CORPORATION LAW • Stockholders (inchoate right)

• Directors
I. GENERAL PRINCIPLES • Officers
• Employees
A Definition, Sec. 2 • Other stockholders (customers, community, suppliers, lenders)

A corporation is an artificial being (juridical personality) created by operation of law Corporate hierarchy
(mere consent insufficient), having the right of succession (not affected by changes in 1. Stockholders
stockholders and members) and the powers, attributes and properties expressly 2. Board of Directors
authorized by law or incident to its existence (only powers conferred by law). 3. Management (Officers)

Theories G Nationality Principle

a. Concessions – owes life to the State • Nationality of the corporation is determined by capital ownership
b. Enterprise entity – prima facie that assets, liabilities and operations are • Constitution mandates full Filipino owned corporations: Filipino Incorporators
those of the enterprise, being of its own and SH, or at least 60% of capital Filipino owned
c. Existence - for a social purpose with profit as its main objective • Partly Nationalized Activities (allows 60-40): exploitation of natural resources
under supervision of State, franchises/licenses to operate public utilities,
B Types of business organizations establishing/owning educational institutions, hereditary succession in owning
a. Sole proprietorship; lands
b. Partnership; and
c. Corporation Control test; Grandfather rule
General rule: Control Test/Liberal Rule
C Advantages, disadvantages • Shares belonging to corporations at least 60% of capital owned by Filipinos
• Advantages: Capital pooling, limited liability has Philippine nationality
• Disadvantages: Burdensome or useless, either mismanaged or confined • Default rule
by trade
Exceptions: Grandfather/ Strict Rule
D History • If the percentage of Filipino ownership in corporation is less than 60%, only
• Spanish: Code of Commerce based on Spanish Code introduced the number of shares corresponding to such percentage shall be counted as
“sociedades anonimas” Philippine nationality.
• American: Corporation Law of 1906, replaces sociedades but gave option • Apply this when there is doubt in equity ownership (i.e. corporate layering)
for some to continue and still be governed by Code of Commerce
• 1955: First draft of Corporation Code Gamboa vs. Teves
• May1, 1980: Approval of Corporation Code, which is combination of How is the term “capital” defined? Consider voting shares only.
common law from the American code. This became the general law for
corporations. Concept of beneficial vs. legal ownership
• Present: Corporation Code, Banking Laws, SRC (authorizing SEC to • Name in the stock certificate – legal owner
supervise corporations). • Holding in trust (corporation) – beneficial owner

E Regulation of corporations II. CLASSES OF CORPORATIONS

a. Corporation Code, BP. 68 

b. R.A. 8799, Securities Regulation Code, Sec. 5 – SEC powers and A Private corporations
functions; 
see also PD 902-A 
 1. Stock, Sec. 3
c. Rules and regulations issued by the SEC pursuant to statutory grant of • Has capital stock divided into shares;
power 
to supervise and regulate corporations 
 • Authorized to distribute dividends to holders;
• Purpose is to make profits for business
F Interest within corporation • Shareholders participate in assets at dissolution and liquidation
• Corporation as distinct legal entity

Corporation Law by Castillo, Roman George P., De La Salle University - COL 1

 2. Non-stock • Public under Special Laws – created for political purpose connected with
• Has capital stock but not divided into shares; public good in administration of civil government.
• No income is distributed • Governed by special laws but supplemented by Corporation Code
• Purpose: charitable, religious, educational, etc. • Ownership of stock is not a determining factor of whether a corporation is
• Members do not participate in assets upon liquidation and public or private.
dissolution • Private corporations can only be created under Corporation Code and not by
any special law. Special laws can govern them but cannot create them.
CIR vs. Club Filipino
When profits merely incidental to operate and provide members convenience, it is Can Congress pass a law creating a private corporation?
deemed non-stock corporation. No. Private corporation can be created only under a general law.

3. Close, Sec. 96 National Coal vs. CIR

• Stock corporation The mere fact that a special law specifies the need for a corporation to explore coal
• Limited to only 20 shareholders on public lands does not make it a public corporation entitled to tax exemption. It is
• Restricts transfer of shares to any assignee of shareholders. still created under Corporation Code and thus, a private corporation.
• Cannot make public offering
• NOT CLOSED if at least 2/3 of OCS is owned by corporation that is PNOC vs. NLRC
not a close corporation Ownership of stock is not determinative of type of corporation. Government can in fact
• Cannot be closed corporation: mining, oil companies, stock own shares of stock in private corporation without the latter changing its class from
exchange, bank, insurance, public utility, education (public interest private to public.
corporations).
C Domestic vs. Foreign
4. Public under SRC - those whose shares are listed in PH stock exchange and 1. Domestic – incorporated under Philippine Laws
offered to public. 2. Foreign – incorporated under foreign laws.

5. Educational, Sec. 106, 107 III. FORMATION AND ORGANIZATION

• Governed by special laws and by the general provisions of this Code
(Sec. 106). A. Who may form – Sec.10
• Requires favorable recommendation of the Ministry of Education • 5-15 natural persons
and Culture before SEC approves AOI and by-laws. (Sec. 107). • legal age
• majority are PH residents
6. Religious, corporation sole, Sec. 109, 110 • incorporators must own or subscribe to at least one share
• May be incorporated by one or more persons.
• Such corporations may be classified into corporation sole and *Corporation cannot be incorporators
religious societies.
• Religious corporations shall be governed by this Chapter and by the B. Steps in formation
general provisions on non-stock corporations insofar as they may
be applicable (Sec. 109) 1. Promotion - process whereby by a PROMOTER enters into contracts to
• For the purpose of administering and managing, as trustee, the initially set up the corporation, formulates initial financial plans, studies, and
affairs, property and temporalities of any religious denomination, forming and organizing the corporation.
sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of 2. Articles of Incorporation
such religious denomination, sect or church.
Sec. 14 – Contents
7. Parent and subsidiary corporations, holding companies; affiliate Sec. 15 – Form 

companies
a. Name
B Corporations created under special laws or charter

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Red Line Transportation Co. vs. Rural Transit Co.
The name of a corporation is therefore essential to its existence. It cannot change its
name except in the manner provided by the statute. By that name alone is it authorized
to transact business. The law gives a corporation no express or implied authority to
assume another name that is unappropriated; still less that of another corporation,
which is expressly set apart for it and protected by the law. If any corporation could
assume at pleasure as an unregistered trade name the name of another corporation,
this practice would result in confusion and open the door to frauds and evasions and
difficulties of administration and supervision.
Universal Mills Corporation vs. Universal Textile Mills, Inc.
The corporate names in question are not identical, but they are indisputably so similar
that even under the test of “reasonable care and observation as the public generally
are capable of using and may be expected to exercise” invoked by respondent,
confusion will usually arise.
Philips Export BV vs. CA, Standard Philips
A corporation’s right to use its corporate and trade name is a property right, a right in
rem which it may assert and protect against the world in the same manner as it may
protect its tangible property, real or personal against trespass or conversion.
Sec. 18 of the Corporation Code provides for two requisites:
1. Prior adoption of the corporate name;
2. Proposed name is either:
a. Identical; or
b. Deceptively or confusingly similar to that of existing corporation or
any other name protected by law; or
c. Patently deceptive, confusing or contrary to existing law
Lyceum of the Philippines vs. CA
Doctrine of secondary meaning (for such length of time and with such
exclusivity)
In the case at bar, the number alone of the respondents in the case at bar suggests
strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning.
PC Javier & Sons vs. CA
A change in corporate name does not make a new corporation, whether effected by a
special act of under a general law. It is the same corporation with a different name,
and its character is in no respect changed.
b. Purpose clause; primary purpose, secondary purpose
• The specific purpose or purposes for which the corporation is being
incorporated.
• Where has more than one stated purpose, the articles - state which is the
primary and secondary
• Non-stock corporation may not include a purpose which would change or
contradict its nature as such; (Sec. 14[2], Code)
• SEC may reject purposes which are patently unconstitutional, illegal,
immoral, or contrary to government rules and regulations; (Sec. 17[2], Code)
• Non-stock corporations may be formed or organized for charitable, religious,
educational, etc.
c. Principal office - location of physical office of corporation within PH only and
must be stated SPECIFICALLY and COMPLETELY (Sec. 14, Code).
Clavecilla Radio System vs. Antillon
The residence of a corporation is the place where its principal office is established. It
can be sued in that place, not in the place where its branch office is located.
Hyatt Elevators vs. Goldstar Elevators
Admittedly, petitioner’s principal place of business is Makati, as indicated in its AOI.
The place indicated in the AOI becomes controlling in determining venue for this case.
inconclusive is the allegations that petitioner already closed its Makati office because
the fact remains that, in law, the petitioner’s residence was still in the place indicated
in the AOI.
d. Term – Sec. 11
• Not exceeding fifty (50) years from the date of incorporation.
• May be extended for periods not exceeding fifty (50) years in any single
instance by an amendment of AOI.
• No extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons as may be
determined by the SEC
e. Incorporators
• Section 5. Corporators are those who compose a corporation, whether
as stockholders or as members.
• Incorporators are those stockholders or members mentioned in the AOI
as originally forming and composing, signatories.
• Section 10. Incorporators 5-15 natural persons.
f. Number of directors; incorporating directors
• The number of directors or trustees, 5-15 (Sec. 14[6])
g. Capital stock
• Minimum, Section 12. Not be required to have any minimum authorized
capital stock by special law.
• Authorized, subscribed, paid-up, Section 13. 25-25 rule. Provided,
however, That in no case shall the paid-up capital be less than
P5,000.00.
• Non-stock. If it be a non-stock corporation, the amount of its capital,
the names, nationalities and residences of the contributors and the
amount contributed by each; (Sec. 14[9])
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 • Treasurer-in-trust (Sec. 15[10th]). Authorized to receive for and in the
name and for the benefit of the corporation, all subscription (or fees) or
contributions or donations paid or given by the subscribers or members.
• Outstanding shares, Section 137. Means the total shares of stock
issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, XPT treasury shares.
h. Other matters
a. Compliance with nationality requirement – Sec. 15[11th], Code
b. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient. (Sec. 14[10])
3. Articles of close corporations
Section 97. Articles of incorporation. – The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding
the same and restrictions on their transfers as may be stated therein, subject to the
provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than
by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose of applying the provisions of this Code;
and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.
4. Articles of special corporations
• Section 106. Incorporation. – Educational corporations shall be
governed by special laws.
• Section 107. Pre-requisites - favorable recommendation of the Ministry
of Education and Culture.
• Section 108. Board of trustees. – Trustees of educational institutions: 5-
15, multiples of 5. Unless otherwise provided in the AOI or by-laws, term
of office of one-fifth (1/5) of their number shall expire every year.
• Section 109. Classes of religious corporations. – Religious corporations
may be incorporated by one or more persons. Such corporations may
be classified into corporations sole and religious societies
5. Form of Articles – Sec. 15, Code
6. Accompanying documents
c. Treasurer’s Affidavit - Sec. 15, Code
 - prepared and sworn and signed
by a Treasurer in trust as elected by the subscribers who shall state the
amount of authorized capital subscribed and paid up and his authority
to receive the fees/contributions for the benefit of the corporation to be
deposited in a “Treasurer-in-trust” account as certified by a Bank.
d. Recommendation of government agency (required for corporations
engaged in certain activities) - Sec. 17 - banks, banking and quasi-
banking institutions, building and loan associations, trust companies and
other financial intermediaries, insurance companies, public utilities,
educational institutions, and other corporations governed by special
laws.
e. SEC Rules on Documentary Requirements for Registration of
Corporations and Partnerships (as of 30 June 2013) – available on SEC
website (under Guide to Registration)
7. Filing of Articles and payment of fees - 1/10 of 1% of the ACS
8. Examination by SEC; grounds for rejection or disapproval
• Shall give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment.
• The following are grounds for such rejection or disapproval:
o not substantially in accordance with the form prescribed herein;
o the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules
and regulations;
o Treasurer’s Affidavit concerning the amount of capital stock
subscribed and/or paid is false;
o PH ownership requirement not complied with.
9. Certificate of Registration; beginning of corporate existence - deemed
incorporated from the date the SEC issues a certificate of incorporation under
its official seal.
10. De facto corporations, Sec. 20 - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private
Corporation Law by Castillo, Roman George P., De La Salle University - COL 4
 suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
• Conditions, requirements:
a. valid statute under which a corporation may be formed;
b. colorable compliance with requirements in good faith; and
c. use of corporate powers
Municipality of Malabang vs. Benito
The rule disallowing collateral attacks applies only where the municipal corporation is
at least a de facto corporation. For where it is neither a corporation de jure nor de
facto, but a nullity, the rule is that its existence may be questioned collaterally or
directly in any action. The mere fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably make it a de facto corporation,
as there is no other valid statute to give color of authority to its creation.
Bergeron v Hobbs
They are not a corporation de facto. As a general rule, where an attempt to organize a
corporation fails, by omission of some substantial step, its members are liable as
partners. The infirmity of the defendant’s contention is in the assumption that they are,
de facto, a corporation. If they had not the color of or legal right, they have obtained
no immunity from individual liability (disallowing collateral attack) for the debts of the
supposed corporation. Until the AOI are filed in the office of the register of deeds of
the country, there is no color of legal right to act as a corporation. So long as an act,
required as condition precedent, remains undone, no immunity from individual liability
is secured.
Harill vs Davis
The defendants cannot escape individual liability because it then HAD NO COLOR OR
INCORPORATION, AND THEY KNEW IT AND YET ACTIVELY USED ITS NAME TO
INCUR THE OBLIGATION.
Hall vs. Piccio
SEC has not issued the corresponding certificate of incorporation. The personality of
a corporation begins to exist only from the moment such certificate is issued — not
before. The immunity on collateral attack is granted to corporations "claiming in good
faith to be a corporation under this act." Persons acting as corporation may not claim
rights of "de facto" corporation if they have not obtained certificate of incorporation.
11. Corporation by estoppel, Section 21
• All persons who assume to act as a corporation knowing it to be without
authority
• Liable as general partners
• Not be allowed to use as a defense its lack of corporate personality.
Empire Manufacturing Company of Grand Rapids vs. Stuart
The giving of a PN under a corporation not yet properly organized could not repudiate
the transaction or evade responsibility when sued.
The Lowell-Woodward Hardware Company vs. G. R Woods, et. al. Partners as
the Superior Leasing Company
One who enters into a contract with a party described therein as a corporation is
precluded, in an action brought thereon by such party under the same designation,
from denying its corporate existence.
Asia Banking v Standard Products
GR: In the absence of fraud, a person who has contracted with an association in such
a way as to recognize its legal existence as a corporate body is thereby estopped to
deny its corporate existence in any action.
Salvatiera v. Hon. Garlitos
As a general rule, a person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped from denying the
same in an action arising out of such transaction or dealing. This doctrine however
is not applicable if fraud attended the transaction. Moreover, being unincorporated,
it has no power to authorize another to act on its behalf—thus those who act as
representatives or agents of said corporations do so without authority and at their own
risk.
Albert v. University Publishing Co., Inc.
A person acting or purporting to act on behalf of a non-existing corporation assumes
personal obligations and privileges and consequently assumes liability he may incur
personally.
Chiang Kai Shek School vs. Court of Appeals
There should also be no question that having contracted with Oh every year for 32
years and thus represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her claim against
it.
12. Effects on non-use of corporate charter and continuous inoperation of
a corporation, Sec. 22
• Non-use: within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation deemed dissolved.
• Inoperation: If commenced but subsequently becomes
continuously inoperative for at least five (5) years, the same shall be
a ground for the suspension or revocation of its corporate franchise
or certificate of incorporation.
• Not apply if the failure is due to causes beyond the control of the
corporation as may be determined by SEC.
Internal organization of corporation
1. By-Laws
1. Adoption – Sec. 36(5), Sec. 46, Code
• Section 36. Not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
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 • Section 46
• When - within one (1) month after receipt of AOI, adopt a code of
by-laws
• How: affirmative vote of stockholders representing at least a
majority of OCS/members
• Signed by the stockholders or members voting for and kept in the
principal office, subject to during office hours.
• A copy, duly certified to by a majority of the directors or trustees
countersigned by the secretary, shall be filed with the SEC attached
to original AOI.
• May be adopted and filed prior to incorporation;
• When effective: upon the issuance of SEC certification that by-laws
are not inconsistent with this Code.
2. Contents – Sec. 47, Code
3. Amendment; delegation of power to amend, Section 48.
• By majority vote of BOD/T, and at least a majority of the
OCS/members.
• At a regular or special meeting duly called for the purpose, may
amend or repeal or adopt new by-laws
• 2/3 of OCS/members may delegate to the BOD/T the power to
amend or repeal any by-laws or adopt new by-laws:
• Any power shall be considered as revoked whenever majority
OCS/members shall so vote at a regular or special meeting.
4. SEC approval – Sec. 46, Code, supra
Henry Fleischer vs. Botica Nolasco Co., Inc.
In adopting said by-law the corporation has transcended the limits fixed by law in the
same section, and has not taken into consideration the provisions of section 35 of the
Corporation Code. It is well settled that by-laws of a corporation must be reasonable
and for 'a corporate purpose, and always within the charter limits. They must always
be strictly subordinate to the constitution and the general laws of the land. They must
not infringe the policy of the state, nor be hostile to public welfare.
Loyola Grand Villas v. CA
By-Laws are indispensable to corporations, since they are required by law for an
orderly management of corporations. However, failure to file them within the period
prescribed does not equate to the automatic dissolution of a corporation. Moreover,
by-laws may be necessary to govern the corporation, but by-laws are still subordinate
to AOI and the Corporation Code. In fact, there are cases where By-Laws are
unnecessary to the corporate existence and to the valid exercise of corporate powers.
Municipality of Malabang vs. Benito et al
At the very least, by its failure to submit its by-laws on time, the AIIBP may be
considered a de facto corporation. Moreover, a corporation which has failed to file its
by-laws within the prescribed period does not ipso facto lose its powers as such. The
SEC Rules on Suspension/Revocation of the Certificate of Registration of
Corporations, details the procedures and remedies that may be availed of before an
order of revocation can be issued.
2. Election of directors – Sec. 24, Code
• Either in person or by written proxy, the owners of a majority OCS/members.
• Must be by ballot if requested.
• In stock corporations, every stockholder to vote the number of shares of
stock standing; and said stockholder may vote such number of shares for:
ü As many persons as there are directors to be elected; or
ü He may cumulate said shares and give to one or several candidates.
• That no delinquent stock shall be voted.
• Unless otherwise provided in AOI or by-laws, members may cast as many
votes as there are trustees to be elected but may not cast more than one vote
for one candidate.
3. Election of officers – Sec. 25, Code
• Directors of a must formally organize by the election of the ff:
• president, who shall be a director;
• treasurer, who may or may not be a director;
• secretary, who shall be a PH resident and citizen; and
• such other officers as may be provided for in the by-laws.
• Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
• For corporate acts, unless the AOI or the by-laws provide for a greater
majority
• Quorum: majority of directors/trustees
• Valid corporate act: majority of present at a meeting at which there
is a quorum
• XPT for the election of officers - vote of a majority of all the BOD/T.
• Directors or trustees cannot attend/vote by proxy at board meetings.
4. Report of election of directors, trustees, officers, Sec. 26, Code 
- within thirty
(30) days after the election.
IV CORPORATE ENTITY
A Separate corporate personality
B Disregarding the corporate entity 

General categories in piercing the veil of corporate fiction:
a. Fraud;
b. Defeat public convenience;
c. Inequity or injustice; and
d. Alter ego
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Sulo ng Bayan vs. Araneta
Absent any showing of interest, therefore, a corporation, like plaintiff, has no
personality to bring an action for and in behalf of its stockholders or members for the
purpose of recovering property which belongs to said stockholders or members in
their personal capacities.
Gallagher vs. Germania Brewing Co.
Given that, liabilities of Gallagher are different from Westphal’s, therefore, there can
be no offsetting and the corporate entity cannot be disregarded.
Palay, Inc. vs. Clave
As a general rule, a corporation may not be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced.
Cruz vs. Dalisay
The mere fact that one is president of a corporation does not render the property he
owns or possesses the property of the corporation, since the president, as individual,
and the corporation are separate entities.
Indophil Textile Mill Workers Union vs. Calica
Under the doctrine of piercing the veil of corporate entity, the corporation will be
considered as a mere association of persons. The members or stockholders of the
corporation will be considered as the corporation, that is liability will attach directly to
the officers and stockholders. In the case at bar, the fact that the businesses of
respondent and Acrylic are related, that some of the employees of the respondent are
the same persons manning and providing for auxilliary services to the units of Acrylic
and that the physical plants, offices and facilities are situated in the same compound
are not sufficient to justify the piercing of the corporate veil of Acrylic.
Child Learning Center, Inc. vs. Tagorio
There was no basis to pierce CLC’s separate corporate personality. To disregard the
corporate existence, the plaintiff must prove:
1) Control by the individual owners, not mere majority or complete stock
ownership, resulting in complete domination not only of finances but of policy
and business practice in respect to a transaction so that the corporate entity
as to this transaction had at the time no separate mind, will or existence of
its own;
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 a dishonest and unjust act in contravention of the plaintiff’s legal right; and
3) The control and breach of duty must proximately cause the injury or unjust
loss complained of.
Laguna Trans. Co., Inc. vs. SSS
To adopt petitioner's argument would defeat, rather than promote, the ends for which
the Social Security Act was enacted. An employer could easily circumvent the statute
by simply changing his form of organization every other year, and then claim
exemption from contribution to the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at least 2 years. The door to
fraudulent circumvention of the statute would, thereby, be opened.
US v. Milwaukee Refrigerator Transit Co. et al
In this case, Court said there can be no question that interests of the two corporations
are identical – Milwaukee is authorized by Brewing to collect and receive freights on
their behalf. Nonetheless, the corporation is a mere association of persons whose
corporate entity/personality is abstract and intangible – separate from their each other.
Marvel Building Corporation et. al. vs David
Maria B. Castro would not have asked them to endorse their stock certificates, or be
keeping these in her possession, if they were really the owners. They never would have
consented that Maria B. Castro keep the funds without receipts or accounting, nor
that she manages the business without their knowledge or concurrence, were they
owners of the stocks in their own rights. Each and every one of the facts all set forth
above, in the same manner, is inconsistent with the claim that the stockholders, other
than Maria B. Castro, own their shares in their own right.
Palacio vs. Fely Transportation
Isabelo Calingasan and defendant Fely Transportation may be regarded as one and
the same person. It is evident that Isabelo Calingasan's main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from the conviction of
his driver, Carillo. This conclusion is borne out by the fact that the incorporators of the
Fely Transportation are Isabelo Calingasan, his wife, his son and his two daughters.
Tan Boon Bee & Co., In. vs Jarencio
When a corporation is merely an adjunct, business conduit or alter ego of another
corporation the fiction of separate and distinct corporation entities should be
disregarded. In the present case, PADCO, as its name suggests, is a drug company
not engaged in the printing business. So it is dubious that it really owns the said
printing machine regardless of PADCO’s title over it.
Garrett vs. Southern Railway Co.
FACTS
The general rule is that stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable for the torts of the
subsidiary unless the separate corporate existence of the subsidiary is a mere sham,
or unless the control of the subsidiary is such that it is but an instrumentality or adjunct
of the dominant corporation.
The circumstances rendering the subsidiary an instrumentality (Sec. 6 of Powell on
Parent and Subsidiary Corporations):
a. The parent corporation owns all or most of the capital stock of the subsidiary.
b. The parent and subsidiary corporations have common directors or officers.
c. The parent corporation finances the subsidiary.
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 d. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
e. The subsidiary has grossly inadequate capital.
f. The parent corporation pays the salaries and other expenses or losses of the
subsidiary.
g. The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
h. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation,
or its business or financial responsibility is referred to as the parent
corporation’s own.
i. The parent corporation uses the property of the subsidiary as its own.
j. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
k. The formal legal requirements of the subsidiary are not observed.
Jardine vs. JRB Reality
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow
that Aircon’s corporate legal existence can just be disregarded.
In the case at bar, petitioner does not exercise control over Aircon; nowhere can it be
gathered that the petitioner manages the business affairs of Aircon. Moreover, the
existence of interlocking directors, corporate officers and shareholders, is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other
public policy consideration.
McConnel vs. CA
The following are findings of the CA:
1. These persons completely dominated and controlled the corporation and that
the functions of the corporation were solely for their benefits.
2. That the corporation was a mere extension of their personality is shown by
the fact that the office of Paredes and that of Park Rite Co., Inc. were located
in the same building, in the same floor and in the same room
3. This further shown by the fact. that the funds of the corporation were kept by
Paredes in his own name.
4. The corporation itself had no visible assets
La Campana Coffee Factory, Inc. v Kaisahan ng mga Manggagawa
A subsidiary or auxiliary corporation which is created by a parent corporation merely
as an agency for the latter may sometimes be regarded as identical with the parent
corporation, especially if the stockholders or officers of the two corporations are
substantially the same or their system of operation unified.
Pamplona Plantation vs. Tinghil
In the present case, the corporations have basically the same incorporators and
directors and are headed by the same official. Both use only one office and one payroll
and are under one management. The attempt to make the two corporations appear as
two separate entities, insofar as the workers are concerned, should be viewed as a
devious but obvious means to defeat the ends of the law.
De Leon vs. NLRC
In the case at bar, it was shown that FISI was a mere adjunct of FTC. FISI, by virtue of
a contract for security services, provided FTC with security guards to safeguard its
premises. However, records show that FISI and FTC have the same owners and
business address, and FISI provided security services only to FTC and other
companies belonging to the Lucio Tan group of companies. The purported sale of the
shares of the former stockholders to a new set of stockholders who changed the name
of the corporation to MISI appears to be part of a scheme to terminate the services of
FISI’s security guards posted at the premises of FTC and bust their newly organized
union which was then beginning to become active in demanding the company’s
compliance with Labor Standards laws.
NAMARCO vs. Associated Finance Inc.
In the case at bar, facts showing Associated as the alter ego of Sycip are as follows:
Sycip referred to himself as the one who contracted or transacted the business in his
personal capacity, the exchange agreement was his personal contract, Associated
was at that time already insolvent, etc.
Lipat vs. Pacific Banking Corporation
When the corporation is the mere alter ego or business conduit of a person, the
separate personality of the corporation may be disregarded. This is commonly referred
to as the “instrumentality rule” or the alter ego doctrine, which the courts have applied
in disregarding the separate juridical personality of corporations. As held in one case,
where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal.
Claparols vs. CIR
Indeed, Claparols Steel and Nail Plant was succeeded by Claparols Steel Corporation.
It is very clear that the latter corporation was a continuation and successor of the first
entity, and its emergence was skillfully timed to avoid the financial liability that already
attached to its predecessor, the Claparols Steel and Nail Plant. Both predecessors
and successor were owned and controlled by petitioner Eduardo Claparols and there
was no break in the succession and continuity of the same business. This
“avoiding­the­liability” scheme is very patent, considering that 90% of the subscribed
shares of stocks of the Claparols Steel Corporation (the second corporation) was
owned by respondent (herein petitioner) Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols
Steel Corporation.
Villa Rey Transit vs. Ferrer
Corporation Law by Castillo, Roman George P., De La Salle University - COL 8
Villa Rey Transit, Inc. is an alter ego of Jose Villarama, and that the restrictive clause
in the contract entered into by the latter and Pantranco is also enforceable and binding
against the said Corporation.
Cease vs. CA
The accounts of the corporation and therefore its operation, as well as that of the
family appears to be indistinguishable and apparently joined together. As admitted by
the defendants, the corporation ‘never’ had any account with any banking institution
or if any account was carried in a bank on its behalf, it was in the name of Mr. Forrest
L. Cease. In brief, the operation of the Corporation is merged with those of the majority
stockholders, the latter using the former as his instrumentality and for the exclusive
benefits of all his family.
Delpher Trades Corp. vs. IAC
In effect, Delpher is a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from unincorporated
to incorporated form by organizing Delpher to take control of their properties and at
the same time save on inheritance taxes and transfer taxes, it being a corporation.
Stone et al. Vs. Eacho
Instances
If VA is treated as separate, VA properties applied to its debts, and claim of DA against
VA is postponed – VA creditors will have their claims practically paid in full, whereas
DE creditors will receive less than 30% of their claim in the DE bankruptcy
proceedings.
If VA is treated as separate, DA’s claim is not postponed – DA’s claim will absorb the
VA assets and VA creditors will receive less than half of the dividends received by DA
creditors.
What is the right thing to do?
Ignore separate entity and consolidate the DE and VA bankruptcy proceedings. Only
by doing so can all the creditors receive equality of treatment which is the purpose of
bankruptcy act. It is settled that courts will not be blinded by corporate forms nor
permit them to be used to defeat public convenience, justify wrong or perpetrate fraud,
but will look behind the corporate entities as justice may require.
Berkey vs. Third Ave. Ry. Co.
It was necessary that the domination of the parent company over the subsidiary was
required to be complete, in order for the parent company to be treated as liable for the
debts of the subsidiary. It was needed that the subsidiary be merely the alter ego of
the parent, or that the subsidiary be thinly capitalized, so as to perpetrate a fraud on
the creditors.
C Entitlement of corporation to moral damages
General rule: NO.
LBC vs. CA, ABS-CBN vs. CA
Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental suffering
can be experienced only by one having a nervous system.
Exception:
Filipinas Broadcasting Network vs. AMEC-BCCM
When the corporation’s reputation is breached or besmirched, as in libel.
D Entitlement to constitutional guarantees
• General rule: Yes (i.e. search and seizure)
• Exceptions: Guarantees that are purely personal (i.e. self-incrimination)
E Criminal/Civil Liability
• General rule: Persons of corporation are individually liable because
corporation can only act thru its agents or officers
• Exception: When statute provides otherwise and in cases of civil liability
People vs. Tan Boon Kong
A corporation can act only through its officers and agents, and where the business
itself involves a violation of the law, the correct rule is that all who participate in it are
liable.
Espiritu vs. Petron, doing business under KPE
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the
persons of its officers, directors, and stockholders. It has been held, however, that
corporate officers or employees, through whose act, default or omission the
corporation commits a crime, may themselves be individually held answerable for the
crime.
People vs. Concepcion
When the corporation itself is forbidden to do an act, the prohibiton extends to the
board of directors, and to each director separately and individually.
Sia vs. People
In the absence of an express provision of law making the petitioner liable for the
criminal offense committed by the corporation of which he is a president as in fact
there is no such provisions in the Revised Penal Code under which petitioner is being
prosecuted, the existence of a criminal liability on his part may not be said to be
beyond any doubt.
V. PROMOTERS CONTRACTS PRIOR TO INCORPORATION
A Liability of corporation for promoter’s contracts
• As corporation is inexistent, it could not have been a party to it
Corporation Law by Castillo, Roman George P., De La Salle University - COL 9
 • Except when after incorporation, it adopts and ratifies the same, with full
knowledge of the terms
• Ratification may express or implied
• Cannot adopt only a part of the contract, must be full adoption
• Adoption must be within the corporate powers
General rule: do not bind the corporation. They are not its contracts, because, when
made, the corporation is not in existence and could not be a party to them. Neither
can they be ratified, because ratification requires that the person on whose behalf the
contract is made, should have been able to have made it himself, in the first instance.
Exception: Corporation can make the promoters' contracts its own contracts, by what
is called adoption, estoppel/continuous act, or the corporation filed suit based on the
contract.
Mc Arthur vs. Times Printing Co.
While a corporation is not bound by engagements made on its behalf by its promoters
before its organization, it may, afterwards, make such engagements its own contracts.
It is not required that such adoption or acceptance be expressed, but it may be inferred
from acts in the part of the corporation, or its authorized agents, as any similar original
contract might be shown.
Cagayan Fishing Devt. Vs, Sandiko
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind' of a contract or transact any business, would
seem to be self­evident.
B Corporate rights under promoter’s contracts
Upon adoption or ratification, corporation acquires rights under the contract. Thus, it
may sue for specific performance or for damages for breach. And the fact of bringing
an action on the contract has been held as sufficient adoption or ratification, to give
the corporation a cause of action.
Builders’ Duntile Co. vs. Dunn Mfg. Co
The power is conceded and the effect of the adoption is to make the contract that of
the corporation. But it is limited to such contracts which the corporation itself is
authorized to enter into (in other words, in accordance to its purpose or Articles of
Incorporation). After such adoption, the corporation may sue upon the contract made
by its promoters for the corporation.
Rizal Light & Ice Co. Inc vs. Public Service Commission
Clearly in this case, ME accepted or adopted the franchise grant after when it applied
for the certificates to validly pursue the activities in said franchise. It likewise adopted
the franchise grant after incorporation when PSC approved of its certificates
application.
C Personal liability of promoter on pre-incorporation contracts
Three possible situations:
1. Promoter takes continuing offer on behalf of corporation, which accepted
after incorporation, will become a contract. In this case, promoter does not
assume personal liability, whether accepted or not by the corporation.
2. Promoter binds himself, with understanding that if the corporation, once
formed, accepts or adopts the contract, he will be relieved.
3. Promoter binds himself personally and assumes responsibility of looking to
the proposed corporation, when formed, for reimbursement.
Under either of the first two were agreed, the third situation will be presumed to exist.
In other words, in absence of agreement, a promoter is personally liable for contracts
made by him in behalf of the corporation. Fact that corporation adopted or ratified,
does not release him from responsibility, unless a novation was intended.
Compensation of promoters
• Only when corporation expressly promises to do so, or when services are
performed both before and after corporation, and the corporation takes the
benefits therefrom.
• Under Corp. Code, no provision relates to compensation.
• Under Sec. 7 of the Securities Act, it authorizes promotion fee if it is provided
for in the registration statement of the securities involved.
• May be in cash, or stocks (FV should be at least equal to par or issued value,
otherwise, it’s a watered stock).
D Fiduciary relationship between corporation and promoter
• Because of the power that they have over investment of others, they should
not, in passing title to the corporation later make secret profits at the expense
of the corporation. If they do, they must account.
VI. CORPORATE POWERS
A General
Section 36. Corporate powers and capacity.
1. To sue and be sued;
2. Of succession;
3. To adopt and use a corporate seal;
4. To amend its AOI;
5. To adopt by-laws not contrary;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell stocks to subscribers and to sell treasury stocks; and to admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation;
9. To make reasonable donations, XPT no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes
of partisan political activity;
Corporation Law by Castillo, Roman George P., De La Salle University - COL 10
 10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes.
E.B Villarosa & Partner Co. v Benito
Accordingly, we rule that the service of summons upon the branch manager of
petitioner at its branch office at Cagayan de Oro, instead of upon the general manager
at its principal office at Davao City is improper. Consequently, the trial court did not
acquire jurisdiction over the person of the petitioner.
NPC vs. Vera
A corporation is not restricted to the exercise of powers expressly conferred upon it
by its charter, but has the power to do what is reasonably necessary or proper to
promote the interest or welfare of the corporation. In the case at bar, the various
shipments of coal which is used exclusively to fuel the Batangas Coal­Fired Thermal
Power Plant of the NPC for the generation of electric power. The stevedoring services
which involve the unloading of the coal shipments into the NPC pier for its eventual
conveyance to the power plant are incidental and indispensable to the operation of
the plant.
Tam Wing Wak vs. Makasiar
It is not disputed in the instant case that Concord, a domestic corporation, was the
payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the
bounced check, which is the injured party. Since petitioner was neither a payee nor a
holder of the bad check, he had neither the personality to sue nor a cause of action
against Vic Ang Siong. Under Section 36 of the Corporation Code, read in relation to
Section 23, it is clear that where a corporation is an injured party, its power to sue is
lodged with its BOD/T. Note that petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by Concord’s board of director to
sue Victor Ang Siong for and on behalf of the firm.
Asset Privatization Trust vs. CA
As a rule, a corporation exercises its powers, including the power to enter into
contracts, through its BOD. While a corporation may appoint agents to enter into a
contract in its behalf, the agent should not exceed his authority. In the case at bar,
there was no showing that the representatives of PNB and DBP in MMIC even had the
requisite authority to enter into a debt­for­equity swap. And if they had such authority,
there was no showing that the banks, through their board of directors, had ratified the
FRP. The FRP is not valid hence the foreclosure is valid. The mere presence of DBP’s
and PNB’s representatives during the drafting of FRP is not constitutive of the banks’
formal approval of the FRP.
B Ultra vires acts
• Section 45. Ultra vires acts of corporations. - No corporation under this
Code shall possess or exercise any corporate powers except those conferred
by this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred.
Republic vs. Acoje Mining Co., Inc.
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by, there are however certain corporate acts that may
be performed outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation, such as the
establishment, in the case at bar, of a local post office in a mining camp which is far
removed from the postal facilities or means of communications accorded to people
living in a city or municipality.
Illegal act vs. ultra vires act
An illegal act is void and cannot be validated, while an ultra vires act is merely voidable
and can be enforced by performance, ratification or estoppel, or on equitable grounds.
In the present case the validity of the resolution of the BOD of the corporation
accepting full responsibility in connection with funds to be received by its postmaster,
should be upheld on the ground of estoppel.
Teresa Electric vs. PSC
It cannot be denied that the operation of an electric light, heat and power plant is
necessarily connected with the business of manufacturing cement. If in the modern
world where we live today electricity is virtually a necessity for our daily needs, it is
more so in the case of industries like the manufacture of cement. While it is true that
operators of public convenience and service deserve some protection from
unnecessary or unlawful competition, the rule is that nobody has any exclusive right
to secure a franchise or a certificate of public convenience.
Carlos vs. Mindoro Sugar
Trust company being in the nature of a banking institution is clearly empowered to
guarantee the bonds.
Government vs. El Hogar Filipino
Too many to mention.
Bissel v Michigan Southern
The contract between the two corporations was an ultra vires act. However, it is not
one tainted with illegality, therefore, the accompanying rights and obligations based
on the contract of carriage between them and the plaintiff cannot be avoided by raising
such a defense.
Pirovano et al v de la Rama Steamship Co
Where the corporation was given broad and almost unlimited powers to carry out the
purposes for which it was organized among them, to aid in any other manner any
person in the affairs and prosperity of whom it has a lawful interest, a donation made
to the heirs of its late president in recognition of the valuable services rendered by the
latter which had immensely contributed to its growth, comes within this broad grant
of power and cannot be considered an ultra vires acts.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 11
C Specific powers
Investment of
Increase/decreas
corporate funds
e capital stock; Sale or other Power to enter
Specific Extend or shorten Denial or pre- Acquisition of its in another Power to declare
incur, create, disposition of into management
powers corporate life emptive right own shares business or dividends
increase bonded assets contracts
corporation or
indebtedness
other purpose
Section 37 38 39 40 41 42 43 44
Requirement 1. Majority of BOD/T Stock – Majority of Majority of BOD/T
s 2. Ratified by 2/3 of OCS/members BOD present in with quorum;
3. Written notice of the proposed action, time and place of the meeting addressed to Same as Sec. 37- quorum, 2/3 OCS majority
Majority of BOD
each stockholder/member at his place of residence as shown on the books of the 41 duly called OCS/members duly
corporation (by mail or personal) Cash – Majority of called*
4. Meeting duly called for said purpose BOD in quorum
Notes/Cases In case of Certificate in Pre-emptive right – When all or Conditions: When approval not From where? URE. Include all service,
extension, appraisal duplicate (one in the option privilege of substantial – render (1) unrestricted RE necessary: when What kind? Cash, management,
right can be office, one for the an existing incapable of (2) for legitimate investment is stock or property operation of all or
exercised. SEC), signed by stockholder to continuing the purpose reasonably substantially all
BOD majority and subscribe to a business. necessary to Any cash dividends affairs of another.
Effected by countersigned by proportionate part When allowed: accomplish its of delinquent stocks
amendment to AOI. chairman and of shares No need of approval: primary purpose shall be applied first *2/3 vote of OCS of
secretary. Requires subsequently (1) abandon the sale Eliminate stated in the AOI. on the balance plus managed c required
Alhambra Cigar prior approval of the issued by the (2) transaction is fractional shares cost and expenses, when: (1)
vs. SEC - A SEC. corporation, before done in ordinary Gokongwei vs. while stock stockholder/s
corporation cannot the same is course of business Collect/compromi SEC - investment dividends are representing same
extend its life When effected? disposed in favor of se indebtedness, was in the form of withheld until unpaid interest of both
effected during the Upon approval of others. Islamic Directorate arising out of purchased beer subscription is fully corporations own or
three­year statutory SEC and issuance vs. CA - Since the unpaid manufacturing paid. control more than
period for of the certificate of Justification: to lands are corporate subscription, in a facilities, same 1/3 of OCS of the
liquidation when its filing. prevent dilution of properties of Islamic, delinquency sale, business stated as Limitation on managing
original term of interest, protection disposition must and to purchase its main purpose in retention of surplus: corporation
existence had Requires of the right to vote, comply with said law. delinquent shares its AOI. Hence, the Shall not exceed (interlocking
already expired. treasurer’s affidavit right to dividends The Carpizo group sold during said vote of 2/3 of the 100% of their paid-in stockholders); (2)
showing and corporate did not, however, sale; and stockholders is not capital stock XPT: majority of directors
compliance with assets, right to meet the twin necessary. 1 Expand/project; of managing
25-25 rule. invest capital. requirements. They To pay dissenting 2 Prohibited by any corporation also
merely or withdrawing loan agreements; constitute majority
Madrigal vs. misrepresented stockholders 3 Necessary under of directors of
Zamora - the themselves as the entitled to special managed
petitioner’s capital legitimate BOT of payment of their circumstances corporation
reduction efforts Islamic. shares. (special reserve for (interlocking
were deception to probable directors)
camouflage the fact contingencies).
that it had been GR: Shall not
making profits, to Neilson v. Lepanto exceed 5-year term
justify the mass lay - stock dividends
off of employees. may only be issued XPT: exploration,
They were to shareholders. development,
premature exploitation or
distribution of utilization of natural
corporate assets. resources
Appraisal Yes, in case of Yes. Yes.
right extension

Corporation Law by Castillo, Roman George P., De La Salle University - COL 12

VIII. CONTROL AND MANAGEMENT OF THE CORPORATION a. There must be a meeting held for the purpose of removal. In this case the
notice for the meeting did not explicitly say that it is for the removal of the
B Board of Directors or Trustees BOD; thus, during said meeting, BOD cannot be removed.
b. There must be a vote of 2/3 of outstanding shares of stocks. In this case, the
Corporate powers voting trust held by Roxas et al amount only to a majority; thus insufficient to
1. Exercise corporate powers remove BOD.
2. Conduct business of corporation
3. Controls/holds corporate properties Vacancies, Sec. 29.
• Filled by majority of BOD/T if:
Election, Sec. 24 o Vacancy NOT caused by removal or by expiration of term;
• Qualifications o BOD/T still constituting a quorum
a. Must own at least 1 share of capital stock in his own name; • Otherwise, filled by the stockholders in a regular or special meeting called for
b. Majority must be residents; that purpose.
• Elected only or the unexpired term.
• When elected • Vacancy by increase: filled only by an election at a regular/special meeting,
ü Either in person or by written proxy, the owners of a majority or in the same meeting authorizing the increase if so stated in the notice of
OCS/members. the meeting.
ü Must be by ballot if requested.
ü In stock corporations, every stockholder to vote the number of Valle Verde Country Club vs. Africa
shares of stock standing; and said stockholder may vote such Thus, after the lapse of one year from his election as member of the Board in 1996,
number of shares for: Makalintal’s term of office is deemed to have expired. That he continued to serve in
§ As many persons as there are directors to be elected; or the Board in a holdover capacity cannot be considered as extending his term. With
§ He may cumulate said shares and give to one or several the expiration of his term of office, a vacancy resulted which, by the terms of Code,
candidates (cumulative voting). must be filled by the stockholders in a regular or special meeting called for the
ü That no delinquent stock shall be voted. purpose. His resignation as a holdover director did not change the nature of the
ü Unless otherwise provided in AOI or by-laws, members may cast as vacancy; the vacancy due to the expiration of Makalintal’s term had been created long
many votes as there are trustees to be elected but may not cast before his resignation.
more than one vote for one candidate.
Meetings of the Board
Term of office, Sec. 23
One (1) year until successors elected. a. Board must act as a body (collegial)

Removal, Sec. 28 Tan v. Sycip et al

• 2/3 of OCS/members Effect of Death of a Member/Shareholder
• Regular meeting or at a special meeting called for the purpose STOCK NON-STOCK
• Previous notice to stockholders or members of the intention Shareholders may generally transfer Membership in and all rights are
• A special meeting must be called by the secretary on order of the president their shares. On the death of a personal and nontransferable, unless
or on the written demand at least a majority OCS/members. shareholder, the executor or AOI or bylaws of the corporation provide
• Should the secretary fail or refuse, call for the meeting by any stockholder or administrator duly appointed by the otherwise.
member of the corporation signing the demand. Court is vested w/ legal title to the
• Removal may be with or without cause stock and entitled to vote it. Until a Determination of whether dead
• Removal without cause may not be used to deprive minority stockholders or settlement and division is effected, members are entitled to exercise their
members of the right of representation to which they may be entitled stocks are held by administrator or voting rights (through executor or
executor. administrator) depends on those AOI or
Roxas vs. De La Rosa bylaws.
In order to remove BOD, the law requires that:
As to the vacancy in the BOT:

Corporation Law by Castillo, Roman George P., De La Salle University - COL 13

Under Sec. 29, the phrase “may be filled” shows that filling of vacancies in the board
by the remaining directors or trustees constituting a quorum is merely permissive, not
mandatory. Corporations, therefore, may choose how vacancies in their respective
boards may be filled up-either by remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called for the purpose.
b. Kinds of meetings; quorum, Sec. 25, 49
• Quorum – majority of that fixed in AOI, unless AOI/by-laws provide for
greater majority.
• Directors or trustees cannot attend or vote by proxy at board meetings.
• Sec. 49. Kinds of meetings - regular or special.
c. When and where; who presides
Unless the by-laws otherwise provides:
• Regular meetings - monthly
• Special meetings - any time upon the call of the president
• Held anywhere in or outside of the Philippines
• Notice sent to every director or trustee at least one (1) day prior to the
scheduled meeting. A director or trustee may waive this requirement,
either expressly or impliedly.
• Who shall preside - president
d. Notice – Sec. 53, Code, supra
e. Quorum – Sec. 25, Code, supra 
 • General rule: Not entitled
f. Close corporations - Sec. 97, Code 
 annual amount shall not exceed 10% of net income before tax.
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than
by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.
SEC Memo Circ. 14, 20 Nov 2001 – meetings by teleconference, see separate page
Lopez vs. Ericta
General rule: Abstention is counted in favor of the issue that won a majority vote.
However, this manner of counting is obviously based on what is deemed to be a
presumption as to the intent of the one abstaining (namely, to assent in the action of
those who vote affirmatively) but which presumption, being merely prima facie, would
not hold in the face of clear evidence to the contrary. It is pertinent, therefore, to inquire
into the facts and circumstances which attended the voting by the members of the
BOR in order to determine whether or not such a construction would govern.
Gokongwei vs. SEC, et. al
Under Philippine Laws, there is no vested right granted to stockholders to be elected
as director. Any person who buys stock from corporation is does not entitle him a
standing, which is above the rest of the stockholders.
Compensation
• Exceptions: (1) reasonable per diems; or (2) profit sharing fixed in by-laws,


Western Institute of Technology, Villasis vs. Salas
Sec. 30 of the Corporation Code: In the absence of any provision in the by-laws fixing
their compensation, directors shall not receive any compensation, as such directors,
except for reasonable per diems. “As such directors” means in their capacity as
members of the board. In this case, the compensation was for them as “officers of the
corporation”, not as members of the board.
Executive committee
• Not less than three (3) members to be appointed by the board.
• Acts, by majority its members, on such specific matters within the
competence of the board, as may be delegated to it in the by-laws or on a
majority vote of the board.
• Except with respect to: (1) approval of any action for which shareholders'
approval is also required; (2) the filing of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of the board which by its express
terms is not so amendable or repealable; and (5) a distribution of cash
dividends to the shareholders.
Filipinas Port v CA
Corporation Law by Castillo, Roman George P., De La Salle University - COL 14
Notwithstanding the silence of Filport’s by-laws on the matter, we cannot rule that the
creation of the executive committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and functions of said
executive committee considering that the “executive committee,” referred to in
Section 35 of the Corporation Code which is as powerful as the board of directors and
in effect acting for the board itself, should be distinguished from other committees
which are within the competency of the board to create at anytime and whose actions
require ratification and confirmation by the board.16 Another reason is that,
ratiocinated by both the two (2) courts below, the Board of Directors has the power to
create positions not provided for in Filport’s bylaws since the board is the
corporation’s governing body, clearly upholding the power of its board to exercise its
prerogatives in managing the business affairs of the corporation.
Board committees
C Corporate officers and agents
1. Minimum set of officers – Sec. 25, Code
• Directors of a must formally organize by the election of the ff:
• president, who shall be a director;
• treasurer, who may or may not be a director;
• secretary, who shall be a PH resident and citizen; and
• such other officers as may be provided for in the by-laws.
• Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
• For corporate acts, unless the AOI or the by-laws provide for a greater
majority
• Quorum: majority of directors/trustees
• Valid corporate act: majority of present at a meeting at which there
is a quorum
• XPT for the election of officers - vote of a majority of all the BOD/T.


2. Qualifications and disqualifications – Sec. 25; 27, Code 
 prior approval on all corporate contracts. But that board itself, by its acts and through
• Applies to all directors, trustees and officers
o Convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years; or
o Violation of this Code committed within five (5) years prior to the
date of his election or appointment.
3. When elected; report of election – Sec. 25; 26, Code
4. Authority; liability of corporate officers
Raniel v. Jochico
As ruled by the SEC, petitioner’s removal was a valid exercise of powers of the BOD.
According to the SEC decision, the actions of Raniel badly affected the operations of
the corporation. This resulted to the loss of confidence by the BOD. Also, since Raniel
occupied all three positions in Nephro, it is not difficult to foresee the disruption that
her immediate and indefinite absence can inflict on the operations of the company.
Thus, her removal was perfectly justified.
Yu Chuck v Kong Li Po
In general
In contracts involving the regular operations of the business, the general rule is that
power to bind the corporation by contract lies with its BOD/T. But this power may
either expressly or impliedly be delegated to other officers or agents of the corporation.
Thus, except where the authority to employ servants and agents is expressly vested
in the board of directors or trustees, an officer or agent who has general control and
management of the corporation's business or a specific part thereof, may bind the
corporation by reasonable contracts of employment of such agents and employees as
are usual and necessary in the conduct of such business.
Contract in dispute
Upon the facts of the present case, the business manager of the defendant
corporation had no implied authority to employ printers for the corporation's
newspaper for the term of three years (unusually long) and upon conditions otherwise
so onerous to the corporation that the possibility of it thereby being thrown into
insolvency was expressly contemplated in the contract of employment.
Board of Liquidators vs. Kalaw
Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager
may bind the company without formal authorization of the board of directors. In
varying language, existence of such authority is established, by proof of the course of
business, the usages and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. In the case at bar, the practice
of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board
approval. If the bylaws were to be literally followed, the board should give its stamp of
acquiescence, practically laid aside the by­law requirement of prior approval.
Zamboanga Transportation v Bachrach Motor
When the president of a corporation, who is one of the principal stockholders and at
the same time its general manager, auditor, attorney or legal adviser, is empowered
by its by-laws to enter into chattel mortgage contracts, subject to the approval of the
board of directors, and enters into such contracts with the tacit approval of two other
members of the board of directors, one of whom is also a principal shareholder, both
of whom, together with the president, form a majority, and said corporation takes
advantage of the benefits afforded by said contract, such acts are equivalent to an
implied ratification of said contract by the board of directors and binds the corporation
even if not formally approved by said board of directors as required by the by-laws of
the aforesaid corporation.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 15
Acuña vs. Batac
There is abundant authority in support of the proposition that ratification may be
express or implied, and that implied ratification may take diverse forms, such as by
silence or acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom.
Yao Ka Sin Trading vs. Court of Appeals
Apparent authority - If a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third persons
dealing in good faith with such officers or agents. This "apparent authority may result
from (1) the general manner by which the corporation holds out an officer or agent as
having power to act or, in other words, the apparent authority with which it clothes
him to act in general, or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without the scope of his
ordinary powers."
Lopez Realty v. Fontecha
As a general rule, a corporation through its BOD should act in the manner and within
the formalities prescribed by its charter or by the general law. Thus, directors must act
as a body in a meeting called pursuant to the law or corporations by-laws, otherwise
any action may be questioned by any objecting stockholder. However, an action of
the BOD during a meeting, which was illegal for lack of notice may be ratified either
expressly or by the action of the directors in subsequent legal meeting or impliedly by
the corporation’s subsequent course of conduct.
Pua Casim Co v Neumark
It is conceded that Neumark was not expressly authorized by the BOD to borrow the
money in question and the general rule is that a business manager or other officer of
a corporation has no implied power to borrow money on its behalf. But much depends
upon the circumstances of each particular case and the rule stated is subject to
important exceptions. Thus, where a general business manager of a corporation is
clothed with apparent authority to borrow and the amount borrowed does not exceed
the ordinary requirements of the business, it has often been held that the authority is
implied and that the corporation is bound.
Francisco vs. GSIS
There is no denying that the telegram was within Andal’s apparent authority, but the
defense is that he did not sign it, but that it was sent by the Board Secretary in his
name and without his knowledge. Assuming this to be true, how was appellee to know
it? Corporate transactions would speedily come to a standstill were every person
dealing with a corporation held duty­bound to disbelieve every act of its responsible
officers, no matter how regular they should appear on their face.
Buenaseda vs. Bowen & Co. Inc. and Bowen
Bowen and Buenaseda’s agreement binds the corporation even there was no approval
of the board because, in the first place, the board did not repudiate the agreement.
Instead, they took advantage of the benefits afforded by said agreement. Such act is
equivalent to an implied ratification. Thus, the agreement binds the corporation even
without formal resolution passed and recorded.
Tramat vs. CA
Ong had there so acted, not in his personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such, it should only be the
corporation, not the person acting for and on its behalf, that properly could be made
liable thereon.
D Stockholders or members
Right to vote
• Election of directors, trustees (Sec. 24);
• Right to vote of pledgers, mortgagors and administrators (Sec. 55)
o Pledgers and mortgagors have the right to attend and vote
unless pledgee or mortgagee is expressly given such right in
writing
o Administrators can, no written proxy needed.
• Voting in case of joint ownership of stock (Sec. 56);
o Consent of all co-owners, unless written proxy, signe d by all
o When owned by and/or capacity, anyone can vote or appoint
proxy
• Voting right for treasury shares (Sec. 57);
o No right as long as it remains in the Treasury
Gokongwei v SEC, et al.
Shareholder has no vested right to be 
elected as director 

Other proprietary rights of shareholders
a. Dividends 

b. Appraisal right 

c. Inspection of corporate records
d. Pre-emptive right
e. Right to share in corporate assets at liquidation 

Stockholders’ or members’ meetings – Sec. 50, 51, 93, Code 

• Annually on a date fixed in the by-laws, or if not so fixed, on any date in April
of every year.
• Written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting.
• Special meetings of stockholders at least one (1) week written notice.
• Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
• Place and time of meetings of stockholders or members. - city or
municipality where the principal office of the corporation is located, and if
practicable in the principal office of the corporation: Provided, That Metro
Manila shall, for purposes of this section, be considered a city or municipality.
• All proceedings had and any business transacted at any meeting of the
Corporation Law by Castillo, Roman George P., De La Salle University - COL 16
 stockholders or members, if within the powers or authority of the corporation, • Making a written demand on the corporation within thirty (30) days
shall be valid even if the meeting be improperly held or called, provided all after the date on which the vote was taken for payment of the fair
the stockholders or members of the corporation are present or duly value of his shares.
represented at the meeting. (24 and 25) • Failure to make the demand shall be deemed a waiver of the
appraisal right.
Quorum, Sec. 52 • If the proposed corporate action is implemented or affected, the
Majority of OCS/members corporation shall pay, upon surrender of the certificate or certificates
of stock, the fair value thereof as of the day prior to the date on
Where no meeting called – Sec. 50, Code; Sec. 5(k), SRC; Sec. 6(f) 
 which the vote was taken, excluding any appreciation or
Whenever, for any cause, there is no person authorized to call a meeting, the SEC, depreciation in anticipation of such corporate action.
upon petition of a stockholder or member on a showing of good cause therefor. The • If within a period of sixty (60) days from the date the corporate action
petitioning stockholder or member shall preside thereat until at least a majority of the was approved by the stockholders, the withdrawing stockholder
stockholders or members present have been chosen one of their number as presiding and the corporation cannot agree on the fair value of the shares, it
officer. shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another
When shareholders’ vote is necessary; instances when non-voting shares 
have by the corporation, and the third by the two thus chosen.
the right to vote – Sec. 6, Code • The findings of the majority of the appraisers shall be final, and their
a. Election of directors – Sec. 24, 92, Code 
 award shall be paid by the corporation within thirty (30) days after
b. Removal of directors – Sec. 28, Code such award is made.
c. Any amendment to articles of incorporation – 2/3 of outstanding capital • No payment shall be made to any dissenting stockholder unless the
d. Adoption of or amendment to By-Laws – majority vote corporation has unrestricted retained earnings.
e. Sale of all or substantially all assets; creation of bonded indebtedness – 
2/3
of outstanding capital c. Effect of demand for appraisal – Sec. 83, Code
f. Investment of corporate funds in business other than the primary purpose –
 • All rights accruing to such shares, including voting and dividend
2/3 of outstanding capital 
 rights, shall be suspended.
g. Denial of pre-emptive right – 2/3 of outstanding capital; Sec. 39 
 • If the dissenting stockholder is not paid the value of his shares within
h. Stock dividends – 2/3 of outstanding capital; Sec. 43 30 days after the award, his voting and dividend rights shall
i. Management contracts – majority vote; 2/3 vote; Sec. 44 immediately be restored.
j. Merger and consolidation – 2/3 of outstanding capital – Sec. 77 • No demand for payment under this Title may be withdrawn unless
k. Voluntary dissolution – 2/3 vote; Sec. 118-119, Code 
 the corporation consents thereto.
• When right to payment ceases:
Appraisal right – Sec. 81 – 86, Code o demand for payment is withdrawn with the consent of the
a. Corporate acts that give rise to appraisal right – Sec. 81; Sec. 37; Sec. 
40; corporation; or
42; Sec. 76, Code o proposed corporate action is abandoned or rescinded by
the corporation or disapproved by the SEC; or
a. In case any amendment to the AOI has the effect of changing or o if the SEC determines that such stockholder is not entitled
restricting the rights of any stockholder or class of shares, or of to the appraisal right
authorizing preferences in any respect superior to those of • Status as a stockholder shall thereupon be restored, and all dividend
outstanding shares of any class, or of extending or shortening the distributions which would have accrued on his shares shall be paid
term of corporate existence; to him.
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and VII. CONTROL AND MANAGEMENT OF THE CORPORATION, cont.
c. In case of merger or consolidation.
E Devices affecting control
b. How right is exercised – Sec. 82
• Any stockholder who shall have voted against the proposed • The more shares, the greater possibility of control
corporate action • Agreement in the by-laws or AOI, transferee may be bound by it

Corporation Law by Castillo, Roman George P., De La Salle University - COL 17

 • Mere private agreement – not so. Transferee will not be bound unless he had
notice thereof. Here, stockholders may waiver their statutory rights.
1 Proxy Device
Proxy
• Person duly authorized by a stockholder to vote (law on agency applies)
• Document which evidences this authority
• May be general or limited
• Revocable at will, unless coupled with interest
Sec. 58 – Proxies
• In writing
• Singed by the stockholder or member
• Filed before the scheduled meeting with the corporate secretary
• Failure to comply – void and ineffective.
• Valid only for the meeting, unless otherwise provided
• Not valid for a period longer than 5 years in one time.
Can by-laws prohibit?
• For stock corporations, no (because it is a right given by statute), but may
provide conditions.
• For non-stock – allows waiver in AOI and by-laws.
Alejandrino vs. De leon
The right of an SH to vote is inherent in ownership, and if the owner can dispose of
the property itself, it is apparent that he can dispose the right to manage it. In this
case, the possession and virtual ownership of the stock was transferred conditionally
to Pambul together with the right to vote it, the condition being the right to vote shall
remain with the president of Pambul Inc., so long as the loan or consideration for the
transfer is not repaid. Valid.
Campbell v. Loew’s, Inc.
Vogel group is entitled to proxy solicitation as representing the management. They are
not soliciting in behalf of majority of the board but because they symbolize the
administration/policy implementer. They are justified therefore in using corporate
funds to solicit proxy votes but not allowed to use corporate facilities and personnel.
In fact, the proxy statement is SEC approved and is in no way misleading.
Rosenfeld v Fairchild Engine and Airplane Corp.
The test is when the directors (Old Board in the case at bar) acted in GF in a contest
over policy, they have right to incur reasonable expenses for solicitation of proxies and
in defense of their corporate policies, and are not obliged to sit idly by.
2 Voting Trusts
• To achieve irrevocable proxies
• Stockholders transfer their shares to a trustee who will exercise the voting
rights
• Stockholders remain the beneficial or equitable owner, but legal ownership is
transferred to the trustee.
• Real ownership is separated from the voting rights.
• Irrevocable so long as the trustee has not violated the trust by misconduct or
fraud.
Requisites:
• Writing and notarized
• Certified copy filed with the corporation and SEC
• No longer than 5 years, subject to renewal each time for not more than 5
years XPT condition under loan agreements, may be longer than 5 years but
not beyond time when loan is fully paid.
• Stock certificates are cancelled, new ones issued to the trustee stating it was
issued pursuant to VTA
• Transfer entered in the corporate books
• Trustee should issue voting trust certificates in favor of the transferring
stockholders
• Not for illegal purpose – monopolies and illegal combinations of trade or for
fraud
Notes
• SEC has the power to pass upon validity.
• Not valid if exists only for the benefit of the trustee, or will restrict powers of
directors
• Trustee qualified to be a director since he is the registered owner
• Rights other voting rights may also be transferred
• Shall not be kept secret
• Both trustee and transferor has right of inspection
• Automatically expires upon end of agreed period, voting trust certificates
cancelled, new stock certificates issued to transferors.
• Trustees may vote by proxy, unless agreed.
National Investment and Development Corp. vs. Aquino
In any event, a voting trust transfers only voting or other rights pertaining to the shares
subject of the agreement, or control over the stock. Not properties and assets of the
corporation.
Lee vs. CA
A voting trust agreement results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, in order
to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the
stock are separated from the other attributes of ownership; (2) that the voting rights
granted are intended to be irrevocable for a definite period of time; and (3) that the
Corporation Law by Castillo, Roman George P., De La Salle University - COL 18
principal purpose of the grant of voting rights is to acquire voting control of the
corporation.
The facts of this case show that the petitioners, by virtue of the voting trust agreement
disposed of all their shares through assignment and delivery in favor of the DBP, as
trustee. Consequently, the petitioners ceased to own at least one share standing in
their names on the books of ALFA as required under Section 23 of the new Corporation
Code. They also ceased to have anything to do with the management of the enterprise.
The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares
to the DBP created vacancies in their respective positions as directors of ALFA.
3 Pooling and voting agreements
• Agreement to vote their shares the same way
• Usually relate to election of directors
• Valid so long as it does not limit the discretion of the board in the
management of the corporate affairs, or work any fraud against the
stockholders not parties to the contract
• Thus, agreement that directors once elected must vote for certain persons as
officers would be void, since it’s board’s discretion.
• DOES NOTYinvolve transfer of stocks but is merely a private agreement
Sec. 100. Agreement by stockholders
• Par. 1 - If executed before formation of a close corporation, signed by all –
valid and binding, if intended, as long as not inconsistent with AOI, wherever
provided, unless required to be embodied in AOI.
• Par. 2 – Agreement, signed and in writing, may pool votes.
• Par. 3 – no provision relating to a phase in the affairs shall be invalidated on
ground that its effect is to make them partners among themselves.
(Partnership as to stockholders, corporation as to third parties).
• Par. 4 – No voting agreement may interfere the discretion of the board. Parties
thereto are liable as directors.
McQuade vs. Stoneham, McGraw
In this case, the parties, before in their capacity as shareholders, cannot form an
agreement to control the decisions vested in the directors of the company. In other
words, they cannot agree that they will retain such positions when they become
officers because such decision is vested upon directors. When the parties became
directors and officers, their agreement before when they were shareholders are illegal
because they do not yet have the right to elect officers. Moreover, authority requires
the court to hold a contract illegal and void if it precludes board of directors, at the risk
of incurring legal liability, from changing officers, salaries or policies or retaining
individuals in office, except by consent of the contracting parties.
Clark vs. Dodge
There can be no doubt that the agreement here in question was legal and that the
complaint states a cause of action. There was no attempt to sterilize the board of
directors, as in the Manson and McQuade cases. The only restrictions on Dodge were:
• that as a stockholder he should vote for Clark as a director — a perfectly legal
contract;
• that as director he should continue Clark as general manager, so long as he
proved faithful, efficient and competent — an agreement which could harm
nobody;
• that Clark should always receive as salary or dividends one-fourth of the "net
income." For the purposes of this motion, it is only just to construe that phrase
as meaning whatever was left for distribution after the directors had in good
faith set aside whatever they deemed wise;
• that no salaries to other officers should be paid, unreasonable in amount or
incommensurate with services rendered — a beneficial and not a harmful
agreement.
4 Cumulative voting, Sec. 24
• Benefits the minority, may limit the extent of majority’s control
• By-laws cannot provide against cumulative voting since it is a right mandated
by law.
Number of shares required = Outstanding votes/Directors to be elected
OR
X = [Y * D/ (D + 1)] + 1
X – number of shares needed to elect a given number of directors
Y - shares represented in the meeting
D – number of directors to be elected
5 Classification of shares, Sec. 6
• Shares may be divided in to classes.
• No share shall be deprived of voting rights unless preferred or redeemable,
unless otherwise provided.
• There should always be voting shares.
• Unless otherwise provided by AOI and stock certificate, each share shall be
equal to every other shares.
• Preference over dividends compensate over the lack of voting rights.
6 Restrictions on share transfers
• Gives option to other stockholders and/or the corporation to acquire the
shares of a stockholder who wishes to sell them.
7 Prescribing qualifications of directors; Founders’ shares
Corporation Law by Castillo, Roman George P., De La Salle University - COL 19
 • Certain qualifications for directors
• Not inconsistent with Sec. 23 which requires only one share.
• Must be reasonable and not unfair depriving minority representation.
Founder shares, Sec. 7
• Founder shares – owned by those who founded the corporation, may be
transferred to others without losing their character.
• May be given, by AOI, certain rights and privileges by the owners of other
stocks, provided that where exclusive right to vote and be voted is granted,
it must be for limited period not to exceed 5 years, subject to SEC approval.
Commences from approval.
• Compensate in some way the efforts of the organizers
8 Management contracts, Sec. 44*
• Majority of BOD/T with quorum; majority OCS/members duly called*
• *2/3 vote of OCS of managed c required when: (1) stockholder/s representing
same interest of both corporations own or control more than 1/3 of OCS of
the managing corporation (interlocking stockholders); (2) majority of directors
of managing corporation also constitute majority of directors of managed
corporation (interlocking directors)
• Include all service, management, operation of all or substantially all affairs of
another.
• GR: Shall not exceed 5-year term
• XPT: exploration, development, exploitation or utilization of natural resources
9 Unusual voting requirements*
• In effect, increase the veto power of the minority in some cases is one where
the voting requirements are increased beyond the minimum required by law.
• Usually happens in corporation clearly defining majority and minority blocks.
• AOI may require votes of 80% of the SCS for approval for amendments of
AOI.
VIII. DUTIES OF DIRECTORS AND CONTROLLING SHAREHOLDERS
A The 3-fold duties of directors
• Diligence – liability may arise for negligence.
• Loyalty; and
• Obedience – imposes director to act only within its corporate powers, under
penalty for damages
B Liability of directors, trustees, officers, Sec. 31
• Willfully vote for unlawful acts;
• Guilty of gross negligence or bad faith in directing the affairs; or
• Acquire any personal or pecuniary interest in conflict.
• EFFECT: Solidarily liable for all damages.
C Duty of diligence; the Business Judgment Rule
• Undertakes that they possess at least ordinary knowledge and skills
• Reasonable diligence, care and prudence
• Although not expected to interfere with day-to-day operations, they must
keep themselves sufficiently informed about general condition.
• If due to their fault, assets are wasted or lost, each of them may be liable, if
resulting from their wrongful acts or ommissions.
Business judgment rule
• NOT liable for mistakes or errors in the exercise of business judgment.
• Intra vires acts are binding, courts will not interfere unless contracts are
unconscionable or oppressive tantamount to a wanton destruction of the
rights of the minority.
• Things to consider: facts, nature of business, injuries resulting from business
judgment.
• Director of bank has higher degree of diligence than an ordinary commercial
corporation.
Otis & Co. v. Pennsylvania R. Co. (PRR)
Business judgment rule - it is stated that courts will not interfere in matters of
business judgment, where it is supposed that reasonable diligence has in fact been
exercised. What would constitute as negligence will depend upon the circumstances
of the case. With this, the court will not interfere with the internal management of the
corporations, and therefore will not substitute its judgment for that of the directors.
Also, mistakes or errors in the exercise of honest business judgment do not subject
the officers and directors to liability for negligence.
Here, the defendants are to have exercised good faith in exercising their judgment for
the best interest of the railroad. Kuhn was chosen as the investment house due to the
custom of the railroad company. Kuhn had long been the banking house of PRR.
Therefore, the defendants were dealing with Kuhn to which they held confidence.
Steinberg vs. Velasco
Duties of a director
The directors of a corporation are bound to care for its property and manage its affairs
in good faith, and for a violation of their duties resulting in waste of its assets or injury
to its property, they are liable to account the same as any other trustee.
Liability of a director
If the directors of a corporation do acts clearly beyond their power, by reason of which
a loss ensued, or dispose of its property without authority, they will be required to
Montelibano v Bacolod Murcia
The directors have authority to modify the proposed terms of contract for the purpose
of making it more acceptable to other contracting parties. Powers or authority of
directors may be based on a test: whether the act is direct and immediate furtherance
of corporation’s business. If yes, then they have the power to do such act but if not
then they are beyond the powers.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 20
Walker vs. Man, et al.
If the defendant knew that an unauthorized loan has been made, and took no steps at
salvaging the loan, and acquiesced in and confirmed the original wrongful act, he
would be open to the charge of negligence and should account for his conduct.
D Fiduciary duties
• A director is a fiduciary of the corporation
• When there is conflict of interest, he cannot sacrifice the corporation’s
interest
• Example violation: Misuse of fund, misappropriation, accepts material
benefits, etc.
Strong vs. Repide
The facts clearly indicate that a director of a corporation who controlled the action of
the corporation, had so concealed his exclusive knowledge of the impending sale to
the government from a shareholder from whom he purchased, through an agent, that
the concealment was in violation of his duty as a director to disclose such knowledge,
and amounted to deceit sufficient to avoid the sale; and, under such circumstances, it
was immaterial whether the shareholder's agent did or did not have power to sell the
stock.
E Self-dealing directors, Sec. 32
A self-dealing director is one who, in order to gain undue advantage over the
corporation, enters into a contract with the latter. He is self-dealing because, while he
is the other party, he also participates in the decision of the corporation. He is subject
to the temptation of putting his interest above that of the corporation.
Sec. 32
General rule: A contract of the corporation with one or more of its directors or trustees
or officers is voidable, at the option of such corporation.
Exception: It is not voidable when the following conditions are present:
• For contracts with directors or trustees:
1. That his presence in the board meeting in which the contract was
approved was not necessary to constitute a quorum;
2. That his vote was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances.
• For contracts with officers who are not at the same time directors of
trustees:
1. That the contract has been previously authorized by the board;
2. That the contract is fair and reasonable un- der the circumstances.
• For contracts with directors or trustees [no mention of officers] where
the first 2 conditions are not present, i.e., the contract is voidable, the contract
may be ratified by a vote of stockholders representing 2/3 of the outstanding
capital
Notes:
The test is now whether the contract is fair and reasonable, with the director having
the burden to prove that it is.
Palting vs. San Jose Petroleum
The Court denied registration on the ground that its Articles of Incorporation provided
for advance condonation of any acts of its Directors, short of fraud. This violates the
fiduciary relationship between directors and stockholders.
Mead vs. McCulluogh
There is a manifest impropriety in allowing the same person to act as the agent of the
seller and to become himself the buyer. In such cases, there arises so often a conflict
between duty and interest.
F Interlocking directors
If the interests of the interlocking director in the corporations are both
substantial (stockholdings exceed 20% of OCS)
General rule: A contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone. (Sec. 32)
Exception: If contract is fraudulent or not fair and reasonable under the
circumstances.
If interests in one is 20% or less, while substantial in the other, the contract shall
be VALID, if the following conditions are met:
1. The presence of such director or trustee in the board meeting in which the
contract was approved was NOT necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances.
Where (1) and (2) are absent, the contract can be ratified by the vote of the
stockholders representing at least 2/3 of the OCS in a meeting called for the purpose
voted to ratify the contract, provided that:
a. Full disclosure of the adverse interest of the di- rectors/trustees involved is
made on such meeting;
b. The contract is fair and reasonable under the circumstances.
G Seizing corporate opportunity, Sec. 34
Instance: Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation
Corporation Law by Castillo, Roman George P., De La Salle University - COL 21
General rule: He must account to the latter for all such profits by refunding the same,
Exception: Ratified by 2/3 OCS.
Note: This provision shall be applicable, notwithstanding the fact that the director
risked his own funds in the venture.
H Compensation of directors and officers
Compensation of directors
• General rule: Not entitled
• Exceptions: (1) reasonable per diems; or (2) profit sharing fixed in by-laws,
annual amount shall not exceed 10% of net income before tax.
 value; or
Barretto vs. La Previsora FIlipina
The authority conferred upon corporations refers only to providing compensation for
the future services of directors, officers, and employees thereof after the adoption of
the by-law or other provisions in relation thereto, and cannot in any sense be held to
authorize the giving, as in this case, of continuous compensation to particular directors
after their employment has terminated for past services rendered gratuitously by them
to the corporation.
Fogelson vs. American Woollen
A retirement plan which provides a very large pension to an officer who has served to
within one year of the retirement age without any expectation of receiving a pension,
would seem analogous to a gift or bonus. In Nemser v. Aviation Corp., court held that
the size of a bonus may raise a justiciable inquiry as to whether it amounts to spoliation
or waste of corporate property. Remanded.
I Using insider information
• The fiduciary position of insiders, directors, and officers prohibits them from
using confidential information relating to the business of the corporation to
benefit themselves or any competitor corporation in which they may have a
mere substantial interest.
• Corporation has a cause of action as long as there is unfair use of inside
information
• Insider information - not generally available to others and is acquired because
of the close relationship of the director or officer of the corporation
Who are insiders? SRC provides
a. the issuer;
b. a director or officer (or person performing similar functions) of, or a person
controlling the issuer;
c. a person whose relationship or former relationship to the issuer gives or gave
him access to material information about the issuer or the security that is not
generally available to the public;
d. a government employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to material
information about an issuer or a security that is not generally available to the
public; or
e. a person who learns such information by a communication from any of the
foregoing insiders (§3.8, Sec Regulations Code)
J Liability for watered stock
Sec. 65
• Liability of directors for watered stocks
• Any director/officer who consents to issuance either:
1. less than par or issued value; or
2. for any consideration other than cash, valued in excess of its fair
3. having knowledge, does not forthwith express his objection in
writing and filed the same with the corporate secretary.
• SOLIDARY LIABILITY to stockholders and creditors (prior or subsequent, no
distinction made by law)
• Amount: difference between fair value received at time of issuance and
par/issued value.
• Reliance by creditor on the valuation is immaterial because the basis of
liability is the statute itself.
K Duty of controlling shareholder
• Duty of good faith when he acts by voting at a stockholder’s meeting
• It is Illegal to sell corporate office or management control by itself, which is,
accompanied by no stock or insufficient stock to carry voting control.
• GR: a controlling stockholder may dispose of his stock at any time and at
such price as he chooses.
• XPT: But, controlling stockholders may not pervert these prerogatives by
transferring office to persons are known or should be known as intending to
raid the corporate treasury or otherwise improperly benefit themselves. Nor
may controlling stockholder receive a bonus/premium in consideration of
their agreement to resign and install the nominees of the purchaser their
stock, above and beyond the price premium normally attributable to the
control stock being sold. 

• Remedy: impose liability upon the resigning directors and officers for all
damages sustained by the corporation and require any bonus received for
such transfer of their office to be returned to the corporation. 

Insuranshares Corp. vs. Northern Fiscal Corp.
The owners of control are under a duty not to transfer it to outsiders if the
circumstances surrounding the proposed transfer are such as to awaken suspicion
and put a prudent man on his guard. If they were deceived by false representations,
there might not be liability. But if the circumstances put them on notice but they failed
to make an adequate investigation is made and harm follows, then liability also
follows. 

Corporation Law by Castillo, Roman George P., De La Salle University - COL 22
IX. RIGHT OF INSPECTION
A Corporate books and records, Sec. 74
1. Books that record all business transactions of the corporation which shall
include contract, memoranda, journals, ledgers, etc;

2. Minute book for meetings of the stockholders/members;
 Remedies
3. Minute book for meetings of the board/trustees;
 1. Mandamus
4. Stock and transfer book
Financial statements, Sec. 75
• Within 10 days from written request, the corporation shall furnish its most
recent financial statement (balance sheet and profit or loss statement as of
last taxable year)
• At a regular meeting, the Board shall present a financial report of the
operations of the corporation for the preceding year, which shall include
financial statements duly signed and certified by an independent CPA.
• Exception: If the paid-up capital is less than P50,000 – the financial
statements may be certified under oath by the treasurer or any responsible
officer of the corporation (instead of an independent CPA).
B Stock and transfer book; transfer agent
• Stock transfer agent – One engaged principally in the business of registering
transfers of stocks in be- half of a stock corporation (licensed by the SEC).
• The corporate secretary is the one duly authorized to make entries in the
stock and transfer book.
• It is the corporate secretary's duty and obligation to register valid transfers of
stocks and if said corporate officer refuses to comply, the transferor-
stockholder may rightfully bring suit to compel performance.
C Extent and liminations
• It must be exercised at reasonable hours on business days and in the place
where the corporation keeps all its records
• The stockholder has not improperly used any information he secured through
any previous examination. 
 Gonzales vs. PNB
• Demand is made in good faith or for a legitimate purpose.
• If the corporation or its officers contest such purpose or contend that there
is evil motive behind the inspection, the burden of proof is with the
corporation or such officer to show the same.
Test to determine whether the purpose is legitimate
A legitimate purpose is one which is germane to the interests of the stockholder as
such and not contrary to the interests of the corporation (Gokongwei v. SEC, 1979)
Who may exercise?
a. Director
b. Trustee/Stockholder /Member
• Either PERSONALLY or through an AGENT 

D Liability for refusal, Sec. 74


2. Injunction
 - where mandamus inadequate to prevent injustice to plaintiff
3. Action for damages - against officer or agent of corporation 
who refused to
allow inspection. Resorted to in case of wrongful refusal
4. File an action under Sec.144 to impose a penal offense by fine and/or
imprisonment
Pardo vs. Hercules Lumber
The shareholders are only given 10 days in March of that year to inspect the books.
Since Pardo did not inspect the books within the period authorized by the board, he
lost such right to inspect. The SC disagreed and held that the resolution cannot unduly
abridge the right of the shareholder to inspect the books.
WG Philpotts vs. Philippine Manufacturing
The record of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member or stockholder of the
corporation at rea- sonable hours. The right of inspection given to a stockholder can
be exercised either by himself or by an proper representative or attorney in fact, and
either with or without the attendance of stock- holder. This is in conformity with the
general rule that what a man may do in person he may do through another.
Veraguth vs. Isabela Lumber
Directors of a corporation have the unqualified right to inspect the books and records
of the corporation at all reasonable times. Even make copies. However, a director or
stockholder does not have any absolute right to secure certified copies of the minutes
of the corporation until these minutes have been written up and approved by the
directors.
Denied of inspection. Although the petitioner has claimed that he has justifiable
motives in seeking the inspection of the books of the respondent bank, he has not set
forth the reasons and the purposes for which he desires such inspection, except to
satisfy himself as to the truth of published reports regarding certain transactions
entered into by the respondent bank and to inquire into their validity. The
circumstances under which he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of his good faith
and proper motivation.
Republic vs. Sandiganbayan
The PCGG cannot unilaterally deny a stockholder from exercising his statutory right of
inspection based on an unsupported and naked assertion that private respondent’s
Corporation Law by Castillo, Roman George P., De La Salle University - COL 23
motive is improper or merely for curiosity or on the ground that the stockholder is not
in friendly terms with the corporation’s officers.
X. DERIVATIVE SUITS
A Nature and basis
Based on wrongful or fraudulent acts or directors or other persons.
Individual, class and derivative suits
• Individual – wrong is done to him personally and not to the other stockholders
or the corporation (ex. right of inspection).
• Class, representative – wrong is done to a group of stockholders (ex.
preferred stocks’ rights are violated).
• Derivative – wrong to the corporation itself (ex. mismanagement through
wrongful acts by directors and trustees, not willing to sue themselves).
Rationale: Although stockholders are affected, corporation are separate and distinct
from stockholders.
Note: Problem arises when a stockholder buys a small number of shares just to bring
a strike suit.
B Requirements, rules
1. The stockholder or member bringing the suit must have exhausted his
remedies within the corporation (ex. demand from directors)
2. Stockholders or members must have been on at the time the transaction or
act complained of took place, or on the case of a stockholder, the shares
must have devolved upon him since by operation of law, unless such
transaction or act continues and is injurious to the stockholder (ex. bona fide
ownership, heirs).
3. Any benefit by stockholder/member as a result of the derivative suit must be
accounted for the corporation, the real party in interest.
4. If suit is successful, plaintiff is entitled to reimbursement from corporation for
reasonable expenses of litigation.
Where to file?
• SEC instead of regular courts, unless it involves third persons.
• Power to issue preliminary and permanent injuction.
• Nature of injunction: derivative (ex. on behalf of the corporation).
Pascual v Orozco
In suits of this character the corporation itself and not the plaintiff stockholder is the
real party in interest. The rights of the individual stockholder are merged into that of
the corporation. It is a universally recognized doctrine that a stockholder in a
corporation has no title legal or equitable to the corporate property; that both of these
are in the corporation itself for the benefit of all the stockholders. So it is clear that the
plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a
right to maintain a suit for and on behalf of the bank, but the extent of such a right
must depend upon when, how, and for what purpose he acquired the shares which he
now owns.
Everett vs. Asia Banking Corporation
Shareholders cannot ordinarily sue in equity to redress wrongs done to the
corporation. The action must be brought by the Board of Directors. However, the
Company was under the complete control of the defendants. It is obvious that a
demand upon the Board of Directors of the Company, which were under control of the
defendants, to institute an action and prosecute the same effectively would have been
useless, and the law does not require litigants to perform useless acts.
Liken v. Shaffer
It is a general rule that judgment in a derivative suit operates as bar in favor of the
defendants in the previous DS filed by another SH. The case herein is dismissed by
virtue of res judicata. It is where a SH maintains a suit in behalf of a corporation, it will
have a legal effect as if the corporation is the one suing. And so, the corporation must
be named and made a party to the case. In instances when a SH’s individual suit were
transformed into a DS, res judicata will apply to the subsequent case even though it
was filed by a different SH.
Evangelista v. Santos
If the officers of the corporation refuse to sue, or where a demand upon them to file
the necessary suit would be futile because they are the very ones to be sued or
because they hold the controlling interest in the corporation, then in that case any one
of the stockholders is allowed to bring suit. But in that case it is the corporation itself
and not the plaintiff stockholder that is the real party in interest. In other words, it is a
derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of
the corporation, which is the real party in interest.
In the present case, the plaintiffs have brought the action not for the benefit of the
corporation but for their own benefit, since they ask that the defendant make good the
losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution.
Republic Bank vs. Cuaderno
Prayer to nullify appointment of BOD with fraudulent scheme. Plaintiff-appellant’s
action in present case is in conformity with such principles. Perez is not alleging or
vindicating his own interest, but the interest of the Bank and the damage caused to it.
The action he brought is a derivative one for and in behalf of the Bank, because it was
futile to demand action by the corporation, since its directors were selected by Roman.
No authority to file needed. Such authority cannot be expected as the suit is aimed to
nullify the action taken by the manager and the BOD of the Bank. Plus, any demand
for intra-corporate remedy would be futile.
Reyes vs. Tan and Justiniano
Corporation Law by Castillo, Roman George P., De La Salle University - COL 24
The derivative suit may be resorted to when BOD is in breach of trust to the damage
of the corporation, and intra-corporate remedy is futile. In such cases, shareholders
may institute the case in behalf of the corporation.
The importation of finished goods in violation of the Central Bank condition; and the
consequent failure to correct or remedy the violation, either by proceeding against the
erring individual or by ceasing to do the violation, constitute fraud and are considered
breach of trust on the part of BOD. The delay in raising the issue before the court on
the part of the stockholders is reasonable because the BOD is expected to take action
and rectify the matter, which it failed to do.
Gamboa vs. Victoriano
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded
as a nominal party, with the corporation as the real party in interest. In the case at bar,
however, the plaintiffs are alleging and vindicating their own individual interests or
prejudice (pre-emptive right), and not that of the corporation.
San Miguel vs. Kahn
The bona fide ownership by a stockholder in his own right suffices to invest him with
the standing to bring a derivative suit for the benefit of the corporation. The number of
his shares is immaterial since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong committed against
him individually but in behalf and for the benefit of the corporation.
The requisites of a derivative suit are: (1) the party bringing the suit should be a
stockholder as of the time of the act or transactions complained of, the number of
shares not being material; (2) exhaustion of intra-corporate remedies (has made a
demand on the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea); and (3) the cause of action actually devolves on the
corporation and not to the particular stockholder bringing the suit.
Western Institute of Technology, Villasis vs. Salas
A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to
sue. It is a principal defense of the minority shareholders against abuses by the
majority.
A requirement for a derivative suit which was not met in this case by the petitioners is
that the complaint must allege that he is suing in a derivative cause of action. If he
were in fact suing in such capacity, then they should’ve filed it with SEC for being an
intra-corporate dispute. It shall be noted that it is the allegations in the complaint that
vests jurisdiction upon the court. In this case, Petitioners did not allege either in their
complaint nor the instant petition that they were suing in a derivative suit.
XI. FINANCING THE CORPORATION
A Sources of financing 

Three main sources
• Contributions from stockholders (equity investments)
• Loans from creditors (Debt financing)
• Profits
Other forms of financing
Short-term financial instruments – do not form part of the capital structure.
Capital structure
• Aggregate of the securities issued by the corporation (long term investments)
• Two classes: shares of stocks and debt securities
• Senior securities (debt securities and preferred stocks), has priority in
corporate earnings; Equity (common and participating preferred), merely
residual rights to earnings.
Variations in the rights
• Early claim on the income before the others
• Right to residual income
• Right to vote on personnel and policy (control)
Capital vs. Capital stock
• Capital stock – amount to be subscribed and paid in (authorized)
• Legal or stated capital – aggregate par or issued value of the SCS
• Capital – actual property of the corporation, corporate assets less losses.
• Capital - Fluctuates based on profits and losses.
• Capital stock remains the same unless AOI are amended to decrease or
increase it.
B Shares of stock; kinds, Sec. 6
• Units in which capital stock is divided.
• Interest of the holder to participate in the management, share in profits, upon
liquidation, obtain an aliquot part of the assets.
• Investment is long term and has no maturity date.
• Does not make him the owner of the corporate assets, NOR a creditor of the
corporation.
• Certificate of stocks are mere evidence of interest in the corporation.
• Corporation may issue such classes of shares as its AOI may provide.
• Shares that may be issued is subject to regulation by the MB.
Sec. 6
Classification of shares
• Any classes of shares is allowed, may provide privileges and restrictions
• No share may be deprived of voting XPT preferred or redeemable shares
• There must always be one class of voting shares
• May have par value or not
Corporation Law by Castillo, Roman George P., De La Salle University - COL 25
 • Banks, trust companies, insurance, public utilities and building and loan
associations CANNOT issue NO-PAR value shares
On preferred stocks
• Preferred shares may be given preference in distribution of assets upon
liquidation
• Preferred shares may only be issued with par value
• BOD, when authorized by AOI, may fix terms and conditions for preferred
stocks
• Such terms and conditions shall be effective upon filing of a certificate with
SEC
Without par value
• Shares without par value shall be deemed fully paid and non-assessable
• Holders are not liable to the corporation or creditors
• Provided that it is not issued for less than P5.00
• No-par value shares shall be treated as capital and cannot be distributed as
dividends.
1 Common 

• Most commonly issued
• Entitled owner to an equal pro rata division of profits
• No priority or preference over stockholders of the same class
• In presence of PS, CS are given exclusive right to vote and residuary rights
to profits and net assets upon liquidation, after PS have been complied with.
2 Preferred
• Entitles the holder to some preference either in the dividends or distribution
of assets upon liquidation, or both, as long as not inconsistent with the Code
• Limitations: (1) issued only with stated par value; (2) preferences must be
stated in both AOI and certificate of stock, otherwise, each share has equal
rights as to any other shares.
• Under requisite (2), if the AOI gives the BOD power to impose terms and
conditions on PS, it may do so, effective upon filing of certificate in the SEC.
2.1 Preference as to dividends
• PS may be given privilege of being paid first before any is paid to CS
• Amount of preference is stated in the contract
• If after payment to PS, no surplus profits remain, CS cannot complain
• If after payment to PS, there are surplus profits, it will be given to CS,
who can receive a much larger dividend than that of the PS.
2.1.1 Participating and non-participating 
 issued by the corporation, along with the voting right of said stocks—so long as such
• Preferred stock may participate (“participating”) in the distribution of
surplus profits, after distribution of their normal share in profits
2.1.2 Cumulative and non-cumulative
Cumulative
• Absence of agreement = cumulative.
• All arrears must be paid to PS before the CS can receive their
shares.
Non-cumulative
• When provisions re found in PS contract making dividends depend
on the existence of profit = non-cumulative.
• Arrears need not be paid
Discretionary
• PS contract may provide that right to dividends would depend
on the discretion of the BOD, even if there are profits for the
year.
• Unless there is abuse of discretion.
Mandatory
• PS contract may impose positive duty on the BOD to declare
dividends.
• Failure of BOD would not deprive the PS dividends
Earned cumulative or dividend credit
• PS contract gives a right to arrears where there are profits
earned during the years where dividends are not declared.
• In effect, it merely postpones the receipt of dividends earned to
a later date.
• The moment dividends are declared; arrears must first be paid
when no dividends were declared although there were profits.
• Difference between cumulative PS: cumulative PS has right to
arrears even when there were NO PROFIT.
2.2 Voting rights 

• By contract, usually denied of voting rights.
• Unless clearly withheld, it has right to vote as incident to stock
ownership.
• Even oftentimes withheld, a contingent right to vote exist when dividends
are not yet paid to PS.
• Even non-voting may vote in special circumstances relating to major
changes in the corporation.
Ellingwood vs. Wolf's Head
Preferred stockholders in the case at bar has the right to vote. It is well settled that a
certificate of incorporation may contain any provision with respect to the stock to be
provisions is not against public policy. Thus, according to the Court, it is necessary to
look at the certificate of incorporation to ascertain the rights of each stock. Rights of
a stock cannot be presumed—it must be expressly stated.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 26
The provision of respondent corporation’s certificate provides that preferred SH shall
not be allowed to vote, EXCEPT: “that if at any time the corporation shall be in default
in respect to the declaration and payment of dividends in the amount of two years’
dividends on the preferred stock, then the holders of the majority…preferred stock
shall have an election to exercise the sole right to vote for the election of directors and
for all other purposes, to the exclusion of any such right of the common stock, until
the corporation shall have declared and paid for a period of a full year at 6% dividend
on the preferred stock when the right to vote for the election of directors and for all
other purposes shall revert to common SH”
2.3 Preference upon liquidation 
 would permit of but one interpretation, and that, to give preference regardless of any
• PS may be given preference to corporate assets upon liquidation
• Absence of provision granting, PS participates pro rata with the CS,
since each share is presumed to be in all respect equal to every other
share.
• If cumulative, liquidation preferences include arrears in cumulative
dividends.
Hay vs. Hay
Preferred stockholders entitled toThe stockholders contracted between themselves
with respect to the division of the assets in case of liquidation. Their agreement was
that the preferred stockholders should receive the par value of their stock plus an
amount equal to "all accrued unpaid dividends thereon" before any assets should be
distributed to the common stockholders.
It should be noted that the articles contain no condition to the effect that the surplus
profits must be equal to, or greater than, the total of all accrued unpaid dividends
before such distribution could be made. The parties were contracting with reference
to a possible future liquidation, a situation where the statutory prohibition against
declaration of dividends out of capital had no application.
Appellant's construction of the subparagraph (d) of Amended Article VI as being
subject to an implied condition that such cumulative dividends are payable only out of
surplus profits, is contrary to the fundamental concept of the law of corporations.
Appellant's construction of subparagraph (d) is based upon a failure to recognize the
vital distinction between a corporation which is a going concern and one which is in
liquidation.
The reference to "all accrued and unpaid dividends" in subparagraph (d) is the only
practical yardstick by which the total share of the assets (which the preferred
stockholders were to receive upon liquidation) could be measured. At the time the
amended article was drafted and adopted, the quoted phrase was the most definite
way that the preferential rights of the preferred stockholders could have been
described. It stated the method by which the amount distributable to the
preferred stockholders could be computed in the event of a liquidation in the
future.
The proper construction of an agreement similar to subparagraph (d) of Amended
Article VI was adopted in Fawkes v. Farm Lands Inv. Co., supra, the court saying: "The
provisions of the preference agreement amount to nothing more than a plan for the
division of the property of the corporation upon its dissolution, and the measure or
standard of such division was the dividend rate fixed by the articles of incorporation
to be paid to the owners of the preferred stock.
The “Preference Clause” is designed as the key for the distribution of the assets of the
firm in dissolution, and is not an agreement for the distribution of profits or surplus.
Viewed from this standpoint, it would seem that that clause `unpaid dividends accrued'
considerations of profits or surplus.
2.4 Preferred stockholder not a creditor
• Equity holder, not a creditor
• His investment is subject to all risk of ownership
• He can get it back only upon liquidation, provided there are remaining
assets after paying all creditors
Cases
167 Augusta Trust Co. vs. Augusta, Hallowell & Gardiner Railroad Co.
Case involving convertible bonds. The surrendering of bonds and taking in lieu thereof,
preferred stock, the bondholders of these street railway companies ceased to be
creditors and became mere stockholders. Those who have not made the exchange
and hold their bonds are entitled to the security of the mortgages shorn of the illegal
conversion agreements. The preferred stockholders are not entitled to share in the
assets of the companies until all creditors have been paid in full.
168 Garcia vs. Lim
CFI ordered the compensation of the defendant's debt of P9K, claimed in the
complaint, with his credit amounting to P10K with the Mercantile Bank of China
(shares of stocks).
Compensation was improper. A share of stock or the certificate thereof is not an
indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a
credit. Stockholders, as such, are not creditors of the corporation.
3 Par or no par shares, Sec. 14(7)
Par shares
• Par value is fixed in the AOI
• Minimum issue price on such share
• Must be stated in the stock certificate, which is issued upon full payment of
subscription
Corporation Law by Castillo, Roman George P., De La Salle University - COL 27
 • If issued less than par value = watered stock, therefore, liable for the
difference of payment and par value.
• May be issued higher than par value.
No-par shares
• Issued price is not stated in the certificate, but which may be fixed in AOI, or
by BOD when authorized by AOI, or the shareholders themselves.
• Limitations:
o Once issued, deemed fully paid, thus, non-assessable (corporation
can no longer increase the price)
o Consideration cannot be less than P5
o Entire consideration constitutes capital, thus it cannot be declared
as dividends
o Cannot be issued to PS
o Cannot be issued by banks, trust, insurance, public utilities and
building and loan associations
o AOI must state such fact
• Issued price may be changed from time to time in accordance to market and
conditions.
• Advantages: Even in decrease in market value, it may be issued at any price
unlike par-value shares where it will be difficult to market because it cannot
be sold at lower than par.
Notes
• Whether with or without par value, it must be paid in full.
• Thus, although no-par shares are non-assessable, where a stockholder has
not paid in full, he may be held liable to pay corporate creditors.
• Both are not considered issued until fully paid.
• In cases of decrease in value, what is done is merely to split the shares.


4 Treasury shares, Sec. 9; 43; 137; 57
• When appraisal right is exercised, such shares becomes treasury shares.
• When reissued, they can be sold at any reasonable price, even less than par,
because they have been previously fully paid.
• Before reissuance, no dividend or voting rights.
• Considered as property of the corporation, thus, may be sold or issued as
property dividend.
5 Redeemable shares, Sec. 8
• May be issued when provided by AOI
• They may be purchased by corporation upon expiration of fixed period
regardless of existence of URE in the books.
• However, SEC requires that corporation must have sufficient assets to cover
debts and liabilities, inclusive of capital stock.
• SEC also required to set up sinking fund to meet cost of redemption should
the option be exercised.
• Upon such terms stated in the AOI and stock certificate
Notes
• Usually given to preferred stocks
• Common feature of debt securities like bonds and debentures
• When attached to shares, must be in AOI and stock certificate
• It is an option to the corporation to purchase the shares and bonds usually at
the par or face value plus specified premium.
• Privilege is significant since it permits adjustment to the capital structure to
meet varying conditions.
• May enable corporation to pay off the securities.
• Ex. redeemed in cases when interest rates decline, or to replace the issue
with another carrying a lower interest rate
6 Founder’s shares, Sec. 7
aUkqOoh nA beH.
FINANCING THE CORPORATION, cont.
C Subscription contract
Two ways to become a stockholder
1. Subscription before or after incorporation (unissued shares)
2. Acquisition of issued shares from an existing stockholder
Notes
• Must be written
• Not covered by Statute of Fraud because it is not a sale
• Once perfected, stockholder becomes a debtor and shall pay unpaid portion
upon call by the BOD
• Shall pay interest from date of subscription, at rate fixed in by-laws, or if none,
legal rate.
• With respect to the unpaid portion, a stockholder is personally liable for the
financial obligation of the corporation to the extent of said unpaid portion.
1 Pre-incorporation
• 25-25 rule
• Majority view: Contracts constitute continuing offers to the corporation and
may be revoked any time prior its formation.
• Minority view, adopted by the Code: when a group in a subscription contract,
they are deemed not only to make a continuing offer to the corporation but
also to have contracted with each other as well. Thus, no one may revoke a
contract even prior to incorporation without the consent of the others.
Sec. 61
• Subscription of a corporation STILL TO BE FORMED shall be irrevocable for
a period of 6 months from date of subscription UNLESS all consents to
revocation or corporation fails to materialize within said period or longer
period.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 28
 • Provided: no pre-incorporation subscription may be revoked after the
submission of AOI to SEC.
• After 6 months or agreed period, may revoked subscription without consent
of others.
Notes
• Assuming SC has been perfected, each subscriber has to comply and pay.
Not even the corporation can release him from his obligation.
• He may however resist compliance if a different corporation as that
contemplated is formed, or there is serious defects prejudicial to him, unless
his acts shows estoppel, waiver or acquiescence.


2 Post-incorporation
• Subscriber becomes stockholder and enjoys rights even if not yet fully paid
• Corporation cannot sue for the purchase price unless it is ready and able to
issue stock certificate
• Neither purchase can require such issuance without paying full
Sec. 60
• Contact for acquisition of unissued stock = SUBSCRIPTION
• Thus, he enjoys all rights whether fully paid or not, unless delinquent
Sec. 80
• Rights of unpaid shares, not delinquent = shall have all rights.
• Since he is a debtor, subscriber liable to pay balance even if the corporation
becomes insolvent.
Cases
170 Wallace v. Eclipse Pocahontas
Bayla vs. Silang Traffic Co., Inc.
Silang Traffic Co. entered into an agreement for the sale on installment of its shares of
stock with various individuals, including the petitioners. It includes a stipulation that
upon default in payment, said shares are to revert to the seller and the payments
already made are to be forfeited in favor of said seller. After several installments,
petitioners defaulted. Subsequently, the BOD passed a resolution authorizing for the
refund of the amounts paid and the reversion of the shares of stock to the corporation.
BOD resolution is valid because the contract was not one of subscription but of
purchase and sale. It seems clear from the terms of the contracts in question that they
are contracts of sale and not of subscription. The lower courts erred in overlooking the
distinction between subscription and purchase. "A subscription, properly speaking, is
the mutual agreement of the subscribers to take and pay for the stock of a corporation,
while a purchase is an independent agreement between the individual and the
corporation to buy shares of stock from it at stipulated price."
Trillana vs. Quezon College, Inc.
Under article 1115 of the old Civil Code which provides as follows: "If the fulfillment of
the condition should depend upon the exclusive will of the debtor, the conditional
obligation shall be void.” In view of proposal of Damasa to pay value of subscription
after he has harvested fish is a condition obviously dependent upon her sole will and
therefore void
Edward Keller & Co. vs. COB Group Marketing Inc.
Validity of call
Here, the call for payment embodied in the SH Resolution 17 was null and void for lack
of publication. The law requires notice of any call for payment of unpaid subscription
should be made not only personally but also by publication. The reason for its
mandatory nature is not only to assure notice to all subscribers, but also to assure
equality and uniformity in the assessment on SH.
Release from subscription obligation
Also, in so far as it tried to relieve the defendant from liability on his unpaid subscription
on the ground that it was not approved by all the SH of the corporation, the resolution
was void. General rule is that a valid and binding subscription for stock of a corporation
cannot be cancelled so as to release the subscriber from liability without the consent
of all stockholders or subscribers. Furthermore, a subscription cannot be cancelled
by the corporation, even under a secret or collateral agreement for cancellation made
with the subscriber at the time of the subscription, EXCEPT, where it is given pursuant
to a bona fide compromise, or to set off a debt due from the corporation, or if it is
supported by a consideration.
D Pre-emptive right, Sec. 39
Pre-emptive right – option privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corporation, before the same
is disposed in favor of others.
Justification: to prevent dilution of interest, protection of the right to vote, right to
dividends and corporate assets, right to invest capital.
Common law: does not apply to additional issuance of authorized capital stock,
treasury shares – logic: presumed that, at inception, shareholders are offered of the
whole authorized shares.
Extent and limitations
Includes all issues (increase and unissued authorized) or disposition (treasury) of
shares of any class.
Section 39 exceptions
1. Not applicable for compliance with laws requiring stock offerings or minimum
stock ownership.
2. Not available when shares are issued in exchange of property needed or
payment of debt. Logic: it might prejudice the interest of the corporation.
Provided, approved by 2/3 of outstanding capital stock.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 29

Denial of such right must be indicated in the AOI.
In close corporation
Exceptions in Section 39 is not applicable.
1. By nature, #1 is not applicable.
2. In close corporations, right is available to ALL ISSUES whether for money,
property etc., unless limited by AOI.
Waiver of preemptive right
Must be indicated in the AOI.
Waiver by amendment of AOI needs the vote of 2/3 of outstanding capital stock,
binding all stockholders including subsequent.
Private agreements, binds stockholders, but not future stockholders.
When to exercise? Within reasonable time. Deemed waived when not exercised.
When the issue is in breach of trust
Even if right does not exist, or exempted under section 39, or denied by AOI, an issue
may still be objectionable if the directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the corporation, or to freeze out the minority
interest.
Remedies when right violated
• Injunction against the issue;
• Mandamus to allow exercise of such right;
• SEC or court may order cancellation of the shares, provided no innocent
party is prejudiced.
Suit shall be individual, not derivative.
Stokes vs. Continental Trust Co.
Stokes, (appellant), brought suit against Continental Trust Co., (Appellee), to compel
it to issue to him at par 221 shares of an increase made in its capital stock or, in the
alternative, damages.
While the corporation could not compel the plaintiff to take new shares at any price,
since they were issued for money and not for property, it could not lawfully dispose of
those shares without giving him a chance to get his proportion at the same price that
outsiders got theirs. He had an inchoate right to one share of the new stock for each
share owned by him of the old stock, provided he was ready to pay the price fixed by
the stockholders.
The directors were under the legal obligation to give him an opportunity to purchase
at the price fixed before they could sell his property to a third party, even with the
approval of a large majority of the stockholders.
• If he had remained silent and had made no request or protest he would have
waived his rights, but after he had given notice that he wanted his part and
had protested against the sale thereof, the defendant was bound to offer it
to him at the price fixed by the stockholders.
• By selling to strangers without thus offering to sell to him, the defendant
wrongfully deprived him of his property and is liable for such damages as he
actually sustained.
Fuller vs. Krogh
Cormier Corp. issued additional shares to Krogh, to further reduce debt to the latter.
Here, Fuller, a stockholder invokes his pre-emptive right. Indeed, Fuller was entitled to
such right. However, it was waived. At the time the stock was issued, Fuller and his
wife constituted the majority of the BOD and Fuller was president. He signed the
certificates. He knew of each transaction for the issuance of stock and the reason
therefor.
Benito vs. SEC
As a general rule, pre-emptive right is only recognized with respect to issuance of new
shares and not to issuances from unissued ACS (as provided by Corporation Law, old
law). The reason is that when a corporation issues shares, it is presumed that the
corporation already issued shares which it is authorized to issue. The original
subscriber is then presumed to know that his shares were only proportionate to the
whole shares of corporation, precluding him from claiming “dilution” in the future.
*Now, under Corporation Code, pre-emptive right is present in ALL issuances whether
new or from unissued ACS
Power to issue shares of stock lodged in BOD without need for consent/approval by
the SH. In the case at bar, the by-laws of corporation allowed the BOT to issue and
transfer shares of stock even without consent of SH.
Dee vs. SEC
Same as case of Benito vs. SEC, presumption as to issuance of authorized but
unissued shares based on old law.
E Debt securities 

F Securities Regulation Code (SRC)
1 What are securities, Sec. 3.1, SRC
"Securities" are shares, participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It includes:
a. Shares of stocks, bonds, debentures, notes evidences of indebtedness,
asset-backed securities;
b. Investment contracts, certificates of interest or participation in a profit sharing
agreement, certifies of deposit for a future subscription;
Corporation Law by Castillo, Roman George P., De La Salle University - COL 30
 c. Fractional undivided interests in oil, gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments
f. Proprietary or nonproprietary membership certificates in corporations; and
g. Other instruments as may in the future be determined by the Commission.
2 Registration of securities, Sec. 8, SRC
Section 8. Requirement of Registration of Securities.
8.1. Securities shall not be sold or offered for sale or distribution within the Philippines,
without a registration statement duly filed with and approved by the Commission. Prior
to such sale, information on the securities, in such form and with such substance as
the Commission may prescribe, shall be made available to each prospective
purchaser.
8.2. The Commission may conditionally approve the registration statement under such
terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any written
communication, including any summary prospectus, shall be deemed not to constitute
an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register Securities in
which shall be recorded orders entered by the Commission with respect such
securities. Such register and all documents or information with the respect to the
securities registered therein shall be open to public inspection at reasonable hours on
business days.
8.5. The Commission may audit the financial statements, assets and other information
of firm applying for registration of its securities whenever it deems the same necessary
to insure full disclosure or to protect the interest of the investors and the public in
general.
3 Exempt securities and exempt transactions, Sec. 9, 10, SRC 
 for actual cash to the par value of the stock to its full equivalent in property is enshrined
HOWEY TEST – to determine whether it a security or not
Requisites:
1. Person makes investment of money;
2. In a common enterprise;
3. Expects to make profit;
4. Derived solely from the efforts of others.
XII CONSIDERATION FOR ISSUANCE OF SHARES
• At least their par or issued value
• Need not be paid in full at time of issuance
• Unpaid portion is a debt
A Form of consideration, Sec. 62
• Not less than par value or issued price
• Any or combination of the following:
1. Cash – deposited in bank in name of treasurer in trust; cannot be
withdrawn until incorporated or withdrawal of application;
2. Property, tangible or intangible (as long as can be used by corp and has
actual value);
3. Labor, services;
4. Previously incurred indebtedness;
5. Unrestricted RE;
6. Outstanding shares (reclassified, converted);
• For valuation, determined by BOD, subject to SEC approval
• PNs and future services = NOT VALID CONSIDERATION because realization
is NOT CERTAIN
• Considerations enumerated may be for issuance of bonds
• Issued price of no-par value may be fixed by:
o AOI; or
o BOD pursuant to authority in AOI; or
o Stockholders, majority of OCS in a meeting duly called for the
purpose
Notes
• Property includes services already performed as long as capable of valuation
and are fairly valued (ex. management contract)
National Exchange Co. vs. Dexter
Whether the stipulation contained in the subscription to the effect that the subscription
is payable from the first dividends declared on the shares has the effect of relieving
the subscriber from personal liability in an action to recover the value of the shares?
Court held that the prohibition against the issuance of shares by corporations except
in both the organic and statutory law of the Philippines.
In this case, the term of payment of Dexter is unlawful for this stipulation obligates the
subscriber to pay nothing for the shares except as dividends may accrue upon the
stock. In the contingency that dividends are not paid, there is no liability at all. And this
is discrimination in favor of the particular subscriber, and hence it is unlawful.
B Watered stock; liability of directors, Sec. 65
Sec. 65
• Liability of directors for watered stocks
• Any director/officer who consents to issuance either:
Corporation Law by Castillo, Roman George P., De La Salle University - COL 31
 4. less than par or issued value; or
5. for any consideration other than cash, valued in excess of its fair
value; or
6. having knowledge, does not forthwith express his objection in
writing and filed the same with the corporate secretary.
• SOLIDARY LIABILITY to stockholders and creditors (prior or subsequent, no
distinction made by law)
• Amount: difference between fair value received at time of issuance and
par/issued value.
• Reliance by creditor on the valuation is immaterial because the basis of
liability is the statute itself.
Notes
• Issued as fully paid but no consideration or inadequate (not equal to par or
issued value)
• Shareholder is liable to the corporation and its creditors
• Bonus shares – issued gratuitously
• Discount shares – issued less than par
• Evil: deprives corporation of needed capital and opportunity to sell its
securities at more advantageous prices; prejudices stockholders because it
dilutes their proportionate interest; injures creditors because it reduces value
of corporate assets.
Two theories
1. Trust fund theory - treats capital of corp as trust fund for payment of debts,
and as substitute for the lack of personal liability of stockholders; discredited
in most American courts.
2. Fraud/misrepresentation theory – liability is based on the false
representation to creditors that par/agreed value has been paid in full; more
favored theory; only creditors subsequent to issuance and without notice are
protected since they are presumed to have relied on the misrepresentation.
Triplex Shoe Co. vs. Rice & Hutchins Inc.
The stocks were not validly issued. The stocks were not issued for a valid
CONSIDERATION. The stock distributed to the Dillman group was “in consideration
for services rendered in organizing the company for agreeing to serve the company at
a smaller compensation.” According to the court, such service is not the service as
consideration required under the law. In fact, there was little service that was actually
rendered so the court presumes it is for future services. As established, future services
can never be a valid consideration for issuance of stocks. Therefore, the Diliman group
could not have been validly elected.
McCarty vs. Langdeau
Shares were initially bought with a promissory note. Contract is valid. The law only
prohibits the issuance of stock. If it is understood that the stock will not be issued to
the subscriber until the note is paid, the contract is valid and not illegal. What is void
by express provision of law is the fictitious increase of stock or indebtedness. The law
was designed for the protection of the corporation and its creditors.
Rhode v Dock-Hop Company
The Court held that the stockholders were innocent transferees of watered stock and
cannot be held to answer for the deficiency of the stocks even at the suit of the creditor
of the company. The creditor’s remedy is against the original owner of the watered
stock. When the corporation issues watered stock and assumes an ostensible
capitalization in excess of its assets, it commits constructive fraud upon the creditors.
The transferee of watered stock who takes it in ignorance of its real character is not
required, even at the suit of a creditor, to pay in anything more upon it.
Campos note
The innocent purchaser of watered stocks is thus treated like the holder in good faith
of a negotiable instrument, based on the policy of encouraging the free transferability
of shares as a means of enhancing the growth of commerce and industry.
C How payment of subscriptions enforced
1 When balance on subscription payable, Sec. 13
• 25-25 rule, paid up capital shall not be less than P5,000.
2 Payment of balance of subscription, Sec. 67
• BOD may at any time declare due and payable to corporation the unpaid
subscription
• May collect the same with interest accrued, as necessary
• Made on the date specified in the contract OR date stated in the call made
by the BOD.
• Failure to pay renders the entire balance due and payable and make the
stockholder liable for interest at legal rate, unless by-laws provides another
rate, computed from such date until full payment.
• If within 30 days and no payment = all stocks covered by said subscription
delinquent and subject to sale, unless BOD orders otherwise.
3 Delinquency sale, Sec. 68, 69
Sec. 68
• BOD, by resolution, order the sale of delinquent stock and shall state the ff:
a. amount due plus accrued interest;
b. date, time and place of sale, 30-60 days from date the stocks
become delinquent.
• Notice and copy o resolution be sent either personally or by registered mail,
published once a week for 2 consecutive weeks in newspaper (gen. circ.) in
the province or city where principal office is located.
• Unless paid before date of sale, highest bidder shall by the ff:
a. Full amount of balance;
b. Accrued interest;
c. Cost of advertisement;
Corporation Law by Castillo, Roman George P., De La Salle University - COL 32
 d. Expense of sale
• Highest bidder = buyer for the smallest number of shares or a fraction thereof.
• Remaining share shall be credited in favor of the delinquent stockholder who
is entitled to stock certs.
• If no bidder, corporation may bid for the same, total amount due shall be
credited as paid in full in the books. Title is vested as treasury shares.
Sec. 69 When sale may be questioned?
• No action to recover sold delinquent stocks on ground of irregularity or defect
in notice of sale UNLESS party seeking it first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest from
date of sale at legal rate
• Commence by filing within 6 months from date of sale
Notes
• Applicable only to sale of stocks for unpaid subscription, not to satisfy
indebtedness of the stockholder. Otherwise, it makes the corporation sole
judge of the merits of its claims against the stockholder depriving the latter
of opportunity to be heard before sale.
• Until such agreed date of payment, no demand or call is valid.
• If no specified date of payment, BOD may at any time decalre it due and
demandable/payable.
• Power to make a call is DISCRETIONARY with the BOD and must NOT be
made MINISTERIAL by the by-laws.
• Once made, call must operate uniformly to prevent favoritism or oppression.
• Call must specify the AMOUNT and WHEN to be paid.
Two modes of action
1. Delinquency sale, supra
2. Court action
• Seek payment
• Valid call is a pre requisite to liability UNLESS subscription contract
provides date of payment or corporation is insolvent
• In case of insolvency, all unpaid subscription become payable and are
immediately recoverable in a court action by the assignee, for the benefit
of the creditor.
• Stockholder may defend on ground that his subscription was induce by
fraudulent misrepresentation, provided not barred by ratification or
laches.
4 Recovery of unpaid subscription, Sec. 69, 70
Velasco vs. Poizat
A corporation has no legal capacity to release a subscriber to its capital stock from
the obligation to pay for his shares; and any agreement to this effect is invalid.
Remedies of the corporation
The corporation has two remedies against the subscriber to the corporate shares,
namely (1) to sell the stock for the account of the delinquent subscriber, and (2) to
bring a legal action against him for the amount due. If not satisfied with the sale,
corporation may sue (no prohibition in the Code).
Insolvency makes unpaid subscription due and demandable – no need for a call!
When insolvency supervenes upon a corporation and the court assumes jurisdiction
to wind it up, unpaid stock subscriptions become payable on demand, and are at once
recoverable in an action instituted by the assignee in insolvency.
Miranda vs. Tarlac Rice Mill Co., Inc.
Corporation Law provides that BOD may at any time declare due and payable to the
corporation unpaid subscriptions. It further provides that no call is necessary when a
subscription is payable, not upon call or demand, but immediately, or on a specified
day, or on or before a specified day, or when it is payable in instalments at specified
times. In such cases it is the duty of the subscriber to pay the subscription or
instalment thereof as soon as it is due, without any call or demand, and, if he fails to
do so, an action may be brought at any time.
Therefore, it becomes the duty of Miranda to pay the subscription price when it
became due, without need of call from the BOD. Neither the fact that the corporation
has ceased to do business nor the fact that the other stockholders have not been
required to pay for their shares in accordance with their subscription agreement
justifies the Court in ordering the corporation to return to the plaintiff the amount paid.
De Silva vs. Aboitiz & Co.
Stipulated in the AOI:
• The manner in which the net profit should be distributed, 70% to be
distributed. But it authorizes or empowers the BOD to collect the value
unpaid subscribed shares by deducting from the 70%.
No violation of Sec. 46 of the by-laws; discretionary upon the BOD
It cannot be maintained that said article has prescribed an operative method for the
payment of said subscriptions continuously until their full amortization, or, that said
article has prescribed that sole and exclusive method for that purpose, for, in the first
place, the adoption of that method for the purpose of collecting the value of
subscriptions due and unpaid lies, according to said article, within the discretion of
the BOD. Also, there is also the discretionary power granted the same BOD to avail
itself of either of the two remedies prescribed by the Corporation Law.
Lumanlan vs. Cura
PNB vs. Bitulok, other lumber companies
Stockholders cannot escape liability on their unpaid subscriptions on the ground that
these were induced by an unfulfilled commitment of the President of the Philippines
that the Philippine government would invest P9.00 for ever peso subscribed. The Court
refused to allow equity and fairness to prevail over the rule of liability laid down by the
statute.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 33

Court also added that a corporation cannot release an original subscriber from its
obligation of paying his shares, without a valuable consideration for such release.
Payment of stock subscriptions is required under the law and must prevail.
Garcia vs. Suarez
The subscription is not payable at the moment of the subscription but on a subsequent
date which may be fixed by the corporation. The BOD, not having declared due and
payable, the prescriptive period of the action for the collection thereof only
commenced to run when the plaintiff, in his capacity as receiver, demanded of the
appellant to pay the balance of his subscription.
A corporation has no legal capacity to release a subscriber to its capital stock from
the obligation to pay for his shares; and any agreement to this effect is invalid. Not
having established that the stockholders of the Compañía Hispano­Filipina, Inc., have
in any wise consented to release, or that the acting president, Pando, was expressly
authorized by the stockholders, or was authorized by the by­laws of the corporation,
to release the appellant from his obligation, the appealed decision is affirmed.
5 Effect of delinquency, Sec. 71
• Holder loses all his rights as stockholder except right to dividends, which
shall not be paid to him but applied to unpaid balance plus cost and
expenses.
• Thus, cannot vote.
• Not counted as part of the quorum.
• Neither be voted as director.
D Unpaid but non-delinquent subscriptions
1 Rights, Sec. 72 

• All rights, such as vote, dividends
2 Interest on unpaid subscription, Sec. 62
 • To assume legal rights, transferee fills up the blanks in the form by inserting
• From date of subscription
• Rate fixed in by-laws, absence, legal rate
3 Issuance of certificate of stock, Sec. 63, 64 
 That procedure cannot be followed in the instant case because, as already noted, the
• Cannot be issued if corporation has any unpaid claim (Sec. 63)
• Issued upon full payment, plus interest and expenses (in case of delinquent).
(Sec. 64)
• Interest is not due unless by-laws provide for its payment.
• If unpaid, may allow registration and recognize rights BUT cannot issue stock
certificate.
Fua Cun vs. Summers, IMPORTANT CASE
Whether Chua Soco is entitled to issuance of certificates over the 250 shares by virtue
of the payment of ½ of the subscription price
No. In the absence of special agreement to the contrary, a subscriber for a certain
number of shares of stock does not, upon payment of 1/2 of the subscription price,
become entitled to the issuance of certificates for 1/2 the number of shares subscribed
for; the subscriber's right consists only in an equity entitling him to a certificate for the
total number of shares subscribed for by him upon payment of the remaining portion
of the subscription price.
A banking corporation has no lien upon its own stock for the indebtedness of the
stockholders even when the by­laws provide that the shares shall be transferable only
upon the books and that no such transfer shall be made if the holder of the shares is
indebted to the corporation. If banking corporations were given a lien on their own
stock for the indebtedness of the stockholders, the prohibition against granting loans
or discounts upon the security of the stock would become largely ineffective.
Baltazar vs. Lingayen Gulf Electric
The case of Fua Cun does not apply: first because it is the practice of the corporation
to issue certs of stocks covering all of the subscribed shares, despite partial payment
on such subscriptions; second because Corp Law declares otherwise. In this case,
the call for payment and declaration of delinquency will affect only those shares for
which no cert of stocks have been issued. For those where the cert was issued, they
cannot be deprived of their voting rights.
Nava vs. Peers Marketing
Reiterated the Fua Cun case. The corporation can include in its by­laws rules, not
inconsistent with law, governing the transfer of its shares of stock. However, no
provision of the by­laws of the corporation covers that situation.
Procedure in the transfer of shares
• Stockholder to sign the form on the back of the stock certificate.
• The certificate may thereafter be transferred from one person to another.
his own name as transferee.
• Deliver to the secretary for the proper registration in the transfer book.
• New certificate is then issued.
twenty shares in question are not covered by any certificate of stock in Po’s name.
Moreover, the corporation has a claim on the said shares for the unpaid balance of
Po’s subscription. There is no clear legal duty on the part of the officers of the
corporation to register the twenty shares in Nava’s name. Hence, there is no cause of
action for mandamus.
Campos notes
Corporation Law by Castillo, Roman George P., De La Salle University - COL 34
Fua Cun
• Contract of subscription is indivisible, absence of agreement to the contrary
• Partial payment does not entitle the issuance of stock cert for which the
payment corresponds
Contrary to Baltazar vs. Lingayen Gulf
• Payment corresponding to some shares may be issued stock cert, and others
will be declared as delinquent.
• It was the practice of the corp to issue stock certs for what is considered as
fully paid shares; custom does not appear in Fua Cun
SEC interpretation: corporation has two alternatives in applying the payments; (1)
apply for corresponding number of shares; or (2) apply pro rata.
Nava
• Ruling in Lingayen is enforced only in special circumstances
• Reinforced the Fua Cun ruling
Section 64 of the Code (that no cert is issued until full payment of subscription)
supports Fua Cun. Must be paid in full.
E Certificate of stock, Sec.63, 67
Issuance of Certificate
• Best evidence – NOT A PROPERTY
• Convenient for transfer
• Issued upon payment of full amount plus interest, if any
• States: Person named therein is the owner of the stated number of shares;
kind of shares; date of issuance; par value; signed by proper officer, usually
President or Secretary; bears corporate seal.
• Not issued for more than the ACS
• Any over issue is VOID, no rights and liabilities arise therefrom. Bona fide
purchasers – right to damages only, cannot acquire stockholder’s rights.
Lost or destroyed certificate, Sec. 73
• Even by fortuitous event shall
o Spend for publication
o Wait for one year before he can get a new one UNLESS he filed a
bond
• If issued without fulfilling conditions and 3 person can prove legality of
rd
entitlement of the shares, corporation is liable even if it acted in GF.
• If issued after fulfillment of conditions, corporation is not liable to the legal
owner, unless acted fraudulently or negligently.
XIII DIVIDENDS AND PURCHASES BY CORPORATION OF ITS OWN SHARES
A Form of dividends, Sec. 43
1 Cash
2 Stock, upon vote of majority of BOD; 2/3 OCS
• Profits are transferred to capital stock and shares representing increase in
capitalization are distributed
• From unissued or increase in ACS
• Issued in proportion of their interests
• Investment and proportional interest remains the same
• Represents no income, but merely increase in share owned
• No income subject to tax
• Civil fruits belonging to usufruct, not to the naked owner
• Issued only to stockholders
• For listed corporations, SEC requires them to fix date for their issuance
• Sometimes, fractional shares results, sometimes corporation issued the
fractions in cash or share warrants. Stockholder may sell the warrants or
purchase warrants to claim one full share.
3 Property
• Scrip – certificate issued to stockholders in lieu of cash dividends, entitling
them to certain amount at some future date; rarely used; property dividend.
Nielson & Co. v Lepanto Consolidated
Lepanto and Nielson entered into a management contract wherein Nielson was to
manage the mining properties of Lepanto, and Nielson would receive 10% of stock
dividends declared and paid AND 10% of the cash value of such stock dividends.
A share of stock coming from stock dividends declared cannot be issued to one who
is not a stockholder. Under Section 16 of the Corporation Law stock dividends cannot
be issued to a person who is not a stockholder in payment of services rendered. A
stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par.
Thus, in the case at bar, Nielson cannot be paid in shares of stock which form part of
the stock dividends of Lepanto. Although the 10% cash value as payment for services
is valid, where the stock dividend was only used as basis for the cash value
computation.
B Sources of dividends, Sec. 43
• Unrestricted RE, on the basis of outstanding stocks
• Cash, property or in stocks
• For cash dividends, delinquent stocks, first be applied to unpaid balance plus
cost and expenses
• For stock dividends, withheld from delinquent stockholder until full payment
of unpaid subscription
Corporation Law by Castillo, Roman George P., De La Salle University - COL 35
 • No stock dividend is issued without the approval of 2/3 of OCS at
regular/special meeting
Retained earnings
• URE – undistributed earnings not allocated for managerial, contractual or
legal purposes and which are free for distribution as dividends; earned
surplus
• Legal or stated capital should be maintained for protection of creditors
• From sale of goods property other than stock
• Does not include premium on stock (paid-in capital)
• However, SEC allows stock dividends out of premiums, with justification that
stock dividends does not involve any distribution of corporate assets to
stockholders but merely gives them tangible evidence of the increase in their
equity.
• Sec. 6, no par stock, entire consideration is not available for distribution as
dividends
• Does not involve transaction involving treasury stock, since purchase and
sale of them are regarded as contractions and expansion if paid in capital.
• Does not include donations = paid-in capital
• Any excess of net assets to par value is surplus which may be declared.
• SEC imposed restriction on RE on cost of treasury shares and are lifted only
upon reissuance or retirement.
SEC Memo Circular No. 11, 5 December 2008, Guidelines on the Determination
of Retained Earnings Available for Dividend Declaration

Berks Broadcasting v Craumer
Whether the defendants lawfully declared and paid out dividends, thereby giving the
Corporation the right to recover the same
No. In this case, the write-ups of $26,000 represented an unrealized appreciation in
the value of the company’s assets. Their inclusion is unlawful. If the said amount was
removed, there would obviously be a deficiency. Thus, the dividends should not have
been declared. The purpose of this prohibition is to afford a margin of protection for
creditors, and also to protect the interest of the shareholders themselves by preserving
the capital so that the purposes for which the corporation was formed may be carried
out. Such a surplus must be a bonafide surplus and not an artificial or fictitious one.
Lich v United States Rubber – PLEASE REVIEW
Whether Lich is entitled to dividends for the years of 1935, 1936, and 1937, to the
extent of the annual net earnings of the said years.
No. The non-cumulative preferred stockholders are not entitled to dividends on said
years because while there were net earnings, there were no profits to be distributed.
The payment of dividends to common stockholders was proper.
Test on whether there are cumulative dividends or non-cumulative preferred
stocks
Whether there were, in the years in which dividends were not declared, net profits
available for the lawful declaration and payment of dividends, but with- held from the
non-cumulative preferred stock- holder and retained in the business?
C Authority to declare dividend, Sec.43
• Discretionary upon the Board
• Unless tainted with BF, fraud or gross negligence, the courts will not interfere
and stockholders will be bound by it (business judgment rule)
Limitations
• Prohibited from retaining surplus in excess of 100% of paid in capital stock
• XPT (1) expansion projects; (2) loan agreement; (3) retention is necessary,
special reserve or contingencies
• IAET may apply for improper accumulation
• Dividends is based on the amount of stock held, regardless of whether or not
he has paid his full subscription.
Keough v St. Paul Milk Co.
The Court may compel the corporation to declare dividends because it was withheld
for unlawful purpose. Considering that capital and surplus of the company amounted
to $435,491.73 for the year, as well as other factors (its lack of mortgages/liens or
other substantial indebtedness, no immediate expansion plans, etc.), the issuance of
cash dividends is proper.
Ordinarily, courts will not compel a dividend (business judgment rule) unless the
directors act fraudulently, unjustly, or unreasonably so as to impair the rights of
complaining stockholders to their just proportion of corporate profit. The mere fact
that a large corporate surplus exists is not enough to warrant equitable intervention.
Ultimately, the test resolves itself into an examination of the good faith and
reasonableness of the policy of retaining that which otherwise is available for
dividends. Based on the facts, it is clear that the corp did not have a reasonable need
for the large surplus accumulated.
Dodge v Ford Motor Co.
Court held that they are entitled to a more equitable-sized dividend, but the Court will
not interfere with the company’s business judgment regarding the price set on the
products or the decision to expand the business (which prevented the dividend
declaration).
D When right to dividends vests; rights of transferee
• Upon declaration of BOD
• No revocation can be made, unless not yet been announced or
communicated
• Based on policy; not to mislead investors
• Whoever owns the stocks, owns the dividends, subsequent transfer will not
transfer dividends declared but not yet paid.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 36
 • Sometimes declared payable to stockholders of record on a specified date,
whoever is registered on record on that date is entitled.
• A transferee after declaration but before specified date, has presumably the
right to such dividends despite failure to record on the books, unless contrary
is agreed.
McLaran Vs. Crescent Planning Mill Co.
No revocation of dividend declaration
The doctrine is that by mere declaration, the dividends becomes immediately fixed
and absolute in the stockholder. That when the writers employed the terms “set
aside,” “set apart” and “actually set apart” in the definition of a dividend, they are
referring to the principle that the act of declaring a dividend from the stock of a corp
is ipso facto the setting part, setting aside and segregating such dividends in the sense
that it creates an immediate right of the stockholder to demand recover the same.
It follows that a cash dividend, properly and fairly declared, cannot be revoked by the
subsequent act of the corp. because it becomes the debtor of the SH. It goes without
saying that debtor cannot revoke, recall or rescind the debt or otherwise absolve itself
from its payment by his action against or without the consent of the creditor.
E Liability for illegal dividends
1 Directors
• Not liable for unintentionally declaring dividends in violation of law unless
acted willfully, or with negligence or bad faith (business judgment rule)
• Ex. reliance on FS of a dishonest employee
• Sec. 31, solidarily liable
2 Stockholders
• Majority view – innocent stockholder is not liable to return the, unless corp is
insolvent at time of payment.
F Purchase by corporation of its own shares, Sec. 41
• Requirements: (1) Unrestricted RE; (2) for legitimate purpose
• When allowed, not exclusive.
a. Eliminate fractional shares
b. Collect/compromise indebtedness, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent shares sold during said
sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment of
their shares.
• Example of when allowed: to keep the corporation close to stranger
• Illegal/improper purpose – to create appearance of active trading in its
shares.
Remedies for improper purchase
• Against the selling stockholders to recover the consideration paid
• If directors were negligent, BF – personally liable to the receiver of the
corporate assets
• Sec. 31 – solidarily liable
• Creditors have right to assume that as long as there are outstanding liabilities,
BOD will not use the corporate assets to purchase its owne stock
• Secondarily liable – purchase of own stocks; Jointly and severally – illegal
dividends
REMINDER (singit lang)
Amendment of:
• Articles of Incorporation BOD majority + 2/3 OCS
• By-laws BOD majority + majority OCS
XIV. AMENDMENTS OF CHARTER
XV. TRANSFER OF SHARES
A. Manner and effectivity of transfer, Sec. 63
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws. Shares
of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates endorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
(1) Endorsement of stock certificate; registration in corporate books

• On the back is a transfer form with blank spaces for the transferee’s name
and person authorized by the transferor to record the transfer in the books.
• When a SH wants to transfer, he’ll just sign the form; the transferee may do
it himself.
• Transferee, armed with the cert and signed transfer form, can now go to the
corp and ask secretary to record the transfer, cancel the cert and issue new
one.
• In cases of widely held corp, stock transfer agent takes charge.
(2) Effect of lack of registration
• Until registration, though valid between parties, not effective against the corp.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 37
 • Unrecorded transferee cannot enjoy status of a SH; cannot vote, no
dividends
• Corp pays dividends to original SH
• Purpose of registration is two-fold:
o Enable transferee to exercise right;
o Inform the corp of any change in ownership to ascertain persons
entitled to the rights
• Until challenged in a proceeding, SH of record has rights to participate in
meeting; absence of fraud, any action in such meeting cannot be collaterally
attacked.
• If registration is refused, can go to court to prove right an transfer.
• Until registration, transferee is merely an outsider.
• Minority view, followed by SC: unregistered transferee (binding only to
parties) cannot prevail over the rights of a subsequent attaching creditor.
(3) Unpaid shares cannot be transferred; assignment of subscription
• Not transferable on the books.
• However, SH can transfer his interest by way of deed of assignment. Here,
corporation may refuse to register although not delinquent.
• “Unpaid claim” – no need for call by BOD. As long as there is unpaid balance,
corp has claim on the shares.
• However, corporation may agree to register/record a transfer although there
still remains unpaid, provided the transferee assumes obligation to pay the
unpaid.
• Nevertheless, no full payment, no cert.
(4) Remedy if registration refused
• Writ of mandamus
• Granted provided transferee has no other plain, speedy and adequate
remedy and there are no unpaid claims; if there is, failure to state cause of
action.
• Right to have the transfer registered exists from time of transfer
• Law does not prescribe any period; the action to enforce the right does not
accrue until there has been a demand and refusal to record.
• Thus, where the transfer was in 1944 and transferee sought to register it only
in 1955, action to compel registration has not yet prescribed when it was
brought two months after corp’ refusal to do so.
Uson v Diosomito
Under Sec. 35 of the Corporation Law, “No transfer... shall be valid, except as between
the parties, until the transfer is entered and noted upon the books of the corporation
so as to show the names of the parties to the transaction, the date of the transfer, the
number of the certificate, and the number of shares transferred”.
Monserrat vs. Ceron
Section 35 of the Corporation Law provides that no transfer shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the
corporation.
Inasmuch as section 35 of the Corporation Law does not require the notation upon the
books of a corporation of transactions relating to its shares, except the transfer of the
possession and ownership thereof, as a necessary requisite to the validity of such
transfer, the notation upon the said books of the corporation of a chattel mortgage
constituted on such shares is not necessary to its validity. The chattel mortgage is not
the transfer referred to by the Corporation Law. In the case at bar, as a chattel
mortgage is not a complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation is not necessary
requisite to its validity.
Embassy vs. CA
Indorsement in blank; transfer of certs is required. From the pleadings submitted,
it is clear that although EBE has indorsed in blank the shares outstanding in his name
he has not delivered the cert of stocks to AGA because the latter has not fully complied
with his obligations under MOA. There being no delivery of the indorsed shares of
stock, AGA cannot therefore effectively transfer to other person or his nominees the
undelivered shares of stocks. The certificate of stock was not actually delivered to
AGA so that EBE is still the controlling stockholder of Embassy Farms despite the
execution of MOA and the turnover of control and management of Embassy Farms.
Razon vs. IAC
The law is clear that in order for a transfer of stock certs to be effective as between
the parties, the certs must be properly indorsed and that the title to such cert of stock
is vested in the transferee by the delivery of the duly indorsed cert of stock (Sec. 35,
Code). In the case at bar, since the cert of stock covering the questioned 1,500 shares
of stock registered in the name of the late Chuidian was never indorsed to Razon, the
inevitable conclusion is that the questioned shares of stock belong to Chuidian. The
indorsement of the cert of shares of stock is a mandatory requirement of law for
an effective transfer of a cert of stock.
Rural Bank Salinas vs. CA
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers, because: “Restrictions in the trasnfer of stock must have
their source in legislative enactment, as the corporation itself cannot create such
impediment. The only limitation imposed by Section 63 of the Corporation Code is
when the corporation holds any unpaid claim against the shares intended to be
transferred, which is absent here.
The duty of the corporation to transfer is a ministerial one and if it refuses to make
such transaction without good cause, it may be compelled to do so by mandamus.
Rural Bank Lipa vs. CA
Deed of assignment is not a sufficient transfer because there was no DELIVERY of
instrument nor any endorsement by owner of agent. The rule is that the delivery of the
Corporation Law by Castillo, Roman George P., De La Salle University - COL 38
stock certificate duly endorsed by the owner is the operative act of transfer of shares
from the lawful owner to the transferee. Thus, title may be vested in the transferee only
by delivery of the duly indorsed certificate of stock.
Tan vs. SEC
Whether endorsement is necessary to complete the transfer of shares, despite
cancellation of the original cert of stock and recording of the transfer in the books of
the corp.
No. First, the provision relied upon is not mandatory in nature. Second, there is already
delivery of unendorsed Cert no 2. It was only returned to Alfonso for his endorsement,
which he did not do. Nevertheless, Cert no 6 and 8 were already issued pursuant to
the cancellation of Cert no 2. Since this was already cancelled which cancellation was
also reported to the respondent Commission, there was no necessity for the same
certificate to be endorsed by the petitioner.
Moreover, there is a difference between a share of stock and cert of stock. Cert of
stock is the paper representative or tangible evidence of the stock itself and of various
interests therein. It merely expresses the contract between the corp and stockholder,
but it is not essential to existence of share in the name of the stockholder.
Tay vs. CA
Lim Tay's ownership over the shares was not yet perfected when the complaint was
filed. The contract of pledge certainly does not make him the owner of the shares
pledged.
TRANSFER OF SHARES, cont.
B Restriction on transfers
1 General rule: free transferability of shares
• When a stockholder becomes dissatisfied with the management, it only fair
that he should be completely free to get out of the business by selling his
shares.
2 Exception: in close corporations
• Most of stockholders are participants in policy decisions
• Thus, they must be wary about the stranger coming into the business and will
want to choose the persons allowed to join the intimate group.
• For protection of stockholders
Sec. 98. Validity of restrictions of shares
• Restrictions must appear in AOI, by-laws and stock certs. Otherwise, not
binding on any purpose in GF.
• Must NOT BE MORE ONEROUS (burdensome) than granting existing SH
option to purchase.
• If upon expiration of period, no option to purchase was exercised transferring
SH may sell to 3 person.
rd
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying
conditions, READ CODAL
Notes
• Restrictions on the right to transfer must be reasonable under the
circumstances to justify their exception to the fundamental rule of free
alienability of property
• Consent restriction – requires consent of SHs
• Option restriction - requires a stockholder who wishes to sell or transfer his
stock to first offer the same to the corporation or to the other stockholders
and give the latter an opportunity to acquire the same should the wish to do
so.
• Restrictions, when ambiguous, are construed in favor of free transferability.
• AOI of a close corporation may provide that only persons meeting specified
qualifications may be stockholders thereof.
• The Code requires that the restriction on transfer of shares appear in the
articles of incorporation, in the by-laws and in the certificate of stock, other-
wise they cannot bind a purchaser in good faith.
Allen vs. Biltomre
Verbatim or substantial statement of a restriction on transfer of shares is not required.
What is unlawful is when there is no notice whatsoever of a restriction on share
transfer. There is sufficient statement of a restriction where there is a legend noting
“issued subject to restriction” and specifying where the full text may be found.
C Unauthorized shares
1 Certificates indorsed in blank; when quasi negotiable
• A transfer of shares may be made by merely signing the “transfer form” on
the back of the stock certificate without filling in the blank spaces with the
name of the transferee.
• A certificate of stock possesses certain attributes of negotiability because a
possessor who is not the owner, though acting wrongfully, can give a bona
fide purchaser better title than he has.
• Such negotiable character is limited to the situation when the owner is guilty
of estoppel in making other people believe that the possessor has a right to
transfer the same.
• The rule is different if the owner has not entrusted the certificate to anyone
and is not guilty of estoppel.
• Thus, if the transfer of a certificate indorsed in blank is made by a finder or a
thief, no title passes even to a bona fide purchaser.
2 Forged transfer
• If the corporation issues a new certificate in pursuance of a forged transfer,
the corporation incurs no liability.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 39
 • It is the duty of the purchaser to determine that the indorsement of the owner
in the transfer is genuine.
• However, if the new certificate issued to the purchaser due to a forged
transfer, is transferred to a bona fide purchaser for value, the corporation is
estopped from denying the validity of the new certificate.
• The corporation is thus forced to recognize the original certificate and the
new certificate.
• But if the recognition of both results to an over-issue of shares, then only the
original and true owner can be recognized as the stockholder.
• However, the bona fide purchaser has a right of damages against the
corporation.
Read Santamaria and Delos Santos case.
Santamaria vs. Hong Kong Shanghai
Although subject to endorsement, stock certificate is not a negotiable instrument.
D Collateral transfers
• Pledge or chattel mortgage
• Not covered by the registration requirement of Sec. 63 since it applies only
to ABSOLUTE TRANSFER
• Thus, registration of pledges and chattel mortgage of shares cannot have
legal effect
• Where the certificate is delivered to creditor as security = PLEDGE; take
effect only against third person if its date appears in the public instrument
• If not delivered, must be registered in CM Registry in the province where
principal office is located, in order to be effective against third persons.
Where the stockholder’s domicile is in a different province, the registration
must also be made in such province.
Chua Guan vs. Samahang Magsasaka Inc.
Chua Guan foreclosed the mortgage assigned to him over shares of Samahang
Magsasaka. He demanded issuance of new certificates in his name.
Under the present laws, the registration cannot have the effect of constructive notice
to other creditors, since it was defective. Under the Chattel Mortgage Law, the
mortgage must be registered in the province where the mortgagor resides and where
the property is located.
COLLATERAL TRANSFERS: Shares of stock may be subject to pledge or mortgage.
Such collateral transfers are not covered by the registration requirement under Sec.
63, since such provision covers only absolute transfers (Monserrat v. Ceron, 1933).
E Non-stock corporations
• Membership is personal and cannot be transferred unless AOI or by-laws
provides (Sec. 90)
• AOI or by-laws will usually provide who may become members, manner,
causes of termination. Effect of termination: all rights extinguishes. (Sec. 91)
• If he wishes to terminate membership, resign.
• Termination by courts must be with cause.
XVI. DISSOLUTION
• Ceases to be a juridical person
• Can no longer continue transacting business
• Except: winding up of affairs for 3 years
• Voluntary or involuntary under Sec. 117
General rule: Court has wide discretion on the question of dissolution
Exception: Substantial injury to the public
A Causes of dissolution
(1) Expiration of corporate term
• Automatically dissolved without any further proceeding
• Cannot be considered even a de facto corporation
• Attempt to extend term after expiration would be ineffective, in effect a
renewal of charter
• Extension cannot be made earlier than 5 years prior to expiration of term
(2) Shortening corporate term
• If wishes to dissolve, shortening term is the least cumbersome
• Does not require publication
Sec. 120
• Effected by amending AOI
• Amended AOI shall be submitted to SEC.
• Upon (1) SEC approval and (2) expiration of shortened term, corporation is
deemed dissolved without further proceedings
• If SEC fails to act within 6 months and shortened term does not expire in 6
months, automatically dissolved when the term expires
• If SEC fails to act within 6 months and shortened term DOES EXPIRE
dissolved until the end of 6 months.
• Unless in either, failure to act is imputed to the corporation; corporation will
not be dissolved even after expiration.
• Appraisal right available
(3) Voluntary dissolution when no creditors affected, Sec. 117; 118, Code
Sec. 118
• By vote of majority of BOD, 2/3 affirmative vote of OCS
Corporation Law by Castillo, Roman George P., De La Salle University - COL 40
 • Meeting called upon for the purpose upon call of BOD after publication of
notice (time, place and object) for 3 consecutive weeks in a newspaper
published in place of principal office. Then in a newspaper of general
circulation, after sending such notice to each SH either by registered mail or
personal delivery at least 30 days prior to meeting.
• Copy of resolution must be certified by majority of BOD, countersigned by
Secretary.
• EFFECTIVE = SEC issues certificate of dissolution
• Mere resolution, without certificate, is not sufficient.
• Since state grants corp’s right to exist, it is only the state which grants its
termination.
(4) Voluntary dissolution where creditors affected, Sec. 117; 119
• Creditors must be given opportunity to present their claims and objections,
so that their interest may be protected
• PD 902-A – SEC’s exclusive jurisdiction over all intra-corporate controversies
• Any petition for dissolution is now filed with SEC
Sec. 119
• Filed with SEC
• Signed by majority BOD, verified by president or secretary or on of BOD, and
shall set forth all claims and demands against it
• Affirmative vote of 2/3 OCS
• Meeting duly called for purpose.
• If sufficient in form and substance, SEC fixes date for objections that may be
filed by any person, date shall not be less than 30 nor more than 60 after entry
of order.
• Upon 5 days’ notice, given after date fixed, SEC proceed to hear the petition
and try any issue
• If no objections and material allegations are true, it shall render judgment
dissolving the corporation and directing disposition of assets and appoint
receiver to collect such assets and pay debts of corp.
• If intention to dissolve is to only “freeze out” the minority, they cane be held
liable for damages which minority may have suffered
Sec. 122
• No distribution of assets EXCEPT upon lawful dissolution and after payment
of liabilities.
(5) Failure to organize; continuous inoperation
Sec. 22
• Failure to organize in 2 years, deemed dissolved.
• Continuous inoperation for 5 years, suspended or revoked.
• XPT: causes beyond corp.’s control
• By-laws must be adopted 1 month after issuance of cert of incorp., otherwise,
cert. is suspended or revoked. No dissolution. SEC proceeding is necessary.
• “Transacting business” – continuity of acts or dealings in the accomplishment
of the purpose for which the corporation was formed.
• As long as first act takes place, saved from Sec. 22 already, assuming it has
been formally organized.
• Art. 3 of Code of Commerce – advertisement in the media = SUFFICIENT to
raise presumption of commencement of business (rebuttable)
(6) Dissolution by minority in close corporations
Sec. 105
• Any SH of close corp. may by written petition to SEC, compel dissolution for
any acts of BOD, officers which are illegal, fraudulent or dishonest,
oppressive or unfairly prejudicial or assets are misapplied or wasted.
• Two special rules on dissolution of close corps:
o In case of deadlocks
o SEC orders, as it deems appropriate
Financing Corporation vs. Teodoro 

Although as a rule, minority stockholders may not ask for its dissolution in a private
suit and such action should be brought by the Government through its legal officer in
a quo warranto case at their instance and request, there might be exceptional cases
wherein the intervention of the State cannot be obtained, as when the State, is not
interested because the complaint is strictly a matter between the stockholders and
does not involve.
NOTE
General rule: Minority cannot demand dissolution to OSG
Exceptions: Financing Corp. case – TOO MANY allegations of mismanagement
(7) Involuntary* read di mo nagets to, or tinamad ka lang pala
Sec. 121
• A corporation may be dissolved by SEC upon filing of verified complaint and
after proper notice and hearing provided by existing laws.
A corporation may be dissolved by the SEC, upon a verified complaint and after proper
notice and hearing, on the following grounds (Sec. 6, par. i, PD 902-A):
1. Fraud in procuring its certificate of registration
2. Serious misrepresentation as to what the corporation can or is doing to the
great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of its
franchise;
Corporation Law by Castillo, Roman George P., De La Salle University - COL 41
 4. Continuous inoperation for a period of at least five years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period;
7. Other grounds
(a) Violation by the corporation of any provision of the Corporation Code (Sec. 144 BP
68)
 business
(b) In case of a deadlock in a close corporation, and the SEC deems it proper to order
the dissolution of the corporation as the only practical solution to the dispute (Sec.
104 BP 68)
Government vs. Philippine Estates

 winding up. It cannot be granted franchise or license. It is NOT EVEN considered as a
Dissolved. Philippines Sugar engaged in the business of buying and selling land. It
held and owned real estate not necessary to carry out the business for which it was
created. The law gives the court a wide discretion in its judgment in depriving
corporations of their franchise. Forfeiture will not be allowed, except under express
limitation, or for a plain abuse of power by which the corporation fails to fulfill the
design and purpose of its organization.
Government v El Hogar Filipino
Republic v Security Credit
Dissolved. Ruling that Security Corp. is clearly a banking institution, it has violated
GBA for engaging in said transactions without securing authority thereunder. It is thus
a misuser of corporate funds and franchise which is willfully done 59,000 times (as
there are 59,000 accounts opened). It also worked to injure the public when they
believed they are investing in a bank duly authorized. Therefore, these are valid
grounds for dissolution.
Republic vs. Bisaya
Not dissolved. The court found that the several acts of misuse and misapplication of
the funds and/or assets of the Bisaya were committed more particularly by the
respondent Manuel Cuenco with the cooperation of Velez, for the commission of which
they may be personally held liable. The court a quo found that the controversy between
the parties was more personal than anything else and did not at all affect public
interest.
B Effects of dissolution; winding up and dissolution, Sec. 122
Sec. 122. Corporate liquidation
• Continued as a body corporate for 3 years for prosecuting and defending
suits, dispose properties, distribute assets and close affairs BUT NOT for
purpose of continuing business.
• Any time within 3 years, it is authorized and empowered to covey all
properties.
• Any distributable asset to any UNKNOWN or CANNOT BE FOUND creditor
or stockholder shall be escheated to the city or municipality where such
assets are located.
(1) Loss of juridical personality
• Cannot enter into contracts which would have the effect of continuing the
• After payment of stocks. Remaining assets should be distributed to
stockholders proportionally.
Buenaflor vs. Cam Sur Industry
Cam Sur’s personality ceases to exist after 1953. It only continues for 3 years for
de facto corporation.
National Abaca vs. Pore


Cannot anymore, after the 3-year lapse, continue with the case filed within 3 years
since the winding up was conducted by the corporation’s Board of Liquidators.
Cebu Port Labor Union vs. State Marine


Dissolved. No personality to sue. During 3-year period, it can sue BUT NOT FOR THE
PURPSOE OF CONTINUING THE BUSINESS. in the case at bar, the case was for the
cancelation of the award of exclusive contract. To warrant complaint, would be
violative of the limitation (not for the purpose of continuing business).
Gonzales v Sugar Regulatory Administration
Section 13 of EO 18 is not to be interpreted as authorizing respondent SRA to disable
Philsucom from paying Philsucom's demandable obligations by simply taking over
Philsucom's assets and immunizing them from legitimate claims against Philsucom.
The right of those who have previously contracted withPhilsucom, to have the assets
of Philsucom applied to the satisfaction of those claims, is a substantive right and not
merely a procedural remedy. Section 13 cannot be read as permitting the SRA to
destroy that substantive right.
(2) Executory contracts 

• Prevailing view – not extinguished by dissolution
• Exemption – employment contracts of officers and employees
Sec. 145. Amendment or repeal
• No rights or liabilities shall be removed or impaired either by subsequent
dissolution or subsequent amendment or repeal of Code
(3) Methods of liquidation
• Winding up – collection of assets, payment of liabilities and distribution of
remaining assets to stockholders
Corporation Law by Castillo, Roman George P., De La Salle University - COL 42
 • Unpaid creditors, after three-year period has expired, does not lose his rights.
He can still sue the trustee, or if none, he may follow the corporate assets in
the hands of the SH who may have received the same as liquidating
dividends.
Three methods of liquidation
1. By corporation itself through its BOD (via authority to manage its own affairs)
2. Conveyance of assets to trustee who will take charge of the liquidation – 3-
year limitation NOT APPLICABLE provided designation is made within that
period. if liquidation started with first method, then 3 years expired,
liquidation may then be vested to a trustee.
3. Receiver appointed by SEC upon decree of dissolution – 3-year limitation
DOES NOT APPLY. Mere appointment of receiver does not result to
dissolution.
(4) Distribution of assets after payment of debts
• Liquidating dividends – remaining assets distributed to SH after payment of
liabilities
• If liabilities are not yet fully satisfied and then distributed liquidating dividends,
BODs and liquidators are liable for negligence or fraud to any prejudice to
creditors.
• NOT A PARTITION OF PROPERTY, but transfer or conveyance by the corp,
subject to DST.
• Notice by publication to SH and creditors who cannot be found is sufficient
before escheatment.
• Distribute ONLY AFTER dissolution and liquidation.
• XPT: (1) decrease of capital stock (thus, surplus results); (2) otherwise allowed
by the Code (appraisal right, repurchase of shares, deadlock, etc.)
Board of Liquidators vs. Kalaw
Trustee was appointed. No time limit has been tacked to the existence of the Board
of Liquidators (trustee) and its function of closing the affairs of the various government
owned corporations, including NACOCO. Also, nowhere in the EO was there any
mention of the lifespan of the Board of Liquidators. Thus, has personality to sue.
Sumera v. Valencia
Receiver was assigned. When a corporation is dissolved and the liquidation of its
assets is placed in the hands of a receiver or assignee, the period of three years
prescribed by section 77 of Act No. 1459 known as the Corporation Law is not
applicable, and the assignee may institute all actions leading to the liquidation of the
assets of the corporation even after the expiration of three years.
Gelano vs. CA
Although Sawmill did not expressly appoint a trustee, their counsel who represented
them in the suit can be considered as one. Thus, suit can be continued.
Republic v. Marsman
Whether action for collection of taxes is barred? No. Although the corporation has
already been extra-judicially dissolved in 1954, there is no claim that the affairs of said
corporation had already been finally liquidated or settled. While Sec. 77 of the
Corporation Law provides for a 3-year period for the continuation of the corporate
existence, there is nothing in said provision which bars an action for recovery of debts,
after the lapse of said period. To assume that creditors could not collect after
dissolution would render the dissolution illegal. Under Sec. 62, dissolution is permitted
only when “it does not affect the rights of any creditor having a claim against the
corporation”.
Tan Tiong Bio vs. CIR
The dissolution of a corporation does not extinguish the debts due or owing to it
because a creditor of a dissolved corporation may follow its assets, as in the nature of
a trust fund, into the hands of its stockholders. 

Chung Ka vs. IAC
Four years had elapsed before the petitioners filed their action for liquidation, and
during such period, new corporation was in full operation. Thus, petitioners are barred
by laches.
Clemente v CA
Whether Clemente et al, as the heir of the only known stockholders of the corp, can
have the property declared to be owned by them. No. Sociedad is the rightful owner
of the property. It has a separate and distinct personality from its shareholders. The
termination of the life of a juridical entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity nor those of its owners and
creditors.
C Distribution of assets of non-stock corporation
Sec. 94. Rules for distribution
1. Pay all obligations
2. Assets, upon a condition requiring return, must be returned
3. Assets, with no condition requiring return, subject to limitation permitting their
use only for charitable, religious, etc. purposes, be given to societies, orgs,
corps engaged in same activities in PH substantially similar.
4. Assets not mentioned above, distributed in accordance with AOI or by-laws.
5. In any other case, assets may be distributed to persons, societies orgs,
corps, as may be specified in a distribution plan adopted by the corporation.
Sec. 95. Plan distribution of assets.
• May be adopted as long as not inconsistent with the Code.
• Approved by majority of BOD
• Adopted by 2/3 members
GR: Follow plan adopted in AOI
XPT: In case of inconsistencies, Sec. 94 prevails.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 43

XVII. CORPORATE COMBINATIONS
A Purposes of combinations; methods
• Corporate reorganization or amalgamation (united as one)
• Causes: on the verge of insolvency, unsound financial structure, or want of
different corporate set-up
• Effects: prevent competition, improve marketing facilities, economize costs
of operation, efficient
• Indiscriminate combinations – create monopolies and combinations in
restraint of trade and eliminating free and healthy competition, prejudicing
public. Act. 3518 and RPC penalize such.
• Different approach of corporate combinations:
o Merger
o Consolidation
o Sale of substantially all corporate assets and purchase thereof by
another corporation
• Each method must pass the test of fairness, particularly to the minority
stockholders
B Merger and consolidation, Sec.76, 77, 78, 79, 80
(1) Nature; distinction
• Consolidation – union of two, to form a new one, composed generally, though
not necessarily, of the SH of the original corp.
• Merger – union of two, one absorbs the other, latter survives and continues
the combined business.
• Parties are called constituent corporations.
• There is NO LIQUIDATION of assets of the dissolved corporations because
surviving corp. absorbs all rights and liabilities
• Surviving corp. acquires all rights, properties and assumes liabilities of
dissolved corp., REGARDLESS of whether creditors gave their consent or not
to such combination.
• Merger may be the following:
o Horizontal – between competing firms.
o Vertical – corp. acquires another which uses or distributes the
former’s products.
o Conglomerate – neither competing nor related in the chain of
production or distribution.
• There must be EXPRESS PROVISION of law authorizing combination,
otherwise, ultra vires.
(2) Only de facto merger under Corporation Law
• Prior to Code, no express authority except for insurance, railway and public
utility companies.
• Reyes vs. Blouse paved the way to de factor mergers and consolidations –
SC held that even without express provision authorizing merger or
consolidation, effects of such could be obtained by the following provisions
of the Corporation Law:
o Sale of all or substantially all of corporate assets of the absorbed to
the absorbing corp.;
o Subsequent dissolution of the selling corp. by shortening its term;
o Amendment of the AOI of the absorbing corp.
• PROBLEM: there is no automatic assumption by the absorbing corp. of the
liabilities of the absorbed corp. Creditor’s consent is INDISPENSABLE.
(3) Express authority to merge granted by Code; requirements
Sec. 76. Plan of merger or consolidation
• BOD/T shall approve plan of merger or consolidation setting the ff.:
o Names of constituent corporations
o Terms and modes to effect
o Statement of changes in the AOI
o Other provisions deemed necessary
Sec. 77. Stockholders’ or members; approval
• Majority BOD approval
• Approval of 2/3 of OCS/members
o Separate meeting for each corporation
o Notice 2 weeks prior to the meeting
o Notice shall state purpose
• Dissenting stockholders may exercise appraisal right; if BOD abandons the
plan, appraisal right is extinguished.
• Any amendments to the plan may be made with vote of majority BOD and
2/3 of OCS/members; such plan will then be considered as the agreement
for the combination.
Sec. 78. Articles of merger or consolidation
• After approval by OCS, articles must be executed by the President or VP,
certified by Secretary or Asst. Sec. of each corp.
• Sets forth the ff.:
o Plan
o Number of outstanding shares or members
o Number of shares/members voting FOR and AGAINST such plan
Sec. 79. SEC’s approval and effectivity
• Submitted for approval to SEC, in quadruplicate
• Favorable recommendations is required for several institutions (bank,
building and loan, public utilities, insurance, etc.)
• When SEC is satisfied, certificate will be issued, then, plan is then
EFFECTIVE.
• If SEC believes its contrary to Code or laws – SEC sets hearing to hear
corporations; notice given 2 weeks prior to hearing.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 44

Sec. 80. Effects of merger and consolidation
1. Constituent corps. become single corp.;
2. Separate existence of constituent corps. ceases, XPT that of surviving in
consolidation; Surviving or consolidated corp. possess all rights, privileges,
immunities; subject to duties and liabilities
3. Transfer of all assets, privileges, properties
4. Absorbs all liabilities and obligations
Steps of merger and consolidation (applies to both non-/stock)
1. BOD draws a plan; amendments, statements of changes in the AOI, etc.
2. Submission of plan to OCS/members for approval; 2/3 approval; notice must
be given to all, personally or by registered mail; appraisal rights are
recognized
3. Execution of formal agreement = articles of merger or consolidation, by the
officers.
4. Submission of articles to SEC for approval
5. If necessary, SEC sets hearing, notice given 2 weeks prior to hearing
6. Issuance of certificate of merger or consolidation
Effective date
Upon issuance of Articles of Merger or Consolidation by the SEC.
Payment of registration fees
Surviving corp.’s acquisition of assets of absorbed corp. is a TRANSFER which can
be registered only upon payment of registration fees. However, transfer or exchange
of shares pursuant to merger or consolidation is exempt from registration under the
Securities Act.
(4) Remedies of creditors and dissenting stockholders; appraisal right
• Creditors cannot prevent plan; remedies are (1) to enforce claim against the
surviving/consolidated corporation OR (2) for fraudulent conveyance, follow
the assets of the dissolved constituents in the hands of the surviving or
consolidated corp.
• For dissenting stockholders, exercise appraisal rights; if proved fraudulent,
(1) enjoin; or (2) sue for the valued of their interests.
• Rescission not granted since it may prejudice persons not parties to the
fraud.
• If absorbing corp. issues new stocks, stockholders will have no pre-emptive
right to such stocks.
• Except for close corp., where consideration is in form of property, there is no
pre-emptive right.
Thom vs. Baltimore
There was a merger. The preemptive right of petitioners would have been correctly
invoked if the shares were intended to be sold for cash. In this case, the shares were
to be sold in exchange of property (shares of Maryland, thus, merger) which
necessarily requires a valid restriction of the preemptive right. The exchange
agreement (merger) with Maryland would not be feasible if petitioners were allowed to
exercise such right since the basis of such merger was to give a set proportion of the
company to the constituent (Maryland).
C Sale of all or substantially all corporate assets Sec. 40; appraisal right;
compared with merger
(1) Legal requirements
• Required vote: majority of BOD, authorized by 2/3 of outstanding
capital/members in a meeting duly called for the purpose. Provided:
dissenting given appraisal right.
• When all or substantial – render incapable of continuing the business.
• BOD, by discretion, may abandon the sale without need of approval by
stockholders.
Notes
• When intention is to effect combination, consideration for the sale will be
stocks of the purchasing corp.
• Unless creditors have agreed to the sale, sufficient assets should be reserved
to pay their claims. In this case, the selling corp. would normally dissolve by
shortening its term. Upon dissolution, it will liquidate by paying creditors;
stocks it received will then be distributed to its stockholders as liquidating
dividends; thus becoming stockholders of the purchasing corp.
(2) No Assumption of liabilities; exceptions
• GR: Purchasing corp. NOT liable to liabilities of the selling corp.
• Exceptions:
1. Purchaser expressly/impliedly agrees to assume;
2. Transaction amounts to merger or consolidation;
3. Purchasing corp. is merely a continuation of the selling corp.;
4. Fraudulent transaction to escape debts.
• Subject to provisions of Bulk Sales Act – renders void fraudulent sales of
stocks of merchandise in bulk, without complying with certain required
notices to creditors.
(3) Remedies of dissenting stockholders; appraisal right
• Paid only (appraisal right) if it has URE
• When purpose is to freeze out minority SH and exclude them from fair
participation in the fruits of the sale; remedies:
o Enjoin the sale;
o If already executed, damages against fraudulent shareholders or
directors.
o Rescission is rarely granted as innocent third persons may be
adversely affected.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 45
 • SH of selling corp. only enjoy the right; NOT SH of purchasing corp.
• For the purchasing corp., mere resolution is needed to effect purchase unless
requires amendment to AOI, or investment not necessary.
• If business of selling corp. is necessary for secondary purpose of the
purchasing corp., no amendment is needed. BUT investment in the
secondary purpose would require SH’s approval, subject to appraisal right.
• If payment is through treasury shares (property), thus, no appraisal right,
UNLESS close corp.
Section 81 – Appraisal right
Right to dissent and demand payment of the FV of his shares in the ff. instances:
1. In case of amendment of AOI has the effect of changing or restricting rights;
2. In case of sale and/or disposition all or substantially all of corporate property;
3. Merger or consolidation.
(4) Compared with merger and consolidation, read again!!!
• Advantage of merger/conso – shortcut to accomplishment of various
transactions, delay and expense accompanying dissolution.
• M/C – constitutes transfer of property in exchange for securities of absorbing
corp.; automatic assumption of liabilities.
• Sale – must have sufficient funds reserved by absorbed corp. to pay its
liabilities, otherwise sale may be attacked
Issuance of stocks
• Sale – issuance of stocks is required to be registered under Revised
Securities Act and SEC
• M/C – no requirement
Reyes vs. Blouse
The transaction called for therein cannot be considered a merger or consolidation of
the two corporations because a merger implies necessarily the termination or
cessation of the merged corporations and not merely a merger of their properties and
assets. What is intended by the resolution is merely a consolidation of properties and
assets, to be managed and operated by a new corporation, and not a merger of the
corporations themselves. This intent is clearly deducible from the provision that the
Laguna Tayabas Bus Co. will not be dissolved but will continue existing until its
stockholders decide to dissolve the same.
Edward J. Nell vs. Pacific Farms
General Rule: when a corporation purchased all or substantially all of its assets to
another corporation, the latter does not become alter ego of the former. And so, the
latter cannot be liable for the debts of former.
Exceptions: (meaning, the latter now becomes liable)
a. Purchaser agrees to assume such debts
b. Said transaction amounts to MERGER or CONSOLIDATION
c. Purchaser is merely a continuation of the seller
d. Transaction is entered to defraud creditors, and escape liability
The theory of Nell that Pacific is alter ego of Insular negates consolidation or merger.
A corporation cannot be its own alter ego.
D Exchange of stocks
• Acquisition of all or substantially all of stocks of one corp., thus all or
substantially all SH of acquired corp. stockholders of the acquiring corp.
• Once exchange is completed, acquired corp. becomes SUBSIDIARY of
acquiring corp.
• No combination of two business under a single corporation.
• Rights of stockholders who refuse to sell their shares depends whether the
parent decides to retain acquired corp. as a subsidiary, or merges with it or
buy all its assets.
• In the last 2 cases, non-selling SH has appraisal rights.
• For the first case, no appraisal right, since not provided under the Code.
XVIII. FOREIGN CORPORATION
A. Legal requirements prior to transacting business –Sec.123; 125; 126; 133
Foreign corporation – one formed and organized under laws other than those of the
Philippines, regardless of citizenship of the incorporators and stockholders.
For licensing purpose, additional requirement by the Code: laws of the country where
the corporation was organized and operates allow Filipino citizens and corporations
to do business in that country.
Under PH law, the condition is that it must obtain a license in the Philippines.
Methods of entry of investment
1. Organize a subsidiary as a domestic corporation, legally independent unit.
Parent company needs license if it will manage or control the subsidiary.
2. Open a branch or agency in the Philippines, bringing in capital and technical
know-how, without legal independent unit. License is required.
3. Joint venture – investment. Need authority of BOI f investment exceeds 40%
of capital of the business enterprises it invests in. not required license unless
participates in management/control.
4. Service contracts with domestic corporations
Permitted areas of investment
1. Partially nationalized areas
2. Preferred areas; incentives for investment therein
3. Non-preferred areas of investment
Legal requirements
Sec. 123. Definition and rights of foreign corporation
Corporation Law by Castillo, Roman George P., De La Salle University - COL 46
 • Definition – one formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and
corporations to od business in its own country or state.
• License and certificate – required to transact business in the Philippines.
Effect – subject to ABSOLUTE jurisdiction, supervision and control of SEC.
1 BOI Certificate, Sec. 48, 49, Omnibus Investments Code
• BOI – agency charged to determine whether business operations of a foreign
corp. will contribute to sound and balance development of national economy.
• No SEC license without BOI cert.
• Under OIC, banks are not required to obtain BOI cert.
Sec. 48. Authority to do business
• No foreign corporation shall do business in the Philippines or be licensed by
SEC, without first securing a written certificate from BOI to the effect:
o That operation is not inconsistent with Investment Priorities Plan;
o Such business will contribute to sound and balance development of
national economy on a self-sustaining basis;
o Business not in conflict with Constitution or PH laws;
o Filed of business Is not one that is being adequately exploited by
PH nationals;
o That entry of applicant will not pose a clear and present danger of
promoting monopolies or combinations in restraint of trade.
Sec. 49. Requirements by BOI
1. Resident agent = PH citizen (legal age, GMC, sound financial standing)
authorized to accept summons;
2. Office in PH with proper notification to SEC of any subsequent transfers;
3. Bring assets to PH as capital to remain unimpaired for protection who third
persons;
4. Proof of reciprocity rule; provided that if foreign country imposes additional
condition for PH nationals aside from that of the BOI, same conditions shall
be imposed to the foreign corporation, on the discretion of the BOI;
5. Submit to SEC charter and by-laws 20 days after grant of BOI cert, and
annually of the financial statements;
6. Keep a complete set of accounting records with resident agent;
7. Give priority to resident creditors;
8. Give SEC 6 months’ advance notice in writing intention to stop doing
business within Philippines;
9. Not to terminate any franchise, licensing or other agreement with PH
nationals
Notes
• Applications for BOI cert, if not acted upon within 10 days = automatically
approved
• After approval, notice of action must be published, at applicant’s expense,
once in a newspaper of general circulation in province or city where principal
office is located.; posted in conspicuous place in BOI office.
• Without publication = INVALID cert.
• Any violation of Sec. 49 requirements is ground for cancellation.
• Any person adversely affected by an irregularly issued license may seek relief
from RTC (principal’s office location).
2 SEC license to do business
Sec. 125. Application for a license
• Submit to SEC: AOI, by-laws, certificates.
• Application must be under oath.
• Certificate under oath by official of foreign country attesting reciprocity rule;
good standing of the corp.
• Statement under oath by the President
• Fore foreign banking, financial and insurance corp. – comply with existing
laws applicable to them.
Sec. 126. Issuance of a license
• Upon issuance of license – corp may commence to transact business in the
Philippines
• Within 60 days from issuance, licensee, XPT banking and insurance, shall
deposit to SEC for benefit of present and future creditors, securities and
bonds, shares of stocks with market value of at least P100K.
• Additional securities:
o If gross income exceeds P5M – additional 2% of gross income
o If deposit decreased 10% of its value
• Deposits may be reduced if, at discretion of SEC:
o Gross income has decreased;
o Value of deposit increased 10% of value
• Substitute securities, if solvent.
• If ceases to do business, securities are released only upon proof that licensee
has no liability to PH residents, including the government.
3 Certificate from appropriate governmental agency
• Insurance Commissioner – insurance companies
• DepEd – educational institutions
• Foreign banks, not required BOD cert, but must seek authority from Monetary
Board of the Central Bank + SEC license.
• Local ordinances must also be met.
Effect of failure to secure SEC license
• if it does business, officers or agents in PH responsible for violation of Code
= criminally liable
Sec. 133. Doing business without a license
Corporation Law by Castillo, Roman George P., De La Salle University - COL 47
 • No foreign corp transacting business in PH without a license, shall be
permitted to MAINTAIN or INTERVENE in any action, suit, or proceedings in
any COURT or ADMINISTRATIVE agency in PH;
• May be used or proceeded against before PH courts or administrative
tribunals on any valid cause of action recognized under PH laws.
Supreme court ruling applicable to Sec. 133
• Doing business w/o license - CANNOT sue before PH courts;
• Doing business w/o license – CAN BE SUED before PH courts; counter-claim
is not an admission of legal capacity to sue*
• NOT doing business – cannot be sued because PH courts cannot acquire
jurisdiction over it;
• NOT doing business – needs no license to sue before PH courts on the ff:
o isolated transactions;
o for infringement of trademark and unfair competition;
o cause of action entirely independent of any business transactions.
• When there is agreement “all legal settlements shall fall under juris of PH
courts” = foreign corp can be sued here despite not doing business in PH.
• Contracts entered into without license are not null and void, cured by
subsequent registration and licensing. Enforceable. (Home Insurance vs.
Eastern Shipping).
Actions for infringement of trademark and unfair competition (Sec. 21-A,
Trademark Law)
Two conditions:
a. Trademark or tradename must have been registered by the FC; and
b. That the country of which FC is a domicillary grants similar privileges to PH
corps.
Our courts are bound by the Union Convention for the Protection of Industrial Property
to which the Philippines is a signatory; thus, existence of such treaty need not be
averred in the complaint brought by the FC (General Garments vs. Director of Patents).
Registration of the trademark would not be necessary if the remedy availed of by FC
is NOT action under 21-A but for the ff:
a. ADMINISTRATIVE CANCELLATION of the trademark of corp. who is alleged
to have infringed (General Garments case);
b. FC files its objection to the registration (Asari Yoko vs. Kee Boc);
c. Case based on a violation of RPC (Lacoste vs. Fernandez)
Moreover, registration requirement is dispensed with when the plaintiff has its
business in a foreign country which is a party to an international treaty relating to the
repression of unfair competition to which the Philippines is also a party (Converse vs.
Universal Products).
Western vs. Fidel Reyes
A foreign corporation which has never done any business in the Philippines and which
is unlicensed and unregistered to do business here, but is widely and favorably known
in the Islands through the use therein of its products bearing its corporate and trade
name, has a legal right to maintain an action in the Islands to restrain the residents
and inhabitants thereof from organizing a corporation therein bearing the same name
as the foreign corporation, when it appears that they have personal knowledge of the
existence of such a foreign corporation, and it is apparent that the purpose of the
proposed domestic corporation is to deal and trade in the same goods as those of the
foreign corporation.
Atlantic Mutual Insurance vs. Cebu Stevedoring
All that is averred in the complaint is that petitioners are both foreign corporations
existing under the laws of the US. This averment conjures two alternative possibilities:
either they are engaged in business in the Philippines or they are not so engaged. If
the first, they must have been duly licensed in order to maintain this suit; if the second,
if the transaction sued upon is singular and isolated, no such license is required. In
either case, the qualifying circumstance is an essential part of the element of
petitioners' capacity to sue and must be affirmatively pleaded.
General Garments vs. Director
A foreign corporation not licensed to do business and not doing business in PH, has
legal capacity to maintain a suit in the PPO for cancellation of trademark registered
therein The right to use of the corporate or trade name is a property right, a right in
rem, which it may assert and protect in any of the courts of the world—even in
jurisdictions where it does not transact business – just the same as it may protect its
tangible property, real or personal against trespass or conversion.
Leviton Industries vs. Salvador
Rule under RA 166
Sec. 21-A of RA 166 grants to a foreign corporation, whether or not licensed to do
business in the Philippines, the right to seek redress for unfair competition before
Philippine courts. But the said law is not without qualifications. Its literal tenor indicates
as a condition sine qua non:
a. The registration of the trade mark of the suing foreign corporation with the
PPO or, in the least, that it be an assignee of such registered trademark; and
b. Country of foreign corporation grants to Filipino corporations or juristic
entities the same reciprocal treatment, either thru treaty, convention or law.
Rule under Rules of Court
Section 4, Rule 8 of the Rules of Court that “facts showing the capacity of a party to
sue or be sued or the authority of a party to sue or be sued in a representative capacity
or the legal existence of an organized association of persons that is made a party,
must be averred.”
In the case at bar, the foreign corporation has no capacity to sue. Here, all that is
alleged in respondent’s complaint is that it is a foreign corporation. Such bare
averment not only fails to comply with both rules mentioned
Lacoste vs. Fernandez
Lacoste yan, syempre pwede yan mag-sue… Read Western case.
Corporation Law by Castillo, Roman George P., De La Salle University - COL 48

Converse Rubber vs. Universal Products
Ito pa, sikat din. Pwede mag-sue. Read Western case.
Home Insurance vs. Eastern Shipping
SC ruled that Home Insurance, after being licensed, has already obtained capacity to
sue. Furthermore, the fact that Home Insurance was not yet duly licensed when it
entered into the contracts will not make the contracts null and void. The lack of
capacity was cured by the subsequent acquisition of the license
B. What constitutes doing business - Art .44, EO 226; Sec.1, IRR of EO 226,
KATAMAD MAG SUMMARIZE
Corporation Code does not define, but OIE enumerates certain acts of “doing
business.”
Article 44. Definition of terms. As used in this Book, the term "investment" shall mean
equity participation in any enterprise formed, organized or existing under the laws of
the Philippines; and the phrase "doing business" shall include soliciting orders,
purchases, service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors who are domiciled in the
Philippines for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business firm,
entity or corporation in the Philippines, and any other act or acts that imply a continuity
of commercial dealings or arrangements and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization.
Sec. 1, IRR of EO 226
"Doing business" shall be any act or combination of acts, enumerated in Article 44
of the Code. In particular, "doing business" includes… See IRR.
The following acts by themselves shall not be deemed doing business in the
Philippines:
1. The publication of a general advertisement through newspapers, brochures,
or other publication media or through radio or television.
2. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines.
3. Collecting information in the Philippines. Thus, sending a roving
correspondent to gather news in the Philippines does not of itself constitute
doing business therein.
4. Performing services auxiliary to an existing isolated contract of sale which
are not on a continuing basis, such as installing in the Philippines machinery
it has manufactured or exported to the Philippines, servicing the same,
training domestic workers to operate it, and similar incidental services.
Notes
• No general rule. What constitutes business is based on the circumstances.
• Test under Mentholaum case = whether there is continuity of business
transactions which are in pursuance of the normal business of the
corporation.
• Isolated transactions, even pursuance to normal operations = NOT DOING
BUSINESS
• Where FC employs an agent in PH to recruit laborers to work abroad =
DOING BUSINESS and can be sued before PH courts even if no license
(Facilities vs. de la Osa)
• Even a single act intended to be the beginning of a series of transactions =
DOING BUSINESS (Far East vs. Nankai)
• Place of consummation is a determining factor. Although FC entered to
export transactions in the past, since all contracts where negotiated,
perfected and the goods contracted for were delivered outside P = NOT
DOING BUSINESS. (Pacific vegetable vs. Singzon)
Aetna Casualty vs. Pacific Star Line
Foreign corporation may file suit for isolated transactions. In the case at bar, suit for
recovery of damages, as insurer.
Antam Consolidated vs. CA
There is no general rule or governing principle laid down as to what constitutes 'doing'
or 'engaging in' or 'transacting business in the Philippines. Each case must be judged
in the light of its peculiar circumstance. The records show that the only reason why
the respondent entered into the second and third transactions with the petitioners was
because it wanted to recover the loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction and in order to give the latter
a chance to make good on their obligation. No continuity of transactions. Foreign corp.
is NOT doing business.
Philippine Products vs. Primateria
A plaintiff could not recover from both the principal and its agents. In case of foreign
corporation not licensed in the Philippines where agents can be held personally liable,
the liability of the agent is necessarily premised on the inability to sue the principal or
non-liability of such principal.
Tests of “Doing Business in the Philippines”
A. Twin Characterization Test

• Under the Continuity Test, doing business implies a continuity of
commercial dealings and arrangements
• Under the Substance Test, a foreign corporation is doing business in the
country if it is continuing the body or substance of the enterprise of business
for which it was organized (Mentholatum v. Mangaliman)
B. Contract test – A foreign corporation is doing business in the Philippines if the
contracts entered into by the foreign corporation or by an agent acting under the
Corporation Law by Castillo, Roman George P., De La Salle University - COL 49
control and direction of the foreign corporation are consummated in the Philippines
(Pacific Vegetable Oil v. Singson)

“Doing Business” Under the Foreign Investment Act

1. Soliciting orders, service contracts, or opening offices;
2. Appointing representatives, distributors domiciled in the Philippines or who
stay for a period or periods totaling 180 days or more;
3. Participating in the management, supervision, or control of any domestic
business, firm, entity, or corporation in the Philippines;
4. Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the performance of acts or
works or the exercise of some functions, normally incident to and in
progressive prosecution of the purpose and object of its organization.

Not Doing Business

1. Mere investment as shareholder and exercise of rights as investor;
2. Having a nominee director or officer to represent its interest in the
corporation;
3. Appointing a representative or distributor which transacts business in its own
name and for its own account.

Jurisprudential Rules on “Not Doing Business in the Philippines”


1. Products manufactured off-shore and returned back to foreign corporation;
2. Single isolated transaction (Marshall-Wells); Multiple transactions are still
considered a single transaction where there are constantly failed attempts in
complying with the contract by one of the contracting parties (Antam case)
3. Trademark protection; foreign corporations not doing business are merely
protecting their property rights (General Garments v. Director of Patents).
4. A foreign firm which does business through middlemen acting on their own
names shall not be deemed doing business in the Philippines (Le Chemise
Lacoste v. Fernandez).

C How courts acquire jurisdiction

D Laws governing foreign corp.

See. Sec. 129, Code

E Withdrawal of foreign corp.

• Requires certification of SEC upon:
o All obligations in PH had been paid or settled;
o PH taxes had been paid
o Publication of petition, 3 consecutive weeks in newspaper of general
circulation.

Corporation Law by Castillo, Roman George P., De La Salle University - COL 50