4 HR.

PRE-BAR NOTES
CORPORATION CODE
Personal property of ATTY. R. C. LADIA
2.0110
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, DEFINITION AND ATTRIBUTES (S ec . 2)

As an ARTIFICIAL BEING, may it be entitled to the award of MORAL DAMAGES?
TAMAYO vs. UNIVImSITY OFNEGROS ( 1 962)
"Moral damages may be awarded in recompense for physical suffering, mental
anguish, fright, social anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. A corporation, being an artificial person and
existing only in contemplation of the law, has no feelings, no emotions and no senses, it
can not, thus, experience mental anguish and physical sufferings."
MAMBULAO LUMBER vs. PNB (1968) = in addition to the above, the SC ruled:
"a corporation may have a good reputation which, if besmirched, may also be a
ground for the award of moral damages."
FIL!PfNAS BROADCASTING vs. AGO MEDICAL CENTER (Jan. 2005) .. ,.. <-<>t.
"Art. 2219 (7) of the Civil Code authorizes the recovery of moral damages in
cases of libel, slander and any form of defamation. The law (2219) does not qualify
whether the plaintiff is a natural or juridical person. Thus, a juridical person can validly
complain for libel or any other form of defamation and claim moral damages."
Reiterated in MERALCO vs. T.E.A.M. ELECTRONICS CORP. (Dec. 2007) - also
citing 2219 - "when a corporation has a reputation that is debased resulting in its
humiliation in the business realm," moral damages may be awarded.

CLASSIFICATION: (S ees . 3&4)

Importance- to determine what law or provisions of the Corp Code is applicable.
E.g. STOCK AND NON-STOCK
Sec. 87 - TITLE 1 1. - The provisions governing stock corporations, when pertinent,
shall be applicable to non-stock corporatipns, except as may be covered by specific
provisions of this Title.
a) VENUE OF MEETfNGS .... (Sec. 5 1 ) at the City or Municipality where the principal
office of the corporation is located or is established, and as far as practicable, at the
principal office of the corporation.
STOCK corporations arc it no way authorized to hold stocld1olders meeting beyond
the territorial boundaries of their principal office. They can not thus, validly provide in
their by-laws that meetings shall stockholders' meetings shall be held elsewhere. BUT, in
the case of NON-STOCK corpomtions, the Code (Sec. 93) authorizes/empowers them to
provide in their by-laws that members' meetings may be held anywhere in the
Philippines.
N.B. 211d par, Sec. 51 > Metro-Manila is considered as one single city or municipality.
b) CUMULATIVE VOTING (S ec . 24)- it is a matter of right in stock corporations
and may not be denied by the Articles of Incorporation or by-laws tmder the Doctrine of
Limited Capacity in the corporate form of business, i.e., it can only do such acts and
things as the law allows it to do so unlike a natural person who may do anything provided
it is not contrary to law, morals public order or policy. WHEREAS - Unless otherwise
provided in the AI/BL, members are entitled to cast only one vote per candidate. (Sec 89)
 BUT it may also be allowed by a provision in the Al/BL since (89) empowers NON
STOCK corps to either BROADEN, LIMIT OR DENY voting rights of the members.
Thus, while stockholders right to vote is a matter of right in a stock corporation is a
matter of right under the same doctrine of limited capacity, in a non-stock corporation the
articles of incorporation or by-laws may validly deny voting by proxy.
+--
c) ELECTION OF CORPORATE OFFICERS (Sec. 25)- Stock- Board of directors
Non-Stock- unless otherwise provided in the AI/BL- directly by the members.
CLOSE Corp. - Unless the AI/BL provide otherwise corporate officers/employees may
be directly elected/appointed by tl1e stocld1olders.

CORPORATE NAME (Sec. 18) "No corporate name shall be allowed by the SEC if
tl1e proposed name is identical or deceptively or confusingly similar to any existing
corporation or ru1y other name already protected by law, or is patently deceptive,
confusing or contrruy to law."
Intent of law- to avoid confusion, deception or fraud.
PHILIPPS EXPORT B.V. vs C.A. (1992) - Actual confusion need not be shown, it
suffices that confusion is probably or likely to occur.

DIRECTORS/TRUSTEES (Sec. 23 in relation to sub section 6, Sec. 14)

QUALIFICATIONS AND NUMBER -a) not less than 5 not more thru1 15, b) he must
own at least one share of the capital stock, which share shall stand in his name in the
books of the corporation, c) majority must be residents of the Philippines, and, d) other
qualifications as may be provided in the by-laws (Sec. 47, subsection 5)
Again, there is no citizenship requirement but only residency, i.e., majority must be
residents of the Phil. Thus, a corporation may have a governing Board consisting solely
of foreigners, unless, of course, the law otherwise requires, e.g. Sec. 4, Article XIV Phil.
Constitution - subject to certain exceptions, "management of educational institutions
shall be vested solely to citizens of the Philippines," or Article XVI Phil. Canst. in the
case of MASS MEDIA corporations which me required to be fully owned by citizens of
the Philippines - no foreigner can be a director because to be a director he must own at
least one share of the capital stock which shall stand in his name in the books of the
corporation.
Should the stockholder be the cquitable/benct1cial owner of the share in order to be
qualified as a director? No. t suffices that he is possessed with legal title to the shrues.
(LEE vs. C.A. 205SCRA752) What is material is the legal title to, not beneficial
ownership, of the stock as apperuing on the books of the corporation. As long as he holds
at least one share as appearing in the books, no matter how he holds the same, in trust for
or otherwise, he becomes qualiiied to be a director. As compared to the old law which
required that the shareholder must own in his own right at least one share- i.e. he must
be both the legal and equitable/beneficial owner of the share/s.
DISQUALIFICATIONS Sec. 27 a) conviction by final judgment, of ru1 offense
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punishable by imprisonment for a period exceeding 6 yerus, b) Violation of the

Corporation Code committed within S yems prior to the date of his election, c) He ceases
to own at least one share of the capital stock (Sec. 23) ru1d, d) others as may be provided
for in the by-laws. (sec. 47{5} ).
 N.B. The by-laws, PU\'suant to subsection 5 of Section 47, may provide for additional
qualifications and disqualifications of the members of the Board.

Tl{E B OARD O.F DIRECTORS/TRUSTEES

Unless otherwise provided in the Code, all corporate powers, all business are
conducted and all properties of a corporation are controlled by the board of directors.
(Sec. 23) They are the corporate managers and are thus the ones who can act for and in
behalf of the corporation. They must, as a general rule however, sit and act as a body at a
validly held and conducted meeting to have a valid corporate act. Individual directors
cannot bind the corporation by their individual acts unless a) there is a valid delegation of
authority; b) when expressly conferred; 3) where the officer or agent is clothed with
actual or apparent authority; 4) when expressly or impliedly ratified; and, 5) estoppel.
(Yao Ka Sin Trading vs. C.A., 209SCRA763; Pua Casim vs. Neumark, 46Phil.242,
Francisco vs. GSIS, 7SCRA557, Lopez Realty vs. Fontecha, 247 SCRA 183)
NB - Doctrine of Apparent Authority -- Advance Paper Corp vs. ARMA Traders,
712SCRA313, Dec. 11, 2013- Where the corporation holds out an agent with apparent
authority to bind the corporation, the latter will be estopped to deny the same and will be
bound by the acts of the agent.
NB E-Commcrcc Law The BOD may meet via TeleNideo Conference. Their
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physical presence at the meeting is no longer necessary.

The quorum requirement for a valid directors' meeting is the majority of the members
of the board as fixed in the articles of incorporation and every decision of at least a
majority of the directors or trustees present at a meeting at which there is a quorum,
will pass a valid corporate act. Thus, while the quorum requirement is majority of the
entire members, the voting requirement isnot majority of their number but majority vote
of those present at which there is a quorum. Thus, the vote of 2 members of a 5-man
governing board may pass a valid corporate act or transaction (exp) (Sec. 25) Exception
to this rule is the election of corporate officers which requires the vote of the majority of
the entire members of the board and whete the articles or by-laws will require a greater
quorum and voting requirement.

LIABILITY OF CORPORATE DlRECTORS/OFFICERS

Directors/officers are not, generally, liable for their official acts as long as they act in
good faith and within the scppc of their powers and authority pursuant to the Corporate
Entity Theory. (Soriano vs. C.A., 174SCRA195, Rustan Pulp and Paper Mills vs. lAC,
214SCRA665, Tramat Mercantile vs. C.A., 238SCRA14) Contracts/obligations incurred
by them in their official capacity is not theirs but that of the corporation which they
represent. This may also be based on the BUSINESS JUDGMENT RULE which states:
"Questions of policy and management are left solely to the honest decision of the
board of directors and the courts are without authority to substitute its judgment as

against the former. As long as they act in good faith, their actuations arc not subject
to judicial review." (Montclibano vs. Bacolod Murcia Milling 5SCRA36, Reiterated in
Filipinas Port Services vs. Go, March 2007) "11.1 .:;e.c 1 o4 D fo <:.-1<
Corporate directors/officers may, however, be held liable, personally or solidarilly, in
four (4) specific instances:

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 1. He assents (a) to patently unlawful act of the corporation, or (b) bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
He consents to the issuance of watered stocks or who, having knowledge thereof
does not forthwith file his written objections with the corpmate secretary;
3. He agrees to hold himself personally and solidarity with the corporation; or,
4. He is made, by specific provision of law, to personally answer for his corporate
action. Eg. B.P. 22 and Trust Receipt Law. (MAM Realty Devt. Corp. vs. NLRC
reiterated in Tramat Mercantile vs. C.A. supra)

JC LIABILITY FOR l<'ORBIDDEN J>ROFITS (Duty of Loyalty)

The Forbidden Profits Rule finds its roots from the provisions of Sees. 3 1 and 34 of
the Code where directors arc considered in equity as bearing a "fiduciary relation" to
the corporation and the stockholders as a whole.
Under Section 31, directors/trustees are liable jointly and severally for damages if they
"acquire any personal or pecuniary interest in conflict with their duty (of loyalty) as
such director." Section 34, on the other hand provides - "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 pre,judice 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 fa ct that the dirccto1 risked his own funds in the venture."
Forbidden in the sense that they arc fiduciary representatives of the corporation and
stockholders and as such they arc not allowed to obtain any personal profit, commission,
bonus or gain for their oHicial actions. This may also refer to those arising from
transactions of directors with 3'd persOJiS which may involve misappropriation of
corporate opportunities and disloyal diverti\1g of business. This is otherwise known as the
CORPORATE Ol'PORTUNITY DOCTRINE which "places a director of a
corporation in the position of a fiduciary and prohibits him from seizing a business
opportunity and/or of developing it at the expense and with the facilities of the
corporation. He cannot appropriate to himself a business oppmiunity which in fairness
should belong to the corporation." NB. Sec 34 states -The provision shall be applicable
notwithstanding the fact th>,t the director 1iskcd his own fund in the venture.

Other matters which may involve a violation of the duty of loyalty of a director would
be where he deals or transacts business with his own corporation where he may either be
a self-dealing director or an interlocking director.
A self-dealing director is one who enters or tansacts business with his own
corporation. While and interlocking director is a director of a corporation which
transacts business with another orporation of which he is also a director. Contacts of
self-dealing directors arc generally voidable at the option of the corporation but they are
valid per se if all of the four (4) conditions set forth in Section 32 are present:
I. The presence of the director/trustee in the board meeting approving the contract
was not necessary to constltute a quonun;
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 2. The vote of such director/trustee in the board meeting approving the contract was
not necessary for the approval of the contTact;
3. The contract is fair and reasonable under the circumstances; and,
- In the case of an ot1iccr, there was a previous authorization from the board of
directors.
If any of the first two (2) conditions is absent it is voidable and thus subject to
ratification by at least two-thirds of the outstanding capital stock at a meeting called for
that purpose provided that full disclosure of the adverse interest of the director involved
is made and provided, finally, that the contract is fair and reasonable.
The contract of an interlocking director, on the other hand is generally valid. Sec.
34 provides that ''except in cases of fraud, and provided the contract is fair and
reasonable, 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/s is merely nominal, the provisions of the preceding section insofar as the
latter corporation is concerned shall apply. Stocld1oldings in excess of 20% is
substantial for the purpose of interlocking directors. Thus, if such is the case the contract
becomes voidable.

ELECTION AND VOTING

Elected by the stockholders/members entitled to vote.
Quorum requirement- Majority of the outstanding capital stock/ members entitled to
vote.
Voting requirement- NONE - Sec. 24 merely provides- "candidates receiving the
highest number of votes."
Stocld1older may avail of their right to cumulative voting, i.e. by multiplying his
number of shares by the number of directors to be elected the total sum of which will be
his number of votes which he may cast in favor of only one candidate or may distribute
them on the same principle in favor of as many candidates sees fit. (Sec. 24)
Members of non-stock corporation are generally entitled to only one vote for each
candidate. But a non-stock corporation may broaden, limit or deny voting rights of the
members and may thus allow cumulative voting. (Sec. 89)

TERM OF OFFICE \

Sec. 23 -- shall hold office for one year until their successors are duly elected and
qualitied in accordance with law.
In VALLE VERDE COUNTRY CLUB vs. AFRICA (Sept 4, 2009) the High Court
construed this provision lo mean that the term shall be for one year only (only as a
general rule since non -stock can be 3 years, and, educational corps 5 years) Their term
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expires one year after election to the office. The term is fixed by law. As may be
compared to tenure which represents the duration which the incumbent actually held or
holds office. Term is defined as the time during which the officer may claim to hold
oftice as a matter of right, and fixes the interval after which the several incumbents
shall succeed one another. The term of office is not affected by the hold over. The term
is fixed by statute and it does not change simply because the office may have become
vacant, nor the incumbent holds otTice beyond the end of the te1m due to the fact that a

5
 successor has not been eleted and/or has failed to qualify. Tenure may be of a sho1ter or
longer duration, eg, resignation before the term expires, or acts in a hold-over capacity.
NB. Detective & Prot6ctive Bmeau vs. Claribel - until their successors have been
.dulj elected and qualified in accordance with law.

REMOVAL OF DIRECTORS/TRUSTEES
A director/trustee may be removed/ousted tiom office with or without cause by at
least 2/3 of the outstanding capital stock or members in cases of non-stock corporations.
Provided, that removal without cause shall not deprive the minority stockholders or
members of the right of representation to which they may be entitled under Secti011 24
of the Code. (Sec.28) Only the stocld1olders/members can remove directors/trustees
elected by them. (Raniel vs. Jochico, March 2007) They can not be removed/ousted by
their fellow directors/trustees or officers.
May the vacancy created by virtue of removal/ouster be filled up by the Board of
Directors/Trustees themselves, if still constituting a quorum? -NO. Only the
stockholders/members can iill up a vacancy created by vi1tue of a removal or expiration
of term. Section 29 provides that "any vacancy occurring in the board of
directors/trustees other tluw by removal by the stockholders or members or by
expiration of term, may be tilled by the vote of at least a majority of the remaining
directors/trustees, if still constituting a quorum."

May the remaining members of the Board of Directors, if still constituting a quorum,
till up a vacancy created by the resignation of a hold-over director? No. VALLE
VERDE COUNTRY CLUB vs. AFRICA supra- TERM is fixed by law. Ordinarilly,
one (1) year until their successors have been elected and qualified in accordance with
law. The hold-over period that time from the lapse of one ( 1 ) year from a member's
election to the Board and until his successor's election and qualification- is not part of
the director's original term of oftice., nor i it a new term; the hold-over period, however
constitutes part of tenure. Corollary, when an incumbent member of the Board of
Director continues to serve in a hold-over capacity, it implies that the office has a fixed
term, which has expired, and the incumbe, nt is holding the succeeding term. The hold
over period is not to be considered as part of his term which had expired.
NB. The Board, if still constituting a, quorum may fill up a vacancy in the office
except by removal or expiration of term.,

COMPENSATION OF DIRECTORS/TRUSTEES
Directors/Trustees arc not, generally, entitled to compensation under section 30 of
the Code, except for reasonable per diem. They may be granted compensation, however,
if a) there is a by-law provision allowing or granting the same; b) if there is a grant by
the stockholders owning or representing at least a majority of the outstanding capital
stock; or, c) If they render unusua1 or extra-ordinary service.
Section 30 also provides a ceiling of the compensation of directors to the effect that it
shall not exceed ten (10%) percent of the net income before tax of the corporation during
the preceding year.
NOTE the 1997 case of WESTERN INSTITUTE OF TECH. vs. SALAS,
278SCRA216. The words as such directors in Section 30 so as to generally deny the

6
 directors of compensation "is not without any significance for it delimits the scope of
the prohibition to compensation given them for services performed purely in their
capacity as directors or trttstees. The unambiguous interpretation is that they may receive
coqpensation (even without any grant or authority from the stockholders or by a by-law
provision) when they render services in a capacity other than.as directors/trustees."
Thus, if they are acting other than as such directors like a president, chairman,
secretary or treasurer, they may receive compensation by a mere grant of the Board of
Directors. Likewise, the ceiling of I 0% will not apply if the compensation granted them
is in a capacity other than as such directors. (N.B. that the words as such directors
tmder section 30 is used two times. First, on the denial of compensation of directors, as
such, and the ceiling of I 0%)

THE CORPORATE ENTITY THEORY AND DOCTRINE OF PIERCING THE

VEIL OF CORPORATE FICTION.
The CORPORATE ENTITY THEORY states to the effect that a corporation is
possessed with a personality separate and distinct from the individual
stockholders/members and or corporate officers and is not affected by the personal rights,
obligations or transactions of the latter. In the same vein, the stockholders/members and
individual directors/officers are not also affected by the rights, obligations and/or
liabilities accrued or incurred by the corporation.
PIERCING THE VEIL OF CORPORATE FICTION - when the notion of the legal
corporate entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime, the Jaw will regard the corporation as a mere association of persons, or, in
the case of two corporations, merge them into one, one of them being regarded merely as
an alter ego, business conduit, adjunct, extension or instrumentality of the other.
But, for the separate personality of the corporation to be disregarded, the wrongdoing
must be clearly and convincingly established. Fraud must be proven by clear and
convincing evidence nmounting to more than preponderance. It can not be justified
by speculation and can never be presm,ncd. (Del Rosario vs. NLRC, I 87SCRA777)
Thus, the mere fact that a corporation may own all of the shares of stock of another
corporation, taken alone, will not justify p'iercing the veil of corporate fiction. (PNB vs.
RITRATTO GROUP, 362SCRA216) This finds its justification to the
INSTRUMENTALITY RUE earlier enpnciated in CONCEPT BUILDERS vs. NLRC
(257SCRA149) which provides:
When one corporation is organized ar1d controlled, and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded.
There are three (3) test/dements for the applicability of pien;:ing the veil of corporate
fiction vis-a-vis the INSTRUMENTALITY RULE I) Control, not mere majority or
complete control (ownership oi"' shares), but domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate
entity, as to this transaction, has, at that time, no separate mind, will or existence of its
own; 2) Such control m ust have been used by the defendant to commit fraud or wrong
to perpetuate a violation of the plaintiffs legal rights; and, 3) the aforesaid control and

7
breach of duty must proximately cause the injury or uniust loss com])lained of The
absence of any one of these elements prevents piercing the veil of corporate fiction .

OTHER CORPORATE POWERS AND AUTHORITY

The Doctrine of Limited Capacity, a corporation is an artificial being existing only
in contemplation of the Jaw and can thus only do such acts and things and exercise such
powers and functions as the law allows it to do. These corporate powers and authority
includes a) Those that arc expressly granted by law; b) those that are conferred by its
Articles of Incorporation; and, c) those that are necessary or incidental to its existence . If
they exercise such powers and function beyond any of them, the act performed is an ultra
vires act, allowing the contracting parties to collaterally attack the validity thereof and
escape liability therefrom. ULTRA VIRES acts/contacts are thus those that are
performed/exercised by the corporation beyond its express, inherent or implied powers or
authority.

Power to sue or be sued --To whom should service of summons be made?

Sec . II, Rule 1 4 (1997 Rules of Civil Procedure) only to the "president, managing
partner, general manager, corporate secretm-y, treasurer or in-house counsel." A strict
compliance with the mode of service is necessary to confer jurisdiction of the court over
a corporation. The officer upon whom service is made must be one who is named in the
statute; otherwise, service i s insufficient . (E.B. Villarosa & Partners vs. Benito,
GR136426, Aug . 1999) Note; the words any of the directors and agents was
deliberately omitted in the New Rules. NB - En Bane decision, thus, the liberalized rules
on service of summons to a corporation no longer hold true.
N.B. fi.1rther - This rule will hold true only, however, if the corporation is sued by a
third party. It will not hold true and is not applicable in intra-corporate controversies.
Under the interim Rules Governing Intra-corporate Controversies (Sec. 5, Rule 2) "If the
defendant is a domestic corporation service shall be deemed adequate if made upon any
of the statutory or corporate officers as fixed by the by-laws, or their respective
secretaries." A director is a statutory officer of a corporation.

Power to acquire/alienate property - (Sec.36) Expressly granted by law which is

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subject to two limitations-- \1) li1nitations imposed by law or the Constitution; and, b) as
the lawful transaction of its business may reasonably require. NB - the early case of
A. D. Santos vs. Luneta Motors - transportation business by water and by land are two
different lines of business thus, LMC cannot validly acquire Certiticate of Public
Conveniece for the operation of taxi cabs - it is not as the lawful transaction of its
business reasonably require.

Power to deny Pre-emptive Righ t (Sec. 39) --Pre-emptive right is the right of existing
stockholders to subscribe to all issues or disposition of shares of any class so as to
maintain their respective proportionate interest in the corporation, ie, voting and dividend
rights. Stockholders may not exercise this right in tluee (3) instances- a) If denied by
the m-ticles of incorporation or any amendment thereto; b) those issued i n compliance
with laws requiring stock offerings or minimum ownership by the public; and, c) those

8
issued in good faith with the approval of the stockholders representing 2/3 of the
outst andin g capital stock e[ther (i) in exchange of property needed for corporate purpose
or (ii) in payment of previously incurred indebtedness.
N.fl. the law as it stands now uses the phrase "all issues or disposition of shares of any
class" - Benito vs. SEC, 123SCRA722 and the subsequent case of Dee vs. SEC,
199SCRA241 excluded from the coverage of the right of pre-emption originally
unsubscribed p01iion of the original authorized capital stock. But, the wordings of the law
is now clear and specitic - "all issues or disposition of shares of any class."
N.B. The preemptive right of a stockholder in a close corporation is absolute. "It shall
extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property, or in payment of corporate debts, unless the articles of incorporation
provide otherwise."(Sec. I 02) N.B. Further, that in ordinary corporations, it can not be
exercised if issued in compliance with laws requiring stock offerings or minimum
ownership of the public will not apply to a close corporation. It can not be a close
corporation if it vested with public interest and it can not make any public offering of
any of its stock of any class.

Power to sell/dispose of all or substantially all assets/properties - (Sec. 40) If the

corporation sells or disposes all or substantially all of its assets/properties (N.B. including
lease, exchange or mortgage) the stocld1olders'/members' consent or approval is required
for its validity, i.e., 2/3 of the outstanding stock or members incases of non-stock
corporations.
A sale or disposition is considered substantial if the corporation would be rendered
incapable of continuing the business or accomplishing the pmpose for which it is
incorporated so as to require stockholders' /members' approval for its validity. The
consent/approval of the latter is not required (even if it is the only prope1iy of the
corporation) if the sale or disposition is in the usual and regular course of its business
or if the proceeds are appropriated for the conduct of its remaining business. E.g
realty business.
Is the purchaser of all or substantially all of the assets/properties of a corporation
liable for the debts and liabilities of the selling corporation? Generally NO- by virtue of
the Corporate Entity Theory (Yu vs. NLRC, 245 SCRA 134) except: a) where the
purchaser expressly or impliedly agrees to assume such debts; b) where the transaction
amounts to a merger or cons,olidation; c) where the purchasing c orporation is a mere
continuation of the selling corporation; and, d) where the transaction is entered into
fraudulently in order to escape liability for such debts. (JOHN MCLEOD vs. NLRC, Jan.
2007, reiterating Edward Nell vs. Pacific Farms)

Power to acquire own shares

(Sec. 41) - Another express power granted by law
subject to the limitation that it must be for legitimate purpose/s. The enumeration of tl1e
law as to what may be a legitimaie purpose is not exclusive for it provides including but
not limited to the following: a) To eliminate fractional shares arising out of stock
dividends; b) to collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale and to purchase delinquent stocks sold during
said sale; and, c) to pay dissenting or withdrawing stockholders entitled thereto. Another
legitimate purpose may include d) to redeem redeemable shares under section 8 of the

9
Code; e) in case of deadlocks in a close corporation under section I 04 where the proper
forum may compel a stockholder to transfer his share to the corporation irrespective of
the existence of unrestricted retained earnings and, f) to acquire the shares of a
wit]adrawing s tockholder in a close corporation under section 105 of the Code.
Save and except letter d), e) and f) the law imposes a limitation that in order that the
corporation can reacquire its own shares it must have u nrestricted retained earnings or
surplus profits .

Power to invest funds in another corporation or for any other purpose. (Sec. 42) It
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may do so with the concurrence/vote of at least 2/3 of the outstanding capital stock or 2/3
of the members in case it is a non-stock corporation. Approval/consent of the
stockholders will not be rcq LLired for its validity if it is necessary to carry out its primary
purpose. (Dela Rama vs. Ma-ao Sugar Central, 27 SCRA247) or it will aid in its primary
purpose. (Gokongwci vs. SEC, 89SCRA369) N.B. the law requires
stockholders' /members' approval only if the investment is in another corporation or
business or pmpose other than the primary purpose.

Power to declare dividends - (Sec. 43) - Requirement - lt must have unrestricted

retained earnings or surplus profits.
N.B. The Board of directors determines the nature of dividends to be declared,
whether cash, property or stock. But, if the Board decides to declare/pay stock dividends
instead of cash or property, the approval of at least 2/3 of the outstanding capital stock
will be required for its validity.
NB- The declaration of stock dividend is otherwise known as capitalization of
umestricted retained earnings to the extent of the stock dividends declared- expl
Are subscribers to shares of stock, not fully paid, entitled to full payment of
dividend.s due them? YES, if they have not been declared delinquent. Under Sec. 72 of
the Code, subscribers to shares of stock, not fully paid, shall have all the rights of a
stockholder. If they are delinquent, they are still entitled to dividends but any cash
dividends due him shall first be applied t9 the amount of his delinquency inclusive of
cost and expenses and the remainder, if any shall be paid to him. If it is stock dividends
it shall be withheld iiom him until he pays up the amount of his delinquency.
The amount or number of stocks that will be paid to the stockholders as their share of
the dividends will be based Of\ their proportionate interest in the corporation.

By-laws. - Sec. 46 of the Code requires every corporation registered under its provision
it must adopt and file its by-laws with the Securities and Exchange Commission within a
period of within one ( 1) month, from the date of its registration, if not filed
simultaneously with the articles of incorporation. The law uses the word must, for that
purpose.
What is the effect of non-adoption/filing of by-laws within the period required by law?
Will it result to the automatic dissolution of the corporation? NO - despite the use of
the word must, the High Comi has ruled in LOYOLA GRAND VILLAS
HOMEOWNERS' ASSN. vs. C.A., 276SCRA681, that the word must is not always
imperative. The tendency is to interpret the word as a reasonable constmction of the
statute in which it is used, will demand or require. The deliberations of the legislature

10
 would show tht bit was 1ot their intentions to make it imperative. Taken as whole, and
.
tmder the pnnc1ple that tle best interpreter is the statute itscH; Bee. 4Ci reveals tile intent
of the legislature to attach a directory and not mandatory meaning to the word. Although
the. Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of non-tiling the same within the period provided for in Sec. 46. However,
such omission has been rectified by Presidential Decree 902-A which grants the SEC the
power to l) suspend, or revoke, after proper notice and hearing, (among others) for
failure to file by-laws within the required period. Failure to file/adopt by-laws would not,
thus, result to the automatic dissolution of the corporation.
NB- Section 144 -

STOCKS AND STOCKHOLDERS

A person, natural or juridical, may become a stockholder in either of three ways; 1) by
a contact of subscription; 2) by acquisition or purchase of shares from existing
stockholders (including those traded in the stock exchange); or, 3) by purchase or
acquisition of treasury shares from the corporation.
Subscription refers to a contact for the acquisition of shares of stock of an existing
corporation or still to be formed and the agreement to pay for the same.
NOTE- "Any contact for the acquisition of u nissued stock in an existing corporation
or a corporation still to be formed is deemed a subscription contract no matter how the
parties will refer to it. (Sec. 60) Whether it is captioned sale or purchase, as long as it is
an acquisition of unissued stocks of the corporation, it is a subscription contract.
Implication- the person acquiring the u nissued stocks of the corporation immediately
becomes a stockholder from effectivity of the contract and acquires all the rights and
the corresponding liability to pay for the full value of the shares. The unpaid portion of
his subscription will become a debt owing to the corporation and just like any other
indebtedness, he is bound to pay the same. Unlike in a sale or purchase where the
obligations of the parties a.re reciprocal an:d dependent on each other, the purchaser will
not be liable to pay any unpaid an1ont unless the seller is ready, able and willing to
deliver the thing or object of the contract. That is, if the corporation becomes
subsequently insolvent, the acquiring person is not bound to pay,since the corporation is
not or will not be able to issue a valid stocl certificate. There will be no consideration as
it will be a worthless piece of paper. On the other hand, the corporation can not be
compelled to issue a stock crrtificate until and unless the other contracting party is able
or tenders to pay the full value thereof. Thus, in the case of purchase or sale if the
agreement is that the acquiring person wil) not be a stockholder until and unless he pays
the full value of the shares, he will not be liable to pay the balance of his acquisition cost
if the corporation has already become insplvent. There is no more distinction between
purchase and subscription insofar as the unissued stocks of the corporation is
concerned. NB - This rule will not apply to treasury shares as they are fully paid up
shares and may thus be subject to a contract o:f sale or purchase.

CONSIDERATION FOR ISSUANCE OF SHARES- (Sec. 62)- Shares of stock can not
be issued for a consideration Jess than its par or issue value. NB - how no par value
shares issue price is determined a) AI, or b) BOD pursuant to an authority granted them
by the AI, or, majority of the outstanding capital stock. If they are issue below the par or

11
 issued value they are COl\Sidered as watered stocks. Watered stocks, are therefore
shares of stocks issued by the corporation as fully paid up when in fact the full value
thereof has not been paid or promised to be paid.
NO;fE - the basis of determining whether there is stock watering is the par o r issued
value and not the fair market or book value. There is thus no stock watering if they are
issued not below their par or issued value even if it is substantially below the fair market
or book value.
Liability of Directors/Officers Issuing Watered Stock - (Sec. 65) - Those voting or
consenting to the issuance or those having knowledge thereof but does not interpose their
written objections with the corporate secretary are solidarily liable with the stocld1older
concerned to the corporation and its creditors for the difference between the par value or
issue value and the amount for which they are issued. Thus, even passive
directors/officers may be held liable if they had knowledge of the issuance but did not
interpose their objection thereto.
NB - Is the stockholder to whom the watered stocks are issued solidarily liable with
the responsible corporate directors/officers? Yes - if they are par value shares pursuant to
sec 65. But No if they are no-par value shares because the Code provides that no-par
value shares, once issued, are deemed fully paid and non-assessable. (sec. 6) .
NB -Are non-voting shares included in determining compliance with the
Nationalization Laws? - No - The Constitutional provision reserving to Philippine
nationals the operation of public utilities or to corporations with at least 60% of the
capital stock outstanding refers only to share4s with voting rights. Citing the Omnibus
Investment Code of 1 981, Omnibus Investment Code of 1 987 and the Foreign Investment
Act, said 3 special laws all carry the definition of a Philippine national as a citizen of the
Philippines, or domestic partnership or corporations organized under the laws of the
Philippines of which at least sixty (60%) percent of the capital stock and entitled to vote,
is owned and held by such citizens of the Philippines. (Heirs of Gamboa vs. Teves, Oct.
9, 2 0 12.) NB- only preferred and redeemable shares may be denied the right to vote, thus
the articles of incorporation cannot provide that common shares are denied the right to
vote. BUT, they may be effectively denied the right to vote --founders' shares (sec 7)

YrSSUANCE OF STOCK CERTIFICATES- (Sec. 64) - "No ce1tificate of stock shall be

issued to a subscriber until the full amount of his subscription together with interest and
expenses ( in case of dclinqu.\'nt shares), if any, has been paid." No certificate of stock
can thus be issued, as the law stands now, for the corresponding number of shares which
the subscriber may have already paid for. Spbscriptions to shares of stock are now clearly
indivisible. Expl-

CERTIFICATES OF STOCK AND THEIR TRANSFER- (Sec. 63) - Shares of stock

"may be transferred by the delivery of the stock certificate or certificates indorsed by
the owner or his attorney in facr x x x. No transfer, however, shall be valid except as
between the parties, until the transfer is recorded in the books of the corporation x x x."
" No shares of stock against which the corporation holds any unpaid claims shall be
transferable in the books of the corporation. x x x.
From the wordings of the statute, a transfer of shares of stock may be transferred by
delivery of the indorsed certificate of stock. Endorsement alone, that is, without delivery,

12
of the stock certiricate is l)Ot su1Ticieqt to eiiect a valid transfer. (Embassy Farms vs. c.
A., 188 SCRA 492). On the other hand, delivery alone, without endorsement is an
ineffective mode of transferring shares. (Razon vs. LA. C., 207 SCRA 204)
, ec. 63, uses the word may be transferred by endorsement coupled with the delivery
of the stock certificate such that in Rural Bank of Salinas vs. C .A., 21 OSCRA510, it was
ruled that a duly notarized deed is also an etiective mode of transferring shares. This is
because in U y Piaco vs. Me Micking, the High Court ruled that a transfer, set in a
notarized deed is equivalent to the delivery of the thing itself.
NOTE, however, the decision of the Supreme Court in RURAL BANK OF LIPA vs.
C.A., 366SCRA188, that when a certificate of stock had already been issued, a mere
notarized deed of transfer will not sutTice for a valid transfer of shares of stock. It must be
coupled with the delivery of the indorsed stock certificate.
NOTE, further, that even without a delivery/endorsement of the stock certificate
transfer may be valid and effective if the transferor is in estoppel. (Tan vs. SEC,
206SCRA740)

DOCTRINE OF NON-NEGOTIABILITY OF STOCK CERTIFICARES

Cm1ificates of Stock may be transferred by endorsement coupled with the delivery
thereof. They are merely quasi-negotiable. They are, however, non- negotiable in the
sense that the holder/transferee thereof takes it without prejudice to all the rights or
defenses which the registered owner may have under the law unless the rules governing
estoppel may apply. Thus, in cases of forged or unauthorized transfer, no matter how
innocent the transferee may be, he can not acquire a better title against that of the true or
lawful owner. (Delos Santos vs. McGrath 95Phil577) Yld Nl><:." "'' ll' _, l'l\l'-D 1 ou a:>ul'.>.i;

ENFORCEMENT AND l'AYMENT OF UNPAID SUBSCRIPTIONS

. There are two possible remedies of the corporation to enforce payment of unpaid
portions of subscriptions to its capital stock 1) by a delinquency sale w1der Sees. 67 and
68; and/or b) by a direct action in court under Sec. 70.
If a call is made by the Board of Directors for the payment of unpajd portions of
subscriptions and the stockholder/s concerned do not pay the same on the date specified
in the call, the shares will there by become delinquent and would subject the shares to a
delinquency sale. The shares will be subjected to auction sale, subject to notice and
publication, not earlier than 30 days but 'not later than 60 days from the date of
delinquency. It will be sold to the bidder who tenders or offers to pay the full an10unt of
the balance in the subscription inclusive of interest, cost and expenses, if any, for the least
number of shares.
From the wordings of the statute, the winning bidder is not the highest bidder but rather
the lowest bidder. expl
WHAT IS THE EFFECT VIS-A-VIS THE RlGHTS OF THE DELINQUENT
SHAREHOLDER? - (Sec. 71) -He losses his right to vote or be voted upon and not
entitled to any of the rights of a stockholder, except the right to receive dividends in
accordance with Sec.43.
If the stockholder concerned is also a director, will he be disqualified to be and act as
a director? NO -- until and unless all his shares are sold to the wirming bidder. He

13
remains the ownr of the shr s pending sale at public auction. And, he may remain as
such stockholder d. not all of h1s shares are acquired by the winning bidder .

.MRGERS AND CONSOLIDATION (SECS 78 to 80)

Sec . 80 items
4. The surviving or the consolidated corporation shall thereuon posses all
. the rights,
pnv1leges, unmumt1es and franchises of each of the constituent corporations;
and all
propery . real or personal, and all receivables due on whatever account, including
subscnptwns to shares and other chooses in action, and all and every other interest
belm)gmg to, or due to each constituent COllJorations, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act and deed, and,
5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations or each of the constituent corporations, in the san1e manner as if
such surviving or consolidated corporation had itself incurred such liabilitie or
obligations, and any pending claim, action or proceeding brought by or against any of
each constituent corporation may be prosecuted by or against the smviving or
consolidated corporation. The rights of creditors or liens upon the prope1iy of any such
constituent corporations shall not be impaired by such merger or consolidation.

Are the employees of the absorbed corporation in a merger also absorbed by the
surviving/absorbing corporation? No. (BANK OF THE PHILIPPINE ISLANDS vs. BPI
EMPLOYEES UNION, Aug. 10,201 0)
In legal parlance, human beings are never embraced by the term "assets and
liabilities." The Corporation Code does not mandate the absorption of the employees of
the non-smviving corporation by the surviving corporation in case of a merger.
"The Articles of Merger and Plan of Merger dated April 7, 2000, did not contain any
specific stipulation with respect to the employment contracts of existing persom1el of the
non-surviving entity which is FEBTC. Unl \ke the Voluntary Arbitrator, this Court cmmot
uphold the reasoning that the general stipulation regarding transfer of FEBTC assets and
liabilities to BPI as set forth in the Aliicles, of Merger necessarily includes the transfer of
all FEBTC employees into the employ of BPI x x x. Even if it is so, it does not follow
that the employees should not be subject to the terms and conditions of employment
obtaining in the surviving corporation. / The rule is that unless expressly assumed, labor
contracts and CBA's are not enforceable against a transferee of an enterprise, labor
contracts being in personam thus binding only between the parties. x x x it would have
been a different matter if there was an express stipulation in the A1iicles of Merger that
as a condition for the merger, BPI wa being. required to assume all employment
contracts of all existing FEBTC employees with conformity of the employees. In the
absence of such a provision, then BPI clearly had the business management decision as to
whether or not to employ FEBTC employees. FEBTC employees likewise reatained the
prerogative to allow themselves to be absorbed or not; otherwise that would be
tantmnount to involuntary servitude." 1
NB- MR- Oct 1 1 ,2011

"It is more in keeping with the dictates of social justice and state policy of according
fi.tll protection to labor to deem employment contracts as automatically assumed byb the
surviving corporation in a merger, even in the absence of an express stipulation in the
.

14
 articles of merger or the merger plan. x x x "However, nothing in this Resolution shall
impair the right of an employer to terminate the employment of the absorbed employees
for a lawful or authorized cause or the right of such an employee to resign, retire or
Oth$:rwise sever his employment before or after the merger, subject to existing contractual
obligations."

SME Bank vs. De Guzman (Oct 8,20 1 3 ) - 'There are two types of corporate
acquisitions: asset sale and stock sales. In asset sales, the corporate entity sells all or
substantially all of its assets to another entity. In stock sales, the individual or
corporate shareholders sell a controlling block of stock to new or existing
stockholders. In asset sales, the rule is that the seller in good faith is authorized to
dismiss the affected employees, but is liable for the payment of separation pay under
the law. The buyer in good faith, on the other hand, is not obliged to absorb the
employees affected by the sale, nor is it liable for the payment of their claims. The
most that it may do, for reasons of social j ustice and public policy, is to give
preference to the qualified separated personnel of the selling firm.
In contrast with asset sales, in which the assets of the selling corporation are
transferred to another entity, the transaction in stock sales takes place at the
shareholder level. Because the corporation possesses a personality separate and
distinct from that of its stockholders, a shift in the composition of its shareholders will
not affect its existence and continuity. Thus, notwithstanding the stock sale, the
corporation continues to be the employer of its people and continues to be liable for
the payment of their just claims. Furthermore, the corporation or its new majority
shareholders are not entitled to lawfully dismiss corporate employees ansent a j ust or
authorized cause."
APPRAISAL RIGHT (Scc.81) is a right granted to dissenting/objecting stockholders
on certain corporate or business decisions and to demand the payment of the fair value of
his shares.
The right of appraisal is not at all times available. It may be exercised only in the
instances provided for by law. Under Sec. 8 1 , the instances when it may be exercised are:
I . In case any amendment to the articles of incorporation has the effect of changing
or restricting the rights of any stock.IJ.older or class of shares, or of authorizing
preferences in any respect SLJperior to tnose outstanding shares of any class, or of
extending or shortening the term of corpor&te 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 cases of merger or consolidation.
It may also be exercised by a dissenting .stockholder in cases of
4. Investment of funds in another corporation or business other than the primary
purpose under Sec. 42.
.
N.B. A stockholder in a close co rporation, as may be compared to stockholders of any
other stock corporation may, for any reason, compel the corporation to purchase his
shares at their fair value. Effectively granting him absolute right of appraisal if not denied
by the articles of incorporation, provided only that the corporation has sufficient assets
to cover its debts and liabilities exclusive of capital. (Sec. l 05)
WHAT IS THE EFFECT OF THE EXERCISE OF APPRAISAL RIGHT (Sec 83)

15
 "From the time of dem<;tnd for payment of the fair value of a stockholders'
shares until
either the abandonment ofthe corporate action involved
or the pmchase of the said shar
b the corporation, all rights accruing to such share
s, including voting and divide
.ngpts, shall be .suspended x x x Provided, that if the stockholder
:
is not paid the value of
h1s shares W!lhm .>0 days after the award, his voting and
diyidend rights shall be
immediately restored."
N.B. Distinction of rights of delinquent stockl1older vs. stockl1older exercisin
g appraisal
nght - The delinquent stockl1older is entitled to receive dividends in accordance
with
Sec. 43 whereas, the stockl1older exercising his appraisal right is not entitled to any of
It, unless he is not paid the FMV of his shares within 30 days from the award. Both,
however, have no voting rights.

NON-STOCK CORPORATION (Sees. 87 to 95)

The provisions governing stock corporations, when pertinent, shall apply to non-stock
corporation, Lmless specifically covered by Title I I )
Membership is personal and non-transferable, w1less the by-laws provide otherwise.
If transferable, e.g., propriety shares in sports club, may the transferee thereof,
compel the corporation, j LJst like a transferee in a stock corporation, that the same be
recorded in the books in order that he (transferee) may become a
stockllolder/shareholder? (NB : If denied without good cause, the corporation may be
compelled to do so by mandamus, since it is ministerial in natnre. (RURAL BANK OF
SALINAS vs. C.A.) If registered in the name of the transferee, is he now a member?
-

NO -
A transferee of shares in non-stock corporation may be a stockholder but not
necessarily a member of the same. CEBU COUNTRY CLUB vs. ELIZAGAQUE,
January 2008 A non-stock corporation can set its own criteria/standards in the
-

admission of its members. But, while it may have the right to approve or disapprove an
application for proprietary membership, the right should not be exercised arbitrarily.

PLACE OF MEETING - By-laws may validly provide that meetings may be held
anywhere in the Phil. If none then the sa11le as any other stock corporation under sec. 5 1
since the provisions governing stock corporations, when pertinent will also apply to non
stock corp.

CLOSE CORPORATIONS primarily governed by Title XV of the Code (Sees. 96 to

105) The provisions of other Titles of the Code shall apply suppletorily. (Sec. 96)
N.B. Definition: - SAN JAUN STRUCTURAL STEEL vs. CA 296SCRA631 - "a
corporation does not become a close corporation just because man and wife owns
99.98% of the capital stock." The qualifying conditions required by law must be
complied with. Sec. 96 defines a close corporation as:
"one whose articles of incorporation provide that: ( I ) All of the corporation's stock of
all classes, exclusive of treasury shares, shall be held of record by not more that a
specified number of persons not exceeding twenty (20); (2) all the issued stocks of all
classes shall be subject to one or more specified restrictions on transfer permitted by

16
this ''itle m d, (3) the coq1oration shall not list in any stock exchan
: : ge or make any
pubhe offcrm . g of any o f 1\S stock of m1y class."
The aforsaid three (3) provisions must be contai
ned in the articles of incorporation,
_
oth4!rw1sc, Jt cm1 not legally. be considered as a close corporation.
If such be the case
the provisions governing ordinmy/regular stock corporations
of the Code.
will .apply m1d not Title XV
The following can not be organized as a close corporation: 1) mining
or oil

compa 1es; 2) stoc ( exchanges; 3) banks; 4) insurance companies; 5) public utilities;
6)
educatwnal msl!tutwns; and, 7) corporations declmed to be vested with public interest.
Title XII arc special provisions applicable only to close corporations, and, as a matter of
comparison between the close cmvoration and the ordinm-y/regulm cmvorations the
following actual and possible distinctions may be had:
1. The number of stockholders in a close corporation m-e specified persons md
cannot exceed twenty whereas in ordinary corporations they are not specified md there is
no limitation as to the number;
2. To the extent that the m'ticles of incorporation em provide that mmagement of the
corporation shall be vested with the stockholders rather thm by a bom-d of directors w1der
Sec. 97, the number of corporate managers or bomd can effectively be more thm1 15
whereas in the ordinary corporation it can not exceed 15 subj ect to certain exceptions;
3 . All of its shares of stock of any class m-e subj ect to one or more specified
restrictions on transfer of shares while in the ordinmy corporation, generally, there m-e
no restrictions;
4. Shares of stock of a close corporationcan not be listed in the stock exchange or
offered forsale to the public while there is no such restriction in ordinm-y corporations;
5. Stockholders of a close corporation can take an active pmt in the management of
the corporate affairs by vesting managernent unto them (Sec. 97) while in ordinary
corporations, management is lodged in the Board of Directors;
6. Those active in management in a close cmvoration are personally liable for
corporate tort unless the corporation has obtained m adequate liability insurm1ce
(Sec. I 00, pm 5) while directors of ordinary corporations m-e liable only if they have acted
fraudulently, in bad faith or gross negligence;
7. Directors in a close corporation can validly act even without a meeting (Sec.
100) while directors of an ordinary corporation must, as a mle, act as a body at a duly
held md constituted meeting;
8. Agreements between stockholders of a close cmvoration regarding the operations
and affairs of the corporation can be validl y made (Sec. 1 00) which will have no binding
force and effect in ordinmy corporations since stocld1olders' agreement em not limit the
discretion of the Board in the management of the corporate affairs.
9. The a11icles of incorporation of a close corporation may provide that all ofticers md
even employees shall be elected or appointed by the stockholders (Sec. 97) whereas
they m-e elected/appointed by the 'Board of Directors in ordinm-y stock corporations;
10. The articles of incorporation of a close cmvoration may provide for a greater
quorum and voting requirements in meetings of stockholders m1d directors (Sec. 97,
pm-3) whereas, in the case of ordinary stock corporations, while the articles or by-laws
may provide for a greater quorum and voting requirement in directors' meetings under
Sec. 25, those for stockholders' meetings cannot be altered;

17
 11. The pe-emptive rights of the stockholder in a close corporation is absolute as it
.
mcludes all 1ssues Without exception (Sec. 102) while in an ordinary corporation, it may
be denied under Sec. 3 9;
p. A stockholder of a close corporation can withdraw therefiom and compel the
corporation to pay the value of his shares for any reason with tbe limitation only that
the corporation has sufficient assets to cover its debts and liabilities exclusive of capital,
while in the case of ordinary stock corporations, tbey may do so only in the exercise of
appraisal right under Sec. 8 1 , or unless they sell their shares to another person;
13. The proper forum may interfere in the management of the corporate affairs in a
close corporation in cases of deadlocks under Sec. 104 and may even order tbe
dissolution, among others, of the corporation even if the stockholders and/or directors are
acting in good faith whereas, generally, the courts can not interfere with the business
judgment of the directors/stockholders;
14. A transferee of shares of stock in a close corporation cannot compel the
corporation to register in its books such transfers if it breaches the qualifYing conditions
provided in the articles of incorporation (Sec. 99), whereas in ordinary corporations it is
generally a ministerial duty of the corporation to register transfers of shares, and if
refused without good cause, it may be compelled to do so by mandamus;
15. Any stockholder in a close corporation may petition the proper forum for
corporate dissolution on grounds, among others, provided for in Sec. 1 05 (Note; Even
dishonesty is a ground for the dissolution of a close corporation) whereas, dissolution
may be had only in ordinary corporations, on grounds provided by the Corporation Code
and P.D. 902-A, as amended.

DISSOLUTION LIQUIDATION AND WINDING UP

Dissolution is the extinguishment of the corporate franchise and the termination of
corporate existence.
Liquidation and winding up refers to the act of collecting all assets/properties, the
payment of all debts and liabilities and the ultimate distribution of tbe remaining assets of
the dissolved corporation, if any of it remains after payment of its debts and liabilities, to
the stockholders in proportion to their respctive shareholdings.
N.B. Despite the termination of the corporate existence and extinguislunent of the
corporate franchise, a dissolve corporation is still possessed with j uridical personality for
another period of three (3) years "or the purpose of prosecuting and defending suits for
or against it and enabling it to settle and close its affairs, to dispose and convey its
properties and to distribute its assets, but not for the purpose of continuing the business
for which it is established." (Sec. 122) Upon the termination of tbe 3 year period, the
juridical personality of the corporation ceases for all intents and purposes, and as a
general rule it can no longer sue or be sued. (Gelano vs. C.A., 1 03SCRA90) It no longer
exist and has no more valid existence.
N.B. May a corporation dissolved transfer its assets and properties to a new
corporation or for purposes of re-incorporating anew and continue the business of
the dissolved one? YES -- CHUNG KA BIO vs. I.A. C. 163 SCRA 164- it was ruled:
"The Board of Directors is not normally permitted to undertake any activity outside
of the usual liquidation of the business of the dissolved corporation, but there is nothing
to prevent the stockholders from conveying their respective stockholdings toward the

18
cre ton of a ne:V corporation to continue the business of the old. Winding up is the sole
actiVIty of a dissolved corporation that docs not intend to incorporate anew. If it
does, however, it is not unlawful for the old Board of Directors to negotiate and transfer
the J!SSets of the dissolved corporation to the new corporation intended to be created as
long as the stockholders have given their consent."
N.B. further that the 3 year period of liquidation will not apply if the liquidation is
undertaken by an assignee, trustee, receiver/liquidator appointed by the
corporation/proper forum. If the corporation or proper fonun appoints one. This is so
because the appointment of a trustee, assignee, receive!" of liquidator would result to the
trustee or assignee to his becoming the legal owner of the prope1iies or rights conveyed
by the corporation, for the benefit of the stockholders and creditors alike, and he may
thus sue or be sued even beyond the 3 year period provided for by law. (Sumera vs.
Valencia, 67Phil. 72 1 , National Abaca vs. Pore, 2SCRA989, Board of Liquidators vs.
Kalaw, 20 SCRA 987)
The 3 year period of liquidation/winding up will apply only if the dissolved
corporation itself, tluough its Board of Directors, undertake tl1e same.

FOREIGN CORPORATIONS
Is a corporation registered under Philippine Jaws, the stockholders of which consist
solely of foreigners, a foreign corporation? NO - Sec. 123 - Definition of foreign
corporation a foreign corporation is one formed, organized or existing under any laws

other than those of the Philippinesxxx.

The test in determining whether a corporation is domestic or foreign if the
incorporation test. If incorporated under the laws of another state it is foreign, whereas,
if incorporated under the laws of the Philippines, it is necessarily a domestic corporation.
\EXCEPTION In case of war - - Filipinas Cia. De Seguros vs. Huenfeld - In times of
-

war and for purposes of national security of the state, the "control test" would apply in
determining the corporate nationality, i.e., tl1e citizenship of the controlling stockholders
determines tl1e nationality of the corporatiqn. Note also - "control test" vis grandfather
rule.
The control test also applies for purposes of determining compliance with
nationalization laws - NAIUU NICKEL MINING vs. REDMONT MINES t ve L
722SCRA, April 2 1 , 20 1 4 "Shares belonging to corporations or pminerships at least
60% of the capital of which is owned by Filipino citizen shall be considered Philippine
national" BUT (Grandfather Rule) "if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only tl1e mm1ber of shares corresponding to
such percentage shall be coLmted as Philipgine nationality."
Thus, if 100,000 shares me registered in the name of a corporation or partnership at
least 60% of the capital stock or capital respectively, of which belong to Filipino
citizens, all the shares shall be recorded as owned by Filipinos. But, if Jess than 60%, or
say, 50% of the capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens."
MR- Jan 28, 20 1 5 - a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there js no doubt as
to who has the beneficial ownc1s.hip and control of the corporation. In that instance,
there is no need for a dissection or fmiher inquiry on the ownership of tl1e. corporate

19
shareholders in both the investing and investee corporation or the application of the
Grandfather Rule. As a qorollary rule, even ifthe 60-40 Filipino to foreign equity ratio
IS apparently met by the subject or investec corporation, a resort to the Grandfathe
r
Rule is necessary if doubt exists as to the locus of the beneficial ownership and
control. In this case, a further investigation as to the nationality of the personalities with
the beneficial ownership and control of the corporate shareholders in both the investing
and investee corporation is necessary.
Under Sec. 1 3 3 of the Code - No foreign corporation transacting business in the
Philippines without a license x x x shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines x x x"
RULE From the foregoing, "it is not the lack of required license but doing business
-

without a license which bars a foreign corporation from access to our courts."
(Universal Shipping vs. I.A.C., \ 88SCRA170)
What constitutes doing or transacting business so as to bar a foreign corporation from
access to our courts if it does so without the requisite license? - The term, doing or
transacting business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works, or the performance of acts
or works or the exercise of some of the f1.mctions normally incident to, and in the
progressive prosecution of the purpose and object of its organization. (Agilent
Technologies vs. Integrated Silicon, April, 2004) Thus, it has been laid to rest that a
foreign corporation can sue or gain access to Philippine courts or administrative agencies
if the act involved is: a) an isolated transaction or the corporation is not seeking to
enforce any legal or contractual rights arising from, or growing out of any business
transaction which it has transacted in the Philippines; (Western Equipment vs. Reyes and
Universal Products vs. C. A., 1 3 0 SCRA 1 06); b) if the purpose of the suit is to protect its
corporate name, trade mark, reputation or goodwill (General Garments vs. Director, .. ...._, c.o"v

4 1 SCRA 50, Converse Rubber vs. Universal Products 1 47SCRA 1 55, Puma vs. I.A.C.,
1 5 8 SCRA233); c) where it is based on a vioh1tion of the Revised Penal Code (Le
Chemise Lacoste ve. Fernandez, 1 29SCRA877); d) or it is merely defending a suit filed
against it (Time vs. Reyes, 3 9 SCRA 303); e) or where the pmty is estopped to challenge
the personality of the corporation by merely entering into a contract/trmisaction with it.
(Communication Materials and Design vs. C.A., 260 SCRA 673).

PRESIDENTIAL DECREE 902-A, as amended [New Insolvency Law 'FRIA']

It granted the SEC extensive powers and authority from administrative, supervisory,
regulatory, investigative, prosecutory, anc! even adjudicative or quasi-judicial powers
m1d functions. Its quasi-judicial powers m1d authority was, however, transferred to the
Special Commercial Courts pursuant to Sec. 5 . 2 of R.A. 8799 (Securities Regulation
Code). It is possessed with original and exclusive jurisdiction to hear and decide cases
involving:
a) Devices or schemes employed by or any act of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public and/or of the stockholders,
partners, members of associations or orgm1izations registered with the
Commission;

20
 b) Controversies arising out if intra-corporate or partnership relations, between and
among stockholders,, members or associates, between any or all of
t11em and the
corporatwn, pm1nersh1p or association to which they are stockh
olders members or
associates, respectvely; and between such corporation, pmtnership ;r associa
tion
and the state msotar arc 1t concerns their individual frm1chise or right to exist
as
such entity;
c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations;
d) Petitions of corporations, partnerships or associations to be declmed in a state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover its debts but foresees the possibility of
meeting tl1em when they respectively fall due or in cases where the corporation,
pmincrship or association has no suIicient assets to cover its liabilities but is
under the management of a Rehabilitation Receiver or Mm1agement Committee
created pursuant to the Decree.
What is intra-corporate controversy to place the case within the exclusive jurisdiction
of the Special Cmmnercial Court? Two requisites must concur - I) There must be an
intra-corporate relationship, and, 2) The controversy must arise out of that
relationship.
SPEED DISTRIBUTING CORP. vs. C.A., 425SCRA6 1 :
"To determine whether a case involves an intra-corporate controversy, and it is to be
heard by the Special Commercial Courts, two clements must concur; (a) the status of the
relationship of the parties; (2) the nature of the question that is the subject of the
controversy. The tirst element requires the existence of intra-corporate relationship
between the pmties i.e., between and among stocld1olders/members/partners and/or
associates; between them and the corporation, partnership or association, m1d between
them and the State insofar as it concerns tl1eir individual frm1chises. The second element
requires that the dispute among the pmiies be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are
purely civil in character, necessarily, the case does not involve m1 intra-corporate
controversy." r"YN>"-" " ' " c. u"WS-
While tl1ere is a seeming inconsistency in the ruling of the High Court in Rivera vs
Florendo, 1 1 4SCRA643 and Abejo vs de Ia Cruz, 149SCRA653, the same may be
reconciled.
In the Rivera case, the alleged vendor of the shares of stock in question did not indorsed
m1d in fact refused to indorse the stock ce;iificate covering the shares allegedly sold to
the purchaser. There was no compliance with the law (63 of the Code) to make the
transfer valid and effective so as to consider the trm1sferee a stockholder. The vendor
likewise specifically resisted the transfer in the books of the corporation. The SC ruled
that since the transferee is not yet a stockholder of record, there is no intra-corporate
controversy to place the case within the specialized jmisdiction of the Special
Commercial Cmui and may thus be filed and heard in the ordinmy/regular court.
The Abejo case, on the other hand, substm1tially complied with the provisions of the
law regarding the transfer of shares. The certificate of stock was duly endorsed and
delivered to the transferee m1d the corporation was notified of the transfer but refused
registration thereof. The transferee, therefore, has effectively become a stocld1o!der for

21
there is nothing left tor him to do to make the transfer valid and effective. The provisions
of section 63 were duly complied with so as to make the corporation's duly of
recordation purely ministeri:;tl. The case falls within the ambit of section S (b) of the PD.
As sych as a stocld1older, jurisdiction vests with the Special Commercial Court and, the
enforcement of one's right as stocld1older would necessarily include the right to have his
shares recorded and/or transferred in the Stock and Transfer Book upon and after due
compliance of section 63. That is, he has, technically and legally, become a stockholder
to place the case under the definition of intra-corporate controversy under section 5 (b).

Controversies in the election/appointment and removal of directors, officers and

managers.
N.B. For so long as the controversy revolves around the question of the validity of
appointment, election or removal of corporate directors and officers elected or
appointed by the Board of Directors, the controversy is exclusively cognizable by the
Special Commercial Courts (Tabang vs. NLRC, Jan. 1 997) and not the NLRC.
N.B. Further, that this will not apply if the controversy is purely a labor dispute or the
main cause of action is for the recovery of unpaid wages and separation pay. (Midland
Construction vs. Movilla, Nov. 1 995)
The main aspect to be considered is thus Whether the corporate officer assets his
--

rights as such officer or questions the propriety of his removal or ouster.

RECEIVERSHIP AND SUSPENSION OF PAYMENTS

The proper court may issue an order suspending payments of claims against a distress
corporation (Sec. 5, d). The last sentence of Sec. 6 (d) also provides that upon
appointment of a management committee, rehabilitation receiver, board or body x x x
"all actions for claims against the corporation, partnership or association under
management or receivership pending before any court, tribunal, board or body shall be
suspended accordingly."
"Claims," - as used in the law refer to debts or demands of pecuniary nature. It
means the assertion of right to have money paid. It refers to the right of payment,
whether or not reduced to a judgment, liq\lidated or unliq I nidated, fixed, contingent,
matured or unmatured, disputed or undisputed, equitable, secured or unsecured. (Finasia
vs. C.A., 237 SCRA 446)
N.B. Once suspension of payments is etiective, all actions for claims against the
corporation are ipso jure suspended in whatever stage the action may be found. (PAL
vs. ZAMORA, Feb. 2007). Even in th stage of foreclosure, execution and/or
consolidation. It refers to all phases of the sit. No exception in favor of labor claims is
mentioned in the law. (ABRERA vs. BARZJ\ Sept. 1 1 , 2009)
Are the properties of individual directors/stockholders used as security for corporate
obligation covered by a suspension of payments order? NO. It is not an action for claims
against the corporation. (UNION' BANK vs. C.A., May 1 998) Thus, the creditor may
proceed to foreclose/consolidate title.

APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6,d)

Two requisites must concur before a management c01runittee, board or body may be
: appointed/created. It must be shown that "the corporate property is in danger of being

22
wasted or destroyed; thar the business of the corporation is being diverted from the
'
purpose for which it is organized; and, that there is serious paraly.tation of its
operations." "In the absence of a strong showing of an imminent danger of dissipation,
los:j, or destruction of the assets or other properties of a corporation and paralysis of its
business operations, the mere apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of a management
conunittee/receiver." (SY CHIM vs. SY SlY HO & SONS, 480 SCRA206)

SECURITIES REGULATION CODE (RA8799)

INDEPENDENT DIRECTOR {38) Any corporation with a class of equity
--

securities listed for trading on an exchange or with assets in excess of Php50Million and
having 200 or more stocld1olders, at least 200 of which are holding at least 100 shares of
a class of equity securities or which has sold a class of equity securities or which has sold
a class of equity securities to the public pursuant to a registration statement in compliance
with section 12, shall have at least 2 independent directors or such independent directors
shall constitute at lest 20% of the members of the Bomd, whichever is lesser/
Who is an independent director? - a person other thm1 an officer or employee of the
corporation, its parents or subsidiaries, or m1y other individual having a relationship with
the corporation, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. Apart from his fees and shareholdings
(which should not be more that 2% of the outstanding stock under the Rules of the SEC)
is independent of management and free from any business or other relationship which
could, or could reasonably perceived to materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director of the corporation.
rN41bG'A. nv. t> rN c !7

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23