, and thereupon shall be bound by all the provisions of to be valid and effective, must be notari6ed and filed with said agreement. the 8E"
@egal title to the shares remain with the beneficial owner
!roxy votes merely as an agent
The owner of the shares may be elected as such since legal title thereof remains with him Kenerally used to secure voting an .uorum re.uirements or merely for the purpose of representing an absent stockholder ;evocable anytime coupled with an interest unless
!roxy can generally act as such only at a particular meeting
!roxy holder person
must
vote
in
!roxy is of a shorter duration and may not exceed D years nless re.uired by the by+laws, proxies need not be notari6ed nor is it re.uired to be filed with the 8E".
4o voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations ;E&- &K&345 @EE Q8. "& in restraint of trade or used for purposes of fraud. NATIONAL INVEST-ENT AND DEVELOP-ENT CORPORATION+ E 8E?3/ Q3@@&T L& >&;3/ L. "/4834K and ;/?E;T/ 8. ?E4E-3"T/, petitioners, nless expressly renewed, all rights granted in a voting trust vs. HON. BENJA-IN A2UINO, in his official capacity as agreement shall automatically expire at the end of the agreed !residing Budge of ?ranch Q333 of the "ourt of Airst 3nstance period, and the voting trust certificates as well as the certificates of ;i6al, ?&TB&R 34"., K;&"3&4/ &. K&;"3& and >&;"E@34/ stock in the name of the trustee or trustees shall therebyofbe "&@34&E&4 B;., respondents. deemed cancelled and new certificates of stock shall be reissued in %K.;. 4o. @+*71=$ Bune *<, 1=CC) the name of the transferors. PHILIPPINE NATIONAL BANK+ petitioner, vs. HON. BENJA-IN H. A2UINO+ in his capacity as !residing The voting trustee or trustees may vote by proxy unless Budge the of the "ourt of Airst 3nstance of ;i6al, ?ranch Q333 and ?&TB&R 34"/;!/;&TE-, respondents agreement provides otherwise. %K.;. 4o. @+*7$1* Bune *<, 1=CC) FACTS: /n /ct. $(, 1=(D, private respondent ?atjak, 3nc. entered into a Qoting Trust &greement with petitioner 43-", in order to assist the former with its financial obligations. The QT& was for a period of D years constituting (<J of the outstanding paid+up and subscribed shares of ?atjak. D years therafter, or on &ug. *1, 1='<, ?atjak represented by
VOTING TRUSTS DISTINGUISHED FRO- PRO,) VOTING TRUST PRO,)
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majority stockholders, through &tty. &mado -uran, legal counsel, wrote to 43-" in.uiring if the atter was still interest in negotiating the renewal of the QT&, but there was no reply even with the second letter sent on 8ept. $$, 1='<. /n 8ept. $*, 1='<, legal counsel of ?atjak wrote another letter asking for a complete accounting of the assets, properties, management and operation of ?atjak, preparatory to their turn+over and transfer to the stockholders of ?atjak. 43-" replied that it had no intention to comply with such demand. ?atjak filed an action for mandamus with preliminary injunction which was granted. ISSUE: E/4 ?atjak has the personality to enforce the voting trust agreement executed by its stockholders and whether it may compel the trustee to turn over the assets of the corporationF HELD: 4o. 3n support of the third ground of their motion to dismiss, !4? and 43-" contend that ?atjakPs complaint for mandamus is based on its claim or right to recovery of possession of the three %*) oil mills, on the ground of an alleged breach of fiduciary relationship. 4oteworthy is the fact that, in the Qoting Trust &greement, the parties thereto were 43-" and certain stockholders of ?atjak. ?atjak itself was not a signatory thereto. nder 8ec. $, ;ule * of the ;ules of "ourt, every action must be prosecuted and defended in the name of the real party in interest. &pplying the rule in the present case, the action should have been filed by the stockholders of ?atjak, who executed the Qoting Trust &greement with 43-", and not by ?atjak itself which is not a party to said agreement, and therefore, not the real party in interest in the suit to enforce the same. 3n addition, !4? claims that ?atjak has no cause of action and prays that the petition for mandamus be dismissed. & careful reading of the Qoting Trust &greement shows that !4? was really not a party thereto. ,ence, mandamus will not lie against !4?. B!"?!3 :!1 $o c0e!r r#>:" "o 9e e$"#"0e& "o ":e 5r#" r!<e& %or. *:!" B!"?!3 1ee31 "o reco;er #1 "#"0e "o+ or o11e11#o$ o%+ re!0 ro er"< '":e ":ree '/( o#0 8#001 5:#c: re!00< 8!&e 7 ":e !11e"1 o% B!"?!3( 97" 5:#c: ":e recor&1 1:o5 !0re!&< 9e0o$> "o NIDC . 3t is not disputed that the mortgages on the three %*) oil mills were foreclosed by !4? and 43-" and ac.uired by them as the highest bidder in the appropriate foreclosure sales. /wnership thereto was subse.uently consolidated by !4? and 43-", after ?atjak failed to exercise its right of redemption. The three %*) oil mills are now titled in the name of 43-". Arom the foregoing, it is evident that ?atjak had no clear right to be entitled to the writ prayed for. 3n @amb vs. !hilippines %$$ !hil. 7D() citing the case of Kon6ales Q. 8ala6ar vs. The ?oard of !harmacy , $< !hil. *(', the "ourt said that the writ of mandamus will not issue to give to the applicant anything to which he is not entitled by law. ?atjak premises its right to the possession of the three %*) off mills on the Qoting Trust &greement, claiming that under said agreement, 43-" was constituted as trustee of the assets, management and operations of ?atjak, that due to
the expiration of the Qoting Trust &greement, on $( /ctober 1='<, 43-" should tum over the assets of the three %*) oil mills to ?atjak Arom the foregoing provisions, it is clear that what was assigned to 43-" was the power to vote the shares of stock of the stockholders of ?atjak, representing (<J of ?atjakPs outstanding shares, and who are the signatories to the agreement. The power entrusted to 43-" also included the authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. 4owhere in the said provisions or in any other part of the Qoting Trust &greement is mention made of any transfer or assignment to 43-" of ?atjakPs assets, operations, and management. 43-" was constituted as trustee only of the voting rights of (<J of the paid+up and outstanding shares of stock in ?atjak. This is confirmed by paragraph 4o. = of the Qoting Trust &greement, thus5 =. TE;>34&T3/4 Y pon termination of this &greement as heretofore provided, the certificates delivered to the T; 8TEE by virtue hereof shall be returned and delivered to the undersigned stockholders as the absolute owners thereof, upon surrender of their respective voting trust certificates, and the duties of the T; 8TEE shall cease and terminate.+ nder the aforecited provision, what was to be returned by 43-" as trustee to ?atjakPs stockholders, upon the termination of the agreement, are the certificates of shares of stock belonging to ?atjakPs stockholders, not the properties or assets of ?atjak itself which were never delivered, in the first place to 43-", under the terms of said Qoting Trust &greement. 3n any event, a voting trust transfers only voting or other rights pertaining to the shares subject of the agreement or control over the stock. The law on the matter is 8ection D=, !aragraph 1 of the "orporation "ode %?! (C) which provides5 8ec. D=. Qoting Trusts Y /ne or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trusties the right to vote and other rights pertaining to the shares for a period not exceeding five %D) years at any one time5 ... The ac.uisition by !4?+43-" of the properties in .uestion was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of ?atjak. CHAPTER 1N: STOCKS AND STOCKHOLDERS & person may become a stockholder in a corporation in either of three ways5 1. ?y a contract of subscription with the corporation1
$. *. &.
?y purchase of treasury shares from the corporation1 and ?y purchase or ac.uisition of shares from existing stockholders. SUBSCRIPTION CONTRACT
=D
precedent, does not make the subscriber a stockholder, or render him to pay the amount of his subscription, until performance of the condition. & 1791cr# "#o$ 7 o$ 1 ec#!0 "er81, on the other hand, is an absolute subscription, making the subscriber a stockholder, and rendering him liable as such, as soon as the subscription is 8ec. (<. S791cr# "#o$ co$"r!c". + &ny contract for the ac.uisition accepted, the special term being an independent stipulation. of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of 3n a case of doubt in the intention of the parties, a this Title, notwithstanding the fact that the parties refer to it as subscription should be considered as an absolute purchase or some other contract. subscription upon special terms, rather than conditional. & GsubscriptionH, properly speaking, is the mutual agreement of the subscribers to take and pay for the stocks of the corporation. & Gsubscription contractH, on the other hand is specifically defined in 8ec. (<5 The policy of giving protection to creditors and other subscribers has led to the adoption of this rule of construction favoring the immediate liability of the subscriber.
SUBSCRIPTION VS. PURCHASE: 3n the latter, the buyer becomes a shareholder only upon full payment of the price. 4388 E- shares cannot be the subject of a GpurchaseH.
GEe may add that the law in force in this jurisdiction makes no distinction, in respect to the liability of the subscriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. &ll like are bound to pay full value in cash or its e.uivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. 3n what is here said we have reference of course primarily to subscriptions to shares that have not been previously issued. 3t is conceivable that the power of the corporation to make terms with the purchaser would be greater where the shares which are the subject of the transaction have been ac.uired by the corporation in course of commerce, after they have already been once issued. ?ut the shares with which are here concerned are not of this sort.H %4ational Exchange "o., 3nc. vs. -exter)
"onditional 8ubscriptions are valid provided5 %1) there is nothing in the charter or enabling act prohibiting the same1 and %$) provided the conditions are not such as to render their performance beyond the powers of the corporation or in violation of law or contrary to public policy.
NAZARIO TRILLANA+ administrator+appellee, vs. 2UEZON COLLEGE+ INC.+ claimant+appellant %K; 4o. @+D<<*1 Bune $', 1=D*) FACTS: -amasa "risostomo sent the following letter to the ?oard of Trustees of the Tue6on "ollege5 Bune 1, 1=7C The ?/&;- /A T; 8TEE8 Tue6on "ollege >anila Kentlemen5 !lease enter my subscription to dalawang daan %$<<) shares of your capital stock with a par value of !1<< each. Enclosed you will find %?abayaran kong lahat pagkatapos na ako ay makapag+pahuli ng isda) pesos as my initial payment and the balance payable in accordance with law and the rules and regulations of the Tue6on "ollege. 3 hereby agree to shoulder the expenses connected with said shares of stock. 3 further submit myself to all lawful demands, decisions or directives of the ?oard of Trustees of the Tue6on "ollege and all its duly constituted officers or authorities %ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman). Qery respectfully, %8gd.) -&>&8& ";38/8T/>/ 8ignature of subscriber
E,A-PLE: 3f 2 corporation had !1> authori6ed capital divided into 1> shares with a par value of !1. D<<,<<< has already been subscribed5 1. U GpurchasedH 1<<,<<< of the 4388 E- shares paying D<J down payment and the balance payable after ( months, with a condition that he will not be considered a shareholder until full payment. ,e is still liable for the balance because this will be considered a subscription no matter how the parties refer to it and accordingly, U is liable as a shareholder therein. $. U was declared a delin.uent shareholder and 2 "o. was declared as the winning bidder by paying !1<<,<<< and ac.uired the delin.uent shares. @ater on, $<,<<< of the shares were sold to L here, the shares being from treasury and not from unissued shares, may be the proper subject of a GpurchaseH and thus, a condition that L would not became a shareholder until full payment may be valid. FOR-: & subscription contract need not be in writing such that an oral contract of subscription is valid and enforceable under the 8tatute of Arauds. Thus, it was ruled by the 8" that such an agreement does not seem to fall within the definition of a sale under our substantive law, and is therefore believed that an oral subscription agreement as distinguished from sale of stock is valid and enforceable. CONDITION: 8ubscriptions may be made upon a condition precedent or upon special terms %condition subse.uent). & co$&#"#o$!0 1791cr# "#o$, or one made upon a condition
4ilagdaan sa aming harapan5 B/8E ";38/8T/>/ E- &;-/ ";38/8T/>/ /n /ct. $(, 1=7C, "risostomo died. &s no payment on the subscriptions appear to have been made, herein appellant filed a claim in her testate proceedings for !$<,<<< which was opposed by the administrator, and dismissed by the "A3.
=(
ISSUE: E/4 the subscription is valid and enfroceableF HELD: 4o. 3t appears that the application sent by -amasa "risostomo to the Tue6on "ollege, 3nc. was written on a general form indicating that an applicant will enclose an amount as initial payment and will pay the balance in accordance with law and the regulations of the "ollege. /n the other hand, in the letter actually sent by -amasa "risostomo, the latter %who re.uested that her subscription for $<< shares be entered) not only did not enclose any initial payment but stated that Nbabayaran kong lahat pagkatapos na ako ay makapagpahuli ng isda.N There is nothing in the record to show that the Tue6on "ollege, 3nc. accepted the term of payment suggested by -amasa "risostomo, or that if there was any acceptance the same came to her knowledge during her lifetime. &s the application of -amasa "risostomo is obviously at variance with the terms evidenced in the form letter issued by the Tue6on "ollege, 3nc., there was absolute necessity on the part of the "ollege to express its agreement to -amasaPs offer in order to bind the latter. "onversely, said acceptance was essential, because it would be unfair to immediately obligate the Tue6on "ollege, 3nc. under -amasaPs promise to pay the price of the subscription after she had caused fish to be caught. 3n other words, ":e re0!"#o$ 9e"5ee$ D!8!1! Cr#1o1"o8o !$& ":e 27eKo$ Co00e>e+ I$c. :!& o$0< ":71 re!c:e& ":e re0#8#$!r< 1"!>e 5:ere9< ":e 0!""er o%%ere& #"1 1"oc3 %or 1791cr# "#o$ o$ ":e "er81 1"!"e& #$ ":e %or8 0e""er+ !$& D!8!1! ! 0#e& %or 1791cr# "#o$ %#4#$> :er o5$ 0!$ o% !<8e$"+ S ! re0!"#o$+ #$ ":e !91e$ce !1 #$ ":e re1e$" c!1e o% !cce "!$ce 9< ":e 27eKo$ Co00e>e+ I$c. o% ":e co7$"er o%%er o% D!8!1! Cr#1o1"o8o+ ":!" :!& $o" r# e$e& #$"o !$ e$%orce!90e co$"r!c". 3ndeed, the need for express acceptance on the part of the Tue6on "ollege, 3nc. becomes the more imperative, in view of the proposal of -amasa "risostomo to pay the value of the subscription after she has harvested fish, a condition obviously dependent upon her sole will and, therefore, facultative in nature, rendering the obligation void, under article 111D of the old "ivil "ode which provides as follows5 N3f the fulfillment of the condition should depend upon the exclusive will of the debtor, the conditional obligation shall be void. 3f it should depend upon chance, or upon the will of a third person, the obligation shall produce all its effects in accordance with the provisions of this code.N 3t cannot be argued that the condition solely is void, because it would have served to create the obligation to pay, unlike a case, exemplified by /smeZa vs. ;ama %17 !hil., ==), wherein only the potestative condition was held void because it referred merely to the fulfillment of an already existing indebtedness. 3n the case of Taylor vs. y Tieng !iao, et al . %7* !hil., C'*, C'=), this "ourt already held that Na condition, facultative as to the debtor, is obnoxious to the first sentence contained in article 111D and renders the whole obligation void.N
made or executed after the formation or organi6ation of the corporation. 8ec. (1. Pre=#$cor or!"#o$ 1791cr# "#o$. + & subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six %() months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materiali6e within said period or within a longer period as may be stipulated in the contract of subscription5 !rovided, That no pre+ incorporation subscription may be revoked after the submission of the articles of incorporation to the 8ecurities and Exchange "ommission.
I--EDIATE BINDING EFFECT5 This new provision gives an immediate binding effect on pre+incorporation subscriptions as against the subscribers of the capital stock of a corporation still to be formed. !re+incorporation subscriptions are, in fact, mandatory as may be culled from the provisions of 8ec. 1* and 17 of the "ode which mandates that a corporation may be registered as such only if at least $DJ of its authori6ed capital stock has been subscribed and that at least $DJ of the subscribed capital has been paid. IRREVOCABLE: !re+incorporation subscriptions are irrevocable5 1. Aor a period of at least ( months from the date of subscription unless %a) all the subscribers consent to the revocation1 or %b) the incorporation fails to materiali6e within said period or within a longer period as may stipulated in the contract of subscription1 and $. &fter submission of the &/3 to the 8E".
".
STOCK ISSUANCE
8tock issuance is generally the initial and primary source of corporate capital. /ther sources may include corporate borrowings, loans and advances from creditors or stockholders. "orporate earnings may also be a source of corporate funds if it is reinvested or ploughed back to the company. Sec. B2. Co$1#&er!"#o$ %or 1"oc31. + 8tocks shall not be issued for a consideration less than the par or issued price thereof. "onsideration for the issuance of stock may be any or a combination of any two or more of the following5
1. &ctual cash paid to the corporation1 $. !roperty, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation e.ual to the par or issued value of the stock issued1 *. @abor performed for or services actually rendered to the corporation1
?.
PRE=INCORPORATION SUBSCRIPTION
!re+incorporation subscriptions make reference to subscriptions for shares of stock of a corporation still to be formed while post+incorporation subscriptions are those
='
7. !reviously incurred indebtedness of the corporation1
TRUE VALUE RULE5 the motives and intent of those making the valuation are disregarded and the sole and D. &mounts transferred from unrestricted retained earnings to decisive factor or .uestion is whether or not the property stated capital1 and or services are in fact worth the value placed on them.
(. /utstanding shares exchanged for stocks in the event of GOOD FAITH RULE: is based on the proposition that the reclassification or conversion. value of the property or services is a matter about which there can be an honest difference of opinion. Therefore, if the parties have acted in good faith without fraud or intentional over+valuation, the transaction cannot be overturned even if it later becomes evident that the Ehere the consideration is other than actual cash, or consists of property or services were in fact worth much less than the intangible property such as patents of copyrights, the valuation value fixed on them initially. thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the 8ecurities >ost and jurisdiction follow the K//- A&3T, rule. Exchange "ommission. STOCK DIVIDENDS: 8ec. ($%D) which states that Gamounts transferred from unrestricted retained earnings to stated capitalH refer to stock dividends where corporate earnings are capitali6ed rather than being distributed as 8hares of stock shall not be issued in exchange for promissory notes cash dividend. 3t merely converts income into capital, the or future service. consideration being the retained earnings itself which would have accrued to the stockholders in proportion to their respective stockholdings. The same considerations provided for in this section, insofar as they NO CONSIDERATION: stocks may not be issued without may be applicable, may be used for the issuance of bonds byconsideration the for the following reasons5 %1) it is discriminatory against other stockholders1 and %$) it corporation. prejudices the rights of creditors under the Trust Aund -octrine.
RECLASSIFICATION: 8ec. ($%() which provides that The issued price of no+par value shares may be fixed in the articles Goutstanding shares exchanged for stocks in the event of of incorporation or by the board of directors pursuant to authority reclassification or conversionH speaks of shares of stock conferred upon it by the articles of incorporation or the by+laws, or surrendered to the corporation in exchange for new or in the absence thereof, by the stockholders representing at least a different type of shares. Example5 Aound 8hares which, after D years, may be converted to common stocks. majority of the outstanding capital stock at a meeting duly called for the purpose. PROHIBITED CONSIDERATIONS: 8hares of stock may not be issued in exchange for %1) promissory notes1 or %$) future services as their reali6ation are not certain. EISSUEF: is generally employed to indicate the making of a share contract or contract of subscription, that is, transaction by which a person becomes the owner of shares and by which new share contracts are created. 3t is often associated with the execution and delivery of a share certificate but the issuance of the shares is not dependent on the delivery of a certificate of stock. EPARF or EISSUED PRICEF: while it may not reflect the true value of the shares which constantly fluctuates, merely indicates the amount which the original subscribers are supposed to contribute to the corporate capital as the basis of the privilege of profit sharing with limited liability. PROPERT): 3f shares are issued in exchange for property, the value of such should at least be e.ual to the par or issued value of the stocks. 8uch value, may be determined with reference to a. ;E&@ !;/!E;TL + %1) independent appraiser#s appraisal report1 %$) ?3; Uonal Qaluation1 or %*) >arket Qalue indicated in the ;eal Estate Tax -eclaration. b. 34T&4K3?@E !;/!E;TL as determined by the incorporators or the ?/- subject to the approval of the 8E".
THE NATIONAL E,CHANGE CO.+ INC.+ plaintiff+appellee, vs. I. B. DE,TER+ defendant+appellant %K; 4o. @+$'C'$1 Aeb. $D, 1=$C) FACTS: /n &ugust 1<, 1=1=, the defendant, 3. ?. -exter, signed a written subscription to the corporate stock of ". 8. 8almon I "o. in the following form5
3 hereby subscribe for three hundred %*<<) shares of the capital stock of ". 8. 8almon and "ompany, payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid
pon subscription, defendant -exter paid !1D,<<< from the dividends declared by the company and supplemented by money supplied personally by the subscriber. 4o other payment was made. ISSUE: E/4 the subscription to be paid out of the dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover
=C
the value of the sharesF HELD: 4o. nder the &merican regime corporate franchises in the !hilippine 3slands are granted subject to the provisions of section '7 of the /rganic &ct of Buly 1, 1=<$, which, in the part here material, is substantially reproduced in section $C of the &utonomy &ct of &ugust $=, 1=1(. 3n the /rganic &ct it is among other things, declared5 NThat all franchises, privileges, or concessions granted under this &ct shall forbid the issue of stock or bonds except in exchange for actual cash or for property at a fair valuation e.ual to the par value of the stock or bonds so issued1 . . . .N %&ct of "ongress of Buly 1, 1=<$, sec. '7.) !ursuant to this provision we find that the !hilippine "ommission inserted in the "orporation @aw, enacted >arch 1, 1=<(, the following provision5 N. . . $o cor or!"#o$ 1:!00 #117e 1"oc3 or 9o$&1 e4ce " #$ e4c:!$>e %or !c"7!0 c!1: !#& "o ":e cor or!"#o$ or %or ro er"< !c"7!00< rece#;e& 9< #" !" ! %!#r ;!07!"#o$ e67!0 "o ":e !r ;!07e o% ":e 1"oc3 or 9o$&1 1o #117e&.G %&ct 4o. 17D=, sec. 1( as amended by &ct 4o. $'=$, sec. $.) The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full e.uivalent in property is thus enshrined in both the organic and statutory law of the !hilippine 3slands1 and it would seem that our lawmakers could scarcely have chosen language more directly suited to secure absolute e.uality stockholders with respect to their liability upon stock subscriptions. 4ow, if it is unlawful to issue stock otherwise than as stated it is self+evident that ! 1"# 70!"#o$ 17c: !1 ":!" $o5 7$&er co$1#&er!"#o$+ #$ ! 1"oc3 1791cr# "#o$+ #1 #00e>!0+ %or ":#1 1"# 70!"#o$ o90#>!"e1 ":e 1791cr#9er "o !< $o":#$> %or ":e 1:!re1 e4ce " !1 &#;#&e$&1 8!< !ccr7e 7 o$ ":e 1"oc3. I$ ":e co$"#$>e$c< ":!" &#;#&e$&1 !re $o" !#&+ ":ere #1 $o 0#!9#0#"< !" !00. T:#1 #1 ! &#1cr#8#$!"#o$ #$ %!;or o% ":e !r"#c70!r 1791cr#9er+ !$& :e$ce ":e 1"# 70!"#o$ #1 7$0!5%70. The general doctrine of corporation law is in conformity with this conclusion, as may be seen from the following proposition taken from the standard encyclopedia treatise, "orpus Buris5 Nor :!1 ! cor or!"#o$ ":e o5er "o rece#;e ! 1791cr# "#o$ 7 o$ 17c: "er81 !1 5#00 o er!"e !1 ! %r!7& 7 o$ ":e o":er 1791cr#9er1 or 1"oc3:o0&er1 9< 179?ec"#$> ":e !r"#c70!r 179cr#9er "o 0#>:"er 97r&e$1+ or 9< >#;#$> :#8 >re!"er r#>:"1 !$& r#;#0e>e1+ or !1 ! %r!7& 7 o$ cre&#"or1 o% ":e cor or!"#o$ 9< 5#":&r!5#$> or &ecre!1#$> ":e c! #"!0. 3t is well settled therefore, as a general rule, that an agreement between a corporation and a particular subscriber, by which the subscription is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that the stock is really greater than it is, or for the purpose of preventing the predominance of certain stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription. %17 ". B., p. D'<.)
The rule thus stated is supported by a long line of decisions from numerous courts, with little or no diversity of opinion. &s stated in the headnote to the opinion of the 8upreme "ourt of nited 8tates in the case of !utnan vs. 4ew &lbany, etc. ;ailroad "o. as reported in $1 @aw. ed., *(1, the rule is that NCo$&#"#o$1 !""!c:e& "o 1791cr# "#o$1+ 5:#c:+ #% ;!0#&+ 0e11e$ ":e c! #"!0 o% ":e co8 !$<+ !re ! %r!7& 7 o$ ":e >r!$"or o% ":e %r!$c:#1e+ !$& 7 o$ ":o1e 5:o 8!< 9eco8e cre&#"or1 o% ":e cor or!"#o$+ !$& 7 o$ 7$co$&#"#o$!0 1"oc3:o0&er1 .N 3n the appellantPs brief attention is called to the third headnote to ?ank vs. "ook %1$D 3owa, 111), where it is stated that a collateral agreement with a subscriber to stock that his subscription shall not be collectible except from dividends on the stock, is valid as between the parties and a complete defense to a suit on notes given for the amount of the subscription. & careful perusal of the decision will show that the rule thus broadly stated in the headnote is not justified by anything in the reported decision1 for what the court really held was that the making of such promise by the agent of the corporation who sold the stock is admissible in evidence in support of the defense of fraud and failure of consideration. >oreover, even if the decision had been to the effect supposed, the rule announced in the headnote, could have no weight in a jurisdiction like this where there is a statutory provision prohibiting such agreements.
-.
CERTIFICATE OF STOCK AND THEIR TRANSFER
S:!re o% S"oc35 may rightfully be described as a profit sharing contract, a series of units of interest and participation in a corporation in consideration of a proportionate right to participate in dividend and other distributions. They are personal properties and the owners thereof have the unbridled right to transfer the same to anyone they please subject only to reasonable charter provisions. Cer"#%#c!"e o% S"oc3: is the piece of paper or document which evidences the ownership of shares and a convenient instrument in the transfer of the title.
Sec. B/. Cer"#%#c!"e o% 1"oc3 !$& "r!$1%er o% 1:!re1. + The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by+laws. 8hares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney+in+fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.
4o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
==
RE2UISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK: 1. 3t must be signed by the president or vice+president and countersigned by the secretary or assistant secretary1 $. 3t must be sealed with the corporate seal, and
*.
*.
The entire value thereof %together with the interest or expenses, if any) should have been paid.
7. D.
stockholder1 &fford the corporation an opportunity to object or refuse registration of the transfer in cases allowed by law %as when it has unpaid claims on the shares transferred)1 &void fictitious and fraudulent transfers1 and !rotect creditors who have the right to look upon stockholders, in case of non+payment or watered shares, for the satisfaction of their claims.
RIGHTS OF SUBSCRIBERS: Ehile it appears, that a subscriber to shares of stock cannot be entitled to the issuance of a certificate of stock until the full amount of his subscription together with interest and expenses %in case of delin.uent shares) if any is due, has been paid, a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the corresponding liability that attach thereunder5
-ANDA-US: 3f the corporate secretary refuses to registered or record the transfer, mandamus will lie to compel the registration. This is because such duty is ministerial. ,/EEQE;, he cannot be compelled to do so when the transferee#s title to said shares has no prima facie validity or is uncertain.
T*O -ODES OF TRANSFERRING STOCKS: 1. Endorsement and delivery of certificate of stock1 8ec. '$. R#>:"1 o% 7$ !#& 1:!re1. + ,olders of subscribed shares $. 4otari6ed deed. not fully paid which are not delin.uent shall have all the rights of a stockholder. The 8E" has, however, ruled that when a corporation has already issued stock certificates, any transfer of the shares can only be effectively made by endorsement and delivery of the stock certificate. & deed of transfer, sale or 3n essence, the issuance of a certificate of stock is not a assignment alone would not suffice %as affirmed by the 8" condition sine .ua non to consider a subscriber a in ;ural ?ank of @ipa "ity, 3nc. vs. "&) for to rule otherwise stockholder. To all intents and purposes, a subscriber is a would open the door to fraudulent or fictitious transfer shareholder upon subscription and entitled to the all the which the 8E" seeks to avoid. 3n effect, while a formal rights as such, except5 contract of sale in a notari6ed document is e.uivalent to 1. Aor the issuance of a certificate of stock1 actual delivery of the certificate itself, this mode of transfer is available only if no certificate of stock has been issued. $. 3f his shares are declared delin.uent1 or
*.
Ehen he exercises appraisal right under 8ec. C*.
NEGOTIABILIT): & certificate of stock is not regarded as GnegotiableH in the sense same sense as a bill or a not, even if its endorsed in blank. Thus, while it may be transferred by endorsement coupled with delivery thereof, it is nonetheless non+negotiable in that the transferee takes it without prejudice to all the rights and defenses which the true and lawful owner may have except in so far as the principles governing estoppel may apply. NON=REGISTRATION5 of shares disposed of by the holder will not affect the validity of the transfer at least in so far as the contracting parties are concerned. &s regards, the corporation, the transferee will not be recogni6ed as such stockholder and could not exercise the rights until the transfer has been duly recorded in the stock and transfer book. &s such, Ghe cannot vote or be vote for, and he will not be entitled to dividends. The corporation may be protected when it pays dividends to the registered owner despite a previous transfer of which it had no knowledge. The purpose of registration therefore is two+fold5 %1) to enable the transferee to exercise all the rights of stockholder, and %$) to inform the corporation of any change in share ownership so that it can ascertain the person entitled to the rights and subject to the liabilities of a corporationH %-e Er.uiga vs. "&) REGISTRATION5 is necessary to5 1. Enable the corporation to know who its stockholders are1 $. Enable the transferee to exercise his rights as a
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably restricted prohibited. Thus, in !adgett vs. ?obcock I Templeton and Aleischer vs. ?otica 4olasco, the 8" held that every owner of corporate shares has the same uncontrollable right to alienate them and is under no obligation from selling them at his sacrifice and for the welfare and benefit of the corporation and other stockholders. ?ut while unreasonable restrictions may not be allowed, the right to transfer may be GregulatedH to give the corporation protection against colorable or fraudulent transfer or to enable it to know who its stockholders are. &lso, as a matter of policy, the 8E" allows the grant of Gpreferential rightsH to existing stockholders andMor the corporation, giving them the first option to purchase the shares of a selling stockholder within a reasonable period not exceeding thirty days provided that the same is contained in the &/3 and in all the stock certificates to be issued. This is considered GreasonableH since it merely suspends the right to transfer within the period specified. OTHER RESTRICTIONS: 1. 3t is not valid, except as between the parties, until recorded in the books of the corporation1 $. 8hares of stock against which the corporation holds any unpaid claim shall not be transferrable in the books of the corporation. npaid claims, refer to claims arising from unpaid subscription and not to any indebtedness which a stockholder may owe the corporation such as monthly dues1 *. ;estrictions re.uired to be indicated in the &/3, bylaws and stock certificates of a close corporation1
1<<
7.
D. (.
;estrictions imposed by special law, such as the !ublic 8ervice &ct re.uiring the approval of the government agency concerned if it will vest unto the transferee 7<J of the capital of the public service company1 8ale to aliens in violation of maximum ownership of shares under the 4ationali6ation @aws1 and Those covered by reasonable agreement of the parties.
the transaction, the date of the transfer the number of the certificate, and the number of shares transferred. 4o share of stock against which the corporation hold, any unpaid claim shall be transferable on the books of the corporation. The legal provision just .uoted does not re.uire any entry except of transfers of shares of stock in order that such transfers may be valid as against third persons. 4ow, what did the @egislature mean in using the word NtransferNF 3nasmuch as it does not appear from the text of the "orporation @aw that an attempt was made to give a special signification to the word NtransferN, we shall construe it according to its accepted meaning in ordinary parlance. The word NtransferenciaN %transfer) is defined by the N-iccionario de la &cademia de la @engua "astellanaN as Naccion y efecto de transferirN %the act and effect of transferring)1 and the verb NtransferirN, as Nceder o renunciar en otro el derecho o dominio .ue se tiene sobre una cosa, haciendole dueno de ellaN %to assign or waive the right in, or absolute ownership of, a thing in favor of another, making him the owner thereof). 3n the @aw -ictionary of NEords and !hrasesN, third series, volume ', p. DC=, the word NtransferN is defined as follows5 NTransferN means any act by which property of one person is vested in another, and Ntransfer of sharesN, as used in niform 8tock Transfer &ct %"omp. 8t. 8upp., (=<), implies any means whereby one may be divested of and another ac.uire ownership of stock. %Eallach vs. 8tein 94.B.:, 1*( &., $<=, $1<.)N 3n view of the definitions cited above, the .uestion arises as to whether or not a mortgage constituted on certain shares of stock in accordance with &ct 4o. 1D<C, as amended by &ct 4o. $7=(, is a transfer of such shares in the abovementioned sense. 8ection * of the aforesaid &ct 4o. 1D<C, as amended by &ct 4o. $7=(, defines the phrase Nhipoteca mobiliariaN %chattel mortgage) as follows5 8E". *. & chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be avoided upon the seller paying to the purchaser a sum of money or doing some other act named. 3f the condition is performed according to its terms the mortgage and sale immediately become void, and the mortgage is hereby divested of his title. &ccording to the legal provision just .uoted, although a chattel mortgage, accompanied by delivery of the mortgaged thing, transfers the title and ownership thereof to the mortgage creditor, such transfer is not absolute but constitutes a mere security for the payment of the mortgage debt, the transfer in .uestion becoming null and void from the time the mortgage debtor complies with his obligation to pay his debt.
TRANSFER: as used in the "orporation "ode, refers to absolute and unconditional transfer to warrant registration in the books of the corporation in order to bind the latter and other third persons.
ENRI2UE -ONSERRAT+ plaintiff+appellee, vs. CARLOS G. CERON+ ET AL.+ defendants. ER-A+ INC.+ !$&+ THE SHERIFF OF -ANILA+ respondents %K.;. 4o. *'<'C1 8eptember $', 1=**) FACTS: Enri.ue >onserrat, president and manager of the >anila Lellow Taxicab "o., 3nc. %>LT"), assigned to "arlos K. "eron the usufruct of his 1,$<< shares in consideration of the interest shown and the financial aid extended him %>onserrat) in the organi6ation of the corporation. This assignment allowed "eron to derive the right to enjoy the profits %during his lifetim) that may be derived from the shares but prohibited him from acts of absolute ownership, such acts and the right to vote, reserved to >onserrat and his heirs. 8uch assignment was recorded in the books of the corporation and the corresponding shares certificate was issued to "eron. @ater on, "eron mortgaged the shares to herein defendant Eduardo >atute, the latter without knowledge of the existence of the assignment. -ue to non+payment, >atute foreclosed the mortgage and the shares were sold at a public auction. >onserrat claims ownership over the shares and the lower court rendered judgment in his favor, holding that the mortgage on the shares was null and void, but the mortgage on the usufruct is valid. ISSUE: E/4 it is necessary to enter upon the books of the corporation a mortgage constituted on shares of stock in order that such mortgage may be valid and may have force and effect as against third personsF HELD: 4o. 8ection *D of the "orporation @aw provides the following5 8E". *D. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice+president, counter signed by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by+ laws. 8hares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to
1<1
3n the case of 4oble vs. At. 8mith Eholesale Krocery "o. %1$' !ac., 17, 1'1 *7 /kl., (($1 7( @. ;. &. 94.8.:, 7DD), cited in Eords and !hrases, second series, vol. 7, p. ='C, the following appears5 & NtransferN is the act by which owner of a thing delivers it to another with the intent of passing the rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such term. Therefore, ":e c:!""e0 8or">!>e #1 $o" ":e "r!$1%er re%erre& "o #$ 1ec"#o$ /A o% Ac" No. 1@AM co88o$0< 3$o5$ !1 ":e Cor or!"#o$ 0!5+ 5:#c: "r!$1%er 1:o70& 9e e$"ere& !$& $o"e& 7 o$ ":e 9oo31 o% ! cor or!"#o$ #$ or&er "o 9e ;!0#&+ !$& 5:#c:+ !1 :!1 !0re!&< 9ee$ 1!#&+ 8e!$1 ":e !91o07"e !$& 7$co$&#"#o$!0 co$;e<!$ce o% ":e "#"0e !$& o5$er1:# o% ! 1:!re o% 1"oc3. 3f, in accordance with said section *D of the "orporation @aw, o$0< ":e "r!$1%er or !91o07"e co$;e<!$ce o% ":e o5$er1:# o% ":e "#"0e "o ! 1:!re $ee& 9e e$"ere& !$& $o"e& 7 o$ ":e 9oo31 o% ":e cor or!"#o$ #$ or&er ":!" 17c: "r!$1%er 8!< 9e ;!0#&+ ":ere%ore+ #$!187c: !1 ! c:!""e0 8or">!>e o% ":e !%ore1!#& "#"0e #1 $o" ! co8 0e"e !$& !91o07"e !0#e$!"#o$ o% ":e &o8#$#o$ !$& o5$er1:# ":ereo%+ #"1 e$"r< !$& $o"!"#o$ 7 o$ ":e 9oo31 o% ":e cor or!"#o$ #1 $o" $ece11!r< re67#1#"e "o #"1 ;!0#&#"<. 3t is obvious, therefore, that the defendant entity Erma, 3nc., as a conditional purchaser of the shares of stock in .uestion given as security for the payment of his credit, ac.uired in good faith "arlos K. "eronPs right and title to the (<< common shares of stock evidenced by certificate 4o. ' of the >LT", and as such conditional purchaser in good faith, it is entitled to the protection of the law. 3n view of the foregoing considerations, we are of the opinion and so hold that, inasmuch as 1ec"#o$ /A o% ":e Cor or!"#o$ L!5 &oe1 $o" re67#re ":e $o"!"#o$ 7 o$ ":e 9oo31 o% ! cor or!"#o$ o% "r!$1!c"#o$1 re0!"#$> "o #"1 1:!re1+ e4ce " ":e "r!$1%er o% o11e11#o$ !$& o5$er1:# ":ereo%+ !1 ! $ece11!r< re67#1#"e "o ":e ;!0#&#"< o% 17c: "r!$1%er+ ":e $o"!"#o$ 7 o$ ":e !%ore1!#& 9oo31 o% ":e cor or!"#o$+ o% ! c:!""e0 8or">!>e co$1"#"7"e& o$ ":e 1:!re1 o% 1"oc3 #$ 67e1"#o$ #1 $o" $ece11!r< "o #"1 ;!0#&#"<. GONZALO CHUA GUAN+ plaintiff+appellant, vs. SA-AHANG -AGSASAKA+ INC.+ and 83>!@3"3/ /"&>!/, &-;3&4/ K. 8/TT/, and E>3@3/ QE;K&;&, as president, secretary and treasurer respectively of the same, defendants+appellees %K.;. 4o. @+7$<=11 4ovember $, 1=*D) FACTS: To secure the payment of a debt, Kon6alo ,. "o Toco mortgage his shares to "hua "hiu, such assignment recorded in the /ffice of the ;egister of -eeds and the books of the corporation. Aor non+payment, the mortgage was foreclosed and the shares were sold at a public auction with plaintiff "hua Kuan as the highest bidder. The "ompany refused to cancel the certificates of stock and issue new ones to herein plaintiff alleging that prior to
the date of plaintiff#s demand, nine attachments had been issued and served and noted on the books of the corporation. Thus, a prayer for a writ of mandamus. The validity of the assignments and the mortgage is not in .uestion. ISSUE: E/4 the registration of the mortgage in the registry of chattel mortgage in the office of the register of deeds give constructive notice to the said attaching creditors and thus gave preference to the mortgage over the other debtsF HELD: 4o. 3n passing, let it be noted that the registration of the said chattel mortgage in the office of the corporation was not necessary and had no legal effect. %>onserrat vs. "eron, DC !hil., 7(=.) The long mooted .uestion as to whether or not shares of a corporation could be hypothecated by placing a chattel mortgage on the certificate representing such shares we now regard as settled by the case of >onserrat vs. "eron, supra. ?ut that case did not deal with any .uestion relating to the registration of such a mortgage or the effect of such registration. 4othing appears in the record of that case even tending to show that the chattel mortgage there involved was ever registered anywhere except in the office of the corporation, and there was no .uestion involved there as to the right of priority among conflicting claims of creditors of the owner of the shares 8ection 7 of &ct 4o. 1D<C provides two ways for executing a valid chattel mortgage which shall be effective against third persons. Airst, the possession of the property mortgage must be delivered to and retained by the mortgagee1 and, second, without such delivery the mortgage must be recorded in the proper office or offices of the register or registers of deeds. 3f a chattel mortgage of shares of stock of a corporation may validly be made without the delivery of possession of the property to the mortgagee and the mere registration of the mortgage is sufficient to constructive notice to third parties, we are confronted with the .uestion as to the proper place of registration of such a mortgage. 8ection 7 provides that in such a case the mortgage resides at the time of making the same or, if he is a non+resident, in the province in which the property is situated1 and it also provides that if the property is situated in a different province from that in which the mortgagor resides the mortgage shall be recorded both in the province of the mortgagorPs residence and in the province where the property is situated. 3f with respect to a chattel mortgage of shares of stock of a corporation, registration in the province of the ownerPs domicile should be sufficient, those who lend on such security would be confronted with the practical difficulty of being compelled not only to search the records of every province in which the mortgagor might have been domiciled but also every province in which a chattel mortgage by any former owner of such shares might be registered. Ee cannot think that it was the intention of the legislature to put this almost prohibitive impediment upon the hypothecation of shares of stock in view of the great volume of business that is done on the faith of the pledge of shares of stock as collateral.
1<$
3t is a common but not accurate generali6ation that the situs of shares of stock is at the domicile of the owner. The term situs is not one of fixed of invariable meaning or usage. 4or should we lose sight of the difference between the situs of the shares and the situs of the certificates of shares. The situs of shares of stock for some purposes may be at the domicile of the owner and for others at the domicile of the corporation1 and even elsewhere. %"f. Qidal vs. 8outh &merican 8ecurities "o., $'( Aed., CDD1 ?lack Eagle >in. "o. vs. "onroy, =7 /kla., 1==1 $$1 !ac,, 7$D 4orrie vs. Ransas "ity 8outhern ;y. "o., ' Aed. 9$d:. 1DC.) I" #1 ! >e$er!0 r70e ":!" %or 7r o1e1 o% e4ec7"#o$+ !""!c:8e$" !$& >!r$#1:8e$"+ #" #1 $o" ":e &o8#c#0e o% ":e o5$er o% ! cer"#%#c!"e 97" ":e &o8#c#0e o% ":e cor or!"#o$ 5:#c: #1 &ec#1#;e. %Aletcher, "yclopedia of the @aw of !rivate "orporations, vol. 11, paragraph D1<(. "f. sections 7*< and 7D<, "ode of "ivil !rocedure.) ?y analogy with the foregoing and considering the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, it seems to us a reasonable construction of section 7 of &ct 4o. 1D<C to hold that ":e ro er"< #$ ":e 1:!re1 8!< 9e &ee8e& "o 9e 1#"7!"e& #$ ":e ro;#$ce #$ 5:#c: ":e cor or!"#o$ :!1 #"1 r#$c# !0 o%%#ce or 0!ce o% 971#$e11. I% ":#1 ro;#$ce #1 !01o ":e ro;#$ce o% ":e o5$erI1 &o8#c#0e+ ! 1#$>0e re>#1"r!"#o$ 17%%#c#e$". I% $o"+ ":e c:!""e0 8or">!>e 1:o70& 9e re>#1"ere& 9o": !" ":e o5$erI1 &o8#c#0e !$& #$ ":e ro;#$ce 5:ere ":e cor or!"#o$ :!1 #"1 r#$c# !0 o%%#ce or 0!ce o% 971#$e11. I$ ":#1 1e$1e ":e ro er"< 8or">!>e& #1 $o" ":e cer"#%#c!"e 97" ":e !r"#c# !"#o$ !$& 1:!re o% ":e o5$er #$ ":e !11e"1 o% ":e cor or!"#o$. 3n view of the premises, the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant and the judgment appealed from must be affirmed without special pronouncement as to costs in this instance. TORIBIA USON+ plaintiff+appellee, vs. VICENTE DIOSO-ITO+ ET &@., defendants. Q3"E4TE -3/8/>3T/, E>ETE;3/ ?&;"E@/4, ,.!.@. B/@@LE and 4/;T, E@E"T;3" "/>!&4L, 34"., appellants. %K.;. 4o. @+7$1*D1 Bune 1', 1=*D) FACTS: 3n a civil action filed by herein plaintiff+appellee son, an attachment was levied on Ban. 1C, 1=*$ upon the property of defendant Qicente -iosmomito including the .uestion 'D shares of 4orth Electric "ompany, 3nc.. /n >arch $<, 1=**, the said shares were sold at a public auction to satisfy the claim of son. 3n the present action, appellant ,!@ Bollye claims ownership of said shares. &pparently, these shares were sold by -iosomito to Emetertio ?arcelon on Aeb. *, 1=*1 but the certificates were cancelled and a new one issued only on 8ep. 1(, 1=*$. @ater on, the same shares were sold to Bollye and registered in the books on Aeb. 1*, 1=**. ISSUE: E/4 a bona fide transfer of the shares of a corporation, not registered or noted on the books of the corporation, is valid as against a subse.uent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or notF
HELD: 8ection *D of the "orporation @aw is as follows5 8E". *D. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice+president, countersigned by the secretary or clerk and sealed with the by+laws. 8hares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred Ee prefer to adopt the line followed by the 8upreme "ourts of >assachusetts and of Eisconsin. % 8ee "lews vs. Ariedman, 1C$ >ass., DDD1 (( 4.E. $<1, and 3n re >urphy, D1 Eis., D1=1 C 4.E., 71=.) 3n this case the court had under consideration a statute identical with our own section *D, supra, and the court said5 Ee think the true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here re.uired, on the books of the corporation. &nd it is e.ually clear to us that !00 "r!$1%er1 o% 1:!re1 $o" 1o e$"ere& !re #$;!0#& !1 "o !""!c:#$> or e4ec7"#o$ cre&#"or1 o% ":e !11#>$or1+ !1 5e00 !1 "o ":e cor or!"#o$ !$& "o 1791e67e$" 7rc:!1er1 #$ >oo& %!#":+ !$& #$&ee&+ !1 "o !00 er1o$1 #$"ere1"e&+ e4ce " ":e !r"#e1 "o 17c: "r!$1%er1. A00 "r!$1%er1 $o" 1o e$"ere& o$ ":e 9oo31 o% ":e cor or!"#o$ !re !91o07"e0< ;o#&H $o" 9ec!71e ":e< !re 5#":o7" $o"#ce or %r!7&70e$" #$ 0!5 or %!c"+ 97" 9ec!71e ":e< !re 8!&e 1o ;o#& 9< 1"!"7"e. To us the language of the legislature is plain to the effect that ":e r#>:" o% ":e o5$er o% ":e 1:!re1 o% 1"oc3 o% ! P:#0# #$e cor or!"#o$ "o "r!$1%er ":e 1!8e 9< &e0#;er< o% ":e cer"#%#c!"e+ 5:e":er #" 9e re>!r&e& !1 1"!"7"or< o$ co88o$ 0!5 r#>:"+ #1 0#8#"e& !$& re1"r#c"e& 9< ":e e4 re11 ro;#1#o$ ":!" G$o "r!$1%er+ :o5e;er+ 1:!00 9e ;!0#&+ e4ce " !1 9e"5ee$ ":e !r"#e1+ 7$"#0 ":e "r!$1%er #1 e$"ere& !$& $o"e& 7 o$ ":e 9oo31 o% ":e cor or!"#o$.G T:ere%ore+ ":e "r!$1%er o% ":e CA 1:!re1 #$ ":e Nor": E0ec"r#c Co8 !$<+ I$c.+ 8!&e 9< ":e &e%e$&!$" D#o1o8#"o "o ":e &e%e$&!$" B!rce0o$ 5!1 $o" ;!0#& !1 "o ":e 0!#$"#%%=! e00ee+ Tor#9#! U1o$+ o$ J!$7!r< 1D+ 1M/2+ ":e &!"e o$ 5:#c: 1:e o9"!#$e& :er !""!c:8e$" 0#e$ o$ 1!#& 1:!re1 o% 1"oc3 5:#c: 1"#00 1"oo& #$ ":e $!8e o% D#o1o8#"o o$ ":e 9oo31 o% ":e cor or!"#o$. C)RUS PADGETT+ plaintiff+appellee, vs. BABCOCK O TE-PLETON+ INC.+ and E. ;. ?&?"/"R+ defendants+appellants %K.;. 4o. @+*C(C71 -ecember $1, 1=**) FACTS: The appellee was an employee of the appellant corporation and rendered services as such from Banuary 1, 1=$*, to &pril 1D, 1=$=. -uring that period he bought *D shares thereof at !1<< a share at the suggestion of the
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president of said corporation. ,e was also the recipient of = shares by way of bonus during "hristmas seasons. 3n this way the said appellee became the owner of 77 shares for which the 1$ certificates, Exhibits A to A+11, were issued in his favor. The word NnontransferableN appears on each and every one of these certificates. ?efore severing his connections with the said corporation, the appellee proposed to the president that the said corporation buy his 77 shares at par value plus the interest thereon, or that he be authori6ed to sell them to other persons. The corporation bought similar shares belonging to other employees, at par value. 8ometime later, the said president offered to buy the appelleePs shares first at !CD each and then at !C<. The appellee did not agree thereto. ISSUE: E/4 the restriction imposed on the right to transfer the shares is validF HELD: 4o. The opinion seems to be unanimous that a re1"r#c"#o$ #8 o1e& 7 o$ ! cer"#%#c!"e o% 1:!re1+ 1#8#0!r "o ":e o$e1 7$&er co$1#&er!"#o$+ #1 $700 !$& ;o#& o$ ":e >ro7$& ":!" #" co$1"#"7"e1 !$& 7$re!1o$!90e 0#8#"!"#o$ o% ":e r#>:" o% o5$er1:# !$& #1 #$ re1"r!#$" o% "r!&e. 8hares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to do so is properly restricted, or the ownerPs privilege of disposing of his shares has been hampered by his own action. %17 ". B., sec. 1<**, pp. ((*, ((7.) &ny restriction on a stockholderPs right to dispose of his shares must be construed strictly1 and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. 8ubject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser. % 3bid., sec. 1<*D, pp. ((D, (((.) 3n the case of Aleischer vs. ?otica 4olasco "o. %7' !hil., DC*), we have discussed the validity of a clause in the by+ laws of the defendant corporation, which provided that, under the same conditions, the owner of a share of stock could not sell it to another person except to the defendant corporation. 3n deciding the legality and validity of said restriction, we held5 T:e o$0< re1"r!#$" #8 o1e& 9< ":e Cor or!"#o$ L!5 7 o$ "r!$1%er o% 1:!re1 #1 %o7$& #$ 1ec"#o$ /A o% Ac" No. 1@AM. T:#1 re1"r#c"#o$ #1 $ece11!r< #$ or&er ":!" ":e o%%#cer1 o% ":e cor or!"#o$ 8!< 3$o5 5:o !re ":e 1"oc3:o0&er1+ 5:#c: #1 e11e$"#!0 #$ co$&7c"#$> e0ec"#o$1 o% o%%#cer1+ #$ c!00#$> 8ee"#$>1 o% 1"oc3:o0&er1+ !$& %or o":er 7r o1e1. B7" !$< re1"r#c"#o$ o% ":e $!"7re o% ":!" #8 o1e& #$ ":e 9<=0!5 $o5 #$ 67e1"#o$+ #1 70"r! ;#re1+ ;#o0!"#;e o% ":e ro er"< r#>:"1 o% 1:!re:o0&er1+ !$& #$ re1"r!#$" o% "r!&e. %3d., p. D=$.)
3t is obvious, therefore, that the restriction consisting in the word NnontransferableN, appearing on the 1$ certificates, Exhibits A to A+11, is illegal and should be eliminated. ISSUE2: E/4 the corporation may be compelled to buy the shares of a selling stockholderF HELD: 4o. There is no existing law nor authority in support of the plaintiffPs claim to the effect that the defendants are obliged to buy his shares of stock value at par value, plus the interest demanded thereon. 3n this respect, we hold that there has been no such contract, either express or implied, between the plaintiff and the defendants. 3n the absence of a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude that it would be unjust and unreasonable to compel the said defendants to comply with a non+existent or imaginary obligation. Ehereupon, we are likewise compelled to conclude that the judgment originally rendered to that effect is untenable and should be set aside LEON J. LA-BERT+ plaintiff+appellant, vs. T. J. FO,+ defendant+appellee %K.;. 4o. @+'==11 Banuary $=, 1=17) FACTS: -efendant and plaintiff, became two of the largest shareholders of Bohn ;. Edgar I "o., 3nc. was incorporated. They were former creditors who agreed to aid the financially distressed predecessor Bohn ;. Edgar I "o.. They entered into an agreement a few days after incorporation as follows5 Ehereas the undersigned are, respectively, owners of large amounts of stock in Bohn ;. Edgar and "o, 3nc1 and, Ehereas it is recogni6ed that the success of said corporation depends, now and for at least one year next following, in the larger stockholders retaining their respective interests in the business of said corporation5 Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said Bohn ;. Edgar I "o. 3nc., till after one year from the date hereof. Either party violating this agreement shall pay to the other the sum of one thousand %!1,<<<) pesos as li.uidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained. 4otwithstanding this contract the defendant Aox on /ctober 1=, 1=11, sold his stock in the said corporation to E. ". >c"ullough of the firm of E. ". >c"ullough I "o. of >anila, a strong competitor of the said Bohn ;. Edgar I "o., 3nc. & complaint was filed and the trial court decided in favor of defendant. ISSUE: E/4 the stipulation in the contract is validF HELD: Les. 3t is urged by the appellee in this case that the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. Ee do not so regard it. T:e 171 e$1#o$ o% ":e o5er "o 1e00 :!1 ! 9e$e%#c#!0 7r o1e+ re170"1 #$ ":e ro"ec"#o$ o% ":e cor or!"#o$ !1 5e00 !1 o% ":e #$&#;#&7!0 !r"#e1
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"o ":e co$"r!c"+ !$& #1 re!1o$!90e !1 "o ":e 0e$>": o% "#8e o% ":e 171 e$1#o$. Ee do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid. E-BASS) FAR-S+ INC.+ petitioner, vs. HON. COURT OF APPEALS %34TE;>E-3&TE &!!E@@&TE "/ ;T), ,/4. UE4&3-& 8. ?&@T&U&;, Budge of the ;egional Trial "ourt, ?ranch "@Q333, %1DC), !asig, >etro >anila, Q/@T&3;E ?. "; U, -eputy 8heriff, ?ranch "@Q333, ;egional Trial "ourt, !asig, >etro >anila and E- &;-/ ?. EQ&4KE@38T&, respondents %K.;. 4o. C<(C$ &ugust 1*, 1==<) FACTS: &lexander K. &suncion and Eduardo ?. Evangelista entered into a >emorandum of &greement %>/&) with the following obligations5
9e#$> $o &e0#;er< o% ":e #$&or1e& 1:!re1 o% 1"oc3 A17$c#o$ c!$$o" ":ere%ore e%%ec"#;e0< "r!$1%er "o o":er er1o$ or :#1 $o8#$ee1 ":e 7$&e0#;ere& 1:!re1 o% 1"oc3. Aor an effective transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed %4avea v. !eers >arketing "orp., '7 8";& (D). &s provided under 8ection * of ?atas !ambansa ?ilang (C, otherwise known as the "orporation "ode of the !hilippines, 1:!re1 o% 1"oc3 8!< 9e "r!$1%erre& 9< &e0#;er< "o ":e "r!$1%erree o% ":e cer"#%#c!"e ro er0< #$&or1e&. T#"0e 8!< 9e ;e1"e& #$ ":e "r!$1%erree 9< ":e &e0#;er< o% ":e &70< #$&or1e& cer"#%#c!"e o% 1"oc3 %1C ".B.8. =$C, cited in ;ivera v. Alorendo, 177 8";& (7*). ,owever, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation %8ec. (*, "orporation "ode of the !hilippines). 3n the case at bar the indorsed certificate of stock was not actually delivered to &suncion so that Evangelista is still the controlling stockholder of Embassy Aarms despite the execution of the memorandum of agreement and the turn+ over of control and management of the Embassy Aarms to &suncion on &ugust $, 1=C7. Ehen &suncion filed on &pril 1<, 1=C( an action for the rescission of contracts with damages, the !asig "ourt merely restored and established the status .uo prior to the execution of the >/& by the issuance of a restraining order on Buly 1<, 1=C' and the writ of preliminary injunction on Buly *<, 1=C'. 3t would be unjust and unfair to allow &suncion and his nominees to control and manage the Embassy Aarms despite the fact that &suncion, who is the source of their supposed shares of stock in the corporation, is not asking for the delivery of the indorsed certificate of stock but for the rescission of the >/&. ;escission would result in mutual restitution %>agdalena Estate v. >yrick, '1 !hil. *77) so it is but proper to allow Evangelista to manage the farm. "ompared to &suncion or his nominees Evangelista would be more interested in the preservation of the assets, e.uipment and facilities of Embassy Aarms during the pendency of the main case. ENRI2UE RAZON+ petitioner, vs. INTER-EDIATE APPELLATE COURT and Q3"E4TE ?. ", 3-3&4, in his capacity as &dministrator of the Estate of the -eceased B &4 T. ", 3-3&4, respondents. %K.;. 4o. '7*<( >arch 1(, 1==$) VICENTE B. CHUIDIAN+ petitioner, vs. INTER-EDIATE APPELLATE COURT, E4;3T E ;&U<4, and E. ;&U/4, 34"., respondents %K.;. 4o. '7*1D >arch 1(, 1==$) FACTS: E. ;a6on, 3nc. was organi6ed by petitioner Enri.ue ;a6on in 1=($. ,owever, it began operations only in 1=(( since the other incorporators withdrew from the said corporation. The petitioner then distributed the stocks previously placed in the names of the withdrawing nominal incorporators to some friends, among them the late Buan T. "huidian to whom he gave 1,D<< shares. The shares of stocks were registered in the name of "huidian only as nominal stockholder and with the agreement that the said shares of stock were owned and
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EQ&4KE@38T&5 To transfer to &suncion 1= parcels of agricultural land registered in his name, together with the stocks, e.uipment and facilities of Embassy Aarms, 3nc. wherein =<J of the shares of stock is owned by Evangelista1 To cede, transfer and convey Gin a manner absolute and irrevocable any and all of his shares of stocksH in Embassy Aarms, 3nc. to &suncion or his nominees Guntil the total of said shares of stock so transferred shall constitute =<J of the paid+in e.uity of said corporationH within a reasonable time from signing the document. &8 4"3/45 To pay Evangelista !C,(*<,===1 To organi6e and register a new corporation with an authori6ed capital stock of !1<> which upon registration will take over all the rights and liabilities of &suncion.
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1. $.
Effective control and management of the piggery at Embassy Aarms, 3nc. was transferred by Evangelista to &suncion pursuant to clause C of the >/&. 3n accordance with clause 1D, Evangelista served as !resident and "hief Executive of Embassy Aarms. Evangelista also endorsed in blank all his shares of stock including that of his wife and three nominees with minor holdings but retained possession of said shares and opted to deliver to &suncion only upon full compliance of the latter of his obligations under the >/&. Aor failure to comply with his obligations, Evangelista intimated the institution of the appropriate legal action. ?ut &suncion eventually filed for the rescission of the >/&. ISSUE: E/4 Evangelista has a better right to the shares and control of the corporate affairsF HELD: Les. Arom the pleadings submitted by the parties it is clear that although Evangelista has indorsed in blank the shares outstanding in his name he has not delivered the certificate of stocks to &suncion because the latter has not fully complied with his obligations under the >/&. T:ere
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held by the petitioner but "huidian was given the option to buy the same "huidian delivered to petitioner the stock certificate in 1=((, and since then petitioner had in his possession such certificate, until the time, he delivered it for deposit with !?"om under the parties# joint custody pursuant to their agreement embodied in the trial court#s order. ISSUE: E/4 petitioner ;a6on is the rightful owner of the sharesF HELD: 4o. 3n the case of Embassy Aarms, 3nc. v. "ourt of &ppeals %1CC 8";& 7=$ 91==<:) we ruled5 . . . Aor an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed %4avea v. !eers >arketing "orp., '7 8";& (D). &s provided under 8ection * of ?atas !ambansa ?ilang, (C otherwise known as the "orporation "ode of the !hilippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock %1C ".B.8. =$C, cited in ;ivera v. Alorendo, 177 8";& (7*). ,owever, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation %8ec. (*, "orporation "ode of the !hilippines1 8ection *D of the "orporation @aw) 3n the instant case, there is no dispute that the .uestioned 1,D<< shares of stock of E. ;a6on, 3nc. are in the name of the late Buan "huidian in the books of the corporation. >oreover, the records show that during his lifetime "huidian was elected member of the ?oard of -irectors of the corporation which clearly shows that he was a stockholder of the corporation. %8ee 8ection *<, "orporation "ode) Arom the point of view of the corporation, therefore, "huidian was the owner of the 1,D<< shares of stock. 3n such a case, the petitioner who claims ownership over the .uestioned shares of stock must show that the same were transferred to him by proving that all the re.uirements for the effective transfer of shares of stock in accordance with the corporationPs by laws, if any, were followed %8ee 4ava v. !eers >arketing "orporation, '7 8";& (D 91='(:) or in accordance with the provisions of law. The petitioner failed in both instances. The petitioner did not present any by+laws which could show that the 1,D<< shares of stock were effectively transferred to him. 3n the absence of the corporationPs by+laws or rules governing effective transfer of shares of stock, the provisions of the "orporation @aw are made applicable to the instant case. T:e 0!5 #1 c0e!r ":!" #$ or&er %or ! "r!$1%er o% 1"oc3 cer"#%#c!"e "o 9e e%%ec"#;e+ ":e cer"#%#c!"e 871" 9e ro er0< #$&or1e& !$& ":!" "#"0e "o 17c: cer"#%#c!"e o% 1"oc3 #1 ;e1"e& #$ ":e "r!$1%eree 9< ":e &e0#;er< o% ":e &70< #$&or1e& cer"#%#c!"e o% 1"oc3. %8ection *D, "orporation "ode) 8ince the certificate of stock covering the .uestioned 1,D<< shares of stock registered in the name of the late Buan "huidian was never indorsed to the petitioner, the inevitable conclusion is that the .uestioned shares of stock belong to "huidian. The petitionerPs asseveration that he did not re.uire an indorsement of the certificate of stock in view of his intimate friendship with the late Buan "huidian cannot overcome the failure to
follow the procedure re.uired by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory re.uirement of law for an effective transfer of a certificate of stock. >oreover, the preponderance of evidence supports the appellate courtPs factual findings that the shares of stock were given to Buan T. "huidian for value. Buan T. "huidian was the legal counsel who handled the legal affairs of the corporation. Ee give credence to the testimony of the private respondent that the shares of stock were given to Buan T. "huidian in payment of his legal services to the corporation. !etitioner ;a6on failed to overcome this testimony. RURAL BANK OF SALINAS+ INC., >&4 E@ 8&@ -, @ UQ3>34-& T;3&8 and A;&4"38"/ T;3&8, petitioners, vs. COURT OF APPEALS, 8E" ;3T3E8 &4- E2",&4KE "/>>3883/4, >E@&43& &. K E;;E;/, @ U &4-3"/, E3@,E>34& K. ;/8&@E8, A;&4"38"/ >. K E;;E;/, B;., and A;&4"38"/ K E;;E;/ , 8;., respondents %K.;. 4o. =(('7 Bune $(, 1==$) FACTS: /n Bune 1<, 1='=, "lemente K. Kuerrero, !resident of the ;ural ?ank of 8alinas, 3nc., executed a 8pecial !ower of &ttorney in favor of his wife, private respondent >elania Kuerrero, giving and granting the latter full power and authority to sell or otherwise dispose of andMor mortgage 7'* shares of stock of the ?ank registered in his name %represented by the ?ankPs stock certificates nos. $(, 7= and (D), to execute the proper documents therefor, and to receive and sign receipts for the dispositions. !ursuant to said 8!&, private respondent >elania Kuerrero, as &ttorney+in+Aact, executed the following assignments of shares of stocks5 @u6 &ndico %7D' shares)1 Eilhelmina ;osales %1< shares)1 Arancisco Kuerrero, Br. %D shares)1 and Arancisco Kuerrero, 8r. %1 share). The last share was transferred $ months before the death of "lemente. 8ubse.uently, >elania Kuerrero presented the -eeds of &ssignments and re.uested for the cancellation of the certificates of stock and new ones to be issued in the name of transferees. ,owever, petitioner ?ank refused. >elania Kuerrero filed for an action for mandamus with the 8E". >aripol Kuerrero, a legally adopted daughter of >elania and "lemente filed for intervention claiming that two weeks before filing the action for mandamus, a petition for the administration of the estate of "elemente has been filed and that the deeds of assignment were fictitious and antedated. 8E" denied the motion for intervention. >aripol filed a complaint before the "A3 for the annulment of the -eeds of &ssignment. @ater on, the 8E" rendered a decision granting the action for mandamus which was affirmed by the 8E" en banc and still later, by the "&. ISSUE: E/4 the mandamus was properly granted for the registration of the transfer of the 7'* shares in .uestionF
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HELD: Les. ;espondent 8E" correctly ruled in favor of the registering of the shares of stock in .uestion in private respondentPs names. 8uch ruling finds support under 8ection (* of the "orporation "ode, to wit5 8ec. (*. . . . 8hares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney+in+fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation . . . 3n the case of Aleisher vs. ?otica 4olasco, 7' !hil. DC*, the "ourt interpreted 8ec. (* in his wise5 8aid 8ection %8ec. *D of &ct 17D= 9now 8ec. (* of the "orporation "ode:) co$"e8 0!"e1 $o re1"r#c"#o$ !1 "o 5:o8 ":e 1"oc31 8!< 9e "r!$1%erre&. I" &oe1 $o" 17>>e1" ":!" !$< &#1cr#8#$!"#o$ 8!< 9e cre!"e& 9< ":e cor or!"#o$ #$ %!;or o%+ or !>!#$1" ! cer"!#$ 7rc:!1er. T:e o5$er o% 1:!re1+ !1 o5$er o% er1o$!0 ro er"<+ #1 !" 0#9er"<+ 7$&er 1!#& 1ec"#o$ "o &#1 o1e ":e8 #$ %!;or o% 5:o8e;er :e 0e!1e1+ 5#":o7" 0#8#"!"#o$ #$ ":#1 re1 ec"+ ":!$ ":e >e$er!0 ro;#1#o$1 o% 0!5. . . . T:e o$0< 0#8#"!"#o$ #8 o1e& 9< Sec"#o$ B/ o% ":e Cor or!"#o$ Co&e #1 5:e$ ":e cor or!"#o$ :o0&1 !$< 7$ !#& c0!#8 !>!#$1" ":e 1:!re1 #$"e$&e& "o 9e "r!$1%erre&+ 5:#c: #1 !91e$" :ere. & corporation, either by its board, its by+laws, or the act of its officers, cannot create restrictions in stock transfers, because5 . . . ;estrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. ?y+laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction1 they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily in.uire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it .uestion the consideration upon which a sale is based. . . . %Tomson on "orporation 8ec. 71*', cited in Aleisher vs. 4olasco, 8upra). The right of a transfereeMassignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus5 *:e$e;er ! cor or!"#o$ re%71e1 "o "r!$1%er !$& re>#1"er 1"oc3 #$ c!1e1 0#3e ":e re1e$"+ 8!$&!871 5#00 0#e "o co8 e0 ":e o%%#cer1 o% ":e cor or!"#o$ "o "r!$1%er 1!#& 1"oc3 #$ ":e 9oo31 o% ":e cor or!"#o$N %$(, "yc. *7', ,yer vs. ?ryan, 1= !hil. 1*C1 Aleisher vs. ?otica 4olasco, 7' !hil. DC*, D=7). The corporationPs obligation to register is ministerial. 3n transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the .uestion of ownership. %Aletcher, 8ec. DD$C, page 7*7).
T:e &7"< o% ":e cor or!"#o$ "o "r!$1%er #1 ! 8#$#1"er#!0 o$e !$& #% #" re%71e1 "o 8!3e 17c: "r!$1!c"#o$ 5#":o7" >oo& c!71e+ #" 8!< 9e co8 e00e& "o &o 1o 9< 8!$&!871. %8ee. DD1C, 1$ Aletcher *=7) Aor the petitioner ;ural ?ank of 8alinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of 8ection (* of the "orporation "ode. Thus, respondent "ourt of &ppeals did not err in upholding the -ecision of respondent 8E" affirming the -ecision of its ,earing /fficer directing the registration of the 7'* shares in the stock and transfer book in the names of private respondents. &t all events, the registration is without prejudice to the proceedings in court to determine the validity of the -eeds of &ssignment of the shares of stock in .uestion. LI- TA)+ petitioner, vs. COURT OF APPEALS+ K/ A&L &4- "/. 34"., 8L K 3/R, and T,E E8T&TE /A &@A/48/ @3>, respondents %K.;. 4o. 1$(C=11 &ugust D, 1==C) FACTS: To secure their separate loans, respondent 8y Kuiok and &lfonso @im, each executed a contract of pledge covering their respective *<< shares in favor of petitioner @im Tay where they indorsed in blank and delivered their shares of stock to Tay. Aor non+payment, @im Tay filed a !etition for >andamus in the 8E" against Ko Aay I "ompny, 3nc. to cancel the old certificates and issue a new one in his name, which was granted by the 8E" but reversed by the "&. ISSUE: E/4 the rulings in the &bejo case and the ;ural ?ank of 8alinas case will applyF HELD: 4o. !etitionerPs reliance on the doctrines set forth in &bejo v. -e la "ru6 and ;ural ?ank of 8alinas, 3nc. v. "ourt of &ppeals is misplaced.
ABEJO: the &bejo spouses sold to Telectronic 8ystems, 3nc. shares of stock in !ocket ?ell !hilippines, 3nc. 8ubse.uent to such contract of sale, the corporate secretary, 4orberto ?raga, refused to record the transfer of the shares in the corporate books and instead asked for the annulment of the sale, claiming that he and his wife had a pre+emptive right over some of the shares, and that his wifePs shares were sold without consideration or consent.
&t the time the ?ragas .uestioned the validity of the sale, the contract had already been perfected, thereby demonstrating that Telectronic 8ystems, 3nc. was already the prima facie owner of the shares and, conse.uently, a stockholder of !ocket ?ell !hilippines, 3nc. Even if the sale were to be annulled later on, Telectronic 8ystems, 3nc. had, in the meantime, title over the shares from the time the sale was perfected until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, at the time the ?ragas .uestioned the validity of the tranfers made by the &bejos, Telectronic 8ystems, 3nc. was already a prima facie shareholder of the corporation, thus making the dispute between the ?ragas and the
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&bejos Nintra+corporateN in nature. ,ence, the "ourt held that Nthe issue is not on ownership of shares but rather the non+performance by the corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary.N nlike &bejo, however, e"#"#o$erI1 o5$er1:# o;er ":e 1:!re1 #$ ":#1 c!1e 5!1 $o" <e" er%ec"e& 5:e$ ":e Co8 0!#$" 5!1 %#0e&. T:e co$"r!c" o% 0e&>e cer"!#$0< &oe1 $o" 8!3e :#8 ":e o5$er o% ":e 1:!re1 0e&>e& . Aurther, whether prescription effectively transferred ownership of the shares, whether there was a novation of the contracts of pledge, and whether laches had set in were difficult legal issues, which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Ko Aay to effect the transfer, in his favor, of the shares pledged to him. I$ R7r!0 B!$3 o% S!0#$!15 >elenia Kuerrero executed deeds of assignment for the shares in favor of the respondents in that case. Ehen the corporate secretary refused to register the transfer, an action for mandamus was instituted. 8ubse.uently, a motion for intervention was filed, seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in fact donations because the considerations therefor were below the book value of the shares. @ike the &bejo spouses, the respondents in ;ural ?ank of 8alinas were already prima facie shareholders when the deeds of assignment were .uestioned. 3f the said deeds were to be annulled later on, respondents would still be considered shareholders of the corporation from the time of the assignment until the annulment of such contracts. ISSUE2: E/4 petitioner is entitled to the relief of mandamus as against the companyF HELD: 4o. !etitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent corporation to have the shares transferred to his name in the corporate books, to issue new certificates of stock and to deliver the corresponding dividends to him. I$ or&er ":!" ! 5r#" o% 8!$&!871 8!< #117e+ #" #1 e11e$"#!0 ":!" ":e er1o$ e"#"#o$#$> %or ":e 1!8e :!1 ! c0e!r 0e>!0 r#>:" "o ":e ":#$> &e8!$&e& !$& ":!" #" #1 ":e #8 er!"#;e &7"< o% ":e re1 o$&e$" "o er%or8 ":e !c" re67#re&. I" $e#":er co$%er1 o5er1 $or #8 o1e1 &7"#e1 !$& #1 $e;er #117e& #$ &o79"%70 c!1e1. I" #1 1#8 0< ! co88!$& "o e4erc#1e ! o5er !0re!&< o11e11e& !$& "o er%or8 ! &7"< !0re!&< #8 o1e&. 3n the present case, petitioner has failed to establish a clear legal right. !etitionerPs contention that he is the owner of the said shares is completely without merit. Tuite the contrary and as already shown, he does not have any ownership rights at all. &t the time petitioner instituted his suit at the 8E", his ownership claim had no prima facie leg to stand on. &t best, his contention was disputable and uncertain >andamus will not issue to establish a legal right, but only to enforce one that is already clearly established.
ISSUE/: E/4 by Kuiok and @im#s failure to pay, the ownership of the shares automatically passed to @im TayF HELD: 4o. /n appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by respondentsP subse.uent acts which amounted to a novation of the contracts of pledge. Ee do not agree. &t the outset, it must be underscored that petitioner did not ac.uire ownership of the shares by virtue of the contracts of pledge. &rticle $11$ of the "ivil "ode states5 GThe creditor to whom the credit has not been satisfied in due time, may proceed before a 4otary !ublic to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. 3f at the first auction the thing is not sold, a second one with the same formalities shall be held1 and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. 3n this case he shall be obliged to give an ac.uittance for his entire claim.H Aurthermore, the contracts of pledge contained a common proviso, which we .uote again for the sake of clarity5 G*. 3n the event of the failure of the !@E-K/; to pay the amount within a period of six %() months from the date hereof, the !@E-KEE is hereby authori6ed to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the !@E-K/;, at which sale the !@E-KEE may be the purchaser at his option1 and Nthe !@E-KEE is hereby authori6ed and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided1H T:ere #1 $o 1:o5#$> ":!" e"#"#o$er 8!&e !$< !""e8 " "o %orec0o1e or 1e00 ":e 1:!re1 ":ro7>: 790#c or r#;!"e !7c"#o$+ !1 1"# 70!"e& #$ ":e co$"r!c"1 o% 0e&>e !$& !1 re67#re& 9< Ar"#c0e 2112 o% ":e C#;#0 Co&e. T:ere%ore+ o5$er1:# o% ":e 1:!re1 co70& $o" :!;e !11e& "o :#8. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by &rticle $1<* of the same "ode5 G nless the thing pledged is expropriated, the debtor continues to be the owner thereof.H RICARDO A. NAVA+ petitioner+appellant. vs. PEERS -ARKETING CORPORATION+ ;E4&T/ ;. " 83 and &>!&;/ " 83, respondents+appellees %K.;. 4o. @+$C1$<1 4ovember $D, 1='() FACTS: Teofilo !o was an incorporator who subscribed to C< shares and paid $DJ of the subscription. 4o certificate of stock was issued to him. @ater on, !o sold to herein petitioner 4ava $< of the C<
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shares at par value of !1<<, or !$,<<<. 4ava re.uested herein private respondents, officers of !eers >arketing "orporation, to register him as owner of the shares, but they refused, !o being delin.uent in the payment of the balance due his subscription. !o filed an action for mandamus in the "A3 of 4egros but it was dismissed. !o claims that the trial court erred in applying the ruling in Aua "un vs. 8ummers and "hina ?anking "orporation wherein it was ruled that the payment of one+half of the subscription does not entitle the subscriber to a certificate for one+half of the number of shares subscribed. ISSUE: E/4 !eers >arketing "orporation may be compelled by mandamus to enter in its stock and transfer book the sale made by !o to 4ava of the $< shares forming part of !o#s subscription of C< shares, it being admitted that the corporation has an unpaid claim of !(,<<< as the balance on said subscriptionF HELD: 4o. Ee hold that the transfer made by !o to 4ava is not the Nalienation, sale, or transfer of stockN that is supposed to be recorded in the stock and transfer book, as contemplated in section D$ of the "orporation @aw. A1 ! r70e+ ":e 1:!re1 5:#c: 8!< 9e !0#e$!"e& !re ":o1e 5:#c: !re co;ere& 9< cer"#%#c!"e1 o% 1"oc3 , as shown in the following provisions of the "orporation @aw and as intimated in ,ager vs. ?ryan, 1= !hil. 1*C %overruling the decision in ,ager vs. ?ryan, $1 !hil. D$*. 8ee 1= !hil. (1(, notes, and ,odges vs. @e6ama, 17 8";& 1<*<). 8E". *D. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice+president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by+ laws. 8hares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. 4o share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation. 8E". *(. %re voting trust agreement) ... The certificates of stock so transferred shall be surrendered and cancelled, and new certificates therefor issued to such person or persons, or corporation, as such trustee or trustees, in which new certificates it shall appear that they are issued pursuant to said agreement. xxx xxx xxx &s prescribed in section *D, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. NTitle may be vested in the transferee by delivery of the certificate with a written assignment or
indorsement thereofN %1C ".B.8. =$C). There should be compliance with the mode of transfer prescribed by law %1C ".B.8. =*<). The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. 3f the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporationPs books. The certificate is then surrendered and a new one issued to the transferee. %,ager vs. ?ryan, 1= !hil. 1*C, 17*+7). That procedure cannot be followed in the instant case because, as already noted, the twenty shares in .uestion are not covered by any certificate of stock in !oPs name. >oreover, ":e cor or!"#o$ :!1 ! c0!#8 o$ ":e 1!#& 1:!re1 %or ":e 7$ !#& 9!0!$ce o% PoI1 1791cr# "#o$. A 1"oc3 1791cr# "#o$ #1 ! 1791#1"#$> 0#!9#0#"< %ro8 ":e "#8e ":e 1791cr# "#o$ #1 8!&e. T:e 1791cr#9er #1 !1 87c: 9o7$& "o !< :#1 1791cr# "#o$ !1 :e 5o70& 9e "o !< !$< o":er &e9". T:e r#>:" o% ":e cor or!"#o$ "o &e8!$& !<8e$" #1 $o 0e11 #$co$"e1"!90e . %Qelasco vs. !oi6at, *' !hil. C<$1 @umanlan vs. "ura, D= !hil. '7(). A cor or!"#o$ c!$$o" re0e!1e !$ or#>#$!0 1791cr#9er %ro8 !<#$> %or :#1 1:!re1 5#":o7" ! ;!07!90e co$1#&er!"#o$ %!hilippine 4ational ?ank vs. ?itulok 8awmill, 3nc., @+$71''+CD, Bune $=, 1=(C, $* 8";& 1*(() or 5#":o7" ":e 7$!$#8o71 co$1e$" o% ":e 1"oc3:o0&er1 %@ingayen Kulf Electric !ower "o., 3nc. vs. ?alta6ar, =* !hil 7<7). nder the facts of this case, there is no clear legal duty on the part of the officers of the corporation to register the twenty shares in 4avaPs name, ,ence, there is no cause of action for mandamus &s already stressed, in this case no stock certificate was issued to !o. *#":o7" 1"oc3 cer"#%#c!"e+ 5:#c: #1 ":e e;#&e$ce o% o5$er1:# o% cor or!"e 1"oc3+ ":e !11#>$8e$" o% cor or!"e 1:!re1 #1 e%%ec"#;e o$0< 9e"5ee$ ":e !r"#e1 "o ":e "r!$1!c"#o$ %-avis vs. Eachter, 17< 8o. *(1). The delivery of the stock certificate, which represents the shares to be alienated , is essential for the protection of both the corporation and its stockholders %8mallwood vs. >oretti, 1$C 8o. $d ($C). THE RURAL BANK OF LIPA CIT)+ INC.+ T,E /AA3"E;8 &4- -3;E"T/;8, ?E;4&;-/ ?& T38T&, B&3>E " 8T/-3/, /"T&Q3/ R&T3K?&R, A;&4"38"/ " 8T/-3/, and B &43T& ?& T38T& /A T,E ; ;&@ ?&4R /A @3!& "3TL, 34"., petitioners, vs. HONORABLE COURT OF APPEALS+ ,/4/;&?@E "/>>3883/4 E4 ?&4", 8E" ;3T3E8 &4- E2",&4KE "/>>3883/4, ,/4/;&?@E E4;3T E @. A@/;E8, B;., in his capacity as ,earing /fficer, ;EL4&@-/ Q3@@&4 EQ&, 8;, &QE@34& >. Q3@@&4 EQ&, "&T&@34/ Q3@@&4 EQ&, &4-;E8
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K/4U&@E8, & ;/;& @&"E;4&, "E@8/ @&LK/, E-K&;-/ ;ELE8, &@EB&4-;& T/4/K&4 and E@E4& 83, respondents %K.;. 4o. 1$7D*D1 8eptember $C, $<<1) FACTS: !rivate respondent ;eynaldo Qillanueva 8r., a stockholder of ;ural ?ank of @ipa "ity, 3nc. executed a -eed of &ssignment wherein he assigned his shares, as well as those of eight stockholders under his control with a total of 1<,7D' shares, in favor of stockholders of the ?ank represented by its ?/-. &t the same time, ,e and his wife executed an agreement wherein he acknowledge their indebtedness of !7> and stipulated that the said debt will be paid out of the proceeds of the sale of their real property described in the agreement. The Qillanueva spouses failed to settle their obligation on the due date, and the ?/- sent a demand letter for the surrender of the said shares and for the delivery of sufficient collateral to cover the balance of the debt, which the Qillanueva spouses ignored. Their shares were converted into Treasury shares. The Qillanueva spouses .uestioned the legality of the such conversion and filed with the 8E" a petition for annulment of the stockholders# meeting and election of directors and officers because they were not notified of such meeting. The 8E" hearing officer dismissed the application for issuance of a preliminary injunction, but was granted on reconsideration. The decision was affirmed by the 8E" en banc and later by the "&. ISSUE: E/4 the transfer of the shares is ineffective for non+indorsement and non+delivery of the certificate of stocksF HELD: Les. The "orporation "ode specifically provides5 8E"T3/4 (*. "ertificate of stock and transfer of shares . Y The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by+ laws. 8hares of stocks so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney+in+fact or other person legally authori6ed to make the transfer. 4o transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. 4o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. %Emphasis ours) !etitioners argue that by virtue of the -eed of &ssignment, private respondents had relin.uished to them any and all rights they may have had as stockholders of the ?ank. Ehile it may be true that there was an assignment of private respondentsP shares to the petitioners, 1!#& !11#>$8e$" 5!1 $o" 17%%#c#e$" "o e%%ec" ":e "r!$1%er o% 1:!re1 1#$ce ":ere 5!1 $o e$&or1e8e$" o% ":e cer"#%#c!"e1 o% 1"oc3 9< ":e o5$er1+ ":e#r !""or$e<1=
#$=%!c" or !$< o":er er1o$ 0e>!00< !7":or#Ke& "o 8!3e ":e "r!$1%er. >oreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule is that ":e &e0#;er< o% ":e 1"oc3 cer"#%#c!"e &70< e$&or1e& 9< ":e o5$er #1 ":e o er!"#;e !c" o% "r!$1%er o% 1:!re1 %ro8 ":e 0!5%70 o5$er "o ":e "r!$1%eree. T:71+ "#"0e 8!< 9e ;e1"e& #$ ":e "r!$1%eree o$0< 9< &e0#;er< o% ":e &70< #$&or1e& cer"#%#c!"e o% 1"oc3 . Ee have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. T:e re67#re8e$"1 !re5 '!( T:ere 871" 9e &e0#;er< o% ":e 1"oc3 cer"#%#c!"e5 %b) T:e cer"#%#c!"e 871" 9e e$&or1e& 9< ":e o5$er or :#1 !""or$e<=#$=%!c" or o":er er1o$1 0e>!00< !7":or#Ke& "o 8!3e ":e "r!$1%er1 and %c) To 9e ;!0#& !>!#$1" ":#r& !r"#e1+ ":e "r!$1%er 871" 9e recor&e& #$ ":e 9oo31 o% ":e cor or!"#o$. &s it is, compliance with any of these re.uisites has not been clearly and sufficiently shown. 3t may be argued that despite non+compliance with the re.uisite endorsement and delivery, the assignment was valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. Ehile the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make the transfer effective. "onse.uently, ":e e"#"#o$er1+ !1 8ere !11#>$ee1+ c!$$o" e$?o< ":e 1"!"71 o% ! 1"oc3:o0&er+ c!$$o" ;o"e $or 9e ;o"e& %or+ !$& 5#00 $o" 9e e$"#"0e& "o &#;#&e$&1+ #$1o%!r !1 ":e !11#>$e& 1:!re1 !re co$cer$e&. !arenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in .uestion is resolved with finality. There being no showing that any of the re.uisites mandated by law was complied with, the 8E" ,earing /fficer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by petitioners in 8E" "ase 4o. <$+=7+7(C* %herein private respondents). &ccordingly, the order of the 8E" en banc affirming the ruling of the 8E" ,earing /fficer, and the "ourt of &ppeals decision upholding the 8E" en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of the instant petition for review. ALFONSO S. TAN+ !etitioner, vs. SECURITIES AND E,CHANGE CO--ISSION+ Q38&L&4 E- "&T3/4&@ 8 !!@L "/;!., T&4 8 ",34K, &@A;E-/ ?. L, &4KE@ 8. T&4 and !&T;3"3& &K 3@&;, ;espondents %K.;. 4o. =D(=(1 >arch *, 1==$) FACTS: Eith the withdrawal of two of the original incorporators, petitioner &lfonso Tan assigned D< of his 7<< shares %covered by 8tock "ertificate 4o. $) to his brother &ngel 8. Tan, private respondent. !etitioner#s stock certificate was cancelled by the corporate secretary, !atricia &guilar, by virtue of ;esolution 4o. 1=C1%b), while petitioner was still the president and member of the board. Eith the cancellation of "ertificate of stock 4o. $ and the subse.uent issuance of 8tock "ertificate 4o. ( in the name
11<
of &ngel 8. Tan and for the remaining *D< shares, 8tock "ertificate 4o. C was issued in the name of petitioner &lfonso 8. Tan, >r. ?u6on, submitted an &ffidavit %Exh. $=), alleging that5 =. That in view of his having taken ** 1M* interest, 3 was personally re.uested by >r. Tan 8u "hing to re.uest >r. &lfonso Tan to make proper endorsement in the cancelled "ertificate of 8tock 4o. $ and "ertificate 4o. C, but he did not endorse, instead he kept the cancelled %1=C1) "ertificate of 8tock 4o. $ and returned only to me "ertificate of 8tock 4o. C, which 3 delivered to Tan 8u "hing. 1<. That the cancellation of his stock %8tock 4o. $) was known by him in 1=C11 that it was 8tock 4o. C that was delivered in >arch 1=C* for his endorsement and cancellation. !etitioner filed with the 8E" a case .uestioning the cancellation of the aforesaid 8tock 4os. $ and C. ISSUE: E/4 the cancellation and transfer of stock certificate no. $ was validF HELD: Les. !etitioner claims that N%T)he cancellation and transfer of petitionerPs shares and "ertificate of 8tock 4o. $ %Exh. &) as well as the issuance and cancellation of "ertificate of 8tock 4o. C %Exh. >) was patently and palpably unlawful, null and void, invalid and fraudulent.N %;ollo, p. =) &nd, that 8ection (* of the "orporation "ode of the !hilippines is Nmandatory in natureN, meaning that without the actual delivery and endorsement of the certificate in .uestion, there can be no transfer, or that such transfer is null and void. "ontrary to the understanding of the petitioner with respect to the use of the word NmayN, in the case of 8hauf v. "ourt of &ppeals, %1=1 8";& '1*, $' 4ovember 1==<), this "ourt held, that N;emedial law statues are to be construed liberally.N The term PmayP as used in adjective rules, is only permissive and not mandatory. This "ourt held in "hua v. 8amahang >agsasaka, that Nthe word NmayN indicates that the transfer may be effected in a manner different from that provided for in the law.N %($ !hil. 7'$) >oreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed 8tock "ertificate 4o. $, which is essential to the issuance of 8tock "ertificate 4os. ( and C to angel 8. Tan and petitioner &lfonso 8. Tan, respectively. Ehat led to the problem was the return of the cancelled certificate %4o. $) to &lfonso 8. Tan for his endorsement and his deliberate non+endorsement. Aor all intents and purposes, however, 1#$ce ":#1 5!1 !0re!&< c!$ce00e& 5:#c: c!$ce00!"#o$ 5!1 !01o re or"e& "o ":e re1 o$&e$" Co88#11#o$+ ":ere 5!1 $o $ece11#"< %or ":e 1!8e cer"#%#c!"e "o 9e e$&or1e& 9< ":e e"#"#o$er. A00 ":e !c"1 re67#re& %or ":e "r!$1%eree "o e4erc#1e #"1 r#>:"1 o;er ":e !c67#re& 1"oc31 5ere !""e$&!$" !$& e;e$ ":e cor or!"#o$ 5!1 ro"ec"e& %ro8 o":er !r"#e1+ co$1#&er#$> ":!" 1!#& "r!$1%er 5!1 e!r0#er recor&e& or re>#1"ere& #$ ":e cor or!"e 1"oc3 !$& "r!$1%er 9oo3.
Aollowing the doctrine enunciated in the case of Tua6on v. @a !rovisora Ailipina, where this "ourt held, that5 B7" &e0#;er< #1 $o" e11e$"#!0 5:ere #" ! e!r1 ":!" ":e er1o$1 1o7>:" "o 9e :e0& !1 1"oc3:o0&er1 !re o%%#cer1 o% ":e cor or!"#o$+ !$& :!;e ":e c71"o&< o% ":e 1"oc3 9oo3 . . . %(' !hi. *(). Aurthermore, there is a necessity to delineate the function of the stock itself from the actual delivery or endorsement of the certificate of stock itself as is the .uestion in the instant case. & certificate of stock is not necessary to render one a stockholder in corporation. 4evertheless, ! cer"#%#c!"e o% 1"oc3 #1 ":e ! er re re1e$"!"#;e or "!$>#90e e;#&e$ce o% ":e 1"oc3 #"1e0% !$& o% ":e ;!r#o71 #$"ere1"1 ":ere#$. T:e cer"#%#c!"e #1 $o" 1"oc3 #$ ":e cor or!"#o$ 97" #1 8ere0< e;#&e$ce o% ":e :o0&erI1 #$"ere1" !$& 1"!"71 #$ ":e cor or!"#o$+ :#1 o5$er1:# o% ":e 1:!re re re1e$"e& ":ere9<+ 97" #1 $o" #$ 0!5 ":e e67#;!0e$" o% 17c: o5$er1:# . I" e4 re11e1 ":e co$"r!c" 9e"5ee$ ":e cor or!"#o$ !$& ":e 1"oc3:o0&er+ 97" #1 $o" e11e$"#!0 "o ":e e4#1"e$ce o% ! 1:!re #$ 1"oc3 or ":e $!"#o$ o% ":e re0!"#o$ o% 1:!re:o0&er "o ":e cor or!"#o$. %1* &m. Bur. $d, '(=) nder the instant case, the fact of the matter is, the new holder, &ngel 8. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and ac.uiescence of petitioner. -ue to the transfer of fifty %D<) shares, &ngel 8. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof. ?esides, in !hilippine jurisprudence, ! cer"#%#c!"e o% 1"oc3 #1 $o" ! $e>o"#!90e #$1"r78e$" . GA0":o7>: #" #1 1o8e"#8e re>!r&e& !1 67!1#=$e>o"#!90e+ #$ ":e 1e$1e ":!" #" 8!< 9e "r!$1%erre& 9< e$&or1e8e$"+ co7 0e& 5#": &e0#;er<+ #" #1 5e00=1e""0e& ":!" #" #1 $o$= $e>o"#!90e+ 9ec!71e ":e :o0&er ":ereo% "!3e1 #" 5#":o7" re?7&#ce "o 17c: r#>:"1 or &e%e$1e1 !1 ":e re>#1"ere& o5$erJ1 or "r!$1%errorI1 cre&#"or 8!< :!;e 7$&er ":e 0!5+ e4ce " #$1o%!r !1 17c: r#>:"1 or &e%e$1e1 !re 179?ec" "o ":e 0#8#"!"#o$1 #8 o1e& 9< ":e r#$c# 0e1 >o;er$#$> e1"o e0.N %-e los 8antos vs. >cKrath, =( !hil. D'') To follow the argument put up by petitioner which was upheld by the "ebu 8E" Extension /ffice ,earing /fficer, Aelix "han, that the cancellation of 8tock "ertificate 4os. $ and C was null and void for lack of delivery of the cancelled NmotherN "ertificate 4o. $ whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. Ehile 8ection 7'%s) grants a stock corporation the authority to determine in the by+laws Nthe manner of issuing certificatesN of shares of stock, however, ":e o5er "o re>70!"e #1 $o" ":e o5er "o ro:#9#"+ or "o #8 o1e 7$re!1o$!90e re1"r#c"#o$1 o% ":e r#>:" o% 1"oc3:o0&er1 "o "r!$1%er ":e#r 1:!re1. %Emphasis supplied)
111
3n Aleisher v. ?otica 4olasco "o., 3nc ., it was held that a by+ law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the president or board of directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. %7' !hil. DC*) LEE E. *ON !0#!1 RA-ON LEE+ plaintiff+appellant, vs. *ACK *ACK GOLF !$& COUNTR) CLUB+ defendant+appellee %K.;. 4o. @+1<1$$1 &ugust *<, 1=DC)
the assignment to the plaintiff and the date of the latter#s demand for registration and issuance of a new certificate. APOLINARIO G. DE LOS SANTOS and 38&?E@/ &8T;&T 3@@/, plaintiffs+appellees, vs. J. HO*ARD -CGRATH ATTORNE) GENERAL OF THE UNITED STATES+ 8 ""E88/; T/ T,E !,3@3!!34E &@3E4 !;/!E;TL &->3438T;&T3/4 /A T,E 43TE- 8T&TE8, defendant+appellant. REPUBLIC OF THE PHILIPPINES+ intervenor+appellant %K.;. 4o. @+7C1C1 Aebruary $C, 1=DD) FACTS: !laintiff delos 8antos alleges that he purchased DD,<<< shares of @epanto "onsolidated >ining "o., 3nc. from Buan "ampos, and later $<<,<<< shares from "arl ,ess and much later C<<,<<< still from ,ess %for the account and benefit of &stra.uillo). ?oth of the supposed vendors, now deceased. ?y virtue of vesting order !+1$, title to the 1,(<<,<<< shares in dispute was, however, vested in the &lien !roperty "ustodian of the 8. 3n due course, the Qested !roperty "laims "ommittee of the !hilippine &lien !roperty &dministration made a GdeterminationH allowing said claims, which were considered and hear jointly. ?ut upon personal review of the !hilippine &lien !roperty &dministrator, the GdeterminationH was reversed and decreed that Gtitle to the shares in .uestion shall remain in the name of the !hilippine &lien !roperty &dministratorH. "onse.uently, plaintiffs instituted the present action to establish title to the aforementioned shares of stock. -efendant &ttorney Keneral of the 8 contends that the shares were bought by Qicente >adrigal, in trust and for the benefit, of the >istsui ?ussan, abranch office of a Bapanese company1 and that >adrigal endorsed in blank and delivered the shares to >istsui for safe keeping1 that >itsui never sold or otherwise disposed of the said shares1 and that the stock certificates must have been stolen or looted during the emergency from the liberation. ISSUE: E/4 plaintiffs are the rightful owners of the sharesF HELD: 4o. Even, however, if Buan "ampos and "arl ,ess had sold the shares of stock in .uestion, as testified to by -e los 8antos, the result, insofar as plaintiffs are concerned, would be the same. 3t is not disputed that said shares of stock were registered, in the records of the @epanto, in the name of Qicente >adrigal. 4either is it denied that the latter was, as regards said shares of stock, a mere trustee for the benefit of the >itsuis. The record shows Y and there is no evidence to the contrary Y that >adrigal had never disposed of said shares of stock in any manner whatsoever, except by turning over the corresponding stock certificates, late in 1=71, to the >itsuis, the beneficial and true owners thereof. 3t has, moreover, been established, by the uncontradicted testimony of Ritajima and >iwa, the managers of the >itsuis in the !hilippines, from 1=71 to 1=7D, that the >itsuis had neither sold, conveyed, or alienated said shares of stock, nor delivered the aforementioned stock certificates, to anybody during said period. 8ection *D of the "orporation @aw reads5
INC.+
FACTS: The defendant corporation issued membership certificate no. $<1 to 3wao Teruyama which on &pril 1=77, was assigned to >T ;eyes and on the same year assigned to herein plaintiff+appellant. /n &pril $(, 1=DD, the plaintiff filed an action against the defendant alleging that shortly after its rehabilitation after the war, plaintiff asked that the assignment be registered in the books of the defendant and that the latter refused and still refuses to do so unlawfully. -efendant filed a motion to dismiss on the ground that 11 years have elapsed from the time of the assignment up to the time of the filing of the complaint, beyond the D year period provided under &rt. 117= of the "ivil "ode. The trial court dismissed the action and denied reconsideration. ISSUE: E/4 plaintiff was bound to present and register the certificate assigned to him within any definite or fixed periodF HELD: 4o. The defendant has not made herein any pretense to that effect1 but it contends that from the moment the certificate was assigned to the plaintiff, the latterPs right to have the assignment registered commenced to exist. This contention is correct, but #" 5o70& $o" %o00o5 ":!" 1!#& r#>:" 1:o70& 9e e4erc#1e& #88e&#!"e0< or 5#":#$ ! &e%#$#"e er#o&. T:e e4#1"e$ce o% ! r#>:" #1 o$e ":#$>+ !$& ":e &7r!"#o$ o% 1!#& r#>:" #1 !$o":er. /n the other hand, it is stated in the appealed order of dismissal that the plaintiff sought to register the assignment on &pril 1*, 1=DD1 whereas in plaintiffPs brief it is alleged that it was only in Aebruary, 1=DD, when the defendant refused to recogni6e the plaintiff. 3f, as already observed, ":ere #1 $o %#4e& er#o& %or re>#1"er#$> !$ !11#>$8e$"+ how can the complaint be considered as already barred by the 8tatute of @imitations when it was filed on &pril $(, 1=DD, or barely a few days %according to the lower court) and two months %according to the plaintiff), after the demand for registration and its denial by the defendant. !laintiffPs right was violated only sometime in 1=DD, and it could not accordingly have asserted any cause of action against the defendant before that. The defendant seems to believe that the plaintiff was compelled immediately to register his assignment. &ny such compulsion is obviously for the benefit of the plaintiff, because it is only after registration that the transfer would be binding against the defendant. ?ut we are not here concerned with a situation where the plaintiff claims anything against the defendant allegedly accruing under the outstanding certificate in .uestion between the date of
11$
The capital stock corporations shall be divided into shares for which certificates signed by the president or the vice+president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by+laws. 8hares of stock so issued are personal property and may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact or other person legally authori6ed to make the transfer. No "r!$1%er+ :o5e;er+ 1:!00 9e ;!0#&+ e4ce " !1 9e"5ee$ ":e !r"#e1+ 7$"#0 ":e "r!$1%er #1 e$"ere& !$& $o"e& 7 o$ ":e 9oo31 o% ":e cor or!"#o$ so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. !ursuant to this provision, ! 1:!re o% 1"oc3 8!< 9e "r!$1%erre& 9< e$&or1e8e$" o% ":e corre1 o$&#$> 1"oc3 cer"#%#c!"e+ co7 0e& 5#": #"1 &e0#;er<. Ho5e;er+ ":e "r!$1%er 1:!00 G$o" 9e ;!0#&+ e4ce " !1 9e"5ee$ ":e !r"#e1+G 7$"#0 #" #1 Ge$"ere& !$& $o"e& 7 o$ ":e 9oo31 o% ":e cor or!"#o$.G no such entry in the name of the plaintiffs herein having been made, it follows that the transfer allegedly effected by Buan "ampos and "arl ,ess in their favor is Nnot valid, except as betweenN themselves. 3t does not bind either >adrigal or the >itsuis, who are not parties to said alleged transaction. Ehat is more, the same is Nnot valid,N or, in the words of the 8upreme "ourt of Eisconsin %;e >urphy, D1 Eisc. D1=, C 4. E. 71=) Y which were .uoted approval in son vs. -iosomito %(1 !hil., D*D) Y Nabsolutely voidN and, hence, as good as non+existent, insofar as >adrigal and the >itsuis are concerned. Aor this reason, !0":o7>: ! 1"oc3 cer"#%#c!"e #1 1o8e"#8e1 re>!r&e& !1 67!1#=$e>o"#!90e+ #$ ":e 1e$1e ":!" #" 8!< 9e "r!$1%erre& 9< e$&or1e8e$"+ co7 0e& 5#": &e0#;er<+ #" #1 5e00 1e""0e& ":!" ":e #$1"r78e$" #1 $o$= $e>o"#!90e+ 9ec!71e ":e :o0&er ":ereo% "!3e1 #" 5#":o7" re?7&#ce "o 17c: r#>:"1 or &e%e$1e1 !1 ":e re>#1"ere& o5$er or cre&#"or 8!< :!;e 7$&er ":e 0!5+ e4ce " #$1o%!r !1 17c: r#>:"1 or &e%e$1e1 !re 179?ec" "o ":e 0#8#"!"#o$1 #8 o1e& 9< ":e r#$c# 0e1 >o;er$#$> e1"o e0. "ertificates of stock are not negotiable instruments %post, !ar. 1<$), conse.uently, a transferee under a forged assignment ac.uires no title which can be asserted against the true owner, unless his own negligence has been such as to create an estoppel against him %"larke on "orporations, 8ec. Ed. p. 71D). 3f the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is ac.uired by an innocent purchaser for value %East ?irmingham @and "o. vs. -ennis, CD &la. D(D, $ @.;.&. C*(1 8herwood vs. mining co., D< "alif. 71$). 3n the case at bar, neither madrigal nor the >itsuis had alienated shares of stock in .uestion. 3t is not even claimed that either had, through negligence, given Y occasion for an improper or irregular disposition of the corresponding stock certificates.
in issuing the certificate, either fraudulently or by mistake. 3n forged or unauthori6ed transfer5 1. The purchaser or purchasers, no matter how innocent they may have been, will ac.uire no title as against the lawful owner by virtue of the doctrine of non+ negotiability of certificates of stock1 $. The purchaser will have no right or remedy against the corporation because he took the shares not by virtue of a misrepresentation made by the corporation but on the faith of a forged endorsement or unauthori6ed transfer1 *. The corporation incurs no liability to the person in whose favor the certificate is endorsed or issued. 7. 3f the old certificate is cancelled and new one is issued by the corporation, the holder thereof may be re.uired to return the same for its cancellation1 D. ,owever, if new certificates are issued and passes into the hands of a subse.uent bona fide purchaser, the latter may rightfully ac.uire title thereto since the corporation will be estopped to deny the validity thereof1 (. The subse.uent purchaser in good faith took the shares, not by virtue of a forged or unauthori6ed transfer but on reliance to the genuineness of the certificate issued by the corporation or by virtue of the representation made by the corporation that the same is valid and therefore, compel the corporation to recogni6e him as a stockholder or claim reimbursement and damages against the latter. Example5 & owns 1<< shares of 2 "o., ? stole the stock certificate and forged &#s signature5 a. 3f ? indorsed and sold it to "5 " will not ac.uire title to the shares whether he is innocent or not1 $. " cannot compel the corporation to register him as stockholder1 *. 2 "o. does not incur any liability in favor of " b. 3f 2 "o. cancelled the certificate and issued a new one to "5 1. 3f & later on finds out that his certificate was stolen, " may still be re.uired to return the new certificate1 $. 3f " sold it to -, an innocent purchaser, may rightfully ac.uire thereto since 2 "o. is estopped to deny the validity of the certificate1 *. 3f & later on finds out that his certificate was stole, 2 "o. may be compelled to recogni6e both & and - as stockholders.0 0This is so because the & cannot be deprived of his rights as owner by virtue of a forged transfer, and ?, because of 2 "o.#s representation that the person named therein is the owner of shares in the corporation.
1.
E.
FORGED AND UNAUTHORIZED TRANSFERS
FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED ISSUANCE OF STOCK CERTIFICATE: 3n the former, what is forged or unauthori6ed is the transfer of the certificate from the true and lawful owner to another person. Ehile the latter refers to the act of the corporation
c.
3f %b*) above would result in over+issuance of shares 1. /nly &, the rightful owner may be recogni6ed and & will have a right to compel 2 "o.
11*
to issue him a new certificate1 $. - will be entitled to damages from the 2 "o.1 *. 2 "o. will have a right of action against the who made false representation and in whose favor a new certificate is issued.00 003n this sense, if - sues 2 "o., the latter will have no valid defense, but he may institute a third party complaint against ". 3f " is an innocent purchaser, 2 "o., may file a fourth party complaint against ?. ISSUANCE OF STOCK CERTIFICATION 8ubscriptions to shares of stock are indivisible such that a subscriber to such shares will not be entitled to the issuance of a stock certificate until he has paid the full amount of his subscription.
FUA CUN '!0#!1 T7! C7$(+ plaintiff+appellee, vs. RICARDO SU--ERS+ in his capacity as 8heriff ex+oficio of the "ity of >anila, and the ",34& ?&4R34K "/;!/;&T3/4, defendants+appellants %K.;. 4o. @+1=7711 >arch $', 1=$*) FACTS: "hua 8oco subscribed to D<< shares of defendant ?ank paying D<J of the subscription price and a corresponding receipt being issued therefor. 8uch shares were mortgaged to plaintiff Aua "un to secure a loan evidenced by a promissory note, together with the receipt, which was endorsed and delivered to plaintiff mortgagee. !laintiff informed the manager of the ?ank about the transaction but was told to await action by the ?/-.
3n the meantime, "hua 8oco became indebted to the bank, and in the action for recovery of money, his D<< shares were attached. 8ec. (7. I117!$ce o% 1"oc3 cer"#%#c!"e1. + 4o certificate of stock shall be issued to a subscriber until the full amount of Aua his "un thereupon instituted the present action maintaining that the payment of D<J of the subscription subscription together with interest and expenses %in case of entitled "hua 8oco to $D< shares and prayed that his lien delin.uent shares), if any is due, has been paid. on the shares by virtue of the chattel mortgage be declared to have priority over the claim of defendant ?ank.
INDIVISIBILIT): &s the law stands now, subscription to shares of stock are deemed indivisible and no certificate of stock can be issued unless and until the full amount of his subscription including interest and expenses, if any is paid.
The ruling, therefore, in ?alta6ar vs. @ingayen Kulf Electronic !ower "o where a subscriber may opt to apply his partial payment to a corresponding number of shares, will not hold true. Thus, even if under the old law, where a corporation may, under a by+law provision or by custom, practice or tradition, issue stock certificates covering the number of shares that might have been correspondingly paid, this authority or practice is valid only two years after the effectivity of the "orporation "ode and after which corporations, registered under the said law should comply with the mandatory re.uirement of 8ec. (7. The "orporation "ode thus provides5
The trial court rendered judgment in favor of plaintiff. ISSUE: %1) E/4 "hua 8oco became entitled to $D< shares or the proportionate share to his partial paymentF %$) E/4 plaintiff had a superior claim over that of the ?ankF HELD: %1) 4o. %$) Les. Though the court below erred in holding that "hua 8oco, by paying one+half of the subscription price of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment appealed from is in the main correct.
The claim of the defendant ?anking "orporation upon which it brought the action in which the writ of attachment was issued, was for the non+payment of drafts accepted by "hua 8oco and had no direct connection with the shares of stock in .uestion. &t common law a corporation has no lien upon the shares of stockholders for any indebtedness to 8ec. 17C. A 0#c!9#0#"< "o e4#1"#$> cor or!"#o$1. + the &llcorporation %Bones on @iens, *d ed., sec. *'D) and our attention has not been called to any statute creating such corporations lawfully existing and doing business in the !hilippines lien here. /n the contrary, section 1$< of the "orporation on the date of the effectivity of this "ode and heretofore authori6ed, &ct provides that Nno bank organi6ed under this &ct shall licensed or registered by the 8ecurities and Exchange "ommission, make any loan or discount on the security of the shares of shall be deemed to have been authori6ed, licensed or registered its own capital stock, nor be the purchaser or holder of any under the provisions of this "ode, subject to the terms such and shares, unless such security or purchase shall be conditions of its license, and shall be governed by the provisions necessary to prevent loss upon a debt previously hereof5 !rovided, That if any such corporation is affected by the contracted new in good faith, and stock so purchased or ac.uired shall, within six months from the time of its re.uirements of this "ode, said corporation shall, unless otherwise purchase, be sold or disposed of at public or private sale, herein provided, be given a period of not more than two %$) years in default thereof, a receiver may be appointed to close from the effectivity of this "ode within which to comply with or, the up the business of the bank in accordance with law.N same. There can be no doubt that an e.uity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. 8uch an assignment exists here, though it was made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above mentioned reads5
-ANDA-US: /nce a subscriber has paid his subscription in full, he becomes entitled to be issued a stock certificate and in the event that the corporation refuses to do so, the stockholder may institute a case for mandamus with damages, such issuance being ministerial.
117
Aor value received, 3 assign all my rights in these shares in favor of >r. Tua "un. >anila, !. 3., >ay 1C, 1=$1. %8gd.) ", & 8/"/
NON=CONSENTING DIRECTORS: may be absolved of liability by their written dissent. /therwise, if they did not issue such written dissent or are passive, they may be held liable for not objecting thereto. ISSUANCE OF *ATERED STOCKS: may be effected in the following ways5 1. Aor a monetary consideration less than its par or issue value1 $. Aor a consideration in property, tangible or intangible, valued in excess of its market value1 *. Kratuitously or under an agreement that nothing shall be paid at all1 or 7. 3n the guise of stock dividends when there are no surplus profits of the corporation. ILLUSTRATION: 2 "o. has !1<> &uthori6ed "apital 8tock divided into5 %1) D> shares at !1.<< par value1 and %$) 1> no par value shares with issued value at !D.<<. & ac.uired 1> of the par value shares for !.C< and 1<<,<<< no par value shares at !7.<<5 1. E&TE;E- 8T/"R5 There is stock watering for both shares. 8ec. (D speaks of issuance of shares at Gless than its par or issued valueH1 $. @3&?3@3TL A/; !&; Q&@ E 8,&;E85 The directors who consented to the issuance or were passive about it, without written dissent, are solidarily liable with & for the difference of !.$<1 *. @3&?3@3TL A/; 4/ !&; Q&@ E 8,&;E85 & cannot be held liable because the no par value shares are Gdeemed fully paid and non+assessableH %8ec. (). &ccordingly, only the directors or officers consenting to the issuance are liable.
This endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a conditional e.uitable assignment. &s against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by virtue of the attachment. ?ut the attachment was levied after the bank had received notice of the assignment of "hua 8ocoPs interests to the plaintiff and was therefore subject to the rights of the latter. 3t follows that as against these rights the defendant bank holds no lien whatever. &s we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stock1 Nthe plaintiffPs rights consist in an e.uity in five hundred shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said five hundred shares in his favor.N The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the costs against the appellants ?anking "orporation. 8o ordered.
A.
*ATERED STOCKS
DEFINITION: Eatered stocks may be defined as one which is issued by the corporation as fully paid+up shares, when in fact the whole amount of the value thereof has not been paid. 3f the shares have thus been issued by the corporation as fully paid, when in fact it has intentionally and knowingly received or agreed to receive nothing at all for them, or less than their par value, either in money, property or services, the shares are said to be GwateredH or Gfictitiously paid+upH to the extent to which they have not been issued or are not to be paid forH
ILLUSTRATION2: 2 "o. has !1<<> &uthori6ed "apital 8tock divided into 1<<> shares at !1.<< par value, there is a provision in the by+laws denying the pre+emptive right of the shareholders. The ?oard of -irectors subscribed to 1> of the unissued shares at !$.<< each when the fair market value of the shares was !1$.<<. Sec. BA. L#!9#0#"< o% &#rec"or1 %or 5!"ere& 1"oc31. + &ny 1. E&TE;E- 8T/"R5 4o stock watering, since the shares director or officer of a corporation consenting to the issuance of were subscribed for more than the par value, stocks for a consideration less than its par or issued value or for a notwithstanding if it less than the fair market value1 consideration in any form other than cash, valued in excess of its $. 3f * days later, the members of the ?oard sold those fair value, or who, having knowledge thereof, does not forthwith purchased shares at !1$.<< per share, making a profit express his objection in writing and file the same with the corporate of !1<.<< per share, they cannot be held liable for secretary, shall be solidarily liable with the stockholder concerned stock watering but they can be .uestion on their duty to the corporation and its creditors for the difference between the of loyalty. 8ince the whole !1$.<< per share could#ve fair value received at the time of issuance of the stock and the par gone to the coffers of the corporation instead of them reaping the profits for themselves. or issued value of the same. EFFECTS OF ISSUANCE OF *ATERED STOCKS: 1. The corporation is deprived of its capital thereby hurting its business prospects, financial capability and responsibility1 $. 8tockholder who paid their subscriptions in full, or promised to pay the same, are injured and prejudiced by the reduction of their proportionate interest in the corporation1 and *. !resent and future creditors are deprived of the corporate assets for the protections of their interest.
RIGHT OF CORPORATION AND CREDITORS: The law does not make any distinction as to the right of the corporation and its creditors to enforce payment of the water in the stocks issued, thus, it applies to all creditors whether prior or subse.uent to the issuance of the watered stock. SOLIDAR) LIABILIT): &ll consenting directors and officers are solidarily liable for the GwaterH in the stock.
11D
BASIS OF LIABILIT): 1. GTrust Aund -octrineH the capital stock of the corporation is treated as inclusive of the unpaid portion of subscriptions to said capital, as a Gtrust fundH which the creditors have a right to look up to for the satisfaction of their claims. 8tockholders, therefore, are mandated to pay the full value of their shares. $. GAraud or >isrepresentation TheoryH liability is based on the false representation made by the corporation and the stockholder concerned to the creditors that the true par value or issued price of the shares has been paid or promised to be paid in full. CONSE2UENCES OF ISSUANCE OF *ATERED STOCKS 'FLETCHER(: 1. &s to the corporation when a corporation is guilty of ultra+vires or illegal acts which constitute an injury to or fraud upon the public, or which will tend to injure or defraud the public, the 8tate may institute a .uo+ warranto proceeding to forfeit its charter for the misuse or abuse of its franchise1 $. &s between the corporation and the subscriber the subscription is void. 8uch being the case, the subscriber is liable to pay the full or par or issued value thereof, to render it valid and effective1 *. &s to the consenting stockholders they are estopped from raising any objection thereto1 7. &s to dissenting stockholders in view of the dilution of their proportionate interest in the corporation, they may compel the payment of the GwaterH in the stock solidarily against the responsible and consenting directors and officers inclusive of the holder of the watered stock1 D. &s to creditors they may enforce payment of the difference in the price, or the water in the stock, solidarily against the responsible directorsMofficers and the stockholders concerned1 and (. &s against the transferees of the watered stocks his right is the same as that of his transferor. 3f, however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at least as against the corporation, since he took the shares on reliance of the misrepresentation made by the corporation that the stock certificate is valid and subsisting. This is because a corporation is prohibited from issuing certificates of stock until the full value of the subscriptions have been paid and could not, therefore, deny the validity of the stock certificate it issued as against a purchaser in good faith. Thus, ?allantine states that whether there is any liability on the part of the transferee of watered stock is made to depend upon whether he ac.uired the same without notice, either as purchaser or donee. 3f he had knowledge thereof, he is subject to the same liability as his transferor. LIABILIT) FOR INTEREST: &side from the value of their subscription, subscribers may likewise be re.uired to pay interest on all unpaid subscriptions if so imposed in the contract or in the corporate by+laws at such rate as may be indicated thereat or the legal rate if so not fixed. nless so re.uired or provided, however, the subscribers to shares of
stock, not fully paid, are not liable to pay interest on their unpaid subscriptions. Sec. BB. I$"ere1" o$ 7$ !#& 1791cr# "#o$1. + 8ubscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so re.uired by, and at the rate of interest fixed in the by+laws. 3f no rate of interest is fixed in the by+laws, such rate shall be deemed to be the legal rate.
K.
ENFORCE-ENT OF PA)-ENT OF SUBSCRIPTIONS
TI-E OF PA)-ENT: npaid subscription or any percentage thereof, together with interest if re.uired by the by+laws or the contract of subscription, shall be paid either5 1. /n the date or dates fixed in the contract or subscription1 $. /n the date or dates that may be specified by the ?/pursuant to a GcallH declaring any or all unpaid portion thereof to be so payable. RE-EDIES TO ENFORCE PA)-ENT ON UNPAID SUBSCRIPTION: 1. ?y board action in accordance with the procedure laid down in 8ec. (' to (= of the "ode1 and $. ?y a collection case in court as provided for in section '<. CREDITORJRECEIVER: Aailure or refusal of the ?/- to enforce or collect payment of unpaid subscription will not prevent the creditors or the receiver of the corporation to institute a court action to collect the unpaid portion thereof. This is because the capital of the corporation is the basis of the credit of and financial responsibility of the corporation. !ersons dealing with a corporation and extending credit to it have a right to insist that the unpaid subscription shall be paid in when this becomes necessary for the satisfaction of their claims. This is otherwise known as the Trust Aund -octrine which states that subscriptions to the capital of a corporation constitute a fund to which creditors have the right to look up to for the satisfaction of their claims.
Sec. BC. P!<8e$" o% 9!0!$ce o% 1791cr# "#o$. + 8ubject 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 and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary.
!ayment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Aailure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by+laws, computed from such date until full payment. 3f within thirty %*<) days from the said
11(
date no payment is made, all stocks covered by said subscription is necessary1 shall thereupon become delin.uent and shall be subject to sale as The stockholders concerned are given notice of the $. hereinafter provided, unless the board of directors orders otherwise. board resolution by the corporation either personally or by registered mail. !ublication of the notice of call is not re.uired unless the by+laws provide otherwise. 4otice is not likewise necessary if the contract of the Sec. BD. De0#$67e$c< 1!0e. + The board of directors may, by subscription stipulates a specific date when any resolution, order the sale of delin.uent stock and shall specifically unpaid portion is due and payable1 *. !ayment shall be made on the date specified in the state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than call or on the date provided for in the contract of thirty %*<) days nor more than sixty %(<) days from the date the subscription1 7. Aailure to pay on the date re.uired in the call or as stocks become delin.uent. specified in the contract of subscription will render the entire balance due and payable and making the stockholder liable for the interest1 D.to 3f within *< days from the date, no payment is made, 4otice of said sale, with a copy of the resolution, shall be sent every delin.uent stockholder either personally or by registered all the stock covered by the subscription shall become mail. The same shall furthermore be published once a week for two delin.uent and shall be subject to a delin.uency sale1 %$) consecutive weeks in a newspaper of general circulation in(. the The board, by resolution, orders the sale of the province or city where the principal office of the corporation is delin.uent stock stating the amount due and the date, time and place of the sale1 located. '. The sale shall be made not less than *< days nor more than (< days from the date the stocks become delin.uent1 C. nless the delin.uent stockholder pays to the corporation, on or !ublication of the notice of sale must be made once a before the date specified for the sale of the delin.uent stock, the week for $ consecutive weeks in the newspaper of balance due on his subscription, plus accrued interest, costs of general circulation in the province or city where the principal office is located1 advertisement and expenses of sale, or unless the board of =. directors otherwise orders, said delin.uent stock shall be sold at 8ale at public auction, if no payment is made by the delin.uent stockholder, in favor of the bidder who public auction to such bidder who shall offer to pay the full amount offered to pay the full amount of the balance in the of the balance on the subscription together with accrued interest, subscription, inclusive of interest, cost of costs of advertisement and expenses of sale, for the smallest advertisement and expenses for the smallest number number of shares or fraction of a share. The stock so purchased of shares1 shall be transferred to such purchaser in the books of 1<. the ;egistration or transfer of the shares of stock in the corporation and a certificate for such stock shall be issued in his name of the bidder and corresponding issuance of the favor. The remaining shares, if any, shall be credited in favor of the stock certificate covering the shares successfully delin.uent stockholder who shall likewise be entitled to the bidded1 issuance of a certificate of stock covering such shares. 11. 3f there be any remaining shares, the same shall be credited in favor of the delin.uent stockholder who shall be entitled to the issuance of a certificate of stock covering such shares1 8hould there be no bidder at the public auction who offers to 1$. pay 3f there is no bidder at the public auction, the the full amount of the balance on the subscription together with corporation may, subject to the provisions of the "ode, accrued interest, costs of advertisement and expenses of sale, for bid for the same and the total amount due shall be the smallest number of shares or fraction of a share, the corporation credited or paid in full in the corporate books1 and 1*. The shares so purchased by the corporation shall be may, 179?ec" "o ":e ro;#1#o$1 o% ":#1 Co&e* , bid for the same, and the total amount due shall be credited as paid in full in the vested in the latter as treasury shares. books of the corporation. Title to all the shares of stock covered by HIGHEST BIDDER: in the case of sale of delin.uent stock, the subscription shall be vested in the corporation as treasury and as indicated in number 1< above, is such bidder who shares and may be disposed of by said corporation in accordance shall offer to pay the full amount of the balance on the with the provisions of this "ode. subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. 3t should be properly termed G@owestH ?idder because the bidders are offering to pay the same amount, and their bids are based PROCEDURE: on the number of shares they are willing to receive, the 1. The ?/-, by a formal ;esolution, declares the whole or lowest of which is the winning bid. any percentage unpaid subscriptions to be due and payable on a specified date. ,owever, if the contract of subscription provides the date or dates when payment is due, no HcallH or declaration by the board Ex. & subscribed to 1<< shares of stock for !1<<.<< each and paid only D<J and later on declared to be delin.uent. Aor the full amount of !D,<<< %unpaid balance) and the
11'
interests, costs, and expenses, the following bidders are willing to accept + 25 '< shares1 L5 C< shares1 U5 =< shares. 3n this case, 2 would be the highest bidder. The remaining *< shares would be credited to &.
for a date or dates when payment is due, or when the corporation has become insolvent. -IGUEL VELASCO+ !11#>$ee o% T:e P:#0# C:e8#c!0 Pro&7c" Co. 'L"&.(+ plaintiff+appellant, vs. JEAN -. POIZAT+ defendant+appellee %K.;. 4o. @+11D$C1 >arch 1D, 1=1C) #$e
*NO BIDDER: 3f there was no bidder, the company has to have unrestricted retained earnings in order to ac.uire the shares as thus provided under 8ec. 71 of the "orporation "ode %!ower to &c.uire /wn 8hares). &ccordingly, if the company has no unrestricted retained earnings, it cannot ac.uire the said shares by virtue of a delin.uency sale, however, it may institute an action for the recovery of the subscription price under 8ec. '<. -A) A DIRECTOR DECLARED TO BE DELIN2UENT ON HIS SUBSCRIPTION BE ALLO*ED TO CARR) OUT HIS FUNCTIONS AS SUCH DIRECTORR Les. ,e is still a shareholder entitled to all the rights as such, and pending the sale, the shares still stand in his name. Even after the sale, he may still be credited to some of the shares and he only needs 1 to .ualify as a director.
FACTS: -efendant Bean >. !oi6at subscribed to $< shares of stock of The !hilippine "hemical !roduct "o., of which D were paid. 3n an action instituted by >iguel Qelasco as assignee of the company, he seeks to recover the balance of the subscription. The "A3 rendered a judgment dismissing the complaint. ,ence, this appeal. ISSUE: E/4 defendant is liable for the balanceF
HELD: Les. Ee think that !oi6at is liable upon this subscription. & stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. 3t is a rule, 2UESTIONING A SALE ON IRREGULARIT) OR DEFECT accepted by the 8upreme "ourt of the nited 8tates, that ! IN THE NOTICE OR IN THE SALE ITSELF: 1791cr# "#o$ %or 1:!re1 o% 1"oc3 &oe1 $o" re67#re !$ e4 re11 ro8#1e "o !< ":e !8o7$" 1791cr#9e&+ !1 8ec. (=. *:e$ 1!0e 8!< 9e 67e1"#o$e&. + 4o action to recover ":e 0!5 #8 0#e1 ! ro8#1e "o !< o$ ":e !r" o% ":e delin.uent stock sold can be sustained upon the ground of 1791cr#9er . %' ;uling "ase @aw, sec. 1=1.) 8ection *( of irregularity or defect in the notice of sale, or in the sale itself ofthe the "orporation @aw clearly recogni6es that a stock subscription is subsisting liability from the time the delin.uent stock, unless the party seeking to maintain such action is made, since it re.uires the subscriber to pay first pays or tenders to the party holding the stock the sumsubscription for interest .uarterly from that date unless he is relieved from which the same was sold, with interest from the date of sale atsuch the liability by the by+laws of the corporation. T:e legal rate1 and no such action shall be maintained unless it is 1791cr#9er #1 !1 87c: 9o7$& "o !< ":e !8o7$" o% commenced by the filing of a complaint within six %() months from ":e 1:!re 1791cr#9e& 9< :#8 !1 :e 5o70& 9e "o !< !$< o":er &e9"+ !$& ":e r#>:" o% ":e co8 !$< "o the date of sale &e8!$& !<8e$" #1 $o 0e11 #$co$"e1"!90e .
T*O CONDITIONS: 1. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of the sale at the legal rate1 and $. The action shall be commenced by the filing of a complaint within ( months from the date of sale. ACTION B) THE CORPORATION:
4otwithstanding the provisions of 8ec. (' to (=, the corporation may enforce payment of unpaid subscriptions by court action.
The provisions of the "orporation @aw %&ct 4o. 17D=) has given recognition of two remedies for the enforcement of stock subscriptions. T:e %#r1" !$& 8o1" 1 ec#!0 re8e&< >#;e$ 9< ":e 1"!"7"e co$1#1"1 #$ er8#""#$> ":e cor or!"#o$ "o 7" 7 ":e 7$ !#& 1"oc3 %or 1!0e !$& &#1 o1e o% #" %or ":e !cco7$" o% ":e &e0#$67e$" 1791cr#9er. 3n this case the provisions of section *C to 7C, inclusive of the "orporation @aw are applicable and must be followed. T:e o":er re8e&< #1 9< !c"#o$ #$ co7r" , concerning which we find in section 7= the following provision5
G4othing in this &ct shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses 8ec. '<. Co7r" !c"#o$ "o reco;er 7$ !#& 1791cr# "#o$. + 4othing incurred.H in this "ode shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid ARNALDO F. DE SILVA+ plaintiff+appellant, vs. subscription, with accrued interest, costs and expenses. ABOITIZ O CO-PAN)+ INC.+ defendant+appellee %K.;. 4o. @+1=C=*1 >arch *1, 1=$*)
CALL: "onsistent with &rt. 11(= of the "ivil "ode, a GcallH is a condition precedent before the right of action to institute a recovery suit accrues. This is because a demand is re.uired before a debtor may incur a delay in the performance of his obligation. &s earlier said however, a call is not necessary if the contract of subscription provides
FACTS: !laintiff de 8ilva subscribed to (D< shares of defendant company and paid $<< of such subscription leaving a balance of !$$D,<<<. /n &pril $$, 1=$$, he was informed by the corporate secretary that he has been declared delin.uent by the ?/- and that he should pay the unpaid subscription otherwise such shares shall be sold at a public auction.
11C
-e 8ilva filed a complaint in the "A3 of "ebu, contending among others that the resolution adopted was violative of &rt. 7( of the by+laws stating that all shares subscribed and were not paid at the time of the incorporation shall be paid out of the '<J of the profit obtained until such shares are paid in full. -e 8ilva contends that such article provides for the operative method of payment of the shares, and by declaring the unpaid subscription to have become due and payable on >ay *1st and in publishing the notice declaring his shares to be delin.uent, the company has exceeded its executive authority. ISSUE: E/4 the ?/- may declare the unpaid shares delin.uent or collect or enforce payment of the same despite the provision of the by+lawsF HELD: Les. 3t is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of a part of the '< percent of the profit distributable in e.ual parts on the payment of the shares subscribed to and not fully paid. 3f the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for accomplishing the same purpose. &s was said by this court in the case of Qelasco vs. !oi6at %*' !hil., C<$)5 GThe first and most special remedy given by the statute consists in permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the delin.uent subscriber. 3n this case the provisions of sections *C to 7C, inclusive, of the "orporation @aw are applicable and must be followed. The other remedy is by action in court.H &dmitting that the provision of article 7( of the said by+ laws maybe regarded as a contract between the defendant corporation and its stockholders , yet as it is only to the board of directors of the corporation that said articles gives the authority or right to apply on the payment of unpaid subscriptions such amount of the '< percent of the profit distributable among the shareholders in e.ual parts as may be deemed fit, it cannot be maintained that the said article has prescribe an operative method for the payment of said subscription continuously until their full amorti6ation. 3n the instant case, the defendant corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies provided by the aforesaid law. /n the other hand, the plaintiff has no right whatsoever under the provision of the above cited article 7( of the said by+laws to prevent the board of directors from following, for that purpose, any other method than that mentioned in the said article, for the very reason that the same does not give the stockholders any right in connection with the determination of the .uestion whether or not there should be deducted from the '< percent of the profit distributable among the stockholders such amount as may be deemed fit for the payment of subscriptions due and unpaid. Therefore, it is evident that the defendant corporation has not violated, nor disregarded any right of the plaintiff recogni6ed by the said by+laws, nor exceeded its authority in the discharge of its executive functions, nor abused its discretion when it performed the acts mentioned in the complaint as grounds
thereof, and, conse.uently, the facts therein alleged do not constitute a cause of action. LINGA)EN GULF ELECTRIC PO*ER CO-PAN)+ INC.+ plaintiff+appellant, vs. IRINEO BALTAZAR+ defendant+appellee. %K.;. 4o. @+7C$71 Bune *<, 1=D*) LINGA)EN GULF ELECTRIC PO*ER CO-PAN)+ INC.+ plaintiff+appellee, vs. IRINEO BALTAZAR+ defendant and appellant %K.;. 4o. @+($771 Bune *<, 1=D*) FACTS: ,erein defendant 3rineo ?alta6ar subscribed to (<< shares, at !1<<.<<< par value per share, of the plaintiff corporation paying !1D,<<< and making further payments leaving a balance of !1C,D<<. /n Buly $*, 1=7(, the stockholders, including herein defendant, approved ;esolution 4o. 1' agreeing5 %1) to GcallH of the balance of the unpaid subscription to be paid5 D<J within (< days beginning &ug. 1, 1=7(1 the remaining D<J (< days beginning /ctober 1, 1=7(1 %$) that all unpaid unpaid subscriptions after the due dates of both calls to be subject to 1$J interest per annum1 %*) that after the expiration of a grace period of (< days, all unpaid subscribed shares would revert to the corporation. & demand was made against defendant, but was ignored. ,ence this action. ISSUE: E/4 ?alta6ar is liable to pay the unpaid portion of his subscription HELD: 4o. Ee agree with the lower court that ":e 0!5 re67#re1 ":!" $o"#ce o% !$< c!00 %or ":e !<8e$" o% 7$ !#& 1791cr# "#o$ 1:o70& 9e 8!&e $o" o$0< er1o$!00< 97" !01o 9< 790#c!"#o$ . This is clear from the provisions of section 7< of the "orporation @aw, &ct 4o. 17D=, as amended. 3t will be noted that section 7< is mandatory as regards publication, using the word NmustN. &s correctly stated by the trial court, the reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure e.uality and uniformity in the assessment on stockholders. %17 ".B. (*=). Ee find the citation of authorities made by the plaintiff and appellant inapplicable. 3n the case of Qelasco vs. !oi6at %*' !hil. C<D), the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. 8aid the court in that case5 G. . . . it is now .uite well settled that 5:e$ ":e cor or!"#o$ 9eco8e1 #$1o0;e$"+ 5#": rocee&#$>1 #$1"#"7"e& 9< cre&#"or1 "o 5#$& 7 !$& &#1"r#97"e #"1 !11e"1+ $o c!00 or !11e118e$" #1 $ece11!r< 9e%ore ":e #$1"#"7"#o$ o% 17#"1 "o co00ec" 7$ !#& 9!0!$ce o$ 1791cr# "#o$.H ?ut when the corporation is a solvent concern, the rule is5
11=
G3t is again insisted that 0!#$"#%%1 c!$$o" reco;er 9ec!71e ":e 17#" 5!1 $o" rocee&e& 9< ! c!00 or !11e118e$" !>!#$1" ":e &e%e$&!$" !1 ! 1791cr#9er+ !$& ":!" 7$"#0 ":#1 #1 &o$e $o r#>:" o% !c"#o$ !ccr7e1 . 3n a suit by a solvent going corporation to collect a subscription, and in certain suits provided by statute this would be true1. . . . . %3d.)H ISSUE 2: E/4 the ?alta6ar is correct in claiming that ;esolution 4o. 1' of 1=7( of the ?/- released him from the obligation to pay for his unpaid subscriptionF HELD: 4o. There must be unanimous consent of the stockholders of the corporation. Ee .uote some authorities5 8ubject to certain exceptions, considered in subdivision %*) of this section, ":e >e$er!0 r70e #1 ":!" ! ;!0#& !$& 9#$&#$> 1791cr# "#o$ %or 1"oc3 o% ! cor or!"#o$ c!$$o" 9e c!$ce00e& 1o !1 "o re0e!1e ":e 1791cr#9er %ro8 0#!9#0#"< ":ereo$ 5#":o7" ":e co$1e$" o% !00 ":e 1"oc3:o0&er1 or 1791cr#9er1. F7r":er8ore+ ! 1791cr# "#o$ c!$$o" 9e c!$ce00e& 9< ":e co8 !$<+ e;e$ 7$&er ! 1ecre" or co00!"er!0 !>ree8e$" %or c!$ce00!"#o$ 8!&e 5#": ":e 1791cr#9er !" ":e "#8e o% ":e 1791cr# "#o$+ !1 !>!#$1" er1o$1 5:o 1791e67e$"0< 1791cr#9e& or 7rc:!1e& 5#":o7" $o"#ce o% 17c: !>ree8e$". %1C ".B.8. C'7). G%*) E4ce "#o$1. 3n particular circumstances, as 5:ere #" #1 >#;e$ 7r17!$" "o ! 9o$! %#&e co8 ro8#1e+ or "o 1e" o%% ! &e9" &7e %ro8 ":e cor or!"#o$ , a release, supported by consideration, will be effectual as against dissenting stockholders and subse.uent and existing creditors. & release which might originally have been held invalid may be sustained after a considerable lapse of time. %1C ".B.8. C'7).H 3n the present case, the release claimed by defendant and appellant does not fall under the exception above referred to, because it was not given pursuant to a bona fide compromise, or to set off a debt due from the corporation, and there was no consideration for it. 3n conclusion we hold that under the "orporation @aw, $o"#ce o% c!00 %or !<8e$" %or 7$ !#& 1791cr#9e& 1"oc3 871" 9e 790#1:e&+ e4ce " 5:e$ ":e cor or!"#o$ #1 #$1o0;e$"+ #$ 5:#c: c!1e+ !<8e$" #1 #88e&#!"e0< &e8!$&!90e. *e !01o r70e ":!" re0e!1e %ro8 17c: !<8e$" 871" 9e 8!&e 9< !00 ":e 1"oc3:o0&er1. ERNESTO -. APODACA+ petitioner, vs. NATIONAL LABOR RELATIONS CO--ISSION+ B/8E >. >3;&8/@ and 34T;&48 !,3@8., 34"., respondents %K.;. 4o. C<<*=1 &pril 1C, 1=C=) FACTS: !etitioner, an employee of respondent company, subscribed to 1,D<< shares at !1<< per share. ,e paid an initial payment !*',D<<. /n 8ept. 1, 1='D, he was appointed !resident and Keneral >anager of the company but on Ban. $, 1=C(, he resigned. ,e filed a complaint with the 4@;" claiming unpaid wages,
cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1=C(. ;espondent admitted that petitioner was entitled to !1',<(<.<' but the same was already set+off against his unpaid subscription. !etitioner .uestioned such set+off claiming that no call or notice was made. The @abor &rbiter decided in favor of petitioner. /n appeal, such decision was reversed by the 4@;". ISSUE: E/4 the set+off was properly madeF HELD: 4o. Airstly, the 4@;" has no jurisdiction to determine such intra+corporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the 8ecurities and Exchange "ommission. 8econdly, assuming arguendo that the 4@;" may exercise jurisdiction over the said subject matter under the circumstances of this case, ":e 7$ !#& 1791cr# "#o$1 !re $o" &7e !$& !<!90e 7$"#0 ! c!00 #1 8!&e 9< ":e cor or!"#o$ %or !<8e$". !rivate respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. 3t does not even appear that a notice of such call has been sent to petitioner by the respondent corporation. Ehat the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions. 4o doubt such set+off was without lawful basis, if not premature. &s there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable. BONIFACIO LU-ANLAN+ plaintiff+appellee, vs. JACINTO R. CURA+ ET AL.+ defendants. DIZON O CO.+ INC.+ ETC.+ appellant. %K.;. 4o. @+*=C(11 >arch $1, 1=*7) FACTS: @umanlan subscribed to *<< shares of stock of appellant company at a par value of !D<. @ayag was appointed the receiver of said company, at the instance of its creditors Bulio Qalen6uela, !edro 8antos and Arancisco Escoto, to collect the unpaid subscriptions, there appearing that the company had no assets except the credits against those who had subscribed for shares of stock. The "A3 rendered a decision in favor of Bulio Qalen6uela and held @umanlan liable for the unpaid subscription and loans and advances together with interests. !ending appeal, the parties entered into an agreement where @umanlan would dismiss the appeal and the corporation would collect only D<J of the amount subscribed by him for stock, provided that in case the D<J was inufficient to pay Qalen6uela he should pay an additional amount not to exceed the judgment against him in that case. @umanlan paid Qalen6uela the sum of !11,C7< including interest. -isregarding the agreement, appellant company asked for and order of execution of the "A3 decision which was
1$<
granted and the provincial sheriff levied upon two parcels of land of @umanlan. ISSUE: E/4 @umanlan is still liable to the corporationF HELD: Les. 3n the promissory note given by the corporation to Qalen6uela the former obligated itself to pay Qalen6uela the sum of !C,<<< with interest at 1$ per cent per annum and, upon failure to pay said sum and interest when due, $D per cent of the principal as expenses of collection and judicial costs in case of litigation. ?y virtue of these facts @umanlan is entitled to a credit against the judgment in case 4o. *'7=$ for !11,C7< and an additional sum of !$,<<<, which is $D per cent on the principal debt, as he had to file this suit to collect, or receive credit for the sum which he had paid Qalen6uela for and in place of the corporation, or a total of !1*,C7<. This leaves a balance due -i6on I co., 3nc., of !1,$(= on that judgment with interest thereon at ( per cent per annum from &ugust *<, 1=*<. 3t appears from the record that during the trial of the case now under consideration, the ?ank of the !hilippine 3slands appeared in this case as assignee in the N3nvoluntary 3nsolvency of -i6on I "o., 3nc. That bank was appointed assignee in case 4o. 7*<(D of the "ourt of Airst 3nstance of the "ity of >anila on 4ovember $C, 1=*$. 3t is therefore evident that there are still other creditors of -i6on I "o., 3nc. This being the case that corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it. I" #1 e1"!90#1:e& &oc"r#$e ":!" 1791cr# "#o$1 "o ":e c! #"!0 o% ! cor or!"#o$ co$1"#"7"e ! %7$& "o 5:#c: ":e cre&#"or1 :!;e ! r#>:" "o 0oo3 %or 1!"#1%!c"#o$ o% ":e#r c0!#81 !$& ":!" ":e !11#>$ee #$ #$1o0;e$c< c!$ 8!#$"!#$ !$ !c"#o$ 7 o$ !$< 7$ !#& 1"oc3 1791cr# "#o$ #$ or&er "o re!0#Ke !11e"1 %or ":e !<8e$" o% #"1 &e9"1. %!hilippine Trust "o. vs. ;ivera, 77 !hil., 7(=, 7'<.) PHILIPPINE NATIONAL BANK+ plaintiff+appellee, vs. BITULOK SA*-ILL+ INC.+ -34K&@&4 @ >?E; "/., 34"., 83E;;& >&-;E @ >?E; "/., 34"., 4&83!3T @ >?E; "/., 34"., E//-E/;R8, 34"., K/4U&@/ ! L&T, T/>&8 ?. >/;&T/, A34-@&L >3@@&; @ >?E; "/., 34"., ET &@., 348 @&; @ >?E; "/., &4&R&4 @ >?E; "/., &4"&4T3@&4 @ >?E; "/., 34"., defendants+appellees. %K.;. 4os. @+$71''+CD1 Bune $=, 1=(C) FACTS: 3n various suits decided jointly, !4? as creditor, and therefore the real party in interest, was allowed by the lower court to substitute the receiver of the !hilippine @umber -istributing &gency in these respective actions for the recovery from the defendant lumber producers the balance of their stock subscriptions. The defendant lumber producers were convinced by the late !resident >anuel ;oxas to form a cooperative and ensure the stable supply of lumber in the country and to eliminate alien middlemen. To induce them, the president promised and agreed to invest !=.<< for every !1.<< that the members would invest therein. There was no appropriation made by congress for the
!=.<< investment. The !resident then instructed ,on. Emilio &bello, then Executive 8ecretary and chairman of the ?/- of !4? to grant an overdraft of !$D<,<<< %later increased to !*D<,<<<) which was approved by the ?/- of !4? with interest at (J. The !hilippines did not invest the !=.<< for every peso coming from defendant lumber producers. The loan extended by !4? was not paid. ,ence, these suits which the trial court dismissed. ISSUE: E/4 the lumber producers are liable for the full value of their subscriptionsF HELD: Les. 3n !hilippine Trust "o. v. ;ivera, citing the leading case of Qelasco v. !oi6at, this "ourt held5 N3t is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to reali6e assets for the payment of its debt.... & corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release1 and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. >oreover, strict compliance with the statutory regulations is necessary....N The !oi6at doctrine found acceptance in later cases. /ne of the latest cases, @ingayen Kulf Electric !ower v. ?alta6ar, 8peaks to this effect5 N3n the case of Qelasco v. !oi6at, the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee.N 3t would be unwarranted to ascribe to the late !resident ;oxas the view that the payment of the stock subscriptions, as thus re.uired by law, could be condoned in the event that the counterpart fund to be invested by the Kovernment would not be available. Even if such were the case, however, and such a promise were in fact made, to further the laudable purpose to which the proposed corporation would be devoted and the possibility that the lumber producers would lose money in the process, 1"#00 ":e 0!#$ !$& 1 ec#%#c 5or&#$> o% ":e ! 0#c!90e 0e>!0 ro;#1#o$ !1 #$"er re"e& 9< ":#1 Co7r" 871" 9e co$"ro00#$>. I" #1 ! 5e00=1e""0e& r#$c# 0e ":!" 5#": !00 ":e ;!1" o5er1 0o&>e& #$ ":e E4ec7"#;e+ :e #1 1"#00 &e;o#& o% ":e rero>!"#;e o% 171 e$&#$> ":e o er!"#o$ o% !$< 1"!"7"e or !$< o% #"1 "er81. ED*ARD A. KELLER O CO.+ LTD.+ petitioner+appellant, vs. COB GROUP -ARKETING+ INC.+ B/8E E. ?&2, A;&4"38"/ ". -E "&8T;/, B/,44L -E @& A E4TE, 8E;K3/ ". /;-/[EU, T;343-&- ". /;-/[EU, >&K4/ ". /;-/[EU, &-/;&"3/4 ". /;-/[EU, T/>&8 ". @/;E4U/, B;., @ 3U >. &K 3@&+&-&/, >/38E8 !. &-&/, &8 4"3/4 >&4&,&4 and 34TE;>E-3&TE &!!E@@&TE "/ ;T, respondents+appellees. %K.;. 4o. @+(C<='1 Banuary 1(, 1=C() FACTS: !etitioner+appellant appointed defendant "/? Kroup >arketing, 3nc. as exclusive distributor of its household products in !anay and 4egros. nder its sales agreement, Reller sold on credit its products to "/? Kroup
1$1
>arketing. The ?/- of "/? Kroup >arketing were apprised by Bose E. ?ax that the firm owed Reller about !1'=,<<<. Reller sued "/? >arketing and its stockholders. ISSUE: E/4 Reller can collect the unpaid subscriptions of the stockholdersF HELD: Les. I" #1 1e""0e& ":!" ! 1"oc3:o0&er #1 er1o$!00< 0#!90e %or ":e %#$!$c#!0 o90#>!"#o$1 o% ! cor or!"#o$ "o ":e e4"e$" o% :#1 7$ !#& 1791cr# "#o$ %Qda. de 8alvatierra vs. Karlitos 1<* !hil. 'D', '(*1 1C "Bs 1*11+$). GERARDO GARCIA+ plaintiff+appellee, vs. ANGEL SUAREZ+ defendant+appellant %K.;. 4o. @+7D7=*1 &pril $1, 1=*=) FACTS: &ppellant 8uare6 subscribed to 1( shares of "ompania ,ispano+Ailipina, 3nc. and paid the value of 7 shares, at !1<< par value each, or !7<<. !laintiff+appellee Karcia was appointed by the court as receiver of the company, to collect the unpaid subscription, among others. /n Bune 1C, 1=*1, Karcia brought an action to recover from 8uare6 and other shareholders the balance of their subscriptions, but the complaint was dismissed for lack of prosecution. /n /ct. 1<, 1=*D, a similar action was instituted which was granted by the "A3 holding defendant liable for the balance of his unpaid subscription and interest. /n appeal, the defendant raises the issue of prescription. ISSUE: E/4 defendant 8uare6 is liableF HELD: Les. The premise of the argument is wrong because it confuses two distinct obligations5 the obligation to pay interest and that to pay the amount of the subscription. The said section *' of the "orporation @aw provides when the obligation to pay interest arises and when payment should be made, but it is absolutely silent as to when the subscription to a stock should be paid. O% co7r1e+ ":e o90#>!"#o$ "o !< !r#1e1 %ro8 ":e &!"e o% ":e 1791cr# "#o$+ 97" ":e co8#$> #$"o 9e#$> o% !$ o90#>!"#o$ 1:o70& $o" 9e co$%71e& 5#": ":e "#8e 5:e$ #" 9eco8e1 &e8!$&!90e. 3n a loan for example, the obligation to pay arises from the time the loan is taken1 but the maturity of that obligation, the date when the debtor can be compelled to pay, is not the date itself of the loan, because this would be absurd. The date when payment can be demanded is necessarily distinct from and subse.uent to that the obligation is contracted. B< ":e 1!8e "o3e$+ ":e 1791cr# "#o$ "o ":e c! #"!0 1"oc3 o% ":e cor or!"#o$+ 7$0e11 o":er5#1e 1"# 70!"#o$+ #1 $o" !<!90e !" ":e 8o8e$" o% ":e 1791cr# "#o$ 97" o$ ! 1791e67e$" &!"e 5:#c: 8!< 9e %#4e& 9< ":e cor or!"#o$. ,ence, section *C of the "orporation @aw, amended by &ct 4o. *D1C, provides that5 GThe board of directors or trustees of any stock corporation formed, organi6ed, or existing under this &ct may at any time declare due and payable to the
corporation stock . . . .H
unpaid
subscriptions
to
the
capital
The board of directors of the "ompaZia ,ispano+Ailipino, 3nc., not having declared due and payable the stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only commenced to run from Bune 1C, 1=*1 when the plaintiff, in his capacity as receiver and in the exercise of the power conferred upon him by the said section *C of the "orporation @aw, demanded of the appellant to pay the balance of his subscription. The present action having been filed on /ctober 1<, 1=*D, the defense of prescription is entirely without basis.
DELIN2UENT: 8hares of stock become delin.uent when no payment is made on the balance of all or any portion of the subscription on the date or dates fixed in the contract of subscription without need of call, or on the date specified by the ?/- pursuant to a call made by it in accordance with the provisions of 8ec. ('. EFFECT OF DELIN2UENC): The stockholder thereof immediately loses the right to vote and be voted upon or represented in any stockholders meeting as well as all the rights pertaining to a stockholder except the right to receive dividends in accordance with the "ode.
8ec. '1. E%%ec" o% &e0#$67e$c<. + 4o delin.uent stock shall be voted for be entitled to vote or to representation at any stockholderPs meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this "ode, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any.
RIGHT TO RECEIVE DIVIDENDS: 8ec. 7* provides that Gany cash dividend due on delin.uent stockholders shall first be applied to the unpaid balance on his subscription plus cost and expenses, while stock dividends shall be withheld until his unpaid subscription is paid in fullH RIGHTS OF UNPAID SHARES: 3f the shares are not delin.uent, however, subscribers to the capital stock of a corporation though not fully paid, are entitled to all the rights of a stockholder %8ec. '$) E2"E!T the issuance of certificate of stocks %8ec. (7). They can vote and be voted upon and entitled to receive all dividends due their shares.
8ec. '$. R#>:"1 o% 7$ !#& 1:!re1. + ,olders of subscribed shares not fully paid which are not delin.uent shall have all the rights of a stockholder.
NON=STOCK CORPORATIONS: The rules on delin.uent shareholders applies to non+stock corporations, such as when members are delin.uent in paying membership dues. RIGHT TO SECURE THE ISSUANCE OF A NE* STOCK CERTIFICATE:
Sec. C/. Lo1" or &e1"ro<e& cer"#%#c!"e1. + The following
1$$
procedure shall be followed for the issuance by a corporation of *. new To protect the corporation against damage from certificates of stock in lieu of those which have been lost, stolen or whatever source arising from the issuance of the destroyed5 duplicate certificate inluding liability to the holder of the original certificate or to innocent holders of certificate based on the duplicate. Thus, 1. The registered owner of a certificate of stock in a corporation or the ?/- has the authority to decide the amount and the kind of surety bond that may be re.uired for the his legal representative shall file with the corporation %&) issuance of a certificate of stock, in liey of the lost or !%%#&!;#" in triplicate setting forth, if possible, %1) destroyed the one, if the same is to be issued prior to the c#rc781"!$ce1 as to how the certificate was lost, stolen or expiration of the 1 year period provided by 8ec. '*. destroyed, %$) the $789er o% 1:!re1 represented by such OF NE* CERTIFICATES: certificate, %*) the 1er#!0 $789er o% ":e cer"#%#c!"e and %7)ISSUANCE the $!8e o% ":e cor or!"#o$ which issued the same. ,e shall 1. also &fter the above procedures have been complied with, submit such %?) o":er #$%or8!"#o$ !$& e;#&e$ce which he may the new certificate will be issued 1 year from the date of the last publication1 deem necessary1 $. 4evertheless, the stockholder may file a bond or other security to have the shares issued before the 1 year prescribed. $. &fter ;er#%<#$> the affidavit and other information and evidence *. 3f a contest has been present to the corporation or an with the books of the corporation, said corporation shall 790#1: action is pending in court, the issuance of the new $o"#ce in a newspaper of general circulation published in the place certificate shall be suspended until final decision. where the corporation has its principal office, once a week for three %*) consecutive weeks at the expense of the registered owner of,. the RIGHTS AND LIABILITIES OF STOCKHOLDERS certificate of stock which has been lost, stolen or destroyed. The OF A STOCKHOLDER: $o"#ce shall state %1) the $!8e o% 1!#& cor or!"#o$, %$) RIGHTS the $!8e of the re>#1"ere& o5$er and %*) the 1er#!0 $789er of 1. said P!r"#c# !"#o$ #$ ":e 8!$!>e8e$" o% ":e certificate, and %7) the $789er o% 1:!re1 represented by such cor or!"e !%%!#r1 by exercising their right to vote and certificate, and that after the expiration of one %1) year from the be voted upon either personally or by proxy as provided for under 8ec. D< and DC of the "ode1 date of the last publication, if no contest has been presented to said $. corporation regarding said certificate of stock, the right to make To e$"er #$"o ! ;o"#$> "r71" !>ree8e$" subject to the procedure, re.uirements and limitations imposed such contest shall be barred and said corporation shall cancel in its under 8ec. D<1 books the certificate of stock which has been lost, stolen or *. To rece#;e &#;#&e$&1 and to compel their declaration destroyed and issue in lieu thereof new certificate of stock, 7$0e11 if warranted under 8ec. 7*1 the registered owner files a bond or other security in lieu thereof as 7. To "r!$1%er 1:!re1 o% 1"oc3 subject only to may be re.uired, effective for a period of one %1) year, for such amount and in such form and with such sureties as may be reasonable restrictions such as the options and preferences as may be allowed by law inclusive of the satisfactory to the board of directors, in which case a new certificate right of the transferee to compel the registration of the may be issued even before the expiration of the one %1) year period transfer in the books of the corporation as provided for provided herein5 !rovided, That if a contest has been presented to in 8ec. (*1 said corporation or if an action is pending in court regarding D. the To 9e #117e& ! cer"#%#c!"e o% 1"oc3 for fully paid+up ownership of said certificate of stock which has been lost, stolen or shares in accordance with 8ec. (71 destroyed, the issuance of the new certificate of stock in (. lieu To e4erc#1e re=e8 "#;e r#>:"1 as provided for in thereof shall be suspended until the final decision by the court 8ec. *=1 regarding the ownership of said certificate of stock which has been '. To e4erc#1e ":e#r ! r!#1!0 r#>:" in accordance with lost, stolen or destroyed. the provision of 8ec. C1 and in those instance allowed by law such as 8ec. 7$ and 1<D1 C. To #$1"#"7"e !$& %#0e ! &er#;!"#;e 17#"1 Except in case of fraud, bad faith, or negligence on the part of=. the To reco;er 1:!re1 o% 1"oc3 7$0!5%700< 1o0& %or corporation and its officers, no action may be brought against any &e0#$67e$c< as may be allowed under 8ec. (=1 1<. corporation which shall have issued certificate of stock in lieu of To #$1 ec" ":e 9oo31 o% ":e cor or!"#o$ subject those lost, stolen or destroyed pursuant to the procedure above+ only to the limitations imposed by 8ec. 'D1 11. To 9e %7r$#1:e& 9< ":e 8o1" rece$" %#$!$c#!0 described. 1"!"e8e$" of the corporation as by 8ec. 'D1 1$. To 9e #117e& ! $e5 1"oc3 cer"#%#c!"e in lieu of the lost or destroyed one subject to the procedure laid RATIONALE: down in 8ec. '*1 1. To avoid duplication of certificates of stock1 1*. To :!;e ":e cor or!"#o$ &#11o0;e& under 8ec. 11C to 1$1, and 8ec. 1<D in a close corporation1 $. To avoid fictitious and fraudulent transfers1 and
1$*
17. To
!r"#c# !"e #$ ":e &#1"r#97"#o$ o% !11e"1 of the corporation upon dissolution under 8ec. 1$$1 1D. 3n the case of a close corporation, to e"#"#o$ ":e SEC "o !r9#"r!"e #$ ":e e;e$" o% ! &e!&0oc3 as allowed under 8ec. 1<71 and 1(. &lso in the case of a close corporation, to 5#":&r!5 ":ere%ro8+ for any reason, and co8 e0 ":e cor or!"#o$ "o 7rc:!1e :#1 1:!re1 as provided for in 8ec. 1<D.
OBLIGATIONS AND LIABILITIES: 1. To !< ":e cor or!"#o$ ":e 9!0!$ce o% :#1 7$ !#& 1791cr# "#o$1 subject to the provision of 8ec. ('+'<1 $. To !< #$"ere1" o$ :#1 7$ !#& 1791cr# "#o$ , if re.uired by the by+laws or by the contract of subscription in accordance with 8ec. ((1 *. To !$15er "o ":e cre&#"or %or ":e 7$ !#& or"#o$ o% :#1 1791cr# "#o$ under the Trust Aund -octrine1 7. To !$15er ":e E5!"erF #$ :#1 1"oc31 as provided for in 8ec. (D1 D. To 9e 0#!90e+ !1 >e$er!0 !r"$er1+ for all debts, liabilities and damages of determinable corporation as envisioned under 8ec. $1 %corporation by estoppel)1 and (. To 9e er1o$!00< 0#!90e %or "or"1, in the event that a stockholder in a close corporation actively participates in the management of corporate affairs.
CHAPTER 11: CORPORATE BOOKS AND RECORDS
examine and copy excerpts from its records or minutes, in accordance with the provisions of this "ode, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under 8ection 177 of this "ode5 !rovided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal5 and !rovided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporationPs records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.
&.
BOOKS AND RECORDS TO BE KEPT
8tock corporations must also keep a book to be known as the Nstock and transfer bookN, in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged1 the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment1 a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made1 and such other entries as the by+laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.
Sec. C@. Boo31 "o 9e 3e "H 1"oc3 "r!$1%er !>e$". + Every corporation shall keep and carefully preserve at its principal office a 4o stock transfer agent or one engaged principally in the business record of all business transactions and minutes of all meetings of of registering transfers of stocks in behalf of a stock corporation stockholders or members, or of the board of directors or trustees, in shall be allowed to operate in the !hilippines unless he secures a which shall be set forth in detail the time and place of holding the license from the 8ecurities and Exchange "ommission and pays a meeting, how authori6ed, the notice given, whether the meeting fee as may be fixed by the "ommission, which shall be renewable was regular or special, if special its object, those present and annually5 !rovided, That a stock corporation is not precluded from absent, and every act done or ordered done at the meeting. pon performing or making transfer of its own stocks, in which case all the demand of any director, trustee, stockholder or member, the the rules and regulations imposed on stock transfer agents, except time when any director, trustee, stockholder or member entered or the payment of a license fee herein provided, shall be applicable. left the meeting must be noted in the minutes1 and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed THE FOLLO*ING SHALL BE KEPT AND -AINTAINED action must be recorded in full on his demand. B) THE CORPORATION: Recor&1 o% !00 971#$e11 "r!$1!c"#o$1 which include, among others, %1) journals, %$) ledger, %*) contracts, %7) vouchers and receipts, %D) financial The records of all business transactions of the corporation and the statements and other books of accounts, %() income minutes of any meetings shall be open to inspection by any tax returns, and %') voting trust agreements + which director, trustee, stockholder or member of the corporation at must be kept and carefully preserved at its principal office1 reasonable hours on business days and he may demand, writing, for $. -#$7"e1 o% !00 8ee"#$>1 of stockholders or a copy of excerpts from said records or minutes, at his expense. members and of the directors or trustees setting forth in detail %1) the date, time and place of meeting, %$) how authori6ed, %*) the notice given, %7) whether the same be regular or special, and if special, the purpose &ny officer or agent of the corporation who shall refuse to allow any thereof shall be specified, %D) those present and director, trustees, stockholder or member of the corporation to absent, and %() every act done or ordered done
1.
1$7
thereat + which must likewise be kept at the principal office of the said corporation1 and *. S"oc3 !$& Tr!$1%er Boo3 showing the %1) names of the stockholders, %$) the amount paid or unpaid on all stocks for which the subscription has been made, %*) a statement of every alienation, sale or transfer of stock made, if any %7) the date thereof, and %D) by whom and to whom + which must also be kept at the principal office of the corporation or in the office of its stock transfer agent.
examine corporate books extends to a wholly owned subsidiary which is completely under the control and management of the parent company where he is such a stockholder. ?ut if the two entities are legally being operated as separate and distinct entities, there is no such right of inspection on the part of the stockholder of the parent company.
STOCK AND TRANSFER AGENT: is the person who records every movement of the shares by the minute or by the hour.
INSPECTION B) AGENT: while the right is founded on stock ownership, thus personal in nature, it may be made by the stockholder#s agent or representative since it may be unavailing in many instances.
INSPECTION B) DIRECTORJTRUSTEE: &s compared to a stockholder or member, the right of a director or trustee to inspect and examine corporate books and records is NON=STOCK CORPORATIONS: can also have a stock and considered absolute and un.ualified and without regard to transfer agent for purposes of the club share+membership. motive. T:#1 #1 9ec!71e ! &#rec"or 17 er;#1e1+ &#rec"1 !$& 8!$!>e1 cor or!"e 971#$e11 !$& #" #1 $ece11!r< INSPECTION O COPIES: These books are subject to ":!" :e 9e e67# e& 5#": !00 ":e #$%or8!"#o$ !$& inspection by any of the directors, trustees, stockholders or &!"! 5#": re>!r& "o ":e !%%!#r1 o% ":e co8 !$< #$ members of the corporation at reasonable hours on or&er ":!" :e 8!< 8!$!>e !$& &#rec" #"1 o er!"#o$1 business days and a copy of excerpts of said records may #$"e00#>e$"0< !$& !ccor&#$> "o ":#1 9e1" ?7&>8e$" in be demanded. 3n fact, in so far as Ainancial 8tatements are the interest of all the stockholders he represents. Thus, concerned, the "ode provides5 while stockholders and mmebers are entitled to inspect and examine the books and records as provided in 8ec. '7 Sec. CA. R#>:" "o %#$!$c#!0 1"!"e8e$"1. + Eithin ten %1<) days and 'D they may not gain access to highly sensitive and from receipt of a written re.uest of any stockholder or member, the co$%#&e$"#!0 #$%or8!"#o$. 3n the case of directors, Git is corporation shall furnish to him its most recent financial statement, not deniedH that they have such access. This would which shall include a balance sheet as of the end of the last taxable include, among others, '!( 8!r3e"#$> 1"r!"e>#e1 !$& year and a profit or loss statement for said taxable year, showingr#c#$> in 1"r7c"7reH '9( 97&>e" %or e4 !$1#o$ !$& &#;er1#%#c!"#o$H 'c( re1e!rc: !$& &e;e0o 8e$"H !$& reasonable detail its assets and liabilities and the result of its '&( 1o7rce1 o% %7$&#$>+ !;!#0!9#0#"< o% er1o$$e0+ operations. ro o1!01 %or 8er>er1 or "#e=7 1 5#": o":er %#r81 . RE-EDIES OF STOCKHOLDERS UNJUSTIFIABL) REFUSED THE RIGHT TO INSPECT THE CORPORATE &t the regular meeting of stockholders or members, the board of BOOKS: '-DC( directors or trustees shall present to such stockholders or members 1. -!$&!871. 3n such event, the corporate secretary a financial report of the operations of the corporation for the shall be included as a party respondent since he is preceding year, which shall include financial statements, duly customarily charged with the custody of all documents signed and certified by an independent certified public accountant. or records of the corporation and against whom personal order of the court would be made1 $. D!8!>e1 either against the corporation or the ,owever, if the paid+up capital of the corporation is less than responsible officer who refused the inspection1 or !D<,<<<.<<, the financial statements may be certified under oath by Cr#8#$!0 co8 0!#$" for violation of his right to *. the treasurer or any responsible officer of the corporation. inspect and copy excerpts of all business transactions and minutes of meetings. The officer or agent who refused the examination or copying thereof, shall be guilty and liable of an offense punishable under 8ec. BASIS OF RIGHT: is to protect his interest as a 177 of the "ode. 8ec. 177 imposes a penalty of a fine stockholder. Thus, it has been said that5 GThe right of the of not less than !1,<<< but not more than !1<,<<< or shareholders to ascertain how the affairs of his company an imprisonment for not less than *< days but not are being conducted by its directors and officers is founded more than D years, or both, at the discretion of the by his beneficial interest through ownership of shares and court. 3f the refusal is pursuant to a resolution or order the necessity of self+protection. >anagers of some of the board, the liability shall be imposed upon the corporations deliberately keep the shareholders in directorsMtrustees who voted for such refusal. ignorance or under misapprehension as to the true condition of its affairs. ?usiness prudence demands that DEFENSE OF CORPRATE OFFICERS: 'INL( the investor keep a watchful eye on the management and 1. That the person demanding has #8 ro er0< 71e& any the condition of the business. Those in charge of the information secured through any prior examination of company may be guilty of gross incompetence or the records or minutes of such corporation or any dishonesty for years and escape liability if the shareholders other corporation1 cannot inspect the records and obtain information.H $. That he was $o" !c"#$> #$ >oo& %!#": or for a legitimate purpose in making his demand1 or BOOKS OF SUBSIDIAR): The right of the stockholder to
1$D
*.
The right is 0#8#"e& or re1"r#c"e& 9< 1 ec#!0 0!5 or the law of its creation.
%K.;. 4o. @+$$77$1 &ugust 1, 1=$7)

FACTS: !etitioner &ntonio !ardo seeks to obtain a writ of mandamus to compel respondent company to permit petitioner and his duly authori6ed agent and representative to examine the records and business transactions of said company. ;espondents raised the defense that under &rt. 1< of the by+laws, it is declared that Gevery shareholder may examine the books of the company and other documents pertaining to the same upon the days which the board of directors# shall annually fixH. &nd thus was set from 1D th to $Dth of >arch by virtue of a board resolution. ISSUE: E/4 the ?/- may choose specific performance and particular dates when the right of inspection may be exercisedF HELD: 4o. T:e >e$er!0 r#>:" >#;e$ 9< ":e 1"!"7"e 8!< $o" 9e 0!5%700< !9r#&>e& "o ":e e4"e$" !""e8 "e& #$ ":#1 re1o07"#o$. 3t may be admitted that the officials in charge of a corporation 8!< &e$< #$1 ec"#o$ when sought at unusual hours or under other improper conditions1 97" $e#":er ":e e4ec7"#;e o%%#cer1 $or ":e 9o!r& o% &#rec"or1 :!;e ":e o5er "o &e r#;e ! 1"oc3:o0&er o% ":e r#>:" !0"o>e":er . & by+law unduly restricting the right of inspection is undoubtedly invalid. &uthorities to this effect are too numerous and direct to re.uire extended comment. %17 ".B., CD=1 ' ;.".@., *$D1 7 Thompson on "orporations, $nd ed., sec. 7D1'1 ,arkness vs. Kuthrie, $' tah, $7C1 1<' &m., 8t. ;ep., ((7. (C1.) The demurrer is, therefore, sustained1 and the writ of mandamus will issue as prayed, with the costs against the respondent. EUGENIO VERAGUTH+ -irector and 8tockholder of the 3sabela 8ugar "ompany, 3nc., petitioner, vs. ISABELA SUGAR CO-PAN)+ INC.+ K3@ >/4T3@@&, &cting !resident, and &K 8T34 ?. >/4T3@@&, 8ecretary of the same corporation, respondents. %K.;. 4o. @+*'<(71 /ctober 7, 1=*$) FACTS: !etitioner Eugenio Qeraguth seeks to obtain a final and absolute writ of mandamus to be issued to each and all of the respondents to, among others, place at his disposal at reasonable hours the minutes, documents and books of 3sabela 8ugar "ompany, 3nc. %which he is a director and stockholder) for his inspection and to issue immediately, upon payment of the fees, certified copies of any documentation in connection with said minutes, documents and the books of the aforesaid corporation. -irector Qeraguth telegraphed the secretary of the company, asking the latter to forward in the shortest possible time a certified copy of the resolution of the board of directors concerning the payment of attorneyPs fees in the case against the 3sabela 8ugar "ompany and others. To this the secretary made answer by letter stating that, since the minutes of the meeting in .uestion had not been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of the stockholders a re.uest should be made to the president of the 3sabela 8ugar "ompany, 3nc. 3t further appears that the board of directors adopted a resolution providing for
*. G. PHILPOTTS+ petitioner, vs. PHILIPPINE -ANUFACTURING CO-PAN) and A. 4. ?E;;L, respondents. %K.;. 4o. @+1DD(C1 4ovember C, 1=1=) FACTS: !etitioner seeks to obtain a writ of mandamus to compel the respondents to permit him, in person or by some authori6ed agent or attorney, to inspect and examine the records of the business by !hilippine >anufacturing "ompany, of which he is a stockholder. ;espondents interposed a demurrer. ISSUE: E/4 the right the law concedes to a stockholder may be exercised by a proper agent or attorneyF HELD: Les. T:e r#>:" o% #$1 ec"#o$ >#;e$ "o ! 1"oc3:o0&er c!$ 9e e4erc#1e& e#":er 9< :#81e0% or 9< !$< ro er re re1e$"!"#;e or !""or$e< #$ %!c"+ !$& e#":er 5#": or 5#":o7" ":e !""e$&!$ce o% ":e 1"oc3:o0&er. This is in conformity with the general rule that what a man may do in person he may do through another1 and we find nothing in the statute that would justify us in .ualifying the right in the manner suggested by the respondents. This conclusion is supported by the undoubted weight of authority in the nited 8tates, where it is generally held that the provisions of law conceding the right of inspection to stockholders of corporations are to be liberally construed and that said right may be exercised through any other properly authori6ed person. &s was said in Aoster vs. Ehite %C( &la., 7('), GT:e r#>:" 8!< 9e re>!r&e& !1 er1o$!0+ #$ ":e 1e$1e ":!" o$0< ! 1"oc3:o0&er 8!< e$?o< #"H 97" ":e #$1 ec"#o$ !$& e4!8#$!"#o$ 8!< 9e 8!&e 9< !$o":er. /therwise it would be unavailing in many instances.N &n observation to the same effect is contained in >artin vs. ?ienville /il Eorks "o. %$C @a., $<7), where it is said5 NThe possession of the right in .uestion would be futile if the possessor of it, through lack of knowledge necessary to exercise it, were debarred the right of procuring in his behalf the services of one who could exercise it.N 3n -eadreck vs. Eilson %C ?axt. 9Tenn.:, 1<C), the court said5 NT:!" 1"oc3:o0&er1 :!;e ":e r#>:" "o #$1 ec" ":e 9oo31 o% ":e cor or!"#o$+ "!3#$> 8#$7"e1 %ro8 ":e 1!8e+ !" !00 re!1o$!90e "#8e1 , !$& 8!< 9e !#&e& #$ ":#1 9< e4 er"1 !$& co7$1e0+ 1o !1 "o 8!3e ":e #$1 ec"#o$ ;!07!90e "o ":e8 , is a principle too well settled to need discussion.N &uthorities on this point could be accumulated in great abundance, but as they may be found cited in any legal encyclopedia or treaties devoted to the subject of corporations, it is unnecessary here to refer to other cases announcing the same rule. The demurrer is overruled1 and it is ordered that the writ of mandamus shall issue as prayed, unless within D days from notification hereof the respondents answer to the merits. ANTONIO PARDO+ petitioner, vs. THE HERCULES LU-BER CO.+ INC.+ !$& IGNACIO FERRER+ respondents
1$(
inspection of the books and the taking of copies Nby authority of the !resident of the corporation previously obtained in each case.N ISSUE: E/4 the corporate secretary is justified in refusing to furnish copies of the minutes of the meeting of the ?/-F HELD: Les. The "orporation @aw, section D1, provides that5 G&ll business corporations shall keep and carefully preserve a record of all business transactions, and a minute of all meetings of directors, members, or stockholders, in which shall be set forth in detail the time and place of holding the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. . . . The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member, or stockholder of the corporation at reasonable hours.H The above puts in statutory form the general principles of "orporation @aw. -irectors of a corporation have the un.ualified right to inspect the books and records of the corporation at all reasonable times. !retexts may not be put forward by officers of corporations to keep a director or shareholder from inspecting the books and minutes of the corporation, and the right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. & director or stockholder cannot of course make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the corporation. *e &o $o" co$ce#;e+ :o5e;er+ ":!" ! &#rec"or or 1"oc3:o0&er :!1 !$< !91o07"e r#>:" "o 1ec7re cer"#%#e& co #e1 o% ":e 8#$7"e1 o% ":e cor or!"#o$ 7$"#0 ":e1e 8#$7"e1 :!;e 9ee$ 5r#""e$ 7 !$& ! ro;e& 9< ":e &#rec"or1. %8ee AisherPs !hilippine @aw of 8tock "orporations, sec. 1D*, and Aletcher "yclopedia "orporations, vol. 7, "hap. 7D.) "ombining the facts and the law, we do not think that anything improper occurred when the secretary declined to furnish certified copies of minutes which had not been approved by the board of directors, and that while so much of the last resolution of the board of directors as provides for prior approval of the president of the corporation before the books of the corporation can be inspected puts an illegal obstacle in the way of a stockholder or director, that resolution, so far as we are aware, has not been enforced to the detriment of anyone. 3n addition, it should be said that this is a family dispute, the petitioner and the individual respondents belonging to the same family1 that a test case between the petitioner and the respondents has not been begun in the "ourt of Airst 3nstance of /ccidental 4egros involving hundreds of thousands of pesos, and that the appellate court should not intrude its views to give an advantage to either party. Ee rule that the petitioner has not made out a case for relief by mandamus. GOKONG*EI VS. SEC %supra, ",&!TE; ' and C) ISSUE: E/4 petitioner may be properly denied examination of the books and records of 8an >iguel 3nternational, 3nc., a fully owned subsidiary of 8>"F
HELD: 4o. !ursuant to the second paragraph of section D1 of the "orporation @aw, N%t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours.N The stockholderPs right of inspection of the corporationPs books and records is based upon their ownership of the assets and property of the corporation. 3t is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an e.uitable ownership, a beneficial ownership, or a ownership. This right is predicated upon the necessity of self+protection. 3t is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. I$ o":er 5or&1+ ":e #$1 ec"#o$ :!1 "o 9e >er8!$e "o ":e e"#"#o$erI1 #$"ere1" !1 ! 1"oc3:o0&er+ !$& :!1 "o 9e ro er !$& 0!5%70 #$ c:!r!c"er !$& $o" #$#8#c!0 "o ":e #$"ere1" o% ":e cor or!"#o$ . 3n Krey v. 3nsular @umber, this "ourt held that N":e r#>:" "o e4!8#$e ":e 9oo31 o% ":e cor or!"#o$ 871" 9e e4erc#1e& #$ >oo& %!#":+ %or 1 ec#%#c !$& :o$e1" 7r o1e+ !$& $o" "o >r!"#%< c7r#o1#"<+ or %or 1 ec#%#c !$& :o$e1" 7r o1e+ !$& $o" "o >r!"#%< c7r#o1#"<+ or %or 1 ec70!"#;e or ;e4!"#o71 7r o1e1. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to in.uire into and consider the stockholderPs good faith and his purpose and motives in seeking inspection. Thus, it was held that N ":e r#>:" >#;e$ 9< 1"!"7"e #1 $o" !91o07"e !$& 8!< 9e re%71e& 5:e$ ":e #$%or8!"#o$ #1 $o" 1o7>:" #$ >oo& %!#": or #1 71e& "o ":e &e"r#8e$" o% ":e cor or!"#o$.G ?ut the Nimpropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the "ourt is to take cogni6ance of it as a .ualification. 3n other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 3t appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others.N *:#0e ":e r#>:" o% ! 1"oc3:o0&er "o e4!8#$e ":e 9oo31 !$& recor&1 o% ! cor or!"#o$ %or ! 0!5%70 7r o1e #1 ! 8!""er o% 0!5+ ":e r#>:" o% 17c: 1"oc3:o0&er "o e4!8#$e ":e 9oo31 !$& recor&1 o% ! 5:o00<=o5$e& 1791#&#!r< o% ":e cor or!"#o$ #$ 5:#c: :e #1 ! 1"oc3:o0&er #1 ! &#%%ere$" ":#$>. 8ome state courts recogni6e the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be re.uired to be produced for examination, and that a writ of mandamus, may be
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granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. >andamus was likewise held proper to inspect both the subsidiaryPs and the parent corporationPs books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. /n the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. @ikewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of Npersons having an interest.N 3n the 4ash case, The 8upreme "ourt of 4ew Lork held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporationPs subsidiariesP books and records which were in corporationPs possession and control in its office in 4ew Lork.N 3n the ?ailey case, stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors. 3n the case at bar, considering that the foreign subsidiary is wholly owned by respondent 8an >iguel "orporation and, therefore, under its control, it would be more in accord with e.uity, good faith and fair dealing to construe ":e 1"!"7"or< r#>:" o% e"#"#o$er !1 1"oc3:o0&er "o #$1 ec" ":e 9oo31 !$& recor&1 o% ":e cor or!"#o$ !1 e4"e$&#$> "o 9oo31 !$& recor&1 o% 17c: 5:o00<= o5$e& 1791#&#!r< 5:#c: !re #$ re1 o$&e$" cor or!"#o$I1 o11e11#o$ !$& co$"ro0. The "ourt voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of 8an >iguel 3nternational, 3nc., as specified by him. RA-ON A. GONZALES+ petitioner, vs. THE PHILIPPINE NATIONAL BANK+ respondent. %K.;. 4o. @+***$<1 >ay *<, 1=C*) FACTS: !etitioner ;amon &. Kon6ales instituted in the "A3 of >anila a special civil action for mandamus against the herein respondent !4? praying that the latter be ordered to allow him to look into the books and records of !4? to satisfy himself as to the truth of the published report that %1) the respondent has guaranteed the obligation of 8outh 4egros -evelopment "orporation in the purchase of a 8S $*> sugar+mill to be financed by Bapanese suppliers and financiers1 that the respondent1 %$) the respondent is financing the construction of the !$1> "ebu+>actan ?ridge to be constructed by Q" !once, 3nc.1 and %*) the construction of !assi 8ugar >ill at 3loilo by the ,omion !hilippines, 3nc.1 as well as %7) to in.uire into the validity of said transactions.
The "A3 dismissed the special civil action. &ssailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank dis.ualifies him to exercise the right of a stockholder to such inspection under 8ection D1 of &ct 4o. 17D=, as amended. 8aid provision reads in part as follows5 8ec. D1. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours. !etitioner maintains that the above+.uoted provision does not justify the .ualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. ,e further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his purpose for asking for the examination and inspection herein involved. ISSUE: E/4 !etitioner is correct in saying that he has an un.ualified right to inspect the books as provided under 8ec. D1 of the "orporation @awF HELD: 4o. !etitioner may no longer insist on his interpretation of 8ection D1 of &ct 4o. 17D=, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former "orporation @aw %&ct 4o. 17D=, as amended) has been replaced by ?atas !ambansa ?lg. (C, otherwise known as the N"orporation "ode of the !hilippines.N The right of inspection granted to a stockholder under 8ection D1 of &ct 4o. 17D= has been retained, but with some modifications. The second and third paragraphs of 8ection '7 of ?atas !ambansa ?lg. (C provide the following5 GThe records of all business transactions of the corporation and the minutes of any meeting shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. &ny officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this "ode, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under 8ection 177 of this "ode5 !rovided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal1 and !rovided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporationPs
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records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.H &s may be noted from the above+.uoted provisions, among the changes introduced in the new "ode with respect to ":e r#>:" o% #$1 ec"#o$ >r!$"e& "o ! 1"oc3:o0&er !re ":e %o00o5#$> '1( ":e recor&1 871" 9e 3e " !" ":e r#$c# !0 o%%#ce o% ":e cor or!"#o$H '2( ":e #$1 ec"#o$ 871" 9e 8!&e o$ 971#$e11 &!<1H '/( ":e 1"oc3:o0&er 8!< &e8!$& ! co < o% ":e e4cer "1 o% ":e recor&1 or 8#$7"e1H '@( !$& ":e re%71!0 "o !00o5 17c: #$1 ec"#o$ 1:!00 179?ec" ":e err#$> o%%#cer or !>e$" o% ":e cor or!"#o$ "o c#;#0 !$& cr#8#$!0 0#!9#0#"#e1. ,owever, while seemingly enlarging the right of inspection, the new "ode has prescribed limitations to the same. I" #1 $o5 e4 re110< re67#re& !1 ! co$&#"#o$ %or 17c: e4!8#$!"#o$ ":!" '1( ":e o$e re67e1"#$> #" 871" $o" :!;e 9ee$ >7#0"< o% 71#$> #8 ro er0< !$< #$%or8!"#o$ ":ro7>: ! r#or e4!8#$!"#o$+ !$& '2( ":!" ":e er1o$ !13#$> %or 17c: e4!8#$!"#o$ 871" 9e G!c"#$> #$ >oo& %!#": !$& %or ! 0e>#"#8!"e 7r o1e #$ 8!3#$> :#1 &e8!$&.G The un.ualified provision on the right of inspection previously contained in 8ection D1, &ct 4o. 17D=, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under 8ection D1 of the former "orporation @aw should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. 3f there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under 8ection D1 of the old "orporation @aw must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent provision contained in 8ection '7 of ?atas !ambansa ?lg. (C. ISSUE2: E/4 petitioner is in good faith in the exercise of his right to inspect the books of !4?F HELD: 4o. &lthough the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to in.uire into their validity. The circumstances under which he ac.uired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. &dmittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. ,is obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. ,e could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.
ISSUE/: E/4 the right of a stockholder to inspect the books provided under 8ec. '7 of the "orporation "ode is applicable to !4?F HELD: 4o. Ee also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. %;epublic &ct 4o. 1*<<, as amended.) 8ections 1D, 1( and *< of the said charter provide respectively as follows5 8ec. 1D. 3nspection by -epartment of 8upervision and Examination of the "entral ?ank. Y T:e N!"#o$!0 B!$3 1:!00 9e 179?ec" "o #$1 ec"#o$ 9< ":e De !r"8e$" o% S7 er;#1#o$ !$& E4!8#$!"#o$ o% ":e Ce$"r!0 B!$3I 8ec. 1(. "onfidential information. YThe 8uperintendent of ?anks and the &uditor Keneral, or other officers designated by law to inspect or investigate the condition of the 4ational ?ank, 1:!00 $o" re;e!0 "o !$< er1o$ o":er ":!$ ":e Pre1#&e$" o% ":e P:#0# #$e1+ ":e Secre"!r< o% F#$!$ce+ !$& ":e Bo!r& o% D#rec"or1 ":e &e"!#01 o% ":e #$1 ec"#o$ or #$;e1"#>!"#o$ , $or 1:!00 ":e< >#;e !$< #$%or8!"#o$ re0!"#;e "o ":e %7$&1 #$ #"1 c71"o&<+ #"1 c7rre$" !cco7$"1 or &e o1#"1 9e0o$>#$> "o r#;!"e #$&#;#&7!01+ cor or!"#o$1+ or !$< o":er e$"#"<+ e4ce " 9< or&er o% ! Co7r" o% co8 e"e$" ?7r#1&#c"#o$ ,P 8ec. *<. !enalties for violation of the provisions of this &ct.Y &ny director, officer, employee, or agent of the ?ank, who violates or permits the violation of any of the provisions of this &ct, or any person aiding or abetting the violations of any of the provisions of this &ct, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment. The !hilippine 4ational ?ank is not an ordinary corporation. ,aving a charter of its own, it is not governed, as a rule, by the "orporation "ode of the !hilippines. 8ection 7 of the said "ode provides5 8E". 7. "orporations created by special laws or charters . Y "orporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this "ode, insofar as they are applicable. T:e ro;#1#o$ o% Sec"#o$ C@ o% B!"!1 P!89!$1! B0>. BD o% ":e $e5 Cor or!"#o$ Co&e 5#": re1 ec" "o ":e r#>:" o% ! 1"oc3:o0&er "o &e8!$& !$ #$1 ec"#o$ or e4!8#$!"#o$ o% ":e 9oo31 o% ":e cor or!"#o$ 8!< $o" 9e reco$c#0e& 5#": ":e !9o;e67o"e& ro;#1#o$1 o% ":e c:!r"er o% ":e re1 o$&e$" 9!$3. I" #1 $o" correc" "o c0!#8+ ":ere%ore+ ":!" ":e r#>:" o% #$1 ec"#o$ 7$&er Sec"#o$ C@ o% ":e $e5 Cor or!"#o$ Co&e 8!< ! 0< #$ ! 17 0e8e$"!r< c! !c#"< "o ":e c:!r"er o% ":e re1 o$&e$" 9!$3. CHAPTER 12: -ERGER AND CONSOLIDATION 8ec. *(, par. C of the "orporation "ode of the !hilippines expressly empowers a corporation to merge or consolidate
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with another corporation subject to the re.uirements and procedure prescribed in T3T@E 32.
shall be extinguished.
Sec. CB. P0!$ or 8er>er o% co$1o0#&!"#o$. + Two or more corporations may merge into a single corporation which shall be amendment to the plan of merger or consolidation may be &ny one of the constituent corporations or may consolidate into a made, new provided such amendment is approved by majority vote of single corporation which shall be the consolidated corporation. the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two+thirds %$M*) of the outstanding capital stock or of two+thirds %$M*) of the members of each of the The board of directors or trustees of each corporation, party to the constituent corporations. 8uch plan, together with any amendment, merger or consolidation, shall approve a 0!$ o% 8er>ershall or be considered as the agreement of merger or consolidation. co$1o0#&!"#o$ setting forth the following5 'NTSO(
Sec. CD. Ar"#c0e1 o% 8er>er or co$1o0#&!"#o$. + &fter the 1. The $!8e1 of the corporations proposing to mergeapproval or by the stockholders or members as re.uired by the consolidate, hereinafter referred to as the constituent corporations1 preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice+president and certified by the secretary or assistant secretary of each corporation setting forth5 $. The "er81 of the merger or consolidation and the mode of carrying the same into effect1 1. The plan of the merger or the plan of consolidation1 *. & 1"!"e8e$" o% ":e c:!$>e1, if any, in the articles of incorporation of the surviving corporation in case of merger1 and, with respect to the consolidated corporation in case $. of &s to stock corporations, the number of shares outstanding, or in consolidation, all the statements re.uired to be set forth in the thecase of non+stock corporations, the number of members1 and articles of incorporation for corporations organi6ed under this "ode1 and *. &s to each corporation, the number of shares or members voting for and against such plan, respectively. 7. 8uch o":er ro;#1#o$1 with respect to the proposed merger or consolidation as are deemed necessary or desirable. Sec. CM. E%%ec"#;#"< o% 8er>er or co$1o0#&!"#o$. + The articles of merger or of consolidation, signed and certified as herein above Sec. CC. S"oc3:o0&erI1 or 8e89erI1 ! ro;!0. + pon approval re.uired, shall be submitted to the 8ecurities and Exchange by majority vote of each of the board of directors or trustees of"ommission the in .uadruplicate for its approval5 !rovided, That in the constituent corporations of the plan of merger or consolidation,case the of merger or consolidation of banks or banking institutions, same shall be submitted for approval by the stockholders or building and loan associations, trust companies, insurance members of each of such corporations at separate corporate companies, public utilities, educational institutions and other special meetings duly called for the purpose. 4otice of such meetings shall corporations governed by special laws, the favorable be given to all stockholders or members of the respective recommendation of the appropriate government agency shall first corporations, at least two %$) weeks prior to the date of be theobtained. 3f the "ommission is satisfied that the merger or meeting, either personally or by registered mail. 8aid notice shall consolidation of the corporations concerned is not inconsistent with state the purpose of the meeting and shall include a copy or thea provisions of this "ode and existing laws, it shall issue a summary of the plan of merger or consolidation. The affirmative certificate of merger or of consolidation, at which time the merger vote of stockholders representing at least two+thirds %$M*) of or the consolidation shall be effective. outstanding capital stock of each corporation in the case of stock corporations or at least two+thirds %$M*) of the members in the case of non+stock corporations shall be necessary for the approval of such plan. &ny dissenting stockholder in stock corporations may 3f, upon investigation, the 8ecurities and Exchange "ommission has exercise his appraisal right in accordance with the "ode5 !rovided, reason to believe that the proposed merger or consolidation is That if after the approval by the stockholders of such plan, contrary the to or inconsistent with the provisions of this "ode or board of directors decides to abandon the plan, the appraisal right existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Eritten notice of the date,
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time and place of hearing shall be given to each constituent enable it to take care of its obligations thereby avoiding or bankruptcy. ?ut in some cases, a corporation at least two %$) weeks before said hearing. li.uidation The "ommission shall thereafter proceed as provided in this "ode. reorgani6ation is effected notwithstanding the fact that the corporation is solvent.
ILLEGAL CO-BINATIONS: Ehile a merger or consolidation is a right, granted by law, to corporations Sec. DN. E%%ec"1 o% 8er>er or co$1o0#&!"#o$. + The merger or registered under the "ode, &ct *D1C proscribes illegal consolidation shall have the following effects5 combination. 3t provides, under 8ec. $< thereof that Gno corporation engaged in commerce may ac.uire, directly or indirectly, the whole or any part of the stock or other share capital of another corporation or corporations engaged in commerce, where the effect of such ac.uisitions may be to 1. The constituent corporations shall become a single corporation substantially lessen competition between the corporation which, in case of merger, shall be the surviving corporation or corporations whose stock is so ac.uired and the designated in the plan of merger1 and, in case of consolidation, shall corporation making the ac.uisition, or between any of be the consolidated corporation designated in the plan of them, or to restrain such commerce in any section consolidation1 community, or ten to create a monopoly of any line of
commerce.H "orollary to this is &rt. 1C( of the ;evised !enal "ode which imposes a penalty of imprisonment andMor fine on any person who enters into a contract or conspiracy to create monopolies and combinations in $. The separate existence of the constituent corporations shall restraint of trade. cease, except that of the surviving or the consolidated corporation1
-ERGER: is a union effected by absorbing one or more existing corporations by another which survives and continues the combined business. 3t is the uniting of two or *. The surviving or the consolidated corporation shall possess all corporations by the transfer of property to one of more the rights, privileges, immunities and powers and shall be subject to which continue in existence, the other or the others them all the duties and liabilities of a corporation organi6ed under being this dissolved and merged therein. "ode1 Example5 3t was agreed that ? "ompany will take over and ac.uire all the business, assets, properties, rights and liabilities of " "orporation and by virtue of which ? will absorb " which is to be dissolved. 7. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities CONSOLIDATION: and is the uniting or amalgamation of two franchises of each of the constituent corporations1 and all property, or more existing corporations to form a new corporation. 3t real or personal, and all receivables due on whatever account, signifies a union as necessarily results in the creation of a new including subscriptions to shares and other choses in action, and all corporation and the termination of existence of old ones. The united concern resulting from such union is and every other interest of, or belonging to, or due to each called consolidated corporation. constituent corporation, shall be deemed transferred to and vested
in such surviving or consolidated corporation without further act or Thus, in the example given, if ? and " agreed to form a deed1 and new corporation, & "ompany, which will absorb both business, and all of ?#s and "#s assets, properties, rights and liabilities are transferred to & which will continue their combined business while ? and " will be dissolved, a consolidation takes place. D. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the 3n or effect, in a consolidation, the constituent corporations constituent corporations in the same manner as if such surviving are all dissolved, while in a merger, the absorbing or consolidated corporation had itself incurred such liabilities or surviving corporation is not, only the absorbed. obligations1 and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted RE2UIRE-ENTS AND PROCEDURE TO ACCO-PLISH by or against the surviving or consolidated corporation. The rights -ERGER OR CONSOLIDATION: of creditors or liens upon the property of any of such constituent 1. The ?/-MT of each constituent corporations shall corporations shall not be impaired by such merger or consolidation. approve a plan or merger or consolidation setting for the matters re.uired in 8ec. '(1 $. &pproval of the plan by the stockholders representing $M* outstanding capital stock or $M* of the member in REASON FOR REORGANIZATION: The reasons inducing a non+stock corporations of each of such corporations at reorgani6ation are not in every case the same, but for the separate corporate meetings called for the purpose1 most part, they are to be found in the weak financial or *. !rior notice of such meeting, with a copy or summary insolvent condition of the particular corporations. The aim of the plan of merger or consolidation shall be given to of corporate reorgani6ation or combination is generally to all stockholders or members at least $ weeks prior to put the company upon a sound financial basis and to
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7.
D.
(.
the scheduled meeting, either personally or by registered mail stating the purpose thereof1 Execution of the articles of merger or consolidation by each constituent corporations to be signed by the president or vice+president and certified by the corporate secretary or assistant secretary setting forth the matters re.uired in 8ec. 'C1 8ubmission of the articles of merger or consolidation in .uadruplicate to the 8E" subject to the re.uirement of 8ec. '= that if it involve corporations under direct supervision of any other government agency or governed by special laws the favorable recommendation of the government agency concerned shall first be secured1 and 3ssuance of the certificate of merger or consolidation by the 8E" at which time the merger or consolidation shall be effective. 3f the plan, however, is believed to be contrary to law, the 8E" shall set a hearing to give the corporations concerned an opportunity to be heard upon notice and thereafter, the "ommission shall proceed as provided in the "ode.
The defendant @oren6o 8armiento Br. executed a promissory note in favor of &ssociated ?ank for !$.D> of which !$.$D> remains unpaid. -espite repeated demands, the defendant failed to pay the sum due. -efendant denied all pertinent allegations in the complaint and alleged as affirmative andMor special defense that &ssociated ?ank is not the real party in interest because the promissory note was executed in favor of "iti6ens ?ank and Trust "ompany. -efendant was declared in default for not appearing in the !re+Trial "onference and the plaintiff was allowed to present evidence ex+parte, the >otion to @ife /rder of -efault and or ;econsideration of the /rder being dismissed. The trial court ruled in favor of &ssociated ?ank. /n appeal, the "& reversed the trial court. ISSUE: E/4 &ssociated ?ank, the surviving corporation, may enforce the promissory note made by 8armiento in favor of "?T", the absorbed company after the effectivity of the mergerF HELD: Les. /rdinarily, #$ ":e 8er>er o% "5o or 8ore e4#1"#$> cor or!"#o$1+ o$e o% ":e co89#$#$> cor or!"#o$1 17r;#;e1 !$& co$"#$7e1 ":e co89#$e& 971#$e11+ 5:#0e ":e re1" !re &#11o0;e& !$& !00 ":e#r r#>:"1+ ro er"#e1 !$& 0#!9#0#"#e1 !re !c67#re& 9< ":e 17r;#;#$> cor or!"#o$. A0":o7>: ":ere #1 ! &#11o07"#o$ o% ":e !91or9e& cor or!"#o$1+ ":ere #1 $o 5#$&#$> 7 o% ":e#r !%%!#r1 or 0#67#&!"#o$ o% ":e#r !11e"1+ 9ec!71e ":e 17r;#;#$> cor or!"#o$ !7"o8!"#c!00< !c67#re1 !00 ":e#r r#>:"1+ r#;#0e>e1 !$& o5er1+ !1 5e00 !1 ":e#r 0#!9#0#"#e1 . T:e 8er>er+ :o5e;er+ &oe1 $o" 9eco8e e%%ec"#;e 7 o$ ":e 8ere !>ree8e$" o% ":e co$1"#"7e$" cor or!"#o$1. The procedure to be followed is prescribed under the "orporation "ode. 8ection '= of said "ode re.uires the approval by the 8ecurities and Exchange "ommission %8E") of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that ":e 8er>er 1:!00 9e e%%ec"#;e o$0< 7 o$ ":e #117!$ce 9< ":e SEC o% ! cer"#%#c!"e o% 8er>er. T:e e%%ec"#;#"< &!"e o% ":e 8er>er #1 cr7c#!0 %or &e"er8#$#$> 5:e$ ":e 8er>e& or !91or9e& cor or!"#o$ ce!1e1 "o e4#1"H !$& 5:e$ #"1 r#>:"1+ r#;#0e>e1+ ro er"#e1 !1 5e00 !1 0#!9#0#"#e1 !11 o$ "o ":e 17r;#;#$> cor or!"#o$ . "onsistent with the aforementioned 8ection '=, the 8eptember 1(, 1='D &greement of >erger, which &ssociated ?anking "orporation %&?") and "iti6ens ?ank and Trust "ompany %"?T") entered into, provided that its effectivity Nshall, for all intents and purposes, be the date when the necessary papers to carry out this 9m:erger shall have been approved by the 8ecurities and Exchange "ommission.N &s to the transfer of the properties of "?T" to &?", the agreement provides5 G1<. pon effective date of the >erger, all rights, privileges, powers, immunities, franchises, assets and property of 9"?T":, whether real, personal or mixed, and including 9"?T"Ps: goodwill and tradename, and all debts due to 9"?T": on whatever act, and all other things in
EFFECTS OF -ERGER OR CONSOLIDATION: 1. There will only be a single corporation. 3n case of merger, the surviving corporation or the consolidate corporation in case of consolidation1 $. The termination of corporate existence of the constituent corporations, except that of the surviving corporation or the consolidated corporation1 *. The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organi6ed under the "ode1 7. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of the constituent corporations, and all property and all receivables due, including subscriptions to shares and other choses in action, and every other interest of, or belonging to or due to the constituent corporations shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed1 and D. The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the merger or consolidation. LI2UIDATION: There would be no need to li.uidate or wind+up the affairs of the corporation because %1) there are no assets to distribute1 %$) no debts and liabilities to pay since all these are transferred to the surviving or consolidated corporation.
ASSOCIATED BANK+ petitioner, vs. COURT OF APPEALS !$& LORENZO SAR-IENTO JR.+ respondents. %K.;. 4o. 1$*'=*1 Bune $=, 1==C) FACTS: &ssociated ?anking "orporation and "iti6ens ?ank and Trust "ompany merged to form &ssociated "iti6ens ?ank which subse.uently changed its corporate name to &ssociate ?ank.
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action belonging to 9"?T": as of the effective date of the 9m:erger shall be vested in 9&?":, the 8 ;Q3Q34K ?&4R, without need of further act or deedH The records do not show when the 8E" approved the merger. !rivate respondentPs theory is that it took effect on the date of the execution of the agreement itself, which was 8eptember 1(, 1='D. !rivate respondent contends that, since he issued the promissory note to "?T" on 8eptember ', 1='' Y two years after the merger agreement had been executed Y "?T" could not have conveyed or transferred to petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory note on private respondent1 such right properly pertains only to "?T". &ssuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. & closer perusal of the merger agreement leads to a different conclusion. The provision .uoted earlier has this other clause5 pon the effective date of the 9m:erger, all references to 9"?T": in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to 9&?":, the 8 ;Q3Q34K ?&4R, as if such references were direct references to 9&?":. . . . Thus, ":e %!c" ":!" ":e ro8#11or< $o"e 5!1 e4ec7"e& !%"er ":e e%%ec"#;#"< &!"e o% ":e 8er>er &oe1 $o" 8#0#"!"e !>!#$1" e"#"#o$er. T:e !>ree8e$" #"1e0% c0e!r0< ro;#&e1 ":!" !00 co$"r!c"1 S #rre1 ec"#;e o% ":e &!"e o% e4ec7"#o$ S e$"ere& #$"o #$ ":e $!8e o% CBTC 1:!00 9e 7$&er1"oo& !1 er"!#$#$> "o ":e 17r;#;#$> 9!$3+ :ere#$ e"#"#o$er. 8ince, in contrast to the earlier afore.uoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks1 specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Thus, although the subject promissory note names "?T" as the payee, the reference to "?T" in the note shall be construed, under the very provisions of the merger agreement, as a reference to petitioner bank, Nas if such reference 9was a: direct reference toN the latter Nfor all intents and purposes.N 4o other construction can be given to the une.uivocal stipulation. ?eing clear, plain and free of ambiguity, the provision must be given its literal meaning and applied without a convoluted interpretation. Qerba lelegis non est recedendum. 3n light of the foregoing, the "ourt holds that petitioner has a valid cause of action against private respondent. "learly, the failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitionerPs right to collect the proceeds of the loan it extended to the former.
BANK OF THE PHILIPPINE ISLANDS+ !etitioner, vs. BPI E-PLO)EES UNION=DAVAO CHAPTER= FEDERATION OF UNIONS IN BPI UNIBANK+ ;espondent %K.;. 4o. 1(7*<11 &ugust 1<, $<1<) FACTS: /n >arch $*, $<<<, the ?angko 8entral ng !ilipinas approved the &rticles of >erger executed on Banuary $<, $<<< by and between ?!3, herein petitioner, and AE?T". This &rticle and !lan of >erger was approved by the 8ecurities and Exchange "ommission on &pril ', $<<<. !ursuant to the &rticle and !lan of >erger, all the assets and liabilities of AE?T" were transferred to and absorbed by ?!3 as the surviving corporation. AE?T" employees, including those in its different branches across the country, were hired by petitioner as its own employees, with their status and tenure recogni6ed and salaries and benefits maintained. ?!3 has an existing nion 8hop "lause agreement with the ?!3 Employees nion+-avao "hapter+Aederation of nions in ?!3 nibank %?!3 nion) whereby it is a pre+condition that new employees must join the union before they can be regulari6ed otherwise they will not have a continued employment. ?y reason of the failure of the AE?T" employees to join the union, ?!3 nion recommended to ?!3 their dismissal. ?!3 refused. The issue went to voluntary arbitration where ?!3 won but the "ourt of &ppeals reversed the Qoluntary &rbitrator. ,ence, this petition. ISSUE: E/4 employees of a dissolved corporation in a merger are considered absorbed by the surviving corporationF HELD: 4o. A91or9e& FEBTC E8 0o<ee1 !re $e#":er !11e"1 $or 0#!9#0#"#e1. 3n legal parlance, however, human beings are never embraced in the term Nassets and liabilities.N >oreover, ?!3#s absorption of former AE?T" employees was neither by operation of law nor by legal conse.uence of contract. T:ere 5!1 $o >o;er$8e$" re>70!"#o$ or 0!5 ":!" co8 e00e& ":e 8er>er o% ":e "5o 9!$31 or ":e !91or "#o$ o% ":e e8 0o<ee1 o% ":e &#11o0;e& cor or!"#o$ 9< ":e 17r;#;#$> cor or!"#o$. H!& ":ere 9ee$ 17c: 0!5 or re>70!"#o$+ ":e !91or "#o$ o% e8 0o<ee1 o% ":e $o$=17r;#;#$> e$"#"#e1 o% ":e 8er>er 5o70& :!;e 9ee$ 8!$&!"or< o$ ":e 17r;#;#$> cor or!"#o$. 3n the present case, the merger was voluntarily entered into by both banks presumably for some mutually acceptable consideration. 3n fact, ":e Cor or!"#o$ Co&e &oe1 $o" !01o 8!$&!"e ":e !91or "#o$ o% ":e e8 0o<ee1 o% ":e $o$= 17r;#;#$> cor or!"#o$ 9< ":e 17r;#;#$> cor or!"#o$ #$ ":e c!1e o% ! 8er>er. Sec"#o$ DN o% ":e Cor or!"#o$ Co&e ro;#&e1. This "ourt believes that it is contrary to public policy to declare the former AE?T" employees as forming part of the assets or liabilities of AE?T" that were transferred and absorbed by ?!3 in the &rticles of >erger. &ssets and liabilities, in this instance, should be deemed to refer only to property rights and obligations of AE?T" and do not include the employment contracts of its personnel. & corporation cannot unilaterally transfer its employees to another employer like chattel. "ertainly, if ?!3 as an employer had the right to choose who to retain among
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AE?T"#s employees, AE?T" employees had the concomitant right to choose not to be absorbed by ?!3. Even though AE?T" employees had no choice or control over the merger of their employer with ?!3, they had a choice whether or not they would allow themselves to be absorbed by ?!3. "ertainly nothing prevented the AE?T"#s employees from resigning or retiring and seeking employment elsewhere instead of going along with the proposed absorption. Employment is a personal consensual contract and absorption by ?!3 of a former AE?T" employee without the consent of the employee is in violation of an individual#s freedom to contract. 3t would have been a different matter if there was an express provision in the articles of merger that as a condition for the merger, ?!3 was being re.uired to assume all the employment contracts of all existing AE?T" employees with the conformity of the employees. 3n the absence of such a provision in the articles of merger, then ?!3 clearly had the business management decision as to whether or not employ AE?T"#s employees. AE?T" employees likewise retained the prerogative to allow themselves to be absorbed or not1 otherwise, that would be tantamount to involuntary servitude. There appears to be no dispute that with respect to AE?T" employees that ?!3 chose not to employ or AE?T" employees who chose to retire or be separated from employment instead of Nbeing absorbed,N BPI.1 !1178e& 0#!9#0#"< to these employees pursuant to the merger is AE?T"#s liability to them in terms of separation pay, retirement pay or other benefits that may be due them depending on the circumstances. &lthough not binding on this "ourt, &merican jurisprudence on the conse.uences of voluntary mergers on the right to employment and seniority rights is persuasive and illuminating. Ee .uote the following pertinent discussion from the &merican @aw ;eports5 8everal cases have involved the situation where as a result of 8er>er1, consolidations, or shutdowns, one group of employees, who had accumulated seniority at one plant or for one employer, finds that their jobs have been discontinued except to the extent that they are offered employment at the place or by the employer where the work is to be carried on in the future. 8uch cases have involved the .uestion whether such transferring employees should be entitled to carry with them their accumulated seniority or whether they are to be compelled to start over at the bottom of the seniority list in the NnewN job. 3t has been recogni6ed in some cases that the accumulated seniority does not survive and cannot be transferred to the NnewN job. 3n "arver v ?rien %1=7$) *1D 3ll &pp (7*, 7* 4E$d D=', the court saying that, absent some specific contract provision otherwise, seniority rights were ordinarily limited to the employment in which they were earned, and concluding that the contract for which specific performance was sought was not such a completed and binding agreement as would support such e.uitable relief, since the railroad, whose concurrence in the arrangements made was essential to their effectuation, was not a party to the agreement.
3ndeed, from the tenor of local and foreign authorities, in voluntary mergers, !91or "#o$ o% ":e &#11o0;e& cor or!"#o$.1 e8 0o<ee1 or ":e reco>$#"#o$ o% ":e !91or9e& e8 0o<ee1. 1er;#ce 5#": ":e#r re;#o71 e8 0o<er 8!< 9e &e8!$&e& %ro8 ":e 17r;#;#$> cor or!"#o$ #% re67#re& 9< ro;#1#o$ o% 0!5 or co$"r!c". The dissent of Bustice &rturo -. ?rion tries to make a distinction as to the terms and conditions of employment of the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take away from corporate management the prerogative to make purely business decisions on the hiring of employees or will give it an excuse not to apply the "?& in force to the prejudice of its own employees and their recogni6ed collective bargaining agent. 3n this regard, we disagree with Bustice ?rion. Bustice ?rion takes the position that because the surviving corporation continues the personality of the dissolved corporation and ac.uires all the latter#s rights and obligations, it is duty+bound to absorb the dissolved corporation#s employees, even in the absence of a stipulation in the plan of merger. ,e proposes that this interpretation would provide the necessary protection to labor as it spares workers from being Nleft in legal limbo.N ,owever, there are instances where an employer can validly discontinue or terminate the employment of an employee without violating his right to security of tenure. &mong others, in case of redundancy, for example, superfluous employees may be terminated and such termination would be authori6ed under &rticle $C* of the @abor "ode. The lack of a provision in the plan of merger regarding the transfer of employment contracts to the surviving corporation could have very well been deliberated on the part of the parties to the merger, in order to grant the surviving corporation the freedom to choose who among the dissolved corporation#s employees to retain, in accordance with the surviving corporation#s business needs. 3f terminations, for instance due to redundancy or labor+saving devices or to prevent losses, are done in good faith, they would be valid. The surviving corporation too is duty+bound to protect the rights of its own employees who may be affected by the merger in terms of seniority and other conditions of their employment due to the merger. Thus, we are not convinced that in the absence of a stipulation in the merger plan the surviving corporation was compelled, or may be judicially compelled, to absorb all employees under the same terms and conditions obtaining in the dissolved corporation as the surviving corporation should also take into consideration the state of its business and its obligations to its own employees, and to their certified collective bargaining agent or labor union. Even assuming we accept Bustice ?rion#s theory that in a merger situation the surviving corporation should be compelled to absorb the dissolved corporation#s employees as a legal conse.uence of the merger and as a social justice consideration, it bears to emphasi6e his dissent also recogni6es that the employee may choose to end his employment at any time by voluntarily resigning. Aor the employee to be NabsorbedN by ?!3, it re.uires the employees# implied or express consent. 3t is because of this human element in employment contracts and the personal,
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consensual nature thereof that we cannot agree that, in a merger situation, employment contracts are automatically transferable from one entity to another in the same manner that a contract pertaining to purely proprietary rights such as a promissory note or a deed of sale of property is perfectly and automatically transferable to the surviving corporation. That ?!3 is the same entity as AE?T" after the merger is but a legal fiction intended as a tool to adjudicate rights and obligations between and among the merged corporations and the persons that deal with them. &lthough in a merger it is as if there is no change in the personality of the employer, there is in reality a change in the situation of the employee. /nce an AE?T" employee is absorbed, there are presumably changes in his condition of employment even if his previous tenure and salary rate is recogni6ed by ?!3. 3t is reasonable to assume that ?!3 would have different rules and regulations and company practices than AE?T" and it is incumbent upon the former AE?T" employees to obey these new rules and adapt to their new environment. 4ot the least of the changes in employment condition that the absorbed AE?T" employees must face is the fact that prior to the merger they were employees of an unorgani6ed establishment and after the merger they became employees of a unioni6ed company that had an existing collective bargaining agreement with the certified union. This presupposes that the union who is party to the collective bargaining agreement is the certified union that has, in the appropriate certification election, been shown to represent a majority of the members of the bargaining unit. @ikewise, with respect to AE?T" employees that ?!3 chose to employ and who also chose to be absorbed, then due to ?!3#s blanket assumption of liabilities and obligations under the articles of merger, ?!3 was bound to respect the years of service of these AE?T" employees and to pay the same, or commensurate salaries and other benefits that these employees previously enjoyed with AE?T". &s the nion likewise pointed out in its pleadings, ":ere 5ere 9e$e%#"1 7$&er ":e CBA ":!" ":e %or8er FEBTC e8 0o<ee1 &#& $o" e$?o< 5#": ":e#r re;#o71 e8 0o<er. &s ?!3 employees, they will enjoy all these "?& benefits upon their Nabsorption.N Thus, although in a sense ?!3 is continuing AE?T"#s employment of these absorbed employees, ?!3#s employment of these absorbed employees was not under exactly the same terms and conditions as stated in the latter#s employment contracts with AE?T". This further strengthens the view that ?!3 and the former AE?T" employees voluntarily contracted with each other for their employment in the surviving corporation.
common+law rule that a single stockholder could block a certain corporate act such as merger.
PURPOSE: is to protect the property rights of dissenting stockholders from actions by the majority shareholders which alters the nature and character of their investment. 3n effect, it is a right granted to dissenting stockholders on certain corporate or business decisions to demand payment of the fair market value of their shares.
?.
*HEN E,ERCISED
Sec. D1. I$1"!$ce1 o% ! r!#1!0 r#>:".+ &ny stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances5
*.
3n case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authori6ing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence1
7.
3n case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the "ode1 and
*. 3n case of merger or consolidation.
ENU-ERATION NOT E,CLUSIVE: it may also cover5 1. 3nvestment of funds in another corporation or business or for any other purpose other than its primary purpose as provided in 8ec. 7$1 $. @ikewise, in a close corporation, a stockholder has the unbridled right to compel the corporation Gfor any reasonH to purchase his shares at their fair value which shall not be less than the par or issued value, when the corporation has sufficient assets to cover its debts and liabilities, exclusive of capital stock %8ec. 1<D). NOT ALL A-END-ENTS: the right may only be exercised in cases of amendment which Ghas the effect of changing or restricting the rights of any stockholder or class of shares, or of authori6ing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existenceH.
&ccordingly, if the amendment is to increase or decrease the number of directors, or change the corporate name, or change of principal office, the appraisal right is not available.
CHAPTER 1/: APPRAISAL RIGHT
&.
DEFINITION
&ppraisal ;ight is the method of paying a shareholder for the taking of his property. 3t is a statutory means whereby a stockholder can avoid the conversion of this property into another property not of his own choosing and is given to a shareholder as compensation for the abrogation of the
STOCKHOLDER *ITH UNPAID SUBSCRIPTION: ,e >&L exercise the appraisal right, since the subscriber is entitled to all the rights of a stockholder under 8ec. '$ and although 8ec. C$ provides for the submission of certificate
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of stock, 8ec. C( provides that the notation to such certificate of stock is /!T3/4&@ at the instance of the corporation.
unrestricted retained earnings, the dissenting stockholder may not, therefore, be able to effectively exercise his appraisal right, E2"E!T in the case of a close corporation under 8ec. 1<D1 ". RE2UIRE-ENTS AND PROCEDURE D. pon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to the Sec. D2. Ho5 r#>:" #1 e4erc#1e&. The appraisal right may be corporation. exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on -. the EFFECT OF E,ERCISE OF APPRAISAL RIGHT corporation within thirty %*<) days after the date on which the vote 8ec. C*. E%%ec" o% &e8!$& !$& "er8#$!"#o$ o% r#>:". + Arom the was taken for payment of the fair value of his shares5 !rovided, That time failure to make the demand within such period shall be deemed a of demand for payment of the fair value of a stockholderPs shares until either the abandonment of the corporate action waiver of the appraisal right. 3f the proposed corporate action is involved or the purchase of the said shares by the corporation, all implemented or affected, the corporation shall pay to such rights accruing to such shares, including voting and dividend rights, stockholder, upon surrender of the certificate or certificates of stock shall representing his shares, the fair value thereof as of the day prior to be suspended in accordance with the provisions of this "ode, except the right of such stockholder to receive payment of the fair the date on which the vote was taken, excluding any appreciation or value thereof5 !rovided, That if the dissenting stockholder is not depreciation in anticipation of such corporate action. paid the value of his shares within *< days after the award, his voting and dividend rights shall immediately be restored. 3f within a period of sixty %(<) days from the date the corporate action was approved by the stockholders, the withdrawing SUSPENSION OF STOCKHOLDER RIGHTS: pon stockholder and the corporation cannot agree on the fair value of completion of the steps provided in 8ec. C$, the the shares, it shall be determined and appraised by three stockholder %*) concerned is regarded as having made an disinterested persons, one of whom shall be named by election the to withdraw from the corporate enterprise and stockholder, another by the corporation, and the third by the take two the value of his stock. 8uch a procedure suspends %for a be maximum period of *< days) certain ownership rights thus chosen. The findings of the majority of the appraisers shall associated with stockholder status, such as the right to final, and their award shall be paid by the corporation within thirty receive dividends or distribution and the right to vote %*<) days after such award is made5 !rovided, That no payment which cannot be restored without compliance with the shall be made to any dissenting stockholder unless the corporation governing statutory conditions. has unrestricted retained earnings in its books to cover such payment5 and !rovided, further, That upon payment by DIRECTOR the E,ERCISING APPRAISAL RIGHT: may still corporation of the agreed or awarded price, the stockholder shall continue to function as such, prior to payment, unless there is a contrary provision in the by+laws. forthwith transfer his shares to the corporation.
E.
RE2UIRE-ENTS AND PROCEDURE FOR THE VALID E,ERCISE OF THIS RIGHT ARE: 1. The stockholder must have voted against the proposed corporate action in any of the instances allowed by law for the exercise of the right of appraisal1 $. The written demand for payment must be made by the dissenting stockholder within *< days after the date on which the vote was taken. Aailure to make the demand within the said period shall be deemed a waiver on the part of the stockholder concerned to exercise his appraisal right1 *. 8urrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and the payment of the corporation of the fair market value of the said shares as of the day prior to the date on which the vote was taken. 3f the stockholder and the corporation cannot agree on the fair market value thereof, the same shall be determined in accordance with the provisions of par.$ of 8ec. C$1 7. The fair value of the shares of the dissenting stockholder must be paid by the corporation only if it has Gunrestricted retained earningsH in its books to cover such payment. 3f the corporation has no
*HEN RIGHT TO PA)-ENT CEASES
8ec. C7. *:e$ r#>:" "o !<8e$" ce!1e1. + 4o demand for payment under this Title may be withdrawn unless the corporation consents thereto. 3f, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the 8ecurities and Exchange "ommission where such approval is necessary, or if the 8ecurities and Exchange "ommission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him.
INSTANCES *HEN THE RIGHT OF A DISSENTING STOCKHOLDER TO BE PAID THE FAIR VALUE OF HIS SHARES CEASES:
1. 2.
Ehen he withdraws his demand for payment and the corporation consents thereto1 Ehen the proposed action is abandoned or rescinded
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by the corporation1
3. 4. 5. 6.
A.
Ehen the proposed action is disapproved by the 8E" where such approval is necessary1 Ehen the 8E" determines that he is not entitled to exercise his appraisal right1 Ehen he fails to submit the stock certificate within ten %1<) days from demand to the corporation for notation that such shares are dissenting shares1 and, 3f the shares are transferred and the certificate subse.uently cancelled. COST OF APPRAISAL
stockholder1 and all dividend distributions which would have accrued on such shares shall be paid to the transferee.
PURPOSE: to give notice and guide to the corporation to determine the respective rights of stockholder. SALE: The law does not prohibit the dissenting stockholder to sell, transfer or assign his shares. 3f such be the case, the right of the dissenting stockholder to be paid the fair value of his shares shall cease and the transferee will ac.uire all the rights of a regular stockholder inclusive of all dividends which would have accrued on such shares.
CHAPTER 1@: NON=STOCK CORPORATIONS 'TITLE ,I(
3f the corporation and the dissenting stockholder do not agree, an appraisal to be made by three disinterested person may be made.
&.
DEFINITION
8ec. CD. *:o 9e!r1 co1"1 o% ! r!#1!0. + The costs and expenses Sec. DC. De%#$#"#o$. + Aor the purposes of this "ode, a non+stock of appraisal shall be borne by the corporation, unless the fair value corporation is one where no part of its income is distributable as ascertained by the appraisers is approximately the same as the dividends to its members, trustees, or officers, subject to the price which the corporation may have offered to pay the provisions of this "ode on dissolution5 !rovided, That any profit stockholder, in which case they shall be borne by the latter. 3n the which a non+stock corporation may obtain as an incident to its case of an action to recover such fair value, all costs and expenses operations shall, whenever necessary or proper, be used for the shall be assessed against the corporation, unless the refusal of the furtherance of the purpose or purposes for which the corporation stockholder to receive payment was unjustified. was organi6ed, subject to the provisions of this Title.
THE CORPORATION BEARS THE COST IF:
a. b.
The price offered by the corporation is lower than the fair value of the shares of the dissenting stockholder as determined by the appraisers1 Ehere an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified.
The provisions governing stock corporation, when pertinent, shall be applicable to non+stock corporations, except as may be covered by specific provisions of this Title.
DISSENTING STOCKHOLDER *ILL BE LIABLE FOR THE COST AND E,PENSES OF APPRAISAL *HEN:
a. b.
K.
Ehen the price offered by the corporation is approximately the same as the fair value ascertained by the appraisers1 Ehere the action filed by the dissenting stockholder and his refusal to accept payment is found by the court to be unjustified. NOTATION
CAPITAL STOCK: the old notion is that a non+stock corporation is one which has no capital stock divided into shares this may no longer hold true under the definition provided by 8ec. C'. Thus, even if it may have capital stock divided into shares, proprietary or otherwise, a corporation is considered Gnon+stockH so long as it does not distribute dividends to its members and officers. Ee have, for instance, "lub shares issued t the members, the totality of which may rightfully represent GcapitalH of the corporation but whose income %if there be any) is not distributed by way of dividends during its corporate existence. The corporation, in such a case, is legally Gnon+stockH.
PROFITS: & non+stock corporation is generally not allowed to engage in any business undertaking or activity for profit as it would run counter to its very nature as a non+profit entity. ,owever, as may be allowed and specified in its &/3 8ec. C(. No"!"#o$ o$ cer"#%#c!"e1H r#>:"1 o% "r!$1%eree. + Eithin or incidental to the objects and purposes indicated therein, ten %1<) days after demanding payment for his shares, a dissenting it may engage in certain money+making ventures or stockholder shall submit the certificates of stock representing his economic activities provided that any profits derived shares to the corporation for notation thereon that such sharestherefrom are shall be used for the furtherance of the purposes dissenting shares. ,is failure to do so shall, at the option of for thewhich the corporation was organi6ed or to defray the corporation, terminate his rights under this Title. 3f shares operating expenses of the entity. 3t has thus been said that represented by the certificates bearing such notation the arefact that a non+profit corporation earns a profit, gain or income for the corporation or members does not make it a transferred, and the certificates conse.uently cancelled, the rights profit+making corporation where such profit or income is of the transferor as a dissenting stockholder under this Title shall used for the purpose set forth in the &/3 and is not cease and the transferee shall have all the rights of a regular distributable to its incorporators, members or officers,
1*'
since mere intangible or pecuniary benefits to the members do not change the nature of the corporation. The determination of whether or not a non+stock corporation can engage in profit+making business or activity depends largely on the purpose or purposes indicated in the &/3. 3f the business activity is authori6ed in the said articles, necessary, incidental or essential thereto, the same may be undertaken by the corporation, otherwise, not, as it would be an ultra+vires act under 8ec. 7D
rights, since it is provided that Gthe right of the members of any class or classes to vote may be limited, broadened or deniedH.
PRO,) VOTING: Kenerally, allowed unless disallowed by the &/3 or the by+laws. VOTING OTHER THAN IN PERSON: may also be allowed by the &/3 or by+laws. "ontrary to a stock corporation, a stockholder has to vote in the meeting called for the purpose except in case of a general amendment where Gwritten assentH is allowed.
?.
8ec. =<. No$="r!$1%er!9#0#"< o% 8e89er1:# . + >embership in a non+stock corporation and all rights arising therefrom are personal 8ec. CC. P7r o1e1. + 4on+stock corporations may be formed or and non+transferable, unless the articles of incorporation or the by+ organi6ed for charitable, religious, educational, professional, laws otherwise provide. cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non+stock corporations. 8ec. =1. Ter8#$!"#o$ o% 8e89er1:# . + >embership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by+laws. Termination of membership shall have the effect of extinguishing all rights of a member in the 4on+stock corporations may be organi6ed or formed for any corporation or in its property, unless otherwise provided in the purpose or purposes allowed or indicated in the above provision. The enumeration, however, is not exclusive as articles of incorporation or the by+laws. the law itself recogni6es similar or allied purpose or purposes for which non+stock corporations may be organi6ed. ;ecreational, sports club, athletic or allied activities of similar import, for instance, may likewise be -E-BERSHIP: non+stock corporations have the right to lawful purpose of a non+stock corporation. adopt rules prescribing the mode and manner in which membership thereat can be obtained or maintained. This includes the right to limit membership. 3n other words, ". -E-BERSHIP AND VOTING RIGHTS membership in non+stock corporations may be ac.uired by complying with the provisions of its rules prescribed in the Sec. DM. R#>:" "o ;o"e. + The right of the members of any class or by+laws. This is in consonance with the express power classes to vote may be limited, broadened or denied to the extent granted by law under 8ec. *(, par. ( of the "ode, specified in the articles of incorporation or the by+laws. nless so authori6ing them to admit members thereof and that limited, broadened or denied, each member, regardless of class, authority carries with it the power to prescribe rules on shall be entitled to one vote. membership. 3t has thus been stated that in the absence of charter or statutory restrictions, non+stock corporations may who shall be admitted to membership and how nless otherwise provided in the articles of incorporation or thedetermine by+ laws, a member may vote by proxy in accordance with they the shall be admitted. 3t may exclude any person whom it deems unfit for membership. 3ndeed, in the absence of provisions of this "ode. restrictions, it may act arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere. 3n other words, it is free to fix .ualifications for membership and to provide for termination of membership. Qoting by mail or other similar means by members of non+stock AUTHORIT) TO AD-IT -E-BERS: the provisions in the corporations may be authori6ed by the by+laws of non+stock by+laws, if any, shall govern. &bsent any provision to the corporations with the approval of, and under such conditions which contrary, it must necessarily be lodged with the ?/T since may be prescribed by, the 8ecurities and Exchange "ommission. it is the body that exercises all corporate powers as enunciated in 8ec. $* of the "ode.
PURPOSE
CU-ULATIVE VOTING: GENERAL RULE: "umulative voting is not allowed, accordingly, even if the members may cast as many votes are there are trustees to be elected, he may not cast more than one vote for one candidate, UNLESS: allowed in the &/3 or the by+laws. CLASSIFICATION: The by+laws or the &/3 may provide for classification as to members with voting or non+voting
SPECIAL CASES: the law itself may provide certain limitations or even perhaps proscription on transfer of membership. Thus, ;& 7'$(, otherwise known as the "ondominium &ct re.uires that membership therein shall not be transferred separately from the condominium unit of which it is appurtenant and that when a member ceases to own a unit, he shall automatically cease to be a member.
1*C
TER-INATION OF -E-BERSHIP: >embership may be terminated in the manner and for causes provided in the &/3 or by+laws and when a member is so terminated it shall extinguish all his rights in the corporation or in its property unless otherwise provided in the said articles or by+laws.
The power or authority to terminate members in non+stock corporations is said to be inherent but strict compliance with the manner and procedure laid down in the by+laws must be observed, otherwise it may render the expulsion ineffective and invalid. 3n the absence of any provision in the &/3 or by+laws relative to the manner and causes of termination or expulsion of member, the decided weight of authority is to the effect that the power is inherent and may be exercised in certain situations, namely5 1. Ehen an offense is committed which, although it has no immediate relation to a member#s duty as such, it is so infamous as to render him unfit for society of honest men, and which is indictable at common law1 $. Ehen the offense is a violation of his duty as member of the corporation1 and
corresponding to the .uestioned '7 applications %that raised the total to $7= from 1'D) were already paid to petitioner L>"& as the time of the said deadline. %Exhibits 7, (, (+&, (+? and (+"). 4o evidence could be cited by the trial court to rebut this well nigh conclusive documentary evidence other than respondentPs unsupported suspicion which the trial court adopted in a negative manner with its statement that it is Nnot improbableN that Nsome of those applications filed after said deadlineN. 3f there were indeed any applications filed after the deadline, they certainly should have been positively pin+pointed and specifically annulled. Ehat is worse, 1'D membership applications were undisputedly filed within the deadline %including the 'D withdrawn by respondent) and yet the 1<< remaining un.uestioned memberships were nullified by the .uestioned decision without the individuals concerned ever having been impleaded or heard %except the individual petitioners president and secretary). The appealed decision thus contravened the established principle that ":e co7r"1 c!$$o" 1"r# ! 8e89er o% ! $o$=1"oc3 $o$= ro%#" cor or!"#o$ o% :#1 8e89er1:# ":ere#$ 5#":o7" c!71e. O":er5#1e+ ":!" 5o70& 9e !$ 7$5!rr!$"e& !$& 7$&7e #$"er%ere$ce 5#": ":e 5e00= e1"!90#1:e& r#>:" o% ! cor or!"#o$ "o &e"er8#$e #"1 8e89er1:# , as announced by Aletcher, as follows5 "ompliance with provisions of charter, constitution or by+ laws. Y3n order that membership may be ac.uired in a non+stock corporation and valid by+laws must be complied with, except in so far as they may be and are waived. 000 ?ut provisions in the by+laws as to formal steps to be taken to ac.uire membership may be waived by the corporation, or it may be estopped to assert that they have not been taken. 91$& Aletcher "yclopedia "orporations, !erm. ed., pp. DC*+DCD1 emphasis supplied.: Ainally, the appealed decision did not give due importance to the undisputed fact therein stated that Nat the board meeting of the association held on -ecember ', 1=(D, a list of 1'7 applications for membership, old and new, was submitted to the board and approved by the latter, over the objection of the petitioner 9therein private respondent: who was present at said meeting.N 8uch action of the petitioner associationPs board of directors approving the 1'7 membership applications of old and new members constituting its active membership as duly processed and screened by the authori6ed committee just be deemed a waiver on its part of any technicality or re.uirement of form, since otherwise the association would be practically paraly6ed and deprived of the substantial revenues from the membership dues of !1',7<<.<< %at !1<<.<< per application). E,E;EA/;E the respondent courtPs decision is hereby set aside and in lieu thereof judgment is rendered dismissing private respondentPs petition in the "ourt of Airst 3nstance of >anila and dissolving the preliminary injunction, with costs against private respondent. CEBU COUNTR) CLUB+ INC.+ 8&?34/ ;. -&!&T, ; ?E4 -. &@>E4-;&8, B @3 8 U. 4E;3, -/ K@&8 @. @ L>, "E8&; T. @3?3, ;&>/4T3T/0 E. K&;"3& and B/8E ?. 8&@&, petitioners,
*.
Ehen the offense is of a mixed nature, being both against his duty as a member of the corporation, and also indictable at common law.
&s to whether or not a member should be expelled or maintained is the established right of the corporation to determine and the courts are without authority to strip a member of his membership without cause. CHINESE )OUNG -ENIS CHRISTIAN ASSOCIATION OF THE PHILIPPINE ISLANDS, E3@@3&> K/@&4K"/, in his capacity as -irector and !resident of the said &ssociation, and B &43T/ R. T&4, in his capacity as ;ecording 8ecretary of the said &ssociation, petitioners, vs. VICTOR CHING !$& THE COURT OF APPEALS+ respondents %K.;. 4o. @+*(=$=1 Bune 1C, 1='() FACTS: ;espondent "hing, a member of the ?/- of petitioner "hinese L>"&, filed an action in the "A3, alleging that on the >embership "ampaign of the "hinese L>"& held from 8ept. $', 1=(D, only 1'D applicants were submitted, canvassed and accepted on the last day of the membership campaign, which was 4ov. $(, 1=(D, 4/T more than $7<, as reported in the 4ov. $C, 1=(D issue of the "hinese "ommercial 4ews. The trial court rendered a decision in favor of herein respondent declaring that only 1'7 applications constitute the present active membership of the association. ISSUE: E/4 the trial court is justified in stripping members of their membership in a non+stock corporationF HELD: 4o. The documentary evidence itself as cited by the trial court, consisting of the applications and the receipts for payment of the membership fees show that they were filed and paid not later than the 4ovember $(, 1=(D deadline, and this was further supported by the bank statement of the petitioner L>"& deposit account with the "hina ?anking "orporation and the checks paid by certain members to the L>"& which show that the application fees
1*=
vs. RICARDO F. ELIZAGA2UE+ respondent %K.;. 4o. 1(<$'* 1 Banuary 1C, $<<C) FACTS: "ebu "ountry "lub, 3nc. %"""3), petitioner, is a domestic corporation operating as a non+profit and non+ stock private membership club, having its principal place of business in ?anilad, "ebu "ity. !etitioners herein are members of its ?oard of -irectors. 8ometime in 1=C', 8an >iguel "orporation, a special company proprietary member of """3, designated respondent ;icardo A. Eli6aga.ue, its 8enior Qice !resident and /perations >anager for the Qisayas and >indanao, as a special non+proprietary member. The designation was thereafter approved by the """3#s ?oard of -irectors. 3n 1==(, respondent filed with """3 an application for proprietary membership. The application was indorsed by """3#s two %$) proprietary members, namely5 Edmundo T. >isa and 8ilvano @udo. &s the price of a proprietary share was around the !D million range, ?enito nchuan, then president of """3, offered to sell respondent a share for only !*.D million. ;espondent, however, purchased the share of a certain -r. ?utalid for only !* million. "onse.uently, on 8eptember (, 1==(, """3 issued !roprietary /wnership "ertificate 4o. 177( to respondent. -uring the meetings dated &pril 7, 1==' and >ay *<, 1==' of the """3 ?oard of -irectors, action on respondent#s application for proprietary membership was deferred. 3n another ?oard meeting held on Buly *<, 1==', respondent#s application was voted upon. 8ubse.uently, or on &ugust 1, 1==', respondent received a letter from Bulius U. 4eri, """3#s corporate secretary, informing him that the ?oard disapproved his application for proprietary membership. /n &ugust (, 1==', Edmundo T. >isa, on behalf of respondent, wrote """3 a letter of reconsideration. &s """3 did not answer, respondent, on /ctober ', 1==', wrote another letter of reconsideration. 8till, """3 kept silent. /n 4ovember D, 1==', respondent again sent """3 a letter in.uiring whether any member of the ?oard objected to his application. &gain, """3 did not reply. "onse.uently, on -ecember $*, 1==C, respondent filed with the ;egional Trial "ourt %;T"), ?ranch '1, !asig "ity a complaint for damages against petitioners, docketed as "ivil "ase 4o. ('1=<. &fter trial, the ;T" rendered its -ecision dated Aebruary 17, $<<1 in favor of respondent. /n appeal by petitioners, the "ourt of &ppeals, in its -ecision dated Banuary *1, $<<*, affirmed the trial court#s -ecision and denied the >otion for ;econsideration subse.uently filed. ,ence, the present petition.
ISSUE: E/4 in disapproving respondent#s application for proprietary membership with """3, petitioners are liable to respondent for damagesF HELD: Les. !etitioners contend, inter alia, that the "ourt &ppeals erred in awarding exorbitant damages respondent despite the lack of evidence that they acted bad faith in disapproving the latter#s application1 and disregarding their defense of damnum abs.ue injuria. of to in in
Aor his part, respondent maintains that the petition lacks merit, hence, should be denied. """3#s &rticles of 3ncorporation provide in part5 8EQE4T,5 That this is a non+stock corporation and membership therein as well as the right of participation in its assets shall be limited to .ualified persons who are duly accredited owners of !roprietary /wnership "ertificates issued by the corporation in accordance with its ?y+@aws. "orollary, 8ection *, &rticle 1 of """3#s &mended ?y+@aws provides5 8E"T3/4 *. ,/E >E>?E;8 &;E E@E"TE- The procedure for the admission of new members of the "lub shall be as follows5 %a) &ny proprietary member, seconded by another voting proprietary member, shall submit to the 8ecretary a written proposal for the admission of a candidate to the NEligible+for+>embership @istN1 %b) 8uch proposal shall be posted by the 8ecretary for a period of thirty %*<) days on the "lub bulletin board during which time any member may interpose objections to the admission of the applicant by communicating the same to the ?oard of -irectors1 %c) &fter the expiration of the aforesaid thirty %*<) days, if no objections have been filed or if there are, the ?oard considers the objections unmeritorious, the candidate shall be .ualified for inclusion in the NEligible+for+ >embership @istN1 %d) /nce included in the NEligible+for+>embership @istN and after the candidate shall have ac.uired in his name a valid !/" duly recorded in the books of the corporation as his own, he shall become a !roprietary >ember, upon a non+refundable admission fee of !1,<<<.<<, provided that admission fees will only be collected once from any person. /n >arch 1, 1='C, 8ection *%c) was amended to read as follows5 %c) &fter the expiration of the aforesaid thirty %*<) days, the ?oard may, by 7$!$#8o71 ;o"e o% !00 &#rec"or1 re1e$" !" ! re>70!r or 1 ec#!0 8ee"#$> , approve the inclusion of the candidate in the NEligible+for+>embership @istN. &s shown by the records, the ?oard adopted a secret balloting known as the Nblack ball systemN of voting wherein each member will drop a ball in the ballot box. & white ball represents conformity to the admission of an applicant, while a black ball means disapproval. !ursuant to 8ection *%c), as amended, cited above, a unanimous
17<
vote of the directors is re.uired. Ehen respondent#s application for proprietary membership was voted upon during the ?oard meeting on Buly *<, 1==', the ballot box contained one %1) black ball. Thus, for lack of unanimity, his application was disapproved. /bviously, the """3 ?oard of -irectors, under its &rticles of 3ncorporation, has the right to approve or disapprove an application for proprietary membership. ?ut such right should not be exercised arbitrarily. &rticles 1= and $1 of the "ivil "ode on the "hapter on ,uman ;elations provide restrictions. 3n KA E.uity, 3nc. v. Qalen6ona , we expounded &rticle 1= and correlated it with &rticle $1, thus5 GThis article, known to contain what is commonly referred to as the principle of abuse of rights, sets certain standards which must be observed not only in the exercise of onePs rights but also in the performance of onePs duties. These standards are the following5 to act with justice1 to give everyone his due1 and to observe honesty and good faith. The law, therefore, recogni6es a primordial limitation on all rights1 that in their exercise, the norms of human conduct set forth in &rticle 1= must be observed. A r#>:"+ ":o7>: 9< #"1e0% 0e>!0 9ec!71e reco>$#Ke& or >r!$"e& 9< 0!5 !1 17c:+ 8!< $e;er":e0e11 9eco8e ":e 1o7rce o% 1o8e #00e>!0#"<. *:e$ ! r#>:" #1 e4erc#1e& #$ ! 8!$$er 5:#c: &oe1 $o" co$%or8 5#": ":e $or81 e$1:r#$e& #$ Ar"#c0e 1M !$& re170"1 #$ &!8!>e "o !$o":er+ ! 0e>!0 5ro$> #1 ":ere9< co88#""e& %or 5:#c: ":e 5ro$>&oer 871" 9e :e0& re1 o$1#90e. ?ut while &rticle 1= lays down a rule of conduct for the government of human relations and for the maintenance of social order, it does not provide a remedy for its violation. Kenerally, an action for damages under either &rticle $< or &rticle $1 would be proper. %Emphasis in the original)H 3n rejecting respondent#s application for proprietary membership, we find that petitioners violated the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings and for the stability of social order. The trial court and the "ourt of &ppeals aptly held that petitioners committed fraud and evident bad faith in disapproving respondent#s applications. This is contrary to morals, good custom or public policy. ,ence, petitioners are liable for damages pursuant to &rticle 1= in relation to &rticle $1 of the same "ode. 3t bears stressing that the amendment to 8ection *%c) of """3#s &mended ?y+@aws re.uiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form respondent filled and submitted to """3. Ehat was printed thereon was the original provision of 8ection *%c) which was silent on the re.uired number of votes needed for admission of an applicant as a proprietary member. !etitioners explained that the amendment was not printed on the application form due to economic reasons. Ee find this excuse flimsy and unconvincing. 8uch amendment, aside from being extremely significant, was introduced way back in 1='C or almost twenty %$<) years before
respondent filed his application. Ee cannot fathom why such a prestigious and exclusive golf country club, like the """3, whose members are all affluent, did not have enough money to cause the printing of an updated application form. I" #1 ":71 c0e!r ":!" re1 o$&e$" 5!1 0e%" >ro #$> #$ ":e &!r3 5o$&er#$> 5:< :#1 ! 0#c!"#o$ 5!1 &#1! ro;e&. He 5!1 $o" e;e$ #$%or8e& ":!" ! 7$!$#8o71 ;o"e o% ":e Bo!r& 8e89er1 5!1 re67#re&. *:e$ :e 1e$" ! 0e""er %or reco$1#&er!"#o$ !$& !$ #$67#r< 5:e":er ":ere 5!1 !$ o9?ec"#o$ "o :#1 ! 0#c!"#o$+ e"#"#o$er1 ! !re$"0< #>$ore& :#8. Cer"!#$0<+ re1 o$&e$" &#& $o" &e1er;e ":#1 3#$& o% "re!"8e$". ,aving been designated by 8an >iguel "orporation as a special non+proprietary member of """3, he should have been treated by petitioners with courtesy and civility. &t the very least, they should have informed him why his application was disapproved. The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. Ehen the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible. 3t bears reiterating that the trial court and the "ourt of &ppeals held that petitioners# disapproval of respondent#s application is characteri6ed by bad faith. &s to petitioners# reliance on the principle of damnum abs.ue injuria or damage without injury, suffice it to state that the same is misplaced. 3n &monoy v. Kutierre6, we held that this principle does not apply when ":ere #1 !$ !971e o% ! er1o$.1 r#>:", as in this case. &s to the appellate court#s award to respondent of moral damages, we find the same in order. nder &rticle $$1= of the 4ew "ivil "ode, moral damages may be recovered, among others, in acts and actions referred to in &rticle $1. Ee believe respondent#s testimony that he suffered mental anguish, social humiliation and wounded feelings as a result of the arbitrary denial of his application. ISSUE2: E/4 the liability is solidary considering that only one voted for disapprovalF HELD: Les. 8ection *1 of the "orporation "ode provides5 8E". *1. @iability of directors, trustees or officers. Y -irectors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or 9!& %!#": in directing the affairs of the corporation or ac.uire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be 0#!90e ?o#$"0< !$& 1e;er!00< for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. %Emphasis ours) *HEREFORE, we DEN) the petition. The challenged -ecision and ;esolution of the "ourt of &ppeals in "&+K.;. "Q 4o. '1D<( are AFFIR-ED with modification in the sense that %a) the award of moral damages is reduced from !$,<<<,<<<.<< to !D<,<<<.<<1 %b) the award of exemplary damages is reduced from !1,<<<,<<<.<< to !$D,<<<.<<1
171
and %c) the award of attorney#s fees and litigation expenses is reduced from !D<<,<<<.<< and !D<,<<<.<< to !D<,<<<.<< and !$D,<<<.<<, respectively.
-.
TRUSTEES AND OFFICERS
The word GtrusteesH as used in 8ec. =$ makes reference to the governing board or body in a non+stock corporation.
GOVERNING BOARDS: Ehile the "ode speaks of the ?/T as the governing board or body in a non+stock corporation the same law allows a non+stock corporation or any other special corporation to designate their governing board by any other name other than ?/-MT. The ;otary "lub for instance, designates it as ?oard of Kovernors while the Evangelica 3ndependence >etodista En @as 3slas Ailipinas calls it as the "onsistory of Elders.
Sec. M2. E0ec"#o$ !$& "er8 o% "r71"ee1. + nless otherwise ELECTION B) -E-BERS OF OFFICERS: /ne of the provided in the articles of incorporation or the by+laws, the board of significant features of a non+stock corporation is that it trustees of non+stock corporations, which may be more than fifteen allows the &/3 or by+laws to provide that the officers %1D) in number as may be fixed in their articles of incorporation or thereof shall be directly elected by the members. nlike in stock corporation where corporate officers are elected by by+laws, shall, as soon as organi6ed, so classify themselves thatathe the ?/-. term of office of one+third %1M*) of their number shall expire every year1 and subse.uent elections of trustees comprising one+third Sec"#o$ 1/D. -esignation of governing boards. + The provisions of %1M*) of the board of trustees shall be held annually and trustees so specific provisions of this "ode to the contrary notwithstanding, elected shall have a term of three %*) years. Trustees thereafter $o$=1"oc3 or 1 ec#!0 cor or!"#o$1 8!<+ ":ro7>: ":e#r !r"#c0e1 elected to fill vacancies occurring before the expiration of a o% #$cor or!"#o$ or ":e#r 9<=0!51+ &e1#>$!"e ":e#r >o;er$#$> particular term shall hold office only for the unexpired period. 9o!r&1 9< !$< $!8e o":er ":!$ !1 9o!r& o% "r71"ee1.
4o person shall be elected as trustee unless he is a member ofLIONS the CLUBS INTERNATIONAL !$& JA-ES L. SO+ corporation. petitioners, vs. AUGUSTO -. A-ORES+ !residing Budge of the nless otherwise provided in the articles of incorporation or theHON. by+ "ourt laws, officers of a non+stock corporation may be directly elected by of Airst 3nstance of >anila, ?ranch 223Q, "/ ;T /A &!!E&@8 and Q3"E4TE B/8EA&, respondents. the members. %K.;. 4o. @+(1$D=1 &pril $(, 1=C*) FACTS: Qicente Bosefa and Bames @. 8o entered into an agreement whereby 8o would withdraw his candidacy for the post of Kovernor of -istrict *<1+& of herein petitioner @ions "lub 3nternational. 8uch withdrawal was accepted by Kovernor ,uang, however news items were published conveying the idea that 8o had not withdrawn from the gubernatorial race. Bosefa filed a complaint before the "A3 for .uo warranto, injunction or at least a temporary restraining order alleging irregularities in the election1 that although at the old site of the election, Bosefa won, the @ions "lub 3nternation unlawfully recogni6ed 8o as the winner. The trial court issued the T;/ which was later on lifted and on appeal, the "& issued a new T;/. ISSUE: E/4 the dispute between petitioners and Bosefa is a justiciable issue cogni6able by the courtsF HELD: 4o. Ee adopt the general rule that G... ":e co7r"1 5#00 $o" #$"er%ere 5#": ":e #$"er$!0 !%%!#r1 o% !$ 7$#$cor or!"e& !11oc#!"#o$ 1o !1 "o 1e""0e &#1 7"e1 9e"5ee$ ":e 8e89er1+ or 67e1"#o$1 o% o0#c<+ &#1c# 0#$e+ or #$"er$!0 >o;er$8e$"+ 1o 0o$> !1 ":e >o;er$8e$" o% ":e 1oc#e"< #1 %!#r0< !$& :o$e1"0< !&8#$#1"ere& #$ co$%or8#"< 5#": #"1 0!51 !$& ":e 0!5 o% ":e 0!$&+ !$& $o ro er"< or c#;#0 r#>:"1 !re #$;!&e&. nder such circumstances, the decision of the governing body or established private tribunal of the association is binding and conclusive and not subject to review or collateral attack in the courts. N %' ".B.8. pp. *C+ *=).
2UALIFICATIONS OF TRUSTEES: 1. ,e is a member of the association1
$. *.
>ajority thereof must be residents of the !hilippines1 and /ther .ualifications as may be provided for in the by+ laws.
DIS2UALIFICATIONS !$& RE-OVAL: 8ec. $' as to dis.ualifications, and 8ec. $= and *< as to removal also apply to Trustees. NU-BER OF TRUSTEES: may exceed 1D as may be fixed in the &/3 or by+laws, contrary to a stock corporation whose ?/- must not exceed 1D members. TER-: 8ec. =$ allows the &/3 or by+laws to provide a desired term of office and may vary depending on the needs of a specific corporation. ?y analogy of the provisions of 8ec. ', however, a term in excess of D years is not allowed as it would unduly deprive other members to take active part in corporate management. STAGGERED TER-: The term of office may also be staggered unless the &/3 or by+laws otherwise provide. 3f such be the case, the board shall classify themselves in order that 1M* of their number shall expire every year and subse.uent elections of trustees comprising 1M* shall be held annually. The trustees so elected to fill up any vacancy occurring before the expiration of a particular term shall hold office only for the unexpired portion of his predecessor.
17$
The general rule of non+interference in the internal affairs of associations is, however, subject to e4ce "#o$1, but the power of review is extremely limited. &ccordingly, ":e co7r"1 :!;e !$& 5#00 e4erc#1e o5er "o #$"er%ere #$ ":e #$"er$!0 !%%!#r1 o% !$ !11oc#!"#o$ 5:ere '1( 0!5 !$& ?71"#ce 1o re67#re+ !$& '2( ":e rocee&#$>1 o% ":e !11oc#!"#o$ !re 179?ec" "o ?7&#c#!0 re;#e5 5:ere ":ere #1 %r!7&+ o re11#o$+ or 9!& %!#":+ or '/( 5:ere ":e !c"#o$ co8 0!#$e& o% #1 c! r#c#o71+ !r9#"r!r<+ or 7$?71"0< &#1cr#8#$!"or<. &lso, the courts will usually entertain jurisdiction to grant relief '@( #$ c!1e ro er"< or c#;#0 r#>:"1 !re #$;!&e&+ although it has also been held that the involvement of property rights does not necessarily authori6e judicial intervention, in the absence of arbitrariness, fraud or collusion. >oreover, the courts will intervene 'A( 5:ere ":e rocee&#$>1 #$ 67e1"#o$ !re ;#o0!"#;e o% ":e 0!51 o% ":e 1oc#e"<+ or ":e 0!5 o% ":e 0!$&+ !1 9< &e r#;#$> ! er1o$ o% &7e roce11 o% 0!5 . 8imilarly, judicial intervention is warranted 'B( 5:ere ":ere #1 ! 0!c3 o% ?7r#1&#c"#o$ o$ ":e !r" o% ":e "r#97$!0 co$&7c"#$> ":e rocee&#$>1+ 5:ere ":e or>!$#K!"#o$ e4cee&1 #"1 o5er1+ or 5:ere ":e rocee&#$>1 !re o":er5#1e #00e>!0. %' ".B.8., pp. *=+71).
3n accordance with the general rules as to judicial interference cited above, the decision of an unincorporated association on the .uestion of an election to office is a matter peculiarly and exclusively to be determined by the association, and, in the absence of fraud, is final and binding on the courts. %' ".B.8., p. 77). The instant controversy between petitioner 8o and respondent Bosefa falls s.uarely within the ambit of the rule of judicial non+intervention or non+ interference. The elections in dispute, the manner by which it was conducted and the results thereof, is strictly the internal affair that concerns only the @ions association andMor its members, and Ee find from the records that the same was resolved within the organi6ation of @ions "lubs 3nternational in accordance with the "onstitution and ?y+@aws which are not immoral, unreasonable, contrary to public policy, or in contravention of the laws of the land &t the meeting of the 3nternational ?oard of -irectors held on Bune $', 1=C$, the election of petitioner Bames @. 8o to serve as -istrict Kovernor of -istrict *<1+&l for the fiscal year 1=C$+C* was approved and said petitioner was duly informed thereof by ;ichard K. ;ice, >anager, -istrict /perations -epartment, @ions "lubs 3nternational in his letter dated Buly C, 1=C$ and marked &nnex NRN to the petition, p. '=, ;ecords. !etitioner attended and completed the -istrict KovernorsP Executive 8eminar as -istrict Kovernor of *<1+&l %see &nnex N@N, !. C<, ;ecords). /n Bune $=, 1=C$, petitioner 8o was proclaimed, sworn to and installed to office as -istrict Kovernor of -istrict *<1+&l by the !resident of @ions 3nternational at the close of the (Dth @ions "lubs 3nternational "onvention held in &tlanta, Keorgia, .8.& The findings upon the evidence submitted and examined at the hearing of the election protest before the "ommittee personally attended by both petitioner 8o and respondent Bosefa may not be disturbed by the courts. The decision of the &ssociationPs tribunal, the 3nternational ?oard of -irectors, is controlling since respondent Bosefa alleges no invasion of this property or civil rights and neither is it
claimed that the government of the &ssociation is not fairly and honestly administered in conformity with its laws and the law of the land.
E.
PLACE OF -EETINGS
8ec. =*. P0!ce o% 8ee"#$>1. + The by+laws may provide that the members of a non+stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located5 !rovided, That proper notice is sent to all members indicating the date, time and place of the meeting5 and !rovided, further, That the place of meeting shall be within the !hilippines.
PLACE OF -EETING: another distinctive feature of a non+ stock corporation is that membership meeting may be held anywhere in the !hilippines whereas in a stock corporation, the stockholders# meeting is mandated to be held or conducted within the city or municipality where the principal office is located, and as far as practicable, within the principal office of the corporation.
A.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
"orporations, stock and non+stock, may be dissolved in accordance and pursuant to the provisions of 8ections 11C to 1$1 of the "orporation "ode and the pertinent provisions of !.-. =<$+&, as amended. 3f such be the case, the assets of the corporation are to be distributed in accordance with law and established jurisprudence. Sec. M@. R70e1 o% &#1"r#97"#o$. + 3n case dissolution of a non+stock corporation in accordance with the provisions of this "ode, its assets shall be applied and distributed as follows5
1. &ll liabilities and obligations of the corporation shall be paid, satisfied and discharged, or ade.uate provision shall be made therefore1
$. &ssets held by the corporation upon a condition re.uiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such re.uirements1
*. &ssets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition re.uiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organi6ations engaged in activities in the !hilippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this "hapter1
17*
%*) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. 4otwithstanding the 7. &ssets other than those mentioned in the preceding paragraphs, foregoing, a corporation shall not be deemed a close corporation if any, shall be distributed in accordance with the provisions ofwhen the at least two+thirds %$M*) of its voting stock or voting rights is articles of incorporation or the by+laws, to the extent that owned the or controlled by another corporation which is not a close articles of incorporation or the by+laws, determine the distributive corporation within the meaning of this "ode. rights of members, or any class or classes of members, or provide for distribution1 and &ny corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance D. 3n any other case, assets may be distributed to such persons, companies, public utilities, educational institutions and corporations societies, organi6ations or corporations, whether or not organi6ed declared to be vested with public interest in accordance with the for profit, as may be specified in a plan of distribution adopted provisions of this "ode. pursuant to this "hapter.
The provisions of this Title shall primarily govern close corporations5 Sec. MA. P0!$ o% &#1"r#97"#o$ o% !11e"1. + & plan providing for!rovided, the That the provisions of other Titles of this "ode shall apply distribution of assets, not inconsistent with the provisions of suppletorily this except insofar as this Title otherwise provides. Title, may be adopted by a non+stock corporation in the process of dissolution in the following manner5 The ultimate effect of the special provisions of the law on close corporations is to furnish another form of business organi6ation a Gde facto corporation with a corporate The board of trustees shall, by majority vote, adopt a resolution shellH. 3t is referred to sometimes as a hybrid of both the recommending a plan of distribution and directing the submission corporate and partnership forms, an Gincorporated thereof to a vote at a regular or special meeting of members having partnershipH or Gcorporation de jure but a de facto voting rights. Eritten notice setting forth the proposed plan of partnershipH. distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within This is because a close corporation may partake the nature of of a partnership in that the stockholders thereof take an the time and in the manner provided in this "ode for the giving active role in the management of the corporate affairs notice of meetings to members. 8uch plan of distribution shall be either as directors, officers or even perhaps as partners in adopted upon approval of at least two+thirds %$M*) of the members management which is akin to the partnership form of having voting rights present or represented by proxy at such business. This, in fact, is the main distinction between a meeting. close corporation and the ordinary stock corporation where, in the latter, the stockholders have hardly a voice in management except perhaps to elect the directors.
"ulled from the law is that non+stock corporations may provide in the &/3 or by+laws, for the distribution of its assets among its members subject to the provisions of 8ec. =7 and =D. That is, the exception relative to assets which it holds upon some trust. 3n which event, the claims of the state, beneficiaries, rightful owners or donors will have to be considered. Thus, assets not subject to the provisions of number $+7 of 8ec. =7 may be distributed in accordance with a plan of distribution thereof in accordance with the rule established in 8ec. =D of the "ode.
-espite this, the stockholders who are active in management still enjoy limited liability to the extent of their subscription in so far as corporate obligations are concerned. 3t will be noted, however, that under no. D of 8ec. 1<< of the "ode, they are made personally liable for corporate torts unless they have obtained a reasonably ade.uate insurance liability.
CLOSE CORPORAIONS: must contain the three provisions re.uired to be indicated in the &/3 as provided by 8ec. =(. &bsent any of the provisions re.uired by the said section, CHAPTER 1A: CLOSE CORPORATION the corporation, will not, for all legal intents and purposes, be considered as a close corporation and would thus not be governed by T3T@E 233 of the "ode, but by the general A. DEFINITION provisions governing ordinary corporation. G& corporation does not become a close corporation just because man and Sec. MB. De%#$#"#o$ !$& ! 0#c!9#0#"< o% T#"0e. + & close his wife owns ==.C(J if the capital stockH %8an Buan corporation, within the meaning of this "ode, is one whose articles 8tructural 8teel vs. "&). The .ualifying conditions re.ureid of incorporation provide that5 %1) &ll the corporationPs issued stock by law must be complied with. of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty 2J/ O*NED B) ANOTHER CORPORATION: Even if %$<)1 %$) all the issued stock of all classes shall be subject to one or another corporation owns or controls $M* of the GvotingH of a close corporation, the latter may still be more specified restrictions on transfer permitted by this Title1 stocks and
177
considered as such close corporation if the corporation owning or controlling the shares is also a close corporation.
BUSINESS *ITH PUBLIC INTEREST: may not be formed as close corporation under the second paragraph of 8ec. =D. 8ec. 17< of the "ode lays down a similar policy authori6ing 4E-& to recommend to the legislature the setting of maximum limits to family or group ownership of stock in corporations vested with public interest, and the determination of whether or not it should be vested with public interest within its domain.
the incorporators1 "lass ? by their relatives within the third civil degree of consanguinity or affinity1 "lass " by their close business associates.
CLASSIFICATION OF DIRECTORS: nder no. $ above, a close corporation may provide for a classification of directors into one or more class, each of whom may be voted for and elected solely by a particular class of stock. Example5 1,<<< "lass & shares1 D<< "lass ? shares1 and $<< "lass " shares. The &/3 may provide that each class shall have a representation in the ?/- regardless of the number of shares within each class. 8o, if the close corporation has D directors, then the &/3 may allocate * B. PER-ISSIVE PROVISIONS directors for "lass & shares, 1 for ? and 1 for ". Eithin each class, cumulative voting may also be exercised by the Sec. MC. Ar"#c0e1 o% #$cor or!"#o$. + The articles of incorporation stockholders of such class to elect their representative in of a close corporation may provide5 the board. ?ut to the extent that each class can elect its own directors regardless of the number of shares in such class, cumulative voting may, in effect be restricted. This is so because if there is no provision for a classification of 1. Aor a classification of shares or rights and the .ualifications for directors, then "lass & stockholders, by cumulating their votes owning or holding the same and restrictions on their transfers as %Dx1<<<) will have D,<<< votes and can elect * directors with 1,((( votes each. "lass ? shares, having may be stated therein, subject to the provisions of the following $,D<< votes can vote $ members and "lass " shares section1 having only 1,<<< votes cannot be guaranteed to any seat in the board. $. Aor a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of 2UORUAND VOTING RE2UIRE-ENT: a close stock1 and corporation may provide for a greater .uorum or voting re.uirement under no. * above. &lthough the &/3 or by+ laws *. Aor a greater .uorum or voting re.uirements in meetings of of other stock corporations may provide for greater .uorum and voting re.uirements in directors# meeting as stockholders or directors than those provided in this "ode. provided in 8ec. $D of the "ode, those for stockholder# meeting, unlike in a close corporation, may not be altered or increased. This provisions in effect, increases the veto power of the minority stockholders. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by DIRECT the -ANAGE-ENT B) STOCKHOLDERS: the &/3 of stockholders of the corporation rather than by a board of directors. the close corporation may provide that the corporation shall be managed by the stockholders rather than by the 8o long as this provision continues in effect5 ?/-. 3f such be the case, the stockholders are deemed directors and are subject to all the rights and liabilities of a director. ,owever, their liability would be more extensive in that they are personally lilable for torts unless, again, the 1. 4o meeting of stockholders need be called to elect directors1 corporation has obtained reasonably ade.uate liability insurance. &s distinguished from the ordinary stock $. nless the context clearly re.uires otherwise, the stockholders of corporation, directors hereof are liable for corporate torts the corporation shall be deemed to be directors for the purpose of if they have been negligent or acted fraudulently in only the performance of their functions. &s to what is applying the provisions of this "ode1 and Greasonably ade.uate liability insuranceH would vary on the facts and circumstances of the case. *. The stockholders of the corporation shall be subject todepending all liabilities of directors. 3n order that the provision allowing a close corporation to do away with a ?/- may be effective, the same must contain the continuing provisions re.uired in par. $ of 8ec. ='5 The articles of incorporation may likewise provide that all officers 1. or 4o meeting of stockholders need be called to elect directors1 employees or that specified officers or employees shall be elected $. of nless the context clearly re.uires otherwise, the or appointed by the stockholders, instead of by the board stockholders of the corporation shall be deemed to be directors. directors for the purpose of applying the provisions of this "ode1 and *. The stockholders of the corporation shall be subject to all liabilities of directors. CLASSIFICATION OF SHARES: nder no. 1 above, the close corporation may classify its shares into different ELECTION OF OFFICERS: 8ec. =' likewise allows the &/3 classes to be held of record only by specified persons. of a close corporation to provide that all officers or Example5 "lasses &, ? and ". "lass & is to be held only by
17D
employees shall be elected stockholders instead of the ?/-.
or
appointed
by
the
re1"r#c"#o$+ #% 17c: !c67#1#"#o$ ;#o0!"e1 ":e re1"r#c"#o$ .
C.
EFFECT OF BREACH OF 2UALIF)ING CONDITIONS
7. Ehenever any person to whom stock of a close corporation has 8ec. =C. V!0#&#"< o% re1"r#c"#o$1 o$ "r!$1%er o% 1:!re1. been issued or transferred has, or is conclusively presumed under ;estrictions on the right to transfer shares must appear in this the section to have, notice either %a) that he is a person not eligible articles of incorporation and in the by+laws as well as in to the be a holder of stock of the corporation, or %b) that transfer of certificate of stock1 otherwise, the same shall not be binding on stock any to him would cause the stock of the corporation to be held by purchaser thereof in good faith. 8aid restrictions shall not be more more than the number of persons permitted by its articles of onerous than granting the existing stockholders or the corporation incorporation to hold stock of the corporation, or %c) that the the option to purchase the shares of the transferring stockholder transfer of stock is in violation of a restriction on transfer of stock, with such reasonable terms, conditions or period stated therein. 3f cor or!"#o$ 8!<+ !" #"1 o "#o$+ re%71e "o re>#1"er ":e ":e upon the expiration of said period, the existing stockholders or"r!$1%er the o% 1"oc3 #$ ":e $!8e o% ":e "r!$1%eree . corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. D. The provisions of subsection %7) shall not applicable if the transfer of stock, though contrary to subsections %1), %$) of %*), :!1 9ee$ co$1e$"e& "o 9< !00 ":e 1"oc3:o0&er1 o% ":e c0o1e cor or!"#o$, or #% ":e c0o1e cor or!"#o$ :!1 !8e$&e& #"1 !r"#c0e1 o% #$cor or!"#o$ #$ !ccor&!$ce 5#": ":#1 T#"0e .
The restriction must be indicated not only in the &/3 and the stock certificates but also in the by+laws. The restrictions, however, shall not be more onerous than granting existing stockholders or the corporation the option to purchase the shares of the selling or transferring stockholder within reasonable terms, conditions and period. 3f, after the expiration of the period, the existing stockholders or the corporation fails to exercise the option, the stockholder concerned may transfer his shares to any third person subject to the provisions, however, of 8ec. ==5
(. The term N"r!$1%erN, as used in this section, is not limited to a transfer for value.
Sec. MM. E%%ec"1 o% #117!$ce or "r!$1%er o% 1"oc3 #$ 9re!c: o% 67!0#%<#$> co$&#"#o$1. '. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied. 1. 3f stock of a close corporation is issued or transferred to person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and SALE OF SHARES: &pparently, a selling stockholder may certificate for such stock conspicuously shows the .ualifications of be able to transfer his shares if to do so would violate not the persons entitled to be holders of record thereof , 17c: er1o$ the .ualifying conditions indicated in the &/3 unless of all the stockholder consents to the transfer or the #1 co$c071#;e0< re178e& "o :!;e $o"#ce o% ":e %!c" o% course, :#1 &/3 is amended %no. D above). #$e0#>#9#0#"< "o 9e ! 1"oc3:o0&er.
STOCKHOLDER: concerned is not, however, left without any recourse as he may compel the close corporation to purchase his shares at their fair value for any reason $. 3f the articles of incorporation of a close corporation states subject the only to the condition laid down in 8ec. 1<D. number of persons, not exceeding twenty %$<), who are entitled to be holders of record of its stock, and if the certificate for such stock TRANSFEREE: may rescind the transaction or to recover from conspicuously states such number , and if the issuance or transfer of the transferor under any applicable warranty, express or implied. stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is co$c071#;e0< re178e& "o :!;e $o"#ce o% D. ":#1 STOCKHOLDERS. AGREE-ENT
%!c". Sec. 1NN. A>ree8e$"1 9< 1"oc3:o0&er1.
*. 3f a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation 1. &greements by and among stockholders executed 9e%ore the formation and organi6ation of a close corporation, signed by all transferee of the stock is co$c071#;e0< re178e& "o :!;e $o"#ce shall survive the incorporation of such corporation o% ":e %!c" ":!" :e :!1 !c67#re& 1"oc3 #$ ;#o0!"#o$ o% stockholders, ":e and shall continue to be valid and binding between and among such
17(
stockholders, #% 17c: 9e ":e#r #$"e$", to the extent that such them partners among themselves. &greements may also entered into by and between the stockholders of a close agreements are $o" #$co$1#1"e$" 5#": ":e !r"#c0e1 be o% corporation which relates to the management of the #$cor or!"#o$, irrespective of where the provisions of such corporate affairs which would not otherwise be valid and agreements are contained, e4ce " those re67#re& 9< ":#1 T#"0e binding in other corporations. This is because stockholders# be embodied in said articles of incorporation. agreement in the latter cannot limit or restrict the discretion and powers of the ?/- to manage the corporate affairs.
$. &n agreement between two or more stockholders, if in writing E. *HEN BOARD -EETINGS NOT NECESSAR): and signed by the parties thereto, may provide that in exercising any ;o"#$> r#>:"1, the shares held by them shall be voted as &s a rule, directors in ordinary stock corporations must act as in a body at a duly constituted meeting to have a valid therein provided, or as they may agree, or as determined corporate transaction. 3n a close corporation, directors may accordance with a procedure agreed upon by them. validly act even without a meeting subject only to the conditions laid down in the "ode under 8ec. 1<15 Sec. 1N1. *:e$ 9o!r& 8ee"#$> #1 7$$ece11!r< or #8 ro er0< *. 4o provision in any written agreement signed by the :e0&. + nless the by+laws provide otherwise, any action by the stockholders, relating to !$< :!1e o% ":e cor or!"e !%%!#r1 directors of a close corporation without a meeting shall shall be invalidated as between the parties on the ground that its nevertheless be deemed valid if5 effect is to make them partners among themselves.
1. ?efore or after such action is taken, written consent thereto is 7. & written agreement among some or all of the stockholders in a signed by all the directors1 or close corporation shall not be invalidated on the ground that relates to the conduct of the business and affairs of the corporation as to re1"r#c" or #$"er%ere 5#": ":e &#1cre"#o$ or o5er1 o% ":e 9o!r& o% &#rec"or15 !rovided, That such agreement shall $. &ll the stockholders have actual or implied knowledge of the impose on the stockholders who are parties thereto the liabilities for and make no prompt objection thereto in writing1 or action managerial acts imposed by this "ode on directors.
*. The directors are accustomed to take informal action with the D. To the extent that the 1"oc3:o0&er1 !re !c"#;e0< e$>!>e& #$ express or implied ac.uiescence of all the stockholders1 or ":e 8!$!>e8e$" or o er!"#o$ of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves . S!#& 1"oc3:o0&er1 1:!00 9e er1o$!00< 0#!90e %or cor or!"e "or"1 7$0e11 7. ":e &ll the directors have express or implied knowledge of the action cor or!"#o$ :!1 o9"!#$e& re!1o$!90< !&e67!"e 0#!9#0#"< in .uestion and none of them makes prompt objection thereto in #$17r!$ce. writing.
PRE=INCORPORATION AGREE-ENTS: under par.1 do not ordinarily survive the corporation in ordinary stock corporations unless it has been ratified or adopted by the corporation after incorporation. /nly in such case may the corporation be bound by said agreement. 3n a close corporation, these pre+incorporation agreements survive and continue to be valid and binding, if such be the intent of the stockholders, provided that the agreement is not inconsistent with the &/3 VOTING AGREE-ENTS or rights or the manner of exercising voting rights under par. $ may be the subject of agreement of stockholders, such as to vote for a specific person or group or to maintain a certain stockholder as their president or chairman. CONDUCT OF CORPORATE AFFAIRS under par. * and 7, may be the subject of an agreement, in writing, and will be effective and binding despite the fact that it may make
3f a directorPs meeting is held without 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.
F.
PRE=E-PTIVE RIGHTS
8ec. 1<$. Pre=e8 "#;e r#>:" #$ c0o1e cor or!"#o$1. + The pre+ emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide
17'
otherwise.
the "ommission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation.
G.
A-END-ENTS TO ARTICLES OF INCORPORATION
8ec. 1<*. A8e$&8e$" o% !r"#c0e1 o% #$cor or!"#o$. + The &ny provision above+.uoted gives the 8E" a very wide discretion in respect to management of a close corporation amendment to the articles of incorporation which seeks to delete or the event of a deadlock. 3t may5 remove any provision re.uired by this Title to be contained inin the 1. "ancel or alter any provision in the &/3, by+laws or any articles of incorporation or to reduce a .uorum or voting re.uirement stated in said articles of incorporation shall not be valid stockholders# agreement1 $. "ancel, alter or enjoin any resolution or other act of or effective unless approved by the affirmative vote of at least two+ thirds %$M*) of the outstanding capital stock, whether with or without the corporation or its ?/-, stockholders or officers1 *. voting rights, or of such greater proportion of shares as may be !rohibit any act of the corporation or its ?/-, specifically provided in the articles of incorporation for amending, stockholders or officers or other persons party to the deleting or removing any of the aforesaid provisions, at a meeting action1 7. ;e.uiring the purchase of the par value of the shares duly called for the purpose. of any stockholders, either by the corporation regardless of availability of unrestricted retained earnings, or by the other shareholders1 D. &ppointment of a provisional director1 + the second H. DEADLOCKS paragraph of 8ec. 1<7 will govern. The provisional Sec. 1N@. De!&0oc31. + 4otwithstanding any contrary provision in director may break the deadlock by casting the the articles of incorporation or by+laws or agreement of deciding vote. (. -issolving the corporation1 or stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporationPs '. /ther relief as the circumstances may warrant. business and affairs that the votes re.uired for any corporate action cannot be obtained, with the conse.uence that the business I. and *ITHDRA*AL OF STOCKHOLDERSJDISSOLUTION affairs of the corporation can no longer be conducted to the a stockholder wishes to withdraw therefrom, he may do advantage of the stockholders generally, the 8ecurities 3f and so Gfor any reasonH and compel the corporation to Exchange "ommission, upon written petition by any stockholder, purchase his shares at their fair value provided only that shall have the power to arbitrate the dispute. 3n the exercise of such the corporation has sufficient assets in its books to cover power, the "ommission shall have authority to make such order as its debts and liabilities exclusive of capital stock. This can it deems appropriate, including an order5 %1) canceling or altering be done by a stockholder in ordinary stock corporation only any provision contained in the articles of incorporation, by+laws, or the exercise of his appraisal right in those instances upon any stockholderPs agreement1 %$) canceling, altering or enjoining allowed under 8ec. C1 of the "ode. any resolution or act of the corporation or its board of directors, a corporation may be dissolved on petitioner of stockholders, or officers1 %*) directing or prohibiting any act of@ikewise the only one stockholder on the grounds indicated in 8ec. 1<D corporation or its board of directors, stockholders, officers, or other which include even mere dishonesty. 3t provides5 persons party to the action1 %7) re.uiring the purchase at their fair value of shares of any stockholder, either by the corporation 8ec. 1<D. *#":&r!5!0 o% 1"oc3:o0&er or &#11o07"#o$ o% regardless of the availability of unrestricted retained earnings in its or!"#o$. + 3n addition and without prejudice to other rights and cor books, or by the other stockholders1 %D) appointing a provisional remedies available to a stockholder under this Title, any stockholder director1 %() dissolving the corporation1 or %') granting such other of a close corporation may, for any reason, compel the said relief as the circumstances may warrant. corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock5 !rovided, That any stockholder of a close & provisional director shall be an impartial person who is neither a corporation may, by written petition to the 8ecurities and Exchange stockholder nor a creditor of the corporation or of any subsidiary or "ommission, compel the dissolution of such corporation whenever affiliate of the corporation, and whose further .ualifications, if any, any of acts of the directors, officers or those in control of the may be determined by the "ommission. & provisional director is not corporation is illegal, or fraudulent, or dishonest, or oppressive or a receiver of the corporation and does not have the title and powers unfairly prejudicial to the corporation or any stockholder, or of a custodian or receiver. & provisional director shall have all the whenever corporate assets are being misapplied or wasted. rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the "ommission or by all the stockholders. ,is compensation shall be determined J.by CLOSE CORPORATION VS. ORDINAR) STOCK agreement between him and the corporation subject to approval of CORPORATION
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CLOSE CORPORATION The number of cannot exceed $< stockholders
ORDINAR) STOCK CORPORATION
sufficient assets to cover its liabilities exclusive of capital stock
appraisal right
To the extent that all stockholders can be deemed directors, the number of directors can effectively be more than 1D 8hares of stock are subject to specified restrictions 8hares of stock are prohibited from being listed in the stock exchange or offered for sale to the public 8tockholders may take an active part in corporate management by vesting management to them rather than a ?oard of -irector Those active in management are personally liable for corporate torts unless the corporation has obtained an ade.uate liability insurance -irectors can validly act even without a meeting &greements between stockholders regarding the operations of the business can validly be made To the extent that directors may be classified into one or more classes and to be voted solely by a particular class of stock, cumulative voting may, in effect, be restricted The articles of incorporation may provide that all officers shall be elected or appointed by the stockholders 3t may provide for greater .uorum and voting re.uirements in meetings of stockholders and directors
4o limitation as to number The of proper forum may interfere shareholder in the management of a close corporation in case of deadlocks >aximum number of directors is under 8ection 1<7, even of the 1D directorsMstockholders are acting in good faith &ny stockholder may petition Kenerally no restriction the on8E" for corporate dissolution on grounds among others, transfer of shares provides for in section 1<D. 4o prohibition
"ourts cannot interfere 3 the business judgment of the directorsMstockholders G? 834E88 B -K>E4T ; @EH
-issolution may be had only on the grounds provided by the provisions of the "ode on dissolution and !.-. =<$+&, as amended
-ANUEL R. DULA) ENTERPRISES+ INC.+ Q3;K3@3/ E. >anagement is lodged in the @&L &4- 4E!/> "E4/ ;E-/Q&4, petitioners, ?oard of -irectors vs. THE HONORABLE COURT OF APPEALS+ E-K&;-/ -. !&?&@&4, >&4 E@ &. T/;;E8, B;., >&;3& T,E;E8& Q. &4- "&8T;E48E ". QE@/8/, respondents. -irectors are liable for torts QE@/8/ only %K.;. if they have acted negligently or 4o. =1CC=1 &ugust $', 1==*) fraudulently FACTS: >anuel -ulay, president of petitioner >anuel -ulay Enterprises, 3nc., through ?oard ;esolution 4o. 1C sold the subject property, known as the -ulay &partment, to private -irectors must, as a rule, act as respondent >aria Theresa Qeloso where a >emorandum to a body at a duly constituted the -eed of &bsolute 8ale was executed giving >anuel meeting -ulay within $ years to repurchase the property. 4ot valid and binding since stockholders# agreement cannot ;espondent Qeloso mortgaged said property to secure a limit the discretion of the ?oard to manage corporate affairs loan from private respondent >anuel Torres. Aor non+ payment of the said loan, Torres foreclosed the mortgage /rdinarily, no such classification and was declared the highest bidder in the public auction. and no restrictions on cumulative voting Aor -ulay#s and Qeloso#s failure to redeem said property, Torres applied for consolidation of title, to which petitioner Qirgilio -ulay, vice president of the corporation intervened alleging that >anuel -ulay was never authori6ed by the /fficers are elected by corporation the to sell the property. 3nstead of impleading ?oard of -irectors Qirgilio -ulay, Torres withdrew his petition and moved for its dismissal which was granted. &lthough the articles @ater of on, Torres and Edgardo !abalan, real estate incorporation or by+laws may administrator of Torres, filed an action against petitioners provide for greater .uorum %;edovan and as tenant of -ulay &partment) for the recovery of voting re.uirements in directors# possession, sum of money and damages with preliminary meeting under section $D, those injunction. for stockholders# meeting cannot generally be altered !rivate respondents and Torres later on filed an action Qalid and binding if indicated in against spouses Alorentino >analastas, a tenant of -ulay the articles of incorporation &partment and with petitioner corporation for ejectment. stock certificates The >T" decided in favor of respondents which was !re+emptive rights may affirmed be by the ;T" and later by the "&. denied as provided for in section *= ISSUE: E/4 the sale of the subject property between private respondents spouses Qeloso and >anuel -ulay has no abinding effect on petitioner corporation as ?oard nless he sells his shares, ;esolution 4o. 1C which authori6ed the sale of the subject stockholder cannot get back his was resolved without the approval of all the investment nor compel property the members of the board of directors and said ?oard corporation to buy his shares except in the exercise of his
;estriction on transfer of shares should be indicated in the articles of incorporation, by+laws and stock certificates !re+emptive rights of stockholders is broader as it include all issues without exception & stockholder may withdraw and compel the corporation to purchase his shares for any reason with the limitation only that the corporation has
17=
;esolution was prepared by a person not designated by the corporation to be its secretaryF HELD: 4o. 8ection 1<1 of the "orporation "ode of the !hilippines provides5 8ec. 1<1. Ehen board meeting is unnecessary or improperly held. nless the by+laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if5 1. ?efore or after such action is taken, written consent thereto is signed by all the directors, or $. &ll the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing1 or *. The directors are accustomed to take informal action with the express or implied ac.uiese of all the stockholders, or 7. &ll the directors have express or implied knowledge of the action in .uestion and none of them makes prompt objection thereto in writing. 3f a directorsP meeting is held without call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. 3n the instant case, petitioner corporation is classified as a close corporation and conse.uently ! 9o!r& re1o07"#o$ !7":or#K#$> ":e 1!0e or 8or">!>e o% ":e 179?ec" ro er"< #1 $o" $ece11!r< "o 9#$& ":e cor or!"#o$ %or ":e !c"#o$ o% #"1 re1#&e$" . &t any rate, corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in his case, petitioner Qirgilio -ulay failed to do. !etitionersP claim that the sale of the subject property by its president, >anuel -ulay, to private respondents spouses Qeloso is null and void as the alleged ?oard ;esolution 4o. 1C was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. &s correctly pointed out by the respondent "ourt of &ppeals5 &ppellant Qirgilio E. -ulayPs protestations of complete innocence to the effect that he never participated nor was even aware of any meeting or resolution authori6ing the mortgage or sale of the subject premises %see par. C, affidavit of Qirgilio E. -ulay, dated >ay *1, 1=C7, p. 17, Exh. N$1N) is difficult to believe. /n the contrary, he is very much privy to the transactions involved. To begin with, he is a incorporator and one of the board of directors designated at the time of the organi6ation of >anuel ;. -ulay Enterprise, 3nc. 3n ordinary parlance, the said entity is loosely referred to as a Nfamily corporationN. The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which >anuel ;. -ulay Enterprises, 3nc. is typical5 four+fifths of its incorporators being close relatives namely, three %*) children and their father whose name identifies their corporation %&rticles of
3ncorporation of >anuel ;. -ulay Enterprises, 3nc. Exh. N*1+&N). ?esides, the fact that petitioner Qirgilio -ulay on Bune $7, 1='D executed an affidavit that he was a signatory witness to the execution of the post+dated -eed of &bsolute 8ale of the subject property in favor of private respondent Torres indicates that he was aware of the transaction executed between his father and private respondents and had, therefore, ade.uate knowledge about the sale of the subject property to private respondents. "onse.uently, petitioner corporation is liable for the act of >anuel -ulay and the sale of the subject property to private respondents by >anuel -ulay is valid and binding. &s stated by the trial court5 . . . the sale between >anuel ;. -ulay Enterprises, 3nc. and the spouses >aria Theresa Q. Qeloso and "astrense ". Qeloso, was a corporate act of the former and not a personal transaction of >anuel ;. -ulay. This is so because >anuel ;. -ulay was not only president and treasurer but also the general manager of the corporation. The corporation was a closed family corporation and the only non+relative in the board of directors was &tty. !laridel ". Bose who appeared on paper as the secretary. There is no denying the fact, however, that >aria 8ocorro ;. -ulay at times acted as secretary. . . ., the "ourt can not lose sight of the fact that the >anuel ;. -ulay Enterprises, 3nc. is a closed family corporation where the incorporators and directors belong to one single family. 3t cannot be concealed that >anuel ;. -ulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation. SERGIO F. NAGUIAT+ doing business under the name and style 8E;K3/ A. 4&K 3&T E4T., 34"., I "@&;R A3E@- T&23, 34"., petitioners, vs. NATIONAL LABOR RELATIONS CO--ISSION %T,3;-3Q383/4), 4&T3/4&@ /;K&43U&T3/4 /A E/;R34K>E4 and its members, @E/4&;-/ T. K&@&4K, et al., respondents. %K.;. 4o. 11(1$*1 >arch 1*, 1==') FACTS: !rivate respondents were employed as taxi drivers of "lark Aield Taxi, 3nc. which held a concessionaire#s contract with &rmy &ir Aorce Exchange 8ervices %&&AE8) for the operation of taxi services within the "lark &ir ?ase. -ue to the phase+out of the 8 >ilitary ?ases in the !hilippines, which "lark &ir ?ase was not spared, the &&AE8 was dissolved and the services of individual respondents were officially terminated. The &&AE8 Taxi -rivers# &ssociation %drivers union) and "AT3 agreed on a separation pay of !D<< per year of service to which private respondents did not agree. !rivate respondents filed a complaint against 8ergio 4aguiat, president of "AT3, doing business under the name and style of 8ergio A. 4aguiat Enterprises, 3nc., &&AE8 and the drivers# union for separation pay which was granted by the @abor &rbiter at !1,$<< per year of service for humanitarian considerations.
1D<
/n appeal, the 4@;" granted separation pay to private respondents. ISSUE: E/4 8ergio A. 4aguiat Enterprises, 3nc., may be held solidarily liable with "AT3F HELD: 4o. Arom the evidence proffered by both parties, there is no substantial basis to hold that 4aguiat Enterprises is an indirect employer of individual respondents much less a labor only contractor. /n the contrary, petitioners submitted documents such as the driversP applications for employment with "AT3, and social security remittances and payroll of 4aguiat Enterprises showing that none of the individual respondents were its employees. >oreover, in the contract between "AT3 and &&AE8, the former, as concessionaire, agreed to purchase from &&AE8 for a certain amount within a specified period a fleet of vehicles to be Nke%pt) on the roadN by "AT3, pursuant to their concessionairePs contract. This indicates that "AT3 became the owner of the taxicabs which became the principal investment and asset of the company. !rivate respondents failed to substantiate their claim that 4aguiat Enterprises managed, supervised and controlled their employment. 3t appears that they were confused on the personalities of 8ergio A. 4aguiat as an individual who was the president of "AT3, and 8ergio A. 4aguiat Enterprises, 3nc., as a separate corporate entity with a separate business. They presumed that 8ergio A. 4aguiat, who was at the same time a stockholder and director of 8ergio A. 4aguiat Enterprises, 3nc., was managing and controlling the taxi business on behalf of the latter. & closer scrutiny and analysis of the records, however, evince the truth of the matter5 that 8ergio A. 4aguiat, in supervising the taxi drivers and determining their employment terms, was rather carrying out his responsibilities as president of "AT3. ,ence, 4aguiat Enterprises as a separate corporation does not appear to be involved at all in the taxi business. &nd, although the witness insisted that 4aguiat Enterprises was his employer, he could not deny that he received his salary from the office of "AT3 inside the base. &nother driver+claimant admitted, upon the prodding of counsel for the corporations, that 4aguiat Enterprises was in the trading business while "AT3 was in taxi services. 3n addition, the "onstitution of "AT3+&&AE8 Taxi -rivers &ssociation which, admittedly, was the union of individual respondents while still working at "lark &ir ?ase, states that members thereof are the employees of "AT3 and N%f)or collective bargaining purposes, the definite employer is the "lark Aield Taxi 3nc.N ISSUE2: E/4 8ergio A. 4aguiat and his son &ntolin 4aguiat, officers of "AT3 may be solidarily liable with "AT3F HELD: /nly 8ergio A. 4aguiat. 8ergio A. 4aguiat, in his capacity as president of "AT3, cannot be exonerated from joint and several liability in the payment of separation pay to individual respondents. 8ergio A. 4aguiat, admittedly, was the president of "AT3 who actively managed the business. Thus, applying the ruling in &.". ;ansom, he falls within the meaning of an NemployerN as contemplated by the @abor "ode, who may
be held jointly and severally liable for the obligations of the corporation to its dismissed employees. >oreover, petitioners also conceded that both "AT3 and 4aguiat Enterprises were Nclose family corporationsN owned by the 4aguiat family. 8ection 1<<, paragraph D, %under Title 233 on "lose "orporations) of the "orporation "ode, states5 %D) To the extent that the stockholders are actively engage%d) in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. 8aid stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably ade.uate liability insurance. %emphasis supplied) 4othing in the records show whether "AT3 obtained Nreasonably ade.uate liability insurance1N thus, what remains is to determine whether there was corporate tort. /ur jurisprudence is wanting as to the definite scope of Ncorporate tort.N Essentially, NtortN consists in the violation of a right given or the omission of a duty imposed by law. 8imply stated, tort is a breach of a legal duty. &rticle $C* of the @abor "ode mandates the employer to grant separation pay to employees in case of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, which is the condition obtaining at bar. "AT3 failed to comply with this law+imposed duty or obligation. "onse.uently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. &s pointed out earlier, the fifth paragraph of 8ection 1<< of the "orporation "ode specifically imposes personal liability upon the stockholder actively managing or operating the business and affairs of the close corporation. The "ourt here finds no application to the rule that a corporate officer cannot be held solidarily liable with a corporation in the absence of evidence that he had acted in bad faith or with malice. 3n the present case, 8ergio 4aguiat is held solidarily liable for corporate tort because he had actively engaged in the management and operation of "AT3, a close corporation. &ntolin T. 4aguiat was the vice president of the "AT3. &lthough he carried the title of Ngeneral managerN as well, it had not been shown that he had acted in such capacity. Aurthermore, no evidence on the extent of his participation in the management or operation of the business was proferred. 3n this light, he cannot be held solidarily liable for the obligations of "AT3 and 8ergio 4aguiat to the private respondents. CHAPTER 1B: SPECIAL CORPORATIONS 'TITLE ,III(
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CHAPTER I T EDUCATIONAL INSTITUTIONS
8ec. 1<(. I$cor or!"#o$. + Educational corporations shall be governed by special laws and by the general provisions of this
1D1
"ode. nless otherwise provided in the articles of incorporation or the by+ laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organi6ed, so classify themselves that the term of office of one+fifth %1MD) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five %D) years. & majority of the trustees shall constitute a .uorum for the transaction of business. The powers and authority of trustees shall be defined in the by+laws.
EDUCATIONAL INSTITUTIONS are those that provide facilities for teaching or instruction. 3t includes both public and private schools or colleges and universities and are subject to the provisions of special laws and by the general provisions of the "ode. PUBLIC SCHOOLS or those created by the government are, however, subject to the law of their creation. ! for instance has its own special charter and would thus be governed by the special law creating it. 3nsofar as they may be applicable however, the provisions of any special law or the "orporation "ode supplement the law of their creation. PRIVATE SCHOOLS OR COLLEGES include any private institutions for teaching, managed by private individuals or corporations which offer courses of kindergarten, primary, intermediary or secondary instructions or superior courses in vocational, technical, professional or special schools by which diploma or certificates are to be granted or titles and degrees conferred %8ec. $, &ct 4o. $<'(, as amended by "& 1C<).
These instructions of learning once recogni6ed by the government as such are mandated by law to be incorporated within =< days under the provisions of the "orporation "ode and must, perforce, comply with the re.uirements and procedure laid down thereunder. %8ec. D, supra) Their failure to do so will not immune the educational institution from suit as a corporation %"hang Rai 8hek 8chool vs. "&1 &pril 1C, 1=C=, supra) The 8E", however, shall not act on the incorporation of any educational corporation, unless the provision of 8ec. 1<' is complied with5
Aor institutions organi6ed as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations.
CONSTITUTIONAL PROVISION ON FILIPINO O*NERSHIP: par. $, 8ec. 7 of &rticle 23Q %Education, 8cience and Technology, &rts, "ulture and 8ports)
Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citi6ens of the !hilippines or corporations or associations at least sixty per centum of the capital of which is owned by such citi6ens. The "ongress may, however, re.uire increased Ailipino e.uity participation in all educational institutions. The control and administration of educational institutions shall be vested in citi6ens of the !hilippines.
4o educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one+third of the 8ec. 1<'. Pre=re67#1#"e1 "o #$cor or!"#o$. + Except upon enrollment in any school. The provisions of this sub section shall not favorable recommendation of the >inistry of Education and "ulture, apply to schools established for foreign diplomatic personnel and the 8ecurities and Exchange "ommission shall not accept their or dependents and, unless otherwise provided by law, for other approve the articles of incorporation and by+laws of any educational foreign temporary residents. institution "ulled from this is that while foreigners may own a maximum of 7<J of the capital stock of an educational corporation, not one of them may sit as a member of the governing board thereof. 4either may they act as an officer with the power of control and administration of the institution. 3n effect their ownership of any capital would be limited to Gnon+controllingH interest.
BOARD OF DIRECTORSJTRUSTEES: or the governing board by any name of an educational institution is similar in number as to any other corporation except that in case it is non+stock, the number must be in multiples of five %D). &s compared to stock corporation, their number may be within the vicinity of five %D) to fifteen %1D). TER- OF OFFICE: >embers of the ?oard may hold office for five years but they shall be staggered so that 1MD of their number shall expire every year. 8ec. 1<C provides5
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CHAPTER II = RELIGIOUS CORPORATIONS
REGLIGIOUS CORPORATIONS are those composed entirely of spiritual persons, which are created for the Sec. 1ND. Bo!r& o% "r71"ee1. + Trustees of educational institutions furtherance of religion or perpetuating the rights of the organi6ed as non+stock corporations shall not be less than five %D) church or for the administration of church or religious work or of property. nor more than fifteen %1D)5 !rovided, however, That the number trustees shall be in multiples of five %D). CLASSES OF RELIGIOUS CORPORATIONS:
1D$
and Sec. 1NM. C0!11e1 o% re0#>#o71 cor or!"#o$1. + ;eligious corporations may be incorporated by one or more persons. 8uch D. The place where the principal office of the corporation sole is to corporations may be classified into corporations sole and religious be established and located, which place must be within the societies. !hilippines.
;eligious corporations shall be governed by this "hapter and byThe the articles of incorporation may include any other provision not general provisions on non+stock corporations insofar as they may be contrary to law for the regulation of the affairs of the corporation. applicable.
PROCEDURE FOR THE ORGANIZATION:
".
CORPORATION SOLE
CORPORATION SOLE: consists of one person only and his successor in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had. PURPOSE OF INCORPORATION AND PERSONS *HO -A) INCORPORATE:
Sec. 112. S798#11#o$ o% ":e !r"#c0e1 o% #$cor or!"#o$. + The articles of incorporation must be verified, before filing, by affidavit 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 commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public.
8ec. 11<. Cor or!"#o$ 1o0e. + Aor the purpose of administering and managing, as trustee, the affairs, property and temporalities of Arom any and after the filing with the 8ecurities and Exchange "ommission of the said articles of incorporation, verified by affidavit religious denomination, sect or church, a corporation sole may be or affirmation, and accompanied by the documents mentioned in formed by the chief archbishop, bishop, priest, minister, rabbi or the preceding paragraph, such chief archbishop, bishop, priest, other presiding elder of such religious denomination, sect or church. minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed CONTENTS OF THE ARTICLES OF INCORPORATION: by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, Sec. 111. Ar"#c0e1 o% #$cor or!"#o$. + 3n order to become a for the use, purpose, behalf and sole benefit of his religious corporation sole, the chief archbishop, bishop, priest, minister, rabbi denomination, sect or church, including hospitals, schools, colleges, or presiding elder of any religious denomination, sect or church orphan asylums, parsonages and cemeteries thereof. must file with the 8ecurities and Exchange "ommission articles of incorporation setting forth the following5
TER- OF E,ISTENCE: &s can be gleaned from the law, the &/3 of a corporation sole does not re.uire a provision for 1. That he is the chief archbishop, bishop, priest, minister, rabbi orits term of existence. Aor obvious reasons, since a sole is supposed to exist in perpetuity. 3t may, presiding elder of his religious denomination, sect or church corporation and however, be dissolved in accordance with 8ec. 11D of the that he desires to become a corporation sole1 "ode.
$. That the rules, regulations and discipline of his religious BEGINNING OF CORPORATE E,ISTENCE: is upon filing denomination, sect or church are not inconsistent with his becoming of the verified &/3 with the 8E" and the documents a corporation sole and do not forbid it1 re.uired under 8ec. 11$. This serves as an exception to the rule that a corporation ac.uires juridical personality only upon *. That as such chief archbishop, bishop, priest, minister, rabbi or the issuance of a certificate of incorporation by the presiding elder, he is charged with the administration of said the government agency. temporalities and the management of the affairs, estate and PO*ER TO ALIENATE PROPERTIES+ LI-ITATION: The properties of his religious denomination, sect or church withinextent his of the its power to mortgage or sell real properties territorial jurisdiction, describing such territorial jurisdiction1 is, however, subject to certain restriction, that is, a proper court order must first be secured for that purpose, which is 7. The manner in which any vacancy occurring in the office of chief not otherwise imposed in any other corporation. 3ntervention of the court may dispensed with only if the archbishop, bishop, priest, minister, rabbi of presiding elder is rules, regulations and discipline of the religious re.uired to be filled, according to the rules, regulations or discipline denomination, sect or church concerned provide or of the religious denomination, sect or church to which he belongs1 regulate the manner or method of holding or alienating
1D*
properties. 8ec. 11* provides5
FACTS: >ateo ;odis executed a -eed of 8ale in favor of the ;oman "atholic &postolic &dministrator of -avao, 3nc., 8ec. 11*. Ac67#1#"#o$ !$& !0#e$!"#o$ o% ro er"<. with >gr. "lovit Thibault, a "anadian citi6en, as actual incumbent. Ehen the deed of sale was presented to the corporation sole may purchase and hold real estate and personal ;egister of -eeds of -avao for registration, the latter property for its church, charitable, benevolent or educational re.uired the corporation to submit an affidavit declaring purposes, and may receive be.uests or gifts for such purposes. that (<J of the members thereof were Ailipino citi6ens. 8uch corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the "ourt of Airst 3nstance Entertaining some doubts as to the registrability of the of the province where the property is situated upon proof made to of sale, the ;egister of -eeds referred the matter to deed the @and ;egistration "ommission which held that by virtue the satisfaction of the court that notice of the application for leave of in the provisions of 8ec. 1 and D of &rt. 2333 of the !hilippine to sell or mortgage has been given by publication or otherwise "onstitution, the vendee was not .ualified to ac.uire such manner and for such time as said court may have directed, private lands in the !hilippines in the absence of proof that and that it is to the interest of the corporation that leave to sell or at least (<J of the capital, property, or assets of the mortgage should be granted. The application for leave to sell or ;oman "atholic &postolic &dministrator of -avao, 3nc. was mortgage must be made by petition, duly verified, by the chief actually owned or controlled by Ailipino citi6ens. archbishop, bishop, priest, minister, rabbi or presiding elder acting E/4 the corporation sole may register the as corporation sole, and may be opposed by any member of ISSUE: the transferredF religious denomination, sect or church represented by property the corporation sole5 !rovided, That in cases where the rules, HELD regulations and discipline of the religious denomination, sect or 5 Les. 3n solving the problem thus submitted to our consideration, Ee can say the following5 A cor or!"#o$ church, religious society or order concerned represented by such 1o0e #1 ! 1 ec#!0 %or8 o% cor or!"#o$ 717!00< corporation sole regulate the method of ac.uiring, holding, selling !11oc#!"e& 5#": ":e c0er>< . "onceived and introduced and mortgaging real estate and personal property, such rules, into the common law by sheer necessity, this legal creation regulations and discipline shall control, and the intervention ofwhich the was referred to as Nthat unhappy freak of English lawN was designed to facilitate the exercise of the functions courts shall not be necessary. of ownership carried on by the clerics for and on behalf of the church which was regarded as the property owner %8ee 3 "ouvierPs @aw -ictionary, p. (C$+(C*). O*NERSHIP OF PROPERT): does not vest unto the head upon registration of real property in the name of the A cor or!"#o$ 1o0e co$1#1"1 o% o$e er1o$ o$0<+ !$& corporation sole, such devolving upon the church or :#1 17cce11or1 '5:o 5#00 !05!<1 9e o$e !" ! "#8e(+ #$ congregation ac.uiring it. 1o8e !r"#c70!r 1"!"#o$+ 5:o !re #$cor or!"e& 9< 0!5 #$ or&er "o >#;e ":e8 1o8e 0e>!0 c! !c#"#e1 !$& CONSITUTIONAL LI-ITATION+ RE: BNL FILIPINO !&;!$"!>e1+ !r"#c70!r0< ":!" o% er e"7#"<+ 5:#c: #$ O*NED: does not apply to corporation sole with regards ":e#r $!"7r!0 er1o$1 ":e< co70& $o" :!;e :!& . 3n this ownership of real property in its own name. 3t has thus sense, the king is a sole corporation1 so is a bishop, or been held that the ;oman "atholic "hurch of the dens, distinct from their several chapters %;eid vs. ?arry, !hilippines, a corporation sole, has no nationality and that =* Ala. C7=, 11$ 8o. C7(). the framers of the "onstitution did not have in mind the religious corporation sole when they provided that (<J of T:!" 0e!;e1 $o roo8 %or &o79" ":!" ":e 9#1:o 1 or the capital of the corporation ac.uiring it must be owned !rc:9#1:o 1+ !1 ":e c!1e 8!< 9e+ !1 cor or!"#o$I1 by Ailipino citi6ens. 1o0e !re 8ere0< !&8#$#1"r!"or1 o% ":e c:7rc: ro er"#e1 ":!" co8e "o ":e#r o11e11#o$+ #$ 5:#c: CHARACTER OF THE LAND5 at the time of institution of ":e< :o0& #$ "r71" %or ":e c:7rc: . 3t can also be said registration proceedings must first be determined before a that while it is true that church properties could be corporation sole, or any private corporation for that matter, administered by a natural persons, problems regarding can ac.uire the land must first be determined. 3f it does not succession to said properties can not be avoided to rise form part of public domain, the constitutional prohibition upon his death. Through this legal fiction, however, church against its ac.uisition by private corporation will not apply. properties ac.uired by the incumbent of a corporation sole Thus, it has likewise been earlier held that under the !ublic pass, by operation of law, upon his death not his personal @and &ct, alienable public land may be subject to heirs but to his successor in office. 3t could be seen, registration by a possessor if he, personally or through his therefore, that a corporation sole is created not only to predecessors+in+interest, had openly continuously and administer the temporalities of the church or religious exclusively possessed the same for *< years as the same is society where he belongs but also to hold and transmit the converted into private property by mere lapse or same to his successor in said office. 3f the ownership or completion of the said period. title to the properties do not pass to the administrators, who are the owners of church propertiesF. THE RO-AN CATHOLIC APOSTOLIC AD-INISTRATOR OF DAVAO+ INC.+ petitioner, ?ouscaren and Elis, 8.B., authorities on cannon law, on their s. treatise comment5 THE LAND REGISTRATION CO--ISSION !$& THE REGISTER OF DEEDS OF DAVAO CIT)+ respondents 3n matters regarding property belonging to the niversal %K.;. 4o. @+C7D11 -ecember $<, 1=D') "hurch and to the &postolic 8ee, the 8upreme !ontiff exercises his office of supreme administrator through the
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;oman "uria1 in matters regarding other church property, through the administrators of the individual moral persons in the "hurch according to that norms, laid down in the "ode of "annon @aw. This does not mean, however, that the ;oman !ontiff is the owner of all the church property1 but merely that he is the supreme guardian %?ouscaren and Ellis, "annon @aw, & Text and "ommentary, p. '(7). Ee must therefore, declare that although a branch of the niversal ;oman "atholic &postolic "hurch, every ;oman "atholic "hurch in different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to such artificial being under the laws of that country, separate and distinct from the personality of the ;oman !ontiff or the ,oly 8ee, without prejudice to its religious relations with the latter which are governed by the "anon @aw or their rules and regulations. The "orporation @aw also contains the following provisions5 8E"T3/4 1D=. &ny corporation sole may purchase and hold real estate and personal1 property for its church, charitable, benevolent, or educational purposes, and may receive be.uests or gifts of such purposes. 8uch corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the "ourt of Airst 3nstance of the province in which the property is situated1 but before making the order proof must be made to the satisfaction of the "ourt that notice of the application for leave to mortgage or sell has been given by publication or otherwise in such manner and for such time as said "ourt or the Budge thereof may have directed, and that it is to the interest of the corporation that leave to mortgage or sell must be made by petition, duly verified by the bishop, chief priest, or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, society or church represented by the corporation sole5 !rovided, however, That in cases where the rules, regulations, and discipline of the religious denomination, society or church concerned represented by such corporation sole regulate the methods of ac.uiring, holding, selling and mortgaging real estate and personal property, such rules, regulations, and discipline shall control and the intervention of the "ourts shall not be necessary. 3t can, therefore, be noticed that the power of a corporation sole to purchase real property, like the power exercised in the case at bar, it is not restricted although the power to sell or mortgage sometimes is, depending upon the rules, regulations, and discipline of the church concerned represented by said corporation sole. 3f corporations sole can purchase and sell real estate for its church, charitable, benevolent, or educational purposes, can they register said real propertiesF &s provided by law, lands held in trust for specific purposes me be subject of registration %section (=, &ct 7=(), and the capacity of a corporation sole, like petitioner herein, to register lands belonging to it is acknowledged, and title thereto may be issued in its name %?ishop of 4ueva 8egovia vs. 3nsular Kovernment, $( !hil. *<<+1=1*). 3ndeed it is absurd that while the corporations sole that might be in need of ac.uiring lands for the erection of temples where the faithful can pray, or schools and cemeteries which they are expressly authori6ed by law
to ac.uire in connection with the propagation of the ;oman "atholic &postolic faith or in furtherance of their freedom of religion they could not register said properties in their name. &s professor Bavier B. 4epomuceno very well says N>an in his search for the immortal and imponderable, has, even before the dawn of recorded history, erected temples to the nknown Kod, and there is no doubt that he will continue to do so for all time to come, as long as he continues Pimploring the aid of -ivine !rovidencePN %4epomucenoPs "orporation 8ole, Q3 &teneo @aw Bournal, 4o. 1, p. 71, 8eptember, 1=D(). nder the circumstances of this case, Ee might safely state that even before the establishment of the !hilippine "ommonwealth and of the ;epublic of the !hilippines every corporation sole then organi6ed and registered had by express provision of law the necessary power and .ualification to purchase in its name private lands located in the territory in which it exercised its functions or ministry and for which it was created, independently of the nationality of its incumbent uni.ue and single member and head, the bishop of the dioceses. 3t can be also maintained without fear of being gainsaid that ":e Ro8!$ C!":o0#c A o1"o0#c C:7rc: #$ ":e P:#0# #$e1 :!1 $o $!"#o$!0#"< !$& ":!" ":e %r!8er1 o% ":e Co$1"#"7"#o$+ !1 5#00 9e :ere7$&er e4 0!#$e&+ &#& $o" :!;e #$ 8#$& ":e re0#>#o71 cor or!"#o$1 1o0e 5:e$ ":e< ro;#&e& ":!" BN er ce$"78 o% ":e c! #"!0 ":ereo% 9e o5$e& 9< F#0# #$o c#"#Ke$1. THE DIRECTOR OF LANDS ;1. CA %supra, !/EE; T/ &"T 3;E !;/!E;TL) FACTS: !rivate respondent 3glesia 4i "risto applied with the "A3 of "avite for registration of a parcel of land which it claimed to have ac.uired by virtue of a -eed of &bsolute 8ale from &.uelina de la "ru6, alleging that the applicant and its predecessors+in+interest have been in actual, continuous, public, peaceful and adverse possession and occupation of the said land for more than *< years, which was opposed by the Kovernment as represented by the -irector of @ands. The "A3 and the "& ruled in favor of 34". ISSUE: E/4 the registration of the land should be upheldF HELD: &s observed at the outset, had this case been resolved immediately after it was submitted for decision, the result may have been .uite adverse to private respondent. Aor the rule then prevailing under the case of >anila Electric "ompany v. "astro+?artolome et al., 117 8";& '==, reiterated in ;epublic v. Qillanueva, 117 8";& C'D as well as the other subse.uent cases involving private respondent adverted to aboveP, is that a juridical person, private respondent in particular, is dis.ualified under the 1='* "onstitution from applying for registration in its name alienable public land, as such land ceases to be public land Nonly upon the issuance of title to any Ailipino citi6en claiming it under section 7C9b:N of "ommonwealth &ct 4o. 171, as amended. These are precisely the cases cited by petitioner in support of its theory of dis.ualification. 8ince then, however, this "ourt had occasion to re+examine the rulings in these cases vis+a+vis the earlier cases of "arino v. 3nsular Kovernment, 71 !hil. =*D, 8usi v. ;a6on, 7C !hil. 7$7 and ,erico v. -ar, =D 8";& 7*', among others. Thus, in the recent case of -irector of @ands v. 3ntermediate &ppellate "ourt, 17( 8";& D<=, Ee
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categorically stated that the majority ruling in >eralco is Nno longer deemed to be binding precedentN, and that N9T:he correct rule, ... is ":!" !0#e$!90e 790#c 0!$& :e0& 9< ! o11e11or+ er1o$!00< or ":ro7>: :#1 re&ece11or1=#$=#$"ere1"+ o e$0<+ co$"#$7o710< !$& e4c071#;e0< %or ":e re1cr#9e& 1"!"7"or< er#o& P/N <e!r1 7$&er ":e P790#c L!$& Ac"+ !1 !8e$&e&Q #1 co$;er"e& "o r#;!"e ro er"< 9< 8ere 0! 1e or co8 0e"#o$ o% 1!#& er#o&+ # 1o ?7re.G Ee further reiterated therein the timehonored principle of non+ impairment of vested rights. The crucial factor to be determined therefore is the length of time private respondent and its predecessors+in+interest had been in possession of the land in .uestion prior to the institution of the instant registration proceedings. The land under consideration was ac.uired by private respondent from &.uelina de la "ru6 in 1=7', who, in turn, ac.uired by same by purchase from the ;amos brothers and sisters, namely5 Eusebia, Eulalia, >ercedes, 8antos and &gapito, in 1=*(. nder section 7C9b: of "ommonwealth &ct 4o. 171, as amended, Nthose who by themselves or through their predecessors+in+interest have been in open, continuous, exclusive and notorious possession and occupation of agricultural lands of the public domain, under a bona fide claim of ac.uisition or ownership, for at least thirty years immediately preceding the filing of the application for confirmation of title except when prevented by war or force majeureN may apply to the "ourt of Airst 3nstance of the province where the land is located for confirmation of their claims, and the issuance of a certificate of title therefor, under the @and ;egistration &ct. 8aid paragraph 9b: further provides that Nthese shall be conclusively presumed to have performed all the conditions essential to a Kovernment grant and shall be entitled to a certificate of title under the provisions of this chapter.N Taking the year 1=*( as the reckoning point, there being no showing as to when the ;amoses first took possession and occupation of the land in .uestion, the *<+year period of open, continuous, exclusive and notorious possession and occupation re.uired by law was completed in 1=((. The completion by private respondent of this statutory *<+ year period has dual significance in the light of 8ection 7C9b: of "ommonwealth &ct 4o. 171, as amended and prevailing jurisprudence5 91: at this point, the land in .uestion ceased by operation of law to be part of the public domain1 and 9$: private respondent could have its title thereto confirmed through the appropriate proceedings as under the "onstitution then in force, private corporations or associations were not prohibited from ac.uiring public lands, but merely prohibited from ac.uiring, holding or leasing such type of land in excess of 1,<$7 hectares. 3f in 1=((, the land in .uestion was converted ipso jure into private land, it remained so in 1='7 when the registration proceedings were commenced. This being the case, the prohibition under the 1='* "onstitution would have no application. /therwise construed, if in 1=((, private respondent could have its title to the land confirmed, then it had ac.uired a vested right thereto, which the 1='* "onstitution can neither impair nor defeat. REPUBLIC OF THE PHILIPPINES+ petitioner, vs. INTER-EDIATE APPELLATE COURT+ RO-AN CATHOLIC BISHOP OF LUCENA+ re re1e$"e& 9< -1>r. Jo1e T.
S!$c:eK+ !$& REGIONAL TRIAL COURT+ BRANCH LIII+ LUCENA CIT)+ respondents %K.;. 4o. 'D<7$1 4ovember $=, 1=CC) FACTS: The ;/>&4 "&T,/@3" ?38,/! of @ucena, represented by >sgr. Bose T. 8anche6, filed an application for confirmation of title to 7 parcels of land which were said to have been obtained either by purchase or donation dating as far back as 1=$C, which was granted by the "A3. &gainst this decision, the 8olicitor Keneral filed a >otion for reconsideration on the following grounds5 1. &rticle 23Q, 8ection 11 of the 4ew "onstitution%1='*) dis.ualifies a private corporation from ac.uiring alienable lands for the public domain1 $. 3n the case at bar the application was filed after the effectivity on the 4ew "onstitution on Banuary 1', 1='*1 which was denied by the lower court for lack of merit. 8till insisting of the alleged unconstitutionality of the registration %a point which, incidentally, the appellant never raised in the lower court prior to its >otion for ;econsideration), the ;epublic elevated this appeal, and the 3&" affirmed the lower court#s decision. ISSUE: E/4 private respondent, corporation sole, is entitled to confirmation of its title to the 7 parcels of landF HELD: The parties herein do not dispute that since the ac.uisition of the four %7) lots by the applicant, it has been in continuous possession and enjoyment thereof, and such possession, together with its predecessors+in+interest, covering a period of more than D$ years %at least from the date of survey in 1=$C) with respect to lots 1 and $, about ($ years with respect to lot *, all of plan !8 +(D(C(1 and more than *= years with respect to the fourth parcel described in plan !8 +11 $D=$ %at least from the date of the survey in 1=7<) have been open, public, continuous, peaceful, adverse against the whole world, and in the concept of owner. !etitioner argues that considering such constitutional prohibition, private respondent is dis.ualified to own and register its title to the lots in .uestion. Aurther, it argues that since the application for registration was filed only on Aebruary $, 1='=, long after the 1='* "onstitution took effect on Banuary 1', 1='*, the application for registration and confirmation of title is ineffectual because at the time it was filed, private corporation had been declared ineligible to ac.uire alienable lands of the public domain pursuant to &rt. 23Q, 8ec. 11 of the said constitution. %;ollo, p. 71) The .uestioned posed before this "ourt has been settled in the case of -3;E"T/; /A @&4-8 vs. 3ntermediate &ppellate "ourt %17( 8";& D<= 91=C(:) which reversed the ruling first enunciated in the 1=C$ case of >anila Electric "o. vs. "&8T;/ ?&;T/@/>E, %117 8";& 'C= 91=C$:) imposing the constitutional ban on public land ac.uisition by private corporations which ruling was declared emphatically as res judicata on Banuary ', 1=C( in -irector of @ands vs. ,ermanos y ,ermanas de 8ta. "ru6 de >ayo, 3nc., %171 8";& $1 91=C(:). 3n said case, %-irector of @ands v. 3&", supra), this "ourt stated that ! &e"er8#$!"#o$ o%
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":e c:!r!c"er o% ":e 0!$&1 !" ":e "#8e o% #$1"#"7"#o$ o% ":e re>#1"r!"#o$ rocee&#$>1 871" 9e 8!&e. 3f they were then still part of the public domain, it must be answered in the negative. 3f, on the other hand, they were already private lands, the constitutional prohibition against their ac.uisition by private corporation or association obviously does not apply. 3n affirming the -ecision of the 3ntermediate &ppellate "ourt in said case, this "ourt adopted the vigorous dissent of the then Bustice, later "hief Bustice "laudio Teehankee, tracing the line of cases beginning with "&;34/, in 1=<=, thru 8 83, in 1=$D, down to ,E;3"/, in 1=C<, which developed, affirmed and reaffirmed the doctrine that open, exclusive and undisputed possession of alienable public land for the period prescribed by law creates the legal fiction whereby the land, upon completion of the re.uisite period ipso jure and without the need of judicial or other sanction, ceases to be public land and becomesP private property. %-3;E"T/; /A @&4-8 vs. 3&", supra, p. D1C). 3t must be emphasi6ed that the "ourt is not here saying that a corporation sole should be treated like an ordinary private corporation. 3n ;oman "atholic &postolic &dministration of -avao, 3nc. vs. @and ;egistration "ommission, et al . %@+C7D1, -ecember $<,1=D',1<$ !hil. D=(). Ee articulated5 3n solving the problem thus submitted to our consideration, Ee can say the following5 & corporation sole is a special form of corporation usually associated with the clergy. "onceived and introduced into the common law by sheer necessity, this legal creation which was referred to as Nthat unhappy freak of English @awN was designed to facilitate the exercise of the functions of ownership carried on by the clerics for and on behalf of the church which was regarded as the property owner %8ee 1 ?ouvierPs @aw -ictionary, p. (C$+(C*). & corporation sole consists of one person only, and his successors %who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particulary that of perpetuity, which in their natural persons they could not have had. There is no doubt that a corporation sole by the nature of its 3ncorporation is vested with the right to purchase and hold real estate and personal property. 3t need not therefore be treated as an ordinary private corporation because whether or not it be so treated as such, the "onstitutional provision involved will, nevertheless, be not applicable. 3n the light of the facts obtaining in this case and the ruling of this "ourt in -irector of @ands vs. 3&", %supra, D1*), the lands subject of this petition were already private property at the time the application for confirmation of title was filed in 1='=. There is therefore no cogent reason to disturb the findings of the appellate court.
until such vacancy has been filled+up. The manner in which the vacancy is to be filled in clearly spelled out in 8ec. 117 of the "ode5 Sec. 11@. F#00#$> o% ;!c!$c#e1. + The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the 8ecurities and Exchange "ommission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public.
-uring any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authori6ed and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy.
nder the above+provision, it is re.uired that the successor, in order to be permitted to transact business as a corporation sole, must file with the 8E" a copy of his commission, certificate of election, or letter of appointment, duly certified by a notary public.
DISSOLUTION:
Sec. 11A. D#11o07"#o$. + & corporation sole may be dissolved and its affairs settled voluntarily by submitting to the 8ecurities and Exchange "ommission a verified declaration of dissolution.
The declaration of dissolution shall set forth5 %4;&4) 1. The $!8e of the corporation1 $. The re!1o$ for dissolution and winding up1 *. The !7":or#K!"#o$ for the dissolution of the corporation by the particular religious denomination, sect or church1 7. The $!8e1 and addresses of the persons who are to supervise the winding up of the affairs of the corporation.
pon approval of such declaration of dissolution by the 8ecurities and Exchange "ommission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.
VACANC): in the office of the GheadH of the corporation, the person authori6ed by the rules, regulations or discipline of the denomination shall exercise all the powers and authority of the corporation sole during such vacancy and
DISSOLUTION B) JUDICIAL DECREE: is generally not allowed because of the doctrine of separation of the
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"hurch and the 8tate. ,owever, the 8tate may exercise its police power if the corporation is being carried out and is being used for illegal purposes.
-.
RELIGIOUS SOCIETIES
D. The place where the principal office of the corporation is to be established and located, which place must be within the !hilippines1 and
nder common law, a religious society is a body of persons associated together for the purpose of maintaining religious worship. The religious society and the church are distinct bodies, independent of each other, though they may exist with each other. nder !hilippine @aw, a religious society, order, diocese, synod or district organi6ation of any religious denomination, sect or church may incorporate for the administration of its temporalities or for the management of its affairs, properties and estate in accordance with the "ode5
(. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organi6ation to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organi6ation, the board of trustees to be not less than five %D) nor more than fifteen %1D).
&pparent from the foregoing, is that a religious society is Sec. 11B. Re0#>#o71 1oc#e"#e1. + &ny religious society or religious not mandated by law to register as a corporation but may order, or any diocese, synod, or district organi6ation of any religious do so to ac.uire juridical personality and for the purpose of denomination, sect or church, unless forbidden by the constitution, administration of its temporalities and properties and even rules, regulations, or discipline of the religious denomination, to sect ac.uire properties of its own. Thus, it has been held that an unincorporated religious association cannot ac.uire or church of which it is a part, or by competent authority, may, upon private agricultural lands in the !hilippines %;egister of written consent andMor by an affirmative vote at a meeting called -eeds vs. ng 8ui Temple) for the purpose of at least two+thirds %$M*) of its membership, incorporate for the administration of its temporalities or for the TER- OF E,ITENCE: @ike the corporation sole, the &/3 of management of its affairs, properties and estate by filing withathe religious society need not contain a term of its existence 8ecurities and Exchange "ommission, articles of incorporation as it is supposed to exist in perpetuity. verified by the affidavit of the presiding elder, secretary, or clerk or BEGINNING OF CORPORATE E,ISTENCE: is upon other member of such religious society or religious order, or issuance of the certificate of registration by the 8E". diocese, synod, or district organi6ation of the religious &bsent any specific provision of the law, it must be deemed denomination, sect or church, setting forth the following5 to fall within the general rule under 8ec. 1=. CHAPTER ,VII: DISSOLUTION 'TITLE ,IV( 1. That the religious society or religious order, or diocese, synod, or DISSOLUTION is the extinguishment of the corporate A. district organi6ation is a religious organi6ation of a religious franchise and the termination of corporate existence. denomination, sect or church1 Ehen a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for which it was incorporated. 3t will nevertheless continue as a body corporate for another period of three years from the time it $. That at least two+thirds %$M*) of its membership have given their is dissolved but only for the purpose of winding up its written consent or have voted to incorporate, at a duly convened affairs and the li.uidation of its assets. meeting of the body1
B.
-ETHODS OF DISSOLUTION
THREE *A)S OF DISSOLUTION: *. That the incorporation of the religious society or religious order, 1. Expiration of its corporate term1 or diocese, synod, or district organi6ation desiring to incorporate is $. Qoluntary surrender of its primary franchise %voluntary not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or dissolution)1 and *. The revocation of its corporate franchise %involuntary church of which it forms a part1 dissolution)
8ec. 11', however, mentions only two methods5 7. That the religious society or religious order, or diocese, synod, or 8ec. 11'. -e":o&1 o% &#11o07"#o$. + & corporation formed or district organi6ation desires to incorporate for the administration of organi6ed under the provisions of this "ode may be dissolved its affairs, properties and estate1 voluntarily or involuntarily.
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This is rightfully so, because the expiration of corporate term can be considered voluntary dissolution t being the intention of the stockholders that it shall exist only for such period.
C.
E,PIRATION OF CORPORATE TER-
& corporation registered under the "orporation "ode, with the exception of religious ones, is re.uired to indicate its term of existence in the &/3. 3t ceases to exist and is deemed automatically dissolved upon the expiration of the term indicated thereat without the need of any formal proceedings.
E,TENSION: 3t is to be observed, however, that the original term of existence indicated in the &/3 is subject to extension in accordance with the provisions of 8ec. 11 and *' of the "ode. 3f such be the case, the corporation continues to be possessed with juridical personality and may carry out its business for the period of time granted by virtue of such extension.
The extension should nonetheless be made before the expiration of the original term, but not earlier than D years prior to such expiration, otherwise the corporation is dissolved, ipso facto. PHILIPPINE NATIONAL BANK+ petitioner, vs. THE COURT OF FIRST INSTANCE OF RIZAL+ PASIG S BRANCH ,,I+ !;E83-E- ?L B -KE K;EK/;3/ K. !34E-&, ", 4K 83/4K !ER \ ?/43A&"3/ ", 4K 83/4K !ER &4Q3"T/;3& ",34K KE4K TL \ Q3"T/;3& ",E4K KE4K TL, and T,E ;EK38TE; /A -EE-8 /A ;3U&@, !&83K, >ET;/ >&43@& &4-M/; ,38 -E! T3E8 &4- &KE4T8, respondents %K.;. 4o. (*$<11 >ay $', 1==$) FACTS: !hilippine ?looming >ills, 3nc. %!?>), a corporation with corporate existence of $D years, entered into a lease contract with private respondents, whereby the latter shall lease the parcels of land owned by them to !?> for a period of $< years, extendible to another $< years, provided that !?> extend its corporate existence in accordance with law. !?> introduced improvements on the land which were annotated with the ;egister of -eeds. @ater on, !?> executed a deed of assignment in favor of !4? over its leasehold rights and later on a real estate mortgage covering all the improvements to secure a loan. !?> filed a petition for registration of improvements in the titles of real property of private respondents which was opposed by private respondents on the ground that !?> failed to renew the contract of lease and apply for extension of its corporate existence. The "A3 issued an order directing the cancellation of the inscriptions on respondents# certificates of title. ISSUE: E/4 the cancellation of entries on respondents# title is valid and properF HELD: Les. The contract of lease expressly provides that the term of the lease shall be twenty years from the
execution of the contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be extended in accordance with law. "learly, the option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as corporation renews or extends its corporate term of existence in accordance with the "orporation "ode which is the applicable law. "ontracts are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of the contract of lease which commenced on >arch 1, 1=D7 ended on >arch 1, 1='7. !?> as lessee continued to occupy the leased premises beyond that date with the ac.uiescence and consent of the respondents as lessor. ;ecords show however, that !?> as a corporation had a corporate life of only twenty+five %$D) years which ended an Banuary 1=, 1=''. 3t should be noted however that !?> allowed its corporate term to expire without complying with the re.uirements provided by law for the extension of its corporate term of existence. 8ection 11 of "orporation "ode provides that a corporation shall exist for a period not exceeding fifty %D<) years from the date of incorporation unless sooner dissolved or unless said period is extended. pon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal re.uisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto %1( Aletcher ('1 cited by &guedo A. &gbayani, "ommercial @aws of the !hilippines, Qol. *, 1=CC Edition p. (1'). Ehen the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organi6ed. ?ut it shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets %8ec. 1$$, "orporation "ode). T:ere #1 $o $ee& %or ":e #$1"#"7"#o$ o% ! rocee&#$> %or 67o 5!rr!$"o "o &e"er8#$e ":e "#8e or &!"e o% ":e &#11o07"#o$ o% ! cor or!"#o$ 9ec!71e ":e er#o& o% cor or!"e e4#1"e$ce #1 ro;#&e& #$ ":e !r"#c0e1 o% #$cor or!"#o$. *:e$ 17c: er#o& e4 #re1 !$& 5#":o7" !$< e4"e$1#o$ :!;#$> 9ee$ 8!&e 7r17!$" "o 0!5+ ":e cor or!"#o$ #1 &#11o0;e& !7"o8!"#c!00< #$1o%!r !1 ":e co$"#$7!"#o$ o% #"1 971#$e11 #1 co$cer$e&. The .uo warranto proceeding under ;ule (( of the ;ules of "ourt, as amended, may be instituted by the 8olicitor Keneral only for the involuntary dissolution of a corporation on the following grounds5 a) when the corporation has offended against a provision of an &ct for its creation or renewal1 b) when it has forfeited its privileges and franchises by non+user1 c) when it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises1 d) when it has mis+used a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. ,ence, there is no need for the 8E" to make an involuntary dissolution of a corporation whose corporate term had ended because its articles of incorporation had in effect expired by its own limitation. "onsidering the foregoing in relation to the contract of lease between the parties herein, when !?>Ps corporate life ended on Banuary 1=, 1='' and its *+year period for
1D=
winding up and li.uidation expired on Banuary 1=, 1=C<, the option of extending the lease was likewise terminated on Banuary 1=, 1='' because !?> failed to renew or extend its corporate life in accordance with law. Arom then on, the respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract. The rights of the lessor and the lessee over the improvements which the latter constructed on the leased premises is governed by &rticle 1('C of the "ivil "ode. The provision gives the lessee the right to remove the improvements if the lessor chooses not to pay one+half of the value thereof. ,owever, in the case at bar, the law will not apply because the parties herein have stipulated in the contract their own terms and conditions concerning the improvements, to wit, that the lessee, namely !?>, bound itself to remove the improvements before the termination of the lease. !etitioner !4?, as assignee of !?> succeeded to the obligation of the latter under the contract of lease. 3t could not possess rights more than what !?> had as lessee under the contract. ,ence, petitioner was duty bound to remove the improvements before the expiration of the period of lease as what we have already discussed in the preceding paragraphs. 3ts failure to do so when the lease was terminated was tantamount to a waiver of its rights and interests over the improvements on the leased premises.
FOR-AL AND PROCEDURAL RE2UIRE-ENTS: 1. >ajority vote of the board of directors or trustees1
$.
*.
7.
D.
(.
8ending of notice of each stockholders or member either by registered mail or personal delivery at least thirty %*<) days prior to the meeting %scheduled by the board for the purpose of submitting the board action to dissolve the corporation for approval of the stockholder or members.)1 !ublication of the notice of time, place and subject of the meeting for three %*) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located or in a newspaper of general circulation in the !hilippines1 ;esolution adopted by the affirmative vote of the stockholders owning at least $M* of the outstanding capital stock or $M* of the members at the meeting duly called for the purpose1 & copy of the resolution authori6ing the dissolution must be certified by a majority of the board of directors or trustees and countersigned by the corporate secretary1 3ssuance of a certificate of dissolution by the 8E".
D.
SURRENDER OF DISSOLUTION(
FRANCHISE
'VOLUNTAR)
-ODES OF VOLUNTAR) DISSOUTION: 1. Qoluntary -issolution where no creditors are affected %8ec. 11C)1 $. Qoluntary -issolution where creditors are affected %8ec. 11=)1 *. 8hortening of corporate term %8ec. 1$<).
FAILURE TO CO-PL): with the above re.uirements will have no effect on the legal existence of the corporation. Elsewise stated, a corporation benig a creation of the law by the grant of its existence by the 8tate, may only be dissolved in the manner prescribed by the law of its creation. 8ince it is the 8tate that grants its right to exist, it is only through the 8tate which can allow th termination of existence. nless dissolved pursuant thereto, a corporation does not cease to have a juridical personality.
& mere resolution by the stockholders or the ?/- of a corporation to dissolve the same does not affect the dissolution but that some other steps, administrative or judicial is necessary %-aguhoy Enterprises vs. !once)
1.
2. VOLUNTAR) DISSOLUTION *HERE CREDITORS 8ec. 11C. Vo07$"!r< &#11o07"#o$ 5:ere $o cre&#"or1 !re ARE AFFECTED !%%ec"e&. + 3f dissolution of a corporation does not prejudice the Sec. 11M. Vo07$"!r< &#11o07"#o$ 5:ere cre&#"or1 !re rights of any creditor having a claim against it, the dissolution may !%%ec"e&. + Ehere the dissolution of a corporation may prejudice be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the therights of any creditor, the petition for dissolution shall be filed with the 8ecurities and Exchange "ommission. The petition shall be stockholders owning at least two+thirds %$M*) of the outstanding signed by a majority of its board of directors or trustees or other capital stock or of at least two+thirds %$M*) of the members of a officers having the management of its affairs, verified by its meeting to be held upon call of the directors or trustees after president or secretary or one of its directors or trustees, and shall publication of the notice of time, place and object of the meeting for set forth all claims and demands against it, and that its dissolution three %*) consecutive weeks in a newspaper published in the place was resolved upon by the affirmative vote of the stockholders where the principal office of said corporation is located1 and if no representing at least two+thirds %$M*) of the outstanding capital newspaper is published in such place, then in a newspaper of stock general circulation in the !hilippines, after sending such notice to or by at least two+thirds %$M*) of the members at a meeting of its stockholders or members called for that purpose. each stockholder or member either by registered mail or by personal delivery at least thirty %*<) days prior to said meeting. & copy of the resolution authori6ing the dissolution shall be certified by a majority of the board of directors or trustees and 3f the petition is sufficient in form and substance, the "ommission countersigned by the secretary of the corporation. The 8ecurities shall, by an order reciting the purpose of the petition, fix a date on and Exchange "ommission shall thereupon issue the certificate of or before which objections thereto may be filed by any person, dissolution. which date shall not be less than thirty %*<) days nor more than sixty %(<) days after the entry of the order. ?efore such date, a copy 1(<
VOLLUNTAR) DISSOUTION CREDITORS ARE AFFECTED:
*HERE
NO
of the order shall be published at least once a week for threeforum. %*) 8uch language, held by the ,igh "ourt, Gtends to recogni6e that in cases of voluntary dissolution, there is no consecutive weeks in a newspaper of general circulation published for the appointment of a receiver except under in the municipality or city where the principal office of occasion the special circumstances and upon proper showingH %"hina corporation is situated, or if there be no such newspaper, then in a ?ank vs. >ichellin) newspaper of general circulation in the !hilippines, and a similar copy shall be posted for three %*) consecutive weeks in three %*) /. DISSOLUTION B) SHORTENING CORPORATE TERpublic places in such municipality or city. 8ec. 1$< was inserted to incorporate the long standing practice of dissolving a corporation by amendment of the &/3 by shortening the corporate existence. pon five %D) dayPs notice, given after the date on which the right to & corporation may exist for D< years, but there is no law file objections as fixed in the order has expired, the "ommission shall proceed to hear the petition and try any issue made by which the prevents the shareholders thereof to shorten that objections filed1 and if no such objection is sufficient, and period the and effect a dissolution of the corporation. material allegations of the petition are true, it shall render judgment PERPETUAL SUCCESSION: 3n fact, a corporation may be dissolving the corporation and directing such disposition ofgiven its the capacity of Gperpetual successionH like the assets as justice re.uires, and may appoint a receiver to collect corporation sole and the religious society. 3t does not mean, such assets and pay the debts of the corporation. however, that it shall continue to exist forever. 3t merely means that it has the capacity of continuous existence during a particular period or until dissolved in accordance with law. FOR-AL AND PROCEDURAL RE2UIRE-ENTS: 3t may thus amend its &/3 and provide a term of existence 1. &ffirmative ;o"e of the stockholders representing or shorten it which may have the effect of a dissolution. at least $M* of the outstanding capital stock or at least Thus, while 8ec. 11D of the "ode provides for the process $M* of the members at a meeting duly called for that and procedure for the dissolution of a corporation sole, purpose1 there is nothing in the law itself which would prohibit it $. Pe"#"#o$ %or &#11o07"#o$ shall be filed with the from amending its &/3. 3t is believed, however, that 8E" %the proper forum) signed by a majority of its authori6ation for the dissolution by the particular religious board of directors or trustees or other officers having denomination, sect or church, as re.uired in sub+paragraph the management of its affairs, verified by the * of 8ec. 11D would still be necessary in the case of president or secretary or one of its directors or amending the &/3 to affect dissolution. trustees, setting forth all claims and demands against it. 8ec. 1$<. D#11o07"#o$ 9< 1:or"e$#$> cor or!"e "er8. + & voluntary dissolution may be effected by amending the articles of *. I117!$ce o% !$ or&er by the 8E" reciting the purpose of the petition and fixing the date on or before incorporation to shorten the corporate term pursuant to the which objections thereto may be filed by any person, provisions of this "ode. & copy of the amended articles of which date shall not be less than thirty days nor more incorporation shall be submitted to the 8ecurities and Exchange than sixty days after entry of the order. "ommission in accordance with this "ode. pon approval of the 7. ?efore such date, a copy of the order must be amended articles of incorporation of the expiration of the shortened 790#1:e& once a week for three %*) consecutive term, as the case may be, the corporation shall be deemed weeks in a newspaper of general circulation published dissolved without any further proceedings, subject to the provisions in the city or municipality where the principal office is of this "ode on li.uidation. situated or in a newspaper of general circulation in the !hilippines.
D. (.
Po1"#$> of the same order for three %*) consecutive weeks in three %*) public places in such city or municipality. pon five %D) days# notice, given after the date on which the right to file objections has expired, the 8E" shall :e!r ":e e"#"#o$ and try any issue made by the objections filed.
'.
Budgment dissolving the corporation and directing of its assets as justice re.uires and the appointment of a receiver %if necessary in its discretion) to collect such assets and pay the debts of the corporation
SPECIAL A-END-ENT: 8hortening of the corporate term with the effect of dissolution is a special type of amendment covered and governed by the special provisions of 8ec. *' of the "ode. Thus, while the general provision on amendment under 8ec. 1( allows Gwritten assentH in determining the voting re.uirement for ordinary amendments, sec. *' mandates that the vote must be cast at a duly constituted meeting.
@ikewise, sec. 1( provides that amendment of the &/3 is deemed approved if not acted upon by the 8E" within ( months from the date of filing for a cause not attributable to the corporation. This is not applicable in case of shortening the corporate term which will have the effect of dissolution in 8ec. 1$<, which re.uires the approval of the 8E".
APPOINT-ENT OF A RECEIVER5 Ehile the foregoing are mandatory re.uirements, the appointment of a receiver is only permissive. &s can be gleaned from the second paragraph of 8ec. 11=, it uses the phrase Gand may appoint a receiverH, showing the clear intent of the aw that the same is merely discretionary on the part of the proper
1(1
E.
INVOLUNTAR) DISSOLUTION: is a harsh remedy akin to capital punishment. Thus, it has been laid to rest in the 8ec. 1$1. I$;o07$"!r< &#11o07"#o$. + & corporation maya be case of Kovernment vs. !hilippine 8ugar Estate that courts dissolved by the 8ecurities and Exchange "ommission upon filing of proceed with extreme caution which have for their object a verified complaint and after proper notice and hearing on the theforfeiture of corporate franchise, and forfeiture will not grounds provided by existing laws, rules and regulations. be allowed, except under express limitation, or for plain abuse of power by which the corporation fails to fulfil the design and purpose of its organi6ation. ?ut when the abuse or violation constitutes or threatens a substantial injury to "ulled from the above provision is that this is a dissolution the public or such as to amount to a violation of the is by judicial decree. fundamental conditions of its charter, or its conduct is characteri6ed by Gobduracy or pertinacity in contempt of JURISDICTION OVER DISSOLUTION CASES: 3n a ruling lawH, dissolution will be granted. laid down by the 8", actions, for .uo warranto against corporations or against persons who usurps an office in a @ikewise, it has been held that the relief of dissolution will corporation fall under the jurisdiction of the 8E" % nilongo, be awarded only where no other ade.uate remedy is et. al. vs. "&1 K; 4o. 1$*=1<1 &pril D, 1===). available and it will not be allowed where the rights of the stockholders can be, or are, protected in some other way. This, however, is no longer exclusive and absolute in view of the amendments introduced by the 8ecurities THE GOVERN-ENT OF THE PHILIPPINE ISLANDS+ ;egulations "ode %8;") of $<<<, or ;& C'==, which plaintiff+appellant, transferred the jurisdiction of the 8E" under 8ec. D of !vs. =<$+& to the regional trial courts as designated by the 8" THE PHILIPPINE SUGAR ESTATES DEVELOP-ENT CO. %8ec. D.$, ;& C'==). The jurisdiction of the courts and the 'LTD.( defendant+appellant 8E" over revocation proceedings seems to be concurrent %K.;. 4o. @+11'C=1 &pril $, 1=1C) under the present set up since 8ec. D of ;& C'==, particularly par. %m) thereof, provides that the 8E" has the FACTS: -efendant corporation by its charter is authori6ed power to Gsuspend, or revoke, after proper notice and among others5 hearing the franchise and certificate of registration of corporations, partnership or associations, upon any ground j) To buy shares of the "ompaZia de 4avegacion, provided by lawH. This, despite the transfer of its Aerrocarriles, -i.ues, y &lmacenes de -epositos, and, in jurisdiction under the 8;". this manner or otherwise, to engage in any mercantile or industrial enterprise. GROUNDS FOR INVOLUNTAR) DISSOLUTION5 as provided under 8ec. ( of !- =<$+&5 'FSRCFF( %k) Eith no other restrictions than those provided by law, place funds of the corporation in hypothecary or pignorative loans, in public securities of the nited 1. Fr!7& in procuring its certificate of registration1 8tates, in stocks or shares issued by firms, corporations, $. Ser#o71 8#1re re1e$"!"#o$ as to what the or companies that are legally organi6ed and operated, corporation can do or is doing to the great prejudice of and in rural and urban property. 3t may also contract and or damage to the general public1 guarantee all kinds of obligations, in conformity with existing laws *. Re%71!0 "o co8 0< or &e%#!$ce o% !$< 0!5%70 or&er of the "ommission restraining commission of acts which would amount to a grave violation of its These powers are necessarily limited by 8ec. 'D of of the franchise1 &ct of "ongress of Buly 1, 1=<$, and by the section 1* &ct of 17D=, the latter being a reproduction of the former, 7. Co$"#$7o71 #$o er!"#o$ for a period of at least which is as follows5 five %D) years1
INVOLUNTAR) DISSOLUTION
D. (.
F!#07re to file 9<=0!51 within the re.uired period1
F!#07re to file re67#re& re or"1 in appropriate forms as determined by the "ommission within the prescribed period.
OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE5 1. Qiolation of any provision of the "ode under section 1771 $. 3n case of deadlock in a close corporation as provided for in section 1<D1 *. 3n a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets are being misapplied or wasted under section 1<D.
That no corporation shall be authori6ed to conduct the business of buying and selling real estate or be permitted to hold or own real estate except such as may be reasonably necessary to enable it to carry out the purposes for which it is created, . . . . "orporations, however, may loan funds upon real estate, security, and purchase real estate when necessary for the collection of loans, but they shall dispose of real estate so obtained within five years after receiving the title . . . The defendant corporation entered into a contract with The Tayabas @and "ompany %T@") where !8E" invested !7<<,<<< in the T@" and that G&ll lands bought or which may be bought with the credit, which The !hilippine 8ugar brings to The Tayabas @and "ompany and which lie within and without the railway line from !agbilao to @ope6, shall be held as security for such credit, at their respective cost price, until their alienation, except the part thereof which
1($
pertains to -. >ariano @im in The Tayabas @and "ompanyH and that if T@" is to sell the land and its improvements at a price lower than !<.D< per s.uare meter T@" is to obtain the consent of !8E" first. &n action for .uo warranto was brought by the &ttorney Keneral for and in behalf of the Kovernment of the !hilippine 3slands for the purpose of having the charter of the defendant corporation !8E" declared forfeited for engaging in the Gbuying and selling of real estateH along the right of way of >anila ;ailroad "ompany with the view of reselling the same to >anila ;ailroad for a profit1 that it had continuously offended against the laws of the !hilippine 3slands and had misused its corporate authority, franchise and privileges and had assumed privileges and franchises not granted. ISSUE: E/4 defendant corporation should be dissolvedF HELD: 4o. 8ection $1$ of &ct 4o. 1=< provides a judgment which may be rendered in said case5 Ehen in any such action, it is found and adjudged that the corporation has, by any act done or omitted surrendered, or forfeited its corporate rights, privileges, and franchise, or has not used the same during the term of five years, judgment shall be entered that it be ousted and excluded therefrom and that it be dissolved1 97" 5:e$ #" #1 %o7$& !$& !&?7&>e& ":!" ! cor or!"#o$ :!1 o%%e$&e& #$ !$< 8!""er or 8!$$er 5:#c: &oe1 $o" 9< 0!5 5or3 !1 ! 17rre$&er or %or%e#"7re+ or :!1 8#171e& ! %r!$c:#1e or e4erc#1e& ! o5er $o" co$%erre& 9< 0!5+ 97" $o" o% 17c: ! c:!r!c"er !1 "o 5or3 ! 17rre$&er or %or%e#"7re o% #"1 %r!$c:#1e+ ?7&>8e$" 1:!00 9e re$&ere& ":!" #" 9e o71"e& %ro8 ":e co$"#$7!$ce o% 17c: o%%e$1e or ":e e4erc#1e o% 17c: o5er. 3t will be seen that said section %$1$) gives the court a wide discretion in its judgment in depriving corporations of their franchise. ,igh, in his work on Extraordinary @egal ;emedies, says at page (<(5 3t is to be observed in the outset that ":e co7r"1 rocee& 5#": e4"re8e c!7"#o$ #$ ":e rocee&#$> 5:#c: :!;e %or ":e#r o9?ec" ":e %or%e#"7re o% cor or!"e %r!$c:#1e1+ !$& ! %or%e#"7re 5#00 $o" 9e !00o5e&+ e4ce " 7$&er e4 re11 0#8#"!"#o$+ or %or ! 0!#$ !971e o% o5er 9< 5:#c: ":e cor or!"#o$ %!#01 "o %70%#00 ":e &e1#>$ !$& 7r o1e o% #"1 or>!$#K!"#o$. 3n the case of 8tate of >innesota vs. >innesota Thresher >anufacturing "o. %* @.;.&. D1<) the court said %p. D1C)5 The scope of the remedy furnished by its % .uo warranto) is to forfeit the franchises of a corporation for misuser or nonuser. 3t is therefore necessary in order to secure a judicial forfeiture of respondentPs charter to show a misuser of its franchises justifying such a forfeiture. &nd as already remarked the object being to protect the public, and not to redress private grievances, the misuser must be such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant1 and ordinarily the wrong or evil
must be one remediable in no other form of judicial proceeding. "ourts always proceed with great caution in declaring a forfeiture of franchises, and re.uire the prosecutor seeking the forfeiture to bring the case clearly within the rules of law entitling him to exact so severe a penalty. %!eople vs. 4orth ;iver 8ugar ;efining "o., = @.;.&., **, *=1 8tate vs. !ortland 4atural Kas "o., 1D*, 3nd., 7C*.) Ehile it is true that the courts are given a wide discretion in ordering the dissolution of corporations for violations of its franchises, etc., yet nevertheless, 5:e$ 17c: !971e1 !$& ;#o0!"#o$1 co$1"#"7"e or ":re!"e$ ! 1791"!$"#!0 #$?7r< "o ":e 790#c or 17c: !1 "o !8o7$" "o ! ;#o0!"#o$ o% ":e %7$&!8e$"!0 co$&#"#o$1 o% ":e co$"r!c" 'c:!r"er( 9< 5:#c: ":e %r!$c:#1e1 5ere >r!$"e& !$& ":71 &e%e!" ":e 7r o1e o% ":e >r!$"+ ":e$ ":e o5er o% ":e co7r"1 1:o70& 9e e4erc#1e& %or ":e ro"ec"#o$ o% ":e eo 0e. nder the law the people of the !hilippine 3slands have guaranteed the payment of the interest upon cost of the construction of the railroad which occupied or occupies at least some of the lands purchased by the defendant. Every additional dollar of increase in the price of the land purchased by the railroad company added that much to the costs of construction and thereby increased the burden imposed upon the people. The very and sole purpose of the intervention of the defendants in the purchase of the land from the original owners was for the purpose of selling the same to the ;ailroad "ompany at profit Y at an increased price, thereby directly increasing the burden of the people by way of additional taxation. The purpose of the intervention of the defendant in the transactions in .uestion, was to enrich itself at the expense of the taxpayers of the !hilippine 3slands, who had, by a franchise granted, permitted the defendant to exist and do business as a corporation. The defendant was not willing to allow the ;ailroad "ompany to purchase the land of the original owners. 3ts intervention with The Tayabas @and "ompany was to obtain an increase in the price of the land in a resale of the same to the railroad company. The conduct of the defendant in the premises merits the severest condemnation of the law. The judgment of the lower court should be modified. 3t is hereby ordered and decreed that the franchise heretofore granted to the defendant by which it was permitted to exist and do business as a corporation in the !hilippine 3slands, be withdrawn and annulled and that it be disallowed to do and to continue doing business in the !hilippine 3slands, 7$0e11 #" 1:!00 5#":#$ ! er#o& o% 1#4 8o$":1 !%"er %#$!0 &ec#1#o$+ 0#67#&!"e+ &#11o0;e !$& 1e !r!"e !91o07"e0< #$ e;er< re1 ec" !$& #$ !00 o% #"1 re0!"#o$1+ co8 0!#$e& o% #$ ":e e"#"#o$+ 5#": T:e T!<!9!1 L!$& Co8 !$<+ 5#":o7" !$< %#$&#$>1 "o co1"1. THE GOVERN-ENT OF THE PHILIPPINE ISLANDS 'o$ re0!"#o$ o% ":e A""or$e<=Ge$er!0(+ plaintiff, vs. EL HOGAR FILIPINO+ defendant %K.;. 4o. @+$((7=1 Buly 1*, 1=$') FACTS: The &ttorney Keneral of the Kovernment of the !hilippine 3slands instituted the present .uo warranto for
1(*
the purpose of depriving defendant corporation of its franchise upon 1' distinct causes of action, the first of which is5 !laintiff Galleged illegal holding by the respondent of the title to real property for a period in excess of five years after the property had been bought in by the respondent at one of its own foreclosure sales. The provision of law relevant to the matter is found in section 'D of &ct of "ongress of Buly 1, 1=<$ %repeated in subsection D of section 1* of the "orporation @aw.) 3n both of these provisions it is in substance declared that while corporations may loan funds upon real estate security and purchase real estate when necessary for the collection of loans, they shall dispose of real estate so obtained within five years after receiving the titleH ISSUE: E/4 the corporation should be dissolved on the first cause of actionF HELD: 4o. 3t is evident that the strict letter of the law was violated by the respondent1 but it is e.ually obvious that its conduct has not been characteri6ed by obduracy or pertinacity in contempt of the law. >oreover, several facts connected with the incident tend to mitigate the offense. 3t has been held by this court that a purchaser of land registered under the Torrens system cannot ac.uire the status of an innocent purchaser for value unless his vendor is able to place in his hands an ownerPs duplicate showing the title of such land to be in the vendor %-irector of @ands vs. &ddison, 7=, !hil., 1=1 ;odrigue6 vs. @lorente, K. ;. 4o. $((1D1). 3t results that prior to >ay ', 1=$1, El ,ogar Ailipino was not really in a position to pass an indefeasible title to any purchaser. 3n this connection it will be noted that section 'D of the &ct of "ongress of Buly 1, 1=<$, and the similar provision in section 1* of the "orporation @aw, allow the corporation Nfive years after receiving the title,N within which to dispose of the property. & fair interpretation of these provisions would seem to indicate that ":e &!"e o% ":e rece#;#$> o% ":e "#"0e #$ ":#1 c!1e 5!1 ":e &!"e 5:e$ ":e re1 o$&e$" rece#;e& ":e o5$erI1 cer"#%#c!"e+ or -!< C+ 1M21+ %or #" 5!1 o$0< !%"er ":!" &!"e ":!" ":e re1 o$&e$" :!& !$ 7$e67#;oc!0 !$& 7$67e1"#o$!90e o5er "o !11 ! co8 0e"e "#"0e. T:e %!#07re o% ":e re1 o$&e$" "o rece#;e ":e cer"#%#c!"e 1oo$er 5!1 $o" &7e #$ !$< 5#1e "o #"1 %!70"+ 97" "o 7$e4 0!#$e& &e0!< o$ ":e !r" o% ":e re>#1"er o% &ee&1. For ":#1 &e0!< ":e re1 o$&e$" c!$$o" 9e :e0& !cco7$"!90e. The .uestion then arises whether the failure of the respondent to get rid of the 8an "lemente property within five years after it first ac.uired the deed thereto, even supposing the five+year period to be properly counted from that date, is such a violation of law as should work a forfeiture of its franchise and re.uire a judgment to be entered for its dissolution in this action of .uo warranto. pon this point we do not hesitate to say that in our opinion the corporation has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. "ertainly no court with any discretion to use in the matter would visit upon the respondent and its thousands of shareholders the extreme penalty of the law as a conse.uence of the delin.uency here shown to have been committed.
The law applicable to the case is in our opinion found in section $1$ of the "ode of "ivil !rocedure, as applied by this court in Kovernment of the !hilippine 3slands vs. !hilippine 8ugar Estates -evelopment "o. %*C !hil., 1D). This section %$1$), in prescribing the judgment to be rendered against a corporation in an action of .uo warranto, among other things says5 . . . Ehen it is found and adjudged that a corporation has offended in any matter or manner which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised a power not conferred by law, but not of such a character as to work a surrender or forfeiture of its franchise, judgment shall be rendered that it be outset from the continuance of such offense or the exercise of such power. T:#1 ro;#1#o$ c0e!r0< 1:o51 ":!" ":e co7r" :!1 ! &#1cre"#o$ 5#": re1 ec" "o ":e #$%0#c"#o$ o% c! #"!0 7$#1:8e$" 7 o$ cor or!"#o$ !$& ":!" ":ere !re cer"!#$ 8#1&e8e!$or1 !$& 8#171e1 o% %r!$c:#1e1 5:#c: 1:o70& $o" 9e reco>$#Ke& !1 re67#r#$> ":e#r &#11o07"#o$.
Go;er$8e$" o% ":e P:#0# #$e I10!$&1 ;1. P:#0# #$e S7>!r E1"!"e1 De;e0o 8e$" Co.5 %*C !hil., 1D)5 3n the !8E", case, it was found that the offending corporation had been largely %though indirectly) engaged in the buying and holding or real property for speculative purposes in contravention of its charter and contrary to the express provisions of law. >oreover, in that case the offending corporation was found to be still interested in the properties so purchased for speculative at the time the action was brought. Ne;er":e0e11+ #$1"e!& o% 8!3#$> !$ !91o07"e !$& 7$co$&#"#o$!0 or&er %or ":e &#11o07"#o$ o% ":e cor or!"#o$+ ":e ?7&>8e$" o% o71"er 5!1 8!&e co$&#"#o$!0 7 o$ ":e %!#07re o% ":e cor or!"#o$ "o &#1co$"#$7e #"1 7$0!5%70 co$&7c" 5#":#$ 1#4 8o$":1 !%"er %#$!0 &ec#1#o$ . 3n the case before us the respondent appears to have rid itself of the 8an "lemente property many months prior to the institution of this action. 3t is evident from this that the dissolution of the respondent would not be an appropriate remedy in this case. Ee do not of course undertake to say that a corporation might not be dissolved for offenses of this nature perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt of law. T:#r& c!71e o% !c"#o$. S U$&er ":e ":#r& c!71e o% !c"#o$ ":e re1 o$&e$" #1 c:!r>e& 5#": e$>!>#$> #$ !c"#;#"#e1 %ore#>$ "o ":e 7r o1e1 %or 5:#c: ":e cor or!"#o$ 5!1 cre!"e& !$& $o" re!1o$!90e $ece11!r< "o #"1 0e>#"#8!"e e$&1. T:e 1 ec#%#c!"#o$1 7$&er ":#1 c!71e o% !c"#o$ re0!"e "o ":ree &#%%ere$" 1or"1 o% !c"#;#"#e1. T:e %#r1" co$1#1" o% ":e !&8#$#1"r!"#o$ o% ":e o%%#ce1 #$ ":e E0 Ho>!r 97#0&#$> $o" 71e& 9< ":e re1 o$&e$" #"1e0% !$& ":e re$"#$> o% 17c: o%%#ce1 "o ":e 790#c.
The second specification under the third cause of action has reference to the administration and management of properties belonging to delin.uent shareholders of the association
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The third specification under this cause of action relates to certain activities which are described in the following paragraphs contained in the agreed statements of facts5 El ,ogar Ailipino has undertaken the management of some parcels of improved real estate situated in >anila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so Aor the services so rendered in the management of such properties El ,ogar Ailipino receives compensation in the form of commissions upon the gross receipts from such properties at rates varying from two and one+half per centum to five per centum of the sums so collected, according to the location of the property and the effort involved in its management. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. ISSUE2: E/4 the defendant should be dissolved on the above+groundF HELD: 4o. 3t is a >e$er!0 r70e of law ":!" cor or!"#o$1 o11e11 o$0< 17c: e4 re11 o5er1. The management and administration of the property of the shareholders of the corporation is not expressly authori6ed by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. B7" #" &oe1 $o" re170" ":!" ":e &#11o07"#o$ o% ":e cor or!"#o$ #1 #$ or&er+ !$& #" 5#00 8ere0< 9e e$?o#$e& %ro8 %7r":er !c"#;#"#e1 o% ":#1 1or".
3t is supposed, in the fourth cause of action, ":!" ":e e4#1"e$ce o% ":#1 !r"#c0e !8o$> ":e 9<=0!51 o% ":e !11oc#!"#o$ #1 ! 8#1&e8e!$or o$ ":e !r" o% ":e re1 o$&e$" 5:#c: ?71"#%#e1 #"1 &#11o07"#o$. 3n this view we are unable to concur. The obnoxious by+law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by+laws of a corporation1 and if there were such, the ha6ards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action. REPUBLIC OF THE PHILIPPINES+ petitioner, vs. SECURIT) CREDIT AND ACCEPTANCE CORPORATION+ ROSENDO T. RESUELLO+ PABLO TANJUTCO+ ARTURO SORIANO+ RUBEN BELTRAN+ BIENVENIDO V. ZAPA+ PILAR G. RESUELLO+ RICARDO D. BALATBAT+ JOSE SEBASTIAN !$& VITO TANJUTCO JR.+ respondents. %K.;. 4o. @+$<DC*1 Banuary $*, 1=(') FACTS: The &/3 of defendant corporation were registered with the 8E" on >arch $', 1=(1. ?ased on the opinion of legal counsel of the "entral ?ank of the !hilippines, that the defendant corporation is a banking institution, the >onetary ?oard promulgated ;esolution 4o. 1<=D, declaring that the corporation is performing banking operations without having first complied with the provisions of 8ec. $ and ( of ;& 4o. **'. -espite such resolution, the company still continued with its operations and was able to establish '7 branches all over the !hilippines and induced the public to open D=,(7* savings deposit accounts. The 8olicitor Keneral initiated this .uo warranto proceeding to dissolve said company. ISSUE: E/4 the company should be dissolvedF HELD: Les. &lthough, admittedly, defendant corporation has not secured the re.uisite authority to engage in banking, defendants deny that its transactions partake of the nature of banking operations. 3t is conceded, however, that, in conse.uence of a propaganda campaign therefor, a total of D=,7(* savings account deposits have been made by the public with the corporation and its '7 branches, with an aggregate deposit of !1,(C=,1*(.'7, which has been lent out to such persons as the corporation deemed suitable therefor. 3t is clear that these transactions partake of the nature of banking, as the term is used in 8ection $ of the Keneral ?anking &ct. &ccordingly, defendant corporation has violated the law by engaging in banking without securing the administrative authority re.uired in ;epublic &ct 4o. **'. That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that ":e %ore>o#$> 8#171er o% ":e cor or!"e %7$&1 !$& %r!$c:#1e !%%ec"1 ":e e11e$ce o% #"1 971#$e11+ ":!" #" #1 5#00%70 !$& :!1 9ee$ re e!"e& AM+@B/ "#8e1+ !$& ":!" #"1 co$"#$7!$ce #$%0#c"1 #$?7r< 7 o$ ":e 790#c+ o5#$> "o ":e $789er o% er1o$1 !%%ec"e& ":ere9<.
Fo7r": c!71e o% !c"#o$. S I" ! e!r1 ":!" !8o$> ":e 9<=0!51 o% ":e !11oc#!"#o$ ":ere #1 !$ !r"#c0e 'No. 1N( 5:#c: re!&1 !1 %o00o51:
T:e 9o!r& o% &#rec"or1 o% ":e !11oc#!"#o$+ 9< ":e ;o"e o% !$ !91o07"e 8!?or#"< o% #"1 8e89er1+ #1 e8 o5ere& "o c!$ce0 1:!re1 !$& "o re"7r$ "o ":e o5$er ":ereo% ":e 9!0!$ce re170"#$> %ro8 ":e 0#67#&!"#o$ ":ereo% 5:e$e;er+ 9< re!1o$ o% ":e#r co$&7c"+ or %or !$< o":er 8o"#;e+ ":e co$"#$7!"#o$ !1 8e89er1 o% ":e o5$er1 o% 17c: 1:!re1 #1 $o" &e1#r!90e. ISSUE/: E/4 if the above corporation may be dissolvedF by+law is invalid, the
HELD: 4o. This by+law is of course a patent nullity, since it is in direct conflict with the latter part of section 1C' of the "orporation @aw, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of li.uidation of the corporation or of forfeiture of the stock for delin.uency. 3t is agreed that this provision of the by+ laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred.
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Eherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly, ordered dissolved. REPUBLIC OF THE PHILIPPINES+ petitioner+appellee, vs. BISA)A LAND TRANSPORTATION CO.+ INC.+ >3K E@ " E4"/, >&4 E@ " E4"/, @/ ;-E8 " E4"/, B/8E !. QE@EU, BE8 8 !. QE@EU and AE-E;3"/ &. ;ELE8 %/riginal ;espondents)1 and &4T/43/ Q. " E4"/, "&;>E4 " E4"/, -3/8"/;/ ?. @&U&;/ and >&4 E@ Q. " E4"/, B;. %4ew -irectors of respondent corporation), respondent+ appellees. -IGUEL CUENCO+ respondent+crossclaimant+appellant. %K.;. 4o. @+*17=<1 Banuary (, 1='C) FACTS: The 8olicitor Keneral initiated this .uo warranto proceedings against respondent corporation on the following nine causes of action5
the general public, its creditors, investors and its stockholders by not accurately and faithfully making a. an ade.uate, accurate and complete record of dividend distribution, and b. an ade.uate, accurate and complete record of transfers of its stocks @ater on, the 8olicitor Keneral filed a motion for the dismissal of the complaint which was granted by the lower court. ISSUE: E/4 the lower court is correct in not dissolving the corporationF HELD: Les. &fter a very careful and deliberate consideration of the evidence adduced by petitioner, the lower court came to the conclusion that the same did not really warrant a .uo warranto by the 8tate that could truly justify to decapitate corporate life, and that the corporate acts or missions complained of had not resulted in substantial injury to the public, nor were they wilful and clearly obdurate. The court found that the several acts of misuse and misapplication of the funds andMor assets of the ?isaya @and Transportation "o., 3nc. were committed new particularly by the respondent -r. >anuel "uenco with the cooperation of Bose !. Qele6, for the commission of which they may be personally held liable. There appears to be no reason for us to disregard the findings of the trial court, which, applying well settled doctrines, ought to be given due weight and credit %-e la ;ama vs. >a+ao 8ugar "entral, @+1'D<7 I @+1'D<(, Aeb. $C, 1=(=). ?esides, the court a .uo found that ":e co$"ro;er1< 9e"5ee$ ":e !r"#e1 5!1 8ore er1o$!0 ":!$ !$<":#$> e01e !$& &#& $o" !" !00 !%%ec" 790#c #$"ere1". The 8olicitor Keneral himself asserts that the only purpose of his ration for the of this .uo warranto is to take the 8tate out of an unnecessary court litigation, so that the dismissal of the case would result in the disposition solely of the .uo warranto by and between petitioner ;epublic of the !hilippines and the respondents named therein. /ther interested parties who might feel aggrieved, therefore, would not be without their remedies since they can still maintain whatever claims they may have against each other. I" :!1 9ee$ :e0& ":!" re0#e% 9< &#11o07"#o$ 5#00 9e !5!r&e& o$0< 5:ere $o o":er !&e67!"e re8e&< #1 !;!#0!90e+ !$& #1 $o" !;!#0!90e 5:ere ":e r#>:"1 o% ":e 1"oc3:o0&er1 c!$ 9e+ or !re+ ro"ec"e& #$ 1o8e o":er 5!< %1( Aletcher "yc. "orporations, 1=7$ Ed., pp. C1$+C1*, citing NThwing vs. >c-onaldN, 1*7 >inn. 17C,1D( 4.E. 'C<,1DC 4.E. C$<, 1D= 4.E. D(7, &nn. "as. 1=1C E 7$<1 >itchell vs. ?ank of 8t. !aul, ' >inn. $D$, cited in -e la ;ama vs. >a+ao 8ugar "entral, supra). &""/;-34K@L, without prejudice to the rights of the private parties herein to take proper steps to enforce whatever causes of action they may have against each other, the order of the lower court embodied in its N;esolutionN dated &pril *, 1=(C, granting the 8olicitor KeneralPs motion to dismiss the .uo warranto proceedings is hereby upheld. FINANCING CORPORATION OF THE PHILIPPINES !$& J. A-ADO ARANETA+ petitioners, vs. HON. JOSE TEODORO+ J7&>e o% ":e Co7r" o% F#r1"
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7.
D.
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To conceal its illegal transaction, respondent corporation falsely reconstituted its articles of incorporation in Buly 1=7C by adding new cattle ranch, agriculture, and general merchandise1 /n >ay $D, 1=7C, respondent corporation through its ?oard of -irectors, adopted a resolution authori6ing it to ac.uire 1,<$7 hectares of public land in Uamboanga and 1<,<<< hectares of timber concession in >indanao in violation of 8ection (, &ct 4o. 17*)1 3n >ay, 1=7=, respondent office constituting themselves as ?oard of -irectors of respondent corporation, passed a resolution authori6ing the corporation to lease a pasture land of $,<<< hectares of cattle ranch on a public land in ?ayawan, 4egros /ccidental1 Arom &ugust 1=7( to the end of 1=D$, respondent corporation operated a general merchandise store, a business which is neither for, nor incidental to, the accomplishment of its principal business for which it was organi6ed, i.e., the operation of land and water transportation1 ;espondent corporation snowed >ariano "uenco and >anuel "uenco to act as president in 1=7D to 1=7C and 1=D* to 1=D7, respectively, when at that time, neither of them owned a single stock1 3n violation of its charter and articles of incorporation, as well as applicable statutes concerning its operation, it engaged in mining by organi6ing the Bose !. Qele6 "oal >ines, and allowing said corporation to use the facilities and assets of respondent corporation1 3t imported and sold at black market prices to third persons truck spare !arts, the of which were appropriated by respondent directors1 3t paid its laborers and employees wages below the minimum wage law to the great prejudice of its labor force, and in violation of the laws of the state, manipulating its books and records so as to make it appear that its laborers and employees were and have been paid their salaries and wages in accordance with the minimum wage law1 3t deliberately failed to maintain accurate and faithful stock and transfer books since 1=7D up to the filing of the petition, enabling it to defraud the state, mislead
1((
I$1"!$ce o% Ne>ro1 Occ#&e$"!0+ ENCARNACION LIZARES VDA. respondents %K.;. 4o. @+7=<<1 &ugust *1, 1=D*)
Br!$c: II+ !$& DE PANLILIO+
FACTS: 3n civil case 4o. 1=$7 of the "ourt of Airst 3nstance of 4egros /ccidental, &suncion @ope6 Qda. de @i6ares, Encarnacion @i6ares Qda. de !anlilio and Efigenia Qda. de !aredes, in their own behalf and in behalf of the other minority stockholders of the Ainancing "orporation of the !hilippines, filed a complaint against the said corporation and B. &mado &raneta, its president and general manager, claiming among other things alleged gross mismanagement and fraudulent conduct of the corporate affairs of the defendant corporation by B. &mado &raneta, and asking that the corporation be dissolved1 that B. &mado &raneta be declared personally accountable for the amounts of the unauthori6ed and fraudulent disbursements and disposition of assets made by him, and that he be re.uired to account for said assets, and that pending trial and disposition of the case on its merits a receiver be appointed to take possession of the books, records and assets of the defendant corporation preparatory to its dissolution and li.uidation and distribution of the assets. /ver the strong objection of the defendants, the trial court granted the petition for the appointment of a receiver and designated >r. &lfredo Lulo as such receiver with a bond of !D<,<<<. ISSUE: The main contention of the petitioners in opposing the appointment of a receiver in this case is that said appointment is merely an auxiliary remedy1 that the principal remedy sought by the respondents in the action in 4egros /ccidental was the dissolution of the Ainancing "orporation of the !hilippines1 that according to the law a suit for the dissolution of a corporation can be brought and maintained only by the 8tate through its legal counsel, and that respondents, much less the minority stockholders of said corporation, have no right or personality to maintain the action for dissolution, and that inasmuch as said action cannot be maintained legally by the respondents, then the auxiliary remedy for the appointment of a receiver has no basis. HELD: True it is that the general rule is that the minority stockholders of a corporation cannot sue and demand its dissolution. ,owever, there are cases that hold that even minority stockholders may ask for dissolution, this, under the theory that such minority members, if unable to obtain redress and protection of their rights within the corporation, must not and should not be left without redress and remedy. This was what probably prompted this "ourt to state in the case of ,all, et al. vs. Budge !iccio,0 K.;. 4o. @+$D=C %7' /ff. Ka6. 4o. 1$ 8upp., p. $<<) that even the existence of a de jure corporation may be terminated in a private suit for its dissolution by the stockholders without the intervention of the 8tate. Ee repeat that although !1 ! r70e+ 8#$or#"< 1"oc3:o0&er1 o% ! cor or!"#o$ 8!< $o" !13 %or #"1 &#11o07"#o$ #$ ! r#;!"e 17#"+ !$& ":!" 17c: !c"#o$ 1:o70& 9e 9ro7>:" 9< ":e Go;er$8e$" ":ro7>: #"1 0e>!0 o%%#cer #$ ! 67o 5!rr!$"o c!1e , at their instance and re.uest, ":ere 8#>:" 9e e4ce "#o$!0 c!1e1 5:ere#$ ":e #$"er;e$"#o$ o% ":e S"!"e+ %or o$e re!1o$ or !$o":er+ c!$$o" 9e o9"!#$e&+ !1 5:e$ ":e S"!"e #1 $o" #$"ere1"e& 9ec!71e ":e co8 0!#$" #1
1"r#c"0< ! 8!""er 9e"5ee$ ":e 1"oc3:o0&er1 !$& &oe1 $o" #$;o0;e+ #$ ":e o #$#o$ o% ":e 0e>!0 o%%#cer o% ":e Go;er$8e$"+ !$< o% ":e !c"1 or o8#11#o$1 5!rr!$"#$> 67o 5!rr!$"o rocee&#$>1, in which minority stockholders are entitled to have such dissolution. Ehen such action or private suit is brought by them, the trial court had jurisdiction and may or may not grant the prayer, depending upon the facts and circumstances attending it. The trial courtPs decision is of course subject to review by the appellate tribunal. ,aving such jurisdiction, the appointment of a receiver pendente lite is left to the sound discretion of the trial court. &s was said in the case of &ngeles vs. 8antos %(7 !hil., (='), the action having been properly brought and the trial court having entertained the same, it was within the power of said court upon proper showing to appoint a receiver pendente lite for the corporation1 that although the appointment of a receiver upon application of the minority stockholders is a power to be exercised with great caution, nevertheless, it should be exercised necessary in order not to entirely ignore and disregard the rights of said minority stockholders, especially when said minority stockholders are unable to obtain redress and protection of their rights within the corporation itself.
PRESENT STATE OF LA*: any stockholder or member of a corporation can institute a dissolution proceeding against his own corporation before the proper forum. This is clear from the provisions of !- =<$+&, as amended, when it provides that the 8E", now the 8pecial "ommercial "ourts, shall hear and decide cases involving Gintra+corporate dispute or partnership relations between and among stockholders, members or associates1 between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively1 and between such corporations, partnerships or association and the 8tate insofar as it concerns their individual franchise or right to exist as such entityH %8ec. D%b) as further amended by 8ec. D.$ of ;& C'==) . /f note, however, is that under 8ec. D%m) of ;& C'==, the 8E" appears to have concurrent jurisdiction to Gsuspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations upon any of the grounds provided by law.
3t has thus been held as early as 1=D< that Geven the existence of a de jure corporation may be determined in a private suit for its dissolution between stockholders, without the intervention of the stateH %,all vs. !iccio). @ikewise, in a close corporation, a petition for the dissolution of the corporation may be instituted by any one individual shareholder on the ground, even by mere dishonesty.
F.
EFFECTS OF DISSOLUTION
-issolution terminates its power to enter into contracts or to continue the business as a going concern. The 8" held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was organi6ed. 3t cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant %?uenaflor vs. "amarines 8ur 3ndustry "orp). 4either can it enforce a contract executed prior to its dissolution for the purpose of continuing the business of its organi6ation
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%"ebu !orts vs. 8tate >arine).

-ebts due to or by a corporation are not extinguished. 3t has thus been held that the termination of the life of a juridical entity does not, by itself, imply the diminution or extinction of rights demandable against such juridical entity %Kon6ales vs. 8ugar ;egulatory &dm.)
as well as the certificate of public convenience to the new corporation. /n 4ov. 1=D', the new corporation answered the motion to dismiss by alleging its recent incorporation. ISSUE: E/4 ?uenaflor#s application should be approvedF
8ec. 17D. A8e$&8e$" or re e!0. + 4o right or remedy in favor of HELD: Les. 3t is admitted Y and the "ommission found or against any corporation, its stockholders, members, directors, that the needs of 8abang ?arrio will be conveniently served with the establishment of a D+ton ice plant. ?ut it elected to trustees, or officers, nor any liability incurred by any such deny ?uenaflorPs application, even as it awarded the corporation, stockholders, members, directors, trustees, or officers, privilege to the new "amarines "orporation on the ground shall be removed or impaired either by the subse.uent dissolution that it %the old corporation) had been serving ice in 8abang of said corporation or by any subse.uent amendment or repeal upof to the time of ?uenaflorPs application, and was, this "ode or of any part thereof. conse.uently, the pioneer operator there. The fact, however, is that since 1=D*, the old "orporation had been illegally plying its business of selling ice in 8abang because, under the "orporation @aw, 8ec. '', after 4ovember 1=D*, it could not lawfully continue the business for which it had been established %operate ice plant, sell ice, etc). &fter 4ovember 1=D*, it could only continue to exist for three years for the purpose of prosecuting and defending suits by or against it, and of enabling it gradually to settle and close its affairs, to dispose and convey its property and to divide its capital stock. 3t could not, without violating the law, continue to sell ice. &nd yet, the "ommission awarded the certificate on the basis of such serve and distribution of ice Y applying the Nprior operatorN rule. 3n other words, the new "amarines "orporation is rewarded, precisely because the old corporation, its predecessor, had violated the law during that period %1=D*+1=D'). Ee cannot, and should not countenance such anomalous result. /n the other hand, when the old "amarines "orporation docketed its application /ctober 1, 1=D', #" :!& $o ?7r#&#c!0 er1o$!0#"<+ #" :!& ce!1e& "o e4#1" !1 ! cor or!"#o$ !$& co70& $o" 17e $or ! 0< %or cer"#%#c!"e+ %or #" 5!1 #$c! !90e o% rece#;#$> ! >r!$". I" 5!1 $o" e;e$ ! cor or!"#o$ &e %!c"o. &nd then, there is no application subscribed by the new "amarines "orporation. Aar from being mere technicality, these point support a conclusion which appears to be just and e.uitable, not only for the reasons already indicated, but also to compensate ?uenaflorPs diligence and courage in exposing the irregular practice of a NghostN corporation foisting its services upon the unsuspecting public of 8abang and neighboring territory Y enjoying a franchise without paying, perhaps, the corporate income tax and other burdens attached to corporate existence. ;emembering the "amarines "orporationPs automatic cessation in 4ovember 1=D( %three years after 4ovember 1=D*) we must decline to regard the new "amarines "orporation %formed /ctober *<, 1=D') as a continuation of the old. &t most, it is the transferee of the properties of the old corporation %or more properly, the assets of the stockholders) plus the certificate of public convenience to operate the ice plant in 4aga and >agarao. &nd yet, as stated, the new corporation has not filed any application for certificate of public convenience in 8abang, and has not published such application Eherefore, revoking the appealed decision in so far as it awarded the certificate to said "orporation, we hereby
PROPERT) RIGHTS: Thus, a lease to a corporation may, by its terms, terminate where the corporation cease to exist. ?ut unless the lease so provides, the rights and obligations thereunder are not extinguished by the corporation#s dissolution since leases affect property rights and survives the death of the parties. The stockholders succeed to the rights and liabilities of the dissolved corporation in an unexpired leasehold state which may be enforced by or against the receiver or li.uidating trustee. CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold true in cases of contracts for personal services which are deemed terminated by the dissolution of the corporation. 3n such cases, there is found an Gimplied conditionH that the contract shall terminate in such event. PERIOD OF LI2UIDATION: -espite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of * years for purposes of li.uidation and winding up its affairs %8ec. 1$$). pon expiration of the * year period to wind up its affairs, the juridical personality of the corporation ceases for all intent and purposes, and as a general rule, it can no longer sue and be sued %see Kelano vs. "&).
JAI-E T. BUENAFLOR+ petitioner, vs. CA-ARINES SUR INDUSTR) respondent %K.;. 4os. @+17==1+=71 >ay *<, 1=(<)
CORPORATION+
FACTS: 3n &ug. and 8ept. 1=D', Baime ?uenaflor filed applications before the !ublic 8ervice "ommission for the construction of a D+ton ice plant and to establish a cold storage and refrigeration service of about (,<<< cubic feet capacity in 8abang, respectively. &fter being served a copy of the application of petitioner, respondent corporation also filed the same applications on /ct. 1=D'. "ounsel for ?uenaflor presented a motion to dismiss on the ground that the corporate life of respondent already expired in 4ov. 1=D*. ;espondent "orporation then registered on /ct. 1=D', a new &/3 and transferred all assets of the old corporation together with existing certificate of public convenience to the new corporation. The !8" provisionally approved the transfer of the assets,
1(C
approve ?uenaflorPs application for five tons, instead of one ton, subject to the usual conditions imposed by the !ublic 8ervice "ommission on ice plant establishments. CEBU PORT LABOR UNION+ re re1e$"e& 9< ":#1 Pre1#&e$" ALEJO CABABAJA)+ petitioner, vs. STATES -ARINE CORPORATION+ NICASIO PANSACALA+ ANDRESTURA+ ALFONSO VILLAJAS+ !$& PERPETUO REGIS+ respondents %K.;. 4o. @+=*D<1 >ay $<, 1=D') FACTS: /n 8ept. 1$, 1=D*, petitioner filed a petition for Grecognition of stevedoring services and injunctionH against respondents claiming that it was awarded a contract for the exclusive right of loading and unloading of the cargoes of the vessel >Q ?isayas formerly owned by Eli6alde I "/., though at the time of the filing of the petition it was owned and operated by the 8tates >arine "orporaiton. ;espondent corporation filed a motion to dismiss on the ground that it has no legal capacity to sue or be sued, it having been dissolved on /ct. 1', 1=D$ and therefore has no personality to enter or refuse to enter into any contract, much less of threatening the petitioner as alleged in the petition. !etitioner relied on 8ec. '' to include said corporation as party respondent despite the fact that counsel for the other respondents called already the attention of the "ourt that the 8tate >arine "orporation was non+existing and suggested that proper substitution or amendment of the petition be made. ISSUE: E/4 8tate >arine "orp can be made a party respondentF HELD: 8ection '' of the "orporation @aw reads as follows5 8E". ''. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established. Even a cursory reading of the above+.uoted provision would convey the idea clearly manifested in the limitation Nbut not for the purpose of continuing the business for which it was establishedN, that the *+year period allowed by the law is only for the purpose of winding up its affairs. !etitioner+appellee prayed that it be declared to have the right to stevedoring work in .uestion Nthereby respecting the contract entered into by petitioner and the Eli6alde I "o. and subse.uently enforced and continued by the respondent 8tates >arine "orporationN. I" ! e!r#$> ":!" ":e 1!#& S"!"e1 -!r#$e Cor or!"#o$ 5!1 !0re!&< &#11o0;e& !" ":e "#8e 1!#& e"#"#o$ 5!1 %#0e&+ !$& ":e ;e11e0 179?ec" o% ":e !>ree8e$" :!;#$> c:!$>e& :!$&1+ #" c!$$o" 9e co8 e00e& $o5 "o re1 ec" 17c: !>ree8e$" 1 ec#!00< co$1#&er#$> ":e %!c" ":!" #"
c!$$o" e;e$ 9e 8!&e ! *, of the ;ules of "ourt.
!r"< "o ":#1 17#" %8ee. 1, ;ule
SPOUSES RA-ON A. GONZALES !$& LILIA ). GONZALES+ petitioners, vs. SUGAR REGULATOR) AD-INISTRATION+ respondent %K.;. 4o. C7(<(1 Bune $C, 1=C=) FACTS: !etitioner spouses file a complaint seeking cancellation of a mortgage and recovery of a sum of money for the overpayment they made, on a loan secured from ;! ?ank, by virtue of an alleged deduction made by !hilippine 8ugar "ommission %!hilsucom) of the proceeds of sugar exports. !etitioners filed an amended complaint which assailed the constitutionality of E/ 4o. 1C abolishing !hilsucom which in effect destroyed petitioners# right to recover from !8". They assert that the transfer from !hilsucom to 8;& are unconstitutional and ineffective. /n &ug. $, 1=CC, the trial court granted the motion to dismiss insofar as 8;& is concerned while denying that same motion insofar as ;! ?ank and !hilsucom were concerned. ISSUE: E/4 8;& could be made a party+respondent liable to the claim of the petitionersF HELD: Les. The termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against such juridical entity. Executive /rder 4o. 1C, promulgated on $C >ay 1=C(, abolished the !hilsucom, created the 8;& and authori6ed the transfer of assets from !hilsucom to 8;&. 8ection 1* of Executive /rder 4o. 1C reads in part5 &ssets and records that, as determined by the 8ugar ;egulatory &dministration, are re.uired in its operation are hereby transferred to the 8ugar ;egulatory &dministration. &lthough the !hilsucom is hereby abolished, it shall nevertheless continue as a juridical entity for three years after the time when it would have been so abolished, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the functions for which it was established, under the supervision of the 8ugar ;egulatory &dministration. Ee believe, that 8ection 1* of Executive /rder 4o. 1C is not to be interpreted as authori6ing respondent 8;& to disable !hilsucom from paying !hilsucomPs demandable obligations by simply taking over !hilsucomPs assets and immuni6ing them from legitimate claims against !hilsucom. The right of those who have previously contracted with, or otherwise ac.uired lawful claims against, !hilsucom, to have the assets of !hilsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. 8ection 1* cannot be read as permitting the 8;& to destroy that substantive right. Ee think that such an interpretation would result in
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8ection 1* of Executive /rder 4o. 1C colliding with the non+ impairment of contracts clause of the "onstitution insofar as contractual claims are concerned, and with the due process clause insofar as the non+contractual claims are concerned. To avoid such a result, we believe and so hold that 1:o70& ":e !11e"1 o% P:#017co8 re8!#$#$> #$ P:#017co8 !" ":e "#8e o% #"1 !9o0#"#o$ $o" 9e !&e67!"e "o !< %or !00 0!5%70 c0!#81 !>!#$1" P:#017co8+ re1 o$&e$" SRA 871" 9e :e0& 0#!90e %or 17c: c0!#81 !>!#$1" P:#017co8 "o ":e e4"e$" o% ":e %!#r ;!07e o% !11e"1 !c"7!00< "!3e$ o;er 9< ":e SRA %ro8 P:#017co8+ #% !$<. To ":#1 e4"e$"+ c0!#8!$"1 !>!#$1" P:#017co8 &o :!;e ! r#>:" "o %o00o5 P:#017co8I1 !11e"1 #$ ":e :!$&1 o% SRA or !$< o":er !>e$c< %or ":!" 8!""er. Ee conclude that dismissal of petitionersP complaint against respondent 8;& was clearly premature. !etitioners have a cause of action against 8;& to the extent that they are able to prove lawful claims against !hilsucom, which claims !hilsucom is or may be unable to satisfy, and to the extent respondent 8;& did, or does, in fact take over all or some of the assets of !hilsucom. &t the very least, the motion to dismiss was not shown to rest upon indubitable grounds and should, therefore, have been denied not only in respect of !hilsucom but also in respect of respondent 8;&.
corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.
pon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this "ode, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
LI2UIDATION -A) BE UNDERTAKEN IN EITHER OF THREE *A)S:
G.
LI2UIDATION AND *INDING UP
-uring the course of li.uidation and winding up, the assets will be collected and reali6ed, the rights and claims of creditors will be settled or provided for and a distribution of the remaining assets to the shareholders who are entitled thereto. Therefore, li.uidation or winding up of corporate affairs therefore means the collection of all corporate assets, the payments of all its debts and settlement of its obligations and the ultimate distribution of corporate assets, if any of it remains, to all stockholders in accordance with their proportionate stockholdings in the corporation or in accordance with their respective contracts of subscription. &fter dissolution, a body corporate continues to exist for * years for the purpose of li.uidation and winding up of its affairs5
1. a.
B< ":e cor or!"#o$ #"1e0% ":ro7>: ":e BOD
This is the usual method or procedure of li.uidating a corporation %"hina ?anking "orp vs. >ichelin) and although there is no law authori6ing it, neither is there anything that prohibits the ?/- from undertaking the same
b. c.
3f this method is resorted to, the board will only have a period of * years to finish its task of li.uidation "laims for or against the corporate entity not filed within the period will become unenforceable as there exist no corporate entity against which they can be enforced.
d.
&ctions pending for or against the corporation when the * year period expires are abated, since after the period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued %4ational &baca I /ther Aibers "o. vs. !ore)
Sec. 122. Cor or!"e 0#67#&!"#o$. + Every corporation whose charter expires by its own limitation or is annulled by forfeiture or 2. B< ! "r71"ee ! o#$"e& 9< ":e cor or!"#o$ otherwise, or whose corporate existence for other purposes is a. The corporation may opt to convey all corporate terminated in any other manner, shall nevertheless be continued as assets to a trustees who will take charge of li.uidation a body corporate for three %*) years after the time when it would b. 3f this method is used, the three year period have been so dissolved, for the purpose of prosecuting and limitation imposed by section 1$$ will not apply defending suits by or against it and enabling it to settle and close provided the designation of the trustee is made within its affairs, to dispose of and convey its property and to distribute its that period. assets, but not for the purpose of continuing the business for which c. Thus, during the period of li.uidation, but before it was established. the completion thereof, a dissolved corporation is still liable for all its debts and liabilities in an action filed against it through its trustee even if the case is filed beyond the * year period of li.uidation. &t any time during said three %*) years, the corporation is authori6ed and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other 3. B< ! o#$"8e$" o% ! rece#;er persons in interest. Arom and after any such conveyance by the
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a.
& receiver may be appointed by the proper forum on petition or motu proprio upon the dissolution of the corporation %8ec. 11=)
b.
The appointment of a receiver is, however, permissive rather than mandatory and the law tends to recogni6e that in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances and upon proper showing %"hina ?anking vs. >ichelin)
dissolution for the purpose of prosecuting and defending suits, etc., the corporation becomes defunct upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action can afterwards be brought by or against it, and must be dismissed. &ctions pending by or against the corporation when the period allowed by the statute expires, ordinarily abate. . . . T:#1 "#8e 0#8#" &oe1 $o" ! 0< 7$0e11 ":e c#rc781"!$ce1 !re 17c: !1 "o 9r#$> ":e cor or!"#o$ 5#":#$ ":e ro;#1#o$ o% ":e 1"!"7"e. ,owever, the wording of the statutes, in some jurisdictions authori6e suits after the expiration of the time limit, where the statute provides that for the purpose of any suit brought by or against the corporation shall continue beyond such period for a further named period after final judgment. %AletcherPs "yclopedia on "orporations, Qol. 1(, pp. C=$+ C=*.). /ur "orporation @aw contains no provision authori6ing a corporation, after three %*) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three %*) years. 3n fact, section '' of said law provides that the corporation shall Nbe continued as a body corporate for three %*) years after the time when it would have been . . . dissolved, for the purpose of prosecuting and defending suits by or against it . . .N, so that, thereafter, it shall no longer enjoy corporate existence for such purpose. Aor this reason, section 'C of the same law authori6es the corporation, Nat any time during said three years . . . to convey all of its property to trustees for the benefit of members, stockholders, creditors and other interestedN, evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. ,ence, commenting on said sections, Budge Aisher, in his work entitled !hilippines @aw on 8tock "orporations %1=$= ed.), has the following to say5 3t is to be noted that the time during which the corporation, through its own officers, may conduct the li.uidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences1 but that ":ere #1 $o "#8e 0#8#" 5#":#$ ":e "r71"ee1 871" co8 0e"e ! 0#67#&!"#o$ 0!ce& #$ ":e#r :!$&1. I" #1 ro;#&e& o$0< 'Cor . L!5+ Sec. CD( ":!" ":e co$;e<!$ce "o ":e "r71"ee1 871" 9e 8!&e 5#":#$ ":e ":ree=<e!r er#o&. 3t may be found impossible to complete the work of li.uidation within the three+year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued %' ;.".@. "orps., !ar. 'D<)1 but trustees to whom the corporate assets have been conveyed pursuant to the authority of section 'C may sue and be sued as such in all matters connected with the li.uidation. ?y the terms of the statute ":e e%%ec" o% ":e co$;e<!$ce #1 "o 8!3e ":e "r71"ee1 ":e 0e>!0 o5$er1 o% ":e ro er"< co$;e<e&+ 179?ec" "o ":e 9e$e%#c#!0 #$"ere1" ":ere#$ o% cre&#"or1 !$& 1"oc3:o0&er1 . %pp. *C=+*=<1 see also 8umera v. Qalencia 9(' !hil. '$1, '$(+ '$'). /bviously, the complete loss of plaintiffPs corporate existence after the expiration of the period of three %*)
c.
3f a receiver is appointed, the * year period fixed by law within which to complete the task of li.uidation will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be sued even after that period %8umera vs. Qalencia).
d.
Thus, it has been held that when a corporation is dissolved and the li.uidation of assets is placed in the hands of a receiver or assignee, the * year period is not applicable and the assignee may institute all actions leading to the li.uidation of the corporation even after the expiration of * years.
e.
4ote however, that a receiver may be appointed by the court even while the corporation is a going concern and does not always imply dissolution of a corporation. NATIONAL ABACA AND OTHER FIBERS CORPORATION+ plaintiff+appellant, vs. APOLONIA PORE+ defendant+appellee %K.;. 4o. @+1(''=1 &ugust 1(, 1=(1) FACTS: /n 4ov. *, 1=D*, plaintiff filed a complaint before the >unicipal "ourt of Tacloban, @eyte, against defendant for the recovery of advances the latter failed to account for, amounting to !1,$1*.*7. The court rendered a decision holding that defendant is liable for !$'$.7=. 8aid court denying reconsideration, plaintiff appealed before the "A3 to which a motion to dismiss was filed by defendant on the ground that E/ 4o. *'$ abolished plaintiff and thus it no longer had capacity to sue. !laintiff objected there to on the ground that the said E/ granted plaintiff to continue in existence for * years from 4ov. *<, 1=D<, the effectivity date of the E/, for the purpose of prosecuting and defending suits by or against it and of enabling the ?oard of @i.uidators to gradually settle the its affairs and that the case was filed on 4ov. 17, 1=D*, or before the expiration of the * year period. ISSUE: E/4 the action commenced within the * year period may be continued after the expiration of the said periodF HELD: 4o. T:e r70e ! e!r1 "o 9e 5e00 1e""0e& ":!"+ #$ ":e !91e$ce o% 1"!"7"or< ro;#1#o$ "o ":e co$"r!r<+ e$&#$> !c"#o$1 9< or !>!#$1" ! cor or!"#o$ !re !9!"e& 7 o$ e4 #r!"#o$ o% ":e er#o& !00o5e& 9< 0!5 %or ":e 0#67#&!"#o$ o% #"1 !%%!#r1 . 3t is generally held, that where a statute continues the existence of a corporation for a certain period after its
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years for the settlement of its affairs is what impelled the !resident to create a ?oard of @i.uidators, to continue the management of such matters as may then be pending. The first .uestion must, therefore, be answered in the negative. Eherefore, actions commenced within the * year period of li.uidation may be continued by the trustee despite the expiration of the said period. TIBURCIO SU-ERA+ !1 rece#;er o% ":e cor or!"#o$ GDe;o"! &e N7e1"r! SeUor! &e 0! Corre!G+ plaintiff+ appellant, vs. EUGENIO VALENCIA+ defendant+appellee %K.;. 4o. 7D7CD1 >ay *, 1=*=) FACTS: -evota de 4uestra 8enora de la "orrea filed for a voluntary dissolution which was approved by the "A3 of ?ulacan on Aeb. 17, 1=$C appointing -amaso 4icolas as assignee to take charge of li.uidation. 4icolas was substituted by herein appellant 8umera who filed a motion with the court asking defendant Qalencia to deliver to him the !7<<.<< funds of the corporation which was denied, reserving, however to said assignee the right to bring the proper action. &ccordingly, on Bune D, 1=*(, 8umera filed the present complaint for recovery of money. The defendant interposed the defense that the right against him had already prescribed which was found by the lower court to be tenable, the case not being filed within the * year period prescribed under 8ec. '' of &ct 4o. 17D=. ISSUE: E/4 the * year period prescribed by the "orporation @aw is applicable if the li.uidation is placed on the hands of a receiver or assigneeF HELD: 4o. !assing now to discuss the .uestion raised by plaintiff and appellant in his sole assignment of alleged error, section '' of &ct 4o. 17D= provides that NEvery corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established.N &nd section '' of the same &ct provides, N&t any time during said three years said corporation is authori6ed and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested. Arom and after any such conveyance by the corporation of its property in trust for the benefit of its members, stockholders, creditors, and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the members, stockholders, creditors, or other persons in interest. Aletcher, in volume C, page =$$(, of his Encyclopedia of !rivate "orporations, says5 (D*'. Effect of expiration of statutory extension of life. Y 3n general. Y The .ualified existence after dissolution,
as provided for by statute, terminates at the expiration of the time fixed, or, no time is fixed, at the expiration of a reasonable time. Ehere the extreme limit to which the statute has extended the life of a corporation after its dissolution has expired, it has no offices which can bind it by agreement, but only has statutory trustees. &fter the expiration of such time, it is generally held not only that the corporation cannot sue or be sued but that actions pending at such time are abated. ?ut a statute authori6ing the continuance of a corporation for three years to wind up its affairs, does not preclude an action to wind up brought after the three years. 3n the light of the legal provisions and authorities cited, interpretative of said laws, #% ":e cor or!"#o$ c!rr#e1 o7" ":e 0#67#&!"#o$ o% #"1 !11e"1 ":ro7>: #"1 o5$ o%%#cer1 !$& co$"#$7e1 !$& &e%e$&1 ":e !c"#o$1 9ro7>:" 9< or !>!#$1" #"+ #"1 e4#1"e$ce 1:!00 "er8#$!"e !" ":e e$& o% ":ree <e!r1 %ro8 ":e "#8e o% &#11o07"#o$ 1 97" #% ! rece#;er or !11#>$ee #1 ! o#$"e&+ !1 :!1 9ee$ &o$e #$ ":e re1e$" c!1e+ 5#": or 5#":o7" ! "r!$1%er o% #"1 ro er"#e1 5#":#$ ":ree <e!r1+ ":e 0e>!0 #$"ere1" !11e1 "o ":e !11#>$ee+ ":e 9e$e%#c#!0 #$"ere1" re8!#$#$> #$ ":e 8e89er1+ 1"oc3:o0&er1+ cre&#"or1 !$& o":er #$"ere1"e& er1o$1H !$& 1!#& !11#>$ee 8!< 9r#$> !$ !c"#o$+ ro1ec7"e ":!" 5:#c: :!1 !0re!&< 9ee$ co88e$ce& %or ":e 9e$e%#" o% ":e cor or!"#o$+ or &e%e$& ":e 0!""er !>!#$1" !$< o":er !c"#o$ !0re!&< #$1"#"7"e& or 5:#c: 8!< 9e #$1"#"7"e& e;e$ o7"1#&e o% ":e er#o& o% ":ree <e!r1 %#4e& %or ":e o%%#ce1 o% ":e cor or!"#o$. Aor the foregoing considerations, we are of the opinion and so hold that 5:e$ ! cor or!"#o$ #1 &#11o0;e& !$& ":e 0#67#&!"#o$ o% #"1 !11e"1 #1 0!ce& #$ ":e :!$&1 o% ! rece#;er or !11#>$ee+ ":e er#o& o% ":ree <e!r1 re1cr#9e& 9< 1ec"#o$ CC o% Ac" No. 1@AM 3$o5$ !1 ":e Cor or!"#o$ L!5 #1 $o" ! 0#c!90e+ !$& ":e !11#>$ee 8!< #$1"#"7"e !00 !c"#o$1 0e!&#$> "o ":e 0#67#&!"#o$ o% ":e !11e"1 o% ":e cor or!"#o$ e;e$ !%"er ":e e4 #r!"#o$ o% ":ree <e!r1. Eherefore, the order appealed from is reversed and it is ordered that the case be remanded to the court of origin to the end that it may decide the same on the merits, with costs against the appellee. THE BOARD OF LI2UIDATORS representing T,E K/QE;4>E4T /A T,E ;E! ?@3" /A T,E !,3@3!!34E8, plaintiff+appellant, vs. HEIRS OF -A,I-O -. KALA*+ B &4 ?/"&;, E8T&TE /A T,E -E"E&8E- "&83>3;/ K&;"3&, and @E/4/; >/@@, defendants+appellees %K.;. 4o. @+1CC<D1 &ugust 17, 1=(') FACTS: & suit was filed by the ?oard of @i.uidators for the recovery of a sum of money from 4ational "oconut "orporation#s %4&"/"/) general manager and board chairman >aximo Ralaw and other defendants as directors. The defendants pose that since the three year period has elapsed since its abolition by virtue of E/ *'$, the ?oard of @i.uidators may not now continue with, and prosecute, the present case to its conclusion.
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ISSUE: E/4 the ?oard of @i.uidators has personality to proceed as party+plaintiff in this caseF HELD: Les. The executive order abolishing 4&"/"/ and creating the ?oard of @i.uidators should be examined in context. The proviso in 8ection 1 of Executive /rder *'$, whereby the corporate existence of 4&"/"/ was continued for a period of three years from the effectivity of the order for Nthe purpose of prosecuting and defending suits by or against it and of enabling the ?oard of @i.uidators gradually to settle and close its affairs, to dispose of and convey its property in the manner hereinafter providedN, is to be read not as an isolated provision but in conjunction with the whole. 8o reading, it will be readily observed that $o "#8e 0#8#" :!1 9ee$ "!c3e& "o ":e e4#1"e$ce o% ":e Bo!r& o% L#67#&!"or1 !$& #"1 %7$c"#o$ o% c0o1#$> ":e !%%!#r1 o% ":e ;!r#o71 >o;er$8e$" o5$e& cor or!"#o$1+ #$c07&#$> NACOCO. ?y 8ection $ of the executive order, while the boards of directors of the various corporations were abolished, their powers and functions and duties under existing laws were to be assumed and exercised by the ?oard of @i.uidators. The !resident thought it best to do away with the boards of directors of the defunct corporations1 at the same time, however, the !resident had chosen to see to it that the ?oard of @i.uidators step into the vacuum. &nd nowhere in the executive order was there any mention of the lifespan of the ?oard of @i.uidators. & glance at the other provisions of the executive order buttresses our conclusions. 4ot that our views on the power of the ?oard of @i.uidators to proceed to the final determination of the present case is without jurisprudential support. The first judicial test before this "ourt is 4ational &baca and /ther Aibers "orporation vs. !ore, @+1(''=, &ugust 1(, 1=(1. 3n that case, the corporation, already dissolved, commenced suit within the three+year extended period for li.uidation. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. 8he failed to account for that money. Ee there said that Nthe rule appears to be well settled that, #$ ":e !91e$ce o% 1"!"7"or< ro;#1#o$ "o ":e co$"r!r<+ e$&#$> !c"#o$1 9< or !>!#$1" ! cor or!"#o$ !re !9!"e& 7 o$ e4 #r!"#o$ o% ":e er#o& !00o5e& 9< 0!5 %or ":e 0#67#&!"#o$ o% #"1 !%%!#r1.N Ee there said that N9o:ur "orporation @aw contains no provision authori6ing a corporation, after three %*) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three %*) years.N Ho5e;er+ ":e1e rece "1 $o"5#":1"!$&#$>+ 5e+ #$ e%%ec"+ :e0& #$ ":!" c!1e ":!" ":e Bo!r& o% L#67#&!"or1 e1c! e1 %ro8 ":e o er!"#o$ ":ereo% %or ":e re!1o$ ":!" GPoQ9;#o710<+ ":e co8 0e"e 0o11 o% 0!#$"#%%I1 cor or!"e e4#1"e$ce !%"er ":e e4 #r!"#o$ o% ":e er#o& o% ":ree '/( <e!r1 %or ":e 1e""0e8e$" o% #"1 !%%!#r1 #1 5:!" #8 e00e& ":e Pre1#&e$" "o cre!"e ! Bo!r& o% L#67#&!"or1+ "o co$"#$7e ":e 8!$!>e8e$" o% 17c: 8!""er1 !1 8!< ":e$ 9e e$&#$>. CARLOS GELANO !$& GUILLER-INA -ENDOZA DE GELANO+ petitioners, vs. THE HONORABLE COURT OF APPEALS !$& INSULAR SA*-ILL+ INC.+ respondents %K.;. 4o. @+*=<D<1 Aebruary $7, 1=C1)
FACTS: !rivate respondent 3nsular 8awmill, 3nc. lease the paraphernal property of petitioner+wife Kuillermina >endo6a de Kelano. 3t was while private respondent was leasing the property that its officers and directors had come to know petitioner+husband "arlos Kelano who received from the corporation cash advances on account of rent to be paid by the corporation to the land. -espite repeated demands by the private respondent refused to pay the cash advances. !etitioner+wife refused to pay on the ground that the cash advances was for the personal account of her husband asked for by, and given to him, without the knowledge and consent and did not benefit the family. /n >ay $=, 1=D=, the corporation, through its lawyer, filed a complaint for collection against petitioners. >eanwhile, the corporation amended its &/3 to shorten its term of existence up to -ec. *1, 1=(< only which was approved by the 8E" but the trial court was not notified of such amendment. /n 4ov. $<, 1=(7, almost 7 years after the dissolution, the trial court rendered a decision in favor of private respondent. ISSUE: E/4 a corporation whose corporate life had ceased by the expiration of its term of existence, could still continue prosecuting and defending suits after its dissolution and beyond the period of * years to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assigneeF HELD: Les. 3n &merican corporate law, upon which our "orporation @aw was patterned, it is well settled that, unless the statutes otherwise provide, all pending suits and actions by and against a corporation are abated by a dissolution of the corporation. 8ection '' of the "orporation @aw provides that the corporation shall Nbe continued as a body corporate for three %*) years after the time when it would have been ... dissolved, for the purpose of prosecuting and defending suits ?y or against it ...,N so that, thereafter, it shall no longer enjoy corporate existence for such purpose. Aor this reason, 8ection 'C of the same law authori6es the corporation, Nat any time during said three years ... to convey all of its property to trustees for the benefit of members, 8tockholders, creditors and other interested,N evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period Ehen 3nsular 8awmill, 3nc. was dissolved on -ecember *1, 1=(<, under 8ection '' of the "orporation @aw, it still has the right until -ecember *1, 1=(* to prosecute in its name the present case. &fter the expiration of said period, the corporation ceased to exist for all purposes and it can no longer sue or be sued. ,owever, a corporation that has a pending action and which cannot be terminated within the three+year period after its dissolution is authori6ed under 8ection 'C to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the Three+year period. A0":o7>: r#;!"e re1 o$&e$" &#& $o" ! o#$" !$< "r71"ee+ <e" ":e co7$1e0 5:o
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ro1ec7"e& !$& &e%e$&e& ":e #$"ere1" o% ":e cor or!"#o$ #$ ":e #$1"!$" c!1e !$& 5:o #$ %!c" ! e!re& #$ 9e:!0% o% ":e cor or!"#o$ 8!< 9e co$1#&ere& ! "r71"ee o% ":e cor or!"#o$ !" 0e!1" 5#": re1 ec" "o ":e 8!""er #$ 0#"#>!"#o$ o$0<. S!#& co7$1e0 :!& 9ee$ :!$&0#$> ":e c!1e 5:e$ ":e 1!8e 5!1 e$&#$> 9e%ore ":e "r#!0 co7r" 7$"#0 #" 5!1 ! e!0e& 9e%ore ":e Co7r" o% A e!01 !$& %#$!00< "o ":#1 Co7r". *e ":ere%ore :o0& ":!" ":ere 5!1 ! 1791"!$"#!0 co8 0#!$ce 5#": Sec"#o$ CD o% ":e Cor or!"#o$ L!5 !$& !1 17c:+ r#;!"e re1 o$&e$" I$170!r S!58#00+ I$c. co70& 1"#00 co$"#$7e ro1ec7"#$> ":e re1e$" c!1e e;e$ 9e<o$& ":e er#o& o% ":ree '/( <e!r1 %ro8 ":e "#8e o% #"1 &#11o07"#o$. T:e 5or& G"r71"eeG !1 17e& #$ ":e cor or!"#o$ 1"!"7"e 871" 9e 7$&er1"oo& #$ #"1 >e$er!0 co$ce " 5:#c: co70& #$c07&e ":e co7$1e0 "o 5:o8 5!1 e$"r71"e& #$ ":e #$1"!$" c!1e+ ":e ro1ec7"#o$ o% ":e 17#" %#0e& 9< ":e cor or!"#o$. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. -ebtors like the petitioners herein may not take advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the first place. To sustain petitionersP contention would be to allow them to enrich themselves at the expense of another, which all enlightened legal systems condemn. REPUBLIC OF THE PHILIPPINES+ plaintiff+appellee, vs. -ARS-AN DEVELOP-ENT CO-PAN) !$&Jor F.H. BURGESS+ #$ :#1 c! !c#"< !1 L#67#&!"or o% ":e -!r18!$ De;e0o 8e$" Co8 !$<+ defendants+ appellants. %K.;. 4o. @+1C=D(1 &pril $', 1='$) FACTS: 8ometime before /ct. 1D, 1=D*, an investigation was conducted on the business operation and activities of defendant corporation leading to the discovery of deficiency taxes on logs produced from its concession. The "ollector of 3nternal ;evenue demanded payment for forest charges and $DJ surcharge. &fter further investigation, another assessment was sent to the defendant by the ?3; demanding a total sum of !7D, D71.(( representing deficiency taxes, forest charges, surcharges and penalties. @ater on, another assessment was sent to defendant corporation for discharging lumber without permit. -efendant contend that the present action was barred by 8ec. '' of the "orporation @aw which allows corporate existence to continue after dissolution only for a period of * years. That the company was extra+judicially dissolved on &pril $*, 1=D7, the orginal complaint was filed only on 8ept. C, 1=DC and the amended complaint on &ug. $(, 1=D(. The trial court ruled in favor of the government holding that the amended complaint was precisely to include A, ?urgess, li.uidator of the company, as party defendant. ISSUE: E/4 the case should prosperF HELD: Les. 3t is to be recalled that the assessments against appellant corporation for deficiency taxes due for
its operations since 1=7' were made by the ?ureau of 3nternal ;evenue on /ctober 1D, 1=D*, 8eptember 1*, 1=D7 and 4ovember C, 1=D7, such that the first was before its dissolution and the last two not later than six months after such dissolution. Thus, in whatever way the matter may be viewed, the Kovernment became the creditor of the corporation before the completion of its dissolution by the li.uidation of its assets. A e00!$" F.H. B7r>e11+ 5:o8 #" c:o1e !1 0#67#&!"or+ 9ec!8e #$ 0!5 ":e "r71"ee o% !00 #"1 !11e"1 %or ":e 9e$e%#" o% !00 er1o$1 e$78er!"e& #$ Sec"#o$ CD+ #$c07&#$> #"1 cre&#"or1+ !8o$> 5:o8 #1 ":e Go;er$8e$"+ %or ":e "!4e1 :ere#$ #$;o0;e&. To !1178e o":er5#1e 5o70& re$&er ":e e4"r!=?7&#c#!0 &#11o07"#o$ #00e>!0 !$& ;o#&+ 1#$ce+ !ccor&#$> "o Sec"#o$ B2 o% ":e Cor or!"#o$ L!5+ 17c: 3#$& o% &#11o07"#o$ #1 er8#""e& o$0< 5:e$ #" G&oe1 $o" !%%ec" ":e r#>:"1 o% !$< cre&#"or :!;#$> ! c0!#8 !>!#$1" ":e cor or!"#o$.G 3t is immaterial that the present action was filed after the expiration of three years after &pril $*, 1=D7, for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that the actual li.uidation has not been terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Kovernment as a creditor of the corporation for whom the li.uidator is supposed to hold assets of the corporation. &nd since the suit at bar is only for the collection of taxes finally assessed against the corporation within the three years invoked by appellants, their assignment of error cannot be sustained. Budgment of the trial court is affirmed.
STOCKHOLDERS UPON DISSOLUTION: pon dissolution of a corporation, it is considered in e.uity, even in the absence of a statute that its assets are held for the benefit of its stockholders after payment of its debts and will be so distributed to the said stockholders in accordance with their proportionate interest in the corporation or their contracts of subscription. PREFERRED SHAREHOLDERS: 3t must herein be remembered that holders of preferred shares may be granted certain rights or privileges upon dissolution of the corporation. The preference may be in the form of receiving a certain part or portion of corporate assets upon dissolution. &nd, depending on their contracts of subscription, they may or may not be entitled to share any of the assets remaining, after they may have received their respective preference in accordance therewith. INCORPORATION OF A NE* CORPORATION: -uring the * year period granted to a corporation to li.uidate or wind up its affairs, the ?/- is not normally permitted to undertake any activity outside of the usual li.uidation of the corporation. There is, however, nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. This is because winding up is the sole activity of a dissolved corporation that does not intend to incorporate a new. 3f it does, however, it is not unlawful for the old ?/- to incorporate and transfer the assets of a dissolved corporation to the new corporation intended to
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be created as long as the stockholders have given their consent %"hung Ra ?io vs. 3&")
LAPSE OF THE THREE )EAR PERIOD: 3f the * year period of li.uidation has elapsed and no effort to finally settle or close the corporate affairs was undertaken, those having pecuniary interest in the corporate assets, including not only the stockholders but likewise the creditors, acting for and in behalf, may make proper representations with the 8E" for working out a final settlement of the corporate concern %"lemente vs. "&). RECEPIENT UNKNO*N OR CANNOT BE FOUND: &ny asset distributable to any creditor or stockholders or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located %8ec. 1$$).
CHUNG KA BIO+ EE@@34KT/4 ", 4K, ", 4K 83/4K !ER, Q3"T/;3&4/ ", 4K, and >&4 E@ ", 4K T/4K /,, petitioners, vs. INTER-EDIATE APPELLATE COURT %$nd 8pecial "ases -ivision), 8E" ;3T3E8 and E2",&4KE "/>>3883/4 E4 ?&4", ,/4. &4T/43/ ;. >&4&?&T, ,/4. B&>E8 R. &? K&4, ,/4. &4TE;/ A.@. Q3@@&A@/;, B;., ,/4. 832T/ T.B. -E K U>&4, B;., &@A;E-/ ",34K, ",34K T&4, ",3/4K T3/4K T&L, ", 4K R3&T , &, ",E4K @ R 4, E>3@3/ T&[E-/, ;/?E;T/ K. "E4/4 and !,3@3!!34E ?@//>34K >3@@8 "/>!&4L, 34"., respondents %K.;. 4o. '1C*'1 Buly $(, 1=CC) FACTS: "hung Ra ?io and other petitioners are stockholders of the old !hilippine ?looming >ills "ompany, 3nc. %!?>) which has been reincorporated on Buly 17, 1='' after the old was dissolved on Ban. 1= 1=''. The assets and liabilities of the old !?> was transferred by the ?/- to the new !?>. "hing Ra ?io and other petitioners filed with the 8E" a petition for li.uidation of both the old and new !?> %for non+usage of its charter and failure to operate within $ years). ISSUE: E/4 the ?/- was justified to convey all the assets of the old !?> to the new corporation without the express consent of its stockholdersF HELD: Les. &s the contention is based on the negative averment that no stockholdersP meeting was held and the $M* consent vote was not obtained, there is no need for affirmative proof. Even so, there is the presumption of regularity which must operate in favor of the private respondents, who insist that the proper authori6ation as re.uired by the "orporation @aw was duly obtained at a meeting called for the purpose. %That authori6ation was embodied in a unanimous resolution dated >arch 1=, 1='', which was reproduced verbatim in the deed of assignment.) /therwise, the new !?> would not have been issued a certificate of incorporation, which should also be presumed to have been done regularly. 3t must also be noted that under 8ection $C+1M$, Nany stockholder who did not vote to authori6e the action of the board of directors may, within forty days after the date upon which such action was authori6ed, object thereto in writing and demand payment for his shares.N The record does not show, nor have the petitioners alleged or proven, that they
filed a written objection and demanded payment of their shares during the reglementary forty+day period. This circumstance should bolster the private respondentsP claim that the authori6ation was unanimous. *:#0e 5e !>ree ":!" ":e 9o!r& o% &#rec"or1 #1 $o" $or8!00< er8#""e& "o 7$&er"!3e !$< !c"#;#"< o7"1#&e o% ":e 717!0 0#67#&!"#o$ o% ":e 971#$e11 o% ":e &#11o0;e& cor or!"#o$+ ":ere #1 $o":#$> "o re;e$" ":e 1"oc3:o0&er1 %ro8 co$;e<#$> ":e#r re1 ec"#;e 1:!re:o0&#$>1 "o5!r& ":e cre!"#o$ o% ! $e5 cor or!"#o$ "o co$"#$7e ":e 971#$e11 o% ":e o0&. *#$&#$> 7 #1 ":e 1o0e !c"#;#"< o% ! &#11o0;e& cor or!"#o$ ":!" &oe1 $o" #$"e$& "o #$cor or!"e !$e5. I% #" &oe1+ :o5e;er+ #" #1 $o" 7$0!5%70 %or ":e o0& 9o!r& o% &#rec"or1 "o $e>o"#!"e !$& "r!$1%er ":e !11e"1 o% ":e &#11o0;e& cor or!"#o$ "o ":e $e5 cor or!"#o$ #$"e$&e& "o 9e cre!"e& !1 0o$> !1 ":e 1"oc3:o0&er1 :!;e >#;e$ ":e#r co$1e$". T:#1 5!1 $o" ro:#9#"e& 9< ":e Cor or!"#o$ Ac" . 3n fact, it was expressly allowed by 8ection $C+1M$. Ehat the "ourt finds especially intriguing in this case is the fact that although the deed of assignment was executed in 1='', it was only in 1=C1 that it occurred to the petitioners to .uestion its validity. &ll of four years had elapsed before the petitioners filed their action for li.uidation of both the old and the new corporations, and during this period, the new !?> was in full operation, openly and .uite visibly conducting the same business undertaken earlier by the old dissolved !?>. The petitioners and the private respondents are not strangers but relatives and close business associates. The !?> office is in the heart of >etro >anila. The new corporation, like the old, employs as many as $,<<< persons, the same personnel who worked for the old !?>. &dditionally, one of the petitioners, "hung 8iong !ek was one of the directors who executed the deed of assignment in favor of the old !?> and it was he also who received the deeded assets on behalf and as treasurer of the new !?>. 8urely, these circumstances must operate to bar the petitioners now from .uestioning the deed of assignment after this long period of inaction in the protection of the rights they are now belatedly asserting. @aches has operated against them. LUIS C. CLE-ENTE+ @E/4/; "@E>E4TE -E E@E!&[/, ,E3;8 /A &;"&-3/ ". /",/&, represented by AE /. /",/&+?&L?&L, "/4"E!"3/4, >&;3&4/, &;TE>3/, Q3"E4TE, &4KE@3T&, ;/?E;T/, ,E;4&4-/ &4- @/ ;-E8, all surnamed E@E!&[/, petitioners, vs. THE HON. COURT OF APPEALS+ E@Q3;& !&4-34"/+ "&8T;/ &4- Q3"T/; "&8T;/, respondents. %K.;. 4o. C$7<'1 >arch $', 1==D) FACTS: !etitioners herein initiated an action to be declared owners of the property in .uestion and to received rentals and other fruits as conse.uence of such ownership. The trial court rendered a decision in favor of respondents holding, among others, that since there is no li.uidation, it is the corporation, not the stockholders, which can assert, if at all, any title to the corporate assets. ISSUE: E/4 petitioners can be held, given their submissions, to have succeeded in establishing for themselves a firm title to the property in .uestionF
1'D
HELD: 4o. @ike the courts below, we find petitionersP evidence to be direly wanting1 all that appear to be certain are that the N8ociedad !opular "alambeZa,N believed to be a Nsociedad anonimaN and for a while engaged in the operation and management of a cockpit, has existed sometime in the past1 that it has ac.uired the parcel of land here involved1 and that the plaintiffsP predecessors, >ariano ElepaZo and !ablo "lemente, had been original stockholders of the sociedad. Except in showing that they are the successors+in+interest of ElepaZo and "lemente, petitioners have been unable to come up with any evidence to substantiate their claim of ownership of the corporate asset. 3f, indeed, the sociedad has long become defunct, it should behoove petitioners, or anyone else who may have any interest in the corporation, to take appropriate measures before a proper forum for a peremptory settlement of its affairs. Ee might invite attention to the various modes provided by the "orporation "ode %see 8ees. 11'+1$$) for dissolving, li.uidating or winding up, and terminating the life of the corporation. &mong the causes for such dissolution are when the corporate term has expired or when, upon a verified complaint and after notice and hearing, the 8ecurities and Exchange "ommission orders the dissolution of a corporation. The corporation continues to be a body corporate for three %*) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. 3t may, during the three+year term, appoint a trustee or a receiver who may act beyond that period. T:e "er8#$!"#o$ o% ":e 0#%e o% ! ?7r#&#c!0 e$"#"< &oe1 $o" 9< #"1e0% c!71e ":e e4"#$c"#o$ or &#8#$7"#o$ o% ":e r#>:"1 !$& 0#!9#0#"#e1 o% 17c: e$"#"< %see Kon6ales vs. 8ugar ;egulatory &dministration, 1'7 8";& *'') $or ":o1e o% #"1 o5$er1 !$& cre&#"or1. 3f the three+year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors %or trustees) itself, following the rationale of the 8upreme "ourtPs decision in Kelano vs. "ourt of &ppeals %1<* 8";& =<) may be permitted to so continue as NtrusteesN by legal implication to complete the corporate li.uidation. 8till #$ ":e !91e$ce o% ! 9o!r& o% &#rec"or1 or "r71"ee1+ ":o1e :!;#$> !$< ec7$#!r< #$"ere1" #$ ":e !11e"1+ #$c07&#$> $o" o$0< ":e 1:!re:o0&er1 97" 0#3e5#1e ":e cre&#"or1 o% ":e cor or!"#o$+ !c"#$> %or !$& #$ #"1 9e:!0%+ 8#>:" 8!3e ro er re re1e$"!"#o$1 5#": ":e Sec7r#"#e1 !$& E4c:!$>e co88#11#o$+ 5:#c: :!1 r#8!r< !$& 17%%#c#e$"0< 9ro!& ?7r#1&#c"#o$ #$ 8!""er1 o% ":#1 $!"7re+ %or 5or3#$> o7" ! %#$!0 1e""0e8e$" o% ":e cor or!"e co$cer$1. E,E;EA/;E, the decision appealed from is &AA3;>E-.
existent for all intents and purposes, after the expiration of the three year period provided by law, could not have legally transferred such property to any person. The Kon6ales case is misapplied, because 8;& was a successor of !hilsucom, while in the Kelano case, there was a lawyer who prosecuted the case who was deemed as trustee. 3n the "lemente case, there was no such successor nor a lawyer who can be deemed a trustee. CHAPTER 1D: FOREIGN CORPORATIONS
A.
DEFINITION: &s to the !hilippines, any corporation, which owe its existence to the laws of another state, government or country is a Gforeign corporationH. Elsewise stated, a foreign corporation is one created or organi6ed under the laws of any state or government other than those of the forum.
8ec. 1$*. De%#$#"#o$ !$& r#>:"1 o% %ore#>$ cor or!"#o$1. + Aor the purposes of this "ode, a foreign corporation is one formed, organi6ed or existing under any laws other than those of the !hilippines and whose laws allow Ailipino citi6ens and corporations to do business in its own country or state. 3t shall have the right to transact business in the !hilippines after it shall have obtained a license to transact business in this country in accordance with this "ode and a certificate of authority from the appropriate government agency.
EAND *HOSE LA*S ALLO* FILIPINO CITIZENS AND CORPORATIONS TO DO BUSINESS IN ITS O*N COUNTR) OR STATEF: is not an accurate inclusion in the definition as any corporation registered or organi6ed under the laws of another state is necessarily a foreign corporation E/4 the state of its corporation allow Ailipino citi6ens or corporations to do business in that forum.
The said phrase was inserted by framers of the law only as a condition precedent to the grant of a license to do business in the !hilippines.
INCORPORATION TEST: is applied in determining whether a corporation is domestic or foreign. 3f it is incorporated in another state, it is a foreign corporation, while if it is registered under !hilippine laws, it is deemed a Ailipino or domestic corporation irrespective of the nationality of its stockholders.
Thus, a corporation registered under the Aoreign 3nvestments &ct of 1==1 %;& 4o. '<'7) or the Trade @iberali6ation @aw of $<<< %;& 4o. C'($) with 1<<J foreign e.uity is considered a Ailipino or domestic corporation and not foreign.
ISSUE AS TO CLE-ENTE CASE: The 8" should have applied 8ec. 1$$, such that, in the absence of a known stockholder, member of the ?/- or creditor, the properties should have been escheated in favor of the local government. Aollowing the rule laid down in "lemente will open the door to fraud in a way that any person claiming interest as heir of the corporation may still go to the 8E" to make proper representations with the 8E" for working out a final settlement. >oreover, the corporation being non+
CONTROL TEST: 3n times of war and for purposes of security of the state, however, the Gcontrol testH would apply in determining the corporate nationality, i.e., the citi6enship of the controlling stockholders determines the nationality of the corporation. CORPORATE PERSONALIT) BE)OND BORDERS:
B.
APPLICATION FOR LICENSE
1'(
nder 8ec. 1$*, a foreign corporation cannot transact business in the !hilippines unless it has obtained a license or permit to do so in accordance with the laws of the country and a certificate of authority from the appropriate government agency such as the ?anko 8entral ng !ilipinas for banking institutions or the /ffice of the 3nsurance "ommission for insurance companies, etc. & certificate of authority from the ?oard of 3nvestments is no longer re.uired under ;& '<7$. 8aid certificate of authority is only necessary for the purpose of availing the incentives granted and allowed under the /mnibus 3nvestments "ode. The manner in which a foreign corporation may obtain a license to do business in the !hilippines is laid down in 8ec. 1$D5
'. & statement of its authori6ed capital stock and the aggregate number of shares which the corporation has authority to issue, itemi6ed by classes, par value of shares, shares without par value, and series, if any1
C. & statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemi6ed by classes, par value of shares, shares without par value, and series, if any1
=. & statement of the amount actually paid in1 and
Sec. 12A. A 0#c!"#o$ %or ! 0#ce$1e. + & foreign corporation applying for a license to transact business in the !hilippines shall 1<. submit to the 8ecurities and Exchange "ommission a copy of its8uch additional information as may be necessary or appropriate in order to enable the 8ecurities and Exchange "ommission to articles of incorporation and by+laws, certified in accordance with determine whether such corporation is entitled to a license to law, and their translation to an official language of the !hilippines, if transact business in the !hilippines, and to determine and assess necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forththe thefees payable. following5
&ttached to the application for license shall be a duly executed certificate under oath by the authori6ed official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Ailipino citi6ens and corporations to do business therein, and that the applicant is an $. The address, including the street number, of the principal office existing corporation in good standing. 3f such certificate is in a of the corporation in the country or state of incorporation1 foreign language, a translation thereof in English under oath of the translator shall be attached thereto. 1. The date and term of incorporation1
*. The name and address of its resident agent authori6ed to accept summons and process in all legal proceedings and, pending The the application for a license to transact business in the !hilippines establishment of a local office, all notices affecting the corporation1 shall likewise be accompanied by a statement under oath of the president or any other person authori6ed by the corporation, showing to the satisfaction of the 8ecurities and Exchange "ommission and other governmental agency in the proper cases 7. The place in the !hilippines where the corporation intends to the applicant is solvent and in sound financial condition, and that operate1 setting forth the assets and liabilities of the corporation as of the date not exceeding one %1) year immediately prior to the filing of the application. D. The specific purpose or purposes which the corporation intends Aoreign banking, financial and insurance corporations shall, in to pursue in the transaction of its business in the !hilippines5 addition to the above re.uirements, comply with the provisions of !rovided, That said purpose or purposes are those specifically existing laws applicable to them. 3n the case of all other foreign stated in the certificate of authority issued by the appropriate corporations, no application for license to transact business in the government agency1 !hilippines shall be accepted by the 8ecurities and Exchange "ommission without previous authority from the appropriate government agency, whenever re.uired by law. (. The names and addresses of the present directors and officers of the corporation1 Aoreign corporations already issued a license to transact business in the !hilippine prior to the effectivity of the
1''
"ode continues to have such authority under the terms and conditions of the license. 8ec. 1$7 provides5
thousand %!1<<,<<<.) pesos1 !rovided, however, That within six %() months after each fiscal year of the licensee, the 8ecurities and Exchange "ommission shall re.uire the licensee to deposit Sec. 12@. A 0#c!"#o$ "o e4#1"#$> %ore#>$ cor or!"#o$1. + Every additional securities e.uivalent in actual market value to two %$J) foreign corporation which on the date of the effectivity of this "ode percent of the amount by which the licenseePs gross income for that is authori6ed to do business in the !hilippines under a license fiscal year exceeds five million %!D,<<<,<<<.<<) pesos. The therefore issued to it, shall continue to have such authority under 8ecurities and Exchange "ommission shall also re.uire deposit of the terms and condition of its license, subject to the provisions of additional securities if the actual market value of the securities on this "ode and other special laws. deposit has decreased by at least ten %1<J) percent of their actual market value at the time they were deposited. The 8ecurities and Exchange "ommission may at its discretion release part of the additional securities deposited with it if the gross income of the pon compliance with the provision of 8ec. 1$D, other licensee has decreased, or if the actual market value of the total special laws and the rules and regulations implementing them, the 8E" shall thereafter issue the license. securities on deposit has increased, by more than ten %1<J) percent of the actual market value of the securities at the time they were Eithin (< days after the issuance of the license, a foreign deposited. The 8ecurities and Exchange "ommission may, from corporation, except those engaged in foreign banking or time to time, allow the licensee to substitute other securities for insurance, shall deposit with the 8E", for the benefit of those already on deposit as long as the licensee is solvent. 8uch creditors, securities consisting of %1) bonds or other licensee shall be entitled to collect the interest or dividends on the evidence of indebtedness of the !hilippine government or securities deposited. 3n the event the licensee ceases to do its political subdivision, or of a K/"", %$) shares of stock in Gregistered enterprisesH as this term is defined under ;& business in the !hilippines, the securities deposited as aforesaid D1C(, %*) shares of stock in domestic corporations shall be returned, upon the licenseePs application therefor and upon registered in the stock exchange and %7) shares of stock in proof to the satisfaction of the 8ecurities and Exchange "ommission domestic insurance companies and banks or any that the licensee has no liability to !hilippine residents, including combination thereof with an actual market value of the Kovernment of the ;epublic of the !hilippines. !1<<,<<<.<<. &dditional securities may be re.uired by the 8E" if the market value of the securities n deposit has decreased by at least 1<J. 8ec. 1$( provides5
OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from performing isolated or single act, but to prevent it from ac.uiring a domicile for the purpose of Sec. 12B. I117!$ce o% ! 0#ce$1e. + 3f the 8ecurities and Exchange its business without taking steps to render it "ommission is satisfied that the applicant has complied with allpursuing the amenable to suit in the local courts. 3f the foreign re.uirements of this "ode and other special laws, rules and corporation transacts business in the !hilippines without regulations, the "ommission shall issue a license to the applicant to re.uisite license, its officers may be subjected to the the transact business in the !hilippines for the purpose or purposes penal provisions of 8ec. 177 of the "ode. specified in such license. pon issuance of the license, such foreign corporation may commence to transact business in the !hilippines and continue to do so for as long as it retains its authority to act as -ODE OF ENTR) OF FOREIGN CORPORATIONS C. a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, 1. Br!$c: O%%#ce of a foreign corporation is one which suspended or annulled in accordance with this "ode or other special carries out the business activities of the foreign corporation itself and derives income from the laws. !hilippines %8ec. 1, ", 3;; of ;& 4o. '<7$) . &s such, the juridical entity involved is one and the same1
2. Re re1e$"!"#;e or L#!1o$ O%%#ce one which deals Eithin sixty %(<) days after the issuance of the license to transact business in the !hilippines, the license, except foreign banking or directly with the clients of the parent company but does not derive income from the host country and is insurance corporation, shall deposit with the 8ecurities and fully subsidi6ed by the head office. 3t undertakes Exchange "ommission for the benefit of present and future activities such as but not limited to information creditors of the licensee in the !hilippines, securities satisfactory to dissemination and promotion of the company#s the 8ecurities and Exchange "ommission, consisting of bonds or products1 other evidence of indebtedness of the Kovernment of the !hilippines, its political subdivisions and instrumentalities, or of Loc!0 S791#&#!r< & foreign corporation may form or /. government+owned or controlled corporations and entities, shares organi6e a separate corporation under the Aoreign of stock in Nregistered enterprisesN as this term is defined in 3nvestment &ct %;& '<7$) by making at least a ;epublic &ct 4o. D1C(, shares of stock in domestic corporations majority of the investments therein. The corporation registered in the stock exchange, or shares of stock in domestic thus formed becomes known as a local subsidiary of the investing foreign corporation which becomes a insurance companies and banks, or any combination of these kinds legally independent unit governed by the laws of the of securities, with an actual market value of at least one hundred !hilippines. ?allantine calls it GdomesticationH in the 1'C
sense that the foreign corporation is granted the right to obtain a charter or organi6e itself into a domestic corporation under the general laws of the other state1
the 3mplementing ;ules and ;egulations of ;& '<7$ unless, of course, the foreign corporation actively participates in the management thereof.
@.
Re>#o$!0 or Are! He!&67!r"er1 is an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordinating center for its subsidiaries, branches or affiliates in the &sia+!acific ;egion and other foreign markets and which does not earn or derive income in the !hilippines %8ec. $%$), ;& C'D(). 3t cannot in any manner, participate in the management of any subsidiary or branch office in the !hilippines nor shall it market goods and services in behalf of its mother company, branches or affiliates. Re>#o$!0 O er!"#$> He!&67!r"er1 is a foreign business entity which is allowed to derive income in the !hilippines by performing .ualifying services exclusively to its affiliates, subsidiaries or branches in the !hilippines, in the &sia+!acific ;egion and in other foreign markets %8ec. $%*), ;& C'D(). Tualifying services, under ;& C'D(, include among others5 general administration and planning, business planning and coordination, sourcing or procurement of raw materials and components, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistic service, research and development services and the like. The ;egional or &rea ,ead.uarters and ;egional /perating ,ead.uarters are granted certain tax incentives such as exemption from all kinds of local taxes, fees or charges imposed by local government units except real property tax on land improvements1 tax and duty+free importation of training materials and e.uipment1 and importation of motor vehicles.
D.
RESIDENT AGENT
&s a condition precedent to the grant of license to do or transact business in the !hilippines, the foreign corporation is re.uired to designate its resident agent on whom summons and other legal processes my be served in all actions or legal proceedings against such corporation. 8ec. 1$C provides5 Sec. 12D. Re1#&e$" !>e$"H 1er;#ce o% roce11. + The 8ecurities and Exchange "ommission shall re.uire as a condition precedent to the issuance of the license to transact business in the !hilippines by any foreign corporation that such corporation file with the 8ecurities and Exchange "ommission a written power of attorney designating some person who must be a resident of the !hilippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authori6ed officers of the foreign corporation at its home office. &ny such foreign corporation shall likewise execute and file with the 8ecurities and Exchange "ommission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows5
A.
B.
Re>#o$!0 *!re:o71e one whose activities are limited to serving as supply depot of ;egional or &rea ,ead.uarters or ;egional /perating ,ead.uarters in the !hilippines, after securing a license therefor from the !hilippine Economic Uone &uthority %!EU&) or the concerned eco6one authorities. The regional warehouse shall only be used for the storage, deposit and safekeeping of its spare parts, components, marking, labelling and cutting or altering to customer#s specifications but shall not directly engage in trade nor solicit business, promote any sale nor enter into contracts for the sale or disposition of goods in the !hilippines, except those for delivery to an authori6ed distributor in the country. Jo#$" Ve$"7re is a one+time grouping of two or more persons, natural or juridical, for carrying out a specified undertaking. nder 8ec. 1, @ of ;& '<7$, it is combination of property, money, efforts, skill or knowledge to carry out a single business enterprise for profit, which is duly registered with the 8E" as a corporation or partnership. 4o license to do business is re.uired on the part of the foreign corporation entering into such kind of a business venture since mere investment does no constitute doing business as per
NThe %name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the 8ecurities and Exchange "ommission a license to transact business in the !hilippines, that if at any time said corporation shall cease to transact business in the !hilippines, or shall be without any resident agent in the !hilippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the !hilippines, service of any summons or other legal process may be made upon the 8ecurities and Exchange "ommission and that such service shall have the same force and effect as if made upon the duly+authori6ed officers of the corporation at its home office.N
C.
Ehenever such service of summons or other process shall be made upon the 8ecurities and Exchange "ommission, the "ommission shall, within ten %1<) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the "ommission shall be necessary part of and shall complete such service. &ll expenses incurred by the "ommission for such service shall be paid in advance by the party at whose instance the service is made.
3n case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the 8ecurities and
1'=
Exchange "ommission of the new address.
may be subject to the penal sanctions provided for in 8ec. 177 of the "ode which may either be imprisonment or fine.
CAPACIT) TO SUE !$& BE SUED: The corporation may not likewise sue or intervene in any action, suit or proceeding in any court or administrative agency of the !hilippines while it may be sued or proceeded against before such court or agency on any valid cause of action Sec. 12C. *:o 8!< 9e ! re1#&e$" !>e$". + & resident agent may recogni6ed under the law. be either an individual residing in the !hilippines or a domestic corporation lawfully transacting business in the !hilippines5 *HETHER OR NOT IT CAN SUE: !rovided, That in the case of an individual, he must be of good 1. & foreign corporation transacting or doing business in moral character and of sound financial standing. the !hilippines with a license can sue before !hilippine "ourts1 $. 8ubject to certain exceptions, a foreign corporation doing business in the country without a license cannot "ulled from the provisions of 8ec. 1$C is that the necessity sue in !hilippine "ourts1 and of the appointment of a resident agent is only for the purpose of receiving summons and other legal processes in *. 3f it is not transacting business in the !hilippines, even any legal action or proceeding against the foreign without a license, it can sue before the !hilippine corporation. &nd, when a foreign corporation has "ourts. designated a person to receive summons in judicial proceedings affecting the corporation that designation is EI" #1 $o" ":e 0!c3 o% re67#re& 0#ce$1e 97" &o#$> exclusive and service of summons is without force and 971#$e11 5#":o7" ! 0#ce$1e 5:#c: 9!r1 ! %ore#>$ effect unless made on him %!oi6at vs. >ogan). Thus, while cor or!"#o$ %ro8 !cce11 "o o7r co7r"1F % niversal the law allows service upon the 8E" %8ec. 1$C), or any of 8hipping vs. 3&") its officers or agents within the !hilippines %8ec. 1*, ;ule 17, ;ules of "ivil !rocedure), the latter two modes may E2"E!T3/485 become effective only if the foreign corporation failed or 1. Aoreign corporations can sue before the !hilippine neglected to designate such a person or an agent. 3n a "ourts if the act or transaction involved is an decision, therefore, rendered by the 8" in the case of E#1o0!"e& "r!$1!c"#o$F or the corporation is not Keneral "orporation of the !hilippines vs. nion 3nsurance seeking to enforce any legal or contractual rights 8oc. /f "anton @td %C' !hil *1*) , it was held that Gwhere arising from, or growing out of, any business which it such foreign corporation actually doing business here has has transacted in the !hilippines %Eestern E.uipment not applied for a license to do and has not designated an 8upply vs. ;eyes) agent to receive summons, then service of summons on it will be made pursuant to the provisions of the ;ules of 2. 4either is a license re.uired before a foreign "ourtH. 3f such foreign corporation has a license to do corporation may sue before the forum if the purpose of business, then summons to it will be served on the agent the suit is to ro"ec" #"1 "r!&e8!r3, trade name, designated by it for the purpose, or otherwise in corporate name, reputation or goodwill1 %Eestern accordance with the "orporation @aw. E.uipment 8upply vs. ;eyes)
&s to who may be appointed as resident agent, the "orporation "ode provides5
E.
DOING BUSINESS *ITHOUT LICENSE AND ITS EFFECT
3. 4.
D.
/r where it is based on a ;#o0!"#o$ o% ":e Re;#1e& Pe$!0 Co&e %@e "hemise @acoste, 8& vs. Aernande6)1 /r merely &e%e$&#$> a suit filed against it %Time, 3nc. vs. ;eyes) /r where a party is e1"o e& to challenge the personality of the corporation by entering into a contract with it %"ommunications >aterials and -esign, 3nc. vs. "& and 3TE")
& foreign corporation must secure the necessary license before it can transact or do business in the !hilippines. This is the clear import of 8ec. 1$* when it states that it shall have the right to transact business in the !hilippines after it shall have obtained a license. Eithout such a license, the law provides for certain conse.uences5
*HETHER OR NOT IT CAN BE SUED: Sec. 1//. Do#$> 971#$e11 5#":o7" ! 0#ce$1e. + 4o foreign corporation transacting business in the !hilippines without 1. a & foreign corporation transacting business in the license, or its successors or assigns, shall be permitted to maintain !hilippines with the re.uisite license can be sued in or intervene in any action, suit or proceeding in any court or !hilippine "ourts1 administrative agency of the !hilippines1 but such corporation may $. & foreign corporation transacting business in the be sued or proceeded against before !hilippine courts or !hilippines without a license can be sued in !hilippine administrative tribunals on any valid cause of action recogni6ed "ourts1 *. 3f it is not doing business in the !hilippines, it cannot under !hilippine laws. be sued in !hilippine "ourts for lack of jurisdiction. RESPONSIBLE OFFICERS: of a foreign corporation doing business in the !hilippines without the re.uisite license EDOING BUSINESSF5 &s to what constitutes Gdoing businessH or Gtransacting businessH which would bar a foreign corporation from access to our courts, no general rule or governing principle can be laid down. 3ndeed, such
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case must be judged in the light of its peculiar environmental circumstance. ,owever, the TRUE TEST seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organi6ed or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements and contemplates, to the extent, the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and objects of its organi6ation %>etholatum, 3nc. vs. >angaliman)
PRESENT STATE OF LA* AS TO EDOING BUSINESSF: under the Aoreign 3nvestment &ct %8ec. *, d), Gdoing businessH would include5 1. 8oliciting orders, service contracts1
$. *.
7. D.
/pening offices, whether called Gliason officesH or branches1 &ppointing representatives or distributor domiciled in the !hilippines or who in any calendar year stay in the country for a period or periods totalling 1C< days or more1 !articipating in the management, supervision or control of any domestic business, firm, entity or corporation in the !hilippines1 &ny other act that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organi6ation.
HELD: 4o. No >e$er!0 r70e or >o;er$#$> r#$c# 0e c!$ 9e 0!#& &o5$ !1 "o 5:!" co$1"#"7"e1 G&o#$>G or Ge$>!>#$> #$G or G"r!$1!c"#$>G 971#$e11. I$&ee&+ e!c: c!1e 871" 9e ?7&>e& #$ ":e 0#>:" o% #"1 ec70#!r e$;#ro$8e$"!0 c#rc781"!$ce1. T:e "r7e "e1"+ :o5e;er+ 1ee81 "o 9e 5:e":er ":e %ore#>$ cor or!"#o$ #1 co$"#$7#$> ":e 9o&< or 1791"!$ce o% ":e 971#$e11 or e$"er r#1e %or 5:#c: #" 5!1 or>!$#Ke& or 5:e":er #" :!1 1791"!$"#!00< re"#re& %ro8 #" !$& "7r$e& #" o;er "o !$o":er . %Traction "os. v. "ollectors of 3nt. ;evenue 9". ". &. /hio:, $$* A. =C7, =C'.) The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organi6ation. %Kriffin v. 3mplement -ealersP >ut. Aire 3ns. "o., $71 4. E. 'D, ''1 !auline /il I Kas "o. v. >utual Tank @ine "o., $7( !. CD1, CD$, 11C /kl. 1111 &utomotive >aterial "o. v. &merican 8tandard >etal !roducts "orp., 1DC 4. E. (=C, '<*, *$' 333. *('.) 3n its decision of Bune $=, 1=7<, the "ourt of &ppeals concluded that Nit is undeniable that the >entholatum "o., through its agent, the !hilippine+&merican -rug "o., 3nc., has been doing business in the !hilippines by selling its products here since the year 1=$=, at least.N This is assailed by petitioners as a pure conclusion of law. This finding is predicated upon the testimony of >r. ;oy 8pringer of the !hilippine+&merican -rug "o., 3nc., and the pleadings filed by petitioners. The complaint filed in the "ourt of Airst 3nstance of >anila on /ctober 1, 1=*D, clearly stated that the !hilippine+&merican -rug "o., 3nc., is the exclusive distributing agent in the !hilippine 3slands of the >entholatum "o., 3nc., in the sale and distribution of its product known as the G>entholatum.N The object of the pleadings being to draw the lines of battle between litigants and to indicate fairly the nature of the claims or defenses of both parties, a party cannot subse.uently take a position contradictory to, or inconsistent with, his pleadings, as the facts therein admitted are to be taken as true for the purpose of the action. 3t follows that whatever transactions the !hilippine+&merican -rug "o., 3nc., had executed in view of the law, the >entholatum "o., 3nc., did it itself. &nd, the >entholatum "o., 3nc., being a foreign corporation doing business in the !hilippines without the license re.uired by section (C of the "orporation @aw, it may not prosecute this action for violation of trade mark and unfair competition. The writ prayed for should be, as it hereby is, denied, with costs against the petitioners.
!rovided, however, that the phrase Gdoing businessH shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, andMor exercise of rights as such investor, nor having a nominee director or officer to represent its interest in such corporation1 nor appointing a representative or distributor domiciled in the !hilippines which transacts business in its own name and for its own account. ISOLATED TRANSACTION: even if it is pursuant of the usual business does not constitute doing business the doing of which would not bar a foreign corporation from access to !hilippine "ourts %Aacilities >gt. vs. -ela /sa)
THE -ENTHOLATU- CO.+ INC.+ ET AL.+ petitioners, vs. ANACLETO -ANGALI-AN+ ET AL.+ respondents %K.;. 4o. @+7''<11 Bune $', 1=71) FACTS: & complaint was filed by herein petitioner, a foreign corporation having !hilippine+&merican -rug "o. as its sole distributor, for infringement of trademark for its product G>entholatumH and unfair competition alleging that herein respondents &nacleto and Alorencio >angaliman prepared a medicament and salve named G>entholimanH which they sold to the public packed in the same si6e, color and shape as its product >etholatum. ISSUE: E/4 petitioner corporation is transacting business in the !hilippinesF
ISOLATED TRANSACTION
-ARSHALL=*ELLS CO-PAN)+ plaintiff+appellant, vs. HENR) *. ELSER O CO.+ INC.+ defendant+appellee %K.;. 4o. $$<1D1 8eptember 1, 1=$7) FACTS: !laintiff sued defendant for the unpaid balance of a bill of goods amounting to !$,((<.'7, for which the plaintiff holds accepted drafts. -efendant demurred on the ground that plaintiff had no capacity to sue which the trial court granted. &nd in as much as the plaintiff could not allege compliance with the
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statute, the order was allowed to become final and no appeal was perfected. ISSUE: E/4 obtaining a license is re.uired before a foreign corporation can maintain any kind of action in the courts of the !hilippine 3slandsF HELD: No. T:e o9?ec" o% ":e 1"!"7"e 5!1 "o 179?ec" ":e %ore#>$ cor or!"#o$ &o#$> 971#$e11 #$ ":e P:#0# #$e1 "o ":e ?7r#1&#c"#o$ o% #"1 co7r"1 . T:e o9?ec" o% ":e 1"!"7"e 5!1 $o" "o re;e$" ":e %ore#>$ cor or!"#o$ %ro8 er%or8#$> 1#$>0e !c"1+ 97" "o re;e$" #" %ro8 !c67#r#$> ! &o8#c#0e %or ":e 7r o1e o% 971#$e11 5#":o7" "!3#$> ":e 1"e 1 $ece11!r< "o re$&er #" !8e$!90e "o 17#" #$ ":e 0oc!0 co7r"1 . The implication of the law is that it was never the purpose of the @egislature to exclude a foreign corporation which happens to obtain an isolated order for business from the !hilippines, from securing redress in the !hilippine courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations. The effect of the statute preventing foreign corporations from doing business and from bringing actions in the local courts, except on compliance with elaborate re.uirements, must not be unduly extended or improperly applied. 3t should not be construed to extend beyond the plain meaning of its terms, considered in connection with its object, and in connection with the spirit of the entire law. T:e 0!5 1#8 0< 8e!$1 ":!" $o %ore#>$ cor or!"#o$ 1:!00 9e er8#""e& G"o "r!$1!c" 971#$e11 #$ ":e P:#0# #$e I10!$&1+G !1 ":#1 :r!1e #1 3$o5$ #$ cor or!"#o$ 0!5+ 7$0e11 #" 1:!00 :!;e ":e 0#ce$1e re67#re& 9< 0!5+ !$&+ 7$"#0 #" co8 0#e1 5#": ":e 0!5+ 1:!00 $o" 9e er8#""e& "o 8!#$"!#$ !$< 17#" #$ ":e 0oc!0 co7r"1. & contrary holding would bring the law to the verge of unconstitutionality, a result which should be and can be easily avoided. The order appealed from shall be set aside and the record shall be returned to the court of origin for further proceedings. Eithout special finding as to costs in this instance, it is so ordered. HATHIBHAI BULAKHIDAS+ petitioner, vs. THE HONORABLE PEDRO L. NAVARRO+ !1 Pre1#&#$> J7&>e o% ":e Co7r" o% F#r1" I$1"!$ce o% R#K!0+ Se;e$": J7&#c#!0 D#1"r#c"+ P!1#>+ -e"ro -!$#0!+ Br!$c: 11 !$& DIA-OND SHIPPING CORPORATION+ respondent. %K.;. 4o. @+7=(=D1 &pril ', 1=C() FACTS: !etitioner, a foreign partnership, filed a complaint for damages against respondent -iamond 8hipping "orporation having failed to deliver the goods shipped to it by petitioner to their proper destination. 8aid complaint alleged that the plaintiff is Gnot doing business in the !hilippinesH and that it is Gsuing under an isolated transactionH. -efendant filed a motion to dismiss on the ground that plaintiff has no capacity to sue which was granted. ISSUE: E/4 a corporation not engaged in business in the !hilippines can institute an action before our courtsF
HELD: Les. This issue is already well+settled in this jurisdiction. 3n &etna "asualty and 8urety "o. vs. !acific 8tar @ines, C< 8";& (*D, is a case similar to the present one in that the action is also one for recovery of damages sustained by cargo shipped on defendantsP vessels. -efendants set up the defense that plaintiff is a foreign corporation not duly licensed to do business in the !hilippines and, therefore, without capacity to sue and be sued. 3n overruling said defense, this "ourt said5 I" #1 1e""0e& ":!" #% ! %ore#>$ cor or!"#o$ #1 $o" e$>!>e& #$ 971#$e11 #$ ":e P:#0# #$e1+ #" 8!< $o" 9e &e$#e& ":e r#>:" "o %#0e !$ !c"#o$ #$ P:#0# #$e co7r"1 %or #1o0!"e& "r!$1!c"#o$1. The object of 8ections (C and (= of the "orporation law was not to prevent the foreign corporation from performing single acts, but to prevent it from ac.uiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts. 3t was never the purpose of the @egislature to exclude a foreign corporation which happens to obtain an isolated order for business from the !hilippines, from securing redress in the !hilippine courts. &nd in Eastboard 4avigation, @td. et al vs. Buan Lsmael I "o., 3nc., this "ourt held that5 %d) *:#0e 0!#$"#%% #1 ! %ore#>$ cor or!"#o$ 5#":o7" 0#ce$1e "o "r!$1!c" 971#$e11 #$ ":e P:#0# #$e1+ #" &oe1 $o" %o00o5 ":!" #" :!1 $o c! !c#"< "o 9r#$> ":e re1e$" !c"#o$. S7c: 0#ce$1e #1 $o" $ece11!r< 9ec!71e #" #1 $o" e$>!>e& #$ 971#$e11 #$ ":e P:#0# #$e1. 3n fact, the transaction herein involved is the first business undertaken by plaintiff in the !hilippines, although on a previous occasion plaintiffPs vessel was chartered by the 4ational ;ice and "orn "orporation to carry rice cargo from abroad to the !hilippines. These two isolated transactions do not constitute engaging in business in the !hilippines within the purview of 8ections (C and (= of the "orporation @aw so as to bar plaintiff from seeking redress in our courts. %>arshall Eells "o. vs. ,enry E. Elser I "o. 7= !hil., '<1 !acific Qegetable /il "orporation vs. &ngle /. 8ingson, K.;. 4o. @+'=1', &pril $=, 1=DD.) &gain, in Aacilities >anagement "orporation vs. -e la /sa C= 8";& 1*1, 1*=, following &etna "asualty I 8urety "o. vs. !acific 8tar @ine, supra, held a foreign corporation not engaged in business in the !hilippines is not barred from seeking redress from the courts of the !hilippines. E,E;EA/;E, the order of respondent "ourt dismissing the petitionerPs complaint is hereby set aside and the case remanded for further proceedings, with costs against private respondent. THE S*EDISH EAST ASIA CO.+ LTD.+ petitioner, vs. -ANILA PORT SERVICE ANDJOR -ANILA RAILROAD CO-PAN)+ respondents %K.;. 4o. @+$(**$1 /ctober $(, 1=(C) FACTS: >8 8 -&4, owned and operated by petitioner, a swedish company without license in the !hilippines, discharged cargo to herein respondent. ?y mistake, cargo destined for ,ongkong consisting of 1( bundles of Glifts and
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mild steel tees window sectionsH covering which the petitioner had issued a bill of lading to a ,ongkong consignee, were also landed at >anila. The erroneous discharge was obviously engendered by the fact that the same ship on the same day discharged 7< similar bundles destined for consignee in the !hilippines. !etitioner, through a complaint filed in the "A3 of >anila, sought for the recovery of the value of the missing goods which it paid to the ,ongkong consignee, which was granted by the lower court. /n appeal, the "& reversed the trial court#s decision. ISSUE: E/4 petitioner should be barred from access to our courtsF HELD: 4o. The respondents challenge the petitionerPs capacity to sue, it being admittedly a foreign corporation without license to engage in business in the !hilippines, citing section (= of the "orporation @aw. I" 871" 9e 1"!"e& :o5e;er ":!" ":#1 1ec"#o$ #1 $o" ! 0#c!90e "o ! %ore#>$ cor or!"#o$ er%or8#$> 1#$>0e !c"1 or G#1o0!"e& "r!$1!c"#o$1.G There is nothing in the record to show that the petitioner has been in the !hilippines engaged in continuing business or enterprise for which it was organi6ed, when the sixteen bundles were erroneously discharged in >anila, for it to be considered as transacting business in the !hilippines. T:e %!c" #1 ":!" ":e 97$&0e1+ ":e ;!07e o% 5:#c: #1 1o7>:" "o 9e reco;ere&+ 5ere 0!$&e& $o" !1 ! re170" o% ! 971#$e11 "r!$1!c"#o$+ G#1o0!"e&G or o":er5#1e+ 97" &7e "o ! 8#1"!3e$ 9e0#e% ":!" ":e< 5ere !r" o% ":e 1:# 8e$" o% %or"< 1#8#0!r 97$&0e1 co$1#>$e& "o er1o$1 or e$"#"#e1 #$ ":e P:#0# #$e1. There is no justification, therefore, for invoking the provisions of section (= of the "orporation @aw. &""/;-34K@L, the judgment of the "ourt of &ppeals is reversed, and another judgment is hereby rendered ordering the respondents, jointly and severally, to pay the petitioner the sum of !$,*7=.($ with interest thereon at the rate of (J per annum from >arch 1*, 1=(1, the date of the filing of the complaint, until the amount shall have been fully paid, and the sum of !(<< as attorneyPs fees. "osts against the respondents. ANTA- CONSOLIDATED+ INC.+ TA-BUNTING TRADING CORPORATION !$& AURORA CONSOLIDATED SECURITIES !$& INVEST-ENT CORPORATION+ petitioners, vs. THE COURT OF APPEALS+ THE HONORABLE -A,I-IANO C. ASUNCION 'Co7r" o% F#r1" I$1"!$ce o% L!>7$!+ Br!$c: II PS"!. Cr7KQ( !$& STOKEL) VAN CA-P+ INC.+ respondents %K.;. 4o. @+(1D$*1 Buly *1, 1=C() FACTS: ;espondent 8tokely Qan "amp, 3nc., a corporation organi6ed and existing under the laws of the state of 3ndiana, filed a complaint against ?anahaw >illing "orporation, &ntam "onsolidated, 3nc., Tambunting Trading "orporation, &urora "onsolidated 8ecurities and 3nvestment "orporation and nited "oconut /il >ills, 3nc. % nicom) for collection of sum of money.
/ne of respondent#s subdivision G"apital "ity !roduct "ompanyH %"apital "ity) entered into a contracts where "oconut /il >anufacturing %!hil), 3nc. %"omphil) were to sell to the former D<< long tons of crude coconut oil at 8S<.*<Mlb, which it failed to comply with and "apital "ity was forced to buy its coconut oil needs from the open market at a higher price resulting in a loss of 8S1<*,(<<. & $nd contract was entered into to settle "apital "ity#s loss, "omphil was supposed to repurchase the coconut oil earlier purchased from the open market at a price of 8S <.*=$DMlb, but the latter failed to pay. To compensate for the loss, "omphil entered into a * rd contract agreeing to sell the same .uantity of coconut oil at a price of 8S<.*7$DMlb which was below the market price. That by the discounted amount, "omphil would have compensated for the loss "apital "ity sustained. ?ut still, "omphil failed to deliver. !etitioners filed a motion to dismiss the complaint on the ground that respondent had no personality to maintain a suit which was denied. The subse.uent petition for certiorari was dismissed by the appellate court. ISSUE: E/4 !hilippinesF respondent is doing business in the
HELD: 4o. 3n the case of Top+Eeld >anufacturing, 3nc. v. E"E-, 8.&. %1*C 8";& 11C,1$'+1$C), we stated5 T:ere #1 $o >e$er!0 r70e or >o;er$#$> r#$c# 0e 0!#& &o5$ !1 "o 5:!" co$1"#"7"e1 V&o#$>I or Ie$>!>#$> #$I or I"r!$1!c"#$> 971#$e11 #$ ":e P:#0# #$e1. E!c: c!1e 871" 9e ?7&>e& #$ ":e L#>:" o% #"1 ec70#!r c#rc781"!$ce %>entholatum "o. v. >angaliman, '$ !hil.D$7). Thus, a foreign corporation with a settling agent in the !hilippines which issues twelve marine policies covering different shipments to the !hilippines %Keneral "orporation of the !hilippines v. nion 3nsurance 8ociety of "anton, @td., C' !hil. *1*) and a foreign corporation which had been collecting premiums on outstanding policies %>anufacturing @ife 3nsurance "o., v. >eer, C= !hil. *D1) were regarded as doing business here. The acts of these corporations should be distinguished from a single or isolated business transaction or occasional, incidental and casual transactions which do not come within the meaning of the law. Ehere a single act or transaction , however, is not merely incidental or casual but indicates the foreign corporationPs intention to do other business in the !hilippines, said single act or transaction constitutes PdoingP or Pengaging inP or PtransactingP business in the !hilippines. %Aar East 3nternational 3mport and Export "orporation v. 4ankai Rogyo, "o., ( 8";& '$D). 3n the >entholatum "o. v. >angaliman case earlier cited, this "ourt held5 xxx xxx xxx ...T:e "r7e "e1"+ :o5e;er+ 1ee81 "o 9e 5:e":er ":e %ore#>$ cor or!"#o$ #1 co$"#$7#$> ":e 9o&< or 1791"!$ce o% ":e 971#$e11 or e$"er r#1e %or 5:#c: #" 5!r$#$>=or>!$#Ke& or 5:e":er #" :!1 1791"!$"#!00< 5!1 re"#re& %ro8 #" !$& "7r$e& #" o;er "o !$o":er. %Traction "os. v. "ollectors of 3nt. ;evenue 9""&., /hio:, $$* A. =C7, =C'.) The term implies a
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continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or workers or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organi6ation. %Kriffin v. 3mplement -ealersP >ut. Aire 3ns. "o., $71 4.E. 'D, '', !auline /il I Kas "o. v. >utual Tank @ine "o., $7( !. CD1, CD$, 11C /kl. 1111 &utomotive >aterial "o. v. &merican 8tandard >etal !roducts "orp., 1DC 4.E. (=C, '<*, *$' 111. *('.) P I$ ":e c!1e !" 9!r+ ":e "r!$1!c"#o$1 e$"ere& #$"o 9< ":e re1 o$&e$" 5#": ":e e"#"#o$er1 !re $o" ! 1er#e1 o% co88erc#!0 &e!0#$>1 5:#c: 1#>$#%< !$ #$"e$" o$ ":e !r" o% ":e re1 o$&e$" "o &o 971#$e11 #$ ":e P:#0# #$e1 97" co$1"#"7"e !$ #1o0!"e& o$e 5:#c: &oe1 $o" %!00 7$&er ":e c!"e>or< o% G&o#$> 971#$e11 .N The records show that the only reason why the respondent entered into the second and third transactions with the petitioners was because it wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude coconut oil under the first transaction and in order to give the latter a chance to make good on their obligation. 3nstead of making an outright demand on the petitioners, the respondent opted to try to push through with the transaction to recover the amount of 8S1<*,(<<.<< it lost. This explains why in the second transaction, the petitioners were supposed to buy back the crude coconut oil they should have delivered to the respondent in an amount which will earn the latter a profit of 8S1<*,(<<.<<. Ehen this failed the third transaction was entered into by the parties whereby the petitioners were supposed to sell crude coconut oil to the respondent at a discounted rate, the total amount of such discount being 8S1<*,(<<.<<. nfortunately, the petitioners failed to deliver again, prompting the respondent to file the suit below. Arom these facts alone, it can be deduced that in reality, there was only one agreement between the petitioners and the respondent and that was the delivery by the former of D<< long tons of crude coconut oil to the latter, who in turn, must pay the corresponding price for the same. The three seemingly different transactions were entered into by the parties only in an effort to fulfill the basic agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of transactions with petitioners which will categori6e it as a foreign corporation doing business in the !hilippines. Thus, the trial court, and the appellate court did not err in denying the petitionersP motion to dismiss not only because the ground thereof does not appear to be indubitable but because the respondent, being a foreign corporation not doing business in the !hilippines, does not need to obtain a license to do business in order to have the capacity to sue Ee agree with the respondent that it is a common ploy of defaulting local companies which are sued by unlicensed foreign companies not engaged in business in the !hilippines to invoke lack of capacity to sue. The respondent cites decisions from 1=<' to 1=D' recogni6ing and rejecting the improper use of this procedural tactic. %-amfschieffs ;hedered nion v. "ia Trans+atlantica, C !hil. '(( 11=<':1 >arshall+Eells "o. v. ,enry E. Elser I "o., 7= !hil. '< 91=$7:1 Eestern E.uipment "o. v. ;eyes, D1 !hil. 11D 91=$':1 "entral ;epublic ?ank v. ?ustamante, '1 !hil. *D= 91=71:1 !acific Qegetable /il "o. v. 8ingson, =( !hil.+ =C( 91=DD:1 Eastboard 4avigation, @td. v. Buan Lsmael and
"o., 3nc., 1<$ !hil. 1 91=D':). The doctrine of lack of capacity to sue based on failure to first ac.uire a local license is based on considerations of sound public policy. 3t intended to favor domestic corporations who enter was never into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country. The petitioners in this case are engaged in the exportation of coconut oil, an export item so vital in our countryPs economy. They filed this petition on the ground that 8tokely is an unlicensed foreign corporation without a bare allegation or showing that their defenses in the collection case are valid and meritorious. Ee cannot fault the two courts below for acting as they did. E,E;EA/;E, 34 Q3EE /A T,E A/;EK/34K, the petition is -38>388E- for lack of merit. The Temporary ;estraining /rder dated Aebruary $, 1=C* is hereby -388/@QE-. "osts against the petitioners.
HAVING A REPRESENTATIVE IN THE PHILIPPINES

FACILITIES -ANAGE-ENT CORPORATION+ J. S. DRE)ER+ !$& J. V. CATUIRA+ petitioners, vs. LEONARDO DE LA OSA AND THE HONORABLE COURT OF INDUSTRIAL RELATIONS+ respondents %K.;. 4o. @+*C(7=1 >arch $(, 1='=) FACTS: ;espondent @eonardo dela /sa filed a petition for reinstatement with recovery of his overtime compensation, swing shift and graveyard shift differentials. !etitioner corporation filed a letter+answer interposing special defenses5 1. Aacilities >anagement "orporation and B8 -eyer are domiciled in Eake 3slands and is beyond the territorial jurisdiction of the !hilippine Kovernment1 and $. BQ "atuira, though an employee of respondent corporation and stationed in >anila does not have power and authority of legal representation1 and *. The employment of respondent is with approval of the -epartment of @abor of the !hilippines. 8ubse.uently, a motion to dismiss was filed which was denied. ISSUE: E/4 petitioner, A>", has been doing business in the !hilippines to vest the !hilippine court with jurisdictionF HELD: Les. Arom the facts of record, the petitioner may be considered as doing business in the !hilippines within the scope of 8ection 17, ;ule 17 of the ;ules of the "ourt which provide5 8E" 17. 8ervice upon private foreign corporations. 3f the defendant is a foreign corporation or a non+resident joint stock company or association5 doing business in the !hilippines, service may be made on its resident agent designated in accordance with law for that purpose or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the !hilippines.
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3ndeed, the petitioner, in compliance with &ct $7C( as implemented by -epartment of @abor /rder 4o. 3Q dated >ay $<, 1=(C had to appoint Baime Q. "atuira, 1*$$ &. >abini, Ermita, >anila as agent for A>" with authority to execute Employment "ontracts and receive, in behalf of that corporation, legal services from and be bound by processes of the !hilippine "ourts of Bustice, for as long as he remains an employee of A>" %&nnex P3P, rollo, p. D(). 3t is a fact that when the summons for the petitioner was served on Baime Q. "atuira he was still in the employ of the A>". 3n his motion to dismiss &nnex ?P, p. 1=, ;ollo), petitioner admits that >r. "atuira represented it in this country Pfor the purpose of making arrangements for the approval by the -epartment of @abor of the employment of Ailipinos who are recruited by the "ompany as its own employees for assignment abroad.P 3n effect, >r. "atuira was an officer representing petitioner in the !hilippines. nder the rules and regulations promulgated by ":e Bo!r& o% I$;e1"8e$"1 5:#c: "oo3 e%%ec" Fe9. /+ 1MBM+ #8 0e8e$"#$> Re . Ac" No. A@AA+ 5:#c: "oo3 e%%ec" Se ". /N+ 1MBD+ ":e :r!1e I&o#$> 971#$e11I :!1 9ee$ e4e8 "#o$ 5#": #0071"r!"#o$1+ !8o$> ":e8 9e#$> !1 %o00o515 xxx xxx xxx %f) the performance within the !hilippines of any act or combination of acts enumerated in section l%l) of the &ct shall constitute Pdoing businessP therein. in particular, Pdoing business includes5 %1) 8oliciting orders, purchases %sales) or service contracts. "oncrete and specific solicitations by a foreign firm, not acting independently of the foreign firm amounting to negotiation or fixing of the terms and conditions of sales or service contracts, regardless of whether the contracts are actually reduced to writing, shall constitute doing business even if the enterprise has no office or fixed place of business in the !hilippines. xxx %$) A o#$"#$> ! re re1e$"!"#;e or &#1"r#97"or 5:o #1 &o8#c#0e& #$ ":e P:#0# #$e1+ 7$0e11 1!#& re re1e$"!"#;e or &#1"r#97"or :!1 !$ #$&e e$&e$" 1"!"71+ #.e.+ #" "r!$1!c"1 971#$e11 #$ #"1 $!8e !$& %or #"1 o5$ !cco7$"+ !$& $o" #$ ":e $!8e or %or ":e !cco7$" o% ":e r#$c# !0. xxx xxx xxx %7) /pening offices, whether called PliaisonPoffices, agencies or branches, unless proved otherwise. xxx xxx xxx %1<) &ny other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, or in the progressive prosecution of, commercial gain or of the purpose and objective of the business organi6ation 3ndeed, if a foreign corporation, not engaged in business in the !hilippines, is not banned from seeking redress from courts in the !hilippines, a fortiori, that same corporation cannot claim exemption from being sued in !hilippine
courts for acts done against a person or persons in the !hilippines. E,E;EA/;E, T,E !ET3T3/4 38 ,E;E?L -E43E- E3T, "/8T8 &K&348T T,E !ET3T3/4E;8
SINGLE ACT *ITH INTENTION TO CONTINUE DOING BUSINESS

FAR EAST INTERNATIONAL I-PORT !$& E,PORT CORPORATION+ plaintiff+appellee, vs. NANKAI KOG)O CO. LTD.+ ET AL.+ defendants, NANKAI KOG)O CO.+ LTD.+ defendant+appellant %K.;. 4o. @+1*D$D1 4ovember *<, 1=($) FACTS: !laintiff Aar East entered into a contract with herein appellant 4ankai for the sale of steel scrap. /nly 1,<DC.( metric tons were delivered upon the expiration of the export license of Aar East. Aar East later on wrote to Everett 8teamship "orporation, re.uesting the issuance of a complete set of the ?ill of @ading for the shipment, in order that payment thereof be effected against the letter of credit opened by 4ankai. Aor failure of 4ankai and the shipping agent to comply, Aar East filed a complaint for specific performance. 4ankai filed a motion to dismiss, on the ground of lack of jurisdiction over its person and the subject matter, which was denied. ISSUE: E/4 the trial court ac.uired jurisdiction over the subject matter and over the person of the defendant+ appellant through the proper service of summonsF HELD: Les. -efendant contends that !hilippine "ourts have no jurisdiction to take cogni6ance of the case because the 4ankai is not doing business in the islands1 and that while it has entered into the transaction in .uestion, same, however, does not constitute Ndoing businessN, so as to make it amenable to summons and subject it to the "ourtPs jurisdiction. 3t bolstered this claim by a provision in the contract which provides that N3n case of disputes, ?oard of &rbitration may be formed in Bapan. -ecision of the ?oard of &rbitration shall be final and binding on both ? LE; and 8E@@E;N. The rule pertinent to the .uestions in issue provides Y 8E". 17. 8ervice upon private foreign corporations. Y 3f the defendant is a foreign corporation, or a non+resident joint stock company or association, doing business in the !hilippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any officer or agent within the !hilipines. %;ule '). T:e !9o;e r70e #$&#c!"e1 ":ree 8o&e1 o% e%%ec"#$> 1er;#ce o% 1788o$1 7 o$ ! r#;!"e+ %ore#>$ cor or!"#o$+ ;#K: '1( 9< 1er;#$> 7 o$ ":e !>e$" &e1#>$!"e& #$ !ccor&!$ce 5#": 0!5 "o !cce " 1er;#ce o% 1788o$1H '2( #% ":ere #1 $o re1#&e$" !>e$"+ 9< 1er;#ce o$ ":e >o;er$8e$" c#!0 &e1#>$!"e& 9< 0!5 "o ":!" e%%ec"H !$& '/( 9< 1er;#$> o$ !$< o%%#cer or
1CD
!>e$" o% 1!#& cor or!"#o$ 5#": P:#0# #$e1 . The plaintiff complied with the third stated above, for it has been shown that >r. 3shida, who personally signed the contract for the purchase of the scrap in .uestion in behalf of the 4ankai Rogyo, the Trade >anager of said "ompany, >r. Tominaga the "hief of the !etroleum 8ection of the same company and >r. Loshida was the man+in+charge of the 3mport 8ection of the companyPs Tokyo ?ranch. &ll these three, including the first two who were served with 8ummons, were officers of the defendant company. 4ot only did appellant allege non+jurisdictional grounds in its pleadings to have the complaint dismissed, but it also went into trial on the merits and presented evidence destined to resist appelleePs claim. Qerily, there could not be a better situation of ac.uired jurisdiction based on consent. "onse.uently, the provision of the contract wherein it was agreed that disputes should be submitted to a ?oard of &rbitration which may be formed in Bapan %in the supposition that it can apply to the matter in dispute + payment of the scrap), seems to have been waived with appellantPs voluntary submission. &part from the fact that the clause employs the word NmayN. Arom the proven facts obtaining in this particular case, the appellantPs defense of lack of jurisdiction appears unavailing. The case of !acific >icronesian @ine, 3nc. v. ?aens del ;osario, et al., K.;. 4o. @+'1D7, /ctober $*, 1=D7, relied upon in the >otion to -ismiss and other pleadings presented by defendant+appellant, stand on a different footing. Therein, Ee made the following pronouncements5 . . . . &nd the only act it did here was to secure the services of @uceno !elingon to act as cook and chief steward in one of its vessels authori6ing to that effect the @u6on 8tevedoring "o., 3nc., a domestic corporation, and the contract of employment was entered into on Buly 1C, 1=D1. 3t further appears that petitioner has never sent its ships to the !hilippines nor has it transported nor even solicited the transportation passengers and cargoes to and from the !hilippines. 3n words, petitioner engaged the services of !elingon not as part of the operation of its business but merely to employ him as member of the crew in one of its ships. That act apparently is an isolated one, incidental, or casual, and Nnot of a character to indicate a purpose to engage in businessN within the meaning of the rule. %Emphasis ours.) ISSUE2: E/4 the single act done in this case can be considered as doing business in the !hilippinesF HELD: Les. 3n the instant case, the testimony of &tty. !ablo /campo that appellant was doing business in the !hilippines corroborated by no less than 4abuo Loshida, one of appellantPs officers, that he was sent to the !hilippines by his company to look into the operation of mines, thereby revealing ":e &e%e$&!$"I1 &e1#re "o co$"#$7e e$>!>#$> #$ 971#$e11 :ere+ after receiving the shipment of the iron under consideration, making the !hilippines a base thereof. The rule stated in the preceding section that the doing of a single act doesnot constitute business within the meaning of statutes prescribing the conditions to be complied with the foreign corporations must be .ualified
to this extent, ":!" ! 1#$>0e !c" 8!< 9r#$> ":e cor or!"#o$. 3n such a case, the single act of transaction is not merly incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, and to make the state a basis of operations for the conduct of a part of corporationPs ordinary business . %1' Aletchers "yc. of "orporations, sec. C7'<, pp. D'$+ D'*, and authorities cited therein.) %Emphasis ours.) E,E;EA/;E, the judgment appealed from is hereby affirmed, with costs against defendant+appellant 4ankai Rogyo.
ESTOPPED TO 2UESTION PERSONALIT) TO SUE

CO--UNICATION -ATERIALS AND DESIGN+ INC.+ ASPAC -ULTI=TRADE+ INC.+ '%or8er0< ASPAC=ITEC PHILIPPINES+ INC.( !$& FRANCISCO S. AGUIRRE+ petitioners, vs. THE COURT OF APPEALS+ ITEC INTERNATIONAL+ INC.+ !$& ITEC+ INC.+ respondents %K.;. 4o. 1<$$$*1 &ugust $$, 1==() FACTS: ;espondent 3TE" entered into a contract with petitioner &8!&" referred to as G;epresentative &greementH where &8!E" was assigned as 3TE"#s Gexclusive representativeH in the !hilippines for the sale of 3TE"#s products. ?y virtue of said contract, &8!&" sold electronic products exported by 3TE", to their sole customer !@-T. &8!&" and !@-T executed a document entitled G!@-T+&8!&"M3TE" !;/T/"/@ H which defined the project detais for the supply of 3TE"#s 3nterface E.uipment in connection with the D th Expansion !rogram of !@-T. 3TE" later on terminated its representative agreement with &8!&" and fied a complaint alleging that the latter and another corporation -igital ?ase "ommunications, 3nc. %-3K3T&@), the president of which is Arancisco &guirre who is also the president of &8!&", used knowledge and information of 3TE"#s product specifications to develop their own line of e.uipment and product support, which are similar, if not identical to 3TE"#s own and offering them to 3TE"#s customers. -efendants filed a motion to dismiss on the ground that 3TE" had no legal capacity to sue as it is a foreign corporation doing business in the !hilippines without the re.uired license, which was denied. /n appeal, the "& affirmed the decision of the trial court. ISSUE: E/4 private respondents 3TE" is an unlicensed corporation doing business in the !hilippines, and E/4 it is barred from invoking the injunctive authority of the courtsF HELD: Les and 4o %by estoppel). Ge$er!00<+ ! G%ore#>$ cor or!"#o$G :!1 $o 0e>!0 e4#1"e$ce 5#":#$ ":e 1"!"e #$ 5:#c: #" #1 %ore#>$. T:#1 rocee&1 %ro8 ":e r#$c# 0e ":!" ?7r#&#c!0 e4#1"e$ce o% ! cor or!"#o$ #1 co$%#$e& 5#":#$ ":e "err#"or< o% ":e 1"!"e 7$&er 5:o1e 0!51 #" 5!1 #$cor or!"e& !$& or>!$#Ke&+ !$& #" :!1 $o 0e>!0 1"!"71 9e<o$& 17c: "err#"or< . 8uch foreign corporation may be excluded by any other state from doing business within its limits, or conditions may be
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imposed on the exercise of such privileges. ?efore a foreign corporation can transact business in this country, it must first obtain a license to transact business in the !hilippines, and a certificate from the appropriate government agency. I% #" "r!$1!c"1 971#$e11 #$ ":e P:#0# #$e1 5#":o7" 17c: ! 0#ce$1e+ #" 1:!00 $o" 9e er8#""e& "o 8!#$"!#$ or #$"er;e$e #$ !$< !c"#o$+ 17#"+ or rocee&#$> #$ !$< co7r" or !&8#$#1"r!"#;e !>e$c< o% ":e P:#0# #$e1+ 97" #" 8!< 9e 17e& o$ !$< ;!0#& c!71e o% !c"#o$ reco>$#Ke& 7$&er P:#0# #$e 0!51. 3n a long line of decisions, this "ourt has not altogether prohibited foreign corporation not licensed to do business in the !hilippines from suing or maintaining an action in !hilippine "ourts. Ehat it seeks to prevent is a foreign corporation doing business in the !hilippines without a license from gaining access to !hilippine "ourts. The 7r o1e o% ":e 0!5 in re.uiring that foreign corporations doing business in the !hilippines be licensed to do so and that they appoint an agent for service of process #1 "o 179?ec" ":e %ore#>$ cor or!"#o$ &o#$> 971#$e11 #$ ":e P:#0# #$e1 "o ":e ?7r#1&#c"#o$ o% #"1 co7r"1. The object is not to prevent the foreign corporation from performing single acts, but to prevent it from ac.uiring a domicile for the purpose of business without taking steps necessary to render it amenable to suit in the local courts. The implication of the law is that it was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the !hilippines, and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations. There is no exact rule or governing principle as to what constitutes NdoingN or NengagingN or NtransactingN business. 3ndeed, such case must be judged in the light of its peculiar circumstances, upon its peculiar facts and upon the language of the statute applicable. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organi6ed. Ar"#c0e @@ o% ":e O8$#971 I$;e1"8e$"1 Co&e o% 1MDC &e%#$e1 ":e :r!1e "o #$c07&e5 E1o0#c#"#$> or&er1+ 7rc:!1e1+ 1er;#ce co$"r!c"1+ o e$#$> o%%#ce1+ 5:e":er c!00e& G0#!#1o$G o%%#ce1 or 9r!$c:e1H ! o#$"#$> re re1e$"!"#;e1 or &#1"r#97"or1 5:o !re &o8#c#0e& #$ ":e P:#0# #$e1 or 5:o #$ !$< c!0e$&!r <e!r 1"!< #$ ":e P:#0# #$e1 %or ! er#o& or er#o&1 "o"!00#$> o$e :7$&re& e#>:"< '1DN( &!<1 or 8oreH !r"#c# !"#$> #$ ":e 8!$!>e8e$"+ 17 er;#1#o$ or co$"ro0 o% !$< &o8e1"#c 971#$e11 %#r8+ e$"#"< or cor or!"#o$ #$ ":e P:#0# #$e1+ !$& !$< o":er !c" or !c"1 ":!" #8 0< ! co$"#$7#"< or co88erc#!0 &e!0#$>1 or !rr!$>e8e$"1 !$& co$"e8 0!"e "o ":!" e4"e$" ":e er%or8!$ce o% !c"1 or 5or31+ or ":e e4erc#1e o% 1o8e o% ":e %7$c"#o$1 $or8!00< #$c#&e$" "o+ !$& #$ ro>re11#;e ro1ec7"#o$ o%+ co88erc#!0 >!#$ or o% ":e 7r o1e !$& o9?ec" o% ":e 971#$e11 or>!$#K!"#o$.F Thus, a foreign corporation with a settling agent in the !hilippines which issued twelve marine policies covering different shipments to the !hilippines and a foreign
corporation which had been collecting premiums on outstanding policies were regarded as doing business here. The same rule was observed relating to a foreign corporation with an Nexclusive distributing agentN in the !hilippines, and which has been selling its products here since 1=$=, and a foreign corporation engaged in the business of manufacturing and selling computers worldwide, and had installed at least $( different products in several corporations in the !hilippines, and allowed its registered logo and trademark to be used and made it known that there exists a designated distributor in the !hilippines. 3n Keorg Krotjahn K>?, and "o. vs. 3snani, it was held that ":e 7$#$"err7 "e& er%or8!$ce 9< ! %ore#>$ cor or!"#o$ o% !c"1 7r17!$" "o #"1 r#8!r< 7r o1e1 !$& %7$c"#o$1 !1 ! re>#o$!0 !re! :e!&67!r"er1 %or #"1 :o8e o%%#ce+ 67!0#%#e1 17c: cor or!"#o$ !1 o$e &o#$> 971#$e11 #$ ":e co7$"r<. T:e1e %ore>o#$> #$1"!$ce1 1:o70& 9e &#1"#$>7#1:e& %ro8 ! 1#$>0e or #1o0!"e& "r!$1!c"#o$ or occ!1#o$!0+ #$c#&e$"!0+ or c!17!0 "r!$1!c"#o$1+ 5:#c: &o $o" co8e 5#":#$ ":e 8e!$#$> o% ":e 0!5+ %or #$ 17c: c!1e+ ":e %ore#>$ cor or!"#o$ #1 &ee8e& $o" e$>!>e& #$ 971#$e11 #$ ":e P:#0# #$e1. Ehere a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporationPs intention to do other business in the !hilippines, said single act or transaction constitutes NdoingN or Nengaging inN or NtransactingN business in the !hilippines. 3n determining whether a corporation does business in the !hilippines or not, aside from their activities within the forum, reference may be made to the contractual agreements entered into by it with other entities in the country. Thus, in the Top+Eeld case %supra), the foreign corporationPs @3"E48E &4- TE",43"&@ &K;EE>E4T and -38T;3? T/; &K;EE>E4T with their local contacts were made the basis of their being regarded by this Tribunal as corporations doing business in the country. @ikewise, in >erill @ynch Autures, 3nc. vs. "ourt of &ppeals, etc., the A T ;E8 "/4T;&"T entered into by the petitioner foreign corporation weighed heavily in the courtPs ruling. Eith the above+stated precedents in mind, we are persuaded to conclude that private respondent had been Nengaged inN or Ndoing businessN in the !hilippines for some time now. This is the inevitable result after a scrutiny of the different contracts and agreements entered into by 3TE" with its various business contacts in the country, particularly &8!&" and Telephone E.uipment 8ales and 8ervices, 3nc. %TE883, for brevity). The latter is a local electronics firm engaged by 3TE" to be its local technical representative, and to create a service center for 3TE" products sold locally. 3ts arrangements, with these entities indicate convincingly 3TE"Ps purpose to bring about the situation among its customers and the general public that they are dealing directly with 3TE", and that 3TE" is actively engaging in business in the country. 3n its >aster 8ervice &greement with TE883, private respondent re.uired its local technical representative to provide the employees of the technical and service center with 3TE" identification cards and business cards, and to
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correspond only on 3TE", 3nc., letterhead. TE883 personnel are instructed to answer the telephone with N3TE" Technical &ssistance "enter.N, such telephone being listed in the telephone book under the heading of 3TE" Technical &ssistance "enter, and all calls being recorded and forwarded to 3TE" on a weekly basis. Ehat is more, TE883 was obliged to provide 3TE" with a monthly report detailing the failure and repair of 3TE" products, and to re.uisition monthly the materials and components needed to replace stock consumed in the warranty repairs of the prior month. & perusal of the agreements between petitioner &8!&" and the respondents shows that there are provisions which are highly restrictive in nature, such as to reduce petitioner &8!&" to a mere extension or instrument of the private respondent. The N4o "ompeting !roductN provision of the ;epresentative &greement between 3TE" and &8!&" provides5 NThe ;epresentative shall not represent or offer for sale within the Territory any product which competes with an existing 3TE" product or any product which 3TE" has under active development.N @ikewise pertinent is the following provision5 NEhen acting under this &greement, ;E!;E8E4T&T3QE is authori6ed to solicit sales within the Territory on 3TE"Ps behalf but is authori6ed to bind 3TE" only in its capacity as ;epresentative and no other, and then only to specific customers and on terms and conditions expressly authori6ed by 3TE" in writing.N *:e$ ITEC e$"ere& #$"o ":e &#1 7"e& co$"r!c"1 5#": ASPAC !$& TESSI+ ":e< 5ere c!rr<#$> o7" ":e 7r o1e1 %or 5:#c: #" 5!1 cre!"e&+ #.e.+ "o 8!r3e" e0ec"ro$#c1 !$& co887$#c!"#o$1 ro&7c"1. The terms and conditions of the contracts as well as 3TE"Ps conduct indicate that they established within our country a continuous business, and not merely one of a temporary character. 4otwithstanding such finding that 3TE" is doing business in the country, petitioner is nonetheless estopped from raising this fact to bar 3TE" from instituting this injunction case against it. & foreign corporation doing business in the !hilippines may sue in !hilippine "ourts although not authori6ed to do business here against a !hilippine citi6en or entity who had contracted with and benefited by said corporation. To 7" #" #$ !$o":er 5!<+ ! !r"< #1 e1"o e& "o c:!00e$>e ":e er1o$!0#"< o% ! cor or!"#o$ !%"er :!;#$> !c3$o50e&>e& ":e 1!8e 9< e$"er#$> #$"o ! co$"r!c" 5#": #". &nd the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic corporations. /ne who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity5 The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract. The rule is deeply rooted in the time+honored axiom of "ommodum ex injuria sua non habere debet Y no person ought to derive any advantage of his own wrong. This is as it should be for as mandated by law, Nevery person must in
the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.N "oncededly, corporations act through agents, like directors and officers. "orporate dealings must be characteri6ed by utmost good faith and fairness. "orporations cannot just feign ignorance of the legal rules as in most cases, they are manned by sophisticated officers with tried management skills and legal experts with practiced eye on legal problems. Each party to a corporate transaction is expected to act with utmost candor and fairness and, thereby allow a reasonable proportion between benefits and expected burdens. This is a norm which should be observed where one or the other is a foreign entity venturing in a global market. &s observed by this "ourt in T/!+EE@- %supra), vi65 The parties are charged with knowledge of the existing law at the time they enter into a contract and at the time it is to become operative. %Twiehaus v. ;osner, $7D 8E $d 1<'1 ,all v. ?ucher, $$' 8E $d =C). >oreover, a person is presumed to be more knowledgeable about his own state law than his alien or foreign contemporary. 3n this case, the record shows that, at least, petitioner had actual knowledge of the applicability of ;.&. 4o. D7DD at the time the contract was executed and at all times thereafter. This conclusion is compelled by the fact that the same statute is now being propounded by the petitioner to bolster its claim. Ee, therefore sustain the appellate courtPs view that Nit was incumbent upon T/!+EE@- to know whether or not 3;T3 and E"E- were properly authori6ed to engage in business in the !hilippines when they entered into the licensing and distributorship agreements.N The very purpose of the law was circumvented and evaded when the petitioner entered into said agreements despite the prohibition of ;.&. 4o. D7DD. The parties in this case being e.ually guilty of violating ;.&. 4o. D7DD, they are in pari delicto, in which case it follows as a conse.uence that petitioner is not entitled to the relief prayed for in this case. T:e &oc"r#$e o% 0!c3 o% c! !c#"< "o 17e 9!1e& o$ ":e %!#07re "o !c67#re ! 0oc!0 0#ce$1e #1 9!1e& o$ co$1#&er!"#o$1 o% 1o7$& 790#c o0#c< . The license re.uirement was imposed to subject the foreign corporation doing business in the !hilippines to the jurisdiction of its courts. I" 5!1 $e;er #$"e$&e& "o %!;or &o8e1"#c cor or!"#o$1 5:o e$"er #$"o 1o0#"!r< "r!$1!c"#o$1 5#": 7$5!r< %ore#>$ %#r81 !$& ":e$ re 7&#!"e ":e#r o90#>!"#o$1 1#8 0< 9ec!71e ":e 0!""er !re $o" 0#ce$1e& "o &o 971#$e11 #$ ":#1 co7$"r< . 3n &ntam "onsolidated 3nc. vs. "ourt of &ppeals, et al. we expressed our chagrin over this commonly used scheme of defaulting local companies which are being sued by unlicensed foreign companies not engaged in business in the !hilippines to invoke the lack of capacity to sue of such foreign companies. /bviously, the same ploy is resorted to by &8!&" to prevent the injunctive action filed by 3TE" to enjoin petitioner from using knowledge possibly ac.uired in violation of fiduciary arrangements between the parties. ?y entering into the N;epresentative &greementN with 3TE", !etitioner is charged with knowledge that 3TE" was not licensed to engage in business activities in the country, and is thus estopped from raising in defense such
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incapacity of 3TE", having chosen to ignore or even presumptively take advantage of the same. 3n Top+Eeld, we ruled that a foreign corporation may be exempted from the license re.uirement in order to institute an action in our courts if its representative in the country maintained an independent status during the existence of the disputed contract. !etitioner is deemed to have acceded to such independent character when it entered into the ;epresentative &greement with 3TE", particularly, provision (.$ %supra). 34 Q3EE /A T,E A/;EK/34K !;E>38E8, the instant !etition is hereby -38>388E-. The decision of the "ourt of &ppeals dated Bune ', 1==1, upholding the ;T" /rder dated Aebruary $$, 1==1, denying the petitionersP >otion to -ismiss, and ordering the issuance of the Erit of !reliminary 3njunction, is hereby affirmed in toto.
organi6ing a corporation, when said inhabitants have knowledge of the existence of such foreign corporationF HELD: Les. 3n the case of >arshall+Eells "o. vs. ,enry E. Elser I "o. %7( !hil., '<, '(), this court held5 The noncompliance of a foreign corporation with the statute may be pleaded as an affirmative defense. Thereafter, it must appear from the evidence, first, that the plaintiff is a foreign corporation, second, that it is doing business in the !hilippines, and third, that it has not obtained the proper license as provided by the statute. 3f it had been stipulated that the plaintiff, Eestern Electric "ompany, 3nc., had been doing business in the !hilippine 3slands without first obtaining a license, another and a very different .uestion would be presented. That company is not here seeking to enforce any legal or contract rights arising from, or growing out of, any business which it has transacted in the !hilippine 3slands. T:e 1o0e 7r o1e o% ":e !c"#o$5 GI1 "o ro"ec" #"1 re 7"!"#o$+ #"1 cor or!"e $!8e+ #"1 >oo&5#00+ 5:e$e;er ":!" re 7"!"#o$+ cor or!"e $!8e or >oo&5#00 :!;e+ ":ro7>: ":e $!"7r!0 &e;e0o 8e$" o% #"1 "r!&e+ e1"!90#1:e& ":e81e0;e1 .N &nd it contends that its rights to the use of its corporate and trade name5 3s a property right, a right in rem, which may assert and protect against all the world, in any of the courts of the world Y even in jurisdictions where it does not transact business Y just the same as it may protect its tangible property, real or personal, against trespass, or conversion. "iting sec. 1<, 4ims on nfair "ompetition and Trade+>arks and cases cited1 secs. $1+$$, ,opkins on Trade+>arks, Trade 4ames and nfair "ompetition and cases cited.N That point is sustained by the authorities, and is well stated in ,anover 8tar >illing "o. vs. &llen and Eheeler "o. %$<C Aed., D1*), in which they syllabus says5 S#$ce #" #1 ":e "r!&e !$& $o" ":e 8!r3 ":!" #1 "o 9e ro"ec"e&+ ! "r!&e=8!r3 !c3$o50e&>e1 $o "err#"or#!0 9o7$&!r#e1 o% 87$#c# !0#"#e1 or 1"!"e1 or $!"#o$1+ 97" e4"e$&1 "o e;er< 8!r3e" 5:ere ":e "r!&erI1 >oo&1 :!;e 9eco8e 3$o5$ !$& #&e$"#%#e& 9< ":e 71e o% ":e 8!r3 3t is very apparent that the purpose and intent of ,erman and his associates in seeking to incorporate under the name of Eestern Electric "ompany, 3nc., was to unfairly and unjustly compete in the !hilippine 3slands with the Eestern Electric "ompany, 3nc., in articles which are manufactured by, and bear the name of, that company, all of which is prohibited by &ct 4o. (((, and was made known to the defendant ;eyes by the letter known in the record to the defendant ;eyes by the letter known in the record as Exhibit &. The plaintiff, Eestern Electric "ompany, 3nc., has been in existence as a corporation for over fifty years, during which time it has established a reputation all over the world including the !hilippine 3slands, for the kind and .uality of its manufactured articles, and it is very apparent that the whole purpose and intent of ,erman and his associates in seeking to incorporate another corporation under the
TRADE-ARK INFRINGE-ENT
*ESTERN E2UIP-ENT AND SUPPL) CO-PAN)+ *ESTERN ELECTRIC CO-PAN)+ INC.+ *. Z. S-ITH !$& FELI, C. RE)ES+ plaintiffs+appellees, vs. FIDEL A. RE)ES+ !1 D#rec"or o% ":e B7re!7 o% Co88erce !$& I$&71"r<+ HENR) HER-AN+ PETER OIBRIEN+ -ANUEL B. DIAZ+ FELIPE -APO) !$& ARTE-IO ZA-ORA+ defendants+appellants. %K.;. 4o. @+$'C=' -ecember $, 1=$') FACTS: The present case was filed and tried on the following facts5 1. !etitioner Eestern E.uipment and 8upply "ompany, through its duly authori6ed agent, the plaintiff, Aelix ;eyes, applied to the defendant -irector of ?ureau of "ommerce and 3ndustry %?"3) for the issuance of a license to engage in business in the !hilippine 3slands which was granted on &ug. $*, 1=$(.
$.
/n the other hand, Eestern Electric "ompany, 3nc, also organi6ed and existing under the laws of 4evada, was not issued such license but it was alleged that it has never engaged in business herein. That a !hilippine corporation known as Electric 8upply "ompany, 3nc., where defendant ,enry ,erman was president, has been importing the manufactures of plaintiff Eestern Electric "ompany, 3nc. That defendant ,enry ,erman signed and filed &/3 with the defendant Aidel ;eyes, as -irector of ?"3, with the intention to organi6e a domestic corporation to be known as GEestern Electric "ompany, 3nc.H for the purpose, among others things, of manufacturing, buying, selling and dealing generally in electrical and telephone apparatus and suppliesH in violation of a trademark over GEestern ElectricH existing in Eashington, -".
*.
7.
The lower court decided in favor of plaintiffs. ISSUE: E/4 plaintiff corporation can maintain an action to restraint residents and inhabitants of the !hilippines from
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identical name of Eestern Electric "ompany, 3nc., and for the same identical purpose as that of the plaintiff, is to trespass upon and profit by its good name and business reputation. The very fact that ,erman and his associates have sought the use of that particular name for that identical purpose is conclusive evidence of the fraudulent intent with which it is done. The judgment of the lower court is affirmed, with costs GENERAL GAR-ENTS CORPORATION+ petitioner, vs. THE DIRECTOR OF PATENTS !$& PURITAN SPORTS*EAR CORPORATION+ respondents %K.;. 4o. @+$7$=D1 8eptember *<, 1='1) FACTS: ;espondent !uritan 8portswear "orporation, a corporation organi6ed and exiting under the laws of the state of !ensylvania, 8& filed a petition with the !hilippine !atent /ffice for the cancellation of the petitioner#s trademark G!uritanH, alleging ownership and prior use in the !hilippines of the said trademark for assorted men#s wear, such as sweaters, shirts, jackets, undershirts and briefs, which has not been abandoned. 3t further alleged that the registration thereof by petitioner had been obtained fraudulently and in violation of 8ec. 1'%c) of ;& 1((, in relation to 8ec. 7%d) thereof. !etitioner filed a motion to dismiss on several grounds which may be synthesi6ed to respondent#s lack of capacity to maintain suit in the !hilippines which was denied. ISSUE: E/4 ;espondent !uritan 8portswear can maintain the suitF HELD: Les. That respondent is a juridical person should be beyond serious dispute. The fact that it may not transact business in the !hilippines unless it has obtained a license for that purpose, nor maintain a suit in !hilippine courts for the recovery of any debt, claim or demand without such license %8ecs. (C and (=, "orporation @aw) does not make respondent any less a juridical person. 3ndeed an exception to the license re.uirement has been recogni6ed in this jurisdiction, namely, where a foreign corporation sues on an isolated transaction. &s first enunciated in >arshall+ Eells "o. v. Elser I "o . Nthe object of the statute %8ecs. (C and (=, "orporation @aw) was not to prevent the foreign corporation from performing single acts, but to prevent it from ac.uiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts ... the implication of the law %being) that it was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the !hilippines, from securing redress in the !hilippine "ourts. ...N The principle has since then been applied in a number of other cases. & more or less analogous .uestion arose in Eestern E.uipment I 8upply "o. v. ;eyes, D1 !hil. 11D. The syllabus of the report, which is a correct statement of the doctrine laid down in the decision, reads as follows5 & foreign corporation which has never done ... business in the !hilippine 3slands and which is unlicensed and unregistered to do business here, but is widely and favorably known in the 3slands through the use therein of
its products bearing its corporate and trade name has a legal right to maintain an action in the 3slands. !arenthetically, it may be stated that the ruling in the >entholatum case was subse.uently derogated when "ongress, purposely to Ncounteract the effectsN of said case, enacted Re 790#c Ac" No. B/D+ #$1er"#$> Sec"#o$ 21=A #$ ":e Tr!&e8!r3 L!5+ 5:#c: !00o51 ! %ore#>$ cor or!"#o$ or ?7r#1"#c er1o$ "o 9r#$> !$ !c"#o$ #$ P:#0# #$e co7r"1 %or #$%r#$>e8e$" o% ! 8!r3 or "r!&e=$!8e+ %or 7$%!#r co8 e"#"#o$+ or %!01e &e1#>$!"#o$ o% or#>#$ !$& %!01e &e1cr# "#o$+ G5:e":er or $o" #" :!1 9ee$ 0#ce$1e& "o &o 971#$e11 #$ ":e P:#0# #$e1 7$&er Ac" N789ere& Fo7r"ee$ :7$&re& !$& %#%"<=$#$e+ !1 !8e$&e&+ o":er5#1e 3$o5$ !1 ":e Cor or!"#o$ L!5+ !" ":e "#8e #" 9r#$>1 co8 0!#$".G !etitioner argues that 8ection $1+& militates against respondentPs capacity to maintain a suit for cancellation, since it re.uires, before a foreign corporation may bring an action, that its trademark or tradename has been registered under the Trademark @aw. The argument misses the essential point in the said provision, which is that the foreign corporation is allowed there under to sue Nwhether or not it has been licensed to do business in the !hilippinesN pursuant to the "orporation @aw %precisely to counteract the effects of the decision in the >entholatum case). 3n any event, respondent in the present case is not suing for infringement or unfair competition under 8ection $1+&, but for cancellation under 8ection 1', on one of the grounds enumerated in 8ection 7. The first kind of action, it maybe stated, is cogni6able by the "ourts of Airst 3nstance %8ec. $')1 the second partakes of an administrative proceeding before the !atent /ffice %8ec. 1C, in relation to 8ec. C). &nd while a suit under 8ection $1+& re.uires that the mark or tradename alleged to have been infringed has been Nregistered or assignedN to the suing foreign corporation, a suit for cancellation of the registration of a mark or tradename under 8ection 1' has no such re.uirement. Aor such mark or tradename should not have been registered in the first place %and conse.uently may be cancelled if so registered) if it Nconsists of or comprises a mark or tradename which so resembles a mark or tradename ... previously used in the !hilippines by another and not abandoned, as to be likely, when applied to or used in connection with goods, business or services of the applicant, to cause confusion or mistake or to deceive purchasers1 ...N%8ec. 7d). E,E;EA/;E, the petition is dismissed, and the resolution of the -irector of !atents dated &ugust (, 1=(7 is affirmed, with costs. PU-A SPORTSCHUHFABRIKEN RUDOLF DASSLER+ K.G.+ petitioner vs. THE INTER-EDIATE APPELLATE COURT !$& -IL=ORO -ANUFACTURING CORPORATION+ respondents %K.;. 4o. 'D<('1 Aebruary $(, 1=CC) FACTS: !etitioner, a corporation organi6ed and existing under the laws of the Aederal ;epublic of Kermany filed a complaint of patent or trademark infringement against herein respondent before the ;T" of >akati.
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!rivate respondent filed a motion to dismiss on the ground that petitioner had no capacity to sue which was denied. /n appeal, the "& reversed the trial court. ISSUE: E/4 petitioner had capacity to sueF HELD: Les. !etitioner maintains that it has substantially complied with the re.uirements of 8ection $1+& of ;epublic &ct ;.&. 4o. 1((, as amended. &ccording to the petitioner, its complaint specifically alleged that it is not doing business in the !hilippines and is suing under the said ;epulbic &ct1 that 8ection $1+& thereof provides that Nthe country of which the said corporation or juristic person is a citi6en, or in which it is domiciled, by treaty, convention or law, grants a similar privilege to corporate or juristic persons of the !hilippinesN but does not mandatorily re.uire that such reciprocity between the Aederal ;epublic of Kermany and the !hilippines be pleaded1 that such reciprocity arrangement is embodied in and supplied by the nion "onvention for the !rotection of 3ndustrial !roperty !aris "onvention) to which both the !hilippines and Aederal ;epublic of Kermany are signatories and that since the !aris P"onvention is a treaty which, pursuant to our "onstitution, forms part of the law of the land, our courts are bound to take judicial notice of such treaty, and, conse.uently, this fact need not be averred in the complaint. Ee agree. 3n the leading case of @a "hemise @acoste, 8.& .v. Aernande6, %1$= 8";& *'*), we ruled5 ?ut even assuming the truth of the private respondents allegation that the petitioner failed to allege material facto in its petition relative to capacity to sue, the petitioner may still maintain the present suit against respondent ,ernandes. &s early as 1=$', this "ourt was, and it still is, of the view that ! %ore#>$ cor or!"#o$ $o" &o#$> 971#$e11 #$ ":e P:#0# #$e1 $ee&1 $o 0#ce$1e "o 17e 9e%ore P:#0# #$e co7r"1 %or #$%r#$>e8e$" o% "r!&e8!r3 !$& 7$%!#r co8 e"#"#o$ . Thus, in Eestern E.uipment and 8upply "o. v. ;eyes %D1 !hil. 11 D), this "ourt held that a foreign corporation which has never done any business in the !hilippines and which is unlicensed and unregistered to do business here, but is widely and favorably known in the !hilippines through the use therein of its products bearing its corporate and tradename, has a legal right to maintain an action in the !hilippines to restrain the residents and inhabitants thereof from organi6ing a corporation therein bearing the same name as the foreign corporation, when it appears that they have personal knowledge of the existence of such a foreign corporation, and it is apparent that the purpose of the proposed domestic corporation is to deal and trade in the same goods as those of the foreign corporation. Tuoting the !aris "onvention and the case of Qanity Aair >ills, 3nc. v. T. Eaton, "o. %$*7 A. $d (**), this "ourt further said5 ?y the same token, the petitioner should be given the same treatment in the !hilippines as we make available to our own citi6ens. Ee are obligated to assure to nationals of Pcountries of the nionP an effective protection against unfair competition in the same way
that they are obligated to similarly protect Ailipino citi6ens and firms. 3n the case of of "erverse ;ubber "orporation Q. niversal ;ubber !roducts, 3nc. %1'7 8";& 1(D), we likewise re+ aafirmed our adherence to the !aris "onvention5 The ruling in the aforecited case is in consonance with the "onvention of "onverse ;ubber "orporation v. niversal ;ubber !roducts, 3nc. %3 7' 8";& 1(D), we likewise re+affirmed our adherence to the !aris "onvention5 the nion of !aris for the !rotection of 3ndustrial !roperty to which the !hilippines became a party on 8eptember $', 1=(D. &rticle C thereof provides that Pa trade name 9corporation name: shall be protected in all the countries of the nion without the obligation of filing or registration, whether or not it forms part of the trademark.P The mandate of the aforementioned "onvention finds implementation in 8ection *' of ;& 4o. 1((, otherwise known as the trademark @aw5
;ights of Aoreign ;egistrants. Y !ersons who are nationals of, domiciled in, or have a bona fide or effective business or commercial establishment in any foreign country, which is a party to an international convention or treaty relating to marks or tradenames on the represssion of unfair competition to which the !hilippines may be party, shall be entitled to the benefits and subject to the provisions of this &ct ...
Tradenames of persons described in the first paragraph of this section shall be protected without the obligation of filing or registration whether or not they form part of marks. Ee, therefore, hold that the petitioner had the legal capacity to file the action below.
SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING BUSINESS UNDER ITS O*N NA-E
LA CHE-ISE LACOSTE+ S. A.+ petitioner, vs. HON. OSCAR C. FERNANDEZ+ Pre1#&#$> J7&>e o% Br!$c: ,LI,+ Re>#o$!0 Tr#!0 Co7r"+ N!"#o$!0 C! #"!0 J7&#c#!0 Re>#o$+ -!$#0! !$& GOBINDRA- HE-ANDAS+ respondents. %K.;. 4o. @+(*'=(+='1 >ay $, 1=C7) GOBINDRA- HE-ANDAS SUJANANI+ petitioner, vs. HON. ROBERTO V. ONGPIN+ #$ :#1 c! !c#"< !1 -#$#1"er o% Tr!&e !$& I$&71"r<+ !$& HON. CESAR SAN DIEGO+ #$ :#1 c! !c#"< !1 D#rec"or o% P!"e$"1+ respondents %K.;. 4o. @+(D(D= >ay $l, 1=C7) FACTS: !etitioner, a corporation organi6ed and existing under the laws of Arance and not doing business in the !hilippines, filed with the 4?3 a letter+complaint alleging therein the acts of unfair competition being committed by respondent ,emandas and re.uesting their assistance in his apprehension and prosecution, after ,ermandas ac.uired a patent for the use of G",E>38E @&"/8TE I -EQ3"EH.
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4?3 filed with the respondent court for two search warrant which was issued and for which a motion to .uash was filed by ,ermandas alleging that his trademark is different from that of petitioner, which was granted by respondent court. ISSUE: E/4 petitioner, having a representative, is doing business in the !hilippinesF HELD: 4o. ;espondent states that not only is the petitioner not doing business in the !hilippines but it also is not licensed to do business in the !hilippines. ,e also cites the case of @eviton 3ndustries v. 8alvador %117 8";& 7$<) to support his contention The @eviton case, however, involved a complaint for unfair competition under 8ection $1+& of ;epublic &ct 4o. 1(( which provides5 8ec. $1 Y &. &ny foreign corporation or juristic person to which a mark or tradename has been registered or assigned under this &ct may bring an action hereunder for infringement, for unfair competition, or false designation of origin and false description, whether or not it has been licensed to do business in the !hilippines under &ct numbered Aourteen ,undred and Aifty+4ine, as amended, otherwise known as the "orporation @aw, at the time it brings the complaint1 !rovided, That the country of which the said foreign corporation or juristic person is a citi6en, or in which it is domiciled, by treaty, convention or law, grants a similar privilege to corporate or juristic persons of the !hilippines. Ee held that it was not enough for @eviton, a foreign corporation organi6ed and existing under the laws of the 8tate of 4ew Lork, nited 8tates of &merica, to merely allege that it is a foreign corporation. 3t averred in !aragraph $ of its complaint that its action was being filed under the provisions of 8ection $1+& of ;epublic &ct 4o. 1((, as amended. "ompliance with the re.uirements imposed by the above+cited provision was necessary because 8ection $1+& of ;epublic &ct 4o. 1(( having explicitly laid down certain conditions in a specific proviso, the same must be expressly averred before a successful prosecution may ensue. 3t is therefore, necessary for the foreign corporation to comply with these re.uirements or aver why it should be exempted from them, if such was the case. The foreign corporation may have the right to sue before !hilippine courts, but our rules on pleadings re.uire that the .ualifying circumstances necessary for the assertion of such right should first be affirmatively pleaded. 3n contradistinction, ":e re1e$" c!1e #$;o0;e1 ! co8 0!#$" %or ;#o0!"#o$ o% Ar"#c0e 1DM o% ":e Re;#1e& Pe$!0 Co&e. The @eviton case is not applicable. &sserting a distinctly different position from the @eviton argument, ,emandas argued in his brief that the petitioner was doing business in the !hilippines but was not licensed to do so. To support this argument, he states that the applicable ruling is the case of >entholatum "o., 3nc. v. >angaliman5 %'$ !hil. D$7) where >entholatum "o. 3nc., a foreign corporation and !hilippine+&merican -rug "o., the formerPs exclusive distributing agent in the !hilippines filed a complaint for infringement of trademark and unfair competition against the >angalimans. The argument has no merit. The >entholatum case is distinct from and inapplicable to the case at bar. !hilippine
&merican -rug "o., 3nc., was admittedly selling products of its principal >entholatum "o., 3nc., in the latterPs name or for the latterPs account. Thus, this "ourt held that Nwhatever transactions the !hilippine+&merican -rug "o., 3nc. had executed in view of the law, the >entholatum "o., 3nc., did it itself. &nd, the >entholatum "o., 3nc., being a foreign doing business in the !hilippines without the license re.uired by 8ection (C of the "orporation @aw, it may not prosecute this action for violation of trademark and unfair competition.N 3n the present case, however, the petitioner is a foreign corporation not doing business in the !hilippines. The marketing of its products in the !hilippines is done through an exclusive distributor, ;ustan "ommercial "orporation. The latter is an independent entity which buys and then markets not only products of the petitioner but also many other products bearing e.ually well+known and established trademarks and tradenames. 3n other words, ;ustan is not a mere agent or conduit of the petitioner. The rules and regulations promulgated by the ?oard of 3nvestments pursuant to its rule+making power under !residential -ecree 4o. 1'C=, otherwise known as the /mnibus 3nvestment "ode, support a finding that the petitioner is $o" &o#$> 971#$e11 #$ ":e P:#0# #$e1. ;ule 3, 8ec. 1 %g) of said rules and regulations defines Ndoing businessN as oneN which includes, inter alia5 %1) ... A %ore#>$ %#r8 5:#c: &oe1 971#$e11 ":ro7>: 8#&&0e8e$ !c"#$> o$ ":e#r o5$ $!8e1, such as indentors, commercial brokers or commission merchants, 1:!00 $o" 9e &ee8e& &o#$> 971#$e11 #$ ":e P:#0# #$e1. ?ut such indentors, commercial brokers or commission merchants shall be the ones deemed to be doing business in the !hilippines. %$) A o#$"#$> ! re re1e$"!"#;e or &#1"r#97"or 5:o #1 &o8#c#0e& #$ ":e P:#0# #$e1+ 7$0e11 1!#& re re1e$"!"#;e or &#1"r#97"or :!1 !$ #$&e e$&e$" 1"!"71, i.e., it transacts business in its name and for its account, and not in the name or for the account of a principal. Thus, where a foreign firm is represented by a person or local company which does not act in its name but in the name of the foreign firm the latter is doing business in the !hilippines. xxx xxx xxx &pplying the above provisions to the facts of this case, 5e %#$& !$& co$c07&e ":!" ":e e"#"#o$er #1 $o" &o#$> 971#$e11 #$ ":e P:#0# #$e1. ;ustan is actually a middleman acting and transacting business in its own name and or its own account and not in the name or for the account of the petitioner. ISSUE2: E/4 the criminal case can be maintained even if the foreign corporation is doing business without a licenseF HELD: Les. ?ut even assuming the truth of the private respondentPs allegation that the petitioner failed to allege material facts in its petition relative to capacity to sue, the petitioner may still maintain the present suit against respondent ,emandas. A1 e!r0< !1 1M2C+ ":#1 Co7r" 5!1+ !$& #" 1"#00 #1+ o% ":e ;#e5 ":!" ! %ore#>$ cor or!"#o$ $o" &o#$> 971#$e11 #$ ":e P:#0# #$e1 $ee&1 $o 0#ce$1e "o 17e 9e%ore P:#0# #$e co7r"1 %or #$%r#$>e8e$" o% "r!&e8!r3 !$& 7$%!#r co8 e"#"#o$.
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/ur recogni6ing the capacity of the petitioner to sue is not by any means novel or precedent setting. /ur jurisprudence is replete with cases illustrating instances when foreign corporations not doing business in the !hilippines may nonetheless sue in our courts. 3n East ?oard 4avigation @td, v. Lsmael and "o., 3nc. %1<$ !hil. 1), we recogni6ed a right of foreign corporation to sue on isolated transactions. 3n Keneral Karments "orp. v. -irector of !atents %71 8";& D<), we sustained the right of !uritan 8portswear "orp., a foreign corporation not licensed to do and not doing business in the !hilippines, to file a petition for cancellation of a trademark before the !atent /ffice. >ore important is the nature of the case which led to this petition. Ehat preceded this petition for certiorari was a letter complaint filed before the 4?3 charging ,emandas with a criminal offense, i.e., violation of &rticle 1C= of the ;evised !enal "ode. 3f prosecution follows after the completion of the preliminary investigation being conducted by the 8pecial !rosecutor ":e #$%or8!"#o$ 1:!00 9e #$ ":e $!8e o% ":e Peo 0e o% ":e P:#0# #$e1 !$& $o 0o$>er ":e e"#"#o$er 5:#c: #1 o$0< !$ !>>r#e;e& !r"< 1#$ce ! cr#8#$!0 o%%e$1e #1 e11e$"#!00< !$ !c" !>!#$1" ":e S"!"e . 3t is the latter which is principally the injured party although there is a private right violated. Pe"#"#o$erI1 c! !c#"< "o 17e 5o70& 9eco8e+ ":ere%ore+ o% $o" 87c: 1#>$#%#c!$ce #$ ":e 8!#$ c!1e. Ee cannot snow a possible violator of our criminal statutes to escape prosecution upon a far+ fetched contention that the aggrieved party or victim of a crime has no standing to sue. ISSUE/: E/4 petitioner has a right to maintain a suit for infringement of trademarksF HELD: Les. Ee are moreover recogni6ing our duties and the rights of foreign states under the !aris "onvention for the !rotection of 3ndustrial !roperty to which the !hilippines and Arance are parties. Ee are simply interpreting and enforcing a solemn international commitment of the !hilippines embodied in a multilateral treaty to which we are a party and which we entered into because it is in our national interest to do so. The !aris "onvention provides in part that5 &;T3"@E $ %$) 4ationals of each of the countries of the nion shall as regards the protection of industrial property, enjoy in all the other countries of the nion the advantages that their respective laws now grant, or may hereafter grant, to nationals, without prejudice to the rights specially provided by the present "onvention. "onse.uently, they shall have the same protection as the latter, and the same legal remedy against any infringement of their rights, provided they observe the conditions and formalities imposed upon nationals. xxx xxx xxx &;T3"@E ( %1) The countries of the nion undertake, either administratively if their legislation so permits, or at the re.uest of an interested party, to refuse or to cancel the registration and to prohibit the use of a trademark which
constitutes a reproduction, imitation or translation, liable to create confusion, of a mark considered by the competent authority of the country of registration or use to be well+known in that country as being already the mark of a person entitled to the benefits of the present "onvention and used for 3dentical or similar goods. These provisions shall also apply when the essential part of the mark constitutes a reproduction of any such well+known mark or an imitation liable to create confusion therewith. xxx xxx xxx &;T3"@E C & trade name shall be protected in all the countries of the nion without the obligation of filing or registration, whether or not it forms part of a trademark. xxx xxx xxx &;T3"@E 1<bis %1) The countries of the nion are bound to assure to persons entitled to the benefits of the nion effective protection against unfair competition A "re!"< or co$;e$"#o$ #1 $o" ! 8ere 8or!0 o90#>!"#o$ "o 9e e$%orce& or $o" !" ":e 5:#81 o% !$ #$c789e$" :e!& o% ! -#$#1"r<. I" cre!"e1 ! 0e>!00< 9#$&#$> o90#>!"#o$ o$ ":e !r"#e1 %o7$&e& o$ ":e >e$er!00< !cce "e& r#$c# 0e o% #$"er$!"#o$!0 0!5 o% !c"! 17$" 1er;!$&! 5:#c: :!1 9ee$ !&o "e& !1 !r" o% ":e 0!5 o% o7r 0!$&. 'Co$1"#"7"#o$+ Ar". II+ Sec. /(. Ee have carefully gone over the records of all the cases filed in this "ourt and find more than enough evidence to sustain a finding that the petitioner is the owner of the trademarks N@&"/8TEN, N",E>38E @&"/8TEN, the crocodile or alligator device, and the composite mark of @&"/8TE and the representation of the crocodile or alligator. &ny pretensions of the private respondent that he is the owner are absolutely without basis. &ny further ventilation of the issue of ownership before the !atent /ffice will be a superfluity and a dilatory tactic. The records show that the goodwill and reputation of the petitionerPs products bearing the trademark @&"/8TE date back even before 1=(7 when @&"/8TE clothing apparels were first marketed in the !hilippines. To allow ,emandas to continue using the trademark @acoste for the simple reason that he was the first registrant in the 8upplemental ;egister of a trademark used in international commerce and not belonging to him is to render nugatory the very essence of the law on trademarks and tradenames. E,E;EA/;E, the petition in K.;. 4/8. (*'='+=' is hereby K;&4TE-. The order dated &pril $$, 1=C* of the respondent regional trial court is ;EQE;8E- and 8ET &83-E.
F.
CAPACIT) TO SUE
GENERAL RULE: & corporation#s capacity to sue must be affirmatively pleaded in order that it may proceed and effectively institute a case in !hilippine courts. Thus, in the case for instance of a complaint for unfair labor competition under 8ec. $1+& of ;& 4o. 1((, it was held that it is necessary for the foreign corporation to comply with the provision thereof or aver why it should be exempted from them, if such be the case. The foreign corporation
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may have the right to sue before our courts but our rules on pleadings re.uire that the .ualifying circumstances necessary for the assertion of such right should first be affirmatively pleaded %@eviton 3ndustries vs 8alvador).
E,CEPTIONS: EFFECT OF NON=PLEADING: 3f the dismissal of the case is based on the failure of the foreign corporation to aver its capacity to sue, would not, however, bar the institution of the same action, dismissal should not be allowed, especially so if it would be an idle, circuitous ceremony considering the absence of any meritorious substantial defense of the defendant. Technical rules should not be accorded undue importance to frustrate and defeat a plainly valid claim %/lympia ?usiness >achines vs. E. ;a6on, 3nc.) CO-PLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION IS -EREL) DEFENDING ITSELF: averment of capacity to sue is not likewise necessary as laid down in the case of "hemise @acoste vs. Aernande6, or when the foreign corporation is not suing or maintaining a suit but is merely defending itself from one filed against it %Times, 3nc. vs. ;eyes).
ATLANTIC -UTUAL INSURANCE CO-PAN) !$& CONTINENTAL INSURANCE CO-PAN)+ plaintiffs and appellants, vs. CEBU STEVEDORING CO.+ INC.+ defendant and appellee %K.;. 4o. @+1C=(11 &ugust *1, 1=(() FACTS: !laintiff+appellants, organi6ed and existing under the laws of the 8, sued herein defendant+appellee, as subrogee to the shipper and consignee, alleging that the latter undertook to carry a shipment of copra for delivery to !IK "ompany at "ebu "ity but upon discharge, a portion of the copra was found damaged. -efendant moved to dismiss on the ground that the complaints on the ground of failure to allege compliance with 8ec. (= of the "orporation @aw which was granted after failure of the plaintiff to comply with the amendment of the complaint. ISSUE: E/4 plaintiff+appellants have the right to sue as to the defects n the pleadings and proceduresF HELD: 4o. 3t should be noted that insofar as the allegations in the complaint have a bearing on appellantsP capacity to sue, all that is averred is that they are both foreign corporations existing under the laws of the nited 8tates. This averment conjures two alternative possibilities5 either they are engaged in business in the !hilippines or they are not so engaged. 3f the first, they must have been duly licensed in order to maintain this suit1 if the second, if the transaction sued upon is singular and isolated, no such license is re.uired. 3n either case, the .ualifying circumstance is an essential part of the element of plaintiffsP capacity to sue and must be affirmatively pleaded. To be sure, under the ;ules of "ourt %8ection 11, ;ule 1D) in force prior to the promulgation of the ;evised ;ules on Banuary 1, 1=(7, it was not necessary to aver the capacity of a party to sue except to the extent re.uired to show
jurisdiction of the court. 3n our opinion, however, such rule does not apply in all situations and under all circumstances. The theory behind a similar rule in the nited 8tates is Nthat capacity ... of a party for purpose of suit is not in dispute in the great bulk of cases , and that pleading and proof can be simplified by a rule that an averment of such matter is not necessary, except to show jurisdiction.N1 ?ut where as in the present case, the law denies to a foreign corporation the right to maintain suit unless it has previously complied with a certain re.uirement, then such compliance, or the fact that the suing corporation is exempt therefrom, becomes a necessary averment in the complaint. These are matters peculiarly within the knowledge of appellants alone, and it would be unfair to impose upon appellee the burden of asserting and proving the contrary. 3t is enough that foreign corporations are allowed by law to seek redress in our courts under certain conditions5 the interpretation of the law should not go so far as to include, in effect, an inference that those conditions have been met from the mere fact that the party suing is a foreign corporation. 3t was indeed in the light of these and other consideration that this "ourt has seen fit to amend the former rule by re.uiring in the ;evised ;ules %8ection 7, ;ule C) that Nfacts showing the capacity of a party to sue or be sued or the authority of a party to sue or be sued in a representative capacity or the legal existence of an organi6ed association of persons that is made a party, must be averred.N The orders appealed from are affirmed, with costs against plaintiffs+appellants OL)-PIA BUSINESS -ACHINES CO. 'PHIL.( INC. !$& CALIFORNIA INSURANCE CO.+ LTD.+ petitioners, vs. E. RAZON+ INC.+ TO)O LINE+ LTD.+ !$& SEA BRIDGE CONTAINER SHIPPING LINES+ INC., respondents. %K.;. 4o. 'D(*11 /ctober $C, 1=C') FACTS: /lympia /ffice >achines, @td., a foreign corporation with offices at ,ongkong, shipped *<< portable typewriters to its sister company in >anila, /lympia ?usiness >achines "ompany %!hil.), 3nc., such shipment insured with "alifornia 3nsurance "o., @td. another foreign corporation. The typewriters were discharged at 4orth ,arbor, >anila into the custody of the carrier#s agent which in turn turned it over to E. ;a6on, 3nc. Ehile in the latter#s possession, part of the shipment was stolen. "alifornia 3nsurance was subrogated to the claim for loss after paying /lympia %!hil). ?oth /lympia %!hil.) and "alifornia thereafter brought a suit against E. ;a6on, 3nc., the carrier and the container company, which had earlier refused to make good the loss of the goods. Aor E.;a6on#s failure to appear at the pre+trial and after ex+ parte reception of evidence, the trial court decided for "alifornia. /n ;a6on#s motion, the order was set aside and ;a6on amended his answer that "alifornia is a foreign corporation doing business in the !hilippines without a license to do so and that it cannot maintain suit in this jurisdiction. ?ut once again, ;a6on failed to appear at the pre+trial, as a result, the trial court revived the decision.
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/n appeal, the 3&" reversed the decision holding, among others, that "alifornia failed to allege in the complaint its capacity to sue. ISSUE: E/4 the failure of "alifornia to aver its capacity to sue is fatalF HELD: The slightest reflection will however immediately make Y Tear that between the factual settings of the &tlantic >utual case and the case at bar, there are distinctions of no little significance. 3n the former, &tlantic >utual 3nsurance "o. and "ontinental 3nsurance "o., two %$) &merican firms, brought suit as subrogees of the shipper andMor consignee of the goods ensured without joining the latter. 3n the case at hand, ":e !c"#o$ 5!1 #$1"#"7"e& 9< 9o": ":e 179ro>ee+ C!0#%or$#! I$17r!$ce Co.+ L"&.+ !$& ":e 179ro>or+ ! &o8e1"#c cor or!"#o$+ O0<8 #! 'P:#0# #$e1( !9o7" 5:o1e c! !c#"< "o 17e $o &#1 7"e e4#1"1. I$ A"0!$"#c -7"7!0+ ":e 0!#$"#%%1I 0!c3 o% c! !c#"< "o 17e 5!1 r!#1e& 9< ":e &e%e$&!$" !" ":e e!r0#e1" o or"7$#"<+ ":ro7>: ! 8o"#o$ "o &#18#11 %#0e& 5#":#$ ":e re>0e8e$"!r< er#o& "o !$15er #$ !ccor&!$ce 5#": R70e 1B o% ":e R70e1 o% Co7r". I$ ":e c!1e !" 9!r+ ":e &e%e$&!$" 5!1 "5#ce &ec0!re& #$ &e%!70"+ !$& ":e &e%e$1e o% 0!c3 o% c! !c#"< "o 17e+ 5!1 $o" r!#1e& 7$"#0 !%"er I":e %#r1" &ec0!r!"#o$ o% &e%!70" :!& 9ee$ 0#%"e& . >oreover, there 3s a pronouncement by the "ourt of &ppeals in the instant case, that the defendant had no meritorious defenses save that of lack of capacity to sue on the part of the plaintiff. These circumstances proscribe the application to the controversy at bar of the doctrine in &tlantic >utual. T:e &e%e$&!$"I1 co$&7c" #$ ":#1 c!1e 1"ro$>0< #$&#c!"e1 ":e !91e$ce o% !$< ;!0#& &e%e$1e o$ #"1 !r" !>!#$1" ":e 0!#$"#%%1I c0!#815 the defendant failed to appear for pre+trial despite notice, not once, but twice and was in conse.uence twice declared in default. The lack of any meritorious defense on its part was in fact confirmed by the declaration of the "ourt of &ppeals, which it has not challenged, that three %*) errors attributed by it to the Trial "ourt were Nunmeritorious except the second,N i. e., plaintiffPs lack of capacity to sue. Even assuming incapacity on the part of "alifornia, no such incapacity may be attributed to its co+plaintiff, /lympia ?usiness >achines "o. %!hil.), 3nc. &nd if strictly necessary, the latter could .uite easily execute a cancellation of the deed of subrogation or of re+assignment of the right of action from "alifornia back to /lympia. >oreover, the dismissal of the case at this stage, would not bar the institution by "alifornia of the same action, this time alleging in its complaint that it was suing on a single, isolated transaction. ?ut this would be an 3dle, circuitous ceremony in the light of the unchallenged declaration by the "ourt of &ppeals of the absence of any meritorious substantial defense on the part of defendant ;a6on. This would be to accord undue importance and significance to technical rules, to allow an inflexible, unreasoning adherence to such technical rules to frustrate and defeat a plainly valid claim. E,E;EA/;E, the judgment of the 3ntermediate &ppellate "ourt subject of the appeal is reverse and that of the Trial "ourt, dated Aebruary 1, 1=C< reinstated and affirmed, with costs against the respondents. TI-E+ INC.+ petitioner,
vs. HON. ANDRES RE)ES+ !1 J7&>e o% ":e Co7r" o% F#r1" I$1"!$ce o% R#K!0+ ELISEO S. ZARI+ !1 De 7"< C0er3 o% Co7r"+ Br!$c: VI+ Co7r" o% F#r1" I$1"!$ce o% R#K!0+ ANTONIO J. VILLEGAS !$& JUAN PONCE ENRILE+ respondents. %K.;. 4o. @+$CCC$1 >ay *1, 1='1) FACTS: ,erein respondents &ntonio Qillegas and Buan !once Enrile sought to recover from herein petitioner damages upon an alleged libel arising from a publication of Time %&sia Edition) maga6ine, in its issue entitled G"orruption in &siaH. !etitioner filed a motion to dismiss on lack of jurisdiction and improper venue which was deferred until after the trial of the case. ISSUE: E/4 the petition for certiorari and prohibition will prosperF HELD: The dismissal of the present petition is asked on the ground that the petitioner foreign corporation failed to allege its capacity to sue in the courts of the !hilippines. ;espondents rely on section (= of the "orporation law, which provides5 8E". (=. 4o foreign corporation or corporations formed, organi6ed, or existing under any laws other than those of the !hilippines shall be permitted to ... maintain by itself or assignee any suit for the recovery of any debt, claim, or demand whatever, unless it shall have the license prescribed in the section immediately preceding. ...N ...1 They also invoke the ruling in >arshall+Eells "o. vs. Elser I "o., 3nc. C that no foreign corporation may be permitted to maintain any suit in the local courts unless it shall have the license re.uired by the law, and the ruling in &tlantic >utual 3ns. "o., 3nc. vs. "ebu 8tevedoring "o., 3nc . D that Nwhere ... the law denies to a foreign corporation the right to maintain suit unless it has previously complied with a certain re.uirement, then such compliance or the fact that the suing corporation is exempt therefrom, becomes a necessary averment in the complaint.N *e %!#0 "o 1ee :o5 ":e1e &oc"r#$e1 c!$ 9e ! ro o1 #$ ":e c!1e !" 9!r+ 1#$ce ":e e"#"#o$er #1 $o" G8!#$"!#$#$> !$< 17#"G 97" #1 8ere0< &e%e$&#$> o$e !>!#$1" #"1e0%H #" &#& $o" %#0e !$< co8 0!#$" 97" o$0< ! coro00!r< &e%e$1#;e e"#"#o$ "o ro:#9#" ":e 0o5er co7r" %ro8 %7r":er rocee&#$> 5#": ! 17#" ":!" #" :!& $o ?7r#1&#c"#o$ "o e$"er"!#$. !etitionerPs failure to aver its legal capacity to institute the present petition is not fatal, for ... & foreign corporation may, by writ of prohibition, seek relief against the wrongful assumption of jurisdiction. &nd ! %ore#>$ cor or!"#o$ 1ee3#$> ! 5r#" o% ro:#9#"#o$ !>!#$1" %7r":er 8!#$"e$!$ce o% ! 17#"+ o$ ":e >ro7$& o% 5!$" o% ?7r#1&#c"#o$ #$ 5:#c: ?7r#1&#c"#o$ #1 $o" 9o7$& 9< ":e r70#$> o% ":e co7r" #$ 5:#c: ":e 17#" 5!1 9ro7>:" , on a motion to .uash service of summons, that it has jurisdiction. E,E;EA/;E, the writs applied for are granted5 the respondent "ourt of Airst 3nstance of ;i6al is declared without jurisdiction to take cogni6ance of its "ivil "ase 4o.
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1<7<*1 and its orders issued in connection therewith are hereby annulled and set aside,. ;espondent court is further commanded to desist from further proceedings in "ivil case 4o. 1<7<* aforesaid. "osts against private respondents, &ntonio B. Qillegas and Buan !once Enrile.
G.
%a) That the stockholder of a corporation in 4ew Lork has the right to inspect its books and records if it can be shown that he seeks information for an honest purpose %17 ". B., CD*), or to protect his interest as stockholder. %3n re 8teinway, 1D= 4. L., $D<1 D* 4. E., 11<*1 7D @. ;. &., 7(1 9aff. *1 &pp. -iv., '<1 D$ 4. L. 8., *7*:).
%b) That said right to examine and inspect the books of the corporation must be exercised in good faith, for a Sec. 12M. L!5 ! 0#c!90e. + &ny foreign corporation lawfully doing specific and honest purpose, and not to gratify curiosity, business in the !hilippines shall be bound by all laws, rules and or for speculative or vexatious purposes. %17 ". B., CD7, regulations applicable to domestic corporations of the same class, CDD.) except such only as provide for the creation, formation, organi6ation or dissolution of corporations or those which fix the relations, The appellant has made no effort to prove or even allege that liabilities, responsibilities, or duties of stockholders, members, or the information he desired to obtain through the examination and inspection of defendantPs books was officers of corporations to each other or to the corporation. necessary to protect his interests as stockholder of the corporation, or that it was for a specific and honest purpose, and not to gratify curiosity, nor for speculative or vexatious purposes. -. E. GRE)+ plaintiff+appellant, vs. INSULAR LU-BER CO-PAN)+ defendant+appelle %K.;. 4o. @+7D1771 &pril *, 1=*=) 3n view of the foregoing, we affirm the judgment of the lower court, with costs against the appellant.
LA*S GOVERNING FOREIGN CORPORATIONS
FACTS: ,erein defendant+appellee 3nsular @umber "ompany is a corporation existing and organi6ed under the laws of the 8tate of 4ew Lork licensed to engage business in the !hilippines. The plaintiff+appellant Krey, holder of D' shares %which is less than *J of the outstanding capital stock of defendant corporation), was denied access to the books and records of the company because, as alleged, the laws of 4ew Lork provide that only a stockholder who own at least *J of the outstanding capital stock of a corporation may make a written re.uest to the treasurer or other fiscal officer for a statement of its affairs1 that plaintiff neither has the *J re.uirement nor made the written re.uest. !laintiff raises the "orporation @aw which does not provide such re.uirements and gives any stockholder the right to examine the books of the corporation. 8uch law, being the law upon which the defendant corporation was issued a license to do business in the !hilippines. ISSUE: E/4 appellant, as a stockholder, is entitled to inspect and examine the books and records of transactions of appelleeF HELD: nder ection '' 8tock "orporation @aw of 4ew Lork. nder this law, plaintiff has the right to be furnished by the treasurer or other fiscal officer of the corporation with statement of its affairs embracing a particular account of all its assets and liabilities. 3n the third place, inasmuch as plaintiff, either at the hearing or in his motion for new trial, did not ask to have the stipulation of facts altered or changed, he cannot now, for the first time on appeal, raise the .uestion that aside from the right conferred upon him by section '' of the 8tock "orporation @aw of 4ew Lork, he also entitled under the common law to examine and inspect the books and records of the defendant corporation. 3n the fourth place, neither can this right under the common law be granted the defendant in the present case, since the same can only be granted at the discretion of the court, under certain conditions, to wit5
H.
A-END-ENTS INCORPROATION
TO
THE
ARTICLES
OF
Sec. 1/N. A8e$&8e$"1 "o !r"#c0e1 o% #$cor or!"#o$ or 9<= 0!51 o% %ore#>$ cor or!"#o$1. + Ehenever the articles of incorporation or by+laws of a foreign corporation authori6ed to transact business in the !hilippines are amended, such foreign corporation shall, within sixty %(<) days after the amendment becomes effective, file with the 8ecurities and Exchange "ommission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by+laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authori6ed official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authori6ed to transact business in the !hilippines.
I.
A-END-ENT OF LICENSE
Sec. 1/1. A8e$&e& 0#ce$1e. + & foreign corporation authori6ed to transact business in the !hilippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the !hilippines other or additional purposes, by submitting an application therefor to the 8ecurities and Exchange "ommission, favorably endorsed by the appropriate government agency in the proper cases.
J.
-ERGERJCONSOLIDATION
Sec. 1/2. -er>er or co$1o0#&!"#o$ #$;o0;#$> ! %ore#>$ cor or!"#o$ 0#ce$1e& #$ ":e P:#0# #$e1. + /ne or more foreign corporations authori6ed to transact business in the !hilippines may
1=(
merge or consolidate with any domestic corporation or corporations (. Aailure to pay any and all taxes, imposts, assessments or if such is permitted under !hilippine laws and by the law of penalties, its if any, lawfully due to the !hilippine Kovernment or any incorporation5 !rovided, That the re.uirements on mergerof or its agencies or political subdivisions1 consolidation as provided in this "ode are followed. Ehenever a foreign corporation authori6ed to transact business in '.its Transacting business in the !hilippines outside of the purpose or the !hilippines shall be a party to a merger or consolidation in purposes for which such corporation is authori6ed under its license1 home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty %(<) days after such merger or consolidation becomes effective, file with the 8ecurities and Exchange "ommission, and in proper cases with the C. or Transacting business in the !hilippines as agent of or acting for appropriate government agency, a copy of the articles of merger and consolidation duly authenticated by the proper official or officials of in behalf of any foreign corporation or entity not duly licensed do business in the !hilippines1 or the country or state under the laws of which mergerto or consolidation was effected5 !rovided, however, That if the absorbed corporation is the foreign corporation doing business in the !hilippines, the latter shall at the same time file a petition for =. &ny other ground as would render it unfit to transact business in withdrawal of it license in accordance with this Title. the !hilippines.
K.
Sec. 1/A. I117!$ce o% cer"#%#c!"e o% re;oc!"#o$. + pon the revocation of any such license to transact business in the Sec. 1/@. Re;oc!"#o$ o% 0#ce$1e. + Eithout prejudice to other !hilippines, the 8ecurities and Exchange "ommission shall issue a grounds provided by special laws, the license of a foreign corresponding certificate of revocation, furnishing a copy thereof to corporation to transact business in the !hilippines may be revoked or suspended by the 8ecurities and Exchange "ommission upon the anyappropriate government agency in the proper cases. of the following grounds5 The 8ecurities and Exchange "ommission shall also mail to the corporation at its registered office in the !hilippines a notice of such 1. Aailure to file its annual report or pay any fees as re.uired by this revocation accompanied by a copy of the certificate of revocation. "ode1
REVOCATION OF LICENSE
L. *ITHDRA*AL OF FOREIGN CORPORATIONS $. Aailure to appoint and maintain a resident agent in the !hilippines as re.uired by this Title1 Sec. 1/B. *#":&r!5!0 o% %ore#>$ cor or!"#o$1. + 8ubject to existing laws and regulations, a foreign corporation licensed to transact business in the !hilippines may be allowed to withdraw from the !hilippines by filing a petition for withdrawal of license. 4o *. Aailure, after change of its resident agent or of his address, to certificate of withdrawal shall be issued by the 8ecurities and submit to the 8ecurities and Exchange "ommission a statement of Exchange "ommission unless all the following re.uirements are such change as re.uired by this Title1 met1
7. Aailure to submit to the 8ecurities and Exchange "ommission an 1. &ll claims which have accrued in the !hilippines have been paid, authenticated copy of any amendment to its articles of compromised or settled1 incorporation or by+laws or of any articles of merger or consolidation within the time prescribed by this Title1 $. &ll taxes, imposts, assessments, and penalties, if any, lawfully due to the !hilippine Kovernment or any of its agencies or political D. & misrepresentation of any material matter in any application, subdivisions have been paid1 and report, affidavit or other document submitted by such corporation pursuant to this Title1
1='
*. The petition for withdrawal of license has been published once economies a of scale, the geographic location, the extent of Ailipino week for three %*) consecutive weeks in a newspaper of general ownership, the labor intensity of the activity, the export potential, circulation in the !hilippines. as well as other factors which are germane to the reali6ation and promotion of business and industry. CHAPTER 1M: -ISCELLANEOUS PROVISIONS 'TITLE ,VI( Sec. 1@1. A$$7!0 re or" or cor or!"#o$1. + Every corporation, Sec. 1/C. O7"1"!$&#$> c! #"!0 1"oc3 &e%#$e&. + The term domestic or foreign, lawfully doing business in the !hilippines shall Noutstanding capital stockN, as used in this "ode, means the total submit to the 8ecurities and Exchange "ommission an annual shares of stock issued under binding subscription agreements to of its operations, together with a financial statement of its report subscribers or stockholders, whether or not fully or partially paid, assets and liabilities, certified by any independent certified public except treasury shares. accountant in appropriate cases, covering the preceding fiscal year and such other re.uirements as the 8ecurities and Exchange "ommission may re.uire. 8uch report shall be submitted within such Sec. 1/D. De1#>$!"#o$ o% >o;er$#$> 9o!r&1. + The provisions of period as may be prescribed by the 8ecurities and Exchange "ommission. specific provisions of this "ode to the contrary notwithstanding, non+stock or special corporations may, through their articles of incorporation or their by+laws, designate their governing boards by any name other than as board of trustees. Sec. 1@2. Co$%#&e$"#!0 $!"7re o% e4!8#$!"#o$ re170"1. + &ll interrogatories propounded by the 8ecurities and Exchange "ommission and the answers thereto, as well as the results of any made by the "ommission or by any other official Sec. 1/M. I$cor or!"#o$ !$& o":er %ee1. + The 8ecurities examination and authori6ed by law to make an examination of the operations, books Exchange "ommission is hereby authori6ed to collect and receive and records of any corporation, shall be kept strictly confidential, fees as authori6ed by law or by rules and regulations promulgated except insofar as the law may re.uire the same to be made public by the "ommission. or where such interrogatories, answers or results are necessary to be presented as evidence before any court. Sec. 1@N. S"oc3 o5$er1:# #$ cer"!#$ cor or!"#o$1. + !ursuant to the duties specified by &rticle 23Q of the "onstitution, the Sec. 4ational Economic and -evelopment &uthority shall, from time to 1@/. R70e=8!3#$> o5er o% ":e Sec7r#"#e1 !$& E4c:!$>e + The 8ecurities and Exchange "ommission shall time, make a determination of whether the corporate vehicle Co88#11#o$. has have the power and authority to implement the provisions of this been used by any corporation or by business or industry to frustrate "ode, and to promulgate rules and regulations reasonably the provisions thereof or of applicable laws, and shall submit to the necessary to enable it to perform its duties hereunder, particularly ?atasang !ambansa, whenever deemed necessary, a report of its the prevention of fraud and abuses on the part of the controlling findings, including recommendations for their preventionin or stockholders, members, directors, trustees or officers. correction.
Sec. 1@@. V#o0!"#o$1 o% ":e Co&e. + Qiolations of any of the >aximum limits may be set by the ?atasang !ambansa provisions for of this "ode or its amendments not otherwise specifically stockholdings in corporations declared by it to be vested with a penali6ed therein shall be punished by a fine of not less than one public interest pursuant to the provisions of this section, belonging thousand %!1,<<<.<<) pesos but not more than ten thousand to individuals or groups of individuals related to each other by %!1<,<<<.<<) pesos or by imprisonment for not less than thirty %*<) consanguinity or affinity or by close business interests, or whenever days but not more than five %D) years, or both, in the discretion of it is necessary to achieve national objectives, prevent illegal the court. 3f the violation is committed by a corporation, the same monopolies or combinations in restraint or trade, or to implement may, after notice and hearing, be dissolved in appropriate national economic policies declared in laws, rules and regulations proceedings before the 8ecurities and Exchange "ommission5 designed to promote the general welfare and foster economic !rovided, That such dissolution shall not preclude the institution of development. appropriate action against the director, trustee or officer of the corporation responsible for said violation5 !rovided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this "ode. 3n recommending to the ?atasang !ambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the 4ational Economic and -evelopment &uthority shall consider Sec. the 1@A. A8e$&8e$" or re e!0. + 4o right or remedy in favor of type and nature of the industry, the si6e of the enterprise, or the against any corporation, its stockholders, members, directors,
1=C
trustees, or officers, nor any liability incurred by any such Sec. 1@D. A 0#c!9#0#"< "o e4#1"#$> cor or!"#o$1. + &ll corporation, stockholders, members, directors, trustees, or officers, corporations lawfully existing and doing business in the !hilippines shall be removed or impaired either by the subse.uent dissolution on the date of the effectivity of this "ode and heretofore authori6ed, of said corporation or by any subse.uent amendment or repeal licensed of or registered by the 8ecurities and Exchange "ommission, this "ode or of any part thereof. shall be deemed to have been authori6ed, licensed or registered under the provisions of this "ode, subject to the terms and conditions of its license, and shall be governed by the provisions hereof5 !rovided, That if any such corporation is affected by the new Sec. 1@B. Re e!0#$> c0!71e. + Except as expressly provided by re.uirements of this "ode, said corporation shall, unless otherwise this "ode, all laws or parts thereof inconsistent with any provision of herein provided, be given a period of not more than two %$) years this "ode shall be deemed repealed. from the effectivity of this "ode within which to comply with the same. Sec. 1@C. Se !r!9#0#"< o% ro;#1#o$1. + 8hould any provision of this "ode or any part thereof be declared invalid or unconstitutional, Sec. 1@M. E%%ec"#;#"<. + This "ode shall take effect immediately the other provisions, so far as they are separable, shall remain in its approval. upon force.
1==

The Corporation Code of The Philippines (Final)

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THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION KINDS OF BUSINESS ORGANIZATION

,as a personality separate and distinct from the partners

are being evolved.

"reated by operation of law %8ec. $I7, "orp "ode)

GOVERN-ENT PO*ERS CORPORATIONS

CORPORATIONS CREATED B) SPECIAL LA* OR CHARTER

OTHER CLASSES OF CORPORATIONS PUBLIC AND PRIVATE CORPORATIONS

DO-ESTIC AND FOREIGN CORPORATIONS

ECCLESIASTICAL AND LA) CORPORATIONS

PARENT OR HOLDING CO-PANIES SUBSIDIARIES AND AFFILIATES

AGGREGATE AND SOLE CORPORATIONS

CLOSE AND OPEN CORPORATION

the will not the

CONTENTS OF THE ARTICLES OF INCORPORATION

CHAPTER @: FOR-ATION AND ORGANIZATIONS OF CORPORATIONS

PRINCIPAL OFFICE xxx

..................... ....... ..................... .......

............................. ............................. 444

TER- OF E,ISTENCE xxx

organi6ed under this "ode must be residents of the !hilippines.

%K; 4o. @+D$1$=1 &pril $1, 1=C<)

To"!0 ........ ........ ........ ........ ........

nevertheless be entitled to vote on the following matters5

shall be considered to have the right to vote and be voted for.

%other cities), and !$,<<<,<<< %municipalities).

RESTRICTIONS AND PREFERENCES

GROUNDS FOR DISAPPROVAL

CO--ENCE-ENT OF CORPORATE E,ISTENCE

DEFECTIVEL) FOR-ED CORPORATIONS

CORPORATE ENTIT) THEOR)

PIERCING THE VEIL OF CORPORATE FICTION

%7r":er !$& e$& 179;er1#;e o% ":!"

*HEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

*HEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

re.uired by existing laws or the "onstitution.

CHAPTER B: BOARD OF DIRECTORSJTRUSTEES AND OFFICERS

PO*ERS OF THE BOARD

RE-OVAL AND FILLING UP OF VACANCIES

LIBABILIT) OF CORPORATE OFFICERS

THREE=FOLD DUT) OF DIRECTORS

&pparent from 8ec. *1 and *7, the duty of loyalty is

*. To adopt and use a corporate seal1

PO*ER TO ADOPT B)=LA*S

PO*ER TO ISSUE OR SELL STOCKS AND TO AD-IT -E-BERS

PO*ER TO AC2UIRE OR ALIENATE REAL OR PERSONAL PROPERT)

PO*ER TO ADOPT AND USE A CO--ON SEAL

PO*ER TO A-END INCORPORATION

PO*ER TO ENTER CONSOLIDATION

PO*ER TO -AKE REASONABLE DONATIONS

;E&-5 &lhambra "igar and "igarette >anufacturing, 3nc. vs. 8E"

PO*ER TO E,TEND OR SHORTEN CORPORATE

04othing in law prohibits increase of capital stock

PO*ER TO DEN) PRE=E-PTIVE RIGHT

re=e8 "#;e r#>:". + &ll stockholders of a

for the the old strength property

PO*ER TO SELL OR DISPOSE OF ASSETS

PO*ER TO AC2UIRE O*N SHARES

PO*ER TO INVEST FUNDS

/nce purchased, the shares are considered as treasury

PO*ER TO DECLARE DIVIDENDS

RE2UIRE-ENTS OF A CONTRACT: 1. ;esolution of the ?/-1

&pparent from 8ec. 1 and 7, the duty of loyalty is

POER TO ADOPT B)=LAS

POER TO AC2UIRE ON SHARES