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ATENEO DE MANILA LAW SCHOOL

2ND SEMESTER, SY 2014-2015


I. HISTORICAL BACKGROUND
1. Philippine Corporate Law:1 A sort-of Codification of American Corporate Law
When attention was drawn to the fact that there was no entity in Spanish law corresponding to the notion of the American
corporation, the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation in the
Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the Spanish law would be obsolete.
The statute is a sort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933).
a. Sociedades Annimas
A sociedad annima was considered a commercial partnership where upon the execution of the public instrument in which its
articles of agreement appear, and the contribution of funds and personal property, becomes a juridical personan artificial being,
invisible, intangible, and existing only in contemplation of lawwith power to hold, buy, and sell property, and to sue and be sueda
corporationnot a general partnership nor a limited partnership . . . The inscribing of its articles of agreement in the commercial register
was not necessary to make it a juridical person; such inscription only operated to show that it partook of the form of a commercial
corporation. Mead v. McCullough, 21 Phil. 95 (1911).
The sociedades annimas were introduced in Philippine jurisdiction on 01 December 1888 with the extension to Philippine territorial
application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and
centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern
commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The old Corporation Law recognized the difference between sociedades annimas and corporations and the Court will not apply legal
provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).
2. The Corporation Law (Act No. 1459)
The Corporation Law as the first corporate statute became effective on 01 April 1906. It had piece-meal amendments during its 74year history, but became antiquated and un-adapted to the changing times.
3. The Corporation Code (Batas Pambansa Bilang 68)
The current Corporation Code of the Philippines took effect on 01 May 1980, adopting various corporate doctrines enunciated by the
Supreme Court under the old Corporation Law; clarified the obligations of corporate directors and officers; expressed in statutory
language established principles and doctrines; and provided for a chapter on close corporations. 2
4. Proper Treatment of Philippine Corporate Law
Although we have a Corporation Code that provides for statutory principles, since Philippine Corporate Law comes from the U.S.
common law system, Philippine Corporate Law is essentially, and continues to be, a common law system and subject to developments in
commercial developments, much of which can be expected to happen in the world of commerce, and some expressed jurisprudential rules
that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.
II. CONCEPTS
1. Definition of Corporation (SEC. 2)
Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its existence.
A corporation is an artificial being created by operation of law, invested by law upon coming into existence with a personality
separate and distinct from the persons composing it, and from any other legal entity to which it may be related. PNB v. Andrada Electric
& Engineering Co., 381 SCRA 244 (2002).3
2. FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2:
(a) An Artificial Being:

It has juridical capacity to contract and enter into legal relationships.

(b) A Creature of the Law: It is created by operation of law and not by mere agreement.
(c) Strong Juridical Personality: It has a right of succession.
(d) Creature of Limited Powers: It has only such powers, attributes and properties as are expressly authorized by law or
incident to its existence.
A corporation has no powers except for those which are expressly conferred on it by the Corporation Code, and those found in its
charter, and are implied by or are incidental to its existence. It exercises its powers through its Board of Directors and/or its duly
authorized officers and agents. Pascual and Santos, Inc. v. The Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438
(2004).4
3. TRI-LEVEL EXISTENCE OF THE CORPORATION:
(a) ASSETS-ONLY Level: The corporation is an aggregation of Assets and resources

1
The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or
Act No. 1459.
2
Corporation Code applies even to corporations organized under the old Corporation Law. Castillo v. Balinghasay, 440 SCRA 442 (2004).
3
Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
4
De Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United Paragon Mining Corp. v. Court of Appeals, 497
SCRA 638 (2006); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010).

(b) BUSINESS ENTERPRISE Level: The corporations primary purpose is to pursue business.
(c) JURIDICAL ENTITY Level: The corporation is a medium of pursuing a business enterprise.
4. TRI-LEVEL RELATIONSHIPS IN THE CORPORATE SETTING:
(a) JURIDICAL ENTITY LEVEL, which treats of the aspects of the State-corporation relationship.
(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is a contractual relationship on four (4) levels:

Between the corporation and its agents/representatives to act in the real world, i.e., directors and officers, which
is governed also by the Law on Agency

Between the corporation and its shareholders or members

Between the shareholders and the corporate directors, trustees and officers

Between and among the shareholders in a common venture

(c) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties or outsiders,
essentially governed by Contract Law and Labor Law.
Between the corporation and its employees, governed by Labor Laws
Between the corporation and those it contracts with, governed by Contract Laws
Between the corporation and the public it affects with its enterprise, governed essentially by Torts or Quasi-Delict
Laws.
5. THEORIES ON THE FORMATION OF CORPORATION
(a) Theory of Concession: Tayag v. Benguet Consolidated, 26 SCRA 242 (1968).
A [corporations] claim of a juridical personality of its own and transact business as such, is not a matter of absolute right, but a
privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of
Commerce & Industry, 5 SCRA 645 (1962).
It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the
form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such
juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association nevertheless, the failure to
comply with the statutory procedure and conditions does not warrant a finding that such association acquired a juridical personality,
even when it adopts constitution and by-laws. Intl Express Travel & Tour Services, Inc. v. CA, 343 SCRA 674 (2000).
All corporations, big or small, must abide by the provisions of the Corporation Code; even a simple family corporation cannot
claim an exemption nor can it have rules and practices other than those established by law. Torres v. Court of Appeals, 278 SCRA 793
(1997).
(b) Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947)
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a
body. PSE v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and their separate corporate personality is not a shield for the commission of
injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA
205 (1988).
6. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM:
(a) Four Advantageous Features of the Corporate Medium:
(i) STRONG AND SOLEMN JURIDICAL PERSONALITY (Sec. 2; Arts. 44(3), 45, 46, and 1775, Civil Code)
Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
Article 44. The following are juridical persons:
xxx
(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality,
separate and distinct from that of each shareholder, partner or member. (35a)
Article 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or
recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and
associations for private interest or purpose are governed by the provisions of this Code concerning partnerships.
Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or
criminal actions, in conformity with the laws and regulations of their organization
While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by
regarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989).

Transfer of corporate assets to the stockholders is an act of conveyance and not in the nature of a partition among co-owners.
Stockholders are not co-owners of corporate assets and properties. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of
Manila, 6 SCRA 373 (1962).
Execution pending appeal may be allowed when the prevailing party is already of advanced age and in danger of extinction, but
not in this case a corporation. [A] juridical entitys existence cannot be likened to a natural personits precarious financial
condition is not by itself a compelling circumstance warranting immediate execution and does not outweigh the long standing general
policy of enforcing only final and executory judgment. Manacop v. Equitable PCIBank, 468 SCRA 256 (2005).
(ii) CENTRALIZED MANAGEMENT (Sec. 23)
Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees which exercises almost all the
corporate powers in a corporation. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
The exercise of corporate powers rest in the Board of Directors, save in those instances where the Corporation Code requires
stockholders approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).
(iii) LIMITED LIABILITY TO INVESTORS AND NON-LIABILITY TO OFFICERS
One of the advantages of the corporation is the limitation of an investors liability to the amount of investment, which flows from
the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc.
v. CA, 296 SCRA 631 (1998).
It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse
cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity.
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).5
Obligations incurred by the corporation acting through its directors and officers, are its sole liabilities. Malayang Samahan ng
mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).
Where the creditor of the corporation sues not only the company but also all stockholders to reach their unpaid subscription which
appear to be the only visible assets of the company, then the controlling doctrine is that a stockholder is personally liable for the
financial obligations of the corporation to the extent of his unpaid subscription. Halley v. Printwell, Inc. 649 SCRA 116 (2011).
(iv) FREE-TRANSFERABILITY OF UNITS OF OWNERSHIP (SHARES) FOR INVESTORS (Sec. 63)
Section 63. Certificate of stock and transfer of shares. 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. Shares 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 authorized to make the transfer. No 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.
It is the inherent right of the stockholder to dispose of his shares of stock (which he owns as any other property of his) anytime he
so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Authority granted to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to
transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting
transfer. Thomson v. CA, 298 SCRA 280 (1998).
(b) Disadvantages of the Corporate Medium:
(1) Abuse of corporate management; breach of trust
(2) Abuse of limited liability feature
(3) High cost of maintenance of the corporate medium
(4) Double taxation
Dividends received by individuals from domestic corporations are subject to final 10% tax for income earned on or after
01 January 1998. Sec. 24(B)(2), 1997 NIRC.
Inter-corporate dividends between domestic corporations, however, are not subject to any income tax, Sec. 27(D)(4), 1997
NIRC.
There is re-imposition of the 10% improperly accumulated earnings tax for holding companies. Sec. 29, 1997 NIRC.
7. COMPARED WITH OTHER BUSINESS MEDIA
(a) Sole Proprietorships
A sole proprietorship is not vested with juridical personality to file or defend an action. xExcellent Quality Apparel, Inc. v. Win
Multiple-Rich Builders, Inc., 578 SCRA 272 (2009); ALPS Transportation v. Rodriguez, 698 SCRA 423 (2013).

5
Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224, 672 SCRA 562 (2012); Gotesco Properties, Inc. v. Fajardo, 692 SCRA 319
(2013).

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Article 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of
failure to comply with the requirements of article 1772, first paragraph.
Article 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members
may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions
relating to co-ownership.
(c) Joint Ventures
Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute
assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the
policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v.
Guingona, Jr., 232 SCRA 110 (1994).
(d) Cooperatives (Sec. 3, R.A. No. 6938)
Section 3. General Concepts. - A cooperative is a duly registered association of persons, with a common bond of interest, who
have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the
capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted
cooperative principles.
Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on
a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).
(e) Business Trusts (Art. 1440, Civil Code)
Article 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the
benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the
beneficiary.
(f) Cuentas En Participacion (Art. 1775, Civil Code)
Article 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members
may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions
relating to co-ownership.
A cuentas en participacion is an accidental partnership constituted in a manner that its existence was only known to those who
had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the
public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under
Art. 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of
cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons
interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless
such manager formally transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
III. NATURE AND ATTRIBUTES OF A CORPORATION
1. Power to Create a Corporation Is Legislative in Character (Sec. 16, Article XII, 1987 Constitution)
Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
Congress cannot enact a law creating a private corporation with a special charter, and it follows that Congress can create corporations
with special charters only if such are government-owned-or-controlled corporations (GOCCs). Feliciano v. Commission on Audit, 419
SCRA 363 (2004); Veterans Federation of the Philippines v. Reyes, 483 SCRA 526 (2006).
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a private corporation by special
legislative act which is not a GOCC, since NDC was merely required to extend a loan to the new corporation, and the new stocks of the
corporation were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their claims against the abolished
corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).
PNRC which was constituted under a special law, is not a GOCC because it is not by its charter owned by the Government, although
it is intended to do public functions, it is owned by the private sector. Consequently, the PNRC Charter, insofar as it creates the PNRC as
a private corporation and grants it corporate powers, is void for being unconstitutional. The other provisions of the PNRC Charter remain
valid as they can be considered as a recognition by the State that the unincorporated PNRC is the local National Society of the
International Red Cross and Red Crescent Movement, and thus entitled to the benefits, exemptions and privileges set forth in the PNRC
Charter. Liban v. Gordon, 593 SCRA 68 (2009).
2. CORPORATION AS A PERSON:
(a) Entitled to Due Process and Equal Protection
The due process clause is universal in its application to all persons, and covers private corporations within the scope of the
guaranty insofar as their properties are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920).
(b) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no
cause of action to assail the legality of the seizures, regardless of the amount of shares of stock of each in said corporation because
the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation;
can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v.
Ruiz, 37 SCRA 823 (1971).
(c) Not Entitled to Privilege Against Self Incrimination
It is elementary that the right against self-incrimination has no application to juridical persons.
Engineering v. PCGG, 150 SCRA 181 (1987).

Bataan Shipyard &

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and franchises by the State, may refuse to show its hand when charged with
an abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906).6
3. Practice of Profession
Corporations cannot engage in the practice of a profession since they lack the moral and technical competence required by the PRC.
ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan
ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).
COUNTER-REVOLUTION: Architectural professional corporations allowed under Rep. Act No. 9266.
4. Liability for Torts
A corporation is civilly liable for torts in the same manner as natural persons, because the rules governing the liability of a principal
for a tort committed by an agent are the same whether the principal be a natural person or a corporation, and whether the agent be a
natural or artificial person. PNB v. Court of Appeals, 83 SCRA 237 (1978).
Corporate tort consists in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The
failure of the corporate employer to comply with the duty under the Labor Code to grant separation pay to employees in case of cessation
of operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be
held personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
Stakeholders Theory: While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons
and medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that reality, three legal
relationships crisscross: (1) between the hospital and the doctor practicing within its premises; (2) between the hospital and the patient
being treated or examined within its premises; and (3) between the patient and the doctor. Regardless of its relationship with the doctor,
the hospital may be held directly liable to the patient for its own negligence or failure to follow established standard of conduct to which
it should conform as a corporation. Professional Services, Inc. v. Court of Appeals, 611 SCRA 282 (2010).
5. Corporate Criminal Liability (Arts. 102 and 103, Revised Penal Code):
Article 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of establishments. - In default of the persons
criminally liable, innkeepers, tavernkeepers, and any other persons or corporations shall be civilly liable for crimes committed in
their establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have
been committed by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their houses from guests lodging
therein, or for the payment of the value thereof, provided that such guests shall have notified in advance the innkeeper himself, or the
person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such
innkeeper or his representative may have given them with respect to the care and vigilance over such goods. No liability shall attach
in case of robbery with violence against or intimidation of persons unless committed by the innkeeper's employees.
Article 103. Subsidiary civil liability of other persons. - The subsidiary liability established in the next preceding article shall also
apply to employers, teachers, persons, and corporations engaged in any kind of industry for felonies committed by their servants,
pupils, workmen, apprentices, or employees in the discharge of their duties.
a. No Criminal Suit Can Lie Against a Corporation:
Corporations cannot be held criminally liable within Philippine jurisdiction since there is no law relating to the practice and
procedure in criminal actions whereby a corporation may be brought to court to be proceeded against criminally. West Coast Life
Ins. Co. v. Hurd, 27 Phil. 401 (1914).
A corporation lacks the element for malice to be held liable for a criminal act. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
But, a corporation can be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the
damages incurred by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA
459 (1999).
b. Stockholders As Such Cannot Be Held Liable for a Corporate Criminal Act
The owners of a corporate organization are its stockholders and they are to be distinguished from its directors and officers.
Stockholders, being basically investors in the corporation, and with the management of its business generally vested in the Board of
Directors, cannot be held liable for the criminal offense committed on behalf of the corporation, unless they personally took part in
the same. Espiritu v. Petron Corp., 605 SCRA 245 (2009).
c. It Is the Acting Officers Who Shall Be Criminally Liable for the Corporate Act
When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the Board of Directors, and to
each director separately and individually. People v. Concepcion, 44 Phil. 129 (1922).
6
Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).

Apart from its sweeping allegation that respondents misappropriated or converted its money placements, petitioner failed to
establish the particular role or actual participation of each respondent in the criminal act; neither was it shown that they assented to its
commission. It is basic that only corporate officers shown to have participated in the alleged anomalous acts may be held criminally
liable. Cruzvale, Inc. v. Eduque, 589 SCRA 534 (2009).
The existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and intentionally
causes the corporation to commit the crime. The corporation obviously acts, and can act, only by and through its human agents, and it
is their conduct which the law must deter. The employee or agent of a corporation engaged in unlawful business naturally aids and
abets in the carrying on of such business and will be prosecuted as principal if, with knowledge of the business, its purpose and effect,
he consciously contributes his efforts to its conduct and promotion [illegal recruitment; tax evasion], however slight his contribution
may be. The Executive Secretary v. Court of Appeals, 429 SCRA 81 (2004); People v. Tan Boon Kong, 54 Phil. 607 (1930).7
A corporate officer who signs the trust receipt in behalf of the corporation cannot be held criminally liable for the crime of estafa
punished under the Revised Penal Code and prior to the promulgation of the Trust Receipts Decree under the doctrine that the
corporation was [not] directly required by law to do an act in a given manner, and the same law makes the person who fails to
perform the act in the prescribed manner expressly liable criminally. Sia v. Court of Appeals, 121 SCRA 655 (1983).
BUT: The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation, hence, if the
entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer
the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 6478 (2003).
If the crime is committed by a corporation, the directors, officers, employees or other officers thereof responsible for the offense
shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may
be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as
penalty, a corporation may be prosecuted and, if found guilty, may be fined. Ching v. Secretary of Justice, 481 SCRA 602 (2006).
When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal
offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not
expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the
statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such
penalty. Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves
individually guilty of the crime. Ching v. Secretary of Justice, 481 SCRA 602 (2006). BUT SEE: Consolidated Bank v. Court of
Appeals, 356 SCRA 671 (2003).
6. Recovery of Moral and Other Damages
A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded
feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation
may have a good reputation which, if besmirched, may be a ground for the award of moral damages. Mambulao Lumber Co. v.
Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998).
BUT: The statement in Manero and Mambulao Lumber that a corporation may recover moral damages if it has a good reputation that
is debased, resulting in social humiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the
Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589
(1999).
NONETHELESS: Likewise, an educational corporations claim for moral damages arising from libel falls under Article 2219(7) of the
Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation, and
does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or any
other form of defamation and claim for moral damages. Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448
SCRA 413 (2005).
PREVAILING RULE: A corporation, being an artificial person and having existence only in legal contemplation, has no feelings,
emotions nor senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by an artificial
person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).8
7. CORPORATE NATIONALITY:
a. Primary Place of Incorporation Test (Sec. 123): The corporation is a national of the country under whose laws it is organized or
incorporated.9
Section 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate
government agency.
b. Ancillary Control Test: In cases involving properties, business or industries reserved for Filipinos, in addition to the place of
incorporation test, the nationality of a corporation is determined by the nationality of the controlling stockholders.
c. Sub-Sets of the Control Test:
(1)

Original DOJ-SEC Grandfather Rule: For purposes of investment holdings, shares belong to corporations at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. But if the percentage of Filipino
ownership in the corporation is least than 60%, then only the number of shares corresponding to such percentage shall be

7
Republic Gas Corp. v. Petron Corp., 698 SCRA 666 (2013).
8
LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275
SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008);
Employees Union of Bayer Phils. V. Bayer Philippines, Inc., 636 SCRA 473 (2010).
9
Sec. 123.

counted as of Philippine nationality.


DOJ-SEC Rule: Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989, XXIV SEC
QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No.
2 -June 1990)
(2)

FIA Test of Philippine National: Sec. 3(a) & (b) of FIA (R.A. 7042), considers for purpose of investment a Philippine
national as a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines, or a trustee of funds for pension or other employee retirement
or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of
Philippine nationals.10
Under Sec. 3 of the FIA 91, a corporation organized under the laws of the Philippines of which at least 60% of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a Philippine National.
Unchuan v. Lozada, 585 SCRA 421 (2009).

(3) New SEC Control Test: As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s. 2013, was issued and
provides that: all covered corporations shall, at all times, observe the constitutional or statutory ownership requirement in that
the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to
vote in the election of directors.
The 1987 Constitution provides for the Filipinization of public utilities by requiring that any from of authorization for the
operation of public utilities should be granted only to citizens of the Philippines or to corporation or associations organized
under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens. The provision is [an
express] recognition of the sensitive and vital position of public utilities both in the national economy and for national
security. The evident purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest. This specific provision explicitly reserves to Filipino citizens control of public
utilities, pursuant to an overriding economic goal of the 1987 Constitution: to conserve and develop our patrimony and to
ensure a a self-reliant and independent national economy effectively controlled by Filipinos. We rule that the term capital
in Sec. 11, Art. XII of the Constitution should cover both; (a) the control test that covers only shares of stock entitled to vote in
the election of directors; and the beneficial interest test, that the 60%-40% equity in favor of Filipinos shall apply to each and
every class of shares, to common shares, to preferred non-voting shares, to preferred voting shares, and other classes of shares.
Gamboa v. Teves, 652 SCRA 690 (2011), affirmed in 682 SCRA 397 (2012).
d. Unlawful Corporate Layering:
The grandfather rule can only extend to such limited as to those who have actual control of the affairs of the corporation. Palting
v. San Jose Petroleum Inc., 18 SCRA 924 (1966).
Lately, the SEC overturned the use of the formula 60%-or-more-equals-100%-Filipino-ownership.
Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e., natural
persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions are
complied with. If the shares of stock of the immediate investor corporation is in turn held and controlled by
another corporation, then we must look into the citizenship of the individual stockholders of the latter
corporation. In other words, if there are lawyers of intervening corporations investing in a mining joint
venture, we must delve into the citizenship of the individual stockholders of each corporation. This is the strict
application of the grandfather rule, which the Commission has been consistently applying prior to the 1990s.
(SEC-OGC Opinion No. 10-31, dated 09 December 2010, addressed to Mr. Leonardo A. Civil, Chairman of
the Board of Co-O Small Scale Miners Association, Inc., penned by General Counsel Vernette G. Umali-Paco)
Although the control test is still the prevailing mode of determining whether or not a corporation is a Filipino corporation,
within the ambit of Sec. 2, Art. II of 1987 Constitution are entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines; however, when there is doubt in the minds of the court, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the grandfather rule.
Narra Nickel Mining v. Redmont Consolidated Mines, G.R. No. 195580, 21 April 2014.
e. Application of the Control Tests:
(1) Wartime Test:
In war time, domestic corporations which are under the control of nationals of the enemy country are deemed foreign enemy
corporations. Haw Pia v. China Banking Corp., 80 Phil. 604 (1948).11
(2) Exploitation of Natural Resources (Sec. 140; Sec. 2, Art. XII, 1987 Constitution)
Section 140. Stock ownership in certain corporations. Pursuant to the duties specified by Article XIV of the Constitution, the
National Economic and Development Authority shall, from time to time, make a determination of whether the corporate
vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws,
and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a
public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other
by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent
illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules
and regulations designed to promote the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest
and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall
10

Affirmed in Unchuan v. Lozada, 585 SCRA 421 (2009).


11
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).

consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane
to the realization and promotion of business and industry.

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake
such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least 60 per centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions
as may provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of waterpower, beneficial use may be the measure and limit of the grant.
(3) Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution)
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain.
The registration of the donation of land to an unincorporated religious organization, whose trustees are foreigners, would violate
constitutional prohibition and the refusal would not be in violation of the freedom of religion clause. The fact that the religious
association has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of
foreign nationality. . . and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership
should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955).
BUT: A corporation sole being a creature prior to the constitution, has no nationality. If a nationality is sought to be determined, the
same depends of the nationality of the majority of the lay members and not on the nationality of the sole corporator.
Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao, 102 Phil. 596
(1957).
If foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign stockholders ownership of the shares
which is adversely affected by the capacity of the corporation to own landthat is, the corporation becomes disqualified to own land.
The prohibition in the Constitution applies only to ownership of land; it does not extend to immovable or real property as defined
under Article 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property such
as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino corporations only. J.G. Summit
Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005).
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not qualified to own land in the
Philippines, and therefore also disqualified to own the rights to ownership of lands in the Philippinesit is basic that an assignor or
seller cannot assign or sell something he does not own at the time the ownership, or the rights to the ownership, are to be transferred
to the assignee or buyer. The assignment by PNCC of the real properties to a nominee to be designated by Radstock is a
circumvention of the constitutional prohibition against a private foreign corporation owning lands in the Philippines. Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
(4) Public Utilities (Sec. 11, Art. XII, Constitution)
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the Philippines.
The nationality test for public utilities applies not at the time of the grant of the primary franchise that makes a corporation a
juridical person, but at the grant of the secondary franchise that authorizes the corporation to engage in a nationalized industry.
People v. Quasha, 93 Phil. 333 (1953).
The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the
corporation itself and cannot be conveyed in the absence of a legislative authority to do so. The secondary franchises are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property,
except such special or secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA
634 (1964).
When a Contract of Lease mandates contribution into the venture on the part of the purported lessee, and makes the lessee
participate not only in the revenues generated from the venture, and in fact absorb most of the risks involved therein, then a joint
venture arrangement has really been constituted between the purported lessor and lessee, since under the Law on Partnership,
whenever there is an agreement to contribute money, property or industry to a common fund, with an agreement to share the profits
and losses therein, then a partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise before one can
own the facilities needed to operate a public utility so long as it does not operate them to serve the public. There is a clear distinction
between operation of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v.Garcia,
Jr., 243 SCRA 436 (1995).
(5) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)
Section 11(1). The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies

in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition
therein shall be allowed.
Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24 March
1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4 December, 1991), at p. 31.
(6) Cable Industry: Cable TV operations shall be governed by E.O. No. 205 (s.1987). If CATV operators offer public
telecommunications services, they shall be treated just like a public telecommunications entity. (NTC Memo Circular No. 8-995)
Cable TV is a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations,
cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution. (DOJ
Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F.2d 70).
(7) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
Sec. 11(2). The advertising industry is impressed with public interest, and shall be regulated by law for the protection of
consumers and the promotion of the general welfare.
Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such
citizens shall be allowed to engage in the advertising industry.
The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate
share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.
f. Special Classifications of Corporations (Sec. 140)
Section 140. Stock ownership in certain corporations. Pursuant to the duties specified by Article XIV of the Constitution, the
National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle
has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public
interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and
regulations designed to promote the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest
and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall
consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent
of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the
realization and promotion of business and industry.
IV. x CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public Corporation (Sec. 3, Act No. 1459).
Section 3. Corporations may be public or private. - Public corporations are those formed or organized for the government
of a portion of the state. Private corporations are those formed for some private purpose, benefit, aim, or end, as
distinguished from public corporations, which have for their purpose the general good and welfare. Private corporations
are divided into stock corporations and nonstock corporations. Corporations which have a capital stock divided into shares
and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of
the shares held are stock corporations. All other private corporations are nonstock corporations.
(b) Quasi-Public Corporation. Marilao Water Consumers Asso. v. IAC, 201 SCRA 437 (1991).
(c) Private Corporation (Sec. 3, Act 1459).
Section 3. Corporations may be public or private. - Public corporations are those formed or organized for the government of
a portion of the state. Private corporations are those formed for some private purpose, benefit, aim, or end, as distinguished
from public corporations, which have for their purpose the general good and welfare. Private corporations are divided into
stock corporations and nonstock corporations. Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares
held are stock corporations. All other private corporations are nonstock corporations.
Governments majority shares does not make an entity a public corporation, for it remains a private corporation organized under
the Corporation Law. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).
But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities and subject to the control
of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).
Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds
and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter
from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they
pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the
nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its
does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities
of government-owned or controlled corporations, is may still be considered as such, or under the 1987 Administrative Code as an

instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196
SCRA 176 (1991).
The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the general corporation
law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present
doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law
are governed by the Labor Code. PNOC-Energy Dev. Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil
Service Commission, 201 SCRA 593 (1991).
Sec. 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by
special charters since Sec. 4 of Corporation Code renders the provisions supplementarily applicable to all corporations, including
those with special or individual charters, such as cooperatives organized under P.D. 269, so long as those provisions are not
inconsistent with such charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by
special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its
own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters
are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission,
and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999).
While public benefit and public welfare may be attributable to the operation of the Bases Conversion and Development Authority
(BCDA), yet it is certain that the functions it performs are basically proprietary in naturethe promotion of economic and social
development of Central Luzon, particularly, and the countrys goal for enhancement. Therefore, the rule that prescription does not run
against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although
artificial bodies of its own creation, are in the same category as ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334
(2001).
Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government, and the intervention in a
transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government
entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001).
Water districts can validly exists as corporate entities under PD 198, and provided they are GOCCs, and their board of directors
and other personnel are government employees subject to civil service laws and anti-graft laws. Feliciano v. COA, 419 SCRA 363
(2004).
When the law vests in a government instrumentality corporate powers, it does not become necessarily a corporation. A
government-owned or controlled corporation must be organized as a stock or non-stock corporation. The MIAA is not a governmentowned or controlled corporation because it is not constituted of capital divided into shares of stock, and neither is it a nonstock
corporation because it has no members. MIAA is a government instrumentality vested with corporate powers to perform efficiently
its government functions. MIAA v. Court of Appeals, 495 SCRA 591 (2006).
Although PNRC has its special charter, the Chairman of PNRC is not appointed by the President or any member of the Executive
Branch. Although Camporendodo v. NLRC had ruled that PNRC is GOCC because it is constituted under a special charter, it failed to
consider the definition of a GOCC as provided under Sec. 2(13) of the Administrative Code of 1987, which requires that a GOCC to
be such must be owned by the government, and in the case of a stock corporation, at least a majority of its capital stock must be
owned by the government. Liban v. Gordon, 593 SCRA 68 (2009).
2. As to Place of Incorporation:
(a) Domestic Corporation
(b) Foreign Corporation (Sec. 123)
Section 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate
government agency
3. As to Purpose of Incorporation:
(a) Municipal Corporation
(b) Religious Corporation (Secs. 109 and 116)
Section 109. Classes of religious corporations. Religious corporations may be incorporated by one or more persons. Such corporations
may be classified into corporations sole and religious societies.
xxx
Section 116. Religious societies. Any religious society or religious order, or any diocese, synod, or district organization of any
religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious
denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the
following:
1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious
denomination, sect or church;

10

2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly
convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the
administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which place must be within the
Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod,
or district organization 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 organization, the board of trustees to be not less than five (5) nor more than
fifteen (15).
Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals, then a
church member who is expelled from the membership by the church authorities, or a priest or minister who is by them deprived of his
sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
Section 106. Incorporation. Educational corporations shall be governed by special laws and by the general provisions of this
Code. (n)
Section 107. Pre-requisites to incorporation. Except upon favorable recommendation of the Ministry of Education and Culture,
the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational
institution. (168a)
Section 108. Board of trustees. Trustees of educational institutions organized as non-stock corporations shall not be less than
five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges,
or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) 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 (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock
corporations.
BP 232, Section 25.
Establishment of Schools - All schools shall be established in accordance with law. The establishment of
new national schools and the conversion of existing schools from elementary to national secondary or tertiary schools shall be by
law: Provided, That any private school proposed to be established must incorporate as an non-stock educational corporation in
accordance with the provisions of the Corporation Code of the Philippines. This requirement to incorporate may be waived in the
case of family-administered pre-school institutions. Government assistance to such schools for educational programs shall be used
exclusively for that purpose.
(d) Charitable, Scientific or Vocational Corporations
(e) Business Corporation
4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole (Secs. 110 to 115)
Section 110. Corporation sole. For the purpose of administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)
Section 111. Articles of incorporation. In order to become a corporation sole, the chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission
articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church
and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his
territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder
is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he
belongs; and

11

5. The place where the principal office of the corporation sole is to be established and located, which place must be within the
Philippines.
The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the
corporation. (n)
Section 112. Submission of the articles of incorporation. 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.
From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit
or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his
religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.
(n)
Section 113. Acquisition and alienation of property. Any corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such
corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance
of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for
leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have
directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave
to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding
elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or
church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention
of the courts shall not be necessary. (159a)
Section 114. Filling of vacancies. 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 Securities and Exchange Commission of a copy of their commission, certificate of election,
or letters of appointment, duly certified by any notary public.
During 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 authorized 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. (158a)
Section 115. Dissolution. A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities
and Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to
carry on its operations except for the purpose of winding up its affairs.
A corporation sole has no nationality being an institution that existed prior to the Republic. But if any nationality is to be
accorded to a corporation sole it is to be judged from the nationality of the majority of the faithfuls thereof. Roman Catholic
Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984), that a
corporation sole is disqualified to acquire/hold alienable lands of the public domain, because of the constitutional prohibition
qualifying only individuals to acquire land and the provision under the Public Land Act which applied only to Filipino citizens or
natural persons, has been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986).1
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
Section 20. De facto corporations. The due incorporation of any corporation claiming in good faith to be a corporation under
this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
(c) Corporation by Estoppel (Sec. 21)
1
Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).

12

Section 21. Corporation by estoppel. All persons who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however,
That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use as a defense its lack of corporate personality.
6. As to Existence of Shares (Secs. 3 and 5):
Section 3. Classes of corporations. Corporations formed or organized under this Code may be stock or non-stock corporations.
Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock
corporations. (3a) xxx
Section 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether
as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called
members.
(a) Stock Corporation
(b) Non-Stock Corporation
V.

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL


OF CORPORATE FICTION

A. MAIN DOCTRINE: A Corporation Has a Personality Separate and Distinct from its Stockholders or Members. (Sec. 2; Art. 44, Civil
Code)
1. Importance of Main Doctrine:
A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing
it as well as from any other legal entity to which it may be related, with the following consequences:
(i) The corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may
be connected or vice versa. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).2
(ii) This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of
justice. LBP v. Court of Appeals, 364 SCRA 375 (2001).3
2. APPLICATIONS:
(a) Majority Equity Ownership and Interlocking Directorship:
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of the corporation is
not, by itself, a sufficient ground for disregarding the separate corporate personality. Other than mere ownership of capital stocks,
circumstances showing that the corporation is being used to commit fraud or proof of existence of absolute control over the
corporation have to be proven. In short, before the corporate fiction can be disregarded, alter-ego elements must first be sufficiently
established. Saverio v. Puyat, 710 SCRA 747 (2013).4
Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another
corporation creates no employer-employee relationship with the latters employees. DBP v. NLRC, 186 SCRA 841 (1990).5
Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction
in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004).6
(b) Being Corporate Officer:
Being an officer or stockholder of a corporation does not by itself make ones property also that of the corporation, and viceversa, for they are separate entities, and that shareholders who are officers are in no legal sense the owners of corporate property
which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991).7
It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse
cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity.
Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001).8
The mere fact that one is President does not render the property he owns the property of the corporation, since the president, as an
individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).
The President of the corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable
for the judgment obligation arising from quasi-delict, since the fact alone of being President is not sufficient to hold him solidarily
liable for the liabilities adjudged against the corporation. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
2
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Shrimp Specialists,
Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Saverio v. Puyat, 710 SCRA 747 (2013).
3
Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain
Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).
4
Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v.
CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); EDSA Shangri-La Hotel and Resorts, Inc. v. BF
Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
5
Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong, 491 SCRA 581 (2006); Shrimp Specialists, Inc. v. Fuji-Triumph AgriIndustrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
6
Also Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); G Holdings, Inc. v. National Mines and Allied Workers Union Local, 103 (NAMAWU), 604 SCRA 73 (2010).
7
Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Saverio v. Puyat, 710 SCRA 747 (2013).
8
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).

13

Since a corporation has a distinct juridical personality, when the compulsory counterclaim filed against corporate officers for their
alleged fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of the
corporation in the suit does not thereby allow the denial of a specific counter-claim being filed to make the corporate officers
personally liable. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).
(c) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed even by the
controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936).
(d) Obligations and Debts:
Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation.
Traders Royal Bank v. CA, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation
they represent. Crisologo v. People, 686 SCRA 782 (2012); Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519
(2013).
The majority stockholder cannot be held personality liable for the attorneys fees charged by a lawyer for representing the
corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second
corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA
333 (1997).
A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual
capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347
(1976).
Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of
shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa. Francisco Motors Corp. v.
Court of Appeals, 309 SCRA 72 (1999).
Stockholders are not themselves the real parties in interest to claim and recover compensation for the damages arising from the
wrongful attachment of the assets of the corporation of which they are stockholders. Stronghold Insurance Co. v. Cuenca, 692 SCRA
473 (2013).
A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it has obtained controlling
equities in the corporate plaintiffs to suspend enforcement of the writ, for they are separate juridical persons, and thus their separate
business and proprietary interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).
B. PIERCING THE VEIL OF CORPORATE FICTION:
1. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a
business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001).9
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. 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. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that
may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances,
there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrong-doing must
be clearly and convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006).
The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means
to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant
violation of the prohibition against forum-shopping. While it is settled that the piercing of the corporate veil has to be done with caution,
this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176
(2002).
2. Objectives and Effects of the Application of the Piercing Doctrine
Under the doctrine of piercing the veil of corporate fiction, the courts look at the corporation as a mere collection of individuals or
an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the
group. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).10
The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking
certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned
upside down because of its erroneous invocation. (?) Francisco Motors Corp. v CA, 309 SCRA 72 (1999).
Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are
distinct entitled and treat them as identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA
225 (2007).11
9
DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R & E Transport, Inc. v. Latag, 422 SCRA 698 (2004);.Secosa v.
Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty
Corp., 590 SCRA 435 (2009).
10
Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)
11
Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).

14

The attempt to make the security agencies appear as two separate entities, when in reality they were but one, was a devise to defeat
the law [i.e., in this case to avoid liabilities under labor laws] and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje,
496 SCRA 169 (2006).
(a) Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not allowed unless the remedy sought is to make the
officer or another corporation pecuniarily liable for corporate debts. (?) Indophil Textile Mill Workers Union-PTGWO v. Calica,
205 SCRA 697 (1992).
BUT SEE: La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
(b) Applicable to Third-Parties: That respondents are not stockholders of the sister corporations does not make them non-parties to
this case, since it is alleged that the sister corporations are mere alter egos of the directors-petitioners, and that the sister corporations
acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners fiduciary duty to FGSRC. The notion
of corporate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being used as
a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole
benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001).
3. Nature of the Piercing Doctrine as an Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed
to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. PNB v. Ritratto
Group, Inc., 362 SCRA 216 (2001). CONSEQUENTLY:
(a) It Is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still
available. Umali v. Court of Appeals, 189 SCRA 529 (1990).
(b) Can Be Availed-of Only to Prevent Fraud: Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result
would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. Villanueva v. Adre,
172 SCRA 876 (1989).
The creation by DBP as the mother company of the three mining corporations to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will not constitute
application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
(c) Piercing Doctrine Not Applicable to Theorizing or to Advance/Create New Rights or Interest: Piercing of the veil of corporate
fiction is not allowed when it is resorted under a theory of co-ownership to justify continued use and possession by stockholders of
corporate properties. Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
BUT SEE: Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became
the consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine shall be applied to
support the fact that the real estate mortgage was valid and supported by proper consideration. Siain Enterprises, Inc v. Cupertino
Realty Corp., 590 SCRA 435 (2009).
The piercing cannot be availed of in order to dislodge from SECs jurisdiction a petition for suspension of payments filed under
P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning
corporate debtor: doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime. Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company cannot be allowed to support a
theory of set-off or compensation, there being no allegation much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516
SCRA 231 (2007).
An employee who has officially retired from the company and availed of her retirement benefit, but who continued to be
employed as a consultant with affiliate companies, cannot employ piercing in order to treat her stint with the affiliate companies as
part of her employment with the main company she retired fromthere is no fraud or employment of unfair shielding. Rivera v.
United Laboratories, Inc., 586 SCRA 269 (2009).
(d) Basis Must Be Clear Evidence
To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must
be clearly and convincingly established. Application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous
application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).12 Thus:

The organization of the corporation at the time when the relationship between the landowner and the developer were still
cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the
developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of
its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).

In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of
the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001).13

Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency conduit or adjunct of Cardale. Even assuming that the businesses of Cardale
and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any

12
Lim v. CA, 323 SCRA 102 (**); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011).
13
Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).

15

showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Francisco
v. Mejia, 362 SCRA 738 (2001).14

The mere assertion by a Filipino litigant against the existence of a tandem between two Japanese corporations cannot
be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing evidence. Marubeni
Corp. v. Lirag, 362 SCRA 620 (2001).

The party seeking to pierce has the burden of presenting clear and convincing evidence to justify the setting aside of the separate
corporate personality rule. The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the
party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).15
(e) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987);
D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
(f) Piercing Has Only Res Judicata Effect: Application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance, or the particular obligation for which the
doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).16
3. CLASSIFICATION OF PIERCING CASES:
DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate corporate personality would be
inconsistent with the business purpose of the legal fiction, or when piercing the corporate fiction is necessary to achieve justice or
equity for those who deal in good faith with the corporation, or when the use of the separate juridical personality is used to
confuse legitimate issues.
FRAUD PIERCING: When corporate entity used to commit a crime, to undertake fraud or do a wrong, or that the corporate veil is
used as a means to evade the consequences of ones criminal or fraudulent acts
ALTER-EGO PIERCING: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or
instrumentality of a person or another entity
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation
from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporation is
used as vehicle for the evasion of existing obligation; 2) fraud cases or when the corporate entity is used to justify wrong, protect fraud,
or defend a crime; or 3) alter ego cases, where the corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007)17
citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576.
(a) Rundown on Piercing Application: This Court pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against
forum shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering
Co., 381 SCRA 244 (2002).
(b) Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).18 The absence of these elements
prevents piercing the corporate veil. Lim v. CA, 323 SCRA 102 (2000).19
(c) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
4. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): Juridical Personality Cannot Be Employed:
(a) To Confuse Legitimate Issues: Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).
(b) To Raise Legal Technicalities: Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011
(1962).20
Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then
the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse the legitimate issues
(as in this case where the actions of management of the two corporations created confusion as to the proper employer of claimants),
the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
The corporate veil cannot be used to blatantly violate the prohibition against forum-shopping. Where the corporation itself has not
been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it, then
shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to pursue the
same claims. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
(c) The Case for Thinly-Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961).
14
Also Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
15
Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Ramirez v. Mar
Fishing Co., Inc., 672 SCRA 137 (2012).
16
Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
17
Also Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Sarona v. NLRC, 663
SCRA 394 (2012).
18
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Pantranco Employees
Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
19
Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc., 516
SCRA 231 (2007).
20
Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005).

16

The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means perpetrated upon the investing
public who were made to believe that ASBHI had the financial capacity to repay the loans it enticed petitioners to extend, despite the
fact that the deficient capitalization evidenced by its articles of incorporation, the treasurers affidavit, the audited financial
statements. Moreover, respondents argument assumes that there is legal obligation on the part of petitioners to undertake an
investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It is unfair to expect a person to procure
every available public record concerning an applicant for credit to satisfy himself of the latters financial standing. At least, that is not
the way an average person takes care of his concerns. Gabionza v. Court of Appeals, 565 SCRA 38 (2008).
Where the corporation was under the control of its stockholders who ran-up quite a high obligation with the printing company
knowing fully well that their corporation was not in a position to pay for the accounts, and where in fact they personally benefited
from the operations of the company to which they never paid their subscription in full, would constitute piercing of the veil to allow
the creditor to be able to collect what otherwise were debts owed by the company which has no visible assets and has ceased all
operations. Halley v. Printwell, Inc. 649 SCRA 116 (2011).
(d) Avoidance or Minimization of Taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v.
Collector of Internal Revenue, 2 SCRA 632 (1961).
Use of nominees to constitute the corporation for the benefit of the controlling stockholder who sought to avoid payment of taxes.
Marvel Building v. David, 9 Phil. 376 (1951).
The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the
incorporating spouses of the estate taxes on the properties transferred to the corporations: With regard to their claim that [the
companies] Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal
right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
HOWEVER: The mere existence of parent-subsidiary relations, or the fact that one corporation is affiliated with another corporation
does not justify piercing based on serving public convenience. Comm. of Internal Revenue v. Norton and Harrison, 11 SCRA 704
(1954).21
5. FRAUD CASES:
When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends,
the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
The general rule is that obligations incurred by a corporation, acting through its directors, officers or employees, are its sole liabilities.
However, there would be piercing of the veil when the corporation is used by any of them as a cloak or cover for fraud or illegality or
injustice. Here, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470
SCRA 86 (2005).
Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction
so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. Lafarge
Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).
However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot warrant the piercing of the corporate
veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
(a) Acts by Controlling Shareholder:
The fact alone that a corporation owns all of the stocks of another corporation does not justify their being treated as one entity. If
used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation, as
well as the subsidiary shall be confined to those arising in their respective business. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231
(2007).22
Where a stockholder, who has absolute control over the affairs of the corporation, entered into a contract with another corporation
through fraud and false representations, such stockholder shall be liable solidarily with co-defendant corporation even when the
contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).
Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling
stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).
Piercing will be applied in the present case when there is an indubitable link between CBBs closure and Binswangers
incorporation: CBB ceased to exist only in name; it re-emerged in the person of Binswanger to avoid payment by CBB of the last two
installments of its monetary obligation to Livesey, as well as its other financial liabilities. Livesey v. Binswanger Philippines, G.R.
No. 177493, 19 March 2014.
(b) Tax Evasion or Fraud:
In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an
adjunct, business conduit or alter ego of another corporation or when they practice fraud on internal revenue laws, the fiction of their
separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment
for the same taxable transaction. Commissioner of Internal Revenue v. Menguito, 565 SCRA 461 (2008).
(c) Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?

There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of
the corporation by itself would not authorize piercing;
The corporate fiction is used as a means to commit the fraud or avoid the consequences thereof; and

21
Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997). Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
22
Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).

17

The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against
corporate officers or stockholders.

Respondent corporations may be engaged in the same business or even share the same address, or have interlocking incorporators,
directors or officers, in the absence of fraud or other public policy consideration, does not warrant piercing the veil of corporate
fiction. McLeod v. NLRC, 512 SCRA 222 (2007).23
Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the
veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to
perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. Laguio v.
NLRC, 262 SCRA 715 (1996).24
6. ALTER-EGO CASES:
(a) Using Corporation as Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and
the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct
corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).25
Just because two foreign companies came from the same country and closely worked together on certain projects would the
conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA
620 (2001).
Use of a controlling stockholders initials in the corporate name is not sufficient reason to pierce, since by that practice alone does
it mean that the said corporation is merely a dummy of the individual stockholder, provided such act is lawful. LBP v. Court of
Appeals, 364 SCRA 375 (2001).
A corporation has a personality separate and distinct from the persons composing it, as well as from any other legal entity to
which it may be related. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced
when the corporation is just an alter ego of a person or of another corporation. Sarona v. NLRC, 663 SCRA 394 (2012).
(b) Mixing-up Operations; Disrespect to the Corporate Entity:
Mixing of personal accounts with corporate bank deposit accounts would authorize piercing to protect the judgment claim of a
creditor. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the
basis to pierce: It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in
the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001).
Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when
necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as
identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
Employment of same workers; single place of business, etc., may indicate alter ego situation. Shoemart v. NLRC, 225 SCRA 311
(1993).
The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is
insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect
fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001).
The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose shares are wholly if not almost
wholly owned by its parent company. The structural and systems overlap inherent in parent and subsidiary relations often render the
subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel
of land purposely for the benefit of its subsidiary, which took over possession of the leased premises, the subsidiary was a mere alter
ego of ESSO Eastern. Mariano v. Petron Corp., 610 SCRA 487 (2010).
(c) Guiding Principles in Alter-Ego Cases:
Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of
separating ownership from management;
Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected
to be bound by the separate juridical entity;
Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or
officers of the corporation.
HOWEVER: The mere existence of a parent-subsidiary relationship between two corporation, or that one corporation is affiliated
with another company does not by itself allow the application of the alter-ego piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil.
97 (1946).26

23
Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992), and Del Rosario v. NLRC, 187 SCRA 777 (1990); Park Hotel v. Soriano, 680 SCRA 328 (2012); Heirs of Fe Tan Uy v.
International Exchange Bank, 690 SCRA 519 (2013).
24
Martinez v. Court of Appeals, 438 SCRA 130 (2004).
25
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).
26
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).

18

A subsidiary corporation 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 and vice-versa. Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555
(2005).27
If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation
agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged
with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
7. PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE
(a) Need to Bring a New Case Against the Officer. McConnel v. CA, 1 SCRA 723 (1961).
A suit against individual shareholders is not a suit against the corporation. Failure to implead the corporations as defendants and
merely annexing a list of such corporations to the complaints is a violation of due process for it would in effect be disregarding their
distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
There is no denial of due process to hold officers liable under the piercing doctrine, provided that evidential basis has been
adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991).28
(b) When Corporate Officers Are Sued in Their Official Capacity, the corporation which was not made a party, is not denied due
process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and
the former is merely a conduit of the other the Supreme Court held void the application of a writ of execution on a judgment held
only against PKA, since the RTC obtained no jurisdiction over the person of Phoenix Omega which was never summoned as formal
party to the case. The general principle is that no person shall be affected by any proceedings to which he is a stranger, and strangers
to a case are not bound by the judgment rendered by the court. Padilla v. Court of Appeals, 370 SCRA 208 (2001).
We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate proceedings involving petitioner
Arcillas bid to avoid the adverse CA decision on argument that he is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot be enforced against the corporation which has not been impleaded as a
party below. Violago v. BA Finance Corp., 559 SCRA 69 (2008).
VI. CORPORATE CONTRACT LAW
1. Pre-Incorporation Contracts
(a) Who Is a Promoter?
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of
the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799])
(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61)
Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to
it as a purchase or some other contract. (n)
Section 61. Pre-incorporation subscription. A subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and Exchange Commission
(c) Theories on Liabilities for Promoter's Contracts:
Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937).
Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA 285 (1968).
Caram, Jr. v. CA, 151 SCRA 372 (1987).
2. De Facto Corporation (Sec. 20)
Section 20. De facto corporations. The due incorporation of any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation
may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
(a) Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such corporations may be a party. Sawadjaan v. Court of
Appeals, 459 SCRA 516 (2005).
3. Corporation by Estoppel Doctrine (SEC. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13
SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46 Phil. 145 [1924])
Section 21. Corporation by estoppel. All persons who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however,
27
Fortune v. Quinsayas, 690 SCRA 336 (2013).
28
Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

19

That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality.
(a) Nature of Doctrine
Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when persons assume to
form a corporation and exercise corporate functions and enter into business relations with third persons. Where no third person is
involved in the conflict, there is no corporation by estoppel. A failed consolidation therefore cannot result in a consolidated
corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when
entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v. Steamship
Pompey, 49 Phil. 117 (1926).29
A person who accepts employment in an unincorporated charitable association is estopped from alleging its lack of juridical
personality. Christian Childrens Fund v. NLRC, 174 SCRA 681 (1989).
One who deals with an unincorporated association which is not duly incorporated is not estopped to deny its corporate existence
when his purpose is not to avoid liability, but precisely to enforce the contract against the action for the purported corporation. Intl
Express Travel v. Court of Appeals, 343 SCRA 674 (2000).
(b) Two Levels: (i) With Fraud; and (ii) Without Fraud
When the incorporators represent themselves to be officers of the corporation which was never duly registered with SEC, and
engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as
corporate officers under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a
result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R. No. 117010, 18 April 1997.
(c) Can a Defective Attempt to Form a Corporation Result at Least in a Partnership?
While it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate
name occupy the position of partners inter se, however, such a relation does not necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it should be
implied only when necessary to do justice between the parties. Thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and
contribution. A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter
Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an ostensible corporation and those benefited by
it, knowing it to be without valid existence, are held liable as general partners. Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999).
4. TRUST FUND DOCTRINE
(a) Commercial/Common Law Premise:

Equity versus Debts; Preference of Creditors over Equity Holders (Art. 2236,
Civil Code)

Article 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the
exemptions provided by law.
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to
the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).
Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(b) Nature and Coverage of the Trust Fund Doctrine:
The subscriptions to the capital stock of a corporation constitute a fund to which the creditors have aright 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 realize assets
for the payment of its debts. Phil. Trust Co. v. Rivera, 44 Phil. 469 (1923).
Even when foreclosure on corporate assets was wrongful done, stockholders have no standing to recover for themselves moral
damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporations
assets before the dissolution and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).
The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, to
which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be
turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus
dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508
(1999).
We clarify that the trust fund doctrine is not limited to reaching the stockholders unpaid subscriptions. The scope of the doctrine
when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in
29
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 (1911), but that case pertained to a commercial partnership which required registration in the registry
under the terms of the Code of Commerce).

20

equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions may
be reached by the creditors in satisfaction of its claim. Halley v. Printwell, Inc. 649 SCRA 116 (2011), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW (2001), p. 558.
(c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph)
Section 8. Redeemable shares. Redeemable shares may be issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and
conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate
of stock representing said shares
Section 41. Power to acquire own shares. A stock corporation shall have the power to purchase or acquire its own shares for
a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and
to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a)
xxx
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such
as when there is need for special reserve for probable contingencies.
Section 122. Corporate liquidation. 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 (3) 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 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 business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the
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.
Upon 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 Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities
Under common law, there were originally conflicting views on whether a corporation had the power to purchase its own stocks.
Only a few American jurisdictions adopted the strict English rule forbidding a corporation from purchasing its own shares. In some
American states where the English rule used to be adopted, statutes granting authority to purchase out of surplus funds were enacted,
while in others, shares might be purchased even out of capital provided the rights of creditors were not prejudiced. The reason
underlying the limitation of share purchases sprang from the necessity of imposing safeguards against the depletion by a corporation
of its assets and against the impairment of its capital needed for the protection of creditors. Turner v. Lorenzo Shipping Corp., 636
SCRA 13 (2010).
(d) Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal commitments, do not constitute legal ground to
rescind the such agreement:. In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since the rescission of a subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed. Distribution of corporate assets among the stockholders cannot even be resorted to achieve
corporate peace. Ong Yong v. Tiu, 401 SCRA 1 (2003).
VII. ARTICLES OF INCORPORATION

21

1. Nature of Charter: The charter is in the nature of a contract between the corporation and the State. Government of P.I. v. Manila
Railroad Co., 52 Phil. 699 (1929).
The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships
between the state and the corporation, the stockholders and the State, and between the corporation and its stockholders. Lanuza v. Court
of Appeals, 454 SCRA 54 (2005).
(a) Commencement of Corporate Existence (Sec. 19).
Section 19. Commencement of corporate existence. A private corporation formed or organized under this Code commences to
have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members
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 corporation is sooner dissolved in accordance with law.
2. Procedure and Documentary Requirements (Sec. 14 and 15)
Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the Securities and
Exchange Commission 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 Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one
stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as
such;
3. The place where the principal office of the corporation is to be located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);
7. 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 qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, 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 original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are
without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the
amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the 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 (25%) percent of
the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent
of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.
Section 15. Forms of Articles of Incorporation. Unless otherwise prescribed by special law, articles of incorporation of all
domestic corporations shall comply substantially with the following form.30
(a) As to Number and Residency of Incorporators (Sec. 10)
Section 10. Number and qualifications of incorporators. Any number of natural persons not less than five (5) but not more than
fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share
of the capital stock of the corporation.
It is possible for a business to be wholly owned by one individual, and the validity of its incorporation is not affected when he
gives nominal ownership of only one share of stock to each of the other four incorporators. This arrangement is not necessarily
illegal, but it valid only between and among the incorporators privy to the agreement. It does not bind the corporation which will
consider all stockholders of record as the lawful owners of their registered shares. As between the corporation on the one hand, and
its stockholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its
shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA 415 (2005).
(b) Corporate Name (Secs. 18, 14(1) and 42)
Section 18. Corporate name. No corporate name may be allowed by the Securities and Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected
by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name.
30

See Codal

22

Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the Securities and
Exchange Commission 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 Code or by special law:
1. The name of the corporation;
2. xxx
Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a stockholders or members meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid,
or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in
the articles of incorporation, the approval of the stockholders or members shall not be necessary.
The name of a corporation is essential not only for its existence as a juridical person, but also in manner of dealing with it, and in
the exercise of its juridical capacities; it cannot be changed except in the manner provided for by law. Red Line Trans. v. Rural
Transit, 60 Phil. 549 (1934).
A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved
by the SEC. Phil. First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated
in their charter are also the same type of business. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
To fall within the prohibition of the law Revised Guidelines in the Approval of Corporate and Partnership Names, two requisites
must be proven, to wit: (a) That the complainant corporation acquired a prior right over the use of such corporate name; and (b) the
proposed name is either: (i) identical, or (ii) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or (iii) patently deceptive, confusing or contrary to existing laws. Philips Export B.V. v. Court of
Appeals, 206 SCRA 457 (1992).
A change in the corporate name does not make a new corporation, and has no effect on the identity of the corporation, or on its
property, rights, or liabilities. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).31
A corporation has no right to intervene in a suit using a name, not even its acronym, other than its registered name, as the law
requires and not another name which it had not registered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253
(1997).
There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered
trade name: A corporation may be sued under the name by which it makes itself known to its workers. Pison-Arceo Agri. Dev.
Corp. v. NLRC, 279 SCRA 312 (1997).
Incorporators must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a
business or a nonprofit organization, if misleading or likely to injure the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay
Kristo Jesus, 372 SCRA 171 (2001).
The policy behind Sec. 18 of Corporation Code, which expressly prohibits the use of a corporate name which is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws, is to avoid fraud upon the public that will occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over
corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).32
(c) Purpose Clauses (Secs. 14(2) and 42)
Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the Securities and
Exchange Commission 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 Code or by special law:
1.

xxx

2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one
stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as
such;
Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a stockholders or members meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid,
or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided,

31
P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005); Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 562 (2013).
32
Also Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).

23

however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in
the articles of incorporation, the approval of the stockholders or members shall not be necessary.
The statement of the primary purpose in the articles of incorporation is means to protect shareholders so they will know the main
business of the corporation and file derivative suits if the corporation deviates from the primary purpose. Uy Siuliong v. Director of
Commerce and Industry, 40 Phil. 541 (1919).
The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must
state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. Therefore, the allegation that the
corporations were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, constitute
prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
(d) Corporate Term (Sec. 11)
Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation
may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of
incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the
original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
No extension of term can be effected once dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v.
SEC, 24 SCRA 269 (1968).
Article 605 of Civil Code clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is
meant only as a lifetime grant. Unlike a natural person, a corporation or associations lifetime may be extended indefinitely. The
usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a corporation or association covers
public land. NHA v. Court of Appeals, 456 SCRA 17 (2005).

(d) Principal Place of Business (Sec. 51)


Section 51. Place and time of meetings of stockholders of members. Stockholders or members meetings, whether regular or
special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All 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.
Although the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should be filed in the location
of its principal office as indicated in its articles of incorporation, jurisprudence has, however, settled that the place where the principal
office of a corporation is located, as stated in the articles, indeed establishes its residence. This ruling is important in determining the
venue of an action by or against a corporation, as in the present case. Hyatt Elevators and Escalators Corp. v. Goldstar Elevators,
Phils., Inc., 473 SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998), p. 162.
Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967)
The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct
from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
(e) Minimum Capitalization (Sec. 12): Why is maximum capitalization required to be indicated?
Section 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code shall not
be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and
subject to the provisions of the following section.
(f)

Subscription and Paid-up Requirements (Sec. 13)

Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. At least twenty-five percent
(25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand
(P5,000.00) pesos.
The entries in the articles of incorporation of the original issuances of shares of stock has a stronger weight that the stock and
transfer book in determining the validity and issuance of such shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
(h) Steps and Documents Required in SEC
3. Grounds for Disapproval (Sec. 17)
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The Securities and
Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time

24

within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such
rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed
herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building
and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational
institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment
is in accordance with law.
When the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking
possession and having control of all municipal property within the incorporated barrio and administer it exclusively for the benefit of the
residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).
It is well to note that, if a corporations purpose, as stated in the articles of incorporation, is lawful, then the SEC has no authority to
inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of
incorporation. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
4. Amendments to the Articles of Incorporation (Sec. 16).
Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the
board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or
written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities
and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
VIII. BY-LAWS
1. Nature, Function and Contents (Sec. 47)
Section 47. Contents of by-laws. Subject to the provisions of the Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
The power to adopt by-laws is an inherent power on the part of those forming a corporation or any other form of association.
Gokongwei v. SEC, 89 SCRA 337 (1979).
As the rules 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,

25

by-laws are indispensable to corporations. These may not be essential to corporate birth but certainly, these are required for an orderly
governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
By-laws hare traditionally defined as regulations, ordinances, rules or laws adopted by an association or corporation or the like for
its internal governance, including rules for routine matters such as calling meetings and the like. If those key by-law provisions on
matters such as quorum requirements, meetings, or on the internal governance of the local/chapter are themselves already provided for in
the constitution, then it would be feasible to overlook the requirements for by-laws. Indeed in such an event, to insist on the submission
of a separate document denominated as By-Laws would be an undue technicality, as well as a redundancy. San Miguel Corp. v.
Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005).
(a) Common Law Limitations on By-Laws
(i) By-Laws Cannot Be Contrary to Law and the Charter
A by-law provision that empowers the Board of Directors to cancel the shares of any member and return to the owner thereof the
value thereof is void for being in violation of the Corporation Law that provided that capital can only be returned after dissolution .
Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
A by-law provision granting to a stockholder permanent seat in the Board of Directors is void, even when formally adopted by the
members of the association, because it is contrary to the provision in Corporation Code requiring all members of the Board to be
elected by the stockholders. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
The by-laws provisions cannot be such or be amended to be able to go around the security of tenure clause of employees nor
impair the obligation of existing contracts or rights; otherwise, it would enable an employer to remove any employee from his
employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the
occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469 (1998).
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws.
By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions on property rights of
stockholders; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. Court of Appeals, 210 SCRA
510 (1992).
Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a
stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed
in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
(iii) By-Law Provisions Cannot Discriminate Among Its Stockholders or Members
(b) Binding Effects on By-laws on the Dealing Public:
By-law provisions on the required quorum for special meetings of the Board have the force of law and are binding even on thirdparties who deal with the properties of the corporation. Pea v. Court of Appeals, 193 SCRA 717 (1991).
The nature of by-laws being intramural instruments would mean that they are not binding on third-parties, except those who have
actual knowledge of their contents. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
Contracts entered into on behalf of the corporation not signed by the Chairman of the Board in violation of the specific by-law
provision are not void, since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277 SCRA 462 (1997).
2. Adoption Procedure (Sec. 46)
Section 46. Adoption of by-laws. Every corporation formed under this Code must, within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall
be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be
filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance company, public utility, educational institution or other
special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the
effect that such by-laws or amendments are in accordance with law.
There can be no automatic dissolution simply because the incorporators failed to file the required by-laws under Sec. 46 of
Corporation Code. There is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due
process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their
neglect or omission and remedy the same. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such, and may
be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. (?) Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
3. Amendments and Revisions of By-Laws (Sec. 48)

26

Section 48. Amendments to by-laws. The board of directors or trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors
or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall
so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles
of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code.
IX. CORPORATE POWERS AND AUTHORITY
1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45)
CC, Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or
criminal actions, in conformity with the laws and regulations of their organization.
Section 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of
incorporation.
Section 45. Ultra vires acts of corporations. No corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred
(a) Classification of Corporate Powers: Express, Implied, and Incidental
A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation ( express powers),
those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes ( implied powers) and
those which may be incident to its existence as a juridical entity (incidental powers). Pilipinas Loan Co. v. SEC, 356 SCRA 193
(2001).
(b) Where Corporate Power Lodged: Board of Directors/Trustees
A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or
incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized
officers and agents. . . In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Shipside Inc. v. Court of
Appeals, 352 SCRA 334 (2001).33
2. Express Powers
(a) Enumerated Powers (Sec. 36)

33
Salenga v. Court of Appeals, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012); Fausto C. Ignacio v. Home Bankers Savings and Trust Co., 689 SCRA 173
( 2013).

27

Section 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation
may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of
incorporation
(b) Extend or Shorten Corporate Term (Secs. 37 and 81[1])
Section 37. Power to extend or shorten corporate term. A private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members
in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment
of the fair value of his shares in the following instances:
1. In 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 authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
(c) Increase or Decrease Capital Stock (Sec. 38)
(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. No corporation shall
increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of
the board of directors and, at a stockholders meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock
shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder
at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and
the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed,
the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;

28

(6) The amount of stock represented at the meeting; and


(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities
and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that
there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of
the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority
to determine the sufficiency of the terms thereof.
Despite the board resolution approving the increase in capital stock and the receipt of payment on the future issues of the shares from
the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC.
Central Textile Mills, Inc. v. NWPC, 260 SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to 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, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).

(e) Sell or Dispose of Assets (Sec. 40)


Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and monopolies,
a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholders or members meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in
this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights
of third parties under any contract relating thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office
will be sufficient authorization for the corporation to enter into any transaction authorized by this section
The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without express
authority from the Board of Directors. Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 requiring ratification of members
representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. CA, 272 SCRA 454 (1997);
Pea v. CA, 193 SCRA 717 (1991).
The Corporation Code defines a sale or disposition of substantially all assets and property of a corporation as one by which the
corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated any
sale or disposition short of this will not need stockholder ratification, and may be pursued by the majority vote of the Board of Directors.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42)

29

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a stockholders or members meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid,
or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not be necessary.
Investment by a sugar central in the equity of a jute-bag manufacturing company used in packing sugar, falls within the implied
powers of the sugar central as part of its primary purpose and does not need ratification by the stockholders. De la Rama v. Ma-ao
Sugar Central Co., 27 SCRA 247 (1969).
(g) Declare Dividends (Sec. 43)
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
Dividends from retained earnings can only be declared to those who are stockholders of the corporation; dividends cannot be declared
to creditors as part of the settlement of debts. Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount
that can loosely be termed as the trust fund of the corporation. NTC v. CA, 311 SCRA 508 (1999).
(h) Management Contracts (Sec. 44): Why the difference in rule between entity and individual?
Section 44. Power to enter into management contract. No corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both
the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and the managed corporations own or control more than onethird (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.
A management contract is not the same as an agency contract, and therefore is not revocable at will. Nielson & Co. v. Lepanto
Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195 SCRA 247 (1991).
3. Implied Powers
When the articles expressly provide that the purpose was to engage in the transportation of person by water, such corporation
cannot engage in the business of land transportation, which is an entirely different line of business. Luneta Motor Co. v. A.D. Santos,
Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to undertake stevedoring services to unload coal
into its pier since it is not reasonably necessary for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193
(2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael v. Court of Appeals, 372 SCRA 587
(2001).
An officer who is authorized to purchase the stock of another corporation has implied power to perform all other obligations arising
therefrom such as payment of the shares of stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).

30

4. Incidental Powers
As a creature of the law, the powers and attributes of a corporation are those set out, expressly or implied, in the law. Among the
general powers granted by law to a corporation is the power to sue in its own name. This power is granted to a duly-organized
corporation, unless specifically revoked by another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a loan to finance the activities of the
corporation, hence, not an ultra vires act. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
5. Other Powers (Sec. 36, supra)
(a) Sell Land and Other Properties
When the corporations primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the
actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Articles 1874
and 1878 of Civil Code requires that when land is sold through an agent, the agents authority must be in writing, otherwise the sale is
void. San Juan Structural v. CA, 296 SCRA 631 (1998).34
(b) Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of Civil
Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the
obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit
because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation.
China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
(c) Power to Sue and Be Sued
Under Sec. 36 in relation to Sec. 23 of Corporation Code, where a corporation is an injured party, its power to sue is lodged with
its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the
corporations behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).35
(i) Power to Bind the Corporation in a Suit
When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the
corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI
Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003).
(ii) Certificate of Non-Forum Shopping:
If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the certification against forum
shopping is necessarya certification not signed by a duly authorized person renders the petition subject to dismissal. Gonzales v.
Climax Mining Ltd., 452 SCRA 607 (2005);36 such as the administrator or project manager, Esteban, Jr. v. Vda. de Onorio, 360 SCRA
230 (2001); or the General Manager, Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
Nonetheless, such lack of authority may be cured: even if the counsel executed the verification and certificate of non-forum
shopping before the board authorized him, the passing of the board resolution of authorization before the actual filing of the
complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622 (2008); the submission in the motion for
reconsideration of the authority to sign the verification and certification constitutes substantial compliance with the procedural
requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).
When a corporate officers has been granted express power by the Board of Directors to institute a suit, the same is considered
broad enough to include the power of said corporate officer to execute the verification and certification against forum shopping
required in initiatory pleadings under the Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620 (2009).
A President, among other enumerated corporate officers and employees, can sign the verification and certification against nonforum shopping in behalf of the corporation without the benefit of a board resolution. South Cotabato Communications Corp. v. Sto.
Tomas, 638 SCRA 566 (2011).
(iii) Service of Summons on Corporations
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term general manager and unlike the old provision in the
Rules of Court, it does not include the term agent. Consequently, the enumeration of persons to whom summons may be served is
restricted, limited and exclusive following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the
earlier cases that uphold service of summons upon a construction project manager; 37 a corporations assistant manager; 38 ordinary
clerk of a corporation;39 private secretary of corporate executives; 40 retained counsel;41 officials who had charge or control of the
operations of the corporation, like the assistant general manager; 42 or the corporations Chief Finance and Administrative Officer; 43 no
34
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Cosco Philippines Shipping, Inc. v.
Kemper Insurance Company, 670 SCRA 343 (2012).
35
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Mediserv, Inc. v.
Court of Appeals, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012); Swedish Match Phils v.
Treasurer of Manila, 700 SCRA 428 (2013); Esguerra v. Holcim Philippines, Inc., 704 SCRA 490 (2013).
36
Also DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Philippine Airlines, Inc. v. Flight Attendance and Stewards Association of the
Philippines (FASAP), 479 SCRA 605 (2006); Metro Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue, 545 SCRA 10
(2008) Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cosco Philippines Shipping, Inc. v. Kemper Insurance Company, 670 SCRA 343 (2012).
37
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
38
Gesulgon v. NLRC, 219 SCRA 561 (1993).
39
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988).
40
Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999).
41
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966).
42
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978).
43
Far Corporation v. Francisco, 146 SCRA 197 (1986).

31

longer apply since they were decided under the old rule that allows service of summons upon an agent 44 of the corporation. E.B.
Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999).
(d) Hire Employees and Appoint Agents
Except where the authority of employing servants and agents is expressly vested in the board of directors or trustees, an officer or
agent who has general control and management of the corporations business, or a specific part thereof, may bind the corporation by
the employment of such agents and employees as are usual and necessary in the conduct of such business. But the contracts of
employment must be reasonable. Yu Chuck v. Kong Li Po, 46 Phil. 608 (1924).
(e) Provide Gratuity Pay for Employees (Sec. 36[10])
Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be considered
to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha,
247 SCRA 183, 192 (1995).
(f) Power to Make Donations (Sec. 36[9])
(g) Enter Into a Partnership or Joint Venture: Tuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC Opinion, 29 February
1980.
6. ULTRA VIRES DOCTRINE
(a) Types of Ultra Vires Acts (Sec. 45)
Section 45. Ultra vires acts of corporations. No corporation under this Code shall possess or exercise any corporate powers
except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred.
A corporation has no power except those expressly conferred on it by the Corporation Code, its charter, and those that are implied
or incidental to its existence. In turn, a corporation exercises said powers through its Board of Directors and /or its duly authorized
officers and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
(i) First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is created as defined by the
law of its organization and therefore beyond the power conferred upon it by law. The term ultra vires is distinguished from an
illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated. Atrium Management Corp. v. CA, 353 SCRA 23 (2001).
(ii) Second Type Ultra Vires: When the President enters into speculative contracts without prior board approval, and without
subsequent Board ratification, nor were the transactions included in the reports of the corporation, such contracts do not bind the
corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie
v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent duly authorized by
the Boardabsent such valid delegation/authorization, the rule is that the declaration of an individual directors relating to the
affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such director, are
held not binding on the corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
(iii) Third Type Ultra Vires: Although arrangements between the two mining companies was prohibited under the terms of the
Corporation Law, the Supreme Court did not declare the nullity of the agreements on the ground that only private rights and
interests, not public interests, were involved in the case.Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 (1933).
(b) General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of ultra vires will not be allowed to prevail, whether
interposed for or against a corporation, when it will not advance justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith. Zomer Dev. Corp. v. Intl Exchange Bank, 581 SCRA 115 (2009).
(c) Ratification of Ultra Vires Acts:
Acts done by the Board of Directors which are ultra vires cannot be set-aside if the acts have been ratified by the stockholders.
Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the corporation, nevertheless it will not
be set aside when, not being malum prohibitum, the corporation, through its senior officers or its Board of Directors, are estopped
from questioning the legality of such act, contract or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).45
Acts done in excess of corporate officers scope of authority cannot bind the corporation. However, when subsequently a
compromise agreement was on behalf of the corporation being represented by its President acting pursuant to a Board of Directors
resolution, such constituted as a confirmatory act signifying ratification of all prior acts of its officers. NPC v. Alonzo-Legasto, 443
SCRA 342 (2004).
X. DIRECTORS, TRUSTEES AND OFFICERS
Board of Directors is the body which (1) exercises all powers provided for under the Corporation Code; (2) conducts all business of
the corporation; and (3) controls and holds all property of the corporation. Its members have been characterized as trustees or directors
clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220
(2003).
1. DOCTRINE OF CENTRALIZED MANAGEMENT: Powers of Board of Directors (Sec. 23)
Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the
44
Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982).
45
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of Appeals, 177 SCRA 594 (1989).

32

board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand
in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of
the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
Section 23 expressly provides that the corporate powers of all corporations shall be exercised by the Board of Directors. Just as a natural
person may authorize another to do certain acts in his behalf, so may the Board of Directors validly delegate some of its functions to
individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the Board of Directors or by a
corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of such
director, are held not binding on the corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).46
A VERBAL PROMISE GIVEN BY THE CHAIRMAN AND PRESIDENT OF THE COMPANY TO THE GENERAL
MANAGER AND CHIEF OPERATING OFFICER TO GIVE THE LATTER UNLIMITED SICK LEAVE AND VACATION
LEAVE BENEFITS AND ITS CASH CONVERSION UPON HIS RETIREMENT OR RESIGNATION, WHEN NOT AN
INTEGRAL PART OF THE COMPANYS RULES AND POLICIES, IS NOT BINDING ON THE COMPANY WHEN IT IS
WITHOUT THE APPROVAL OF THE BOARD OF DIRECTORS. KWOK V. PHILIPPINE CARPET MANUFACTURING CORP.,
457 SCRA 465 (2005).
(a) Rationale for Centralized Management Doctrine:
The raison detre behind the conferment of corporate powers on the Board of Directors is not lost on the Court indeed, the
concentration in the Board of the powers of control of corporate business and appointment of corporate officers and managers is
necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors
who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A corporation is an artificial being and can only exercise its powers and transact its business through the instrumentalities of its
Board of Directors, and through its officers and agents, when authorized by resolution or by its by-laws. Consequently, when legal
counsel was clothed with authority through formal board resolution, his acts bind the corporation which must be held bound the
actuations of its counsel of record. De Liano v. Court of Appeals, 370 SCRA 349 (2001).
The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized
for the purpose by corporate by-laws or by a special act of the board of directors. Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).
(b) Theories on Source of Board Power
Delegated Powers Coming from the Stockholders: The Board of Directors is a creation of the stockholders and controls and
directs the affairs of the corporation by delegation of the stockholders. By drawing themselves the powers of the corporation, they
occupy positions of trusteeship in relation to the stockholders. Angeles v. Santos, 64 Phil. 697 (1937).
One of the most important rights of a qualified shareholder or member is the right to vote for the directors or trustees who are to
manage the corporate affairs. The right to choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a
nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved. Once the directors or
trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law. Tan v. Sycip,
499 SCRA 216 (2006).
(c) Board Must Act As a Body (Sec. 25)
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members
of the board.
Directors or trustees cannot attend or vote by proxy at board meetings
Exercise of powers by the Board of Directors may either be express and formal through the adoption of a board resolution in a
meeting called for the purpose, or it may be implied where the Board collectively and knowingly allows the President to enter into
important contracts in the pursuit of the corporate business. Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987
(1967).
A Director-Treasurer has no power to bind the company even in transactions that are pursuant to the primary purpose its
corporation, especially when the by-laws specifically provided that the acts entered into can only be done by the Board of Directors.
Ramirez v. Orientalist Co., 38 Phil. 634 (1918).

46
Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of
Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine International, 617 SCRA 491 (2010).

33

Between the act of the Board as a body affirming informally the perfection of a contract entered into in behalf of the corporation
by a senior officer, and the subsequent formal board resolution rejecting the same contract, the former must prevail under the doctrine
of estoppel. Acua v. Batac Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]).
A corporation, through its Board of Directors, should act in the manner and within the formalities prescribed by its charter or by
the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the Board of Directors
during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent
legal meeting, or impliedly, by the corporation's subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995).
(d) Effects of Bogus Board: The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of Civil Code
because of the lack of consent. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997).
(e) Executive Committee (Sec. 35)
Section 35. Executive committee. The by-laws of a corporation may create an executive committee, composed of not less than
three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the
board, except with respect to: (1) approval of any action for which shareholders approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal
of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash
dividends to the shareholders.
It is within the power of the Board of Directors to authorize any person or committee to undertake corporate acts. The board has
power to constitute even an executive committee, even when no such committee is provided for in the articles and by-laws of the
corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
2. BUSINESS JUDGMENT RULE:
a. BJR First Branch:
When a resolution is passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses
or decrease the profits of the corporation, the court has no authority to review them. It is a well-known rule of law that questions of
policy or 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 [for that] of the board of directors; 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. Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA
36 (1962).
While SEC is the agency with the primary say as to whether or not securities, including shares of stock of a corporation, may be
traded or not in the stock exchange, it does not mean that PSEs management prerogatives are under the absolute control of the SEC.
The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of
the PSEs main concerns, as such, is still the generation of profit for its stockholders. Philippine Stock Exchange v. Court of
Appeals, 281 SCRA 232 (1997).
No court can, as an integral part of resolving the issues between squabbling stockholders, order the corporation to undertake
certain corporate acts, since it would be in violation of the business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.
The Board of Directors is the business manager of the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts. Estacio v. Pampanga I Electric Cooperative, Inc., 596 SCRA 542 (2009).
Questions of policy and management are left to the honest decision of the officers and directors of a corporation, and the courts
are without authority to substitute their judgment for the judgment of the board of directors. Cua, Jr. v. Tan, 607 SCRA 645 (2009).
b. BJR Second Branch:
Directors and officers who purport to act for the corporation, keep within the lawful scope of their authority and act in good faith,
do not become liable, whether civilly or otherwise, for the consequences of their acts, which are properly attributed to the corporation
alone. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers
are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only
matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the
assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud.
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
3. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS
a. Theory of Estoppel or Ratification
The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered
into by its officer with a third party who in good faith, relied on the authority of the former as manager to act on behalf of the
corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing
body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which
it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to
make the contract, but the ratification must be by the officer or governing body having authority to make such contract. Vicente v.
Geraldez, 52 SCRA 210 (1973).
The admission by counsel on behalf of the corporation of the latters culpability for personal loans obtained by its corporate
officers cannot be given legal effect when the admission was without any enabling act or attendant ratification of corporate act, as

34

would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the
corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).
PER ITS SECRETARYS CERTIFICATE, THE FOUNDATION HAD GIVEN ITS PRESIDENT OSTENSIBLE AND
APPARENT AUTHORITY TO INTER ALIA DEAL WITH THE RESPONDENT BANK, AND THEREFORE THE
FOUNDATION IS ESTOPPED FROM QUESTIONING THE PRESIDENTS AUTHORITY TO OBTAIN THE SUBJECT
LOANS FROM THE RESPONDENT BANK. LAPULAPU FOUNDATION, INC., V. COURT OF APPEALS, 421 SCRA 328
(2004).
When an officer in a banking corporation arrange a credit line agreement and forwards the same to the legal department at its
head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686
(2004).
The acceptance of the offer to purchase by the clerk of the branch of the bank, and the representation that the manager had already
approved the sale (which in fact was not true), cannot bind the bank to the contract of sale, it being obvious that such a clerk is not
among the bank officers upon whom putative authority may be reposed by a third party. There is, thus, no legal basis to bind the bank
into any valid contract of sale with the buyers, given the absolute absence of any approval or consent by any responsible officer of the
bank. DBP v. Ong, 460 SCRA 170 (2005).
Under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them. . . . Thus, contracts entered into by
corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the Corporation.
Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA 235 (2004).
Acts done in excess of corporate officers scope of authority cannot bind the corporation. However, when subsequently a
compromise agreement was on behalf of the corporation being represented by its President acting pursuant to a Board of Directors
resolution, such constituted as a confirmatory act signifying ratification of all prior acts of its officers. National Power Corp. v.
Alonzo-Legasto, 443 SCRA 342 (2004).
b. Doctrine of Laches or Stale Demands
The principle of laches or stale demands provides that the failure or neglect, for an unreasonable and unexplained length of
time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission to assert a
right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or declined to assert
it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
c. Doctrine of Apparent Authority: Art. 1883, Civil Code.
Article 1883. If an agent acts in his own name, the principal has no right of action against the persons with whom the agent
has contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction were
his own, except when the contract involves things belonging to the principal.
The provisions of this article shall be understood to be without prejudice to the actions between the principal and agent.
If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agents authority. Francisco v. GSIS, 7 SCRA 577 (1963).47
A corporation cannot disown its Presidents act of applying to the bank for credit accommodation, simply on the ground that it
never authorized the President by the lack of any formal board resolution. The following placed the corporation and its Board of
Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the President, which includes, executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks; secondly, there were already previous transaction of
discounting the checks involving the same personalities wherein any enabling resolution from the Board was dispensed with and yet
the bank was able to collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal is liable for the
obligations contracted by the agent. The agent apparent representation yields to the principal's true representation and the contract is
considered as entered into between the principal and the third person. First Philippine Intl Bank v. Court of Appeals, 252 SCRA 259
(1996).
Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority,
may not hold the corporation liable. Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).
Apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as
having the power to act, or, in other words the apparent authority to act in general with which is clothes them; or (2) the acquiescence
in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.
Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003).
The general rule remains that, in the absence of authority from the Board of Directors, no person, not even its officers, can validly
bind a corporation. If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an
apparent authority, it will be estopped from denying such officers authority. . . Unmistakably, the Courts directive in Yao Ka Sin
Trading is that a corporation should first prove by clear evidence that its corporate officer is not in fact authorized to act on its behalf
before the burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was clothes by the
corporation with apparent authority. Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).
Rationale for the Doctrine of Apparent Authority: Naturally, the third person has little or no information as to what occurs in
corporate meeting; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with
47
Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Soler v. Court of Appeals, 358 SCRA 57 (2001);zcxzUnited Coconut Planters Bank v. Planters Products, Inc., 672
SCRA 285 (2012).

35

law. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the
part of the respondents in failing to find out the scope of Atty. Solutas authority. Indeed, the public has the right to rely on the
trustworthiness of bank officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).
4. Qualifications of Directors/Trustees (Secs. 23 and 27)
Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall
stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the
Philippines.
xxx
Section 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of
his election or appointment, shall qualify as a director, trustee or officer of any corporation.
The qualifications provided for in the law are only minimum qualifications; additional qualifications and disqualifications can be
provided for but only by proper provisions in the by-laws of the corporation. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
A director must own at least one share of stock. Pea v. CA, 193 SCRA 717 (1991).48
Beneficial ownership under VTA no longer qualifies as a director owning at least one share of stock in his name. Lee v. CA, 205
SCRA 752 (1992).
The law does not require that a Vice-President be a stockholder. Baguio v. Court of Appeals, 226 SCRA 366 (1993).
5. Election of Directors and Trustees
a. Directors (Secs. 24 and 26)
Section 24. Election of directors or trustees. At all elections of directors or trustees, there must be present, either in person or
by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be
no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting
stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares
for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes
as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the
same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not
exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles
of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are
trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of
votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to
day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. (31a)
Section 26. Report of election of directors, trustees and officers. Within thirty (30) 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 Securities
and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should 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 Securities
and Exchange Commission
A by-law provision or company practice of giving a stockholder a permanent seat in the Board would be against the provisions
of Corporation Code which requires member of the board of corporations to be elected. Grace Christian High School v. Court of
Appeals, 281 SCRA 133 (1997).
Since under Sec. 26 all corporations are mandated to submit a formal report to the SEC on the changes in their directors and
officers, then only those directors and officers appearing in such report (General Information Sheet) to the SEC are deemed legally
constituted to bind the corporation, especially in the bringing of suits in behalf of the corporation. Premium Marble Resources v. CA,
264 SCRA 11 (1996).
Corporations are required under Section 26 to submit to the SEC within thirty (30) days after the election the names, nationalities,
and residences of the directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting
business with domestic corporation properly informed of their organization operational status, the SEC has issued the rule requiring
the filing of the General Information Sheet. When the names of some of the directors who signed the board resolution does not appear
in the General Information Sheet filed with the SEC, then there is doubt whether they were indeed duly elected members of the Board
legally constituted to bring suit in behalf of the Corporation. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434
SCRA 27 (2004).
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only
48
Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).

36

in that way can the directors continued accountability to the shareholders, and the legitimacy of their decisions that bind the
corporations stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
The remedy is quo warranto to question the legality and proper qualification of persons elected to the board.
Encarnacion, 94 Phil. 81 (1953).

Ponce v.

b. CUMULATIVE VOTING (SEC. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 SOUTH
CAROLINA L. REV. 295)
c. Trustee (Secs. 92 and 138)
Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-laws, the
board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their
number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall
be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly
elected by the members.
Section 138. Designation of governing boards. The provisions of specific provisions of this Code 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.
6. Term of Office, Vacancy and Holdover Principle (Sec. 29)
Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the
unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by
an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the meeting.
Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold-over until
qualification of their successors. Government v. El Hogar Filipino, 50 Phil. 399 (1927).
The theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporations board of directors is caused not only by the expiration of a members term, the successor so
elected to fill in a vacancy shall be elected only for the unexpired term of his predecessors in office. The law has authorized the remaining
members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations; 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 unexpired term of his predecessor in office. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
The remaining members of a corporations board of directors cannot elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The holdover period is not part of the term of office of a member of the board of directors.
Consequently, when during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the stockholders,
since there is no term left to fill-up pursuant to the provisions of Section 29 of the Corporation which mandates that a vacancy occurring
in the board of directors caused by the expiration of a members term shall be filled by the corporations stockholders. That a director
continues to serve after one year from his election (i.e., on a holdover capacity), cannot be considered as extending his term. This
holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. Valle Verde Country
Club, Inc. v. Africa, 598 SCRA 202 (2009)
7. Removal of Directors or Trustees (Sec. 28)
Section 28. Removal of directors or trustees. Any director or trustee of a corporation may be removed from office by a vote of
the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special
meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least
a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon 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. Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be
with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section 24 of this Code.
A stockholders meeting called for the removal of a director is valid only when called by at least two-thirds of the outstanding capital
stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).
Only stockholders or members have the power to remove the directors or trustees elected by them, as laid down in Sec. 28 of
Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230 (2007).

37

8. Directors or Trustees Meetings (Secs. 49, 53, 54 and 92)


Section 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be regular or special.
Section 53. Regular and special meetings of directors or trustees. Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the
by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws
provide otherwise. Notice 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. A director or
trustee may waive this requirement, either expressly or impliedly. (n)
Section 54. Who shall preside at meetings. 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.
Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their
number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be
held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly
elected by the members.
(a) Quorum
For stock corporations, the quorum referred to in Section 52 is based on the number of outstanding voting stocks. For nonstock
corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum
during members meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006).
When the principle for determining quorum for stock corporations is applied by analogy to non-stock corporations, only those
who are actual members with voting rights should be counted. Tan v. Sycip, 499 SCRA 216 (2006).
(b) Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an
acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the
face of clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972).
(c) Minutes of Meetings
The signing of the minutes by all the members of the board is not requiredthere is no provision in the Corporation Code that
requires that the minutes of the meeting should be signed by all the members of the board. The signature of the corporate secretary
gives the minutes of the meting probative value and credibility. People v. Dumlao, 580 SCRA 409 (2009).
The entries contained in the minutes are prima facie evidence of what actually took place during the meeting, pursuant to Section
44, Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009).
Resolution versus Minutes of Meetings: A resolution is distinct and different from the minutes of the meetinga board resolution
is a formal action by a corporate board of directors or other corporate body authorizing a particular act, transaction, or appointment,
while, on the other hand, minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/members or
directors/trustees, but also at a meeting of an executive committee. People v. Dumlao, 580 SCRA 409 (2009).
10. COMPENSATION OF DIRECTORS (Sec. 30)
Section 30. Compensation of directors. In the absence of any provision in the by-laws fixing their compensation, the directors
shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of
the outstanding capital stock at a regular or special stockholders meeting. In no case shall the total yearly compensation of
directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the
preceding year.
Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary
duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their
shares adequately furnishes the motives for service, without compensation. But they can receive remunerations for executive officer
position. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).49
11. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS
(a) Directors as Fiduciaries
Pre-Corporation Code Fiduciary Rule for Corporate Officers: Palting v. San Jose Petroleum, Inc., 18 SCRA 924.
In Philippine jurisdiction, the members of the Board of Directors have a three-fold duty: duty of obedience, duty of diligence, and
the duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation only in
accordance with the purpose for which it was organized; (2) shall not willfully and knowingly vote for or assent to patently unlawful
49
Singson v. Commission on Audit, 627 SCRA 36 (2010).

38

acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees. Strategic Alliance Dev. Corp. v.
Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.
(b) Duty of Obedience (Sec. 25)
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the
members of the board.
The Board of Directors should act in the manner and within the formalities, if any, prescribed by its charter or by the general law.
Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)
(c) Duty of Diligence (Sec. 31)
Section 31. Liability of directors, trustees or officers. - Directors 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 acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
The President being closer to the banks operations on a day to day basis is more liable for breach of diligence when compared to
directors who must act on the basis of reports and representations to them during board meetings. Bates v. Dresser, 251 U.S. 524,
64 L. Ed. 388 (1919).
The directors shall be personally liable to reimburse the corporation for the amounts of dividends wrongfully declared and paid to
stockholders, when they failed to consider that therecoreded retained earnings in the books of the corporation was illusory
considering the various accounts receivables that had to be written off as uncollectible. Steinberg v. Velasco, 52 Phil. 953 (1929).
Although directors have the protection of the business judgment rule against personal liability for decisions that cause damage to
the corporation, such protection is available only when they act or decide based on an informed judgment and not merely accept the
representations and reports of the CEO. Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985).
To make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by the director must be
a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes
penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. Carag v.
NLRC, 520 SCRA 28 (2007); Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009).
Holding a corporate officer personally liable for directing the corporate affairs with gross negligence or in bad faith does not
amount to an application of the doctrine of piercing the veil of corporate fiction, for such personal liability is imposed directly under
Section 31 to directors and officers of corporation who are guilty of violating their duty of diligence. Sanchez v. Republic, 603 SCRA
229 (2009).
(d) Duty of Loyalty (Secs. 31 to 34)
Section 31. Liability of directors, trustees or officers. - Directors 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 acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation. (n)
Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the corporation with one or more of
its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and

39

4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure
of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is
fair and reasonable under the circumstances. (n)
Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and provided the contract
is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors
shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of
the preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of
interlocking directors. (n)
Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the venture.
(i) Doctrine of Corporate Opportunity
(ii) Using Inside Information
When a director-majority stockholder, who is the administrator of corporate affairs directly negotiating the sale of corporate
landholdings to the Government at great prices, purchases the stocks of a shareholder without informing the latter of the on-going
negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of
concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil. 947 (1909).
Doctrine of corporate opportunity applies to confidential employees of the corporation. cf. Sing Juco v. Llorente, 43 Phil. 589
(1922).
It is well established that corporate officers are not permitted to use their position of trust and confidence to further their private
interests. The doctrine of corporate opportunity s precisely a recognition by the courts that the fiduciary standards could not be
upheld where the fiduciary was acting for two entities with competing interest. The doctrine rest fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for his personal profit when the interest of the
corporation justly calls for protection. Gokongwei v. SEC, 89 SCRA 336 (1979).
(iii) Self-Dealings of Directors and Officers (Sec. 32)
The provisions of Section 32 on self-dealings by directors/trustees and officers merely incorporate well-established principles in
Corporate Law. A director who enters into a distributorship agreement with the corporation would make the contract voidable at the
option of the corporation especially when the terms are disadvantageous to the corporation. The director cannot claim the same
doctrine as an outsider dealing in good faith with the corporation. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).
(e) Contracts Between Corporations with Interlocking Directors (Sec. 33)
The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with interlocking directors
resulting in the prejudice to one of the corporation, has no application to cases where fraud is alleged to have been committed to third
parties. DBP v. Court of Appeals, 363 SCRA 307 (2001).
(f) Duty to Creditors and Outsiders
Under the trust fund doctrine, it would be a violation of the right of creditors to allow the return to the stockholders of any portion
of their capital or declare dividends outside of the unrestricted retained earnings, and that upon the corporations insolvency, the
Board of Directors are duty bound to hold its assets primarily for the payment of the creditors. Mead v. McCullough, 21 Phil. 95
(1911).
(g) Stakeholder Theory (versus the Theory of Increasing Shareholders Value): SEC Revised Code of Corporate Governance (SEC
Memorandum. Circular No. 6, s. 2009, as amended by SEC Memo. Circular No. 9, s. 2014)
12. CORPORATE OFFICERS
The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of
incorporation, by-laws, or relevant provisions of lawwhen authorized, their acts bind the corporation, otherwise, their acts cannot bind
it. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
(a) Powers of Corporate Officers:
Even though a judgment or order is addressed to the corporation only, the officers as well as the corporation itself, may be
punished for contempt for disobedience to its terms, at least if they knowingly disobey the courts mandate, since a lawful judicial
command to a corporation is in effect a command to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422
SCRA 101 (2004).
A corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed
to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700 (1961).

40

While the Court agrees that those who belong to the upper corporate echelons would have more privileges, it cannot be presume
the existence of such privileges or benefitshe who claims the same is burdened to prove not only the existence of such benefits but
also that he is entitled to the same. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
While it is a general rule that, in the absence of authority from the board of directors, no person, not even its officers, can validly
bind a corporation, the Board may validly delegate some of its functions and powers to its officers, committee and agents.
Associated Bank v. Pronstroller, 558 SCRA 113 (2008).50
(i) Rule on Corporate Officers Power to Bind Corporation
Just as a natural person may authorize another to do certain acts for and on his behalf, the Board of Directors may validly
delegate some of its functions and powers to officers, committees or agentsthe authority of such individuals to bind the corporation
is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).51
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation, but when these
officers exceeded their authority, their actions cannot bind the corporation, unless it has ratified such acts or is estopped from
disclaiming them. Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006).
Doctrine of Apparent Authority: Corporate policies need not be in writing. Contracts entered into by a corporate officer or
obligations or prestations assumed by such officer for and in behalf of such corporation are binding on the said corporation only if
such officer acted within the scope of his authority or if such officer exceeded the limits of his authority, the corporation has ratified
such contracts or obligations. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
(ii) President
In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the
domain of the general objectives of the corporations business and within the scope of his or her usual duties. Hence, it has been ruled
in other jurisdiction that the president of the corporation possesses the power to enter into a contract for the corporation, when the
conduct on the part of both the president and the corporation [shows] that he had been in the habit of acting in similar matters on
behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and
similar actions. Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998).1
It is the Board of Directors, not the President, that exercises corporate powers. It must be emphasized that the basis for agency is
representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.
Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
The President is considered as the corporations agent, and as such, his knowledge of the repeal of a resolution in another juridical
person in which his corporation has an interest, is ascribed to his principal under the theory of imputed knowledge. Rovels
Enterprises v. Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable
for the judgment obligation arising from quasi-delict, since the fact alone of being President is not sufficient to hold him solidarily
liable for the liabilities adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273
(2004).
(iii) Corporate Secretary
In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate recordshe keeps the stock and
transfer book and makes proper and necessary entries therein. It is his duty and obligation to register valid transfers of stock in the
books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to
compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
Although the corporate secretarys duty to record transfers of stock is ministerial, he cannot be compelled to do so when the
transferees title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale,
does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged
ownership of such shares on the basis merely of the contract of pledge. Mandamus will not issue to establish a right, but only to
enforce one that is already established. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349
SCRA 35 (2001).
A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the buyer relies upon a Secretarys
Certificate confirming authority. A secretarys certificate which is regular on its face can be relied upon by a third party who does not
have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would
become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997).
(iv) Corporate Treasurer
A corporate treasurers function have generally been described as to receive and keeps funds of the corporation, and to disburse
them in accordance with the authority given him by the board or the properly authorized officers. Unless duly authorized, a
treasurer, whose power are limited, cannot bind the corporation in a sale of its assets, which obviously is foreign to a corporate
treasurers function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645 (1998).
A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of crossed checks, knowing fully well
that the checks were strictly endorsed for deposit only to the payees account and not to be further negotiated, may be personally
liable for the damaged caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
(v) Manager
Although a branch manager of a bank, within his field and as to third persons, is the general agent and is in general charge of the
corporation, with apparent authority commensurate with the ordinary business entrusted him and the usual course and conduct
50
Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).
51
Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
1
Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).

41

thereof, yet the power to modify contracts of the bank remains generally with the board of directors. Being a branch manager alone is
insufficient to support the conclusion that he has been clothed with apparent authority to verbally alter terms of the banks written
contract, such a the mortgage contract. Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).
(b) POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE OFFICERS
(i) Who Is a Corporate Officer? (Sec. 25)
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or
more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the
members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Corporate officers in the context of P.D. No. 902-A are those officers of the corporation who are given that character by the
Corporation Code or by the corporations by-laws. Gurrea v. Lezama, 103 Phil. 553 (1958).2
The position of Executive Secretary, which is provided for in the Societys by-laws, is an officer position. Since the
appointment of the incumbent did not contain a fixed term, the implication was that the appointee held the appointent at the pleasure
of the Board of Directors, such that when the Board opted to replace the incumbent, technically there was no removal but only an
expiration of the term and there was no need of prior notice, due hearing or sufficient grounds before the incumbent could be
separated from office. Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).3
When the by-laws provide for the position of Superintendent/ Administrator, it is clearly a corporate officer position and issues
of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).
A mere manager not so named in the by-laws does is not an officer of the corporation. Pamplona Plantation Company v. Acosta,
510 SCRA 249 (2006).
One who is included in the by-laws of a corporation in its roster of corporate officers is an officer of said corporation and not a
mere employeebeing a corporate officer, his removal is deemed to be an intra-corporate dispute cognizable by the SEC and not by
the Labor Arbiter. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the
Management of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other
hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation
Code or by the corporations by-laws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009).4
Although the by-laws provide expressly that the Board of Directors shall have full power to create new offices and to appoint the
officers thereto, any office created, and any officer appointed pursuant to such clause does not become a corporate officer, but is
an employee and the determination of the rights and liabilities relating to his removal are within the jurisdiction of the NLRC; they do
not constitute intra-corporate controversies. A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws of an
enabling clause on the creation of just any corporate officer position. The rulings in Tabang v. NLRC, 266 SCRA 462 (1997), and
Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002), should no longer be controlling. Matling Industrial and
Commercial Corp. v. Coros, 633 SCRA 12 (2010).5
(ii) Nature of Exercise of Power to Terminate Officers
An officers removal is a corporate act, and if such removal occasions an intra-corporate controversy, its nature is not altered by
the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. Perforce, the matter would
come within the area of corporate affairs and management, and such a corporate controversy would call for SEC adjudicative
expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999); Okol v. Slimmers
World International, 608 SCRA 97 (2009).
13. LIABILITIES OF CORPORATE OFFICERS (Sec. 31)
Section 31. Liability of directors, trustees or officers. - Directors 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 acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons.
(a) GENERAL RULE: Corporate Officers Not Liable for Corporate Debts

2
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010).
3
PSBA v. Leao, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications Phils., Inc. v. King, 478 SCRA 102 (2005);
Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, Inc., 715 SCRA 534 (2014).
4
Okol v. Slimmers World Intl, 608 SCRA 97 (2009).
5
Reiterated in Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, Inc., 715 SCRA 534 (2014).

42

Mere ownership by an officer (President) of majority of the equity of the corporation do not warrant a piercing of the veil of
corporate fiction to make such officer personally liable for the debts of the corporation. Palay, Inc. v. Clave, 124 SCRA 638 (1993).6
To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad
judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill motive
or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).7
Corporate officers who entered into and signed contracts on behalf of the corporation in their official capacities cannot be made
personally liable thereunder in the absence of stipulation to that effect, due to the personality of the corporation being separate and
distinct from the persons composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990).8
Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts,
because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. Price v.
Innodata Phils., Inc., 567 SCRA 269 (2008).9
A corporation has a personality separate and distinct from the persons composing or representing it; hence, personal liability
attaches only in exceptional cases, such as when the director, trustee, or officer is guilty of bad faith or gross negligence in directing
the affairs of the corporation. Continental Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).10
Obligations incurred as a result of the directors and officers acts as corporate agents, are not their personal liability but the direct
responsibility of the corporation they represent. Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013).
(b) Rundown on Corporate Liability: Tramat Mercantile, Inc. v. CA, 238 SCRA 14 (1994).11
Before a director or officer of a corporation can be held personally liable for corporate obligations, the following requisites must
concur: (a) the complaint must allege that the director or officer assented to patently unlawful acts of the corporation, or the officers
or directors were guilty of gross negligence or bad faith; and (b) the complainant must clearly and convincingly prove such unlawful
acts, negligence or bad faith. Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013).12
An officer-stockholder who signs in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate
juridical entity: Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape liability
under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to
avoid injustice and inequity. Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).
The finding of solidary liability among the corporation, its officers and directors would patently be baseless when the decision
contains no allegation, finding or conclusion regarding particular acts committed by said officers and director that show them to have
been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate
officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997).13
While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the
corporate debts, a corporate officer may nevertheless divest himself of this protection by voluntarily binding himself to the payment
of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003).
The corporate representatives signing as a solidary guarantee as corporate representative did not undertake to guarantee
personally the payment of the corporations debt embodied in the trust receipts. Debts incurred by directors, officers and employees
acting as such corporate agents are not theirs but the direct liability of the corporation they represent. As an exception, directors or
officers are personally liable for the corporations debt if they so contractually agree or stipulate. Tupaz IV v. Court of Appeals, 476
SCRA 398 (2005).
Officers of a corporation may become liable for its loans when they have breached their duty of diligence under Section 31 of the
Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007);14
Bad faith does not arise just because a corporation fails to pay its obligation, because the inability to pay ones obligation is not
synonymous with fraudulent intent not to honor the obligations. In order to piece the veil of corporate fiction, for reasons of
negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be gross.
Magaling v. Ong, 562 SCRA 152 (2008).
Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the corporation or acquire any
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. EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
Where the Chairman & President has made himself accountable in the promissory note in his personal capacity and as
authorized by the Board Resolution, and in the absence of any representation on the part of corporation that the obligation is all its
own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case.
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).
(c) SPECIAL PROVISIONS IN LABOR LAWS:
6
Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc. Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 (1962).
7
EPG Constructions Co. v. CA, 210 SCRA 230 (1992).
8
Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949); Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Laborte v. Pagsanjan Tourism Consumers Cooperative,
713 SCRA 536 (2014).
9
Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992); Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); St. Tomas
v. Salac, 685 SCRA 245 (2012).
10
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Pena, 659 SCRA 418 (2011) ; Gotesco Properties, Inc. v. Fajardo, 692 SCRA 319 (2013).
11
MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA 700 (1999); Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001); Malayang Samahan
ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L. Carlos Construction, Inc. v. Marina Properties
Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Abott Laboratories Phil. V. Alcaraz, 701 SCRA 682 (2013); SPI Technologies, Inc. v. Mapua, G.R. No. 199022, 07 April
2014.
12
Abott Laboratories Phil. V. Alcaraz, 701 SCRA 682 (2013); Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013).
13
Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
14
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005)

43

Since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the
person acting in the interest of (the) employer as defined in Art. 283 of the Labor Code. A.C. Ransom Labor Union-CCLU v.
NLRC, 142 SCRA 269 (1986).
(i) Overturning the A.C. Ransom Ruling:
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation
because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation.
David v. National Federation of Labor Unions, 586 SCRA 100 (2009).
Corporate officers cannot be held personally liable for damages on account of employees dismissal because the employer
corporation has a personality separate and distinct from its officers who merely acted as its agents. Malayang Samahan . . . sa M.
Greenfields v. Ramos, 357 SCRA 77 (2001).15
Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and
bad faith in terminating their employment. AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).16
Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable
for the corporate obligations arising from such act. Maglutac v. NLRC, 189 SCRA 767 (1990);17 and for the separate juridical
personality of a corporation to be disregarded as to make the highest corporate officer personally liable on labor claims, the
wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).
A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by
them, acting as corporate agents, are not theirs but the direct accountabilities of the corporation they represent. In labor cases,
corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees done with
malice or bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).18
In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of
corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the
illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board
Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and
unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997).
(ii) Limiting the A.C. Ransom Ruling to Insolvent Corporation
A.C. Ransom is not in point because there the corporation actually ceased operations after the decision of the Court was
promulgated against it, making it necessary to enforce it against its former president. When the corporation is still existing and able to
satisfy the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC, 171
SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for the employees claims are stockholdersofficers of employer-corporation. In the case at bar, a mere general manager while admittedly the highest ranking local representative
of the corporation, is nevertheless not a stockholder and much less a member of the Board of Directors nor an officer thereof. De
Guzman v. NLRC, 211 SCRA 723 (1992).
(iii) A.C. Ransom doctrine has been reiterated subsequently in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).19
(iv) Definitive Overturning of A.C. Ransom Ruling:
It is settled that in the absence of malice, bad faith, or specific provisions of law, a stockholder or an officer of a corporation
cannot be made personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).20
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22
strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case.
[What applies therefore is the ruling [i]n Santos v. NLRC, [254 SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).21
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the
Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporationthe governing law on
personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Code. Pantranco
Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).22
(d) Personal Liability of Trustees and Officers of Non-Stock Corporation
The non-stock corporation acted in clear bad faith when it sent the final notice to a member under the pretense they believed him
to be still alive, when in fact it had very well known that he had already died. Non-stock corporations and their officers are not
exempt from the obligation imposed by Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code, which
provisions enunciate a general obligation under law for every person to act fairly and in good faith towards one another. Valley Golf
and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
15
AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009).
16
Reiterated in Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); M+W Zander Philippines,
Inc. v. Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe, Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor v.
Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).
17
Reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
18
Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011); Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011); Alert Security and Investigation
Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing Enterprises, Inc. v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co., Inc. v. Blas, 667 SCRA 727 (2012).
19
Villanueva v. Adre, 172 SCRA 876 (1989); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996); NYK Intl Knitwear Corp. Phil. v. NLRC, 397
SCRA 607 (2003).
20
Citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics
Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils., Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System
Construction, Inc., 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011). Grandteq
Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011); Mirant (Philippines) Corp. v. Caro, G.R. No. 181490, 23 April 2014.
21
Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Company v. Acosta, 510 SCRA 249 (2006); Elcee Farms, Inc. v.
NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
22
Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100 (2009); Alert Security and Investigation Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011).

44

XI. RIGHT OF STOCKHOLDERS AND MEMBERS


1. What Does a Share Represent?
While shares of stock constitute personal property, they do not represent property of the corporation [ i.e., they are properties of the
stockholders who own them]. A share of stock only typifies an aliquot part of the corporations property, or the right to share in its
proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties]
of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate
property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
The registration of shares in a stockholders name, the issuance of stock certificates, and the right to receive dividends which pertain
to the shares are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of
Appeals, 349 SCRA 35 (2001).
As early as the case of Fisher v. Trinidad, the Court already declared that [t]he distinction between the title of a corporation, and the
interest of its members or stockholders in the property of the corporation, is familiar and well-settled. The ownership of that property is in
the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part
of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the
property remaining, upon the termination or dissolution of the corporation, after payment of its debts. Mobilia Products, Inc. v.
Umezawa, 452 SCRA 736 (2005).
2. Preemptive Rights (Sec. 39)
Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued
in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good
faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted debt.
Pre-emptive right under Section 39 refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of
shares of any class, in proportion to their respective shareholdings. Although it can validly be withdrawn, it cannot be done in breach of
fiduciary duties such as to perpetuate control over the corporation. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA
461 (2011).
The early pronouncement in Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983) that pre-emptive right only covers increases in
authorized capital stock, the new wordings under Section 39 as to cover all issuances of shares has been corrected in Dee v. SEC, 199
SCRA 238 (1991).
3. Right to Transfer or Dispose of Shareholdings (Sec. 63)
Section 63. Certificate of stock and transfer of shares. 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. Shares 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 authorized to make the transfer. No 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.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
Shares of stock of a corporation are not owned or are the assets of the corporationthey are owned by the stockholders of record.
The corporation whose shares of stock are the subject of transfer transaction (through sale, assignment, donation, or any other mode of
conveyance) need not be a part to transaction to be valid; however, to bind the corporation as well as third parties, it is necessary that
the transfer is recorded in the books of the corporation. Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., 692
SCRA 706 (2013).
(a) Restriction on Transfers:
Restraint of Trade: An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and
reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such
agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918).
A contractual undertaking on restriction of transfer of shares that has a reasonable business purpose and limited in coverage is
valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).
(i) RIGHT OF REFUSAL:
Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may
be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at
liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general
provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The indication on th face of the stock certificate that it is Nontranferable alone odes no compel the corporation to buy back the
shares from the stockholder, and held that in 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 corporation to comply with a non-existent or
imaginary obligation. Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
The right of first refusal is primarily an attribute of ownership. Conversely, a waiver thereof is an act of ownership. To allow
the PCGG to vote the sequestered shares for this purpose would be sanctioning its exercise of an act of strict ownership. PCGG v.
SEC, G.R. No. 82188, 30 June 1988 (unrep.)

45

A corporation cannot by its board, its by-laws, or the act of its officers, create restrictions in stock transfers, because Restrictions
in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. Bylaws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the
charter of the corporation. The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares
intended to be transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, and where there exists a right of
first refusal agreement between the co-shareholders, the fact that the corporations owns land cannot deprive stockholders of their
right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the corporation from owning land. J.G. Summit Holdings, Inc. v. Court of
Appeals, 450 SCRA 169 (2005).
(b) Remedy If Registration Refused:
Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the corporate books when the
petitioner is not the registered stockholder nor does he hold a power of attorney from the latter. This is under the general rule that as
between the corporation one the one hand and its shareholders on other, the corporation looks only to its books for the purpose of
determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not necessarily
be recognized as such by the corporation and its officers, in absence of express instructions of the registered owner to make such
transfer to the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911).23
Period to Enforce. Considering that the law does not prescribe a period within which the registration of purchase of shares
should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the
transfer. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
A stipulation on the stock certificate that any assignment would not be binding on the corporation unless registered in the
corporate books as required under the by-laws and without providing when registration should be made, would mean that the cause of
action and the determination of prescription period would begin only when demand for registration is made and not at the time of the
assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958).
The claim for damages of what the shares could have sold had the demand for their registration in the name of the buyer been
complied with is deemed to be speculative damage and non-recoverable Batong Buhay Gold Mines v. CA, 147 SCRA 4 (1987).
4. Rights to Dividends (Sec. 43)
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
The term dividend in its technical sense and ordinary acceptation is that part of portion of the profits of the enterprise which the
corporation, by its governing agents, sets apart for ratable division among the holders of it capital stockit is a payment, and the right
thereto is an incident of ownership of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).
Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the
stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Sec.
43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than twothirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a stockholder is not a matter of right
but a matter of consensus. Furthermore, interest bearing stocks, on which the corporation agrees absolutely to pay interest before
dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net
earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
When the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic by way of declaring the Republic to be
the rightful owner of said shares, that necessarily included the reconveyance to the Republic of the dividends and interest accruing
thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).

5. Right to Vote and to Attend Meetings (Secs. 6 and 89)


Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in
case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation
23
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).

46

which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated
par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued
for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by
the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares
shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided
in this Code shall be deemed to refer only to stocks with voting rights.
Section 89. Right to vote. The right of the members of any class or classes to vote may be limited, broadened or denied to the
extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of
class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the
provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange
Commission.
Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the
absence of fraud the action of the stockholders meeting cannot be collaterally attacked on account of such participation, even if it be
shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).
One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through
his votea right inherent in and incidental to the ownership of corporate stock, and as such is a property right. Castillo v. Balinghasay,
440 SCRA 442 (2004).
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted
or considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock of the
corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6, each
share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67.
Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders, or,
having so passed, have again been purchased by the corporation. These shares are not to be taken into consideration in determining
majorities. When the law speaks of a given proportion of the stock, it must be construed to mean shares that have passed from the
corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216 (2006).
The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares
may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). The PCGG may, however, be granted
such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2)
demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government
until a decision, ruling with finality on their ownership, is promulgated by the proper court. Nevertheless, the foregoing "two-tiered" test
does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the
subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to
vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one, applies. Republic v. COCOFED,
372 SCRA 462 (2001); Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006).
(a) Instances When Stockholders Entitled to Vote:
- Amendment of articles of incorporation (Sec. 16)
- Election of directors and trustees (Sec. 24)

47

- Investment in another business or corporation (Secs. 36 and 42)


- Increase and Decrease of capital stock (Sec. 38)
- Incurring, or increasing bonded indebtedness (Sec. 38)
- Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec. 40)
- Declaration of stock dividends (Sec. 43).
- Management contracts (Sec. 44)
- Adoption, amendment and repeal of by-laws (Sec. 48).
- Fixing of consideration of no par value shares (Sec. 62)
- Merger and consolidation (Sec. 72)
(b) Joint Ownership (Sec. 56)
Section 56. Voting in case of joint ownership of stock. In case of shares of stock owned jointly by two or more persons, in
order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the coowners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are
owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy
therefor.
(c) Pledgor, Mortgagors and Administrators (Sec. 55)
Section 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock
corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee
or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate
corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members without need of any written proxy.
When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does
not become the owner thereof simply by the failure of the registered stockholder to pay his loan. Consequently, without proper
foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to bring suits on behalf of the
deceased, do no prohibit the heirs from representing the deceased. When no administrator has been appointed, there is all the more
reason to recognize the heirs as the proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).
(d) Treasury Share No Voting Rights (Sec. 57)
Section 57. Voting right for treasury shares. Treasury shares shall have no voting right as long as such shares remain in the
Treasury.
Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA 216 (2006).
(e) Voting Rights of Members
In stock corporation, shareholders may generally transfer their shares; and on the death of a shareholder, the executor or
administrator is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from a
non-stock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. In other words, the determination of whether or not dead members are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of incorporation or bylaws. Tan v. Sycip, 499 SCRA 216 (2006).
Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member.
Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation,
unless otherwise provided in the articles of the incorporation or the bylaws. Applying Section 91 to the present case, we hold that
dead members who are dropped from the membership roster in the manner for the cause provided for in the By-Law of GCHS are not
to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11
remaining members, the quorum in the present case should be 6. therefore, there being a quorum, the annual members meeting,
conducted with six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006).
(f) Conduct of Stockholders' Meetings:

Kinds and Requirements of Meetings (Secs. 49 and 50);

Section 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be regular or special. (n)
Section 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be
held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board
of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of
record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws:
Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise
provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

48

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon
petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present
have chosen one of their number as presiding officer.

Place and Time of Meeting (Secs. 51 and 93);

Section 51. Place and time of meetings of stockholders of members. Stockholders or members meetings, whether regular or
special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in
the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All 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.

Quorum (Sec. 52)

Section 52. Quorum in meetings. Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock
corporations.
Quorum is based on the totality of the shares which have been subscribed and issued whether it be founders shares or common
shares. To base the computation of quorum solely on the obviously deficient, if not inaccurate STB, and completely disregarding the
issued and outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or successors in
interest of the said shares. The stock and transfer book cannot be used as the sole basis for determining the quorum as it does not
reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger
amount of shares issued and outstanding as compared to that listed in the stock and transfer book. Lanuza v. CA, 454 SCRA 54
(2005).
6. Contracts and Agreement Affecting Shareholdings
(a) Proxy (Sec. 58)
Section 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members.
Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall
be valid and effective for a period longer than five (5) years at any one time.
Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the validation of such secured
and submitted proxies. It is possible that an intra-corporate controversy may animate a disgruntled shareholder to complain to the
Securities and Exchange Commission (SEC) a corporations violations of SEC rules and regulations, but that motive alone should not
be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu
proprio basis. GSIS v. Court of Appeals, 585 SCRA 679 (2009).
The SECs power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as
it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the
voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the
Securities and Exchange Commission (SEC) to regulate proxies remains extant and could very well be exercised when stockholders
vote on matters other than the election of directors. GSIS v. Court of Appeals, 585 SCRA 679 (2009).
(b) Voting Trust Agreements (Sec. 59)
Section 59. Voting trusts. One or more stockholders of a stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five
(5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting
trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
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.
The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in
the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the
voting trust agreement, and thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.

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Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby
be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.
A VTA separates the voting rights and other rights covered of the stock from other attributes of ownership, intended to be
irrevocable for a definite period of time and the purpose of which is to give to the trustee to acquire voting control of the corporation.
Lee v. CA, 205 SCRA 752 [1992]).
The trustor has a right to terminate the VTA for breach thereof. Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
(c) Pooling Agreements or Shareholders Agreements (Sec. 100)
Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by
all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between
and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the
articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by
this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be
invalidated as between the parties on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground
that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion
or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a
close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate
liability insurance.
7. Rights to Inspect and Copy Corporate Records
(a) Basis of Right
The stockholders right of inspection of corporate books and records is based on his ownership of the assets and property of the
corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership or a quasi-ownership. The right of inspection is predicated upon the necessity of selfprotection on the part of the stockholder. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
The stockholders right of inspection of the corporations books and records is based upon his ownership of shares in the
corporation and the necessity for self-protection. Puno v. Puno Enterprises, 599 SCRA 585 (2009).
(b) Limitations on Right
The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it should be exercised at
reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and
minutes has not improperly used any information secured through any previous examination of records; and (c) the demand is made
in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).
Summary of Rulings: The right to inspect corporate books and records:
Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know
corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919).
Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises.
Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth
v. Isabela Sugar Co., 57 Phil. 266 (1932).
Cannot be limited to a period of ten days shortly prior to the annual stockholders meeting, as such would be an unreasonable
restriction and violates the legal provision granting the exercise of such right at reasonable hours. Pardo v. Hercules Lumber
Co., 47 Phil. 964 (1924).
(c) Specified Records (Secs. 74, 75 and 141)

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Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office
a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given,
whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done
at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee,
stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the 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 action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings 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.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, 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 Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the
board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporations 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.
Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all
stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made; 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.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B.
No. 268.)
Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or
member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the
end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and
liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or
members a financial report of the operations of the corporation for the preceding year, which shall include financial
statements, duly signed and certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath
by the treasurer or any responsible officer of the corporation.
Section 141. Annual report or corporations. Every corporation, domestic or foreign, lawfully doing business in the
Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases,
covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may require.
Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission.
(d) Remedies If Denied: Mandamus
In contrasting the language of the present Corporation Code from the old Corporation Law, the law now provides for express
limitation on the right to inspect and now requires as a condition for such examination that one requesting it must not have been
guilty of using improperly any information secured through a prior examination, an that the person asking for such examination must
be acting in good faith and for a legitimate purpose in making his demand. The stockholder seeking to exercise the right of inspection
must set forth the reasons and the purposes for which he desires such inspection. Gonzales v. PNB, 122 SCRA 489 (1983).
Burden of proof to show that examination is for improper purpose is on the part of the corporation. Republic v. Sandiganbayan,
199 SCRA 39 (1999).
(e) Criminal Sanction under Section 144
Section 144. Violations of the Code. Violations of any of the provisions of this Code or its amendments not otherwise
specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in
the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved
in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not
preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said
violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code.
In Ang-Abaya v. Ang, 573 SCRA 129 (2008), the Court had the occasion to enumerate the requisites before the penal provision
under Section 144 of the Corporation Code may be applied in a case of violation of a stockholder or members right to inspect the

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corporate books/records as provided for under Section 74 of the Corporation Code. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517
(2009).
In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature
of a justifying circumstance that would exonerate those who raise and are able to prove the samewhere the corporation denies
inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the
corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009).
(f) Confidential Nature of SEC Examinations (Sec. 142)
Section 142. Confidential nature of examination results. All interrogatories propounded by the Securities and Exchange
Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other
official authorized by law to make an examination of the operations, books and records of any corporation, shall be kept
strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, answers
or results are necessary to be presented as evidence before any court.
8. Appraisal Right (Secs. 81 to 86 and 105)
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of his shares in the following instances:
1. In 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 authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In 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 Code; and
3. In case of merger or consolidation. (n)
Section 82. How right is exercised. The appraisal right may be exercised by any stockholder who shall have voted against the
proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the
vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be
deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action.
If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing
stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within
thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n)
Section 83. Effect of demand and termination of right. From the time of demand for payment of the fair value of a stockholders
shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all
rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this
Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be
restored. (n)
Section 84. When right to payment ceases. No demand for payment under this Title may be withdrawn unless the corporation
consents thereto. If, 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 Securities and Exchange Commission
where such approval is necessary, or if the Securities and Exchange Commission 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. (n)
Section 85. Who bears costs of appraisal. The costs and expenses of appraisal shall be borne by the corporation, unless the fair
value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)
Section 86. Notation on certificates; rights of transferee. Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title.
If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the
rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a
regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee.
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares. This
right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code. Clearly, the right of appraisal may
be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the
stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder
to have his interest purchased and to retire from the corporation. Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010).
9. RIGHT TO FILE DERIVATIVE SUITS
Derivative suits are governed by a special set of procedural rules known as the Interim Rules of Procedure Governing IntraCorporate Controversies under Republic Act No. 8799 (A.M. No. 01-2-04-SC; effective 01 April 2001). Section 1, Rule 1 thereof
expressly lists derivative suits among the cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009).

52

A family corporation is not exempt from complying with the clear requirements and formalities of the rules for filing a derivative
suit. There is nothing in the pertinent laws or rules which state that there is a distinction between family corporations and other types of
corporations in the institution by a stockholder of a derivative suit. Ang v. Spouses Ang, 699 SCRA 272 (2013).
(a) Derivative Suit Must Be Effected When Board Cannot Properly Exercise Business Judgment
General Rule: In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf of the
corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any
court by a corporation is lodged in the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v.
Court of Appeals, 292 SCRA 503 (1998).
While questions of policy and management are left to the honest decision of the officers and directors of a corporation, and the
courts are without authority to substitute their judgment for the judgment of the Board of Directors; yet where the corporate directors
are guilty of breach of trustnot of mere error of judgment or abuse of discretionand intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation. However, the
corporation is the real party in interest in a derivative suit and the suing stockholder is only a nominal party. Cua, Jr. v. Tan, 607
SCRA 645 (2009).
Under Sec. 36, in relation to Sec. 23, a corporations power to sue is lodged with its board of directors or trustees. An individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks 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. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.
Chua v. Court of Appeals, 443 SCRA 259 (2004).24
(b) Nature of the Power to File Derivative Suit
A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed
against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of
the minority shareholders against abuses by the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).25
The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce rights which are
derivative (secondary) in nature, i.e., to enforce a corporate cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312
(2005).26
A stockholders right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA 588 (2009).
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order
to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation-in such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in
interest. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
(c) Requisites of Derivative Suit
In the case of, we enumerated the foregoing requisites before a stockholder can file a derivative suit: (a) the party bringing suit
should be a shareholder during the time of the act or transaction complained of, the number of shares not being material; (b) the party
has tried to exhaust intra-corporate remedies, relief, but the latter has failed or refused to heed his plea; and (c) the cause of action
actually devolves on the corporation; the wrongdoing or harm having been or being caused to the corporation and not to the particular
stockholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).27
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following
requirements which a stockholder must comply with in filing a derivative suit: A stockholder or member may bring an action in the
name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts
complained of; and (4) The suit is not a nuisance or harassment suit. Yu v. Yukayguan, 589 SCRA 588 (2009).28
Nuisance and harassment suits are prohibited, and in determining whether a suit is a nuisance or harassment suit, the court shall
consider, among others, the follow: (a) The extent of the shareholding or interest of the initiating stockholder or member; (b) subject
matter of the suit; (c) legal and factual basis of the complaint; (d) availability of appraisal rights for the act or acts complained of; and
(e) prejudice or damage to the corporation. In case of nuisance or harassments suits, the court may motu proprio or upon motion
dismiss the case. Ang v. Ang, 699 SCRA 272 (2013).
(d) Who May Bring the Suit
The relators must be stockholders both at time of occurrence of the events constituting the cause of action and at the time of the
filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911); Gochan v. Young, 354 SCRA 207 (2001).
A minority stockholder can file a derivative suit against the president for diverting corporate income to his personal accounts.
Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
A lawyer engaged as counsel for a corporation cannot represent members of the same corporations board of directors in a
derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is prohibited by the
Code of Professional Responsibility. Hornilla v. Salunat, 405 SCRA 220 (2003).
24
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
25
Ang v. Ang, 699 SCRA 272 (2013).
26
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
27
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007)Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548
(2009).
28
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan, 607 SCRA 645
(2009); Ang v. Ang, 699 SCRA 272 (2013).

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A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the
suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a
defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. Chua v.
Court of Appeals, 443 SCRA 259 (2004).29
Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly
institute a derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real
party-in-interest. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
A minority stockholder and member of the board has no power or authority to sue on the corporations behalf. Nor can we uphold
this as a derivative suit, since it is required that the minority stockholder suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated
who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. Tam Wing Tak
v. Makasiar, 350 SCRA 475 (2001); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
The status of heirs as co-owners of shares of stocks prior to the partition of the decedents estate does not immediately and
necessarily make them stockholders of the corporation-unless and until there is compliance with the Section 63 of the Corporation
Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Reyes v. Regional Trial
Court of Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).
(e) Exhaustion of Intra-Corporate Remedies:
A condition precedent to the filing of a derivative suit is that the party has tried to exhaust inta-corporate remedies, i.e., has made
a demand on the Board of Directors for the appropriate relief, but the latter has failed to or refused to heed his plea. Everett v. Asia
Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed without prior demand
upon the Board of Directors where the legality of the constitution of the Board lies at the center of the issues. DBP v. Pundogar, 218
SCRA 118 (1993).
While it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his
grievances within the corporation, except when such remedy is complete control of the person against whom the suit is being filed.
The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have been useless and
an exercise in futility. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 557 (2009).
The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert all reasonable efforts to exhaust
all remedies available under the articles of incorporation, by laws, laws or rules governing the corporation or partnership to obtain
relief he desires is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought
had failed. Yu v. Yukayguan, 589 SCRA 588 (2009).
(f) Nature of Relief or Remedies Prayed For:
The complaint cannot demand for the defendants to pay the suing stockholders the value of their respective participation in the
assets that have been damaged, for a derivative suit must have cause of action for the benefit of the corporation. Evangelista v.
Santos, 86 Phil. 387 (1950).30
Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or
interest of the corporation. When the relief prayed for do not pertain to the corporation, then it is an improper derivative suit. Legaspi
Towers 300, Inc. v. Muer, 673 SCRA 453 (2012),31 citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.
The allegations of injury to the relators can co-exist with those pertaining to the corporation, and does not disqualify them from
filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring
directors. Gochan v. Young, 354 SCRA 207 (2001).
In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. A suit to
enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary restraining order enjoining a person from
representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the
corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and
indirectly to the stockholders. In such derivative suit, the corporation is the real party in interest while the stockholder filing suit for
the corporations behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405
SCRA 220 (2003).
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966).
(g) Venue for Derivative Suit
Under Section 5, Rule 1 of the Interim Rules, the proper venue for derivative suit would be in the RTC which has jurisdiction
over the principal office of the corporation. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
10. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 122)
Section 122. Corporate liquidation. 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 (3) 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 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 business for which it was established.
29
Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).
30
Reyes v. Tan, 3 SCRA 198 (1961); Republic Bank v. Cuaderno, 19 SCRA 671 (1967).
31
Also R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005); Ang v. Ang, 699 SCRA 272 (2013).

54

At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the
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.
Upon 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 Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its debts and liabilities.
In the liquidation of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be
distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon
liquidation is what is known as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).
XII. SHARES OF STOCK AND CAPITAL STOCK
1. Power of the Corporation to Issue Shares of Stock
The power to issue shares of stock in a corporation is lodged in the board of directors and no stockholders meting is required to
consider it because additional issuances of shares of stock does not need approval of the stockholderswhat is only required is the board
resolution approving the additional issuance of shares. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
2. Concept of Capital Stock (Sec. 137)
Section 137. Outstanding capital stock defined. The term "outstanding capital stock", as used in this Code, means the total
shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially
paid, except treasury shares.
By express provision of Sec. 137, paid-up capital is that portion of the authorized capital stock which has been both subscribed and
paid. . . Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical signification in
Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up. MSCINACUSIP v. National Wages and Productivity Comm., 269 SCRA 173 (1997).
The term capital and other terms used to describe the capital structure of a corporation are of universal acceptance, and their
usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The
capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need
not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of
the premium if any, in consideration of the original issuance of the shares. NTC v. Court of Appeals, 311 SCRA 508 (1999).
The outstanding capital stock is defined under Sec. 137 as the total shares of stock issued to subscribers or stockholders whether or
not fully or partially paid (as long as there is binding subscription agreement) except treasury shares. Thus, quorum is based on the
totality of the shares which have been subscribed and issued, whether it be founders shares or common shares. Lanuza v. Court of
Appeals, 454 SCRA 54 (2005).
An investment, being in the nature of equity, is an expenditure to acquire property or other assets in order to produce revenue. It is
the placing of capital or laying out of money in a way intended to secure income or profit from its employment. Unlike a deposit of
money or a loan that earns interest, cannot be assured of a dividend or an interest on the amount invested, for dividends on investments
are granted only after profits or gains are generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
Advances for Future Subscription is a receivable account and does not form part of the capital stock of the corporation since it
does not correspond to any particular issuance of shares of stock. Central Textile Mills v. National Wage and Productivity Comm., 260
SCRA 368 (1996). Consequently there is no liability for the payment of the documentary stamp tax on such deposit for future
subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.
Commissioner of Internal Revenue v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
3. Classification of Shares (Sec. 6)
Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in
case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated
par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued
for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by
the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

55

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares
shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided
in this Code shall be deemed to refer only to stocks with voting rights.
It is not correct to say that holders of the preferred shares lose all their voting rights, since Section 6 of the Corporation Code provides
for the situations where non-voting shares like preferred shares are granted voting rights. Philippine Coconut Producers Federation. v.
Republic, 600 SCRA 102 (2009).
(a) Common Shares
A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Comm. of Internal
Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(b) Preferred Shares:

(i) Participating and Non-participating


(ii) Cumulative and Non-cumulative
(iii) Par Value and No Par Value

Even for preferred shares issued with a 1% dividend rate, the stockholders do not become entitled to the payment thereof as a
matter of right without the necessity of a prior declaration of dividends which can only come from existing retained earnings.
Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. CIR v. Court of
Appeals, 301 SCRA 152 (1999).
In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the
same voting rights as common shares. However, preferred shareholders are often excluded from any control, that is, deprived of the
right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares
can be deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common shareholders to vote is invalid. Gamboa v. Teves, 652 SCRA
690 (2011).
(b) Redeemable Shares (Sec. 8):
Section 8. Redeemable shares. Redeemable shares may be issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and
conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate
of stock representing said shares.
When the certificates of stock recognizes redemption, but the option to do so is clearly vested in the corporation, the redemption
is clearly the type known as optional and rest entirely with the corporation, and that the stockholder is without right to either
compel or refuse the redemption of his shares of stock. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or
not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash dividends. Commissioner of Internal Revenue v. Court of
Appeals, 301 SCRA 152 (1999).
(c) Founder Shares (Sec. 7)32
Section 7. Founders shares. Founders 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 (5) years subject to the approval of the
32
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a class of shares to have the exclusive right to vote and be voted for
into the Board of Directors, that such shares would essentially be founders share was raised but not resolved by the Court.

56

Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the
Securities and Exchange Commission.
(d) Treasury Shares (Sec. 9)
Section 9. Treasury shares. Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of directors.
Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or
other means, and do not have the status of being outstanding shares and are not entitled to be voted upon nor participate in dividend
declarations. Commissioner v. Manning, 66 SCRA 14 (1975).
A treasury share, which may be common or preferred, may be used for a variety of corporate purposes, such as for a stock bonus
plan for management and employees, or for acquiring another company. It may be held indefinitely, resold or retired. While held in
the companys treasury, the stock earns no dividends and has no vote in company affairs. Philippine Coconut Producers Federation,
Inc. v. Republic, 600 SCRA 102 (2009).
(e) Stock Warrants
(f) Stock Options
(g) Re-Classification of Shares
Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But the
exchange is differentthere would be a shifting of the balance of stock features like priority in dividend declarations or absence of
voting rights. Yet neither the reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of
shares, without more, produces no realized income to the subscriber. There is only a modification of the subscribers rights and
privilegeswhich is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of
his entire interests and not when there is still maintenance of proprietary interest. CIR v. Court of Appeals, 301 SCRA 152 (1999).
The conversion of common shares into preferred shares, pursued to the amendment of the SMC articles of incorporation, is a
legitimate exercise of corporate powers under the Corporation Code. The conversion does not amount to SMC using its funds to
effect conversion, but would amount merely to a reconfiguration of said (common) shares into preferred shares. Philippine Coconut
Producers Federation, Inc. v. Republic, 600 SCRA 102 (2009).
4. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15 (1918).
5. Quasi-Reorganization
(a) Reduction of Capital Stock (Sec. 38)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. No corporation shall
increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote
of the board of directors and, at a stockholders meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increase
or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman
and the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of nopar stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital
stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective
stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall
stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any

57

certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased
capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote
of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
Reduction of capital stock cannot be employed to avoid the corporations obligations under the Labor Code. Madrigal & Co. v.
Zamora, 151 SCRA 355 (1987).
(b) Stock Splits versus Stock Consolidations
6. Shareholders Not Corporate Creditors: Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).
7. Subscription Contract (Secs. 60 and 72; overturned Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]).
Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer
to it as a purchase or some other contract.
xxx
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.
(a) Purchase Agreement: Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942).
(b) Pre-Incorporation Subscription (Sec. 61)
Section 61. Pre-incorporation subscription. A subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and Exchange Commission.
When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails to issue the
covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate
distribution of assets prior to dissolution. Ong Yong v. Tiu, 375 SCRA 614 (2002).
(c) Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216 (2006).33
(d) Condition of Payment Provided in By-laws.
8. CONSIDERATION (Sec. 62):

(a) Cash (b) Property (c) Service (d) Shares (e) Retained Earnings

Section 62. Consideration for stocks. Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by
the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to
authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

33
Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bituloc Sawmill, Inc., 23 SCRA 1366 (1968); National Exchange Co. v. Dexter, 51 Phil. 601 (1928).

58

Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings
converted into equity in the corporations books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).34
(a) Watered Stocks (Sec. 65)
Section 65. Liability of directors for watered stocks. Any director or officer of a corporation consenting to the issuance of stocks
for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate
secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between
the fair value received at the time of issuance of the stock and the par or issued value of the same.
(b) Unpaid Subscription (Secs. 66 and 67):
Section 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest
is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)
Section 67. Payment of balance of subscription. Subject to the provisions of the contract of subscription, the board of directors
of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary.
Payment 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. Failure 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. If within thirty (30)
days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of directors orders otherwise.
A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability
thereon without the consent of all the stockholders. Lingayen Gulf Elect Power v. Baltazar, 93 Phil. 404 (1953).
A stockholder who is employed with the company, cannot offset his unpaid subscription against his awarded claims for wages,
where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989).
(c) Delinquency on Subscription (Secs. 68, 69, 70 and 71)
Section 68. Delinquency sale. The board of directors may, by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which
shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by
registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock,
the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of
directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books
of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the
corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in
full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.
(39a-46a)
Section 69. When sale may be questioned. No action to recover delinquent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless 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
sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6)
months from the date of sale. (47a)
Section 70. Court action to recover unpaid subscription. Nothing in this Code shall prevent the corporation from collecting
by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and
expenses. (49a)
Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to vote or to representation at any
stockholders meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any.
Under the trust fund doctrine, a board resolution releasing the stockholders from payment of the balance of their subscription is
wholly ineffectual; and the trustee of the insolvent corporation has still recover the amounts waived. Philippine Trust Co. v. Rivera,
44 Phil. 469 (1923).

34
The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation,
and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).

59

In spite of a specific provision in the by-laws providing for the manner of collection of unpaid subscription, the Board of
Directors still has the business judgment prerogative of determining the best manner of collecting unpaid subscriptions, which may
include the filing of a collection suit. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923).
The power of the Board of Directors to make a call on unpaid subscription cannot be limited by the provisions of the subscription
contract. Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 (1932).
The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of
demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939).
9. CERTIFICATE OF STOCK (Sec. 63)
Section 63. Certificate of stock and transfer of shares. 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. Shares 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 authorized to make the transfer. No 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.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
(a) Nature of Certificate:
A stock certificate is not necessary to render one a stockholder in a corporation; nevertheless, it is the paper representative or
tangible evidence of the stock itself and the various interests therein. The stock certificate expresses the contract between the
corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder
to the corporation. Tan v. SEC, 206 SCRA 740 (1992).35
A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
The fact that the stock certificates registered in the name of one person are found in the possession of another stockholder does
not prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible evidence of ownership of
shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock
certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
Even without the covering certificate of stock having been issued, yet, the registered subscriber to the shares may validly and
legally transact with the shares, and sell and dispose of them to ay interest buyer thereof provided he complies with the right of first
refusal provided for in the by-laws. (?) Makati Sports Club, Inc. v. Cheng, 621 SCRA 103 (2010).
(b) Quasi-Negotiable Character of Certificate of Stock
A certificate of stock is merely a quasi-negotiable instrument in the sense that it may be transferred by endorsement, coupled with
delivery; but it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered
owners or transferors creditors may have under the law, except only insofar as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel. De los Santos v. Republic, 96 Phil. 577 (1955).
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally
authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The
delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new
transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of
Appeals, 292 SCRA 503 (1998).36
Since physical delivery of the certificates of stock is one of the essential requisites for the transfer of ownership of the stocks
purchased, then the failure of the seller-registered owner to delivery the stock certificates would constitute a material breach that
warrants the rescission of the sale of the shares upon the option of the buyer. Fil-Estate Golf v. Vertex Sales and Trading, 698 SCRA
272 (2013).
(c) Right to Certificate of Stock for Fully Paid Shares (Sec. 64)
Section 64. Issuance of stock certificates. No certificate of stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid
The Board resolution which prohibited from voting shares of stocks which were not fully paid, although certificates have been
issued for them is unlawful, since not fully paid shares which are not delinquent may not be denied their voting rights. Unless
prohibited by the by-laws, certificates of stock may be issued for less than the number of the shares subscribed for provided the par
value of ach of the stocks represented by each of the certificates has been paid. Baltazar v. Lingayen Gulf Elect. Power Co., Inc.,
14 SCRA 522 (1965).
(d) Lost or Destroyed Certificates (Sec. 63 and 73)
Section 63. Certificate of stock and transfer of shares. 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. Shares 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 authorized to make the transfer. No 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.
35
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002); Nautica Canning Corp.
v. Yumul, 473 SCRA 415 (2005); Lao v. Lao, 567 SCRA 558 (2008).
36
Rivera V. Florendo, 144 SCRA 643 (1986); Razon v. IAC, 207 SCRA 234 (1992); Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001); Raquel-Santos v. Court of Appeals,
592 SCRA 169 (2009).

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Section 73. Lost or destroyed certificates. The following procedure shall be followed for the issuance by a corporation of new
certificates of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the
number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which
issued the same. He shall also submit such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall
publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been
lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial
number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1)
year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of
stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a
bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such
form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued
even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said
corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen
or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
While Sec. 73 appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new
certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section.
It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of
liquidation. It is well-settled that unless proven otherwise, the stock and transfer book is the best evidence to establish stock
ownership. (SEC Opinion 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos).
(e) Forged and Unauthorized Transfers.
A bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations laced on
said certificates by the real owner, or of any secret agreement relating to the use which might be made of the stock by the holder.
When a stock certificate has been endorsed in blank by the owner thereof, it becomes a street certificate so that upon its face the
holder is entitled to demand its transfer into his name from the issuing corporation. As such the certificate if quasi-negotiable and the
transferee thereof is justified in believing that it belongs to the older and transferor. J. Santamaria v. HongKong and Shanghai
Banking Corp., 89 Phil. 780 (1951).
Since certificates of stock are only quasi-negotiable instruments, a transferee in good faith under a forged assignment acquires no
title which can be asserted against the true owner, unless the true owners own negligence has been such as to create an estoppel
against him. Delos Santos v. Republic, 96 Phil. 577 (1955).
When the stock certificates have been endorsed in blank for purposes of showing the nominee relations, the eventual delivery and
registration of the shares in violation of the trust relationship and after their having been stolen, would be void, even when such
transfers have been registered in the stock and transfer book. Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295
(1999).
Indeed, even if Gilberts parents were not the beneficial owners, an endorsement in blank of the stock certificate coupled with its
delivery, entitles the holder thereof to demand the transfer of said stock certificate in his name from the issuing corporation. Guy v.
Guy, 680 SCRA 214 (2012).
10. STOCK AND TRANSFER BOOK (Secs. 63, 72 and 74):
Section 63. Certificate of stock and transfer of shares. 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. Shares 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 authorized to make the
transfer. No 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.
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.
Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office a record of
all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall
be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or
special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the 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 action must be recorded in full on
his demand.

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The records of all business transactions of the corporation and the minutes of any meetings 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.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, 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 Section 144 of
this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under
this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall
be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporations 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.
Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in
the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by
and to whom made; 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.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall
be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may
be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a
license fee herein provided, shall be applicable.
Sales and other dispositions of shares of stock must under Section 63 be registered in the stock and transfer book: (a) to enable the
corporation to know at all times who are the actual stockholders; (b) to afford the corporation an opportunity to object or refuse its
consent to such transfer when it has claims against such shares; and (c) to avoid fictitious or fraudulent transfers. Escao v. Filipinas
Mining Corporation, 74 Phil. 71 (1944).
Shares for which no certificate of stock has been issued may validly be mortgaged in whole (an not just with respect to the portion
paid-up) and the corporation receiving notice thereof is bound to respect the security arrangement. Fua Cun v. Summers, 44 Phil. 704
(1923).
When the shares are covered by a stock certificate issued in the name of the usufructuary by the original owner with the agreement
between them that they should not be disposed or sold, but the registered owner had pledged the shares by endorsement and delivery of
the certificate to one who took them in good faith and for value, the latter shall be preferred since registration of a security arrangement
covering shares of stock does not require, for its validity and binding effect on the world, to be registered in the stock and transfer book.
Monserrat v. Ceran, 58 Phil. 469 (1933).
The failure to register a sale or disposition of shares of stock in the books of the corporation would render the same invalid to all
persons, including the attaching creditors of the seller. Uson v. Diosomito, 61 Phil. 535 (1935).
In order for the chattel mortgage on shares of stock be valid and binding on third parties, registration thereof in the stock and transfer
book is not required and not legally effective. What is necessary is that the chattel mortgage over the shares be registered in the Registry
of Deeds of the principal place of business of the corporation, as well as in the Registry of Deeds of the stockholders domicile. Chua
Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 (1935).
The pledge of shares of stock covered by a certificate is valid and binding on third parties, when the certificate of stock has been
endorsed and delivered to the creditor, notwithstanding the fact that the contract does not appear in a public instrument (chattel
mortgage). Certificates of stock . . . are quasi-negotiable instruments in the sense that they may be given in pledge or mortgage to secure
an obligation. Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937).
Only fully paid shares for which certificates of stock have been issued are subject to the registration requirement in the stock and
transfer book in cases dealing with their sales and absolute disposition. Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
BUT: The stock and transfer book records the names and addresses of all stockholders arranged alphabetically, the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or
transfer of stock made the date thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters
and things which ordinarily are or should be written therein. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
(a) Validity of Transfers:
A transferee has no right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly
executed by a registered stockholder. It is explicit under Sec. 63 that the transfer must be registered to affect the corporation and third
persons. Magsaysay-Labrador v. CA, 180 SCRA 266 (1989).
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful attachment of said
shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books
of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so
void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000).
Under Sec. 63, the sale of stocks shall not be recognized as valid unless registered in the books of the corporation insofar as third
persons, including the corporation, are concernedas between the parties to the sale, the transfer shall be valid even if not recorded
in the books of the corporation. The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a
stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders
resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who

62

desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the
corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus
Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is non-existent as far as the
corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the
corporation looks only into its books for the purpose of determining who its shareholders are. Ponce v. Alsons Cement Corp., 393
SCRA 602 (2002).
Absence of a deed of sale evidencing sale of shares of stock does not necessarily show irregularity since Section 63 itself does not
require any deed for the validity of the transfer of shares stock, it being sufficient that such transfer be effected by delivery of the
stock certificates duly endorsed. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188
(2001)] the execution not a deed of sale does not necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475
SCRA 20 (2005).
As between the General Information Sheet and the corporate books, it is the latter that is controlling as to the number of shares
held by shareholders. Lao v. Lao, 567 SCRA 558 (2008).
A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties. Hence, the
transferor has the right to dividends as against the corporation without notice of transfer but it serves as trustee of the real owner of
the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. Cojuangco v.
Sandiganbayn, 586 SCRA 790 (2009).
(b) Who May Make Entries: Entries made on the stock and transfer book by any person other than the corporate secretary, such as
those made by the President and Chairman, cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
(c) Attachments: Attachments of shares of stock are not included in the term transfer as provided in Sec. 63 of Corporation Code.
Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporations STB for the attachment of
shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995).
(d) Meaning of Unpaid Claims: The unpaid claims under Sec. 63 refers to any unpaid subscription, and not to any indebtedness
which a stockholder may owe the corporation arising from any other transactions, like unpaid monthly dues. Fua Cun v. Summers, 44
Phil. 704 (1923); China Banking Corp. v. CA, 270 SCRA 503 (1997).
(e) Equitable Mortgage Assignment: The assignment of voting shares as security for a loan operates to give the assignee not only the
right to vote on the shares, but would also treat the assignee as the owner of the shares (not just an equitable mortgage): It is true
that the assignment was predicated on the intention that it would serve as security vis--vis DBPs financial accommodation extended
to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition, which was the settlement of PJIs loan
obligation with DBP. APT v. Sandiganbayan, 341 SCRA 551, 560 (2000).
11. Situs of Shares of Stocks (Sec. 55)
Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo Bank and Union v. Collector, 70 Phil.
325 (1940).37
XIII. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS
1. Concept of Business Enterprise, Economic Unit or Going Concern (Sec. 40)
Business enterprise constitutes the goodwill, the customer lists and all factors that make a business profitable. Villa Rey Transit,
Inc. v. Ferrer, 25 SCRA 845 (1968).
2. Types of Acquisitions\Transfers
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the
former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1)
where the purchasers expressly or impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters into the
transactions to escape liability for those debts (3) where the purchasing corporation is merely a continuation of the selling corporation,
and (4) where the transaction amounts to a consolidation or merger of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415
(1965).38
The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assets, if thereby
the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated.
Such a sale or disposition must be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies
that the assignee assumes the debts of the assignor. Even under the provisions of the Civil Code, a creditor has a real interest to go after
any person to whom the debtor fraudulently transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498
SCRA 400 (2006).
PSALM took ownership over most of NPCs assets by operation of lawthese properties may be used to satisfy the Courts
judgment, and such being the case, the employees may go after such properties. NPC Drivers and Mechanics Association (NPC DAMA)
v. NPC, 606 SCRA 409 (2009).
3. Business Enterprise Transfers:
A business enterprise operated under a partnership and later incorporated, or where a corporation assumed all the assets and liabilities
of the partnership, then the corporation cannot be regarded, for purposes of the SSS Law, as having come into being only on the date of
its incorporation but from the date the partnership started the business. Laguna Trans. Co., Inc. v. SSS, 107 Phil. 833 (1960).39

37
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
38
Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); McLeod v. NLRC, 512 SCRA 222 (2007); Jiao v. NLRC, 670 SCRA 184 (2012).
39
Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).

63

The judgment in a suit for workmens compensation can be pursued against the corporation organized by the controlling stockholder
who as the sole proprietor organized the corporation to insulate properties transferred thereto against the judgment debt. A.D. Santos v.
Vasquez, 22 SCRA 1156 (1968).
When the bus operations belonging to the estate of the deceased spouses is duly incorporated by the administratrix with the intention
to make the corporation liable for past and pending obligations of the estate as the transportation business itself, then that liability on the
part of the corporation, vis--vis the estate, should continue to remain with it even after the percentage of the estates shares of stock in
the corporation should have been diluted. Buan v. Alcantara, 127 SCRA 845 (1984).
When a corporation transferred all its assets to another corporation to settle its obligations that would not amount to a fraudulent
transfer, and does not authorize application of the piercing doctrine to make the transferee liable for labor claims against the transferor.
McLeod v. NLRC, 512 SCRA 222 (2007).
Settled now is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter
is not, by that fact alone, liable for the debts and liabilities of the transferor. Pantranco Employees Association (PEA-PTGWO) v. NLRC,
581 SCRA 598 (2009).
4. Equity Transfers
The disposition by the controlling shareholder of all of its equity in the corporation warrants the application of the alter ego piercing
doctrine since it shows that the transferor had complete control of the corporation. (?) PHIVIDEC v. Court of Appeals, 181 SCRA 669
(1990).
PROPER DOCTRINE: The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection
case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has
no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires.
Remo, Jr. v. IAC, 172 SCRA 405 (1989).40
B. MERGER AND CONSOLIDATIONS
1. Concepts
A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on
the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the
combined business. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law authorizing them. PNB v. Andrada Electric & Engineering Co., 381
SCRA 244 (2002).41
Merger is a re-organization of two or more corporations that results in their consolidating into a single corporation, which is one of
the constituent corporations, one disappearing or dissolving and the other surviving. To put it another way, merger is the absorption of
one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises,
properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the
life or lives of the other corporation(s) is or are terminated. Bank of Commerce v. Radio Philippines Network, Inc., G.R. No. 195615, 21
April 2014.
2. Procedure:
(a) Plan of Merger or Consolidation (Sec. 76)
(b) Stockholders or Members Approvals (Sec. 77)
(c) Articles of Merger or Consolidation (Sec. 78)
(d) Submission of Financial Statements Requirements: For applications of merger, the audited financial statements of the constituent
corporations (surviving and absorbed) as of the date not earlier than 120 days prior to the date of filing of the application and the
long-form audit report for absorbed corporation(s) are always required. Long form audit report for the surviving corporation is
required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002).
(e) Approval by SEC (Sec. 79)
When the procedure for merger/consolidation prescribed under the Corporation Code are not followed, there can be no merger or
consolidation, corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be
enforced against another entity. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
The issuance by the SEC of the certificate of merger is crucial because not only does it bear out SECs approval but also marks
the moment whereupon the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the
absorbed corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to and
vested in the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).42
3. Effects of Merger or Consolidation (Sec. 80)
It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the
other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation
therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations. Babst v. CA, 350 SCRA 341
(2001).
Global is bound by the terms of the contract entered into by its predecessor-in-interest, Asian Bank. Due to Globals merger with
Asian Bank and because it is the surviving corporation, it is as if it was the one which entered into contract with Surecomp. In the same
way, Global also has the right to exercise all defenses, rights, privileges, and counter-claims of every kind and nature which Asian Bank
may have or invoke under the law. Global Business Holdings Inc. v. Surecompsoftware, B.V., 633 SCRA 94 (2010).
40
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
41

McLeod v. NLRC, 512 SCRA 222 (2007).


42
Associated Bank v. CA, 291 SCRA 511 (1998); Mindanao Savings and Loan Asso. V. Willkom, 634 SCRA 291 (2010).

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C. EFFECTS ON EMPLOYEES OF CORPORATION


1. Assets Only Transfers:
There is no law requiring that the purchaser of MDIIs assets should absorb its employees . . . the most that the NLRC could do, for
reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in
the filling up of vacancies in the facilities. MDII Supervisors & Confidential Employees Asso. v. Pres. Assistance on Legal Affairs, 79
SCRA 40 (1977).
Unless expressly assumed, employment contracts and CBAs are not enforceable against a transferee of an enterprise, labor contracts
being in personam, thus binding only between the parties. A labor contract merely creates an action in personam and does not create any
real right which should be respected by third parties. Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).
2. Business-Enterprise Transfers:
There is no law requiring that the purchaser should absorb the employees of the selling company. Well-established is the principle
that it is within the employers legitimate sphere of management control of the business to adopt economic policies to make some
changes or adjustments in their organization or operations that would insure profit to itself or protect the investments of its stockholders.
As in the exercise of such management prerogative, the employer may merge or consolidate its business with another, or sell or dispose
all or substantially all of its assets and properties which may bring about the dismissal or termination of its employees in the process
Central Azucarera del Danao v. CA, 137 SCRA 295 (1985).
Where a corporation is closed for alleged losses and its equipment are transferred to another company which engaged in the same
operations, the separate juridical personality of the latter can be pierced to make it liable for the labor claims of the employees of the
closed company. National Federation of Labor Union v. Ople, 143 SCRA 124 (1986).
Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same
type of operations, it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm.
Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992).43
Under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is
not obliged to absorb the latters employees. The most that the purchasing company may do, for reasons of public policy and social
justice, is to give preference of reemployment to the selling companys qualified separated employees, who in its judgment are necessary
to the continued operation of the business establishment. In the case of a transfer of all or substantially all of the assets of a corporation
(i.e., business enterprise transfers), the liabilities of the previous owners to its employees are not enforceable against the buyer or
transferee, unless (a) the latter unequivocally assumes them; or (b) the sale or transfer was made in bad faith. Barayoga v. APT, 473
SCRA 690 (2005). 44
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the successor-employer is deemed to have
absorbed the employees and is held liable for the transgressions of his or her predecessor. Peafrancia Tours and Travel Transport v.
Sarmiento, 634 SCRA 279 (2010).
3. Equity Transfers:
Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferors employees as there
is no law compelling such absorption. The most that the transferee may do, for reasons of public policy and social justice, is to give
preference to the qualified separated employees in the filling of vacancies in the facilities of the purchaser . Manlimos v. NLRC, 242
SCRA 145 (1995).45
4. Mergers and Consolidations
In the case of merger or consolidation of two or more corporations, the employees have a right to their retirement benefits computed
from the time worked with the predecessor-constituent corporations, saying there was no break in the employer-employee relationship.
Filipinas Port Services v. NLRC, 200 SCRA 773 (1991).46
CONTRA: the employees of a predecessor-constituent corporation cannot avail of their previous tenure when determining their
termination benefits with the surviving corporation in the merger. Filipinas Port Services, Inc. v. NLRC, 177 SCRA203 (1989).
It is more in keeping with the dictates of social justice of according full protection to labor to deem employment contracts as
automatically assumed by the surviving corporation in a merger, even in the absence of an express stipulation in the articles of merger or
the merger plan. This ruling strengthens judicial protection of the right to security of tenure of employees affected by a merger and avoids
confusion regarding the status of their various benefits. BPI. v. BPI Employees Union, 658 SCRA 828 (2011).
5. Spin-Offs:
Where a spin-off by the corporation of a division into another corporation is done for valid business reasons and in good faith, the
employees in the spun-off unit no longer belong to the bargaining unit of the mother company, and that the employees in the new
corporations constitute new bargaining unit. SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 (1996).
XIV. xREHABILITATION AND INSOLVENCY
XV. CORPORATE DISSOLUTION AND LIQUIDATION
1. No Vested Rights to Corporate Fiction: No person who has a claim against a juridical entity can claim any constitutional right to the
perpetual existence of such entity. Gonzales v. SRA, 174 SCRA 377 (1989).
43

Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995)

44

Sunio v. NLRC, 127 SCRA 390 (1984); San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991); Yu v. NLRC, 245 SCRA 134 (1995); Complex Electronics Employees
Assn. v. NLRC, 310 SCRA 403 (1999).
45
Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v. NLRC, 258 SCRA 704 (1996); Avon Dale
Garments, Inc. v. NLRC, 246 SCRA 733 (1995).
46
Same ruling in National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988). Reiterated in First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993); Pharmacia and Upjohn, Inc. v.
Albayda, 628 SCRA 544 (2010).

65

2. Voluntary Dissolution (Sec. 117)


When a corporation is contemplating dissolution, it must submit tax return on the income earned by it from the beginning of the year
up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001).
(a) When There Are No Creditors Affected (Sec. 118)
(b) When There Are Creditors Affected (Secs. 119 and 122).
(c) Shortening of Corporate Term (Sec. 120)
3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66, Rules of Court)
(a) Quo Warranto
Dissolution is a serious remedy granted by the courts only in extreme cases and only to ensure that there is an avoidance of
prejudice to the public. Even when the prejudice were public in nature, the remedy is to enjoin or correct the mistake; and only when
it cannot be remedied anymore that dissolution should be imposed. Republic v. Bisaya Land Transportation Co., 81 SCRA 9 (1978).
Government v. El Hogar Filipino, 50 Phil. 399 (1927).
Thus, in Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967), dissolution was imposed on a corporation that was
engaging in banking activities without a license from the Central Bank, and risking the savings of the public.
(b) Non-user of Charter and Continuous In-Operation (Sec. 22)
To organize involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of
by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which
the corporation was created. Organization relates merely to the systematization and orderly arrangement of the internal and
managerial affairs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for
such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
(c) Expiration of Term
Where the corporate life of a corporation as stated in its articles of incorporation expired, without a valid extension having been
effected, it was deemed dissolved by such expiration without need of further action on the part of the corporation. Majority
Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p.
841.
(d) Demand of Minority Stockholders for Dissolution.
When it comes to close or family corporations, there was recognition under the Corporation Law of a equitable right to demand
dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be
remedied such as giving minority stockholders a veto power to any decision. Chase v. Buencamino, 136 SCRA 365 (1985).
4. Legal Effects of Dissolution
A corporation that has reached the stage of dissolution is no longer qualified to receive a secondary franchise. Buenaflor v.
Camarines Industry, 108 Phil. 472 (1960).
A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for
liquidation when its original term of existence had already expired, as the same would constitute new business. Alhambra Cigar &
Cigarette Mfg. Co. v. SEC, 24 SCRA 269 (1968).
When 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 organized. PNB v. Court of First Instance of Rizal, 209 SCRA 294 (1992).
A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective [t]he
requirements mandated by the Corporation Code should have been strictly complied with. Vesagas v. Court of Appeals, 371 SCRA 509
(2002).
The dissolution of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since
it is allowed to continue as a juridical entity for 3 years 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. Republic v. Tancinco, 394 SCRA 386
(2002).
A corporations board of directors is not rendered functus officio by its dissolution, since Section 122 prohibits a dissolved
corporation from continuing its business, but allows it to continue with a limited personality in order to settle and close it affairs,
including its complete liquidation. Necessarily there must be a board that will continue acting for and on behalf of the dissolved
corporation for that purpose. Aguirre II v. FQB+7, Inc., 688 SCRA 242 (2013).
5. Meaning of Liquidation
Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so
that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing
surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation proceedingsthey are neither part of each other nor the
necessary consequence of the other. There is therefore no basis from one action to result in the other. Following the dissolution of a
corporation, liquidation or the settlement of its affairs consists of adjusting the debts and claims, i.e., collecting all that is due to the

66

corporation, the settlement and adjustment of claims against it and the payment of its just debts. Yu v. Yukayguan, 589 SCRA 588
(2009).47
6. Methods of Liquidation (Sec. 122)
(a) The Board of Directors/Trustees Pursuing Liquidation; Subject to the 3-year Period
OLD RULE: Since the old Corporation Law did not contain any provision that allowed any action after the 3-year period for
liquidation, then all actions for or against the corporation as abated after the expiration thereof. National Abaca Corp. v. Pore, 2
SCRA 989 (1961).
PRESENT RULE: Even after the expiration of the 3-year period, corporate creditors can still pursue their claims against corporate
assets against the officers or stockholders who have taken over the properties of the corporation. Tan Tiong Bio v. Commissioner, 100
Phil. 86 (1956).48
Although a corporate officer is not liable for corporate obligations, such as claims for wages, however, when such corporate
officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to
corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as
general manager and applied the corporation's assets in payment exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723
(1992).
There is nothing in the Corporation Law which bars an action for the recovery of the debts of the corporation against the
liquidator thereof, after the lapse of the said three-year period. It immaterial that the present action was filed after the expiration of
the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years
despite the fact that actual liquidation has not 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 Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.
Republic v. Marsman Dev. Co., 44 SCRA 418 (1972). Reiterated under the Corporation Code in Paramount Insurance Corp. v. A.C.
Ordonez Corp., 561 SCRA 327 (2008).
The executed releases, waivers and quitclaims involving labor claims are valid and binding notwithstanding that they were
executed six (6) years after the revocation of the corporations certificate of incorporationthe revocation does not result in the
termination of its liabilities. Sections 122 and 145 provide for a three-year winding up period for a corporation whose charter is
annulled by forfeiture or otherwise to continue as a body corporate for the purpose, among others, of settling and closing its affairs.
Vigilla v. Philippine College of Criminology, Inc., 698 SCRA 247 (2013).
(b) Liquidation Pursued Thru a Court-Appointed Receiver
There can be no doubt that under the Corporation Law, the Legislature intended to let the shareholders have the control of the
assets of the corporation upon dissolution in winding up its affairs, by having the directors and executive officers to have charge of
the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the
benefit of its creditors and shareholders. While the appointment of a receiver rests within the sound judicial discretion of the court,
such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of
which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the
relative advantages and disadvantages of appointing a receiver to wind up the corporate business. China Banking Corp. v. M.
Michelin & Cie, 58 Phil. 261 (1933).
When the liquidation of a dissolved corporation has been placed in the hands of a receiver or assignee, the 3-year period
prescribed by law for liquidation cannot be made to apply, and that the receiver or trustee may institute all actions leading to the
liquidation of the assets of the corporation even after the expiration of said period. Sumera v. Valencia, 67 Phil. 721 (1939).
(c) Liquidation Pursued Through a Trustee
When upon dissolution the affairs of the corporation were placed in a Board of Liquidators, they were duly constituted as trustees
for the liquidation of the corporate affairs, and there being no term placed on the Board, their power to pursue liquidation did not
terminate upon the expiration of the 3-year period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967)
For purposes of dissolution and liquidation of a corporation, the term trustee should include counsel of record who may be
deem to have authority to pursue pending litigation after the expiration of the 3-year liquidation period. Gelano v. Court of
Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of Directors itself,
following the rationale of the decision in Gelano, may be permitted to so continue as trustees to complete liquidation; and in the
absence of a Board, those having pecuniary interest in the assets, including the shareholders and the creditors of the corporation,
acting for and in its behalf, might make proper representations with the appropriate body for working out a final settlement of the
corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995).49
A trustee appointed for purposes of liquidation does not become personally liable for the outstanding obligations of the
corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
The trustee of a corporation may continue to prosecute a case commenced by the corporation within three years from its
dissolution until rendition of the final judgment, even if such judgment is rendered beyond the three-year period allowed by Section
122. However, there is nothing in the said cases which allows an already defunct corporation to initiate a suit after the lapse of the
said three-year period. To allow petitioner to initiate the subject complaint and pursue it until final judgment, on the ground that such
complaint was filed for the sole purpose of liquidating its assets, would be to circumvent the provisions of Section 122 of the
Corporation Code. Alabang Dev. Corp. v. Alabang Hills Village Assn., G.R. No. 187456, 02 June 2014.

47
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
48
Reiterated in Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
49
Reiterated in Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002); Pepsi-Cola Products Phils., Inc. v. Court of Appeals, 443
SCRA 571 (2004).

67

7. REINCORPORATION: The procedures on the sale of all or substantially all of the assets of the corporation, allows stockholders to transfer
the assets and business enterprise of the dissolved corporation to a newly registered entity bearing the same corporate name. Chung Ka
Bio v. IAC, 163 SCRA 534 (1988).
XVI. CLOSE CORPORATIONS
1. Definition (Sec. 96)
The concept of a close corporation organized for the purpose of running a family business or managing family property has formed
the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hardearned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial
security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work as a rallying point for
family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of
mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to
facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431
(2003).
a. De Jure Close Corporations: Articles of Incorporation Requirements (Sec. 97)
(i) Restriction on Transfer of Shares (Secs. 98 and 99)
(ii) Pre-Emptive Rights (Sec. 102)
(iii) Amendment (Sec. 103)
b. De Facto Close Corporation:
The Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and
general manager almost had absolute control of the corporation. 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 Manuel R. Dulay
Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father whose name
identifies their corporation. Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 (1993).
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were close family corporations owned by the
Naguiat family. Section 100, paragraph 5, (under Title XII on Close Corporations) of the Corporation Code, states: . . . (5) 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. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Sergio F. Naguiat v. NLRC,
269 SCRA 564 (1997).
BUT SEE: The articles of incorporation of Motorich Sales Corporation does not contain any provision stating that (1) the number
of stockholders shall not exceed 20, or (2) a preemption (sic) of shares is restricted in favor of any stockholder or of the corporation,
or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that
Respondent Motorich is not a close corporation. Motorich does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The [m]ere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personalities. So, too a narrow distribution of ownership does not, by itself, make a close corporation. San Juan Structural v.
Court of Appeals, 296 SCRA 631 (1998).
2. Binding Agreements by Stockholders (Sec. 100)
3. No Necessity of Board (Sec. 101)
4. Deadlocks (Sec. 104). Missed opportunity in Ong Yong v. Tiu, 401 SCRA 1 (2003).
5. Withdrawal and Dissolution (Sec. 105)
Even prior to the passage of Corporation Code which recognized close corporations, the Supreme Court had on limited instances
recognized the common law rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v.
Teodoro, 93 Phil. 404 (1953).
XVII. NON-STOCK CORPORATIONS AND FOUNDATIONS
1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94[5])
It is not inconsistent with the nature of a non-stock corporation for it to incidentally earn profits in pursuing its eleemosynary
purpose. What is prohibited is to operate the company for profit and/or distribute any profits so earned to its officers and members.
Collector of Internal Revenue v. University of Visayas, 1 SCRA 669 (1961); Collector of Internal Revenue v. Club Filipino Inc. de Cebu,
5 SCRA 321 (1962).
The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider
whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain,
and not for the purpose of carrying out the objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit
is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation, such profits are
not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 115054-66, 12
September 1999 (unrep.).
In a mutual life insurance company organized as a non-stock non-profit corporation, the so-called dividends received by memberspolicyholders are not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital
stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak

68

of, but only members. Two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit
will not change its character; it remains an overpayment, a benefit to which the member-policyholder is equitably entitled. Republic v.
Sunlife Assurance Company, 473 SCRA 129 (2005).
2. Non-Applicability of the Nationalization Laws
A foreigner may become a member or an officer of a non-stock corporation. Save for the position of the Secretary, who must be a
Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business
does not apply to the activities of a non-stock corporation which do not fall within the coverage of a nationalized industry or area of
business reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, s.2002, 21 November 2002).
3. Delinquency of Membership Dues
Sec. 69 of the Corporation Code refers specifically to unpaid subscriptions to capital stock, the sale of which is governed by Sec. 68,
and utterly inapplicable to non-stock corporations. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil Code under the Chapter on Human
Relations: The obligation of a corporation to treat every person honestly and in good faith extends even to its shareholders or members,
even if the latter find themselves contractually bound to perform certain obligations to the corporation. In such recovery claims, neither
Article 1146 or Article 1149 is applicable, but Article 1140 of the Civil Code which provides that an action to recover movables shall
prescribe in 8 years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of its unpaid debts to the
corporation (i.e., unpaid monthly dues) when it is authorized to do so under the corporate by-laws (not by the articles of incorporation),
and in spite of the fact that Sec. 67 of Corporation Code on delinquency sale pertains to payment of shares subscription. The right of a
non-stock corporation to expel a member through the forfeiture of such members share may be established in the by-laws alone, and
need not be embodied in the articles of incorporation. This is authorized under Sec. 91 of Corporation Code providing that membership
shall be terminated in the manner and for causes provided in the articles of incorporation or the by-laws of a non-stock corporation.
Valley Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).
4. Board of Trustees and Corporate Officers
Section 108 of Corporation Code, although setting the term of the members of the Board of Trustees at 5 years, contains a proviso
expressly subjecting the duration to what is otherwise provided in the articles of incorporation or by-laws of the educational corporation
that contrary provision control on the term of office. Barayuga v. Advestist University of the Philippines, 655 SCRA 640 (2011).
A trustee occupying his office in a hold-over capacity could be removed at any time, without cause, upon the election or appointment
of his successor. Barayuga v. Advestist University, 655 SCRA 640 (2011).
5. Conversion of Non-Stock Corporation to Stock Corporation
The conversion of a non-stock educational institution into a stock corporation is not legally feasible, as it violates Sec. 87 of
Corporation Code that no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or
officers. Thus, the Commission has previously ruled that a non-stock corporation cannot be converted into a stock corporation by a mere
amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved
first under any of the methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation
directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 10 December 1992; SEC Opinion dated 24 February
2003).
5. What Is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Rev. Reg. No. 2; BIR-NEDA Regulations No. 1-81, as
amended)
Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of compliance with such requirements,
still show that it falls under the provisions of Sec. of NIRC. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
6. Dissolution: Right of Members to Proportionate Share of Remaining Assets (Secs. 94 and 95; Sec. 34(H)(2)(c), 1997 NIRC).
As provided for under Secs. 94 and 95 of Corporation Code, in the event of dissolution of a non-stock corporation, its assets shall be
distributed in accordance with the rules. Unless, it is so provided in the Articles of Incorporation or By-Laws, the members are not
entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit
corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24
February 2003; SEC Opinion dated 13 May 1992).
XVIII.

FOREIGN CORPORATIONS

1. Definition (Sec. 123)


A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the State
in which it is foreign. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
2. License to Do Business in the Philippines
a. Application for License (Secs. 124 and 125; Art. 48, Omnibus Investment Code)
b. Rationale for Requiring License:
Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the
jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring
domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. MarshallWells v. Elser, 46 Phil. 71 (1924).
Otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license to
do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the
jurisdiction of the local courts. The same danger does not exist among foreign corporations that are indubitably not doing business
in the Philippines: there would be no reason for it to be subject to the States regulation; for in so far as the State is concerned, such

69

foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the local courts jurisdiction would
violate the essence of sovereignty of the creating state. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
c. Appointment of a Resident Agent (Sec. 127 and 128)
When a corporation has designated a person to receive service of summon pursuant to the Corporation Code, the designation is
exclusive and service of summons on any other person is inefficacious. H.B. Zachry Company Intl v. CA, 232 SCRA 329 (1994).
A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident
agent in Philippine jurisdiction. New York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995).
A resident agent of a foreign corporation is not per se authorized to execute the requisite certification against forum shopping
while a resident agent may be aware of actions filed against his principal, he may not be aware of actions initiated by its principal,
whether in the Philippines or abroad. Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005).
d. Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code)
A foreign corporation licensed to do business should be subjected to no harsher rules that is required of domestic corporation
and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines.
Claude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932).

e. Effects of Failure to Obtain License (Secs. 133 and 144)


The contract itself is valid, but it is the standing to sue of the foreign corporation that is missing, which can be remedied with
the subsequent obtaining of the license to do business. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
Summary of Rulings on Doing Business: The principles regarding the right of a foreign corporation to bring suit in Philippine
courts may thus be condensed in four statements: (1) if a foreign corporation does business in the Philippines without a license, it
cannot sue before Philippine courts; (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; (3) if a
foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said
corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before the
Philippine courts; and (4) if a foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).1
f. Amendment of License (Sec. 131)
g. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code)
3. Concepts of Doing Business in the Philippines; Effects of Not Obtaining the Licesnse
a. Statutory Concept of Doing Business (R.A. No. 7042, Foreign Investment Act of 1991).
Under Sec. 123, a foreign corporation must first obtain a license and a certificate from the appropriate government agency
before it can transact business in the Philippines. Where a foreign corporation does business in the Philippines without the proper
license, it cannot maintain any action or proceeding before Philippine courts as provided in Section 133 of the Corporation Code.
Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
The Foreign Investments Act of 1991, repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987,
enumerated in Sec. 3(d) not only the acts or activities which constitute doing business but also those activities which are not
deemed doing business. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
Under Section 3(d) of the Foreign Investments Act of 1991, as supplemented by Rule I, Section 1(f) of its Implementing Rules
and Regulations, the appointment of a distributor in the Philippines is not sufficient to constitute doing business unless it is under
the full control of the foreign corporation. In the same manner, if the distributor is an independent entity which buys and distributes
products, other than those of the foreign corporation, for its own name and its own account, the latter cannot be considered to be
doing business in the Philippines. Steelcase, Inc. v. Design International Selections, Inc., 670 SCRA 64 (2012).
b. Jurisprudential Concepts of Doing Business: It implies a continuity of commercial dealings and arrangements and the
performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of a foreign
corporations organization. Mentholatum v. Mangaliman, 72 Phil. 525 (1941).
(i) Single Transaction Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business. Far
East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962).
It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged
in business in the Philippines, since other circumstances must be considered. Where a single act or transaction is not merely
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, such act will be considered as constituting business. Litton Mills, Inc. v. Court of Appeals, 256 SCRA 696
(1996).
Participating in a bidding process constitutes doing business because it shows the foreign corporations intention to
engage in business in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was
created, regardless of volume of business, that determines whether a foreign corporation needs a license or not. European
Resources and Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte, 435 SCRA 246 (2004).
(ii) Territoriality Rule

1
Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).

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To be doing business in the Philippines requires that the contract must be perfected or consummated in Phlippine soil. A
CIF, West Coast arrangement makes delivery outside of the Philippines. Pacific Vegetable Oil Corp. v. Singson, Advanced
Decision Supreme Court, April 1955 Vol., p. 100-A.
Foreign insurance companies who undertake on a regular basis the filing of collection suits with Philippine courts arising
from insurance contracts entered into and premiums paid abroad are not doing business in the Philippines. Aetna Casualty &
Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).2
To be transaction business in the Philippines for purposes of Section 133, the foreign corporation must actually transact
business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in
its own name and for its own account. B. Van Zuiden Bros., Ltd v. GTVL Manufacturing Industries, Inc., 523 SCRA 233 (2007),
citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813 (2001).
Exception: Solicitation of business contracts constitutes doing business in the Philippines. Marubeni Nederland B.V. v.
Tensuan, 190 SCRA 105 (1990).
(iii) Transactions Seeking Profit
Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding
principles for the application of these tests. By and large, to constitute doing business, the activity to be undertaken in
the Philippines is one that is for profit-making. Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon
Technology Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq. (1998 ed.);
Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 801802 (2001).
Examples:

Insurance Business A foreign corporation with a Philippine settling agent which issues twelve marine policies covering
different shipments to the Philippines is doing business here. General Corp. of the Phil. v. Union Insurance Society of
Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is doing business in the
Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).

Air Carriers Off-line air carriers having general sales agents in the Philippines are engaged in business in the
Philippines and that their income from sales of passage here (i.e., uplifts of passengers and cargo occur to or from the
Philippines) is income from within the Philippines. South African Airways v. Commissioner of Internal Revenue, 612
SCRA 665 (2010).

EXCEPTION: Transactions with Agents and Brokers When it is shown that the foreign corporation exercised control over
the business of its brokers, then it is deemed doing business in the country. Granger Associates v. Microwave Systems,
Inc., 189 SCRA 631 (1990).3
c. Special Cases on Infringement of Business Names and Trademarks:
The right to the use of the corporate name and trade name of a foreign corporation is a property right, a right in rem, which it
may assert and protect in any of the courts of the world even in countries where it does not personally transact any business.
Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 (1927).
Infringement of trade name. General Garments Corp. v. Director of Patens, 41 SCRA 50 (1971); Universal Rubber Products,
Inc. v. Court of Appeals, 130 SCRA 104 (1988).
d. Doctrine on Unrelated or Isolated Transactions:
The performance of services auxiliary to an existing isolated contract of sale which are not on a continuing basis do not
constitute doing business in the Philippines. Antam Consolidated v. CA, 143 SCRA 288 (1986).4
Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as carrying on of business. Typical
examples of these are the making of a single contract, sale with the taking of a note and mortgage in the state to secure payment
thereof, purchase, or note, or the mere commission of a tort. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
A foreign corporation needs no license to sue before Philippine courts on an isolated transaction. Even a series of transactions
which are occasional, incidental and casualnot of a character to indicate a purpose to engage in businessdo not constitute the
doing or engaging in business as contemplated by law. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
(i) Case-Law Examples of Isolated Transactions:

Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v. La Campaia
Transatlantica, 8 Phil. 766 (1907).

Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East Asia Co., Ltd. v. Manila Port
Service, 25 SCRA 633 (1968).

Recovery of damages sustained by cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA 1 (1986).

Sale of construction equipment to the Government with no intent of continuity of transaction. Gonzales v. Raquiza, 180
SCRA 254 (1989).

Recovery on a Hongkong judgment against a Manila resident. Hang Lung Bak v. Saulog, 201 SCRA 137 (1991).

2
Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).
3
La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 (1988); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1974).
4
Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 (1957).

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Appointment of local lawyer by foreign movie companies who have registered intellectual property rights over their movies
in the Philippines, to protect such rights for piracy: We fail to see how exercising one's legal and property rights and taking
steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed by and of
themselves to be doing business here. Columbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).

4. Suits Brought BY Foreign Corporations


a. Need to Allege Capacity to Sue: The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign
corporation desires to sue in Philippines courts under the isolated transactions rule. Atlantic Mutual Inc. v. Cebu Stevedoring
Co., 17 SCRA 1037 (1966).5
The filing of an action by a foreign corporation before Philippine courts would mean that by voluntary appearance, the local
courts have actually obtained jurisdiction over the person of the foreign corporation. Communication Materials v. Court of
Appeals, 260 SCRA 673 (1996).
b. Discredited Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines
without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the
principle of pari delicto. Top-Weld Mfg. v. ECED, 119 SCRA 118 (1985).
c. ESTOPPEL DOCTRINE: Under the principle of estoppel, a foreign corporation doing business in the Philippines may sue in Philippine
courts even without license to do business against a Philippine citizen who had contracted with and been benefited by said
corporation and knew it to be without the necessary license to do business. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824
(1992).6
PROPER DOCTRINE: Foreign corporations which conduct regular business should be denied any access to courts until they secure a
license so as to ensure that they will abide by the decisions of our courts, even if adverse to it. Dismissal of the petition would be
without prejudice to the foreign corporation subsequently re-filing the case when it has obtained the requisite license. Eriks Ltd. v.
Court of Appeals, 267 SCRA 567 (1997).
d. On Isolated Transactions: A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from
filing a suit in local court. Aboitiz Shipping Corp. v. Insurance Company of North America, 561 SCRA 262 (2008).
5. Suits AGAINST Foreign Corporations: A fundamental rule of international law on state jurisdiction is that no state can by its laws, and
no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the
limits of that state. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 14, Rule 14, Rules of Court)
The participation of counsel for a foreign corporation in the trial process, including the cross-examination of witnesses,
agreement and objection to documentary evidence, and the introduction of witnesses and documentary evidence would prevent the
plea of lack of jurisdiction over the person of such foreign corporation. General Corp. of the Phil. v. Union Insurance Society of
Canton, Ltd., 87 Phil. 313 (1950).7
For purpose serving summons a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the
complaint that it is doing business in the Philippines. Hahn v. Court of Appeals, 266 SCRA 537 (1997).
When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent
designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any
of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is the agent of the foreign
corporation is not sufficient to allow proper service to such alleged agent; it is necessary that there must be specific allegations that
establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question.
French Oil Mills Machinery Co.v. CA, 295 SCRA 462 (1998).
For purposes of venue involving a foreign corporation, its residence includes the country where it exercises corporate functions
or the place where its business is done. State Investment House v. Citibank, 203 SCRA 9 (1991); Northwest Orient Airlines v. Court
of Apppeals, 241 SCRA 192 (1995).
b. Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the tribunals jurisdiction over its person
is not equivalent to service of summons, nor does it constitute an acquiescence to the courts jurisdiction. Avon Insurance PLC v.
CA, 278 SCRA 312 (1997).
c. ODD DOCTRINE:
Indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from the courts in
the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a
person or persons in the Philippines. Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979).8
CONTRA: The sine qua non requirement for service of summons and other legal processes or any such agent or representative is that
the foreign corporation is doing business in the Philippines. Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1(988); Signetics
Corp. v. CA, 225 SCRA 737 (1993).
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations not doing business here; insofar as the
State is concerned, such foreign corporation has no legal existence, and to subject foreign corporations not doing business to the
courts jurisdiction would violate the essence of sovereignty. The Court is not persuaded by the position taken invoking the ruling in
Facilities Management. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
5
This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the lack of authority of foreign
corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. Also Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
6
Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications Material and Design, Inc. v. Court of Appeals, 260 SCRA 673 (1996); Agilent Technologies Singapore (PTE)
Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004); Global Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design
International Selections, Inc., 670 SCRA 64 (2012).
7
Johnlo Trading Co., v Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23 (1954); Far East Intl Import
and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
8
FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Intl v. NLRC, 178 SCRA 569 (1989); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987).

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d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the Philippines, it is deemed a confirmation by the
foreign corporation, even though not doing business in the Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC,
125 SCRA 522 (1983).
6. Laws Applicable to Foreign Corporations (Sec. 129)
The provision in the New York law which allowed only stockholders with a minimum number of shareholdings (3%) to be entitled to
exercise the right of inspection is valid in the case of a foreign corporation licensed to do business in the Philippines which in its internal
relationship was bound by the New York law. Grey v. Insular Lumber Co., 67 Phil. 139 (1938).
7. Amendment of Articles of Incorporation (Sec. 130)
8. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code)
9. Withdrawal of Foreign Corporation (Sec. 136)
XIX. PENALTY PROVISIONS OF THE CODE
1. Penalty Clause for Violations of the Provisions of the Code (Sec. 144)
2. Cross-reference (Sec. 27).
3. Specific application (Sec. 74).
4. Strict Principles in Criminal Law; the issue of malice.
5. Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground for involuntary dissolution
of the corporation and that the court was entitled to exercise discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil. 399
(1927).
Penalties imposed in Sec. 190(A) for the violation of the prohibition in question are of such nature that they can be enforced only by a
criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Solicitor General in
representation of the Government. Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
6. Violation of Sec. 133 by Foreign Corporations
Section 133, unlike its counterpart Sec. 69 in the old Corporation Law which specifically provided for penal sanctions for foreign
corporations engaging in business in the Philippines without obtaining the requisite license, should be deemed to have a penal sanction by
virtue of Sec. 144 of the Corporation Code. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
XX. MISCELLANEOUS
1. SEC Power and Supervision (Secs. 108 and 143; PD 902-A)
2. Special Corporations (Sec. 4)
3. New Requirements on Existing Corporations (Sec. 148).
4. Applicability of Other Provision of old Corporation Law (Secs. 145 and 146).
oOo
03 NOVEMBER 2014\SCRA 715

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