PRIVATE CORPORATIONS & SECURITIES EXPRESS powers
(STUDY GUIDE – Atty. E.M. Polistico) - are the powers expressly conferred upon the corporation by law. These powers can
Sec. 36. Corporate powers and capacity.
— Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into with other corporations merger or consolidation as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no corporation, domestic or foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.
Powers of a corporation has reference to the corporation's capacity or right under its
charter and laws to do certain things. (6 Fletcher, p. 230.)
Three Classes of Powers of a Corporation are:
(1) Those expressly granted or authorized by law (Sec. 2.), i.e., those conferred by the
Corporation Code and its articles of
incorporation (Sec. 45.) – EXPRESS;
(2) Those that are necessary to the exercise of the express or incidental powers (Sees.
236[11], 45.) – IMPLIED; and
(3) Those incidental to its existence (Sees. 2, 45.) – INCIDENTAL.
be ascertained from the special law creating the corporation, or in case the
corporation is formed under the general incorporation law, from such law, the
general laws of the land applicable to corporations, and its articles of incorporation.
IMPLIED powers
- are those powers which are reasonably neces- sary to execute the express powers
and to accomplish or carry out the purposes for which the corporation was formed.
These implied powers are expressly recognized by Section 36(11).
INCIDENTAL or inherent powers
- are powers which a corporation can exercise by the mere fact of its being a
corporation or powers which are necessary to corporate existence and are, therefore,
impliedly granted.
Ways of increasing (decreasing) authorized capital stock.
(1) By increasing (decreasing) the number of shares authorized to be issued without
increasing (decreasing) the par value thereof;
(2) By increasing (decreasing) the par value of each share without increasing
(decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares
authorized to be issued and the par value thereof
Power to incur, create, or increase bonded indebtedness.
A corporate bond is an obligation to pay a definite sum of money at a future time at
fixed rate of interest.
Notes and bonds. — When a corporation borrows money, its indebtedness may be
evidenced by notes or bonds as its primary security.
(a) If the amount borrowed is small and if it is borrowed in a single sum, or from a
few persons, or for a short time, notes are usually given.
(b) If, however, the amount is large and obtained from a number of people and
extends over a period of years, the corporate obligation is preferably and usually
evidenced by bonds.
Right of Pre-Emption of Stockholders.
Whenever the capital stock of a corporation is increased and new shares of stock are
issued, the new issue must be offered first to the stockholders who are such at the
time the increase was made in proportion to their existing shareholdings and on
equal terms with other holders of the original stocks before subscriptions are
received from the general public.
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Reason for the grant of right.
The rule aims to safeguard the right of a stockholder to pre- serve unaltered and
unimpaired his proportionate influence and interest in the corporation and the
relative value of his holdings.
In other words, the purpose of the right is to protect from impairment and dilution
the basic rights of the existing stock- holders in the corporation
Power to sell, lease, etc. all or substantially all corporate assets.
(1) Requisites. — A corporation by the action of its board of directors or trustees
supported by the vote of shareholders or members may sell, lease, exchange,
mortgage, pledge, or otherwise dispose of all or substantially all of its property, and
assets including its goodwill x x x
The Requisites for the Validity of such Sale, etc. are as follows:
(a) The sale, etc., must be approved by the board of directors or trustees;
(b) The action of the board of directors or trustees must be authorized by the vote of
stockholders representing 2/3 of the outstanding capital stock including holders of
non- voting shares (see Sec. 6, par. 6[3].) or 2/3 of the members, as the case may be;
and
(c) The authorization must be done at a stockholders' or members' meeting duly
called for that purpose after written notice.
SUBSTANTIALLY ALL means:
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
(Sec. 40, par. 2)
Liability of Purchasing Corporation. — Generally, where one corporation sells or
otherwise transfers all of its assets to another corporation, the latter is not liable for
the debts and liabilities of the transferor, provided the latter acted in good faith and
paid adequate consideration for such assets, except where any of the following
circumstances is present:
(a) Where the purchaser expressly or impliedly agrees to assume such debts;
(b) Where the transaction amounts to a consolidation or merger of the corporations;
(c) Where the purchasing corporation is merely a continuation of the selling
corporation (see Caliguia vs. National Labor Relations Commission, 264 SCRA 110
[1996].); and
(d) Where the transaction is entered into fraudulently in order to escape liability for
such debts.
Fractional Share is a share which is less than one (1) corporation share.
Trust Fund Doctrine.
This doctrine, first enunciated by the Supreme Court in the case of Philippine Trust
Co. vs. Rivera (144 Phil. 469 [1923].), holds that the assets of the corporation as
represented by its capital stock are "trust funds" to be maintained unimpaired and to
be used to pay corporate creditors in the sense that there can be no distribution of
such assets among the stockholders without pro- vision being first made for the
payment of corporate debts and that any such disposition of it is a fraud on the
creditors of the corporation who extend credit to the corporation on the faith of its
outstanding capital stock and, therefore, void.
Dividend
- is that part or portion of the profits of a corpo- ration set aside, declared and
ordered by the directors to be paid ratably to the stockholders on demand or at a
fixed time. (Fisher vs. Trinidad, 43 Phil. 480 [1922]; Nielson & Co., Inc. vs. Lepanto
Consolidated Mining Co., 26 SCRA 540 [1968].) It is a payment to the stockholders of
a corporation as a return upon their investment.
Profit
- means the "return to capital rather than earnings from labor performed or services
rendered.
Dividends distinguished from Profits or Earnings.
(1) A dividend, as applied to corporate stock, is that portion of the profits or net
earnings which the corporation has set aside for ratable distribution among the
stockholders. Thus, dividends come from profits, while profits are the source of
dividends.
(2) Profits are not dividends until so declared or set aside by the corporation. In the
meantime, all profits are a part of the assets of the corporation and do not belong to
the stockholders individually. (19 Am. Jur. 2d 284.) They may be in cash as well as in
kind.
Power to Declare Dividends.
The board of directors of a stock corporation has the power to declare dividends out
of the "unrestricted retained earnings" which shall be payable in cash, in property, or
in stock to all stockholders "on the basis of the outstanding shares held by them."
Retained Earnings of a Corporation (Retained Earrings = Assets – Liabilities & Legal
Capital)
- is the difference between the total present value of its assets after deducting losses
and liabilities and the amount of its capital stock.
Retained Earnings = TPV Assets – Losses, Liabilities & Outstanding Capital
Stock
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Note: If there are no unrestricted retained earnings, dividends should not be declared.
Persons entitled to dividends.
it is only the stockholders of record as of the date of the declaration of dividends or
holders of record on a certain future date, as the case may be, who are entitled to
receive dividends unless the parties have agreed otherwise.
Discretion of the Board of Directors to Declare Dividends.
The board of directors has the responsibility to declare dividends and determine the
timing as well as their amount.
(1) The fact that profits or earnings have accrued in the prosecution of the corporate
business does not necessarily impose upon the directors the duty to declare them as
dividends. (Wabask R. Co. vs. Barclay, 280 U.S. 197.)
(2) If in their honest judgment the directors reasonably determine that the profits
should be kept in the business, no court has the power to compel them to make the
distribution in the absence of bad faith or clear abuse of discretion, or such arbitrary
or unreasonable conduct as amounts to a breach of trust. The apportionment of the
net earnings to the payment of dividends is largely a question of policy entrusted to
the discretion of the board of directors. If there is any doubt about the propriety of
declaring dividends, the directors are justified in resolving the doubt against such
action.
Declaration of Dividends.
(1) Conditions. — A dividend declaration ordinarily requires the concurrence of two
things, namely:
(a) The existence of "unrestricted retained earnings" out of which the dividends may
be declared and paid; and
(b) A corporate resolution of the board of directors declaring the payment of a
portion or all of such earnings to the stockholders.
(2) Additional requirements for stock dividends.
Classes of Dividends
(1) Cash dividend. — It is dividend payable in cash.
(2) Property dividend. — It is dividend distributed to the stockholders in the form of
property, real or personal, such as warehouse receipts, or shares of stock of another
corporation, (see Ballantine, p. 564.)
(3) Stock dividend. — It is dividend payable in unissued or increased or additional
shares of the corporation instead of in cash or in property out of the unrestricted
retained earnings of the corporation. A stock dividend may be declared only to the
extent of the maximum number of shares authorized in the articles of incorporation.
(4) Optional dividend. — It is dividend which gives the stock- holder an option to
receive cash or stock dividend;
(5) Composite dividend. — It is dividend which is partly in cash and partly in stocks.
Here, there is no option involved;
(6) Preferred or preferential dividend. — It is dividend which is payable, by virtue
of contract, to one class of stockholders in priority to that to be paid to another class
(19 Am. Jur. 2d 286.)
(7) Cumulative dividend. — It is dividend which is contracted to be paid at a certain
rate at stated times and, if net earnings at any dividend period are insufficient to pay
the contract dividend, it is to be made out of subsequent net earnings (Ibid.)
Ultra Vires Act is one not within the express, implied, and incidental powers of the
corporation conferred by the Corporation Code or articles of incorporation It is an act
which is not positively forbidden, but impliedly forbidden because not expressly or
impliedly authorized or necessary or incidental in the exercise of the powers so
conferred.
By-Laws
- may be defined as the rules of action adopted by a corporation (or association) for
its internal government and for the government of its stockholders or members and
those having the direction, management and control of its affairs in their relation to
the corporation and as among themselves (see 18 C.J.S. 589, p. 344; 8 Fletcher, pp.
632-633.), including rules for routine matters such as calling meetings and the like.
The function of by-laws is to define the rights and duties of corporate officers and
directors or trustees, and of stockholders or members towards the corporation and
among themselves with reference to the management of corporate affairs and to
regulate transaction of the business of the corporation in a particular way.
Elements of Valid By-Laws:
(1) They must not be contrary to existing law and inconsistent with the Code (Sec.
36[5]; Sec. 46.)
(2) They must not be contrary to morals and public policy
(3) They must not impair obligations of contract (Ibid.)
(4) They must be general and uniform in their operation and not directed against
particular individuals (8 Fletcher, p. 734.), i.e., not discriminatory;
(5) They must be consistent with the charter or articles of incorporation; and
(6) They must be reasonable.
Place of Meeting. — While the place of directors' or trustees' meeting may be held at
the place determined in the by-laws, "anywhere in or outside of the Philippines" (Sec.
53, par. 3.), the stockholders' or members' meeting must always "be held at the city
or municipality where the principal office of the corporation
is located or if practicable in the principal office of the corporation."
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Articles of incorporation and by-laws distinguished.
A clear distinction exists between the two.
(1) The former constitutes the charter or fundamental law of the corporation, while
the latter are merely rules and regulations adopted by the corporation;
(2) The former is executed before incorporation by the incorporators, while the latter,
usually after incorporation by the stockholders or members; and
(3) The filing of the former is a condition precedent to corpo- rate existence, while
the filing of the latter is a condition subsequent.
Kinds of meetings.
1. Meetings of Stockholders or Members. — It may be:
(a) Regular or those held annually (see Sec. 24.) on a date fixed in the by-laws, or if
not so fixed, on any date in April of every year as determined by the board of
directors or trustees. It is held principally for the purpose of electing another set
of directors or trustees; or
(b) Special or those held at any time deemed necessary or as provided in the by-
laws. (49, 50.)
2. Meetings of Directors or Trustees. — It may be:
(a) Regular or those held by the board monthly, unless the by-laws provide
otherwise; or
(b) Special or those held by the board at any time upon the call of the president or as
provided in the by-laws.
Requisites for a Valid Meeting of Stockholders or Members.
The following requisites must be complied with in order that there will be a valid
meeting of stockholders or members:
(1) It must be held at the proper place (Sec. 51.)
(2) It must be held at the stated date and at the appointed time or at a reasonable
time thereafter
(3) It must be called by the proper person (Sec. 50, last par.)
(4) There must be a previous notice (Sees. 50, 51.); and
(5) There must be a quorum.
Proper Person to Call Meeting
(1) The person or persons designated in the by-laws have authority to call
stockholders' or members' meeting.
(2) In the absence of such provision in the by-laws, the meeting may be called by a
director or trustee or by an officer entrusted with the management of the corporation
unless otherwise provided by law.
(3) Under Section 50 (last par.), a stockholder or member may make the call on order
of the Securities and Exchange Commission whenever for any cause, there is no
person authorized to call a meeting. Presidential Decree No. 902-A empowers the
Securities and Exchange Commission, among others, "to compel the officers of any
corporation or association registered by it to call meetings of stockholders or
members thereof under its supervision." (Sec. 6[f] thereof.) Section 50 (last par.)
applies only where there is no person authorized to call a corporate meeting or the
officers authorized fail or refuse to call a meeting. Any interested stockholder or
member may petition the Commission to authorize him to call a meeting or to compel
the officers of the corporation to call a meeting.
Status of Voting Trustee. — A voting trust agreement transfers only voting or other
rights pertaining to the shares subject of the agreement, or control over the stock, not
the properties or assets of the corporation. (National Investment & Dev. Corp. vs.
Aquino, 163 SCRA 153 [1988].) Under such agreement, title to the shares conveyed is
transferred to the trustee on the books of the corporation. The certificates of stock
covering said shares are surrendered and cancelled and new certificates are issued in
the name of the voting trustee in which new certificates as well as in the entry of
transfer on the books it shall appear that they are issued pursuant to said agreement.
(Ibid.)
Status of Transferring Stockholder. — By its very nature, a voting trust agreement
results in the separation of the voting rights of a stockholder from his other rights.
(Lee vs. Court of Appeals, 205 SCRA 752 [1992].) In such agreement, the transferring
stockholder of a stock corporation parts with the voting power only but retains the
equitable or beneficial ownership of the stock. A voting trustee is only a share owner
vested with colorable and fictitious title for the sole purpose of voting upon stocks
that he does not own. (SEC Opinion, Aug. 17,1979, citing cases.)
Purposes held Valid. — Under Section 59, a voting trust agreement may confer upon
a trustee not only the stockholder's voting rights but also other rights pertaining to
his shares. But the principal purpose of the grant of voting rights is to acquire control
of the corporation.
The following purposes of a voting trust have been sustained:
1. to assure continuity of policy and management especially of a new corporation
desirous of attracting investors;
2. to enable the owners of the majority of the stock of the corporation to control the
corporation;
3. to vest and retain the management of the corporation in the persons originally
promoting it;
4. to prevent a rival concern from acquiring control of the corporation;
5. to carry out a proposed sale of the corporation's assets and to facilitate its
dissolution;
6. to enable two holding companies to operate jointly a corporation controlled by
them;
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7. to effect a plan for reorganization of a corporation in financial difficulty or in Certificate of Stock is a written instrument signed by the proper officer of a
bankruptcy proceedings; and corporation stating or acknowledging that the person named therein is the owner of
8. to aid a financially embarrassed corporation to obtain a loan and protect its a designated number of shares of its stock. It indicates the name of the holder, the
creditors. (19 Am. Jur. 2d 196.) number, kind and class of shares represented, and the date of issuance.

Reasons for requiring registration of stock transfer.

Proxy and Voting Trust distinguished. The following are the distinctions:
The reasons for this requirement have been stated as follows:
1. A proxy has no legal title to the shares of the stockholder giving the agency, while a
(1) to enable the corporation to know at all times who its actual stockholders are
trustee acquires legal title to the shares;
because mutual rights and obligations exist between the corporation and its
2. A proxy, unless coupled with interest, is revocable at anytime, while a voting trust
stockholders;
agreement, if validly executed, is intended to be irrevocable for a definite and
(2) to afford to the corporation an opportunity to object or refuse its consent to the
limited period of time;
transfer in case it has any claim against the stock sought to be transferred, or for any
3. A proxy can only act at the specified stockholders' or members' meeting (if the
valid reason; and
proxy is not continuing in nature), while a trustee is not limited to any particular
(3) to avoid fictitious or fraudulent transfers. (Escano vs. Filipinas Mining Corp., 74
meeting;
Phil. 711 [1944].
4. A proxy votes only in the absence of the owner of the stock, while a trustee can vote
and exercise all the rights of the transferring stockholder even when the latter is
The purpose of registration, it has been said, is two-fold: to enable the transferee to
present;
exercise all the rights of a stockholder, including the right to vote and be voted for,
5. A proxy is usually of shorter duration than a voting trust agreement, although
and to inform the
under the law the maximum duration of both cannot exceed five (5) years at any
one time;
Actions by stockholders or members.
6. A proxy need not be notarized nor a copy filed with the Securities and Exchange
Actions by stockholders (or members) may be divided into three general categories:
Commission, while a voting trust must be notarized and a certified copy filed with
(1) derivative actions; (2) individual actions; and (3) representative actions. (19 Am.
the Commission; and
Jur. 2d 60.)
7. A proxy does not have a right of inspection of corporate books, while a trustee has
such right.
A Derivative Suit is thus defined as one brought by one or more stockholders or
members in the name and on behalf of the corporation to redress wrongs committed
How participation in a corporation acquired.
against it or to protect or vindicate corporate rights, whenever the officials of the
In a stock corporation, a person may become a shareholder:
corporation refuse to sue, or are the ones to be sued, or hold control of the
(a) by subscription contract with an existing corporation;
corporation. It is a remedy designed by equity for those situations where the
(b) by purchase from the corporation of treasury shares; or
management through fraud, neglect of duty, or other cause, declines to take the
(c) by transfer from a previous stockholder of the outstanding shares or existing
proper and necessary steps to assert the corporation's rights. (Commart [Phils.], Inc.
subscription to shares.
vs. Securities and Exchange Commission, 198 SCRA 73 [1991].
Kinds of Subscription.
Importance of derivative suits.
Subscription is an offer to acquire a specified number of unissued shares of an
If the duties of care and loyalty which directors (or trustees) owe to their corporation
existing corporation or one still to be formed. It may be:
could be enforced only in suits by the corporation, many wrongs done by directors
1. Pre-incorporation subscription or one entered into before incorporation. It
would never be remedied.
constitutes a binding contract among the subscribers (Sec. 61.)
2. Post incorporation subscription or one entered into after the incorporation for
the acquisition of unissued stock. It shall be deemed a subscription
notwithstanding the fact that the parties refer to it as a purchase or some other
contract. (Sec. 60)

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Requisites for bringing derivative suit.
Before a stockholder or member may sue in behalf of the corporation, the following
requisites must exist:
(1) There must be an existing cause of action in favor of the corporation, as where the
board of directors (or trustees) wastes or dissipates the funds of the corporation,
fraudulently disposes of its property, or perform ultra vires acts (Angeles vs. Santos,
64 Phil. 697 [1927].) and not in favor of the particular stockholder bringing the suit;
(2) The stockholder or member must first make a demand upon the corporation or
the management to sue, unless such a demand would be futile or useless (Reyes vs.
Tan, 3 SCRA 198 [1961]; Pascual vs. Del Saz Orosco, 19 Phil. 82 [1911].), and the
corporation refuses or fails to sue notwithstanding such demand. This is known as
exhausting intra-corporate remedies;
(3) The stockholder or member must have been such at the time of the objectionable
acts or transactions, as well as at the time the action was filed and during the
pendency of the action (Gochan vs. Young, 354 SCRA 207 [2001].), "unless such
transactions continue and are injurious to him or affect him especially or specifically
in some other way" (Pascual vs. Del Saz Orosco, supra.); and
(4) The action must be brought by the stockholder or member in the name and for
the benefit of the corporation. (Evangelista vs. Santos, 86 Phil. 388 [1950].
Individual Suit is, therefore, an action brought by a stockholder against the
corporation for direct violation of his contractual rights as such individual stock-
holder, such as the right to vote, the right to share in the declared dividends, the right
to inspect corporate books and records and similar other examples. In a derivative
suit, the wrong is inflicted directly on the corporation and indirectly upon the
stockholders.
When a wrong is committed against a group of stockholders, a stockholder may bring
a suit in behalf of himself and all other stockholders who are similarly situated. This
is called a shareholder's representative suit which is a kind of class action. It saves
the persons involved in the action substantial time and money.
Watered stock is stock issued not in exchange for its equivalent either in cash,
property, share, stock dividends, or services, (see Sec. 62.) It includes stock:
(1) issued without consideration (bonus share); or
(2) issued as fully paid when the corporation has received a lesser sum of money
than its par or issued value (discount share); or
(3) issued for a consideration other than actual cash, such as property or services, the
fair valuation of which is less than its par or issued value; or
(4) issued as stock dividend when there are no sufficient retained earnings or surplus
(see Sec. 43.) to justify it.
Call is a declaration officially made by a corporation usually expressed in the form of
a resolution of the board of directors requiring the payment of all or a certain
prescribed portion of a subscriber's stock subscription.
Requisites for a valid call.
The requisites for a valid call are intended to safeguard the rights of stockholders and
subject them only to equality of assessments. (SEC Opinion, July 21,1976.) These
requisites are:
(1) It must be made in the manner prescribed by law;
(2) It must be made by the board of directors; and
(3) It must operate uniformly upon all the shareholders. (Clark on Corporations, Sec.
123.)
Failure to pay on such date shall render the entire balance due and payable and make
all the stocks covered by the said subscription delinquent and subject to sale at public
auction. This means that the delinquent shares shall cover not only the unpaid
portion of the stockholder's subscription but his entire subscription consistently with
the doctrine that a subscription is one, entire, indivisible, whole contract,
Effects of Stock Delinquency.
(1) Stock delinquency shall deprive the stockholder the right to be voted for or be
entitled to vote or to representation at any stockholders' meeting as provided above
and in Section 24. Section 67 (par. 2.) expressly provides that the delinquent
stockholder loses his rights pertaining to a stockholder the moment the unpaid
subscription becomes delinquent.
Denial of Voting Rights.
Delinquent stock is denied voting rights because, if it shall be allowed to have the
same rights as non-delinquent stock, stockholders of good standing will cease to have
interest in paying their subscriptions promptly, and that will be inimical to the best
interest of the corporation. The same observation applies with respect to payment of
dues by members of non-stock corporations, (see SEC Opinion, June 14, 1972.) But
delinquent members may still be allowed to vote depending upon the provisions of
their by-laws. (SEC Opinion, April 8,1976.)
(1) Any director, trustee, or stockholder or member. — Section 74 states that "the
record of all business transactions of the corporation and the minutes of any meeting
shall be open to the inspection of any director, trustee, or stockholder or member of
the corporation at reasonable hours on business days." (par. 2.)
(2) Voting trust certificate holder. — The w ord "stockholder," as used in Section 74,
means not only a stockholder of record; it includes a voting trust certificate holder
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who has become merely the equitable owner of the shares transferred, (see Sec. 59,
par. 3.)
(3) Stockholder of a sequestered company. — Pursuant to said provision, a
stockholder of a sequestered corporation retains the right to inspect and/or examine
the records of the corporation. The act of sequestration of property does not import
or bring about a divestment of title over said property. In relation to the property
sequestered, frozen or provisionally taken over, the sequestrating authority is a
conservator, not an owner. (Republic vs. Sandiganbayan, 199 SCRA 39 [1991]; Africa
vs. Presidential Commission on Good Government, 205 SCRA 39 [1992].
(4) Beneficial owner of shares. — A beneficial owner of shares (e.g., buyer from
record owner), pledgee, or judgment debtor may also be given the right of inspection,
provided his interest is clearly established by evidence.
The law is based on the principle that the stockholders or members have a right to be
fully informed as to the condition of the corporation, in the manner its affairs are
conducted, and how its capital stock to which they have contributed is employed and
managed.
Right to Inspection NOT Absolute.
In spite of the fact that the right of inspection by a stockholder or member would
appear to be absolute according to the provision of Section 74, there are limitations
on the right.
(1) Purpose of inspection. — The stockholder's (or member's) right of inspection is
given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto (such as where the purpose is to
find out the actual financial condition of the corporation and how his investment is
being used) or in the interest of the corporation, (see Gokongwei, Jr. vs. Securities
and Exchange Commission, 89 SCRA 336 [1979].
(a) Ground for denial of right. — The right should be denied on the ground that "the
person demanding to examine or copy excerpts from the corporation's records and
minutes has improperly used information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand" (Sec. 74, par.
3.), or has an ulterior purpose or improper ends prejudicial to the corporation
(Acuna vs. Parlatone, [C.A.] O.G. Suppl., Oct. 17, 1941, p. 28.), such as where the
purpose is merely to gratify his curiosity or for a speculative use. (Gutherie vs.
Harkness, 199 U.S. 148.)
Common forms of corporate combinations.
Below are the common forms of corporate combinations.
(1) Sale of assets. — A union of corporations may be effected by one corporation
selling all or substantially all of its assets to another, (see Sec. 40.) Such sale is usually,
though not necessarily, made in the course of the dissolution of the vendor
corporation.
(2) Lease of assets. — In this case, a corporation, without being dissolved, leases its
property to another corporation for which the lessor merely receives rental paid by
the lessee.
(3) Sale of stock. — The purpose of a holding company is to acquire a sufficient
amount of the stock of another corporation for the purpose of acquiring control. The
acquiring corporation is called the parent or holding company. The corporation
whose stocks are acquired is known as the subsidiary corporation.
Note: See Secs. 36 (par. 7) & 42 as legal bases for sale of stock.
(a) A holding company has been defined as "a super corporation which owns or at
least controls such a dominant interest in one or more other corporations that it is
enabled to dictate their policies through voting power, or which is in position to
control or materially to influence the management of one or more companies by
virtue, in part at least, of its ownership of securities in the other company or
companies." (18Am. Jur. 2d 557.)
(b) A subsidiary corporation may be created by organizing a new corporation out
of the operating division or divisions of an existing corporation which shall continue
its existence after the spinoff and act as a holding company of the new corporation to
which shall be transferred the net assets of the operating divisions in exchange for
the shares of stock of the new corporation. This method of corporate combination is
effected when the corporation to be acquired refuses to approve a sale of assets, a
merger, or a consolidation.
(4) Merger. — Here, two (or more) corporations unite, one corporation which
retains its corporate existence absorbing or merging in itself the other which
disappears as a separate corporation. It is the absorption of one corporation by
another which survives.
(5) Consolidation. — Here, two (or more) corporations unite, giving rise to a new
corporate body and dissolving the constituent corporations which cease to exist as
separate corporations.
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 APPRAISAL RIGHT (Secs. 81-86)
What is meant by the stockholder’s right of appraisal?
The so-called appraisal right of a stockholder refers to his right to demand payment
of the fair value of his shares, after dissenting from a proposed corporate action
involving a fundamental change in the corporation in the cases provided by law.
What are the instances when a stockholder may exercise his right of appraisal?
Sec. 81. Instances of appraisal right. — Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of
all or substantially all of the corporate property and assets as provided in this Code;
and
3. In case of merger or consolidation, (n)
Instances when appraisal right available.
The appraisal right does not normally belong to a stock- holder as a matter of
absolute right; otherwise, a stockholder can withdraw from a corporation anytime by
returning his share and getting back his capital, which is truly violative of the trust
fund doctrine. (SEC Opinion, Jan. 11,1982; see Sec. 41.)
(1) Section 81 lists the three (3) instances when the right may be exercised as
provided in Sections 16,37,40, and 77.
(2) It is also available to a dissenting stockholder in case the corporation decides to
invest its funds in another corporation or business for any purpose other than its
primary purpose as provided in Section 42.
(3) Under Section 105, any stockholder of a close corporation may, for any reason,
compel said corporation to purchase his shares at their fair value, which shall not be
less than their par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock.
How is the fair value of the dissenting stockholder’s shares determined?
Sec. 82. x x x If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon surrender of the certificate(s) of
stock representing his shares, the fair value thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved
by the stockholders, the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares, it shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen. The findings of the majority of
the appraisers shall be final, and their award shall be paid by the corporation within
thirty (30) days… x x x
When will the dissenting stockholder lose his right of appraisal?
“Sec. 82. How right is exercised. — The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the date on which
the vote was taken for payment of the fair value of his shares: Provided, That failure to
make the demand within such period shall be deemed a waiver of the appraisal
right. x x x”
Give the effects of the exercise by a dissenting stockholder of his right of appraisal right.
Effect of exercise of right. (Sec. 83)
Once the dissenting stockholder demands payment of the fair value of his shares —
(1) All rights accruing to such shares including voting and dividend rights shall be
suspended; and
(2) He shall be entitled to receive payment of the fair value of his shares as agreed
upon between him and the corporation or as determined by the appraisers chosen by
them.
CORPORATE DISSOLUTION (Secs. 117-122)
Define DISSOLUTION as applied to corporation.
The term DISSOLUTION, as applied to a corporation, signifies the extinguishment of
its franchise to be a corporation and the termination of its corporate existence.
What are the 2 steps/stages in corporate dissolution? Explain each.
Dissolution of a corporation involves Two Legal Steps:
(1) The termination of the corporate existence at least as far as the right to go on
doing ordinary business is concerned; and
(2) The winding-up of its affairs, the payment of its debts, and the distribution of its
assets among the shareholders (Ibid., p. 655.) or members and other persons
interested. After winding- up, the existence of the corporation is terminated for all
purposes.
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After the formal dissolution of the corporation, any of its stockholders may form
another corporation which will engage in the same line of business even if it is done
during the liquidation period, (see Sec. 122.)
What are the methods of dissolution of a corporation? Discuss each.
(1) VOLUNTARY, which may be effected:
(a) by the vote of the board of directors/trustees and the stockholders/members
where no creditors are affected (Sec. 118.);
(b) by judgment of the Securities and Exchange Commis- sion after hearing of
petition for voluntary dissolution where creditors are affected (Sec. 119.);
(c) by amending the articles of incorporation to shorten the corporate term (Sec.
120.); or
(d) In the case of a corporation sole, by submitting to the Securities and Exchange
Commission a verified declaration of dissolution for approval. (Sec. 115.)
2) INVOLUNTARY, which may be effected:
(a) by expiration of the term provided for in the original articles of incorporation (Sec.
11.);
(b) by legislative enactment (infra.);
(c) by failure to formally organize and commence the transaction of its business
within two (2) years from date of incorporation (Sec. 22.); or
(d) by order of the Securities and Exchange Commission. (Sec. 121.)
State the limitations on the power of the legislature to dissolve a corporation.
- Art. XII, Sec. 11, 1987 Constitution
"Neither shall any such franchise or right be granted except under the condition that
it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires."
- Sec. 145, Corporation Code
“No right or remedy in favor of or accrued against any corporation, its stockholders,
members, directors, trustees, or officers nor any liability incurred by any such
corporation, its stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent amendment or repeal of the Code or
any part or portion thereof.”
Under Sec. 6 (l) of PD No. 902-A, upon what grounds may the SEC suspend or revoke the
franchise or certificate of incorporation of a corporation?
Suspension or revocation of certificate of registration of a corporation. —
Although the Securities Regulation Code transferred the Commission's jurisdiction
over matters enumerated under Section 5 of Presidential Decree No. 902-A to the
regional trial courts (infra.), it retains its power to suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by law, including the
following:
(a) Fraud in procuring its certificate of registration;
(b) Serious misrepresentation as to what the corporation can do or is doing to the
great prejudice of, or damage to, the general public;
(c) 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;
(d) Continuous inoperation for a period of at least five (5) years;
(e) Failure to file by-laws within the required period; and
(f) Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period.2 (Sec. 6[1] thereof; see Sec. 144.)
What are the effects of dissolution of a corporation? (Asked 1962, 1968 and 1973 Bar
Exams)
Effects of dissolution. A dissolved corporation continues to exist but only for a
limited purpose and for a limited time.
(1) Transfer of legal title to corporate property. — The dissolution of the
corporation results in the vesting of legal title to the corporate property in the
stockholders, who become co-owners thereof. The stockholders are, therefore,
entitled to have the corporate assets sold or converted into cash which will, in turn,
be distributed to those entitled thereto. (SEC Opinion, Aug. 3,1984.)
(2) Continuation of corporate business. — The corporation ceases as a body
corporate to continue the business for which it was established. (Sec. 122, par. 1.) But
x x x it may operate to continue to undertake the purposes for which it was organized
but its status is only that of an ordinary "association" (see Sec. 10.) which has no
juridical personality. (SEC Opinion, Sept. 25, 1995.)
(3) Creation of a new corporation. — While the board of directors of a dissolved
corporation is not normally permitted to undertake any activity outside of the usual
liquidation of its business, there is nothing to prevent its stockholders from
conveying their respective shareholdings toward the creation of a new corporation to
continue the business of the old. Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate anew. If it does, however, it is not
unlawful for the old board of directors to negotiate and transfer the assets of the
dissolved corporation, as expressly allowed by Section 40, to the new corporation
intended to be created as long as the stockholders have given their consent. (Chung
Ka Bio vs. Intermediate Appellate Court, 163 SCRA 534 [1988].)
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(4) Reincorporation of dissolved corporation. — A dissolved corporation cannot
be revived. However, those interested may reincorporate by refiling a new articles of
incorporation and by-laws. (Rebollido vs. Court of Appeals, 170 SCRA 800 [1989].)
(5) Continuation as a body corporate. — The dissolution does not by itself imply
the diminution or extinction of the rights and liabilities of such entity (Gonzales vs.
Sugar Regulatory Board, 170 SCRA 377 [1989].), nor those of its owners and
creditors. (Clemente vs. Court of Appeals, 242 SCRA 717 [1995].) A defendant
corporation is subject to suit and service of process even though dissolved.
(Rebollido vs. Court of Appeals, supra.) The corporation continues as a body
corporate for three (3) years for purposes of winding up or liquidation. (Sec. 122, par.
1.) It may hold an election of officers but only for said purposes.
(6) Cessation of corporate existence for all purposes. — Upon the expiration of
the winding up period of three (3) years, the corporation ceases to exist for all
purposes and as a general rule, it can no longer sue and be sued as such. (Gelano vs.
Court of Appeals and Insular Sawmill, Inc., 103 SCRA 90 [1981].)
In the absence of a statutory provision to the contrary, pending actions by or
against a corporation are abated upon the expiration of the period allowed by law for
the liquidation of its affairs. (National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA
989 [1961].)
LIQUIDATION, as applied to a corporation, means the winding-up of the affairs of the
corporation by reducing its assets in money, settling with creditors and debtors, and
apportioning the amount of profit and loss, (see 16 Fletcher, p. 658.)
What are the methods of liquidation of a dissolved corporation?
There are three methods by which a dissolved corporation may wind up its affairs:
(1) Liquidation by the corporation itself (Sec. 122, par. 1.);
(2) Liquidation by a duly appointed receiver (Sec. 119, last par.); and
(3) Liquidation by a trustee to whom the corporation had conveyed the corporate
assets, (see Sec. 122, par. 2.)
What are the consequences if corporate liquidation is not terminated within the three
(3)-year period of liquidation? (Asked 1997 Bar Exam)
- claims by and against it not presented and settled within that period become
unenforceable as there exists no longer a corpo- rate entity against which they can be
enforced, (see Buenaflor vs. Camarines Sur Industry Corp., 108 Phil. 472 [I960].)
- actions pending by or against the corpora- tion when the three (3)-year period
expires are abated, for after said period, the corporation becomes defunct and ceases
to be an entity capable of suing or being sued. (National Abaca & Other Fibers Corp.
vs. Pore, 2 SCRA 989 [1961].)
FOREIGN CORPORATIONS (Secs. 123-136)
Define FOREIGN CORPORATION.
Sec. 123. Definition and rights of foreign corporations. — For the purposes of this
Code, a FOREIGN CORPORATION is done, formed, organized or existing under
any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or State. x x x
As a rule, do foreign corporation transact business in the Philippines?
Sec. 123. x x x It shall have the right to transact business in the Philippines after it
shall have obtained a license to transact business in this country in accordance with
this Code and a certificate of authority from the appropriate government agency.
Under the Corporation Code, the existence of a foreign law allowing Filipino citizens
and corporations to do business in the country of the foreign corporation is
prescribed only as a condition for securing a license to transact business in the
Philippines. It is not an essential element of being a foreign corporation.
What is the purpose of the law in requiring that foreign corporations doing business in
the Philippines be licensed to do so?
The object of the statute in requiring that foreign corporations doing
business in the Philippines be licensed to do so and that they appoint an agent for
service of process is to subject the foreign corporation doing business in the
Philippines to the jurisdiction of its courts. It is not to prevent the foreign corporation
from performing single or isolated acts, but to bar it from acquiring a domicile for the
purpose of business without taking steps necessary to render it amenable to suit in
the local courts. (Marshall-Wells Co. vs. Elser & Co., 46 Phil. 71 [1924].) In other
words, what the law seeks to prevent is a foreign corporation doing business in the
Philippines without a license from gaining access to Philippine courts. (Hang Lung
Bank, Ltd. vs. Saulog, 201 SCRA 137 [1991].)
The requirement enables our government to exercise jurisdiction over
foreign corporations doing business in the Philippines for the regulation of their
activities in the country. By securing a license, a foreign corporation gives assurance
that it will abide by the decisions of our courts, even if adverse to it. (Eriks Pte., Ltd. vs.
Court of Appeals, 267 SCRA 567 [1997].)
How may a foreign corporation obtain license to do business in the Philippines?
Requisites for issuance of a license:
1. The foreign corporation should file a copy of its articles of incorporation and by-
laws, and a verified application (See Sec. 125) accompanied by the following:
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 (a) Name and address of its designated resident agent who will receive summons
and notices for the corporation; a special power of attorney should also be submitted
for such purpose.
(b) An agreement that if it ceases to transact business or if there is no more
resident agent, summons shall then be served through the SEC (c) Oath of Reciprocity
stating that the foreign corporation’s country allows Filipino citizens and
corporations to do business in said country.
(2) Within 60 days from issuance of license, the corporation should deposit at least
P100,000 (cash, property, bond) for the benefit of creditors subject to further deposit
every six months (See Sec. 126).
What are the consequences if a foreign corporation transacts a business in the
Philippines without a license?
Sec. 133. Doing business without a license. — No foreign corporation transacting in
the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
May a foreign corporation not doing business in the Philippines sue in Philippine courts?
A foreign corporation without a license is not ipso facto barred from bringing an
action in Philippine courts. Thus, a foreign corporation not transacting business in
the Philippines may maintain an action in our courts for relief, even if it has no
license; reciprocally, such corporation may likewise be sued in Philip- pine courts for
acts done against a person or persons in the Philippines, provided that in this case, it
would not be impossible for court processes to reach the foreign corporation, a matter
that can later be consequential in the proper execution of judgment. (Signetics
Corporation vs. Court of Appeals, 225 SCRA 737 [1993].)
What is meant by “doing (or transacting) business” in the Philippines?
“Doing Business” means:
1. Soliciting orders, service contracts, or opening offices;
2. Appointing representatives, distributors domiciled in the Philippines or who stay
for a period or periods totalling 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.
[Under the Foreign investment Act of 1991 (Sec. 3(d), RA 7042) - (Asked in ‘98 and
‘02)]
Tests of “Doing Business in the Philippines” (Asked in ‘98 and ‘02)
1. Twin Characterization Test
(a) Under the Continuity Test, doing business implies a continuity of commercial
dealings and arrangements, or performance of acts normally incidental to the
purpose and object of the organization.
(b) 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, 1941)
2. 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
control and direction of the foreign corporation are consummated in the Philippines
(Pacific Vegetable Oil v. Singson, 1955).
May a foreign corporation doing business in the Philippines without a license be sued in
our country?
Suit against foreign corporation. — Such corporation may, however, be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws under the doctrine of quasi-
estoppel by acceptance of benefits. It shall not be allowed, under any circum-
stances, to invoke its lack of license to impugn their jurisdiction. (Marubeni Nedeland
B.V. vs. Tensuan, 190 SCRA 105 [1990].) It is against justice and equity for an
unlicensed foreign corporation to execute contracts with domestic firms and then
repudiate their obligations thereunder or plead immunity to Philippine jurisdic- tion
just because it has not obtained license in the Philippines. (SEC Opinion, Jan. 10,1995.)
It has been held that where a local plaintiff and a foreign corporation have agreed on
Philippine courts as venue of action, evidence as to whether such foreign corporation
was doing business in the Philippines is no longer necessary before it can be sued,
and for the expeditious determination of the controversy, summons by publication
can be made on it. (Lingner & Fisher GMBH vs. Intermediate Appellate Court, 125
SCRA 522 [1983].)
“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.
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 Status Consequence (e) The forum has no particular interest in the case, the parties not being citizens of
the forum or are residents elsewhere; or the subject-matter of the case evolved
Doing Business in the PH, WITH a license May be sued an can be sued
somewhere else;
Doing Business in the PH, WITHOUT a (f) Other courts are open and case may be better tried in said courts;
Cannot sue, but may be sued in the PH
license
(g) The inadequacy of the local jurisdiction machinery for effectuating the right
May sue; may be sued sought to be enforced by the plaintiff; or
NOT doing business in the PH, on
(Facilities Management v. Dela Osa 89 (h) The difficulty of ascertaining the foreign law applicable. (See Stimson, Conflict of
isolated transactions
SCRA 131) Laws, pp. 348-352; Canada Malting Co. v. Patterson Steamship, 285 U.S. 413. 423:
Heine v. New York Ins. Co., 45 Fed. (2d) 426).
May Philippine courts refuse to assume jurisdiction over a case involving a foreign
corporation on the ground of forum non conveniens?
Yes. The court may invoke the principle of forum non conveniens, for
practical purposes eg. belief that the matter can be better tried and decided
elsewhere, either because the main aspect of the case transpired in a foreign
jurisdiction, or the material witnesses have residence there, etc. Or it would not
entertain the suit if it believes itself to be a serious inconvenient forum, provided that
a more convenient forum is available to plaintiff;

3 factors are considered for “most convenient forum”

Whether the forum is one to which the parties may conveniently resort
Whether it is in a position to make an intelligent decision as to the law and the facts
Whether it has or is likely to have power to enforce its decision (the principle of
effectiveness – judge has no right to pronounce a judgment if it cannot enforce it)

Note: Forum non conveniens is a principle in PIL that when the ends of justice
strongly indicate that the controversy may be more suitably tried elsewhere, then
jurisdiction should be declined and the parties relegated to relief to be sought in
another forum.

As has been said before, even if the court has jurisdiction over a conflicts case, it may,
by invoking the principle of forun non conveniens, refuse to exercise or assume that
jurisdiction, in view of any of the following practical reasons:
(a) The evidence and the witnesses may not be readily available in the forum;
(b) The court dockets of the forum may already be clogged so that to permit
additional cases would hamper the speedy administration of justice;
(c) The belief that the matter can be better tried and decided in another jurisdiction,
either because the main aspects of the case transpired there or the material
witnesses have their residence there;
(d) To curb the evils of “forum shopping”; i.e., the non-resident plaintiff might have
filed the case in the forum merely to secure procedural advantage or to annoy or
harass the defendant;

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