In computing 25-25 rule, subscriptions made by a
LAW on CORPORATION corporation will be included. Corporations can be
(2007 edition)
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.
It is deemed organize when after issuance to it of its
certificate of incorporation,it proceeds to adopt its by-
laws, elect its board, which in turn elects its President,
secretary, treasurer,and other officers nad occupies an
office for the transaction or business allowed it by its
articles.
2 yr period to run from the date the certificate of
incorporation is issued to the corporation, if the
corporation within 2 yrs from said date fails to perform the
organizational acts above indicated, then it is a ground for
involuntary dissolution.
Advantages:
1.easier to raise capital and to attract other persons as
investors because of limited liability
2.it has the attribute of perpetual succession and a
juridical personality independent from its stockholders
3.managed by group of persons called the board of
directors
4.transfer of interest is easier and will not dissolve the
enterprise
Disadvantages:
1.it takes time to organize
2.business decisions may be stalemated by differences of
opinion among the board members
MINIMUM CAPITAL
Now, as a rule, there is no minimum required capital,
although the law requires the 25-25 rule which is that
atleast 25% of the authorized shares(amount fixed in the
articles of incorporation to be subscribed and paid by
stockholder) must be subscribed, and at least 25% of that
shares subscribed was already paid.
You need not have everybody paying 25% (since individual
subscriber may pay less than 25%, as long as the 25% of
the aggregate amount of the subscribe shares is already
paid).
Although, the law says that paid-up capital should not be
less than P5K, so you can form a corporation with a paid-
up capital of P80K subscription would be 20K and paid-
up would be 5K. But for certain lines of businesses, special
laws require minimum, authorized capital, like banks,
insurance companies, financing companies.
subscribers, only that they can not be incorporators.
2006 notes:this 25-25 is only applicable in terms of par
value shares since if no par value is involved, whatever is
issued is fully paid.
CORPORATE TERM
It should have a corporate term which should not exceed
50 years. And it may be extended for another 50 years. But
you cannot incorporate today, then tomorrow, extend the
corporation life. You can only do that in the last 5 years of
its existence (except for justifiable reasons like in securing
a loan of 8 yr life and corp term remaining is only 7 yrs so
dapat na i-amend for reason of securing a loan)
2006 notes:corporation cannot be granted a usufruct over
50 yrs.
DIFFERENCE FROM PARTNERSHIP:
1.How Created: Corpo is by law while partnership is by
agreement
2.Powers: corp can exercise only those powers expressly
granted or fairly inferable from those granted to them
while partnerships can exercise any power except those
prohibited by law,morals,good customs and public policy
3.Corpo is managed through a board of directors while
partnerships is by all partners or through a managing
partner
4.Corpo has 5 to 15 persons while partnership has 2 or
more
2006 notes: If person does not want to risk his other
properties, he can organize a private stock corporation
where his liability will be limited to his stock subscription
--if he do not want to manage, and wants others to
manage,then he can form a partnership with others with
himself as capitalist partner and other person as industrial
partner or he can form a stock corporation and make other
person as director and President or general manager and
let latter run the business with the board.
--if he wants to manage and control the business ,then he
should form a sole proprietorship
DIFFERENCE FROM COOPERATIVES:
1.coop members run the cooperative while employees of a
corp run it.
2.coop members are entitled to one vote each.
Stockholders vote according to the number of shares they
hold.
3.coop member employee cannot assert collective
bargaining .the employees of corp can.
DIFFERENCE FROM JOINT VENTURES:
Joint ventures is a business organization between two corp
where the participants deviate from traditional matters on
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corporate management in the ff manner:
1.required vote might be greater than a mere majority
2.group of stockholders may be given the power to elect
specified number of directors
3.stockholders control the selection and retention of
employees
4.venture may set up a procedure for settling disputes by
arbitration.
2006 notes: corporations may enter into joint venture
(pooling of resources or formal creation of another
corporation) with another but not a partnership.
4blue 95 notes:SINGLE PROPRIETORSHIP is composed of one
person doing business either under his own name or a
business name. It has no personality separate from its
owner.
4blue 95 notes: in JOINT ACCOUNT, it is a business
arrangement whereby 2/more persons contribute capital
in a business and participate in the results thereof. No
common fund is formed and no juridical personality is
created.
ATTRIBUTES OF A CORPORATION
1.Personality distinct from the persons composing it
Corporation is a creature without any existence until it has
received imprimatur of the state acting according to law. It
cannot legitimately refuse to yield obedience to acts of its
state organs.
2006 notes: incapable of intent ,so it cannot commit
felony. But it can be fine due to officers acts.
2006 notes: Corp not subject to Moral damages even if
corporation may have establish a reputation of its own and
created goodwill in the course of its business operations
over the years. And even if they get besmirched
,corporation has still no cause of action against the
offender (ABS-CBN v CA).
2006 notes:where president is impleaded in his personal
capacity, as such,he becomes a real party in interest so he
cannot sign in his own behalf (but he can sign in behalf of
the corporationdue to the 2 signature rule 1 st in behalf
of the corporation and 2nd in his personal capacity)
Corporate name:
No corporation name may be allowed if it is identical or
deceptively or confusingly similar to that of any existing
corp. And that the way the jurisprudence has developed,
the name will not be allowed if it uses a dominant word in
the name of another corporation, and they are engaged in
the same line of business.
On the other hand, the Court has said that Lyceum of the
Phils. cannot prevent other schools from using lyceum
because lyceum is a generic name. It means a school. Like
university, UE cannot prevent others from using university
as part of their name because it's a generic name. So
Lyceum of the Phils. cannot have an exclusive right to use
lyceum because it is a generic term for schools.
2006 notes: It may change its name by merely amending
its Articles of Incorporation in the manner prescribed by
law.
2006 notes: Change of name has no more effect upon the
identity of the corporation,since it is just a change of
name, not of being. It remains and continues to be the
original corporation.
2006 notes: in corporation corp, incorp may be used
and if it contain initials, an explanation must be included.
2006 notes:in partnershipthe words company and
ltdmay be used.
2006 notes: words in ordinary language are not susceptible
of appropriation ,but words use together ,attained a 2 nd
meaning, they are subject to appropriation (secondary
meaning rule).
2006 notes:cannot use brgy, national, state and
Philippines as part of a name.
2006 notes:if name only lacks even a single word/entry
you may dismiss the case since such constitute a
substantial defect which would tantamount a lack of cause
of action.
2.Perpetual succession
Continued corporate existence irrespective of death or
withdrawal of its component members, limited in duration
to the pds stated in charter.
3.Acquisition of Property, contracting obligations and
bringing of suits
Property of the corporation is not the property of its
stockholders or members and may not be sold by the
stockholders or members without express authorization
from the corporations board of directors.
Obligations incurred by the corporation acting through its
directors ,officers and employees are its sole liabilities. As
such, corporate officers are not personally liable for money
claims of discharged corporate employees unless they
acted with evident malice and bad faith in terminating
their employment.
Stockholder is not directly ,individually and/or personally
liable for the indebtedness of the corporation. Being the
officer or stockholder of corporation does not make ones
property the property also of the corporation for they are
separate entities.
Interest of stockholders in corporate property is purely
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inchoate, and will not entitle them to intervene in a
litigation involving corporate property(rights belonging to
corp cannot be enjoined by stockholder).
DOUBLE TAXATION. When a corporation earns profits, it
pays income tax, when the corporation distributes the
profits to the stockholders, the income will again be
subject to tax---as you know, dividends are subject to
withholding tax.
EVERY CORPORATION INCORPORATED UNDER THIS CODE
HAS THE POWER AND CAPACITY TO SUE AND BE SUED IN
ITS CORPORATE NAME.
--if party wants to intervene, it must used its corporate
name as the law requires and not another name which it
had not registered. (Laureano v CA)
(2000 BAR) suit will prosper against A Corp since it is the
one renting the office space as lessee from the owner of
building as the lessor but the suit will not prosper against
Y,the President of A Corp since he has a legal personality
distinct and separate from that of the corporation.
4.Receipt and enjoyment in common of privileges and
immunities
DOCTRINE OF PIERCING THE VEIL
When the separate juridical personality of a corporation is
used to defeat public convenience, to justify wrong, to
protect fraud, to commit a crime, its separate juridical
personality will be disregarded. BUT, time and again, the
Court said that the mere fact that one stockholder is the
controlling stockholder of a corporation, is not sufficient
for disregarding the separate juridical personality. Mere
control, in other words is not enough to constitute a
ground for disregarding the separate personality.
It must be CONTROL + something else, like fraud.
For example, somebody is suedthere is a judgment
against himso what does he do----he forms a corporation
and transfers his properties to that corporation so that
they cant levy upon the property by saying that they
belong to the corporation.
It is applicable when:
1.used as a cloak to cover fraud, illegality, or it results in
injustice
2.defeat public convenience, justify wrong, defend crime
3.necessary to achieve equity or to protect creditors and
other valid grounds
4.where two factories are made to appear as one and used
as a device to defeat the ends of law or as a shield to
confuse legitimate issues
5.where parent corp assumes complete control of its
subsidiarys business
6.when corporation is an alter ego of one of the principal
stockholders
7.forum shopping since the corporate veil cannot be used
to shield an otherwise blatant violation of the prohibition
against forum shopping shareholders whether suing as
the majority in direct actions or as the minority in a
derivative suit cannot be allowed to trifle with the court
processes.
2006 notes: Piercing applies to sale of stocks but not
applicable to sale of assets or properties.
4blue 95 notes: Doctrine can only come into play if
summons is served on the corporation through any one of
the persons named: President, Managing Partner,
Corporate secretary, Treasurer, or in-house counsel (Rule
14)
Not applicable when:
1.Director has no participation to a representation made
by the President ,and the execution of a promissory note
with we as maker has a reference to the corporation and
not to the directors.
2.for the separate juridical personality of a corporation to
be disregarded, the wrongdoing must be clearly and
convincingly established it cannot be presumed
3.In Liddel v CIR, mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate
personalities.
Consequences if Viel is Pierced:
1.if only one corporation is involved, to regard its existence
as an association of persons
2.if two corporations participate, to merge them, and
consider them only as one entity.
4Blue 95 notes: members or stockholders of the
corporation will be considered as the corporation that is
liability will attach directly to the officers and stockholders.
Test in determining applicability of Piercing the Veil:
1.control, not mere majority or complete stock control, but
complete 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
had at the time no separate mind,will or existence of its
own.
Page 3 of 39
2.such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiffs legal rights.
3.control and breach of duty must proximately cause the
injury or unjust loss compliance of. The absence of any one
of these elements prevents piercing the veil.
INSTRUMENTALITY RULE (ALTER EGO)
Where one corporation is so organized and controlled and
its affairs are conducted so that it is a mere
instrumentality or adjunct of the other. The fiction of the
corporate entity of the instrumentality may be
disregarded.
In applying this rule,the courts are concerned with the
reality and not form with how the corporation operated
and the individuals relationship to that operation. The
question of where corporation is a mere alter ego is one of
fact, essentially then ,a matter of proof.
2006 notes: in Francisco v Mejia: SC states that mere
ownership of substantial capital in a corp is not enough
that piercing is appied, since there should be disregard of
rights of third parties.
ARTICLES OF INCORPORATION
It contains the following:
1.name of corporation
2.purposeprimary and secondary
3.place of its principal office, which must be a city or
municipality.
4.duration
5.the name, nationality, and residence of the incorporators
6.the name, number of directors [which should not be less
than 5 nor more than 15], those who will act as directors
until the regular directors are elected.
7.if stock corporation, amount of capital stock ,number of
shares in case of par value stock corporations ,the par
value of each share
8.names and residences and number of shares and
amount of subscription of the subscribers,which shall not
be less than 25% of the authorized capital stock
9.name,residences and amounts paid by each subscriber
on their subscriptions which shall not be less than 25 % of
total subscriptions
10.name of treasurer elected by subscribers
11.if the corporation engages in a nationalized industry, a
statement that no transfer of stock will be allowed if it will
reduce the stock ownership of Filipinos to a percentage
below the required legal minimum.
2006 notes: for Non stock ,# 1-6 in lieu of stock
subscriptions and payments ,the names of donors and
their citizenship ,residences and amounts contributed or
donated should be indicated.
CONVERSION FROM STOCK TO NON-STOCK
(BAR) X company is a stock corporation composed of the
Reyes family engaged in the real estate business. Because
of the regional crisis, the stockholders decided to convert
their stock corporation to charitable non-stock corporation
and non profit association by amending the articles of
incorporation.
HELD: This can be legally done. In conversion by mere
amendment, the stock corporation is not distributing any
of its assets to the stockholders. On the contrary, the
stockholders are deemed to have waived their right to
share in the profits of the corporation which is a gain not a
loss to the corporation.
If at inception, such company is a non-stock, then, the
members are not entitled to share in the profits of the
corporation since all present and future profits belong to
the corporation. In converting the non-stock corporation to
a stock corporation by a mere amendment of Articles of
Incorporation, the non stock corp is deemed to have
distributed an asset of the corporation.
Non stock must be dissolved first.
2006 notes:nonstock to stock di pwede since it would
violate prohibition of nonstock to distribute surplus profits
to members (an exception to such is when corp. has
distribution plan approved by SEC and included in its
articles of incorporation whereby assets are return to its
assets or given to another nonstock to be used for a
specific purpose and if there still remains ,it shall be
returned to members.
Documents accompanying the Articles:
1.treasurers certificate
2.statement of assets and liabilities
3.bank statement of money paid in for subscriptions
4.letter of authority for SEC examiners to examine the bank
acct
5. the favorable recommendation of the appropriate
government agency
-- like in an insurance corp it must be with
recommendation of insurance commissioner, if it is a
school it should be with the DECS or CHED (4blue 95)
Grounds for Rejection or Disapproval by SEC of Articles or
Amendments:
1.not substantially in the prescribed form
2.purpose patently unconstitutional ,illegal or immoral
Page 4 of 39
3.treasurers affidavit false
4.non-compliance of required percentage of Filipino stock
ownership in nationalized corporations
Ways of proving corporate existence where this is put in
issue are by producing:
1.original of the certificate of Incorporation with the seal
of the SEC or a copy of the same certified by the SEC
2.copy of the Articles of Incorporation certified by the SEC
3.copy of the Articles of Incorporation filed with some
government office like the Register of Deeds ,and certified
by the custodian of that document.
2006 notes:In a stock corporation, the articles of
incorporation should mention a primary and secondary
purpose (no need if it is a non-stock)
Purpose should be specific and lawful. And the 1st and 2nd
purpose must be combinable.
Corporations not allowed for more than 1 purpose are:
banks/quasi-banks, trust company and public utilities
Summary: Procedure for organizing a corporation:
1.execution of the Articles of Incorporation and
accompanying documents and filing them whether or not
together with the by-laws ,with the SEC.The accompanying
documents consist of the treasurers certificate of deposit
of paid up capital, letter authorizing SEC to examine said
depositand other required documents
2.Issue by SEC of Certificate of incorporation
3.Election of the board and corporate officers and
adoption of the by laws within 30 days from the issue of
the certificate of incorporation if the by laws was not filed
with the articles of incorporation.
Procedure for amendment of the Articles:
1. board by majority vote approves the amendment
2. stockholders representing at least 2/3 of the
outstanding capital stock on proper notice,
approve the amendment without prejudice to
the appraisal right of a dissenting stockholder
3. copy of the amended articles certified by the
President, Corporate secretary and a majority of
the board is filed with the SEC.
Procedure for amendment of the By-laws:
1. by majority vote of the board and approval of a
majority of the outstanding capital stock at a
meeting called for the purpose
In stockholders meeting ,those representing a
majority of the outstanding capital stock approve
the amendment to the by-laws. The amended by
laws duly certified to by the secretary and a
majority of the directors is then filed with the
SEC.
2. by board of directors :
In a stockholders meeting ,those representing at
least 2/3 of the outstanding capital stock
approve a resolution delegating the power to
amend or adopt new by laws to the board
The board ,by majority vote, then approves the
amendments to the by-laws. The amendments
duly certified by a majority of the directors and
countersigned by the Secretary are then filed
with the SEC.
In case of banks and other special corporations,
the amendments should be accompanied by a
certificate of the appropriate government
agency. The amended or new by laws become
effective upon issuance by SEC of a certificate of
filing.
2006 notes:amendment of by-laws cannot be used to
defeat the security of tenure of an individual
2006 notes: Proposal to restrict election to all holders of
majority of outstanding cap stock is invalid since it deprives
minority stockholders of right to election.
2006 notes:Corporation Code so states that it will not
allow a non-stockholder to occupy President position
whereby it requires among the directors elected by the
stockholders.
2006 notes:Proposal to give bonuses to directors
equivalent to 10% of the gross revenues in any given year
violates Corpo Code restricting the total directors salaries
to not more than 10% of the net income of the corp b4
income tax for the year.
2006 notes:It is only in the stockholders meetings where
venue is restricted to the principal place of business.
INSPECTION OF BOOKS
Corporate books and records are open to the inspection of
any director, stockholder, or member of the corporation at
reasonable hours during any business day, including the
right to copy excerpts of the same.
it may be refused if shown that a prior right
granted was improperly used or that he was not
acting in good faith or for a legitimate purpose.
It may be exercise by stockholder personally or
through his representative and if refused without
justification, the Corporate officers responsible
may be criminally liable
Page 5 of 39
 This right to inspect is not absolute and corp may
deny said right on the basis of propriety of
motive and purpose.
This right is subject to the ff limitations:
It must be done during reasonable hours on a
business day
Right has not been used in the past by the
stockholder improperly
He should act in good faith and for a legitimate
purpose
4Blue 95 notes: Stockholders right to inspection of books
will have to bow to the provisions of the Law on Non-
Disclosure of Deposits ,which provides as a general rule
that the deposit account of a depositor in a bank cannot
be inquired into by any person even including the
government.
The remedy of the stockholder is not an inquiry
into the bank deposit but merely an order to the
bank to inform the court whether or not the
defendant has a deposit therein
As such, stockholder must secure a writ of
execution from the court to be serve on the
bank.
Within 10 days from request of a stockholder or
member ,the corporation shall furnish him a copy of its
most recent financial statements including a balance
sheet and net income statement.(NCC)
At regular meetings of stockholders and members ,the
corporation should furnish them a financial report of
operations including certified financial statements (NCC)
MERGERS AND CONSOLIDATION
In merger, one corp. is absorbed by another as the
surviving corporation.
In consolidation, a new corp. is formed which will absorb
two or more existing corporations.
2006 notes: with regard mergers:
a.a corpo engaged in transportation cannot engage in any
other business alien to transportation.
b.operation of a transpo business opens the operator to
the risk of liability to passengers injured or killed in
accidents. This liability might encroach on the investment
in the clothing business if joined with the transportation
business.
Procedure:
a.approval of a plan of merger by the boards of directors or
trustees of the constituent corporations setting forth the
terms of the merger or consolidation and a statement of
changes in the articles of incorporation of the
surviving/consolidating corporation
b.approval of the plan by stockholders of each of the
constituent corporations by a vote of at least 2/3 of the
outstanding capital stock of each in stock corporations, or
2/3 of the members in a non-stock corp in meetings
separately held on at least 2 wks advance notice stating
the purpose of such meeting
c.execution of the articles of merger/consolidation by each
of the constituent corporations,signed by the Pres/Vice
Pres of each and certified by their respective
secretaries/asst secretaries.
d.submission of 4 copies of the duly executed articles of
merger/consolidation to the SEC and issuance by the SEC
of the certificate of merger/consolidation in the proper
case.
4Blue 95 notes: If SEC believes such merger or
consolidation to be contrary to law, a hearing will be
conducted
Effect:
a.in merger, the constituent corporation shall become one
corporation ,in consolidation, new consolidated corp shall
be the remaining corp.
b.separate existence of the constituent corporation shall
cease
c.surviving or consolidated corp shall possess all rights and
liabilities of a corp(like with regard CBA of the old
corporation)
d.all rights, privileges,immunites and franchises of each are
transferred to the surviving/consolidated corp.
e.surviving/consolidated corp shall absorb and be liable for
liabilities and obligations of each of the constituent
corporations.
Due Diligence Rule:
If a corporation is planned to be purchased on cash, the
latter must exercise due diligence in order to maintain the
stable standing of its assets for a period of time as to be
observed by the one who is planning to bought such
corporation.
If a corporation is acquire by share of stocks of the
acquiring corporation ,both corporation must maintain due
diligence with regard the status of their assets.
NATIONALITY OF A CORPORATION
Gen Rule: The country where the corporation was
incorporated determines the nationality of a corporation
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(Domiciliary Test)
Foreign corporations classified under the domiciliary test
are subject to the laws of the country of their creation on
the ff matters:
1.creation,formation, organization or dissolution of
corporations
2.relations, liabilities, responsibilities and duties of
members, stockholders or officers of corporation to each
other or to the corporation.
In times of war or national emergency , the control test is
used, whereby if the controlling stock of a corporation is
owned by citizens of a particular country which is at war
with the Philippines then that corporation although
organized in the Philippines is a foreign corporation.
FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY
,DEFENSE, RISK TO HEALTH AND MORALS AND PROTECTION OF
SMALL-AND-MEDIUM SCALE ENTERPRISES:
Upto 40% Foreign Equity:
a. manufacture ,repair ,storage and distribution of
products and ingredients requiring PNP
clearance
b. manufacture, repair, storage and distribution of
products requiring Dept of National Defense
clearance
c. manufacture and distribution of dangerous drugs
d. sauna and steam bathhouses, massage clinics
and other like activities regulated by law due to
risk posed to public health and morals
e. all forms of gambling
f. domestic market enterprises with paid in capital
of less than the equivalent of $200,000.
g. domestic market enterprise which involve
advanced technology or employ at least 50%
direct employees with paid in equity capital of
less than the equivalent of $100,000.
2005 notes: there is no law prohibiting a foreigner from
becoming a stockholder and consequently from becoming
a director of a corporation engaged in the lumber business,
irrespective of whether the lumber utilized is taken from
private forest lands or from timber lands of the public
domain, provided that in the latter case, at least 60% of
the capital of said corporation is owned by Filipinos.
Corporation cannot however engage in retailing of lumber.
4Blue 95 notes:A corp composed entirely of aliens may be
organized in the Philippines.The corp law only requires a
majority of the incorporators to be residents not
necessarily citizens of the Philippines.However,in
nationalized corporations (retail,agriculture, mining,tranpo
and shipping)no aliens or some but not all can form the
corporation depending on its percentage control.
2006 notes:Foreign corp can secure lease of lands but
cannot own it.They can acquire stock solely for investment
but not to exercise control.
FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE
CONSTITUTION AND SPECIFIC LAWS( NATIONALIZED).
Corporations with No Foreign Equity:
1.mass media except recording
2.retail enterprise with paid up capital of less than
$2500000.
3.private security agencies
4.small scale mining
5.utilization of marine resources in archipelagic waters,
territorial sea and exclusive economic zone.
6.ownerhip, repair ,stockpiling and distribution of nuclear
weapons
7.manufacture , repair ,stockpiling and distribution of
biological chemical and radiological weapons and anti-
personal mines
8.manufacture of firecrackers and other pyrotechnic
devices
9.rural banks except shareholdings of corporations
organized primarily to hold equities in rural banks and of
Filipino-controlled domestic banks.
Upto 60% Foreign Equity
a.financing companies regulated by SEC
b.investment houses regulated by SEC
Upto 40% Foreign Equity
a.exploration, development and utilization of natural
resources
b.ownership of private lands
c.operation and management of public utilities
d.ownership/establishment and administration of
educational institutions
e.culture, production, milling, processing, trading except
retail of rice and corn and acquiring by barter or purchase
of rice and corn and by products thereof.
f. contracts for the supply of materials , goods and
commodities to GOCCs.
g.project proponent and facility operator of a BOT project
requiring a public utilities franchise
h.operation of deep sea commercial fishing vessel
2006 notes:if foreigner become head of board of directors
of logging company(exploitation of resources)it is possible,
as long as share must not exceed 40%.
Page 7 of 39

Upto 30% Foreign Equity
a.advertising
b.domestic banks except where new bank is established as
a result of
-local incorporation of any of the existing branches or
agencies of foreign banks in the Philippines pursuant to sec
68 of General Banking Act
-consolidation of existing banks in any of which there are
foreign owned voting stock at time of consolidation
Upto 25% Foreign Equity:
a.private recruitment ,whether local or overseas
employment
b.contracts for the construction and repair of locally-
funded public works except:
-infrastructure/development projects covered by RA 7718
-contracts for construction of defense-related structure
-projects which are foreign funded or assisted and required
to undergo international competitive bidding
Upto 20% Foreign Equity:
Private radio communication network
CLASSIFICATIONS OF A CORPORATION
General classification of corporation is into Public and
Private.
a.as to organizers:
Public-by state only
Private-by private persons alone or with the state
b.as to functions:
Public-governmental and other public functions
Private-private, usually for profit making
c.governing law
Public-special laws (with original charter)
Private-law of Private Corporations
4Blue 95 notes: by engaging in a particular business
through the instrumentality of a corporation, the
government divest itself pro hac vice of its sovereign
character, so as to render the corporation subject to the
rules of law governing private corporations.
-- when government enters into a commercial business, it
abandons its sovereign capacity and is to be treated like
any private corporation so as to render the corporation
subject to the rules of law governing private corporations.
-- it therefore cannot invoke immunity from suit.
4Blue 95 notes: GOCC have personality of their own,
separate and distinct from the government and their funds
although considered to be public in character are not
exempt from garnishment (PNB v Pabalan)
There are distinctions between a corporation going
public and a corporation going private
1.corporation going public allows its stocks to be issued to
person other than its registered stockholders
Going private restricts the issue of its stocks to its
registered stockholders only, and prevents transfers by
stockholders of their stocks without first giving the
corporation and its stockholders the first opportunity of
acquiring the same.
2.going public may allow its stock to be sold in stock
exchanges, going private may not allow its stock already
issued to be traded in stock exchanges/
3.articles of incorporation and by laws of a corporation
going private usually contains right of first refusal clause
giving corp and its stockholders preference as against non-
stockholders in the acquisition of stocks. The articles and
or by laws of a corporation going public would not contain
the right of first refusal.
New Corporation Code(NCC) classifies corporations into
stock and non-stock corporations. And those created by
Special laws and those incorporated under the NCC.
NCC under scattered sections also provides for close
corporations and special corporations. No mention was
made of public corporation.
8 CLASSIFICATIONS OF PRIVATE CORPORATION:
1.Stock Corporation
Capital stock divided into shares and are authorized to
distribute profits on the basis of the shares thus held.
a.Par value is where latter is stated in the articles and
which value remains generally unchangeable.
b.No Par value are those which have stocks where the
issue value ,which changes from time to time, is left to the
discretion of the corporation to determine.jt may be issued
at different prices.
2005 notes: A holder of one share of no par value stock is
entitled to the same rights as another holder of one share
of par value stock irrespective of the difference in issue
values of the two shares.
2005 notes: when articles or by-laws are silent, the
corporation is deemed to have the power to declare
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dividends.
2005 notes: prohibition in its articles that at dissolution the
assets of the corporation shall be given to a charitable
corporation does not prohibit the corporation from
declaring dividends before dissolution.
2.Non Stock Corporation
Corporation organized for non profit purposes, and
primarily for charitable ,religious, educational ,fraternal
etc..
2006 notes:di pwede ang stock and profit (like
manufacture soap and sell it ,di yan pwede pag non stock
corporation)
3.Aggregate and Sole
Aggregate are those with incorporators not less than 5 nor
more than 15 in stock corp or up to more than 15 in non-
stock corporations
Corporation sole is a special form of corporation
associated with the clergy consisting of one person only
and his successors to give him some legal capacities and
advantages for and in behalf of the church represented by
him.
4.Ecclesiastical and Lay
In Lay, it is divided into civil (organized for profit) and
eleemosynary which is a non religious corporation
organized for charitable purposes.
5.Domestic and Foreign
6.De Jure, De Facto, by Estoppel & by Prescription
Prescription is recognize by immemorial usage as a corp
though not lawfully organized as corporation like the
Roman Catholic Archbishop of Manila before the law on
corporation sole took effect
7.Quasi-Public and Quasi-Corporation
Quasi-public is a private corp performing functions where
public has an interest(like MERALCO & PLDT) while Quasi-
corp is a municipal society though not vested with gen
powers of corporation is recognized as such (no charter
like the BIR & AFP)
8.Condominium Corporation
Private corporation organized for the construction of a
building with complete living or office units which it sells
creating full ownership for the buyers of the units thus
sold, and a co-ownership over the land and other portions
of the building used in common by the unit buyers.
SPECIAL CORPORATIONS
1.EDUCATIONAL CORPORATIONS
For educational corporations, where the trustees should
be divided into multiples of five. So you should have five,
ten, or fifteen trustees if they are organized as non-stock
corporation. And unless otherwise provided in the articles
of incorporation or by-laws, the terms of the trustees
should be five years, and every year only one fifth (1/5) is
elected, again to provide for continuity in policies. But you
can provide that they will all be elected instead for a term
of one year, so every year, everybody has to be elected.
2.CLOSE CORPORATIONS
It is one whose articles provides :
a.that its shares shall not be held by a group of more than
20 persons
b.all of the issued stocks shall be subject to one or more
restrictions on transfer
c.corporation shall not list in any stock exchange or make
public offering of any of its stocks
If at least 2/3 of the voting stock of the above corporations
is owned or controlled by another corporation which is not
a close corporation, then the above corporation shall not
be deemed a close corporation.
4blue 95 notes: In a close corporation, the restriction as to
the transfer of shares has to be annotated in the articles of
incorporation ,the by-laws and the certificate of stock. This
serves as notice to the person dealing with such shares ,as
such, the person is bound by the pricing stated in the by
laws.
3.RELIGIOUS CORPORATIONS
There are three (3) ways by which a religious organization
can provide for the administration of its properties:
1. by forming a non-stock corporation
2. by corporation sole
3. by religious aggregate or society
Corporation sole may constitute of one person only so the
head of a religious sect would incorporate himself for the
purpose of administering the properties of a religious sect.
To incorporate what you will file with the SEC is an
affidavit. The affidavit will state that the affiant is the head
of a religious denomination or sect and would want to
become a corporation sole. and the rules of his religion
allow him to incorporate as a corporation sole and that he
is charged with the administration of its properties and in
fact he will be required to submit an inventory and the
Page 9 of 39
manner in which the successor will be chosen and the
place where he will hold his office.
The Roman Catholic Archbishop of Manila is a corporation
sole so if Cardinal Sin dies the new archbishop will simply
submit his appointment and he need not incorporate again
because the corporation is different from the occupant of
the position. The Iglesia ni Kristo is incorporated as a
corporation sole.
The court has held in Roman Catholic Apostolic Adm. of
Davao, Inc. v. Land Registration Commission that although
the Bishop was a foreigner, he could register a parcel of
land in his name because he is a mere administrator the
property really belongs to the faithful and since they are
Filipinos they could register the land in the administrators
name .
Under the law if a corporation sole wants to dispose of or
mortgage real property, he has to get authorization from
the Regional Trial Court unless the rules of the religious
sect allow him to dispose of or mortgage real property and
that is usually the case.
The last is the religious aggregate or religious society. It can
incorporate for the purpose of managing its properties and
the articles would indicate that the members constitute a
religious order or society and that at least 2/3 of the
members have agreed to incorporate, that the rules allow
them to incorporate they desire to incorporate to manage
their properties in the place where located. The recollects
are incorporated to manage their properties, they are the
single biggest bloc of stockholder of San Miguel
Corporation.
2006 notes:the test of nationality in corporation sole is not
the nationality of the head in a corporation sole,but the
nationality of the congregation, as such, even if foreigner is
the head, if the whole congregation are Filipinos, then the
nationality is that of a Filipino.
4.CORPORATION BY ESTOPPEL
It is a corp, which is a group of a persons, which is so
defectively formed so that it is not a de jure or a de facto
corp but is considered as a corp with respect to those who
cannot deny its existence because of some agreement or
admission or conduct on their part.
This doctrine requires that there must be dealings among
the parties on a corporate basis.
And there are differences between a de facto corp and a
corp by estoppel. A de facto corp has a real existence in
law, while a corp by estoppel has none. A de facto corp
may exist even if there are no dealings among parties on a
corporate basis. In corps by estoppel, dealings on a
corporate basis among the parties involved are required.
Also, where not all requisites for corp de facto are present,
you can have corp by estoppel.
2006 notes: The principle of estoppel can be invoked by
the victim but not by the corporation as duly organized as
against the victim of said misrepresentation.
Christian Childrens Fund Case
There was a teacher hired by the CCF, which was
unincorporated. She wanted to go after the one with
money, the organization that was funding CCF, and she was
claiming Im an employee of that org and not the CCF.
But the court said that since she accepted employment
with CCF, she was estopped from claiming that CCF is not a
corp.
2006 notes:the people who represented themselves as
forming that corp would be liable as general partners, they
will be solidarily liable. Thats why in one case the court
said the people who represented themselves as the
officers of a corporation that is really an unincorporated
org they were illegally recruiting persons the court said
they were liable as general partners, solidarily liable for all
claims.
5. DE FACTO CORPORATIONS
A de facto corporation is one that is defectively created so
as not to become a de jure corporation. It is the result of
an attempt to incorporate under an existing law coupled
with the exercise of corporate powers.
(while a dejure on the other hand is a corporation formed
with all of the requirements of law)
The existence of a de facto corporation can only be
attacked directly by the state through quo warranto
proceedings. If the corporation does not qualify as a de
facto corporation, its existence may be attacked
collaterally. This doctrine is based on public policy to
ensure stability in business transactions.
4blue 95 notes: a corporation was created by special law,
later, the law creating it was declared invalid. May such
corporation claim to be a de facto corporation? No, a
private corporation may be created only under the
corporation code. Only public corporation may be created
under a special law.
2006 notes:where private corporation is created under a
special law ,there is no attempt at a valid incorporation,
such cannot claim a de facto status.
2006 notes: where a person convinces others to form a
corporation, which however was not formed at all, the
parties are partners inter se and are governed by the law
Page 10 of 39
on Partnerships .the relationship is not that of a de facto
corporation.
(BAR) 7 persons form a corporation by registering their
articles of incorporation with SEC. but after the certificate
of incorporation has been issued ,it is discovered that only
5 of the 7 have acknowledged the articles of incorporation
before a notary public.
HELD: It is a de facto corporation , although defectively
formed ,it may nevertheless exercise corporate powers
validly until the state dissolves it by quo warranto
proceedings.
4 REQUISITES OF A DE FACTO CORPORATION:
1.Valid law under which the corporation was
incorporated.
Attempt in good faith form a corporation according to the
requirements of the law. Here the SC requires that you
must have filed with the SEC articles of incorporation and
gotten the certificate with the blue ribbon and gold seal.
For instance the majority of the directors are not residents
of the Philippines or the statement regarding the paid up
capital stock is not true, those are defects that may make
the corporation de facto.
2.User of corporate powers. The corporation must have
performed acts which are peculiar to a corporation like
entering into a subscription agreement, adopting by-laws,
electing directors.
3.It must act in good faith. So the moment, for example,
there is a decision declaring the corporation was not
validly created, it can no longer claim good faith.
4.A de facto corporation will incur the same obligations,
have the same powers and rights as a de jure corporation.
It can acquire property, sue or be sued, enter into
contracts. Likewise, the officers, directors, and
stockholders will have the same rights, powers, and
liabilities as those of a de jure corporation.
6.FOREIGN CORPORATIONS
Section 123 defines what is a foreign corporation, 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. Note the element of reciprocity is included in the
definition of a foreign corporation as an ingredient of a
foreign corporation.
There are different ways by which a foreign corporation
can establish its presence here. one is by setting a branch
office, another is by setting up subsidiary, for tax purposes
there are no trade-offs because a branch and a subsidiary
are taxed in the same way but a subsidiary may be
beneficial in the sense that it limits the exposure of the
mother company to its subscription instead of risking all
the assets of the mother company. Another is the regional
headquarters which does not do business, it is just a
coordinating and communication center. Foreign
companies are setting up regional headquarters here
because it has subsidiaries in Southeast Asia or licensees
and franchisees and its function is to supervise and
coordinate with those subsidiaries or franchisees so
normally a regional headquarters would have a one room
office here probably with country manager and secretary, a
telephone, computer and fax machine.
If a foreign corporation wants to do business here it has to
appoint a resident agent who may be a corporation,
partnership or individual, if individual he must be of good
moral character, sound financial standing, although his
only function is to receive summonses in behalf of the
corporation.
If a foreign corporation is being sued, the summons must
be served on the resident agent. The corporation is also
required to file with the SEC a power of attorney or
resolution which says that if it has no resident agent it
agrees that the summons be served with the SEC which
will forward the summons and the complaint to the foreign
corporation. If no resident agent and any officer who will
be in the Philippines may be served with summons.
Section 133 says that if the foreign corporation will be
doing business without a license it cannot sue or intervene
in any action in court or administrative agency.
The SC had said that if a foreign corporation is doing
business here without a license, a contract it entered into
is valid, it is not rendered void so the court said the
legislature made a judgment call that imposing penal
sanctions and denying access to the courts are sufficient
penalties for doing business without a license. The
legislature did not provide that the contract it entered into
is void. Although the foreign corporation did not have
license to do business when it entered into in that
contract, it could sue if later on it acquired a license to do
business.
(BAR) If a foreign corporation which has been licensed to
do business in the Philippines by the BOI and SEC ,wants to
expand its business activities in the Philippines, is further
approval from the BOI necessary?
HELD: Board of Investments (BOI) approval of the
expansion of business of a foreign corporation already
licensed on or before the effectivity date of the foreign
investments law(1968) to engage in business is not
necessary. BOI approval is needed only in situations where
foreign enterprise desires to exceed the permitted
percentage of equity of its investments under the Foreign
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Investments Law.
The Foreign Investment Act and its implementing
regulations define what is doing business. It includes:
Soliciting orders. When we talk of soliciting
orders we mean negotiations of the specific
terms and conditions of the contract. If you just
advertise, that is not doing business.
Opening offices
Appointing representatives or distributors
Operating under full control of the foreign
corporation
Domiciled in the Philippines or who in any
calendar year stay in the Philippines for at least
180 days
Participating in the management, supervision or
control of any domestic corporate entity
Any other acts that involve continuity of
commercial dealings, and
Performance of acts or functions incident to or in
progressive prosecution of commercial gain
The rules also state certain acts which do not constitute
doing business like:
Mere investment in a domestic corporation. This
repudiates the ruling in the Granger case where
Justice Cruz said that being a mere investor is
doing business. That is wrong. It could have
been just a passive investment. So that decision
is being repudiated here.
Having a director to represent you in a
corporation because of your investment.
Appointing a representative distributor which
transacts business in the distributors own name.
The usual distributorship agreement will contain
a provision something like this, The relationship
between the parties is that of seller and buyer.
This means that the local distributor has to pay
for the goods he purchased irrespective of
whether he is able to resell them or not. And it
is up to him to sell them for whatever price he
can get. Now if the distributor is transacting
business not in his own name, but as agent of
the foreign corporation, then the foreign
corporation will be doing business. This is what
happened to BMW. They have a distributor here
but if somebody wants to buy a car, the
distributor will merely forward the order to
BMW in Bavaria and he will send the payment to
BMW in Bavaria and BMW in Bavaria will ship
the car to him. So the court said that BMW was
actually doing business here, because the agent
was dealing with customers in the name of
BMW.
Publication of advertisement. Like the
advertisement in magazines which are sold here.
Maintaining stock of goods to have them
processed like this garment business in the
United States which send their textiles to be
processed into dresses which are then shipped
back to United States or components for
electronic products which are sent here to be
processed and sent back to Silicon Valley.
Consignment of the equipment to be used in
processing the products for export. So that if the
foreign company sends its equipment to be used
by the local processor, that is not doing business.
Gathering information about the Philippines
Performing service auxiliary to an isolated
contract not in a continuing basis such as
installing in the Philippines machinery, servicing
the same, and training workers to operate it.
2006 notes: Consequences on Foreign corporations
engaging in business in the Philippines without license :
(1) it shall not be permitted to transact business in the
Philippines
(2) it cannot sue, but it can be sued.
Contract Test- foreign corporation not doing business in RP
and entered into contract w/ a domestic corporation
whereby the perfection and consummation was done
outside, the same would not constitute doing business in
RP.
When Unlicensed Foreign Corporation can sue:
1. corporation not doing business in the Philippines can
bring suits on isolated acts, If it can sue, it can likewise be
sued.
-- if a foreign corporation not engaged in business is not
barred to seek redress from Philippine courts, with more
reason can said corporation not claim exemption from
being sued in Philippine courts.
Isolated transactions means a series of transactions set
apart form the common business of a foreign enterprise in
the sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the
business organization.
The fact that a foreign corporation does not do business
here,that is a matter that should be ventilated in the trial
on the merits but not in a motion to dismiss.
2.action to protect good name ,good will and reputation
of foreign corporation
3.where contract provides Philippine court as venue for
controversies
4.license subsequently granted enables foreign
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corporation to sue on contracts executed before grant of
license
5.recovery of misdelivered property
6.where the unlicensed foreign corporation has domestic
corporation as co-plaintiff
7.estoppel
Acquisition by Philippine courts of Jurisdiction over
Foreign Corporation
1. by serving upon the resident agent designated in
accordance with law to accept service of summons
when corporation designated a person to receive
service of summon pursuant to corporation
code, that designation is exclusive and service of
summons on other person is inefficacious.
2.it there is not resident agent ,by service on the
government official designated by law (like the SEC)
3.by serving on any officer or agent of said corporation
without the Philippines.
IMPORTANT RULES:
GRANDFATHER RULE
The test being used here is the nationality/ citizenship of
the stockholders. According to the formula under the
grandfather rule, if you have a corporation owned by
another corporation, you trace who are the owners of this
owning corp.
In other words, if a company is 60% Filipino and such 60%
is acquired by company w/c is 50%fil & 50% foreign, so it is
30% Filipino (60 x 50%); but if it the acquiring company is
60% Filipino, so since lampas 50 then the whole 60% of the
acquired corporation is Filipino
2006 notes: in JG Summit v CA (2005 case)- the
stockholders are not limited to transfer their shares to
another even if it is a foreigner, such limitation only apply
to the corporation.
An illustration is that you can sell your 60% shares to
foreign corporation which would not violate the 60-40
rule, the only effect of such undertaking is that such
foreign corporation cannot acquire real property.
4blue 95 notes: However, the Foreign Investment Act has
disregarded the grandfather rule. It adopted the liberalized
interpretation of Filipino-ownership.
ONE MAN CORPORATION
2006 notes: A one man corporation is a corporate entity
where one person holds directly or indirectly all or
substantially all of the stocks of the corporations.
-- this form of corporation enjoys all the attributed of a
corporation although it always faces the risk of its
corporate existence being attacked of said corporate
fiction is utilized for unlawful pruposes.
-- to assure that corporation will continue to enjoy the
attributes, the corporation should have a duly constituted
board which should meet regularly to pass upon the
problems of the corporation. The stockholder who holds
substantial stocks should consider his holdings as merely
for investment purposes.
2006 notes: in concession theorythe state concedes that
youre a person (the corp) and once it is created, it should
be for public purpose.
As such, congress cannot enact law creating private corp
with special charter.
All waterworks are public corp, exception to such is a de
facto corporation where it failed to comply in a fatal matter
resulting to a fatal defect but once a special law is
enacted ,it is not anymore a defacto corp
COMPONENTS OF A CORPORATION.
1.INCORPORATORS - Stockholders or members who
appear in the articles of incorporation, as originally
forming and composing the corporation and who are
signatories thereof.
2.CORPORATORS - those who compose a corporation.
3.PROMOTER Person who undertakes to form a
conrporation and to produce for it the rights
,instrumentalities,and capacity by which it is to carry out
the purposes set forth in its charter ,and to establish it as
fully able to do its business.
2005 notes: a promoter although an agent of the
incorporators is not an agent of the corporation unless
prevented by estoppel or ratification from honoring a
contract executed by the promoter in its behalf before
incorporation, the corporation may validly refuse to accept
the sale.
Page 13 of 39
2005 notes: corporation, if it accepts the sale, may validly
claim the 30% commission. The acceptance by the
corporation of the sale ratifies the agency relationship and
all benefits acquired by the agent inure to the corporation.
4.EXECUTIVE COMMITTEE By-laws may create an
executive committee composed of not less than 3 directors
appointed by the board
It cannot act on the following (1) matters needing
stockholders approval (2) filling up of board vacancies (3)
amendment ,repeal or adoption of by laws (4)amendment
or repeal of board resolution and (5) cash dividend
declarations.
2006 notes:it can only perform delegate acts by the board.
2006 notes:purpose of an executive committee is to
remedy situation in between board meetings (sec 35)
2006 notes:to bind corporation,it must act by a majority
vote of all its members ,thus ,the committee cannot
delegate its authority to one of its members
5.OFFICERS- President, Secretary and Treasurer.
However ,law does not limit corporate officers to these
three.(secretary of the president is not the secretary
mentioned by law)
2006 notes: suit for damages for illegal outster of a
corporate officer prescribes in 4 years.
2006 notes:An officer appointed at the pleasure of the
board, per the corporate by-laws may be terminated at any
time.
2006 notes: where a loan procured for corporate purposes
and an official signed for and in behalf of corporation
solidarily with himself in his personal capacity, both
corporation and official are solidarily liable.
A Corporate director, trustee or officer may be held
personally liable with the corporation under the ff
circumstances:
a.when he assents to a patently unlawful act of the
corporation
b.when he acts in bad faith or with gross negligence in
directing the affairs of the corporation ,or in conflict with
the interest of the corporation resulting in damages to the
corporation, its stockholders or other persons.
c.when he consents to the issuance of watered stocks or
who having knowledge thereof ,does not forthwith file
with the secretary his written objection
d.when he agrees to hold himself personally and solidarily
liable with the corporation
e.when he is made by a specific provision of law to
personally answer for the corporate action.
(BAR) the trial court erred in holding D, President and
General Manager of Turtle jointly and severally liable with
Turtle Mercantile.
In issuing the check issued to SHAMRON and thereafter
stopping payment thereof, S was acting in his capacity as
an officer of Turtle. He was not acting in his personal
capacity.
Furthermore, no facts have been provided which would
indicate that the action of S was dictated by an intent to
defraud SHAMRON by himself or in collusion with Turtle.
Having acted in what he considered as his duty as an
officer of the corporation, S should not be held personally
liable.
2006notes: there is no law which prohibits a corporate
officer from binding himself personally to answer for a
corporate debt while the limited liability doctrine is
intended to protect a stockholder by immunizing him from
personal liability for corporate debts ,he may nevertheless
divest himself of this protection by voluntarily binding
himself to the payment of corporate debts.
2006notes: corporate officer is not personally liable for the
money claims of discharged corporate employees unless
he acted with evident malice and bad faith in terminating
their employment.
2006 notes:appointment/election of a corporate officer is
with the board; the stockholders has no say in the election
or appointment.
6.STOCKHOLDERS - corporators in a stock corporation.
MEMBERS - corporators in a non-stock corporation.
2006 notes:PROXY- only allowed if stockholder (di pwede
sa board of director), and as such it is only the stockholder
who may revoke it either expressly or impliedly.
Proprietary Rights of Stockholders:
A.RIGHT TO DIVIDENDS
NCC prohibit the issuance of any stock dividend without
the approval of the stockholders representing not less than
2/3 of the outstanding capital stock at a meeting called for
that purpose.
Payment by a corporation of dividends to a wrong party
Page 14 of 39
will not absolve the corporation from paying the party
adjudged by the court to be lawful owner of the stocks.
(BAR) for past 3 yrs , X Company has been earining
tremendously in excess of 100% of the corporations paid
in capital. All of the stockholders have been claiming their
share in the profits by way of dividends but the board of
directors failed to lift its finger .
a. Is corporation guilty of violating the law?
It is guilty of violationg sec 43 of Corporation code
since this provision prohibits stock corporations from
retaining surplus profits in excess of 100% of their
paid-in capital
b. Are there instances when a corporation shall not
be held liable for not declaring dividends?
1.when justified by definite corporate expansion
projects or programs approved by the board of
directors
2.when corporation is prohibited under any loan
agreement with any financial institution/creditor
whether local or foreign ,from declaring dividends
without its consent and such consent has not yet
been secured
3.when it can be clearly shown that such relation is
necessary under special circumstances obtaining in
the corporation such as when there is need for special
reserve for probable contingencies.
2005 notes:dividend has no existence until declared;
profits are part of the assets of a corporation and do not
belong to the stockholders individually.
2005 notes: dividends are declared by the board, but in
case of stock dividends ,approval by stockholders
representing 2/3 of the outstanding capital stock is
necessary and in all cases only if unrestricted retained
earnings exist.
2005 notes: corporation can pay cash dividends when
declared by the board and can have stock dividends when
declared by the board and approved by stockholders
owning 2/3 of the capital stock outstanding.
2005 notesDividends ,whether cash or stock can be paid
only from unrestricted retained earnings. This fund is the
balance of net profits, income and gains of a corporation
from the date of incorporation after deducting losses and
contributions of stockholders and transfers to capital stock
accounts when made out of such surplus.
2005 notes:If dividends was made from a source other
than surplus profits, it would constitute a violation of sec
43 and of the trust fund doctrine and would be a fraud
against creditors.
B. APPRAISAL RIGHT
Right to withdraw is called Appraisal right and is available
in favor of a stockholder who dissents to the :
a.amendments of the articles to change ,restrict existing
rights or to authorize new preferences of stockholders
-extension/reduction of corporate term
b.sale or other dispositions of all or substantially all of the
corporate assets
c.merger or consolidations
d.investment of corporation funds in another corporation
or for a different purpose.
(BAR) X subscribed and paid for P10t worth of shares of
stock of R Mines as an incorporator and original
subscriber. He was employed as the mine superintendent.
After some time, the corporation suffered a loss of which it
accused X of infidelity and breach of trust and confiscated
his shares.
HELD: Action of Board is not legal. The rights of X as a
stockholder and his obligation as a mine superintendent
are two different matters.Code provides for the manner by
which the corporation may become owner of the stocks of
a stockholder (like where the stockholder is declared
delinquent, his stocks sold at auction, and there is no
person interested in the bidding as a consequence of
which the corporation becomes owner of the stocks).His
being remiss as an employee in his obligations is not a
ground for the corporation to confiscate his shares.
4blue95 says: If I were a stockholder who did not vote to
authorize the action of the board, I will compel the
corporation to buy my stocks. To avail of this remedy , I
will have to do the following:
a.within 30 days after action was taken by corporation, I
should object in writing and demand payment of my
shares.
b.if I and corporation agree with the price, or in case of
disagreement(a 3-man committee of disinterested persons
is created within 60 days), where the committee of
appraisers fixes the price, the corporation pays me the
price within 30 days from agreement or from award (in
case of disagreement).
c.upon payment, I will indorse my certificate of stock and
deliver the same to the corporation.
(BAR) ABC Corp has an authorized capital stock of P1M
divided into 50000 common shares and 50000 preferred
shares.At its inception, the Corporation offered for
subscription all the common shares.however, only 40000
Page 15 of 39
shares were subscribed.Recently,the directors thought of
raising additional capital and decided to offer to the public
all the authorized shares of the corporation at their market
value.Assuming a stockholder disagrees with the issuance
of new shares and the pricing for the shares, may the
stockholder invoke his appraisal rights?
Stockholder cannot exercise appraisal right since the
matter that he dissented from is not one of those where
right of appraisal is available.
Obligation of a corporation to pay a withdrawing
stockholder for his stocks availing of his appraisal right is
dependent on the existence of unrestricted retained
earnings otherwise the preference of creditors to
corporate assets is violated
C.PRE-EMPTIVE RIGHT OF STOCKHOLDERS
Right at time of issue of capital stock, in preference to
other persons and as between themselves, to subscribe
for , or purchase ,the unissued stocks in proportion to the
number of shares of the original stock held by them
respectively.
It applies to all issues or disposition of shares of any class
unless such right is denied by the corporate articles or its
amendments like in the following (denial of right):
1.shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public
2.shares to be issued in good faith with the approval of
stockholders representing 2/3 of the outstanding capital
stock in exchange for property needed for corporate
purposes or in payment of debt.
2006 notes:The additional issue of unissued shares from
the original stock may be made by the board without need
of getting stockholder approval.
Shares will be offered at a price fixed by the board of
directors but not less than the par value of such shares.
A stockholder cannot invoke his appraisal right and
demand payment for his shareholdings under the pre-
emptive right.
The remedies of the stockholder in case his pre-emptive
right is denied are:
1.he may maintain an action to compel the corporation to
give him that right
2.if denial is by an appointment of the articles of
corporation, he may exercise his appraisal right.
(BAR) X as stockholder of 4000 shares or 1/10 of the total
outstanding share of 40000 has pre-emptive right to
subscribe to 1/10 of the unissued common shares or 1/10
of 10000.
aside from that , the law allows the stockholder
to subscribe to all issues or disposition of shares
of any class(preferred or common) in proportion
to his shareholding.
Stockholder can exercise the pre-emptive right
after the corporation has complied with the
notice requirement to all examining stockholders
of record.
2006 NOTES: IF THE UNRESTRICTED RETAINED EARNINGS IS AT 100%
OF PAID UP CAPITAL ,THEN , CORP MAY DECLARE DIVIDENDS.
D.ISSUANCE OF STOCK CERTIFICATE
A stockholder is entitled to the issuance of a certificate of
stock to him after his compliance of the conditions for its
issuance , usually full payment of the subscription.
2006 notes: A corporation against whom stocks are
claimed by two different persons should initiate an
interpleader suit between the claimants, and not wait for
the claimants to file a suit against it (Dy v Enage)
Right of First Refusal (Swiss Challenge)
no stockholder shall transfer any share of corporation to
any other person w/Io first notifying the secretary-
treasurer in writing and under same conditions the
corporation shall have the right to acquire for itself the
shares intended to be transferred . This is valid under
certain conditions:
1.right should appear in the Articles or by-laws
2.it should be stated in the stock certificate
3.reasonable time limit to the exercise of said right
4.terms and conditions for its exercise should be
reasonable
TRUST FUND DOCTRINE
It always involved the stockholder. The usual question
asked : is there authorization in giving back of capital to
stockholder?
It considers the subscribed capital stock as a trust fund for
the payment of the debts of the corporation, and to which
the creditors have a right to look up to for the satisfaction
of their credits. Hence , the corporation cannot dissipate it
to the prejudice of its creditors.
It is an extablished doctrince that subscription to the
capital stock of a corporation constitute a fund to which
the creditors have a right to look put to 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 debtors.
2006 notes:in connection with this rule,a corporation
cannot issue a share below par value(or else it would
violate trust fund doctrine).
2006 notes:trust fund doctrine is not about
Page 16 of 39
mismanagement (like buying property which is not really the purpose of vesting in such person/s or corporation as
necessary) trustee voting or other rights pertaining to the shares for a
certain period not exceeding that fixed by the code and
upon the terms and conditions stated in the agreement.
(BAR) A,B &C are shareholders of X Corp. A has an unpaind
subscription of P100T, Bs shares are fully paid up while Trustees may vote by person or by proxy
Cowns only nominal but fully paid up shares and is a
director and officer. X Corp becomes insolvent, and it is
established that the insolvency is the result of fraudulent
practices within the company.
HELD: If I were counsel for a creditor of X Corp, I would
advise my client that his course of actions are:
1.he can claim against the unpaid subscription of A to
answer for the companys liability by virtue of the Trust
Fund.
2.he can no longer run after B since Bs subscription have
been fully paid up and being a mere stockholder, his
personality and liability is separate and distinct from X
Corp
3.he may hold C personally liable not as a stockholder but Distinction between Voting Trust and Proxy
as director and officer for fraudulent practices in the
company that produced its insolvency.
1.Proxy has no legal title to the shares of the stockholder
giving the agency
(BAR) A corp executed a promi note binding itself to pay its Trustee acquires legal title to the shares of the transferring
president who had tendered his resignation a certain sum stockholder
of money in payment of the latters shares and interest in
the company. The corp defaulted in paying the full amount 2.Proxy unless coupled with interest is revocable at any
so that said former President filed suit for collection of time while a voting trust agreement if validly executed is
sum of money with the SEC. irrevocable
HELD:Agreement is dependent on the existence of
unrestricted retained earnings (same fund available for 3.Proxy can only act at the specified stockholders or
dividends) otherwise, the disbursement would result in a members meeting (if the proxy is not continuing in nature)
preference to persons other than the creditors of the while a trustee is not limited to any particular meeting.
corporation hence would constitute a violation of trust
fund doctrine. 4.Proxy votes only in the absence of the owner of the
stock while a trustee can vote and exercise all the rights of
the transferring stockholder even when the latter is
Acts in violation of trust fund: present

1.Corp condone/excused/released non payment
of a subscription (or unpaid portion)
2.Payment of dividends without Unrestricted
Retained earnings
5.Proxy is usually of shorter duration than a voting trust
agreement, although under the law the maximum duration
of both cannot exceed 5 years at any one time.

3.Properties transferred in fraud of creditors Limitations on a voting trust agreement:

4.Properties disposed or undue preference given
to stockholders ahead of creditors (especially
when corp is insolvent)
VOTING TRUST AGREEMENT
Agreement in writing whereby one or more stockholders
of a stock corporation transfer their share to any person/s
or to a corporation having authority to act as a trustee for
1.no voting agreement can be entered into:
a.for period exceeding 5 years at any one time except in
case of a voting trust specifically requiring a longer period
as a condition in a loan agreement, in which case, the
period may exceed 5 yrs but shall automatically expire
upon full payment of the loan.
b.for purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade.

Page 17 of 39

2.agreeement must not be used for purposes of fraud
3.agreement must be in writing and notarized and specify
the terms and conditions thereof
4.certified copy of said agreement must be filed with the
corporation and with the SEC otherwise it is ineffective and
unenforceable
5.agreement is subject to examination by any stockholder
of the corporation in the same manner as any other
corporate book or record.
6.unless expressly renewed, all rights granted shall
automatically expire at the end of the agreed period.
STOCKHOLDERS SUIT AND REMEDIES
1.individual suit
One brought to assert a right by a stockholder peculiar to
himself.
Suits brought by a stockholder for the issuance to him of a
stock certificate ,payment of his dividend, payment to him
of the book value of his stocks , in those instances where
the law allows him the right of appraisal are individual
suits.
2.representative suit
One brought by a stockholder in his own behalf and in
behalf of other stockholders similarly situated and having a
common cause against the corporation.
3.derivative suit
Action brought by a minority shareholders in the name of
the corporation to redress wrongs committed against it 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 of the majority.
Requisites before it can be filed
1.cause of action in favor of the corporation
2.refusal of corporation to sue
3.party filing the suit is a stockholder
The minority shareholder suing must allege in his
complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and
all other shareholders similarly situated who wish to join
(Tan v Makasiar)
A derivative suit will be dismissed if the petitioners fail to
show that they have a legal basis for representing their co-
members and have not shown what acts of the board are
detrimental to the interests of the corporation and its
members(PPSTA v Quisumbing)
Fact that no other stockholder has made common cause
with the plaintiff is irrelevant since the smallness of
plaintiffs holding is no ground for denying him relief (Rep v
Cuaderno)
2005 notes: stockholder has a cause of action to annul
certain actions of the board of directors of a bank which
actions were considered anomalous and a breach of trust
prejudicial to the bank.
2005 notes: A person cannot bring a derivative suit in the
name of the corporation concerning an act that took place
before he became a stockholder,but if its a continuing one,
then the person may do so.
2005 notes:third party cannot question the right of a
stockholder to sue in behalf of the corporation since in
derivative suit ,the action is instituted in the name of the
corporation, and reliefs are prayed for therein by a
minority stockholder. (SMC v Khan)
(BAR) As counsel for minority stockholders, I will file an
action in behalf of my clients and other stockholders for
the benefit of the corp.(aka stockholders derivative suit
To succeed in this action ,I will have to prove the
following
1.wasting away and fraudulent disposition by the
management of corporate assets
2.refusal of the board to sue after the matter was brought
to the attention of the board
3.injury to the corporation
4.exhaustion of intra-corporate remedies
Such a suit need not be authorized by the corporation
where its objective is to nullify the action taken by its
manager and the board of directors ,in which case, any
demand for intra corporate remedy is futile.
When corporate directors are guilty of breach of trust or
abuse of discretion, then , intra corporate remedies is
futile, a stockholder may bring a derivative suit.
GenRule: It is the board of directors which determines
whether or not the corporation should file a case in court,
Page 18 of 39
however, if the board itself or members of it are the
defendants,then a stockholder may file a derivative suit.
5.that they are suing on a derivative cause of action on
behalf of the corp and all other stockholders similarly
situated.
2005 notes: stockholder may sue for mismanagement
,waste or dissipation of corporate assets because of special
injury to him for which he is otherwise without redress.
In effect, the suit is an action for specific performance of
an obligation owed by the corporation to the stockholders
to assist its rights of action when the corporation has been
put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection.
2005 notes:It is not a derivative suit where a stockholder
was merely praying that she be allowed to subscribe to the
additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of
ownership in the corporation. She was not acting in behalf
of the corporation. (Lim v Lim-Yu)
LIABILITIES OF STOCKHOLDERS
a. to corporation for unpaid subscription plus
interest
b. to creditors for unpaid subscription
stockholder may be sued directly by creditors to the
extent of their unpaid subscription to the corporation
(Keller v COB)
c. to corporation for watered stock (sec 65)
7.BOARD OF DIRECTORS
The directors must be owners of at least one share of stock
in a stock corporation, must be subsisting members in a
non-stock corporation. Cessation as stockholders or
members, respectively automatically disqualifies them as
directors. A majority of them must be Philippine Residents.
The corporation law now provides that an incorporator
must be a stockholder. That was not required before in the
corporation law. Moreover, only natural person may be
incorporators, but a corporation may be a subscriber but
not an incorporator coz he is not a natural person.
Directors are elected by the SHs. And the law says they
should be elected annually except in the case of corps
where the law allows directors to hold a longer term like
schools, non-stock corps. But for ordinary stock corps,
they have to be elected every year. So you cannot put a
provision there that the outgoing president will
automatically be a director because they must be elected.
2006 notes:like in case of Gokongwei v SEC, whereby
former is hindered from being Director of SMC, the SC said
that before a stockholder is disqualified ,there should be
an opportunity to be heard.
2006 notes: A person cannot be a director because he
ceased to be a stockholder by the sale of all his stocks. A
director is required to be owner of at least one share of
stock in a corporation, and the moment he totally disposes
of his stocks, he automatically terminates his directorship.
2006 notes: A person cannot be a director since he was not
elected as such, neither can he claim appointment as such
to replace the person who sold his stocks to him since he
was never appointed to the position by the remaining
members of the board his basis of claim being that he
acquired all of the shares of the stockholder who sold his
shares to him.
2006 notes: the acquisition by a person of all the stocks of
an incumbent director of a corporation will not make him
(the transferee) a director of that corporation.
(BAR) The board of directors of C Corp amended its by-laws
so as to disqualify any stockholder who is also a
stockholder and director of a competitor ,from being
elected to its board of directors.
S,a stockholder holding sufficient shares to assure him a
seat in the board filed a petition with the SEC for a
declaration of nullity of the amended by-laws and the
cancellation of the certificate of filing of amended by-laws.
He alleged among others that as a stockholder, he had
acquired rights inherent in stock ownership such as the
right to vote and be voted upon in the election of
directors.
HELD: Petition of S should be denied. It is within the
authority of the stockholders of a corp to enact by-laws
which would disqualify as a candidate for a director any of
its stockholders who holds a substantial equity in a
competing corporation.
Matters taken up in board meetings could involve trade
secrets which ought not to go out of the board room for
the protection of the corporations business interests. The
presence as a member of the board a person who holds a
substantial interest in a competing corp can destroy that
secrecy on many business matters.
(BAR) A group of stockholders of S Corp filed a court suit
against the members of the Board of Directors to make
good to the shareholders, in proportion to their
shareholdings, the losses incurred by the corporation due
to the boards mismanagement.
HELD: Action will not prosper. It is not enough to show that
losses were incurred due to mismanagement. It is
necessary that the stockholders who brought the suit
should show that the losses were incurred due to the fraud
and malice of the defendant directors. If cause of loss is
merely error of business judgemtn, the directors could not
Page 19 of 39
be held liable for the loss.
2006 notes: Remedy in this situation is to remove the
errant directors by resolution of the stockholders
representing 2/3 of the outstanding cap stock in a meeting
called for the purpose.
2006 notes:In a board of nine members, the quorum
would be 5 and it remains as such inspite of the death of
the two and the absence of one who is abroad.
2006 notes: The President of a corporation or the
chairman of its board of directors cannot bind the
corporation because the powers of a corporation generally
reside in the board unless the board delegates specific
powers to the President .
Resolutions passed by the board of directors in a duly
constituted meeting or a person delegated by said board
binds the corporation (and not by stockholders nor a
compromise agreement by its corporate lawyer) .
(BAR) S Cement was organized primarily for cement
manufacturing. Anticipating substantial profits, its
President proposed that S invest in (a) power plant project,
(b) concrete road project and (c) quarry operations for
limestone used in the manufacture of cement.
What corporate approval or votes are needed for the
proposed investments?
HELD: Unless the power plant and the concrete road
project are reasonably necessary to the manufacture of
cement by S (and they do not appear to be so) then ,the
approval of the said projects by a majority of the Board of
Directors and the ratification of such approval by
stockholders representing at least 2/3 of outstanding
capital stock would be necessary.
As for the quarry operations,the same is an indispensable
ingredient in the manufacture of cement and may be
considered reasonably necessary to accomplish the
primary purpose of S, in such case, only the approval of
the Board of Directors would be necessary.(BP 68)
2 ways by which members of the board can be granted
compensation apart from reasonable per diems:
1.when there is a provision in the by-laws fixing their
compensation
2.when the stockholders representing majority of the
outstanding capital stock at a regular or special meeting
agree to give it to them.
2005 notes: bonus or other forms of compensation not per
diems should not exceed 10% of the net income before
income tax of the corporation during the preceding year.
DOCTRINE OF CORPORATE OPPORTUNITY:
Rule expressly provided for by the corporation code
making the director account to his corporation ,gains and
profits from any transactions entered into by him or
another competing corporation or entity where he has a
substantial interest WHICH SHOULD HAVE BEEN a
transaction undertaken by his corporation.
2006 notes:which means the officer should account any
transaction which he entered on his benefit whereby dapat
sana it should be entered and for the benefit of the
corporation.
2006 notes: A corporation is authorized to prescribed
qualifications for its directors (Gokongwei v SEC) A director
stands in a fiduciary relation to the corporation and its
stockholders. The disqualification of competitor from being
elected as the board is a reasonable exercise of corporate
authority.
2006 notes: ABC Pigery is engaged in the raising and selling
of pigs in the local market. The sale of pig skins for leather
goods manufacture is different from the business of ABC of
raising and selling pigs.The act of Director de dios of
organizing another company to export pig skins does not
violate the doctrine of corporate opportunity. (it is
because it is a pig skin and not raising and selling pigs
which the former is not related to the primary business of
the corporation)
Consequences of the Board of Directors being the organ
of management are:
1.stockholder cannot disapproved contract entered into
by the board.
2.dismissal of a general manager is not with the
stockholder (even if there is resolution passed), it is with
the board.
2006 notes: a stock corporation may have not less than 5
nor more than 15 directors (exception to such is under the
General banking Law which allows 21 directors in cases of
merger and also another exception is in non stock
corporation whereby it is more than 15)
2006 notes: a mere pledgee of stock is not a stockholder
and therefore disqualified to become a candidate, and to
be elected a director of the corporation.
2006 notes: subsequent act of X,Y and Z of electing A as
the sixth director(or president) is invalid as only one of the
3 was a valid director.
2006 notes: director must not be convicted of final
judgment of an offense carrying a penalty of 6 years and
not disqualified by law and the by-laws (since latter may
provide for additional requirement for the director but
qualification in the Code must first be met)
2006 notes:term of director is 1 yr and until his successor
is elected and qualify( while waiting for successor,he is
called HOLD OVER DIRECTOR)
Page 20 of 39

Independent Directors:
The Securities Regulation Code so provides that there must
be atleast 2 independent directors on any of the ff
grounds:
1.corporation is listed on the stock exchange
2.sold on open market
3.atleast P50 Million in assets whereby it has 200 or more
stockholders, of which 20% atleast owns 200 shares of
stock.
2006 notes: the purpose of the independent directors are
for the public (not for the minority nor majority
stockholders)
An independent director should have the following:
1.not a holder of more than 10% of shares of the
corporation
2.not related to any of the directors
3.not employee of the corporation within the last 5 years
4.not retained for service by the company (like an external
auditor)
5.lastly, if the corporation is a bank or a quasi-bank, the
independent auditor should pass the fit and proper rule
(sec16 Gen Banking law) Central Bank has power to
prescribe additional qualifications of a board member
2006 notes: members of the board can be granted
compensation when there is a provision in the by-laws
fixing their compensaton or when stockholders
representing majority of outstanding capital stock at a
regular/special meeting agree to give it to them
2006 notes: aside from that he may receive a fee when
they render services to the corporation in a capacity other
than as a director/trustees and also per diem (it usually
signifies a reimbursement of expenses incurred in trade or
profession)
2006 notes:compensation of all directors must not exceed
10% of income of corp (applicable also to trustees of non-
stock)
BUSINESS JUDGEMENT RULE
Resolutions or contracts transactions of the board cannot
be set aside by the stockholder or by the court.
Directors and officers cannot be held liable personally for
acts done in exercise of their business function.
Except when
1.corporation code so provides (when stockholder directly
manage a close corporation)
2.when directors or officers acted with fraud, gross
negligence or in bad faith
3.guilty of conflict of interest
4.contractually the director holds himself personally liable
then stockholder may seek judicial relief (derivative suit)
In voting for the members of the board of directors:
stockholders may only elect board members on the ff
ground: (all else it is with the board of directors)
1.removal of director
2.at beginning/expiration of term of a director (annual
meeting)
3.when remaining directors no longer constitutes a
quorum
4.amendment of the by-laws that increases number of
directors (and as to increase ,it is the stockholders who will
elect)
2006 notes: Proxies are not allowed in a board of directors
meeting and also in constitution of by-laws
However, in stockholders meetings, pwede and proxy
(except in a condominium corporation)
2006 notes: in stock corporation, you cannot prohibit
cumulative voting ( which is no. of shares x no.of directors
to be elected)
-- since it is the only way that the minority may have a
chance to be represented.
In Non-stock corporation, if silent, no cumulative voting (it
should be explicitly stated)
2006 notes: A director of the majority can be remove w/ or
w/o cause by 2/3 vote.
2006 notes:A director of the minority can be remove only
with cause.
2006 notes: holders of non-voting shares and owners of
delinquent shares are not allowed to vote
2006 notes:an officer appointed at the pleasure of the
board per corporate by-laws may be terminated any time.
Liability of Directors:
As a general rule, the directors are not liable personally
since obligations incurred by the corporation acting
through its directors ,officers and employees are
its(corporation) sole liabilities .
Nevertheless , being a mere fiction of law, peculiar
situations or valid grounds can exist to warrant ,albeit done
sparingly ,the disregard of its independent being and the
lifting of the corporate veil.
As a rule, it should only be the corporation, not the person
acting for and on its behalf ,that a property could be made
Page 21 of 39
liable under the ff questioned transactions:
1.a corporation is used to evade a just and due obligation
or to justify a wrong ,
2.to shield or perpetrate fraud ,
3.to carry out similar other unjustifiable aims or intentions
4.as a subterfuge to commit injustice and so circumvent
the law.
Exception to this is when corporation is no longer existing
and is unable to satisfy judgment in favor of employee, the
officers should be liable for acting on behalf of the
corporation.
Members of the board who acted in good faith and in
behalf of the corporation keep within the lawful scope of
their authority in so acting do not become liable whether
civilly or criminally for the consequences of their acts
which are considered acts of the corporation itself.
Unauthorized used/distribution of the Central Bank
certificate of indebtedness by a corporate officer cannot
bind the said corporation ,not without the approval of its
board and the maintenance of the required reserve fund.
A director is not liable for the misconduct or dishonesty of
his co-directors or other officers of the corporation since a
director is not an insurer of the fidelity of agents of the
corporation.
--he may be held liable if it is shown that he neglected his
duty to supervise the business with attention or to use
proper care in the appointment of agents.
CORPORATE POWERS
Corporate Powers exercisable through the Board of
Directors fall under three classifications:
1.Express
Powers expressly vested in the corporation by purpose
clause of its articles of incorporation ,the corporation law
and by special laws
2.Implied
Those which can be fairly inferred from the express powers
and fall under 5 classification to wit:
a.acts in the usual course of business
b.acts to protect debts owing to the corporation
c.embarking in different business
d.acts to aid employees
e.acts to increase business
3.Incidental
Powers inherent in all corporations as legal entities such as
perpetual succession.
2005 notes: The concession theory is followed in the
Philippines in the creation of the corporations.Under this
theory, a group of persons wanting to create a corporation
will have to execute documents and comply with the
requirements set by the state before the latter gives to the
group corporate personality.
-- the grant being a privilege, the state provides for the
causes and reasons by which such privilege may later on
be withdrawn by it.
3 levels of Control in a Corporation
1.board of directors ,which is responsible for corporate
policies and the general management of the business
affairs of the corporation.
2.officers, who in theory execute the policies laid down by
the board, but in practice often have wide latitude in
determining the course of business operations
3.stockholders who have the residual power over
fundamental corporate changes like amendments of the
articles of incorporation.
2005 notes: However, just as a natural person may
authorize another to do certain acts in his behalf, so may
the board of directors of a corporation validly delegate
some of its functions to individual officers or agents
appointed by it
2005 notes: corporation has no power except those
expressly conferred on it by the corporation code and
those that are implied or incidental to its existence.
CORPORATE LIABILITIES
Contractual
Corporation is bound by contracts entered into, or
authorized to be entered into by its board.
The residence of the corporation is the place where its
principal office is established .It can be sued in that place
not in the place where its branch is located (Clavecilla v
Antillon)
Principal place of business of the suing corporation ,not
the place of residence of its President, determines venue
for suits by the corporation.
Jurisdiction under the Civil Procedure, persons eligible to
receive service of summons for a domestic juridical entity
are now limited to the
President
Managing Partner
General Manager
Page 22 of 39
Corporate Secretary
Treasurer
In-house counsel
2006 notes: The requirement that the petitioner should
sign the certificate of non-forum shopping applies even to
corporations that the mandatory directives of the circular
and the Rules of Court make no distinction between
natural and juridical persons.
2006 notes: Certification should have been signed by a
duly authorized director or officer of the corp who has
knowledge of the matter being certified.
Torts
Corporation is liable for torts committed by its agents or
subordinates in the performance of their duties under the
Principle of its negligence in the selection or supervision of
its employees.
A principal or master is liable for every tort which he
expressly directs or authorizes and this is just as true of a
corporation as of a natural persons.
Crimes
Criminal case can only be filed against the officers of a
corporation and not against the corporation itself. It does
not follow however that the corporation cannot be a real
party in interest for the purpose of bringing a civil action
for malicious prosecution.
ACTS NEEDING STOCKHOLDERS VOTE
a.Vote of Stockholders Holding Majority of Outstanding
Capital Stock
1.fixing of issue value of no par stocks
2.adoption, amendment or repeal of by-laws
(in adoption of bylaws ,no stockholder is involved but if
late na nagawa, then stockholders are involved)
-- by laws is either through the stockholder or delegated to
board of directors (but it must have assent of stockholders
holding 2/3 of subscribed capital stock)
-- to repeal such delegation,it needs the majority of
outstanding capital stock.
3.compensation, other than per diems for directors.
4.entering into management contracts (an additional
requirement is that 2/3 stockholder vote is needed if
common shareholder is 1/3 owner managed corporation
see #9)
b.Vote of Stockholders Holding 2/3 of Subscribed Capital
Stock(after Absolute Majority vote of directors approved
such)
-- the 2/3 includes non-voting shares except in acquiring
own shares, declaring stock dividends,entering
management contracts and revocation of delegation to
amend by-laws
--items mentioned needs a qualified notice
1.extension or shortening of corporate term (appraisal
right is also applicable)
2.amendment of articles to increase or decrease capital
stock
In decreasing capital stock, it requires amendment of the
articles
3.approval of issue shares in exchange for property needed
for corporate purposes or payment of prior debts.
4.sale/disposition of all or sublstantially all of corp assets
(appraisal right is also applicable)
5.investment of fund for purposes different from those
stated in the articles of incorporation
6.investment in another corporation or business (appraisal
right is applicable)
7.stock dividend declaration (no qualified notice)
8.execution of management contracts
9.delegation of board of directors of power to amend the
by-laws or adopt new by-laws
2006 notes: in delegation, there is qualified notice, but in
amendment of by-laws,qualified notice do not exist.
2006 notes:revocation of delegation do not require a
qualified notice.
10.other amendments to the articles of incorporation
11.ratification of certain corporate contracts with a
director or officer
12.ratificaiton of acquisition of business opportunity by a
director or officer
13.approval of merger or consolidation(appraisal right
exist)
2006 notes: every amendment or change in plan of merger
needs vote of 2/3
14.removal of directors
15.voluntary dissolution of corporation
16.incurring, creation or increase of bonded indebtedness
Bond--Certificate of indebtedness issued by the
corporation for money borrowed from the public in
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general.It is used by the corporation where the corporation
needs capital in big amounts but does not have any desire
to increase its capitalization(4blue 95).
Registered Bond , which by nature is registered in the
books of the corporation in the name of the bondholder,
can be transferred but only by assignment It is not
negotiable since it is made payable in the name of a
specificed person only.
Coupon Bond is one with detachable coupons bearing
dates and amounts, which on surrender to the corporation
on the dates stated, entitles the holder to receive cash
which represents interest on the bond up to that date. It is
payable to bearer and negotiable by delivery
Detachable Bonds may be sold apart from the bond
Non-Detachable Bond warrant are those which cannot be
sold separately from the bond.
Convertible Bond is one entitling the holder to exchange it
with other types of bonds
Mortgage Bond are secured by a lien or mortgage on
specific property of the corporation
Collateral Trust Bond are secured by pledge of personal
property which may consist of shares of stock, bonds or
both which are deposited with a trustee.
Debenture do not have any specific fund or property as
security for their payment. They rest on credit of the
corporation and not on security. Usual protection is a
negative pledge clause against new mortgages on
corporate assets.
Callable/Redeemable Bonds are due and payable at a
specific time but may be redeemed at the pleasure of the
issuing entity(but not obliged to do so until date of
maturity)
Equipment Bonds are secured by specific equipment of
the issuer such as its buses,cars,trucks,locomotives and
similar properties.
Bond v Shares of stock
Govern by Civil code Corporation code
Since it is a mutuum
Interest is paid Dividends is paid
Interest paid on bond Surplus profit must
exist
Whether corp has profit or before payment
non
Interest is fixed dividend depends on profit
Creditor gets his money back stockholder waits for
dissolution
On a specific period and after all
creditors are paid
No right to participate has right to
participate
In management
in acquiring own share, only the board action by majority
vote is needed
--and only when there is unrestricted retained earnings.
if it buys back its own shares, it is not decreasing, since the
corporation is using the unrestricted retained earnings
however, after you redeem, then you retire it so capital is
reduced , however the reduction is limited so as to protect
the right of creditors
--in reissued treasury shares, the stockholders has no right
to such except when it is a close corporations.
SPECIAL CORPORATE POWERS
1.Eminent Domain (Private Land)
No private corporation may occupy or use property
without the consent of the owners or prior condemnation
proceedings and paying or tendering just compensation.
2.Franchise
Primary (Gen Franchise)- right to exist, as such it is vested
on an individual who compose the corp and not on the
corp itself. Such is not subject to transfer (sale)
Secondary(Special Franchise)- right granted by the state to
use public property for public use but with a private
profit.it is a right/privilege confirmed on corp (like right to
engage in business), it may be transferred so subject to
levy, execution etc..
The special corporate power referred to here is the
secondary franchise. An example is the right to operate a
messenger and delivery service by virtue of a legislative
enactment.
3.Investment in other corporations for purposes other
than those stated in articles
Corporation may invest its funds in another corporation
only if they can comply with the ff requirements(NCC):
a.investment must be approved by a majority of the board
of directors or trustees
b.invetment must be ratified by the stockholders
representing at least 2/3 of the outstanding capital stock or
by at least 2/3 of the members in case of non stock, in a
meeting called for that purpose
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c.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.
Requisites in order that a corporation may validly
sell,lease ,exchange or otherwise dispose of all or
substantially all its assets:
1.sale must be authorized by the board of directors or
trustees
2.authorization of the board must be approved by all the
stockholders representing 2/3 of the outstanding capital
stock or 2/3 of the members(non stock) as the case may be
3.authorization must be done at a stockholders or
members meeting duly called for the purpose.
2006 notes:any stockholder who dissents shall have
appraisal right to demand payment of the fair value of his
shares in case of sale or other disposition of all or
substantially all of the corporate property and assets
2006 notes:board may sell or dispose without
authorization any of its property or assets if such is
necessary in the usual and regular course of business &
proceeds is appropriated for the conduct of its remaining
business in case of its dissolution.(Approval of SH and right
of appraisal is not required in case of ordinary disposition)
Special Limitations on Corporate Powers
Corporations engage in agriculture are prohibited from
having any interest in any other corporation organized for
the purpose of engaging in agriculture. The same extends
to mining corporations
A Philippine corporation not a realty corporation can
acquire real estate only up to the extent that the purpose
for which the corporation may permit and up to the extent
that the lawful business of the corporation may require .It
cannot engage in buying and selling of public lands.
Constitutional Rights of Corporations
Entitled to immunity against unreasonable searches and
seizures.
While an individual may lawfully refuse to answer
incriminating question unless protected by an immunity
statute, it does not follow that a corporation vested with
special privileges and franchises may refuse to show its
hands when charged with an abuse of priviledge.
Corporations are not entitled to all constitutional
protections which private individuals have. They are not
within the privilege against self incrimination although that
privilege runs very closely with the search and seizure
provisions ( Baseco v PCGG)
ULTRA VIRES ACTS
Acts done by a corporation outside of the express or
implied powers vested in it by its charter and by the law.
(Ex: merchandise corp engaging in buying and selling of
real estate)
1.By the Corporation Itself
Settled rules:
1.wholly executory ultra vires contract cannot be enforced
2.wholly executed ultra vires contract on both sides will
not be set aside nor interfered with by the courts
3.in ultra vires contracts executed by one party but
executory on the other, recovery may be had under the
principle of unjust enrichment.
2005 notes: contracts ultra vires entered into by board of
directors are binding upon the corporation and courts will
not interfere unless such contracts are so oppressive and
unconscionable as to amount to a wanton destruction of
the rights of the minority.
An Ultra Vires act may be differentiated from illegal act in
the ff manner:
1.ultra vires is an act not necessary unlawful but outside
the purposes and authority of the corporation to perform
Illegal act is an act which goes against the law,morals,
public policy and public order and therefore unlawful for
the corporate to perform
2.ultra Vires Acts may be ratified, an illegal act cannot
3.unlta vires act ,if fully or partly executed ,can bind the
parties to ti, an illegal act can never be binding.
2.By Corporate Officers
A corporate officer entrusted with the general
management and control of its business has implied
authority to make any contract or do any other act which is
necessary to the conduct of the ordinary business of the
corporation.
-- he may without special authority from the board of
directors perform all acts of an ordinary nature which by
usage or necessity are incident to his office and may bind
the corporation by contracts in matters arisng in the usual
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course of business.
Ratification can be made by the corporate board either
expressly(it hold out agent to public as possessing power
to do those acts) or impliedly.
Implied ratificationi may take various forms (like silence or
acquiescence, by acts showing approval or adoption of
contract or by acceptance or retention of benefits)
(BAR) X,a domestic corp, owns and operates a sugar
central. In 1965,President invested P1M of company funds
in shares of A, a domestic corporation engage in the
manufacture of sugar bags out of bagasse as basic raw
materials. X became the biggest consumer of the bags
produced by A. In 1967, A shut down its operation due to
high cost of production and huge losses already suffered.
Stockholder B of X Corp assailed the investment as
violative of Corporation law.
Board of Directors of X then met and ratified the
investment made by the President.
HELD: Effect of such ratification by the board of the act of
the President investing the funds of the corporation did
not operate to validate the Presidents act.
the investment of funds of a corporation in the
equity of another corporation is an extraordinary
corporate power which can be exercised by its
board of directors only on authority from
stockholders holding atleast 2/3 of the
outstanding capital stock of the corporation, the
decision being made in a regular or special
meeting of said stockholders.
Claim of B is not valid since corporations are
expressly authorized by New Corporation Code
(NCC) to invest in equity of other corporations.
However, before either boards can do so, they
should be authorized by stockholders holding at
least 2/3 of the outstanding capital stock. This
authority for the stockholders is what is missing
in the problem
Effect when no Ratification (under the 1898 Civil code)
Acts of agent beyond the scope of authority do not bind
the principal unless the latter ratifies the same expressly or
impliedly.
It also bears emphasizing that when third persons knows
that agent was acting beyond his authority, the prinicipal
cannot be held liable for the acts of the agent . If said third
person is aware of such ,he is to blame and is not entitled
to recover damages from the agent unless the latter
undertook to secure the principals ratification.
CONFLICT OF INTEREST
Section 32. A contract between a corporation and (one of
its directors or trustees or) its officers is voidable at the
option of such corporation, unless all the following (4)
conditions are satisfied/ 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 nor
necessary for the approval of the contract;
3.That the contract is fair and reasonable under the
circumstances; and
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.
Now, if the presence of that director is needed to have a
quorum or to approve the contract, to validate the
contract, it should be ratified by the stockholders. You
would need the 2/3 vote of the stockholders to ratify the
contract. When the stockholders are asked to ratify the
contract, there must be full disclosure. In other words, you
must tell the stockholders that theres this contract, one of
our directors wants to buy this parcel of land and these are
the terms and conditions.
2006 notes: Teleconferencing as a general rule is not
allowed in corporation code but in SEC issued memo, this
is allowed only with regard board of directors meeting but
not in a stockholders meeting since a stockholder is
allowed a proxy)
-- those entering into teleconferencing ,the
secretary of the corporation must specify the type of
device used, that the director & secretary can clearly
comprehend the event occurring and he receives the
documents in the meetings and the secretary must state
that a quorum was attained and lastly that all directors
must sign in the minutes of the meeting.
1.(BAR) L is the chairman and President while R is a
director of NT Corp. On one occasion, NT represented by L
and A Enterprise, a single proprietorship owned by R
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entered into a dealership agreement whereby NT
appointed A Enterprise as exclusive distributor of its
products in Northern Luzon.
HELD: Dealership agreement is voidable at option of NT
inasmuch as the facts do not indicate that the same was
approved by the Board of NT before it was signed or
assuming such approval that it was approved under the ff
conditions:
a.presence of R, the owner of A, in the meeting of the
Board at which the agreement was approved was not
necessary to constitute a quorum for such meeting
b.vote of R was not necessary for the approval of the
agreement
c.agreement is fair and reasonable under the
circumstances (NCC)
2006 notes: As such, kung walang approval ng board, hindi
valid ang transaction in isang individual or president or
chairman.
2006 notes: NCC provides that a corporation may conclude
a management contract with another corporation for a
period not exceeding 5 years, which contract should be
approved by the board of both corporations
-- and by the stockholders holding a majority of the
outstanding capital stock or by majority of member of
both. The majority requirement is increased to 2/3 in case
of interlocking directors or ownership by same person of
at least 1/3 of the stock in both corporations.
2.(BAR) C is a director of both P and K Corporations.He
owns 1% of the outstanding capital stock of P and 40% of
K. P plans to enter into contract with K that will make both
companies earn very substantial profits. The contract is
presented at the respective board meetings of P and K.. In
order the contract will not be voidable, what conditions
will have to be complied with?
HELD:At meeting of Board of Directors of P to approve the
contract, C would have to make sure that:
1.his presence as director at the meeting is not necessary
to constitute a quorum for such meeting
2.his vote is not necessary for the approval of the contract
3.contract is fair and reasonable under the circumstances
At the meeting of Board of K, C would have to make sure
that:
1.no fraud involved
2.contract is fair and reasonable under the circumstances
4Blue 95 notes: If conditions relating to quorum and
required number of votes not met. Contract must be
ratified by the vote of stockholders representing at least
2/3 of the outstanding capital stock in a meeting called for
the purpose. Furthermore, the adverse interest of C in the
contract must be disclosed and the contract is fair and
reasonable
CAPITAL STOCK
It is the actual property or estate of a corporation whether
in property or in money including surplus and undivided
profits.
Capital stock of a par value stock corporation is called
authorized capital stock
while that of no par it is stated capital (corp fixes the issue
value of these shares at the time of issue for consideration
which shall not be less than P5).
Authorized Capital (only in stock corp,and it is fixed by
corp unless amended) is the amount fixed in the articles of
incorporation to be subscribed and paid by stockholders
Subscribed Capital is the portion of authorized capital
covered by subscription agreement and that at least 25%
of such authorized capital is subscribed.
Paid-up Capital is the portion of authorized capital that
has been subscribed and actually paid (at least 25% of
subscribed capital has been paid)
Outstanding Capital is the total shares of stock issued
whether or not fully paid (it is issued less treasury)
Share of stock is a unit of capital stock representing the
proportionate interest of its owner in the management
,dividends ,and assets on liquidation of the corporation.
2006 notes: even if theres stock but if dividends not
declared and no RE is distributed, it is still not a stock
corporation.
Difference from Capital:
1.capital stock is amount of money stated in articles to be
subscribed and paid in while capital represents the actual
property of a corporation.
2.capital stock remains fixed unless changed by proper
amendment of the articles, capital varies according to the
results of the business operations of a corporation.
2006 notes:if sobra sa par- - it can only be distributed by
way of stock dividend.
2006 notes: shares cannot be issued lower than the par
value (only when selling Treasury shares can it be lower
than par since treasury shares are only bonus since entire
capital is still there,it is not impaired)
Page 27 of 39
(BAR)
a.the name of the corporation should contain the word
incorporated or corporation. P1M is in effect an amendment to the seventh article .The
b.principal office should mention the town and province or
the city where it is located. The board by resolution cannot
designate the principal office of the corporation or change
the same from time to time.
c.the seventh article should not only mention the amount
of capital stock, but also the number of shares into which
said capital stock is divided and the par value for each
shares, if the shares are of the par value type.
Increase or Decrease of Capital Stock
It may be increased/decreased at a stockholders meeting
called for the purpose wherein 2/3 of the outstanding
capital stock shall favor such increase or decrease, after
prior approval by a majority vote of the board of directors.
Three practical reasons for a corporation to increase its
capital stocks are:
1.generate more working capital
2.to have more shares with which to pay for the acquisition
of more assets like acquisition of company car etc
3.to have extra shares with which to cover or meet the
requirement for declaration of stock dividend.
Procedure
1.notice to stockholders specifying the purpose of the
meeting
2.affirmative vote of 2/3 of the entire corporate capital
stock
3.certificate signed by majority of the directors and
countersigned by the chairman and secretary of the
stockholders meeting
4.treasurers certificate that 20% of the increase has been
subscribed and 25% of such subscription paid up.
Limitation on Power to Decrease or Increase Capital
Stock:
1.a corporation cannot lawfully decrease its capital stock if
such decrease will have the effect of relieving existing
subscribers from the obligation of paying for their unpaid
subscriptions w/o a valuable consideration for such
release,as such an act of the corporation constitutes an
attempted withdrawal of so much capital upon which
corporate creditors are entitled to rely.
2.corporation cannot issue stock in excess of the amount
limited by its articles of incorporation; such issue is ultra
vires and the stock so issued is void even in the hands of a
bona fide purchaser for value
3.reduction or increase of the capital stock can take place
only in the manner and under the conditions prescribed by
law.
(BAR) Action of the board is not correct and is not
sufficient. The act to increase capital stock from P800T to
approval of the board of this increase of capital requires
the further approval by stockholders representing 2/3 of
the outstanding capital stock in a meeting called for the
purpose.
Furthermore, the setting aside by the board of P200T
worth of shares (the whole of the increase) in exchange for
a 5 hectare land at the same time stipulating that existing
stockholders would have no preemptive right to said
increase ,requires again the vote of approval of
stockholders, representing at least 2/3 of the outstanding
capital stock in a meeting called for said purpose.
(BAR) Suppose X corp has an authorized capital stock of
P1M divided into 100000 shares of stock with par value of
P10 each.Give two ways whereby said authorized capital
stock may be increased to about P1.5M
HELD:
1.increase the number of shares from P100000 to P150000
shares with the same par value of P10 each.
2.increase par value of the 100000 shares to P15 each.
Cash dividend v Stock dividend :
1.cash dividends withdraw assets from the corporation ,
stock dividends do not.
2.cash dividend, money is received by the stockholder
,stock dividend the stock instead of money is received
3.cash dividend is taxable while stock dividend is not
4.cash dividend may be declared by the board alone , a
stock is declared by .
(BAR) X Corporation has an authorized capital stock of
P500T divided into 50000 shares with each share having a
par value of P10. 30000 shares of which have been
subscribed. The total payment on these shares is P200t
only. As of July 16, 2005 (birthday ni 4blue95) ,the
corporation had a surplus of P150t .May the corporation
declare a stock dividend? If so, to what extent?
HELD: Yes, corporation can declare a stock dividend .it can
do so up to the full extent of its surplus of P150T or 15000
shares. Since the only limit is that the stock dividend can
be absorbed by the unissued shares of the corporation.
Only 30000 shares of the 50000 authorized number of
shares were issued by the corporation, leaving a balance
unissued of 20000 shares. 15000 shares only are needed
to absorb the P150000 stock dividend.
(BAR) A company was incorporated in 1999 with an
authorized and paid-in capital in cash of P1M .it has not
engaged in business up to now and its cash of P1M is intact
at the PNB .may the board of directors declare dividends of
P50t from that cash?
Page 28 of 39
HELD: NO, board may not declare dividend from its paid
in capital. The only fund available for dividends is the
unrestricted retained earnings .since such corporation not
having engaged in business, then it cannot possibly earned
profit.
(BAR) P Corporation has an authorized capital stock of
P500t all subscribed and outstanding as of Dec 31,2004.
the corporation also has an unrestricted retained earnings
in its books amounting to P375T. Since the corporation
needed the cash surplus to carry out its expansion
projects, the board of directors, in its meeting held on Jan
5,2005 approved a resolution declaring and ordering the
issuance of 50% stock dividends in lieu of cash dividends.
HELD: Resolution of the board declaring 50% stock
dividend is invalid for the following reasons
a. no unissued capital stock.
b. Stock dividend declarations need further
approval of stockholders holding at least 2/3 of
the outstanding capital stock of the corporation.
In order that stock declaration may be implemented ,the
following steps should be taken
a.articles should be amended to increase the capital stock
by at least P250T,this needs approval by a majority of the
board and approval by stockholders holding atleast 2/3 of
the outstanding capital stock of the corp filed with the SEC
b.declaration of 50% stock dividend already approved by
the board, should be approved by stockholders holding
atleast 2/3 of outstanding capital stock of the corporation
c.notice to stockholders
d.issuance of stockholders of stock certificates
corresponding to the stock dividend.
No Par Value
When a corporation has no par value shares, no amount
will be mentioned. Unlike corporations with par value
shares, for ex., the Authorized Capital Stock (ACS) of the
corporation shall be P1M consisting of 10,000 shares with
a par value of P100 each, if you have a corporation with no
par value shares, it will simply be, the ACS of the
corporation consists of 10,000 no par value shares---no
amount is mentioned. That's why these banks, trust
companies, etc. are not allowed to have no par value
shares because these are enterprises which are required
by law to have a minimum paid-up capital - so that you
can easily see right away - has it met the minimum paid-up
capital, because if its shares have no par value - you cannot
see if it has satisfied the required minimum paid-up
capital.
2006 notes: No par value shares are issued to allow
flexibility in the price at which they may be issued, the
issue value being usually pegged to their book value.
2006 notes: issue value of no par is fixed by the articles of
incorporation. Any updated value cannot be had especially
so when there has been surplus at retained earnings
(usually no par by this time is issued at a premium w/c is
higher than par value)
Following corporations may not issue no-par value shares:
1.banks
2.insurance companies
3.building and loan associations
4.public utility companies without approval of any of the
appropriate boards created to replace the PSC
5.trust companies
6.public utilities
Following shares of stock may not be issued without a
stated par value:
1.preferred shares
2.shares issued issued by the above stated corporations
Paid Up Capital
Amount actually paid in money or property on account of
the subscribed capital stock.It is the actual money paid or
property delivered to the corporation on account of the
subscription of a stockholder.
Subscribed Capital stock
It is the capital stock or a portion of it which has been
issued the corporation to its stockholders or subscribed,
and paid for in part or in whole.
For purpose of incorporation, law requires that at least
25% of the authorized shares of capital stock has been
subscribed.
CLASSIFICATION OF SHARES
I. Voting shares
Founders shares
these shares may be given rights and privileges not
enjoyed by owners of other stocks. Where however, the
exclusive right to vote and be voted for in the election of
directors is granted ,said right cannot exceed 5 yrs, subject
to SEC approval and counted from the date of said
approval(not renewable).
II. Non-voting Shares
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Voting Rights exercisable by owners of Non-voting shares
Except for treasury shares which cannot be voted upon on
any corporate matter, holders of other non voting shares
shall nevertheless be entitled to vote on the ff matters:
1.amendment of articles (effected by SEC or after 6 months
where no action from SEC occurs)
2.adoption and amendment of the by laws
2006 notes:it should be consistent with articles of
incorporation, consistent with law and reasonable not
arbitrary or oppressive.
3.sale or other disposition of all or substantially all of the
corporate property
4.incurring bonded indebtedness
5.increase/decrease of capital stock
6.merger or consolidation with other corporations
7.investment of funds in another corporation or for a
different purpose
8.corporate dissolution
2006 notes: in cases of shortening or lengthening the life
a notice for a meeting should be had and in the meeting
there should be atleast 2/3 vote that is required (no
written assent is needed)
2006 notes:in cases where there is increase/decrease of
number of directorsthere should be a written assent
(directors should be by odd numbers in order to prevent
tie)
2006 notes: if corporation has no by-laws, then it is
considered as de facto.
a.Par Value and No Par Value shares
Shares issued without par value are deemed fully paid and
non assessable and their holders are not liable to the
corporation or to its creditors in respect thereto. They
cannot be issued for a consideration less than P5 per
share, and payment thereon are treated as capital and are
therefore not available for dividend distribution.
Price at which no par value shares may be issued may be
fixed by articles of incorporation or by the board or by law
or in absence, by the stockholders at a meeting called for
the purpose representing atleast a majority of outstanding
capital stock.
(classifications as to what occurred to the stock)
Guaranteed stock entitled to receive dividends at fixed
annual rate .payment is guaranteed by 3rd person or by
corporation.
Promotion stock is stock issued by corporation usually a
mining company to owners of mining ground deeded to
the corporation and to promoters and other persons for
services rendered before incorporating.
Escrow stock is stock deposited with a third person to be
delivered to the stockholder or his assigns after complying
with certain conditions usually the payment of the full
subscription price.
2006 notes:it occurs since dati, corporation would give
option to management officers to buy such option at less
than market value (not par). GAAP dictates that it should
be reported at cost. Option is not part of financial
statement since no payment of cash but only options. As
such,instead of options, corporations issues escrow stock.
Over-issued stock is stock issued in excess of the
authorized amount or number of shares of the capital
stock hence null and void.
Watered stocks are issued by corporation gratuitously, for
money or property or services less than par value in form
of dividends when no unrestricted retained earnings exist.
Liability of officer consenting (having knowledge)of
issuance of such stock is solidarily liable with the one who
issued such as against the corp and the 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.Preferred Shares
One which entitles the holder thereof to certain
preferences like preference as to dividend/assets upon
dissolution.
However, preferred shareholders do not give them a lien
upon the property of the corporation nor make them
creditors of the corporation since their right is subordinate
to the creditors.
Dividends are only payable where there are profits earned
by the corporation and as a general rule ,even if there are
existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared.
Preferred v Common Shares
Doctirne of Equality of Shares: All stocks issued by
corporation are presumed equal with the same privileges
Page 30 of 39
and liabilities provided that the Articles of Incorporation is
silent on such differences.
Common stock represents residual ownership interest in
the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges
and entitles shareholder pro rata division of profits.
Preferences to preferred shareholders may be (1) on the
dividends (if there are unrestricted retained earnings left)
up to a stated percentage and (2) on liquidation of assets
(they are refunded of their investments after creditors are
paid).
-Redeemable Shares
Usually preferred which by their terms are redeemable at a
fixed date or at option of either issuing corp or stockholder
or both at a certain redemption price.
A redemption by the corp of its stock is in a sense a
repurchase of it for cancellation. The present code allows
redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation.
Redemption may not be made where the corporation is
insolvent or if such redemption will cause insolvency or
inability of the corporation to meet its debts as they
mature.
Upon maturity, it should be paid by corporation even if
latter has no unrestricted retained earnings. It should be
retired (since Capital stock is reduced)unlike in treasury
shares where latter do not reduce capital since it came
from surplus of the shares.
2006 notes:redemption cannot be made if such would
result to insolvency/inability of corp to pay its obligation.
2006 notes: Optional redeemable shares are option to
redeem is vested on corp, and stockholder cannot compel
nor refuse redemption of the shares that he hold.
2006 notes: Compulsory redeemable shares pertains to
the corporation ,it must redeem after stated period or if
demanded by the holder .It can be restricted by police
power.
-Treasury Shares
It is not classified as such,it only becomes as such due to
what happens to it.
Stocks previously issued by corporation, fully paid for and
reacquired by it by lawful means( purchase, donation,
forfeiture). It is not considered as outstanding shares (so
no dividends) ,but if theres surplus in retained earnings,its
may be distributed as property dividend but not as stock
dividend.
Conditions whereby a stock corporation empowered to
acquire its own shares:
1. eliminate fractional shares
2. compromise an indebtedness arising out of
unpaid subscriptions
3. purchase delinquent shares
4. exercise its right of appraisal
2006 notes:before corp may purchase or acquire its own
shares,the ff must be present:
1.acquisition must be for a legitimate purpose
2.execise in cases allowed by law
3.corporation has unrestricted retained earnings to cover
the shares to be purchased or acquired
2006 notes:source of corporate assets are:
1.contributions of shareholders
2.loans by creditors
3.profits
4.declaration of stock dividends the effect of which is to
convert retained earnings into capital
2006 notes: Stock split up occurs like if it is formerly
p100/shareafter split up it is change to 100 shares at p1.
CERTIFICATE OF STOCK
Written acknowledgement by the corporation of the
stockholders interest in the corporation. It should be
signed by the President or Vice President countersigned by
the secretary or assistant secretary and sealed with the
corporate seal.
As soon as stockholder pay for the subscription, he is
entitled to the issuance of a certificate of stock.
Where stock certificate prepared by the corporation in the
name of a registered stockholder are claimed by another
person who alleges that they are merely held in trust by
said registered stockholder,an interpleader filed by the
issuing corp against the two claimants is a proper remedy.
2006 notes:stock certificate is not necessary for
stockholder to exercise his rights as long as his name is
listed in the corporate books.
2006 notes:if stated books closed by March 30- - it
means that it will not entertain any new stockholder after
such date (so no voting right to the latter)
As a general rule, stockholder who pays partially his
subscription is not entitled to the issue of prescribed
stock certificates to him, the requirement being that the
total par value of stocks subscribed by him should first be
paid.
Exception:
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1.by laws of corporation allows it
2.corporate board does not prohibit it.
2005 notes: Under the NCC, stock certificates issued in an
and/or capacity may be voted upon by any of its joint
owners, who can also appoint a proxy to vote for the
stocks.
Pledge/ Mortgage of Shares
a.Pledge of Shares
It is enough that the pledge to affect the third persons
must be in a public instrument containing among others a
description of the thing pledged and the date of the
pledge. Registration either with the Register of Deeds or
with the books of the corporation is unnecessary.
A pledge or chattel mortgagee does not have voting rights
in stockholders meetings unless such right is expressly
given in the contract and recorded in the books of the
corporation.
b.Chattel Mortgage
Rules of Court and NCC do not require annotation in the
corporations stock and transfer books for the attachment
of shares of stock to be valid and binding on the
corporation and third parties.
To protect right of mortgagee, the chattel mortgage of the
certificate should be registered with the Register of Deeds
of the province of the domicile of the mortgagor ,and with
the Register of Deeds of the province of the corporate
domicile, the corporation should be notified of said
mortgage and or furnished a copy of the contract.
Lost and Stolen Certificates
2006 notes:If certificate of stock is lost , then there should
be an affidavit of lost and state that it is lost beyond
retrieval and there must be publication. However, period is
shorten by depositing with the corporation a bond or other
security in satisfaction of the board.
The moment it is issued, if certificate is lost (by stockholder
or by the corporation) then follow the above rule.
Finder or one who steals does not become owner and
cannot vest in his transferee a valid title, even if latter
acquires it in good faith and for value.
Procedure for reconstitution:
1.stockholder executed an affidavit in triplicate stating the
circumstances of the loss, destruction or stealing and
submits the same to the corporation
2.corp shall publish in a newspaper of gen circulation once
a wk for 3 wks.
3.if after lapse of one year from last publication, no contest
is made by any third person, the corp shall cancel from its
book the said lost, stolen or destroyed certificate and issue
a new one to the stockholder who will file a bond
acceptable to the board in which case ,the certificate may
be issued even before the expiration of said period
4.if contest is presented to the corp or a case is pending in
court, issuance shall be suspended until final decision is
rendered.
2006 notes:Intracorporate controversy is now lodged with
theRTC.
(BAR) A is the registered owner of a certificate. He
entrusted possession to B who borrowed said endorsed
certificate to support Bs application for passport(or for
purpose other than a transfer) but B sold it to X,a bonafide
purchaser who relied on the endorsed certificate and
believed him to be the owner thereof. Can A claim the
shares of stocks from X?
HELD: No, since certificate have been duly endorsed by A
and entrusted by him to B. by his act ,A is now estopped
from claiming said shares from X.
But if A lost it ,then he has right to claim the certificate of
stock from the thief who had no right or title to it.
2006 notes: stock certificate are not negotiable
instruments, but it is quasi-negotiable since it can be
transferred by delivery and indorsement.
2006 notes:a street certificate is indorsed in blank, as such
the holder of which is prima facie to be the owner of the
same.
TRANSFER OF SHARES OF STOCK
A stockholder has an absolute and inherent right as an
incident of ownership to sell and transfer his stocks at will,
except as may be restricted by the articles, the general law,
the by laws or the agreement between him and the
corporation.
Transfer of shares, it must be transferred by the selling
stockholder with intent to make the purchaser the owner,
and that the latter must bring to the secretary of the
corporation such certificate and demand issuance of new
stock certificate.
Transfer be effected by
(1) indorsement of the certificate followed by delivery and
(2) sale or assignment evidenced by a notarial document.
Requisites to be valid:
(1)there must be delivery of stock certificate
(2)it must be endorsed by owner or atty in fact or other
persons legally authorized to make transfer
(3)to be valid against third persons, transfer must be
recorded in the books of the corporation.
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2006 notes:the person who acquires such share is already
a shareholder, but he is not entitled to certificate if there is
still a balance.
When balance of subscription be paid:
(1)date fixed on day of subscription contract w/o need of a
call
(2)in absence of subscription contract, upon call of board
of directors.
As far as the corporation is concerned, no transfer is valid
except as between the parties, until the transfer is
recorded in the stock and transfer book of the corporation
showing the names of the parties to the transfer ,date of
transfer and the number of certificates and shares
transferred.
2006 notes: a corp cannot refuse payment before date
fixed in subscription contract or before call of board of
directors.
2006 notes:A corporation cannot refuse registration as
such ,Mandamus can be maintained in the RTC to compel a
corporation to register stock transferespecially so if
there is substantial compliance and if corp will not register
it ,you may also go to SEC and latter will give you a receipt
w/c is equivalent to recording.
2006 notes: A stock certificate already delivered to the
transferee recorded in the stock and transfer book and
reported to the SEC but returned to transferor for
indorsement which he refused to make
-- it does not prevent the transferee from being owner of
the stocks represented by said unendorsed stock
certificate.
A corporation cannot inquire into or pass upon the legality
of the transaction nor can it question the consideration
upon which the transfer is made.
Stamping of cert as non-negotiable constitutes undue
limitation on transfer
if shares are still unpaid, then,corp may refuse registration
Effect of the failure to register a transfer of shares:
1.as between the transferor and transfereevalid and
binding
2.as between the corporation and transferee -- invalid
3.between corporate corporation and transferor latter is
still the stockholder but he is the trustee of the real owner
(transferee)
4.between corpo creditors and transferor transfer of
shares is invalid, transferor is still liable to the corporation
for any unpaid subscription
5.between transferee and transferors creditors it is
invalid as against the creditor of the transferor without the
notice of transfer.
2006 notes: it is the corporate secretary(purely ministerial
who will not decide question of ownership) who is duly
authorized to make entries in stock and transfer books and
not the chairman or the owner since if they do it ,that
would tantamount to an invalid transfer.
A transferee of 20 shares out of the 80 shares subscribed
by the transferor who has paid P2T or only of the par
value of said subscription cannot compel the corporation
to record said sale in the corporate stock and transfer book
--only transfers evidence by indorsements by the
stockholder at the back of duly issued stock certificates
may be thus recorded, the indorsed stock certificate
cancelled and a new one issued to said transferee.
2006 notes: for transfer to be effective, certificate must be
properly indorsed and that title to said stock certificate is
vested in the transferee by delivery of such indorsed stock
certificate to the latter.
2006 notes:shares may be transferred by delivery of
certificate indorsed by the owner or his atty-in-fact or
other persons legally authorized to transfer (sec62) or by
issuing deed of sale.
Valid Denial (reasonable Restriction)
When a corporation holds any unpaid claim on shares of
stock (whether for unpaid subscription or loans), transfer
of said shares shall not be recorded in corporate books.
(Sec63)
There is reasonable restriction on transfer so long as it is
necessary and convenient to the attainment of the object
for which corporation was incorporated.
2006 notes:the restriction to be valid must appear in the
by-laws , in the articles of incorporation and in the
certificate of stock.
2006 notes:there should be a right of first refusal on behalf
of the stockholders (swiss challenge)
Corporation are given option to match to match the price
offered to third person (this is the most common
restriction as to transfer)
In close corporation,the most common restriction as to
transfer is that the number of shareholders is either not
more than 20 or that stated in the articles whichever is
lower.- - - as such, if 1 died, it will not transfer to heirs of
the deceased the shares of the latter but the remaining
shareholders may choose if 1 of them will buy the shares
or sell it to 3rd party.
MODES OF ISSUANCE OF STOCKS
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(1) by subscription
If it is through subscription, then it must be fully paid
before issuance.
subscription contract
Contract for acquisition of an unissued share (since
corporation is still to be formed.) This is a pre-
incorporation subscription w/c is irrevocable for atleast 6
months unless all other subscribers consent to the
revocation or the corporation fails to materialize.
A subscription for shares of stock of a corporation may be
revoked either by the subscriber or by the corporation,
provided that(sec61):
1.all of the other subscriber consent to the revocation or
2.if the incorporation of the corporation fails to materialize
within the said period or within a longer period as may be
stipulated in the contract of subscription unless in either
case, the articles of incorporations has already been
submitted to SEC in which case the pre-incorporation is
irrevocable.
2006 notes: subscription is irrevocable
(a)for a period of at least 6 months from date of
subscription notwithstanding any agreement to the
contrary
(b)after submission of the articles of incorporation to SEC
although beyond the said period
Subscription contract v ordinary sale
of shares
subscription unless all stockholders rescind for non
agreed and no creditor is prejudice fulfillment
corporate creditors may proceed against creditors
cannot
subscriber in case the asset of proceedcorporation is
insufficient
Consideration
Stocks shall not be issued for a consideration less than the
par or issue value. The consideration may take any of the
following forms (sec62):
1.cash paid
2.property delivered at fair value to the corporation
3.labor or services actually rendered to the corporation
4.prior corporate obligations
5.amounts transferred from unrestricted retained earnings
to stated capital
6.outstanding shares exchanged for stocks in the event of
reclassification or conversion.
2006 notes: Services actually rendered to the company is a
lawful consideration for the issuance of stocks.
2006 notes: A lawyer who has already rendered service to
the corporation is entitled to be paid for such service
which credit is considered as property the value of which is
ascertainable. Stocks may be issued for this purpose.
(2) by sale or exchange of unissued stock,
2006 notes: where unissued stocks are merely exchanged
for real property, there is no transfer of ownership but
merely a change of form of ownership in the same hands.
The right of first refusal is not violated.

(3) in payment of obligations

in any form and not covered if over P500,it is (4) stock dividends
by statute of frauds covered by statute
of
fraud (BAR) On Jan 1,1972, C signed a written subscription to
the corporate stock of S in the ff terms:
deemed subscriber even if not fully not become holder I hereby subscribe for 100 shares of capital stock of S
paid unless fully paid payable form the first dividends declared on any or all
shares of said company owned by me at time dividends are
if subscription not fully paid, it is not declared until the full amount of this subscription has been
complete paid
the corporation who may demand Will this stipulation to the first dividends declared has
payment,transferring effect of relieving the subscriber C from personal liability
payment (by filing with ordinary court) stockholder cannot in an action to recover the value of the share?
or make the share delinquent resort to HELD: NO, stipulation to have the subscription payable
corporation, from first dividends declared is null and void since the
he has to go to court and file an ordinary dividends which can be the consideration for the issue of
suit (since not an intra stocks are those coming from operations at the time the
corporate dispute) stocks are issued. The dividends contemplated in the
problem have no right to exist yet.
subscriber cannot be release from
corporation may 2006 notes: Source of fund for dividends is the

Page 34 of 39
unrestricted retained earnings.
(BAR) S bought shares of stock from a stock broker who
delivered a street certificate to S. As security for a loan, S
delivered the certificate to R who in turn pledged the
certificate to a bank to secure his own loan. After S paid
R,S demanded the return of the certificate from R and
from the bank. Can S recover the certificate?
HELD: NO, a street certificate is a stock certificate endorsed
by the registered holder in blank and upon its face, the
transferee is entitled to demand its transfer into his name
from the issuing corporation .When so indorsed in
blank,the certificate is transferable by mere delivery.
When delivered by R to the bank still with the blank
indorsement,the latter had perferct right to assume that R
was its holder.Hence, until the bank returns it to R after R
has paid in full his loan ,S cannot recover it.If it is in
possession of R ,S can recover it because of their contract.
COLLECTION OF UNPAID SUBSCRIPTION
A stockholder cannot ask to be release from his
subscription(if he has still an unpaid balance), such is illegal
and violating the trust fund doctrine. Even if he is released,
the assignee of the insolvent corp or the creditor can still
collect from the released holder the unpaid balance of his
subscription.
1.Call , delinquency and sale at auction of delinquent
shares
(BAR) Victor was employed in NAIA. He subscribed to 1500
shares of the corporation at P100 per share or a total of
P150000. He made an initial down payment of P37500. He
was appointed President and General Manager. Due to
disagreement with the Board ,he resigned and demanded
payment of his unpaid salaries ,his cola,his bonus and
reimbursement of his gasoline and representation
expenses.
NAIA admits that it owed Victor P40000 but told him that
this will be applied to the unpaid balance of his
subscription in the amount of P100T.there was no call or
notice for the payment of the unpaid subscription. Victor
questioned the set off.
HELD: NAIA cannot set off the unpaid subscription with
Victors claim for salaries. The unpaid subscription is not
yet due as there is no call.
If there had been a call for the unpaid subscription ,still the
corp cannot set it off since Victor is entitled to the
payment of his salaries which NAIA has no right to
withhold in payment of unpaid subscription.To do so would
violate Labor Laws(Apodaco v NLRC)
Extrajudicial Remedy for collecting Unpaid subscriptions,
steps:
1.Call- subject to the provisions of the subscription
contract, if any, a declaration is made by the board as to
the percentage of the subscription due and when it is to be
paid.
2.if no payment is made within 30 days from said date, the
whole subscription is declared delinquent and subject to
sale.
2006 notes:30 days from due date will interest begin,but
board must declare that subscriber has become
delinquent.
3.board shall fix the date ,time and place of sale which
shall not be less than 30 nor more than 60 days from the
date the stocks became delinquent.
4.notice is sent to all delinquent stockholders and
publication of the declaration of delinquency and fixing the
date, time and place of sale ,is made in a newspaper of
general circulation, once a week for two weeks.
5.sale at auction and award to highest bidder. The highest
bidder is the one who bidsthe lowest number of shares (in
it ,the delinquent subscriber has a share if there is excess
in the proceeds)
4Blue 95 notes: if no bidder, the corporation may buy back
all subscription (w/c would make it Treasury shares),
therefore delinquent subscriber has no share in the
proceeds.
Or corporation, if they dont want to buy the shares, may
file in court asking the subscriber to pay the unpaid
amount then execute it against latters personal property.
6.issue of certificate of stock to highest bidder.
(BAR) Corporate secretary can validy refuse to issue a stock
certificate for 25 shares to allegedly correspond to the 25%
that X paid on his subscription for 100 shares. When a
subscriber makes a partial payment on his subscription
,the amount is applied proportionately to all the number
of shares subscribed by him.
---X is not correct also in refusing to pay for the balance of
his subscribed shares since unpaid subscription is a trust
fund the creditors of the corporation may look up to for
the payment of their credits should anything adversely
affect the corporation.
(BAR) The board of Directors of a corporation ,by a vote of
ten in favor and one against ,declared due and payable all
unpaid subscription to the capital stock. The lone
dissenting director failed to pay on due date his unpaid
subscription. Other than the shares whereon he was
unable to complete the payment ,he did not own any
share in the corporation. He was later informed by board
that unless due payment is meanwhile received, he:
a.could no longer served as director of the corporation:
INVALID, removal is not valid due to prerequisite of prior
Page 35 of 39
notioe to the stockholders of the company is missing
b.would not be entitled to cash and stock dividend which
were declared and payable a day after such information .
INVALID, shares although unpaid has not yet become
delinquent, since it is delinquent only upon failure of the
stockholders to pay the unpaid subscription or balance
thereof within the grace period of 30 days from the date
stated in the call.
Owners of delinquent stocks are entitled to cash
dividends.cash dividends due on delinquent stocks should
be applied first to the unpaid balance on the subscription
plus cost and expenses.
c.could not vote in the stockholders meeting
INVALID, since not yet delinquent ,they shall have all the
rights of a stockholder, including right to vote.
2.Ordinary Court Action
3.Collection from cash dividends and other amounts due
to the stockholder, if allowed by the by-laws or agreed by
him.
2006 notes:if there is no interest stated in the by-laws,
then the subscriber must not pay interest, but if it
becomes delinquent, then subscriber must pay interest
even if not stated in the by-laws.
2006 notes:as a general rule, the corporation will not
release subscriber from subscription,an exception is when
shares become delinquent as declared by the board.
DISSOLUTION OF A CORPORATION
Publication is needed and SEC will require to get a tax
clearance from the BIR and the stockholders will be
required to sign an undertaking that they will answer for
the claim of the creditors to the extent of the liquidating
dividends they will receive.
Once dissolution is approved, the Board of Directors is
dissolved and so the corporation have either an assignee
dissolution or a receiver dissolution.
Effect of dissolution is that there is a transfer of legal titles
of property to stockholder, and corporation exist for 3yr
period for it to liquidate (it is not anymore conducting
business since no Board of Directors anymore) however,
with regard cases filed by Corporation for sum of money, it
would still goes on and if it goes beyond 3 years, the
lawyer of corporation becomes the assignee for the
successful recovery of the money.
Then you can have a voluntary dissolution. This could be
done by filing a quo warranto case under rule 66 of the
ROC on the ground mentioned there or a corporation can
be dissolved for certain violation of the corporation code
as mentioned in the Corporation Code or PD 902-A and
also a minority stockholder may file a petition to dissolve
the corporation where the majority is mismanaging the
assets of the corporation, dissipating its assets, and
fraudulently disposing of its properties and a receiver may
be appointed in an action for involuntary dissolution.
Board of Directors cannot pass a resolution to extend
corporate life after the corporation was dissolved since:
1.corporate life terminates , so there is no more life to
extend
2.if board is given 3 years grace period after its dissolution
to wind up and liquidate, that grace period can be utilized
for nothing more than a liquidation. Board cannot pass
resolution not germane to the liquidation process.
3.even if extension was done by the board before its
dissolution, the extension and filing of an amendment to
the articles of incorporation need the approval of
stockholders holding atleast 2/3 of the outstanding capital
stock of the corporation.
2006 notes:full liquidation can be effected only after 3
years.
Main Modes of Dissolution
1.voluntary
by filing the proper papers w/ sec .no hearing is required if
there are no creditors affected.
a.where no creditors are affected
In all the methods of voluntary dissolution, you need a
resolution approved by a majority of directors and a
resolution approved by at least 2/3 of the stockholders In
Section 118, where no creditors are affected the directors
and the stockholders pass the resolution dissolving the
corporation and that will be filed in the SEC for approval. In
a case where a suit was filed and the corporation said, we
have already been dissolved and they submitted a board
resolution, the SC held that it is not enough to dissolve a
corporation.
b.where creditors are affected
Here the board and the stockholders will approve the
dissolution but a petition will be filed signed by the
majority of the directors and verified by the president,
secretary or one of the directors which will indicate the
claims of creditors. That will be set for hearing and not less
than thirty (30) days nor more than sixty (60) days after the
entry of the issuance of the order and a copy of the order
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will be published once a week for 3 consecutive weeks in a
newspaper of general circulation and that will also be
posted for three weeks in three public places like the
bulletin board of a municipal hall, post office, the plaza and
then the SEC will set that for hearing and determine w/n
the corporation should be dissolved
c.by shortening corporate term
this is the simplest and fastest way of dissolving the
corporation voluntarily like when Ford Philippines decided
to close its subsidiary they simply amended the articles of
corporation that the corporation will exist until December
31, 1978.
2.involuntary
Upon verified complaint filed w/ SEC
Grounds:
a.continuous inactivity of the corporation for a period of
at least 5 years.
b.commission by the corporation of ultra vires/illegal acts
c.corporation was illegally organized
d.serious dissension in the corporation
The Court said the employees of a railroad are required to
wear uniform indicating their positions in their nameplate,
now you mean tell me if one employee did not have such a
nameplate you are going to dissolve a corporation because
that is a legal requirement, it has to be a serious violation.
But in one case, the SC dissolved a corporation which was
engaging in banking without authorization from the
monetary board, it was accepting deposits from the public,
the court considered that as a serious violation.
When a minority stockholder files a case and asks to
dissolve the corporation, the court said that that is a harsh
remedy unless the situation is really beyond redemption
you should not impose that remedy.
Winding Up or Liquidation
Liquidation means the winding up of the affairs of the
corporation by getting in the assets,settling with creditors
and debtors and apportioning the amount of profit and
loss.
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.
2005 notes: On the opposite end of the spectrum, it is
rehabilitation which connoted a reopening or
reorganization .Rehabilitation contemplates a continuance
of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of
successful operation and solvency.
Methods of Winding Up:
1.upon voluntary dissolution of a corporation ,the court
may direct such disposition of its assets as justice requires
and may appoint a receiver to collect such assets and pay
the debts of the corporation (Rule 104 of Rules of Court)
2.corporation whose corporate existence is terminated,
shall nevertheless be continued as a body corporate for 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 of enabling it gradually to settle and close its
affairs ,to dispose of and convey its property and to divide
its capital stock but not for the purpose of continuing the
business for which it was established.
3.by vitue of which the corporation, within 3 year period
just mentioned, is authorized and empowered to convey
all of its property to a trustee for the benefit of members,
stockholders ,creditors and others interested.
The corporation has three years after it should have been
dissolved for the purpose of winding up its affairs. The SEC
has said the three year period should be counted from the
time the dissolution was approved by the SEC even if the
directors and stockholders pass a resolution dissolving the
corporation that is not effective until it has been approved
by the SEC.
For three years , the corporation will continue to exist it
will no longer be a going concern but only for the purpose
of winding up that is why the SC has said that the
corporation cannot for example renew its contract of lease
because it is no longer a going concern.
During the three year period, it should devote its time
prosecuting and defending law suits, winding up its affairs
disposing its properties so they can be used to pay off its
creditors and to distribute balance to the stockholders.
2005 notes:As such, cases can still be pursued even beyond
the date when its corporate existence is terminated for a
period of 3 years. As such ,prosecution of cases within the
3 year period of liquidation is allowed.
Partition of Properties:
1.physical division or partition based on the proportion of
values of their stockholdings
2.selling the property to a third person and dividing the
proceeds among themselves in proportion to their
stockholdings.
3.after determination of value of property, by assigning or
transferring the property to one stockholder with the
obligation on the part of said stockholder to pay the other
stockholders the amounts in proportion to value of their
Page 37 of 39
stockholdings.
2005 notes: lawyer who handled the case in the trial court
may be considered as trustee for the dissolved
corporation, with respect to the matter in litigation only
,although no appointment as such was extended to him.
2005 notes:trial court has jurisdiction to order a receiver of
a corporation under receivership to do any act so as to
protect and preserve its properties and to that end it may
order the secretary of the corporation to do an act within
the internal affairs of the corporation aimed at protecting
the interest of the stockholders(Hodges v Lezama)
2005 notes: at any time during the said 3 years(for winding
up) said corporation is authorized and empowered to
convey all of its properties to the trustee for the benefit of
stockholders, creditors and other interested persons.The
trustee holds legal title to these assets but beneficial
interest remains with the stockholders and creditors.
Take over of Assets of a Dissolved Corporation
Corporation taking over the assets of a dissolved
corporation becomes liable for the obligations of the
dissolved corporation ,even if the charter of a corporation
taking over limits its liabilities with respect to obligations
of the dissolved corporation (Gonzales v SRA)
How assets distributed:
1.creditors starting with the preferred and continuing with
all common if the assets can pay all
2.refund of the par value of stocks of preferred
stockholders
3.refund of the par value to common stockholders
4.if assets still remain, then they are proportionately
distributed to all stockholders ,common or preferred.
There can be no distribution of assets to stockholders
without first paying the creditors.
Assets distributable to any creditor ,stockholder or
member who is unknown or who cannot be located shall
be escheated to the city or municipality where such assets
are located (Sec 122)
Other Modes of Dissolution:
1.expiration of term (involuntary)
2.shortening of corporate term
3.failure to organize and commence business within 2 yrs
from date of issuance of certificate of incorporation
The effect of non use of corporate charter and continouos
inoperation of the corporation within 2 yrs from the date
of its incorporation, its corporate powers shall cease and
the corporation shall be deemed dissolved (not
automatically since there should be a notice and hearing)
However, if a corporation has commenced the transaction
of its business but subsequently becomes continouosly
inoperative for a period of at least 5 yrs, the same shall be
a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation.
2006 notes:this is not applicable if failure to organize or
commence is due to causes beyond the control of the
corporation as may be determined by SEC.
4.legislative dissolution
INSOLVENCY, REHABILITATION & DISSOLUTION
Insolvency (Bankruptcy)
Objective is to discharge a corporation from debt since
there is still intention that corporation can still continue its
transactions
Proceedings involved:
1.suspension of payments
Occurs when a corporation has sufficient assets but latter
do not mature at same time with the debt.
As such ,it operates whereby the amount of debt is not
reduced, only the payment is postponed
However, it must involved publication and authentication
of debts and that after debts are proven, the plan of
repayment are approve by the regular court.
2.voluntary insolvency or involuntary insolvency
In this scenario, the corporation or the person do not have
sufficient assets to meets its obligation.
Since the liabilities are greater than assets, then the law
followed is the concurrence and preference of credit.
But there must be publication for 60 days.
In voluntary insolvency, it is the debtor who filed, while in
involuntary insolvency, it is the creditiors who filed such
proceeding (since the debtor might abscond, or remove a
security from place where it should belike transferring a
car from Manila to Davao, or that debtor is out of country
and no intention to return).
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After applying the payment in accordance with the
concurrence of credit, the natural debtor is discharge,
however, if the debtor is a corporation it is not discharge.

2006 notes:if after discharge, you win lotto, la na habol ang

mga creditors sa yo

Rehabilitation

Objective is for the approval of the plan of rehabilitation

and its implementation.

If court finds it adequate that a plan of rehabilitation must

be carried out, then it orders that no creditors can touch
property of the corporation (even those already foreclose
by creditors and applied shall be stop ,as such, even
secured creditors are covered by suspension of
payments---- so there is automatic stay)

Once plan of rehabilitation is approved, it is subject to its

implementation / execution.

End Result: Corporation continues to carry on its business.

2006 notes: Aside from plan of rehabilitation, the

corporation may also propose for an interim plan.

Dissolution

Objective is to liquidate since corporation is already

dead(read the corporation lectures by 4blue 95).

In voluntary dissolution ,it is the debtor who files it on

grounds of fraud or corporate officers mismanage the
corporation resulting to depletion of its assets.

As such, if liabilities is greater than assets, it can be a

ground for insolvency or the creditors may propose for
rehabilitation.

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