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BUSINESS ORGANIZATION II [CORPORATION LAW]

3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

Dec. 13, 2018 [Ugdang] manufacturing or repair activity is


specifically authorized, with a
11TH REGULAR substantial export component, to
a non-Philippine national by the
FOREIGN INVESTMENT NEGATIVE LIST 1 Secretary of National Defense; or
FIA OF 1991 [FOREIGN INVESTMENTS ACT OF 1991]
[2] which have implications on public
(RA. No. 7042)
health and morals, such as the
manufacture and distribution of
This law allowed the National Economic and
dangerous drugs; all forms of
Development Authority [NEDA] to issue Foreign
gambling; nightclubs, bars, beer
Investment Negative List [FINL] where the issue in
houses, dance halls, sauna and
list [are restricted industries.]
steam bathhouses and massage
clinics.
FINL [FOREIGN INVESTMENT NEGATIVE LIST]

It is composed of 2 lists: List A and List B.


[1] LIST A—Consists of areas of activities
reserved to Philippine nationals where
foreign equity participation in any domestic
Section 8. List of Investment Areas Reserved
or export enterprise engaged in any activity
to Philippine Nationals [Foreign Investment
listed therein shall be limited to a maximum
Negative List]
of forty percent (40%) as prescribed by the
Constitution and other specific laws.
The Foreign Investment Negative List shall
have two [2] component lists: A and B:
(This looks like the prohibition prescribed by
the constitution and under specific laws.)
[a] List A shall enumerate the areas of
activities reserved to Philippine
[2] LIST B— consists of areas of activities where
nationals by mandate of the
foreign ownership is limited pursuant to law
Constitution and specific laws.
such as defense or law enforcement-related
activities, which have negative implications
[b] List B shall contain the areas of
on public health and morals, and small and
activities and enterprises regulated
medium-scale enterprises.
pursuant to law:

[1] which are defense-related LIST A


activities, requiring prior NO FOREIGN EQUITY
clearance and authorization from

Business Organization 2 [Corporation Law]—1st exam coverage


the Department of National
Defense [DND] to engage in such LIST A: FOREIGN OWNERSHIP IS LIMITED BY
activity, such as the manufacture, MANDATE OF THE CONSTITUTION AND
repair, storage and/or distribution SPECIFIC LAWS2
of firearms, ammunition, lethal
weapons, military ordnance, NO FOREIGN EQUITY
explosives, pyrotechnics and
similar materials; unless such [1] Mass media, except recording (Art.
X VI, Sec. Il of the 1987 Constitution;
Presidential Memorandum dated 05
1
May 1994) and internet business
Introduction: This is actually quite new, like last month lang
(DOJ Opinion No. 40, s. 1998)
(November). Actually every 3 years dapat mag issue ka nang new
FINL [Foreign Investment Negative List]. So the last issued was with [2] Practice of professions (Art. Xll, Sec.
that of Aquino administration. Then, pagkatapos niyan, is in-open-up
14 of the Constitution, Sec. I of RA
No. 5181, Sec. 70] of RA No. 8981),
lang ni Pres. Duterte.
including
The idea of Filipinization is good but it hampers the economic
Radiologic and x-ray
development. In a sense that there are some industries that could technology (RA No. 7431),
have been financed by foreign investments and Filipinization may
never finance. It prevents further economic development. Criminology (RA No. 6506),

This is one of the platforms of the current President to open up some Law (Art. Vlll, Section 5 of
industries to foreign ownership. Ang nangyari diba, last year, the Constitution; Rule 138,
nakailang revisions ang NEDA or nakailang proposals sila, if I know,
pinermahan na, last month lang. This is new, 11th pa lang— foreign 2 E.O. No. 65 promulgating the eleventh regular Foreign Investment

negative investment list [FINL]. Negative List

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

Sec. 2 of the Rules of Court supported by the Philippines)


of the Philippines), and
[11] Manufacture of firecrackers and
Marine deck offlcers and other pyrotechnic devices (Sec. 5 of
marine engine officers (RA RA NO. 7183)
No. 10635),

subject to the Annex on Professions Comment:


attached herewith and forming an
integral part of this document, [1] Mass media except recording—That’s why yung
indicating the professions where sa Rappler case diba? They were trying to say
that they were engaged in internet business?—
[a] are allowed to practice in Mass media.
the Philippines subject to
reciprocity; and [2] Practice of professions— [1] Professional
organizations and [2] professional business
[b] where corporate practice should be limited only to Filipinos in the
is allowed. Foreigners may Philippines.
teach at higher
education levels (RA No. [3] Retail trade enterprises with paid-up capital of
8292), provided the less than US$2,500,000—So kung retail trade ka,
subject being taught is and your capitalization is less than
not a professional subject US$2,500,000? It really prevents foreign investors
(i.e., included in a (to invest).
government board or bar
examination). Bakit sir, bakit ang dami d’yan’g ‘instik-instik’,
but you cannot engage in retail trade and
[3] Retail trade enterprises with paid-up enterprise? Kase in paper Filipino naman.3
capital of less than US$2,500,00 (Sec.
5 of RA No. 8762)
LIST A
FOREIGNER MAY OWN BUT ONLY UPTO 30%EQUITY:
[4] Cooperatives (Ch. Ill, Art. 26 of RA
No. 6938, as amended by Ch. Il, Art.
10 of RA No. 9520)
UP TO THIRTY PERCENT (30%) FOREIGN EQUITY
[5] Organization and operation of
[14] Advertising (Art. XVI, Sec. II of the
private detective, watchmen or
Constitution)
security guards agencies (Sec. 4 of

Business Organization 2 [Corporation Law]—1st exam coverage


RA No. 5487)
Sa advertising pwede 70% Filipinos—30% foreign
[6] Small-scale mining (Sec. 3 of RA No.
7076)
LIST A
[7] Utilization of marine resources in FOREIGNER MAY OWN BUT ONLY UPTO 40% EQUITY:
archipelagic waters, territorial sea
and exclusive economic zone as
well as small-scale utilization of UP TO FORTY PERCENT (40%) FOREIGN EQUITY
natural resources in rivers, lakes,
bays and lagoons (Art. X Il, Sec. 2 [15] Subject to applicable regulatory
ofthe Constitution) frameworks, contracts for the
construction and repair of locally-funded
[8] Ownership , operation and public works (Sec. I of CA No. 541, Letter
management of cockpits (Sec. 5 of of Instruction No. 630), except:
PD No. 449)
[a] Infrastructure/development
[9] Manufacture, repair, stockpiling projects covered in RA No. 771 8;
and/or distribution of nuclear and
weapons (Art. Il, Sec. 8 of the
Constitution) [b] Projects which are foreign-
funded or assisted and required
[10] Manufacture, repair, stockpiling to undergo international
and/or distribution of biological, competitive bidding (Sec. 2[a] of
chemical and radiological weapons
and anti-personnel mines (various
treaties to which the Philippines is a 3 Enumerated further the next succeeding industries [see above list]—
signatory and conventions
no further explanation.

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

RA No. 7718)6 Exploration,


development and utilization of SEC-OGC OPINION NO. 27-14
natural resources (Art. XII, Sec. 2 [October 2,2014]
of the Constitution)
[I]
[16] Exploration, development and utilization FACTS:
of natural resources (Art. Xll, Sec. 2 of the
Constitution) WPCI is a domestic corporation primarily
engaged in the construction business pursuant
[17] Ownership of private lands (Art. Xll, Sec. 7 to its primary purpose under the Second Article
of the Constitution; Sec. 22 of CA No. of its Articles of Incorporation ("AOI"), to wit: “To
141; Sec. 4 of RA No. 9182) engage in general construction and other allied
businesses…4“
[18] Operation of public utilities (Art, Xll, Sec. I
I of the Constitution; Sec. 16 of CA No. WPCI intends to undertake overseas
146; Sec. 2(a) Of RA No. 7718), except construction projects, and that for this purpose,
power generation and the supply of WPCI proposes to register with the Philippine
electricity to the contestable market Overseas Construction Board,
(Sec. 6 and Sec. 29, respectively, of RA which operates under the CIAP.
No. 9136) and such other like businesses
or services not covered by the definition [1] OWNERSHIP: WPCI is sixty percent (60%)
of public utilities owned by Luzon Industrial Commercials
Holdings, Inc., a Filipino corporation, and
[19] Educational institutions other than those forty percent (40%) owned by
established by religious groups and British Nationals;
mission boards, for foreign diplomatic
personnel and their dependents, and [2] AUTHORIZED CAPITALIZATION: the
other foreign temporary residents (Art. authorized capital stock of the
XIV, Sec. 4 of the Constitution), or for corporation is ₱5,200,000.00 divided into
short-term high-level skills development 52,000 shares with par value of 100.00
that do not form part Of the formal each; and
education system as defined in Sec. 20
of Batas Pambansa No. 232 (1982) [3] PAID-IN CAPITALIZATION: it has a paid-in
capital amounting to ₱10,139,590.15,
[20] Culture, production, milling, processing, consisting of the paid-up capital of
trading except retailing, of rice and corn ₱1,300,000.00 and the additional paid-in
and acquiring, by barter, purchase or capital of ₱8,839,590.50
otherwise, rice and corn and the by-

Business Organization 2 [Corporation Law]—1st exam coverage


products thereof (Sec. 5 of PD No. 194) ISSUE:

[21] Contracts for the supply of materials, [1] Whether Construction corporations which
goods and commodities to government- will cater exclusively to private construction
owned or controlled corporation, contracts are not subject to limitation on
company, agency or municipal foreign ownership and that the same can
corporation (Sec. 1 of RA No. 5183) be majority-owned by foreign nationals,
provided that it is not engaged in any of the
[22] Operation of deep sea commercial industries indicated in the Foreign
fishing vessels (Sec. 27 of RA No. 8550, as Investments Negative List ("FINL") and the
amended by RA No. 10654) minimum capitalization requirement is
satisfied; and

[23] Ownership of condominium units (Sec. 5 [2] Whether Ownership, management, and
of RA No. 4726) operations of WPCI need not be vested in
citizens of the Philippines.

[24] Private radio communications network SEC’S OPINION:


(Art. XII, Sec. Il of the Constitution, NTC
Memorandum Circular No. 10-8-91) The Commission has acknowledged that as a
business, private construction contracts used to
be included in List A of the Foreign
Investments Negative List ("FINL") with forty
percent (40%) foreign equity limitation.
[15] CONTRACTS FOR THE CONSTRUCTION AND
REPAIR OF LOCALLY-FUNDED PUBLIC WORKS—

WHEN COVERED BY THE RESTRICTION, WHEN NOT 4


Omission is mine

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

the minimum capitalization requirement therein is


In the current FINL [Ninth Regular Foreign satisfied.
Investments Negative List, Executive Order No.
98, 29 October 2012 as of this Opinion.] [Note: [II]
11th Regular FINL (2018) is the latest] the said
economic activity is no longer included. This FACTS:
means that corporations which undertake
private construction contracts may be wholly WPCI’s Position: An earlier SEC Opinion states that
owned by foreign nationals provided the Construction Industry Authority of the
Philippines ("CIAP"), being an administrative
[1] the minimum capitalization requirement agency, can neither amend nor overrule the law
under the FINL is satisfied and it seeks to implement, nor by its rules and
regulations extend or restrict the terms and
[2] that it does not undertake other nationalized provisions thereof;
or partially nationalized activities.
SEC’S OPINION:

CORPORATION ENGAGED IN PRIVATE WPCI’s position arises from what it believes to be


CONSTRUCTION—WHEN COVERED BY THE an inconsistency between Section 20 of Republic
RESTRICTION: Act No. 4566, otherwise known as the
Contractor's License Law ("CL Law")and Section
[1] DOMESTIC MARKET ENTERPRISES WITH PAID-IN 3.1(a) of the Rules and Regulations Governing
CAPITALIZATION OF LESS THAN US$200K Licensing and Accreditation of Constructors in
the Philippines ("Rules"), promulgated by the
CIAP.
On the other hand, a corporation, although
engaged in private construction, may be The forty percent (40%) foreign equity limitation
covered by the foreign equity restrictions for as a requirement for the issuance of a
domestic market enterprises. contractor's license is found only in the Rules, but
not in the CL Law which the Rules seek to
Under Section 8 of the Foreign Investments implement.
Act of 1991 ("FIA"), which is adopted in List
"B" of the current FINL, domestic market However, the SEC cannot give any confirmation
enterprises, with paid-in equity capital of less as to your presented position.
than the equivalent of two hundred
thousand US Dollars (US$ 200,000.00), are First, it is the policy of the Commission to refrain
restricted to a maximum of forty percent from rendering opinions on matters which require
(40%) foreign equity. an examination and review of the acts and ruling

Business Organization 2 [Corporation Law]—1st exam coverage


of another government agency since
[2] INVOLVES ADVANCED TECHNOLOGY Commission does not review acts and ruling of
other government agencies.
[3] EMPLOYS AT LEAST FIFTY (50) DIRECT
EMPLOYEES, AND HAS A PAID-IN CAPITAL OF Second, the opinion cited is NOT of SEC’s, but of
LESS THAN THE EQUIVALENT OF US$ the DOJ.
100,000.00
Further, the Commission, in a past Opinion, took
Moreover, if the domestic market enterprise note that the CIAP, through the Philippine
either Contractors Accreditation Board, still maintains
the forty percent (40%) foreign equity limit as a
[1] involves advanced technology as requirement for the issuance of regular
determined by the Department of contractors' licenses. In relation thereto, the
Science and Technology, or Commission suggested that this particular matter
be clarified with the said government agency.
[2] employs at least fifty (50) direct The same suggestion was made as well by the
employees, and has a paid-in capital of DOJ in the Opinion you
less than the equivalent of one hundred cited.
thousand US Dollars (US$ 100,000.00),
then the foreign equity restriction applies.
Comment: apparently there was an anomaly. It
Based on the foregoing, Construction renders nugatory this phrase:
corporations which will cater exclusively to
private construction contracts are not subject to [15] “Contracts for the construction and repair of
limitation on foreign ownership and that the locally-funded public works”—this is really
same can be majority-owned by foreign controversial since it would seem na pwede
nationals, provided that it is not engaged in any naman pala mag-contractor: mag-engage
of the industries indicated in the current FINL and ng mga construction project. Pwede na man

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

pala na 40% equity. Pwede naman pala 40% Condominium Act) and
foreign. Presidential Decree No. 957
(Regulating the Sale of
But in reality, that’s so controversial. Kase, OK Subdivision Lots and
lang na bigyan ka ng license ng SEC— you are Condominiums,
incorporated. Magkakaroon ka nang private Providing Penalties for Violations
franchise as a corporation. Thereof).

But when you go To PCAB [Philippine It is hereby understood that all


Contractors Accreditation Board], sasabihan title, rights and interest so
ng PCAB No! Construction is a practice of conveyed shall be subject to the
profession kase mga engineers at mga provisions of the Condominium
architects ang mga to’. Act…, the Articles of
Incorporation and By-Laws and
It has to be 100% Filipino. So here comes a the Rules and Regulations of the
problem, wherein you can exist as a Condominium Corporation…
corporation and yet you cannot function your and such other restrictions on the
bids because you need a PCAB license, but use of the property as annotated
PCAB does not issue you PCAB license on the title or may be imposed
because they have this board resolution. by any government agency or
instrumentality having jurisdiction
This is one of the issues that both of the thereon.
governments are saying [that] this has not
been raised before the Supreme Court. But On September 3, 2007, the Court rendered a
there is SEC ruling, but it refrained from ruling on Decision ordering JACOBUS BERNHARD HULST
the PCAB issue. to return to PR BUILDERS the amount, in excess
of the proceeds of the auction sale delivered
[23] CONDOMINIUM UNITS —Note: Under list A, it is to JACOBUS BERNHARD HULST.
limited to 40% foreign equity. So kung
halimbawa katulad diyan sa Condo, can JACOBUS BERNHARD HULST filed the present
foreigners own condominium units?. Ba’t sabi Motion for Partial Reconsideration insofar as
dito 40%? he was ordered to return to PR BUILDERS the
amount in excess of the proceeds of the
auction sale delivered to JACOBUS
AS LONG AS 60% OF THE MEMBERS OF THIS BERNHARD HULST.
CONDOMINIUM CORPORATION ARE FILIPINO, THE
REMAINING MEMBERS CAN BE FOREIGNERS.
JACOBUS BERNHARD HULST contends

Business Organization 2 [Corporation Law]—1st exam coverage


JACOBUS BERNHARD HULST V. PR BUILDER, INC that:
[September 25, 2008] [1] the Contract to Sell between
JACOBUS BERNHARD HULST and
FACTS: PR BUILDERS involved a
condominium unit and did not
The Contract to Sell between JACOBUS violate the Constitutional
BERNHARD HULST [JACOBUS] and PR proscription against ownership of
BUILDERS[PR] provides: land by aliens.

[2] that the contract to sell will not


Section 3. Title and Ownership of Unit transfer to the buyer ownership
of the land on which the unit is
[a] Upon full payment by the BUYER situated; thus, the buyer will not
[JACOBUS] … the SELLER[PR] get a transfer certificate of title
shall deliver to the but merely a Condominium
BUYER[JACOBUS] the Deed of Certificate of Title as evidence of
Absolute Sale conveying its ownership; a perusal of the
rights, interests and title to the contract will show that what the
UNIT and to the common areas buyer acquires is the seller's title
appurtenant to such UNIT, and and rights to and interests in the
the unit and the common areas.
corresponding Condominium
Certificate of Title in the SELLER's ISSUE:
[PR’S] name;…
Did the Contract to Sell between JACOBUS
[b] The Seller [PR] … immediately and PR violate proscription against ownership
comply with all requirements of land by aliens?
of Republic Act No. 4726 (The

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

HOLDING: No.
ISSUE: Whether Vivant Corporation is subject to
Foreign nationals can own Philippine real any foreign ownership restriction.
estate through the purchase of condominium
units or townhouses constituted under the SEC’S OPINION: Vivant must observe the 40%
Condominium principle with Condominium foreign equity threshold provided in the
Certificates of Title[Republic Act (R.A.) No.
4726, otherwise known as the Condominium [1] Constitution,
Act]. [2] the Foreign Investments Act of 1991
[3] the Foreign Investment Negative List (FINL),
The law provides that no condominium UNIT [4] the Public Land Act and
can be sold without at the same time selling the [5] the Condominium Act.
corresponding amount of rights, SHARES or other
interests in the condominium management Accordingly, Vivant must comply with the 40%
body, the Condominium Corporation; foreign equity threshold in order to be qualified to
acquire private lands or disposable lands of public
and no one can buy SHARES in a Condominium domain in the Philippines.
Corporation without at the same time buying a
condominium UNIT. Assuming that Vivant would retain in its purpose
clause the ownership of real properties but would
It expressly allows foreigners to acquire exclude therefrom ownership of land, other rules
condominium UNITS and SHARES in would apply.
condominium corporations up to not more than
40% of the total and outstanding capital stock Under Section 8 of the FIA and List B of the FINL,
of a Filipino-owned or controlled corporation.
[a] a domestic market enterprise
Under this set up, the ownership of the land is [b] with paid-in equity' capital of less than the
legally separated from the unit itself. The land is equivalent of US$200,000.00
owned by a Condominium Corporation and the
unit owner is simply a member in this is partially reserved to Philippine nationals and that
Condominium Corporation. As long as 60% of foreign equity' participation is limited only up to
the members of this Condominium Corporation form percent (40%).
are Filipino, the remaining members can be
foreigners. In Vivant's case, its 2010 General Information Sheet
shows that it has exceeded the required minimum
Considering that the rights and liabilities of the paid-in equity capital equivalent of Two Hundred
parties under the Contract to Sell is covered by Thousand US Dollars (US$200,000.00) in Philippine
the Condominium Act wherein petitioner as unit Peso under the FIA. Thus, the aforementioned

Business Organization 2 [Corporation Law]—1st exam coverage


owner was simply a member of the foreign ownership restriction does not apply to
Condominium Corporation and the land Vivant.
remained owned by respondent, then the
constitutional proscription against aliens owning Moreover, a business activity in the operation and
real property does not apply to the present management of buildings which does not include
case. There being no circumvention of the ownership or acquisition of land in the Philippines
constitutional prohibition, the Court's and whose paid-in equity' capital is more than the
pronouncements on the invalidity of the equivalent of US$200,000.00 is not a nationalized
Contract of Sale should be set aside. or partly nationalized activity. In such a case, the
aforementioned foreign ownership restrictions
would not apply to Vivant.
Comment: So that explains why condominiums can
actually be owned by them. So the SEC clarified that CONDOMINIUM UNITS—OWNERSHIP
matter and issued an opinion. Sabi ng SEC:
Also, interests in a condominium, which may be in
the form of ownership, lease or any other real
RULE ON FOREIGN OWNERSHIP OF CONDOMINIUM rights, are subject to the following rules:

SEC-OGC OPINION NO. 12-11, [1] If the condominium project is set up on


[Feb. 6, 2012] leased land, the corresponding condominium
corporation may be established by a
FACTS: VIVANT CORPORATION’s (VIVANT) primary corporation which is wholly owned by a
purpose allows it to invest in, purchase, or foreign firm. In such a case, the land
otherwise acquire and own, hold, develop, use, ownership restriction would not apply to
sell, lease, assign, transfer, mortgage, pledge Vivant.
exchange or otherwise dispose of, real property,
of every kind and description, including buildings, [2] Where the condominium corporation is a
apartments. Filipino corporation which owns the land on

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

which the condominium project is situated, Tapos ikaw may registration ka in Singapore. Tapos
no interest in the condominium may be ang client mo lang in the Philippines is the branch
transferred to aliens or to corporations more of the company na client mo sa Singpore.
than 40% of the capital stock of which is
owned by aliens; or, You know that recruitment is highly regulated. So,
how would you go around? You need to set-up a
when the common areas are held by a recruitment firm in the Philippines just to cater to
condominium corporation, the transfer to that, tapos pag mag-se-set-up ka naman, fully
aliens of units in the project may be made owned ka—Singaporean company ka, hahanap ka
only up to the point where the concomitant pa ng i-du-dummy para maging 75% Filipino?
transfer of stockholdings in the condominium
corporation would not cause the alien And you know the definition of “recruitment”: any
interest in such corporation to exceed 40% of type of solicitation any type of offering can be
its entire capital stock. considered recruitment, tapos nagkataon pa na
wala kang license—that’s illegal recruitment. So
sasabihin ng client, “so pupunta na lang ako sa
Comment: This is why when you try to look at yung corporate firms sa Pilipinas?” How would you
mga structures ng mga condominium, iba yung mitigate first? Anong ga’win niyo?
may-ari ng lupa, iba yung may-ari ng unit. Tapos
minsan naman nakalista lang siya per equity …5[P]ag ganon. Ah set up kami doon [sa Pilipinas]
because they are trying to [observe] the proscription ng branch! Wala na, ang e-earn mo doon, wala
of foreign ownership of land. na!

Pero pag common area naman it’s co-owned. Kase Tignan niyo yung extent ng criminal jurisdiction, kase
nga, diba, pag unit-holder ka ng isang condo, you most of the jurisdiction hindi extraterritorial. So, that’s
are also a member of a corporation tapos owning one thing. Dito sa Pilipinas, now, when I commit that
crime, ano ba ang magagawa nila sa akin? That’s
that common areas. You still have to comply with the
one
40% restriction.
Second, is, do I mitigate it in such a way na di’
These are [mostly samples] of corporate structuring malalaman ng regulatory board that I engaged in
just to avoid the proscription. [recruitment]? Well, how do you do that?

You represent the client himself in the Philippines. Do


LIST A not go to the Philippines representing your
FOREIGNER MAY OWN BUT ONLY UPTO 25% EQUITY: recruitment firm. You go to the Philippines
representing the HR of your clients, para it would
appear na direct hiring. All your correspondents, e-

Business Organization 2 [Corporation Law]—1st exam coverage


UP TO TWENTY-FIVE PERCENT (25%) FOREIGN mail, contact number should be under the branch in
EQUITY the Philippines. It is as if you are a branch. So
wala…[S]o ok, lang kung Direct hiring. You are not
[12] Private recruitment, whether for local or engaged in illegal recruitment. So all correspondents,
overseas employment (Art. 27 of PD No. di ka magpakilala na you belong to the recruitment
442) firm in the Singapore, but you belong to the client.
That’s [another] thing.
[13] Contracts for the construction of defense-
related structures (Sec. 1 of Kase, sometimes, isipin mo wala namang
Commonwealth Act No. 541) extraterrorial applicability, but may blacklist din. Even
if di ka naman maproprosecute now, but what if
there is really good business here? Di ka na
Comment: makapasok kase blacklisted ka na.

[12] PRIVATE RECRUITMENT;


LIST B
FOREIGNER MAY OWN BUT ONLY UPTO 40% EQUITY:
Q: Paano ba if ang industry na papasokan mo
prohibited? You want to engage [in] private
LIST B: FOREIGN OWNERSHIP IS LIMITED FOR
recruitment, what happen sa mga foreigners?
REASONS OF SECURITY, DEFENSE, RISK TO
HEALTH AND MORALS AND PROTECTION OF
Example: Kunwari recruitment firm ka, let’s say you
SMALL AND MEDIUM SCALE ENTERPRISES
are in Singapore, tapos meron kang client, X
company. Nagpaparecruit sayo ng sobra. May
UP TO FORTY PERCENT (40 %) FOREIGN
branch ka in the Philippines. Tapos Hanapan mo
EQUITY
ako, magrecruit ka doon sa Pilipinas.

5
Students answering in chorus [indistinctive]

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

[1] Manufacture, repair, storage, and/or


However, the manufacture or repair of these items
distribution of products and/or may be authorized by the Secretary of National
ingredients requiring Philippine National Defense to non-Philippine nationals; provided that a
Police (PNP) clearance: substantial percentage of output, as determined by
the said agency, is exported. Provided further that
the extent of foreign equity ownership allowed shall
[a] Firearms (handguns to shotguns), parts of be specified in the said authority/clearance (RA No.
firearms and ammunition therefor, instruments 7042 as amended by RA No. 8179).
or implements used or intended to be used in
the manufacture of firearms;
[b] Gunpowder; [3] Manufacture and distribution of
[c] Dynamite; dangerous drugs (RA No. 7042 as
[d] Blasting supplies;
[e] Ingredients used in making explosives: amended by RA No. 8179)

[i] Chlorates of potassium and sodium; [4] Sauna and steam bathhouses, massage
[ii] Nitrates of ammonium, potassium,
sodium barium, copper (11), lead clinics and other like activities regulated
(11), calcium and cuprite; by law because of risks posed to public
[iii] Nitric acid; health and morals, except wellness
[iv] Nitrocellulose;
[v] Perchlorates of ammonium, centers (RA No. 7042 as amended by
potassium and sodium; RA No. 8 179)
[vi] Dinitrocellulose;
[vii] Glycerol;
[viii] Amorphous phosphorus; [5] All forms of gambling (RA No. 7042 as
[ix] Hydrogen peroxide; amended by RA No. 8179) except
[x] Strontium nitrate powder; those covered by investment
[xi] Toluene; and
[xii] Telescopic sights, sniper scope and agreements with PAGCOR (PD No.
other similar devices. 1869, as amended by RA No. 9487)
[f] Telescopic sights, sniper scope and other similar
devices. [6] Domestic market enterprises with paid-
in equity capital of less than the
However, the manufacture or repair of these equivalent of US$200,000 (RA No. 7042,
items may be authorized by the Chief of the
PNP to non-Philippine nationals; Provided that as amended by RA No. 8179)
a substantial percentage of output, as
determined by the said agency, is exported. [7] Domestic market enterprises which
Provided funher that the extent or foreign
equity ownership allowed shall be specified in involve advanced technology or
the said authority/clearance (RA No. 7042 as employ at least fifty (50) direct
amended by RA No. 8179). employees with paid-in equity capital
of less than the equivalent (RA NO.
[2] Manufacture, repair, storage and/or 7042, as amended by RA No. 8179)
distribution of products requiring
Department of National Defense (DND)

Business Organization 2 [Corporation Law]—1st exam coverage


clearance: clearance: Comment:
[a] Guns and ammunition for warfare;
[b] Military ordnance and parts thereof LIST B: Again, this is based on
(e.g., torpedoes, depth charges,
bombs, grenades, missiles); [a] defense or law enforcement-related activities,
[c] Gunnery, bombing and fire control [b] public health and morals, and
systems and components; [c] small and medium-scale enterprises.
[d] Guided missiles/missile systems and
components; [6] DOMESTIC MARKET ENTERPRISES WITH PAID-IN
EQUITY CAPITAL OF LESS THAN THE EQUIVALENT OF
[e] Tactical aircraft (fixed and rotary- US$200,000
winged), parts and components
thereof;
(So this is the common question) Kase, if, let’s say,
[f] Space vehicles and component wala ka naman doon sa List A, pero your market is
systems;
domestic (meaning, within the Philippines) your
[g] Combat vessels (air, land and capital should not be lower than US$200,000;
naval) and auxiliaries;

[h] Weapons repair and maintenance but let’s say lower siya , you need to have a
equipment; maximum 40% foreign equity. Pwede ka namang
foreign owned but you need to have more than
[i] Military communications equipment;
US$200,000. Ngayon, mag-kano yan in peso? Diba
[j] Night vision equipment; ang laki!
[k] Stimulated coherent radiation
devices, components and So para maging fully foreign-owned ako, I need to
accessories; have a capital of not less than US$200,000. Eto,
this is really one thing that turns foreign investors
[l] Armament training devices; and
off. Pag-tingin nila, sobrang mahal pala ng
[m] Others as may be determined by kailangan na funding capital, ayaw ko nalang
the Secretary of the DND.

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mag-negosyo diyan sa Pilipinas. Sobrang laki related to the manufacture of such finished
niyan eh, kase domestic. products". [FOR EXPORT]
[2]
So what is the exemption of that? You are not
engaged in domestic market, meaning, if your [3] AAI does not own any real property in the
client is outside, so BPO companies. Pag-private Philippines.
companies engaged in export, di mo kailangan In connection with them,
mag-comply sa US$200,000.
SEC’S OPINION:

So you can be 100% foreign-owned kase wala ka THE ACTIVITIES BEING PERFORMED BY AAI DO NOT
naman doon sa list A diba, wala ka naman sa FALL WITHIN THE 8TH FINL [old FINL]
ibang list, your only remaining here seats with
domestic enterprise of US$200,000 capital. The general rule is that non-Philippine nationals
can own up to one hundred percent (100%) of the
So kung hindi ka naman domestic enterprise in the equity in export as well as domestic market
enterprises.
first place, you don’t have to comply with the
US$200,000 capital. So pwede ka na. And why is However, the 8th FINL [Old FINL] restricts foreign
that the policy? Because remember on types of ownership to a maximum of forty percent (40%) of
payments, we have discussed yesterday, we the equity in small and medium-sized domestic
need to have more exports because it stabilizes market enterprises in cases where the paid-in
the peso (in sales and returns outside). That’s why capital is less than the equivalent of Two Hundred
we encouraged firms to invest here, to export Thousand US dollars (US$200,000).
because that would stabilize our economy. That is
Nonetheless, a paid- in capital of at least the
one thing na maka-affect. But the question here, equivalent of One Hundred Thousand US dollars
is, “[i]s this counter-productive?” Maraming na- (US$I00,000) is sufficient so long as the enterprise
tuturn off diyan na mga foreigner, kase malaki rin either
yan.
[1] involves advanced technology as
There is a lower bracket, it involves : determined by the Department of Science
and Technology, or
[7] Domestic market enterprises which involve
[2] employs at least fifty (50) direct employees,
and the foreign equity restriction shall not
[a] advanced technology or apply
[b] employ at least fifty (50) direct Here,

Business Organization 2 [Corporation Law]—1st exam coverage


employees with paid-in equity capital of
US$100,000(RA NO. 7042, as amended by [1] IF EXPORT ENTERPRISE—NOT SUBJECT TO
RA No. 8179) RESTRICTION:

AAI shall not be subject to any foreign equity


That’s still quite a sum.
ownership restriction if it is an EXPORT
ENTERPRISE, which is defined by RA 7042 as
DOMESTIC MARKET ENTERPRISE— one "wherein a manufacturer, processor or
WHEN SUBJECT TO RESTRICTION, WHEN NOT: service (including tourism) enterprise exports
sixty percent (60%) or more of its output, or
SEC-OGC OPINION NO. 27-11 wherein a trader purchases products
[April 20, 2011] domestically and exports sixty percent (60%)
or more of such purchases".
FACTS: This refers to Active Alliance Incorporated’s
("AAI") letter requesting SEC’s opinion on whether [2] IF DOMESTIC MARKET ENTERPRISE—SUBJECT
or not AAI is subject to any foreign ownership TO RESTRICTION IF ACTIVITES COVERED; HERE,
restriction. AAI’S ACTIVITIES NOT COVERED:

AAI's primary purpose is On the other hand, if its activities make it a


DOMESTIC MARKET ENTERPRISE that "
[1] to engage in the business of manufacturing,
producing, processing, assembling, importing, [a] produces goods for sale, or
exporting, buying, selling or otherwise dealing [b] renders services to the domestic
in all kinds of commerce, including but not market entirely or
limited to consumer communication, [c] if exporting a portion of its output fails
electronic equipment and other goods of to consistently export at least sixty
similar nature, and any and all equipment, percent (60%) thereof",
materials and supplies used or employed in or

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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

it is subject to the restrictions given above. Q: So you have sales here [domestically], how many
percent?
Here, it appears the activities being
performed by AAI do not fall within the 8th A: Less than 60% of its output.
FINL.
[Transcriber’s note: I think, this should be 40% or
[3] IF SMALL OR MEDIUM-SIZED ENTERPRISE—
SUBJECT TO RESTRICTION; HERE, AAI’S less, otherwise, 60% less may be 41% to 59% which
CAPITALIZATION MORE THAN US $200K—NOT is in excess of 40%. Note that the export must be
COVERED BY RESTRICTION 60% or more of its output, hence domestic sales
may only be 40% or less.]
However, there is a need to determine if AAI
is considered a small or medium-sized Q: So ok sila?
enterprise (SME) as defined by RA 7042 to
determine whether or not the statutory A: Yes.
restrictions on said kinds of enterprises apply
to it.
[7] CLASSIFICATION OF CORPORATIONS
Nonetheless, even assuming that AAI is
classified as a SME under the law, it appears
AS TO EXISTENCE OF SHARES OF STOCK
that it is still not subject to any foreign
[1] STOCK CORPORATIONS
ownership restriction since its authorized
capital stock is Eighty Million Pesos which is [2] NON-STOCK CORPORATIONS
more than the equivalent of Two Hundred
Thousand US dollars (US$200,000.00).
Section 3. Classes of corporations. –
The foregoing opinion rendered is based Corporations formed or organized under
solely on the facts disclosed in the query this Code may be stock or non-stock
and relevant solely to the particular issues corporations. Corporations which have
raised therein and shall not be used in the capital stock divided into shares and are
nature of a standing rule binding upon the authorized to distribute to the holders of
Commission. such shares dividends or allotments of the
surplus profits on the basis of the shares
Q: What is the business of the company here? held are stock corporations. All other
corporations are non-stock corporations.

Business Organization 2 [Corporation Law]—1st exam coverage


A: It engaged in the business of manufacturing (3a)
etc., or otherwise dealing in all kinds of commerce,
including but not limited to consumer
communication, electronic equipment and other Note: Sec 3, has not been amended.
goods of similar nature
CORPORATIONS CREATED BY SPECIAL LAWS OR
Q: For domestic? CHARTERS.

A: For export.
Section 4. Corporations created by special
Q: Is it subject to restriction? laws or charters.—Corporations created by
special laws or charters shall be governed
A: No. [Export enterprise is not subject to restriction]. primarily by the provisions of the special
law or charter creating them or applicable
to them, supplemented by the provisions of
“Export enterprise”—is defined as one "wherein a
this Code, insofar as they are applicable.
manufacturer, processor or service (including (n)
tourism) enterprise exports

[1] sixty percent (60%) or more of its output, or Example: The New Central Bank Act creating the
[2] wherein a trader purchases products BSP. That’s an example of a charter which creates
domestically and exports sixty percent (60%) or the BSP.
more of such purchases" [RA 7042].
STOCK V. NON-STOCK CORPORATION
It may offer its product here [domestically] but 60%
of its output must be exported abroad. It is not STOCK CORPORATION NON-STOCK
covered by the FINL. CORPORATION

AS TO DEFINITION 1
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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

Corporations which All other private are called are called


have capital stock corporations are stockholders or members.11
divided into shares non-stock shareholders.10
and are authorized to corporations.7
distribute to the SCOPE OF RIGHT TO VOTE,
holders of such shares
dividends or Each stockholder each member
allotments of the holds according to regardless of
surplus profits on the the proportion of class is entitled to
basis of the shares shares12 one vote.13
held are stock
corporations.6

AS TO PURPOSE AS TO SCOPE OF RIGHT TO VOTE


VOTING BY PROXY
Primarily for profits. It is formed or
organized for may be denied by Cannot be
charitable, the aoi[articles of denied.15
religious, incorporation] or by-
educational, laws 14
professional,
cultural, VOTING BY MAIL
fraternal, literary,
scientific, social, may be authorized not possible
civic service, or by the by-laws under your non-
similar purposes, under stock16 stock
like trade,
industry, WHO EXERCISES CORPORATE POWERS/
agricultural and GOVERNING BOARD
like chambers, or BODs BOTs
any combination [Board of Directors] [Board of Trustees]
thereof 8 TERM17
For BOD For BOT
PLACE OF MEETING

Business Organization 2 [Corporation Law]—1st exam coverage


Examples:
TRANSFERABILITY OF INTEREST/ MEMBERSHIP
Foundations
[and] charitable
institutions Transferrable Generally
nontransferable,
since
AS TO DISTRIBUTION OF PROFITS:
membership and
all rights arising
Profits allowed to be It should not be
therefrom are
distributed (under the main
personal,
your stock) purpose:
whatever
[So you go in
incidental profit
with your
may in stock be
definition of...18
distributed
Bakit di
among its
matatransfer
members but is
yung
used for
membership in
furtherance of its
purpose. 9

10
[Sec. 5, id.]
AS TO COMPOSITION 11
[id.]
12
[Section 24, id.]
13
[Section 89, id..]
14
[Sec. 24, Sec. 5, id.]
6
[id.] 15
[Sec Opinion 20 Sept. 1994]
7
[Sec. 3, B.P. id.] 16[Sec. 24, id.]
8
[Section 88, id.] 17 will just discuss that
9
[See: Section 87, id.] 18 Nothing else follows 1
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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

non-stock? common Control and operated as part of a


Generally can system.” [SEC-OGC Opinion No. 11-15]
you transfer?
Kase its personal. [12] SUBSIDIARY COMPANY
Pinili ka to be a
part of that
corporation
because of your
characteristics ILLUSTRATION:
so hindi mo
pwedeng i-
delegate.]

HOLDING/
IN RELATION TO THE STATE PARENT COMPANY
[3] PUBLIC CORPORATIONS

[CF. PubCorp discussion]

[4] PRIVATE CORPORATIONS


SUBSIDIARY/ SUBSIDIARY/
DAUGHTER DAUGHTER
They are under your Corporation Code.
COMPANY COMPANY
AS TO PLACE OF INCORPORATION
[5] DOMESTIC CORPORATIONS
HOLDING COMPANY V. SUBSIDIARY COMPANY
[6] FOREIGN CORPORATIONS
[1] “Holding company”— can also be called a
“parent corporation.”
AS TO LEGAL STATUS
[7] DE JURE CORPORATIONS [2] “Subsidiary”— is yung hinahawakan; and can
also be called “daughter corporation.”

Business Organization 2 [Corporation Law]—1st exam coverage


[8] DE FACTO CORPORATIONS
[3] “Operating Holding Company”—a holding
[9] CORPORATION BY ESTOPPEL company can also have its own operations,
and does not only hold the shares of the
[10] CORPORATION BY PRESCRIPTION subsidiary or daughter company.

AS TO RELATIONSHIP OF MANAGEMENT & CONTROL It can have a business, e.g., it may have
[11] HOLDING COMPANY/ PARENT COMPANY manufacturing; therefore, it may have its own
operation and at the same time hold the shares
“HOLDING COMPANY” of the daughter company. This is what you call
“operating holding company”.
A holding company has been aptly defined as
"a corporation organized to hold the stock of [13] AFFILIATE COMPANY
another or other corporations.
SUBSIDIARY V. AFFILIATE
Its essential feature is that it holds stock. The
term "holding company" is equivalent to a SUBSIDIARY AFFILIATE
parent corporation, having such an interest in
another corporation, or power of control, that it
may elect its directors and influence its is controlled by Pag-affiliate, less
management. another corporation, than 50% but
so more than 50%. more than 20%. 19

A parent or holding company is one that ______________________________________________________


controls another as a subsidiary or affiliate by
the power to elect its management. Affliates
are those concerns that are subject to
19 Implementing Rules of the Anti-Money Laundering Law
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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

PRE-INCORPORATION CONTRACT
[8] PRE-INCORPORATION STAGE
So, what happens kapag meron kang ka-kontrata of
an intended corporation. So subscription and
“CORPORATORS”;“INCORPORATORS”; payment of a corporation that has yet to be
“’STOCKHOLDERS”; “MEMBERS” incorporated. What will happen? May capacity,
may consent ba yung sa corporation? Hinda pa
naman siya na i-incorporate.
Section 5. Corporators and incorporators,
stockholders and members. — Corporators Bakit hindi pa siya na i-incorporate? Sige daw, ikaw
are those who compose a corporation, daw, mag-incorporate ka saka’ ka [hum]ingi ng
whether as stockholders or as members. pera? magpull-out ka muna ng pera. [hu]mingi ka
Incorporators are those stockholders or muna ng pero bago ka mag-incorporate, kase fund
members mentioned in the articles of mo yun—capital!
incorporation as originally forming and
composing the corporation and who are So what happens with that contract: the pre-
signatories thereof. incorporation contract? What’s the legality of that
contract?

Corporators in a stock corporation are Mag subscribe ka, oh! amot-amot, magbuhat ta’g
called stockholders or shareholders. corporation, so buhat ta ug kontrata. So, kinsa ang
Corporators in a non-stock corporation are party?
called members. (4a)
Mag subscribe ko’g ingon aning share sa
corporation ,wala pa man ni siya’y juridical
[1] “Member”—is also called a stockholder or personality, so kinsa ang party?
shareholder.
Does it have a capacity to give consent, given the
[2] “Incorporators”—are those stockholders or fact na hindi pa naman siya in a nature of a
members mentioned in the articles of corporation, though wala pa naman siyang essence
incorporation as originally forming and of a person?
composing the corporation and who are
signatories thereof. So this is what we call mga “pre-incorpration
contracts. “
“CORPORATOR” V. “INCORPORATOR”:

Business Organization 2 [Corporation Law]—1st exam coverage


Incorporators are not always corporators— Kung “PROMOTER”
incorporator ka, hindi ka forever corporator,
because incorporators [are] only those forming or “Promoter”— is a person who, acting alone or with
others, takes initiative in founding and organizing the
organizing a corporation, so pwede namang ibenta
business or enterprise of the issuer and receives
niya ang kanyang shares. consideration therefor.20

So di’ pwedeng nakalagay sa AOI [Articles of Comment: Usually , pag dagkong company,
Incorporation] niyo yung pangalan mo. Hindi there is what you call “promoter.” Sila tong’
pwede’ng forever kang corporator, kase pwede promoter na ti’g-promote: “Uy! Mag
mo namang ibenta. corporation mi, mag corporation mi!” Tawag
ana promotes.

But, it does not necessarily mean na pag corporator-


PROMOTER’S PURPOSE
shareholder ka, [that] you are also the incorporator
or vice versa. Pwede namang iba yung nag-
It is necessary to identify the promoters because it fills
organize.
[-in] the gap between the intention to create the
corporation and its actual work.
REGISTRATION: COI [CERTIFICATE OF
Comment: Without the promoter, hindi
INCORPORATION] GRANTS CORPORATION ITS
magkakaroon ng corporation, because it is the
JURIDICAL PERSONALITY.
promoter [who] promotes, to establish the
corporation.
Good question here is that, so diba wala ka pa
namang juridical personality? What gives a
corporation juridical personality? It’s the registration.
It’s COI [Certificate of Incorporation] which grants it
juridical personality.

20
[Section 3.10.of the Securities Regulation Code] 1
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3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

The agent who acts as such is not


PROMOTER’S LIABILITY personally liable to the party with
whom he contracts, unless he
So In the normal scheme of things, should the expressly binds himself or exceeds the
promoter be liable for contracts? limits of his authority without giving
such party sufficient notice of his
Example: Let’s say, mag-subcribe ka ng 100K shares, powers. (1725) [Article 1897, Civil
sino ang bibigyan mo no’n? It’s the promoter. Is the Code]
promoter liable for these contracts?
If the agent contracts in the name of
Technically, pagma-boboo yung corporation, those
the principal, exceeding the scope of
contracts would be transferred to the corporation.
his authority, and the principal does
Meaning, it has the essence of ratifying its previously
not ratify the contract, it shall be void
executed contract. Wala pa siyang existence nito,
if the party with whom the agent
but once it exists already under the law, ira-ratify,
contracted is aware of the limits of the
there is what we call deemed ratification.
powers granted by the principal. In this
case, however, the agent is liable if he
This is an anomaly of a contract kase it’s one of the
undertook to secure the principal’s
exceptions, wherein a counter-party or a party of a
ratification. (n) [Article 1898, Civil
contract can be [held] liable for a contract, even if
Code]
before it actually exists. It is an exception to the
general rule that at the time of the execution of a
Dito tatama ang liability (ditto), kase, alam naman ni
contract you have to have the capacity to give
counter-party na si promoter wala siyang [principal],
consent.
“If the party with whom the agent
So in this scenario, the contracts entered into through
contracts aware the limits of the power
the promoter will be transferred to the corporation.
granted by the principal.”
But, what if ni’wala’ng nabuong corporation, will the
Alam naman niya na wala talagang principal, so it’s
promoters be [held] liable?
actually void.
Of course! Kase, sino nama’ng hahabulin mo? Kung
“In this case however, the agent is
wala, kung ganito pala, di’ nag-promoter na rin ako!
liable if he undertook to secure the
principal’s ratification.”
Of course, sila ang magiging liable, otherwise, wala.

Business Organization 2 [Corporation Law]—1st exam coverage


Walang hustisiya!
So nakalagay din sa pre-incorporation agreement
that the corporation will ratify this document. So that
is the basis of the liability of the promoter, kase alam
“PROMOTER’S CONTRACTS”
pala— that the counterparty was aware na wala
talaga siya’ng authority kase wala pa namang
Promoters contracts—refers to contracts entered into
principal. So please take note of your provisions on
when the parties know fully well that the corporation
agency.
does not yet even exist.
“PRE-INCORPORATION CONTRACT”
It is valid; so, the event of the birth of the corporation,
all the contracts are deemed transferred.
Pre-incorporation contract— is a “special contract”
or a type of promoter’s contract. Although these are
contracts between the subscriber and the
PROMOTER’S CONTRACTS—
corporation, at the same time they are deemed to
WHEN CORPORATION BOUND, WHEN NOT:
be contracts among the stockholders of the
corporation.
General rule: All these contracts are not necessarily
binding [upon] the corporation,
SUBSCRIPTION CONTRACT
Exception: when the corporation receives the benefit
of the contract at the time of its constitution.
Section 60. Subscription contract. – Any contract
So kung ti-nransfer talaga yung money du’n that’s for the acquisition of unissued stock in an existing
deemed ratified, di na kailangan mag-execute si corporation or a corporation still to be formed
corporation ng any documents kase it’s deemed shall be deemed a subscription within the
ratified. meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other
BASIS FOR PROMOTER’S LIABILITY contract. (n)

Now look at your provisions on agency:


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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

A “subscription contract” is not necessarily a pre- transferred to the name of the plaintiff
incorporation contract. company until the latter has fully and
completely paid TABORA’s indebtedness.

PRE-INCORPORATION CONTRACT The CAGAYAN FISHING filed its articles of


V. incorporation with the Bureau of Commerce
SUBSCRIPTION CONTRACT: and Industry on OCTOBER 22, 1930.
SUBSCRIPTION PRE-INCORPORATION
CONTRACT CONTRACT On October 28, 1931, the board of directors of
CAGAYAN FISHING authorized its president to
Presupposes that Presupposes the non- sell the four parcels of land in question to
there is already a existence yet of a SANDIKO; and SANDIKO in turn obligated
corporation. corporation. himself to shoulder the 3 mortgages.

The SANDIKO having failed to pay the sum


stated in the promissory note, CAGAYAN
FISHING, brought this action praying that
Note: “Subscription agreement”, judgment be rendered against the SANDIKO for
notwithstanding the fact that the parties refer to the sum.
it as a purchase or some other contract”
CFI: Absolved SANDIKO, holding that the
PRE-INCORPORATION SUBSCRIPTION. contract of sale between CAGAYAN FISHING
and SANDIKO is invalid because of vice in
consent and repugnancy to law.
Section 61. Pre-incorporation subscription. – A
subscription for shares of stock of a corporation ISSUE: Is the contract binding on the
still to be formed shall be irrevocable for a corporation?
period of at least six (6) months from the date of
subscription, unless all of the other subscribers HOLDING:
consent to the revocation, or unless the
incorporation of said corporation fails to The contract is not binding on the corporation;
materialize within said period or within a longer however, the SC did not agree with THE CFI’s
period as may be stipulated in the contract of conclusion, [rather because the corporation
subscription: Provided, That no pre-incorporation does not have legal existence at the time the
subscription may be revoked after the promoter entered into the contract with

Business Organization 2 [Corporation Law]—1st exam coverage


submission of the articles of incorporation to the TABORA.]
Securities and Exchange Commission. (n)
TRANSFER MADE TO A NON-EXISTENT
CORPORATION; JURIDICAL CAPACITY TO ENTER
INTO A CONTRACT. —
Please take note, that this 6 months irrevocability was
not amended. TABORA made a transfer to CAGAYAN FISHING
on MAY 31, 1930 and the actual incorporation
PROMOTERS COULD NOT HAVE ACTED AS AGENTS FOR of said company was effected later on
A PROJECTED CORPORATION, SINCE THAT [PROJECTED OCTOBER 22, 1930.
CORPORATION]— WHICH HAD NO LEGAL
EXISTENCE— COULD HAVE NO AGENT. In other words, the transfer was made almost
five months before the incorporation of the
CAGAYAN FISHING DEVELOPMENT CO., INC. V. SANDIKO company. Unquestionably, a duly organized
[December 23, 1937] corporation has the power to purchase and
hold such real property as the purposes for
FACTS: which such corporation was formed may permit
and for this purpose may enter into such
TABORA is the registered owner of 4 parcels of contracts as may be necessary.
land. He mortgaged the said lands to secure 3
obligations. But before a corporation may be said to be
lawfully organized, many things have to be
On MAY 31, 1930, Tabora executed a public done. Among other things, the law requires the
document21 through which he sold the 4 filing of articles of incorporation,
parcels of land to CAGAYAN FISHING, said to
be under process of incorporation, subject to Although there is a presumption that all the
the mortgages, to the condition that the requirements of law have been complied with,
certificate of title to said lands shall not be in the case before us it cannot be denied that
the plaintiff was not yet incorporated when it
entered into the contract of sale.
21
"Escritura de Traspaso de Propiedad Inmueble" 1
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The contract itself referred to the plaintiff as corporation composed of himself, his wife, and
[“under process of incorporation”]. It was not a few others. From the articles of incorporation,
even a de facto corporation at the time. Not it appears that out of the P48,700, amount of
being in legal existence then, it did not possess capital stock subscribed, P45,000 was
juridical capacity to enter into the contract. subscribed by Tabora himself and P500 by his
wife,; and out of the P43,300, amount paid on
Corporations are creatures of the law, and can subscriptions, P42,100 is made to appear as
only come into existence in the manner paid by Tabora and P200 by his wife.
prescribed by law. As has already been stated,
general laws authorizing the formation of Both Tabora and his wife were directors and the
corporations are general offers to any persons latter was treasurer as well. In fact, to this day,
who may bring themselves within their the lands remain inscribed in Tabora’s name.
provisions; and if conditions precedent are The defendant always regarded Tabora as the
prescribed in the statute, or certain acts are owner of the lands. He dealt with Tabora
required to be done, they are terms of the offer, directly. Jose Ventura, president of the plaintiff
and must be complied with substantially before corporation, intervened only to sign the
legal corporate existence can be acquired. contract, in behalf of the plaintiff.

That a corporation should have a full and Even the PNB, mortgagee of the four parcels of
complete organization and existence as an land, always treated Tabora as the owner of the
entity before it can enter into any kind of a same. Two civil suits were brought against
contract or transact any business, would seem Tabora.
to be self evident. . . .
The PNB threatened to foreclose its mortgages.
A corporation, until organized, has no being, Tabora approached the defendant Sandiko
franchises or faculties. Nor do those engaged in and succeeded in making him, among other
bringing it into being have any power to bind it things, assume the payment of Tabora’s
by contract, unless so authorized by the charter. indebtedness to the Philippine National Bank.
Until organized as authorized by the charter
there is not a corporation, nor does it possess The promissory note, was made payable to the
franchises or faculties for it or others to exercise, CAGAYAN FISHING so that it may not be
until it acquires a complete existence." attached by Tabora’s creditors, two of whom
had obtained writs of attachment against the
HERE, THE CORORATION IS NOT LIABLE; four parcels of land.
PROMOTERS ARE:

Business Organization 2 [Corporation Law]—1st exam coverage


If the CAGAYAN FISHING could not and did not
Here, the contract was entered into not only acquire the four parcels of land here involved, it
between Tabora and a non-existent follows that it did not possess any resultant right
corporation but between Tabora as owner of to dispose of them by sale to the defendant,
four parcels of land on the one hand and the Teodoro Sandiko.
same Manuel Tabora, his wife and others, as
mere promoters of a corporation on the other
hand. For reasons that are self-evident, these Q: Sino ang nag-offer ng defense na “[t]he
promoters could not have acted as agents for a corporation was not yet corporated”?
projected corporation since that which had no
legal existence could have no agent. A: Sandiko

A corporation, until organized, has no life and Q: Yung’ seller?


therefore no faculties. It is, as it were, a child in
ventre sa mere. This is not saying that under no A: Yung’ buy[er] ng property from the corporation.
circumstances may the acts of promoters of a
corporation be ratified by the corporation if Q: but was it subsequently incorporated?
and when subsequently organized. There are, of
course, exceptions, but under the peculiar A: Yes.
facts and circumstances of the present case we
decline to extend the doctrine of ratification Q: Bakit di siya [the parcels of land] ma-aattach?
which would result in the commission of injustice
or fraud to the candid and unwary. A: Because the ownership of the property was
already transferred to the corporation.
It should be observed that Manuel Tabora was
the registered owner of the four parcels of land, Comment: That is one way actually of what they are
which he succeeded in mortgaging to the trying to avoid:
Philippine National Bank so that he might have
the necessary funds with which to convert and Di’ Kung ganon pala, pwede pala akong
develop them into fishery. He appeared to mangutang, tapos hinahabol ako,
have met with financial reverses. He formed a transfer ko lang yung ownership, gawa 1
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ako ng corporation kahit hindi pa siya na- consideration.


iincorporate, diba there’s doctrine of
ratification, so magiging validated rin
MORONG ELECTRIC’S CONTENTION:
naman siya after. sabi dito, if you would
apply that thinking it would bring
injustice!22 MORONG ELECTRIC argues that it was a de
facto corporation at the time the franchise was
granted and, as such, it was not incapacitated
WHEN PROJECTED CORPORATION HAD NO
to enter into any contract or to apply for and
CORPORATE EXISTENCE ON THE DAY THE FRANCHISE accept a franchise.
WAS GRANTED IN ITS NAME DOES NOT RENDER THE
FRANCHISE INVALID, AS WHEN LATER THE
Not having been incapacitated, MORONG
COPORATION OBTAINED ITS CERTIFICATE OF ELECTRIC maintains that the franchise granted
INCORPORATION AND THEN ACCEPTED THE to it is valid.
FRANCHISE IN ACCORDANCE WITH THE TERMS AND
CONDITIONS THEREOF. ISSUE: Is the franchise validly granted to
MORONG ELECTRIC notwithstanding lack of
RIZAL LIGHT & ICE CO., INC V. THE MUNICIPALITY OF corporate existence at that time.
MORONG
]September 28, 1968] HOLDING: Yes.

FACTS:
RIZAL LIGHT’S contention that MORONG
ELECTRIC did not yet have a legal personality
RIZAL LIGHTS’ CONTENTION::
on MAY 6, 1962 when a municipal franchise was
granted to it is correct.
RIZAL LIGHT assailed the personality of
MORONG ELECTRIC on the proposition that
MORONG ELECTRIC—NOT A DE FACTO
since a franchise is a contract, at least two
CORPORATION PRIOR TO C.O.I. ISSUANCE BY
competent parties are necessary [for its]
SEC
execution, and parties are not competent
except when they are in being.
The juridical personality and legal existence of
MORONG ELECTRIC began only on OCTOBER
Hence, it is contended that until a corporation
17, 1962 when its certificate of incorporation

Business Organization 2 [Corporation Law]—1st exam coverage


has come into being, in this jurisdiction, by the
was issued by the SEC. Before that date, or
issuance of a certificate of incorporation by the
pending the issuance of said certificate of
Securities and Exchange Commission (SEC) it
incorporation, the incorporators cannot be
cannot enter into any contract as a
considered as de facto corporation.
corporation.

CORPORATE EXISTENCE NECESSARY FOR


The certificate of incorporation of the MORONG
CONTRACT’S VALIDITY; EXCEPTION:
ELECTRIC was issued by the SEC on OCTOBER
17, 1962, so only from that date, not before, did
it acquire juridical personality and legal But the fact that MORONG ELECTRIC had no
existence. corporate existence on the day the franchise
was granted in its name does not render the
franchise invalid, because later MORONG
Petitioner concludes that the franchise granted
ELECTRIC obtained its certificate of
to Morong Electric on MAY 6, 1962 when it was
incorporation and then accepted the franchise
not yet [in existence]23 is null and void and
in accordance with the terms and conditions
cannot be the subject of the Commission's
thereof.

The fact that a company is not completely


22 incorporated at the time the grant is made to it
This is not saying that under no circumstances may the acts of by a municipality to use the streets does not, in
promoters of a corporation be ratified by the corporation if most jurisdictions, affect the validity of the grant.
But such grant cannot take effect until the
and when subsequently organized. There are, of course, corporation is organized. And in Illinois it has
exceptions, but under the peculiar facts and circumstances been decided that the ordinance granting the
franchise may be presented before the
of the present case we decline to extend the doctrine of
corporation grantee is fully organized, where
ratification which would result in the commission of injustice the organization is completed before the
passage and acceptance. [McQuillin]
or fraud to the candid and unwary.
23 esse 1
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While a franchise cannot take effect until the require, and to issue certificates of
grantee corporation is organized, the franchise public convenience and necessity
may, nevertheless, be applied for before the when such is required or provided
company is fully organized. by any law or franchise."

A grant of a street franchise is valid although Thus, the efficacy of a municipal


the corporation is not created until afterwards. electric franchise arises, therefore,
[Fletcher] only after the approval of the Public
Service Commission. (Almendras vs.
Ramos, 90 Phil. 231).
(I)n the matter of the secondary franchise the
authorities are numerous in support of the
proposition that an ordinance granting a CF. CAGAYAN FISHING V. SANDIKO
privilege to a corporation is not void because
the beneficiary of the ordinance is not fully
The conclusion herein reached regarding the
organized at the time of the introduction of the
validity of the franchise granted to MORONG
ordinance. It is enough that organization is
ELECTRIC is not incompatible with the holding of
complete prior to the passage and
this Court in Cagayan Fishing Development Co.,
acceptance of the ordinance. The reason is
Inc. vs. Teodoro Sandiko upon which the
that a privilege of this character is a mere
petitioner leans heavily in support of its position.
license to the corporation until it accepts the
grant and complies with its terms and
conditions. [Thompson] In said case this Court held that a corporation
should have a full and complete organization
and existence as an entity before it can enter
The incorporation of MORONG ELECTRIC on
into any kind of a contract or transact any
OCTOBER 17, 1962 and its acceptance of the
business. It should be pointed out, however, that
franchise as shown by its action in prosecuting
this Court did not say in that case that the rule is
the application filed with the Commission for the
absolute or that under no circumstances may
approval of said franchise, not only perfected a
the acts of promoters of a corporation be
contract between the respondent municipality
ratified or accepted by the corporation if and
and MORONG ELECTRIC but also cured the
when subsequently organized. Of course, there
deficiency pointed out by the petitioner in the
are exceptions. It will be noted that American
application of MORONG EIECTRIC.
courts generally hold that a contract made by
the promoters of a corporation on its behalf
The efficacy of the franchise, however, arose may be adopted, accepted or ratified by the

Business Organization 2 [Corporation Law]—1st exam coverage


only upon its approval by the Commission on corporation when organized.
MARCH 13, 1963. The reason is that —

Under Act No. 667, as amended by [9] DE FACTO CORPORATION DOCTRINE


Act No. 1022, a municipal council
has the power to grant electric
franchises, subject to the approval Section 20. De facto corporations. – The due
of the provincial board and the incorporation of any corporation claiming in
President. good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall
However, under Section 16(b) of not be inquired into collaterally in any private
Commonwealth Act No. 146, as suit to which such corporation may be a party.
amended, the Public Service Such inquiry may be made by the Solicitor
Commission is empowered "to General in a quo warranto proceeding. (n)
approve, subject to constitutional
limitations any franchise or privilege
granted under the provisions of Act CONSEQUENCES OF DE FACTO CORPORATION
No. 667, as amended by Act No. DOCTRINE
1022, by any political subdivision of
the Philippines when, in the The main consequences of the de facto corporation
judgment of the Commission, such doctrine are as follows:
franchise or privilege will properly
conserve the public interests and [1] The enterprise enters into a contract with an
the Commission shall in so approving outsider, who later brings an action against the
impose such conditions as to enterprise as though it were a corporation, and
construction, equipment, the enterprise is held liable in corporate form;
maintenance, service, or operation
as the public interests and [2] The enterprise enters into a contract with an
convenience may reasonably outsider, and subsequently brings an action in
1
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corporate form against the outsider, the outsider EASTERN LUMBER was an unregistered
is held liable to the enterprise; partnership; that they wished to have it
dissolved because of bitter dissension among
[3] The enterprise enters into a contract with an the members, mismanagement and fraud by
outsider, and the outsider brings an action the managers and heavy financial losses.
against the component individuals, they are
absolved from liability and the outsider is limited ISSUE:
to his remedy against the enterprise only; or

[4] The enterprise enters into a contract with an Whether:


outsider, and the component individuals seek to
hold the outsider liable on his contract, where [1] The court had no jurisdiction to decree
logically the individuals are not allowed to the dissolution of the company, because
recover, recovery must be by the enterprise. it being a de facto corporation, dissolution
thereof may only be ordered in a quo
Comment: Therefore, what the de facto warranto proceeding instituted in
corporation deems is that there is really no accordance with section 19 of the
corporation, but for purposes of public policy to Corporation Law.
protect third person, they are considered as
corporation: It is as if there is a corporation. HOLDING:

REQUISITIES OFR DE FACTO CORPORATIO DOCTRINE’S


APPLICATION: The court has jurisdiction; FAR EASTERN LUMBER
is not a [de facto] corporation, and the
The following requisites must concur: Corporation Law provision cited does not
apply.
[1] The existence of a valid law under which the
corporation may be incorporated; THE CORPORATION DID NOT COME INTO BEING

[2] An attempt in good faith to incorporate. Or


All the parties are informed that the Securities
existence of a “colorable compliance“ with
and Exchange Commission has not, so far,
the provisions on incorporation; and
issued the corresponding certificate of
incorporation.
[3] The assumption by the enterprise of corporate
power.

Business Organization 2 [Corporation Law]—1st exam coverage


All of them know, or sought to know, that the
So we have here the term “colorable compliance personality of a corporation begins to exist only
with the law.” So what is “colorable compliance” from the moment such certificate is issued —
with the law” to make the corporation de facto? So not before24.
di’ kailangang full compliance, pero kung meron
lang siyang colorable compliance it could be The complaining associates have not
considered as de facto corporation. represented to the others that they were
incorporated any more than the latter had
“COLORABLE COMPLIANCE WITH THE LAW”—STILL made similar representations to them. And as
REQUIRES ISSUANCE OF CERTIFICATE OF nobody was led to believe anything to his
INCORPORATION. prejudice and damage, the principle of
estoppel does not apply. Obviously this is not
HALL V. PICCIO an instance requiring the enforcement of
[June 29, 1950] contracts with the corporation through the rule
of estoppel.
FACTS:
FAR EASTERN LUMBER IS NOT A DE FACTO
HALL et al. and BROWN et al. signed and CORPORATION
acknowledged the article of incorporation of
the FAR EASTERN LUMBER [May 28, 1947].
The first [issue] above stated is premised on the
theory that, inasmuch as the FAR EASTERN
The said articles of incorporation were filed in LUMBER is a de facto corporation. Section 19 of
the office of the SEC, for the issuance of the the Corporation Law applies, and therefore
corresponding certificate of incorporation the court had not jurisdiction to take
[December 2, 1947]. cognizance of said civil case. Section 19 reads

Pending action on the articles of incorporation


by the SEC, BROWN et al. filed a civil case
against HALL et al.", alleging that the FAR 24
(Sec. 11, Corporation Law) 1
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as follows: Q: What is “colorable compliance with the law”?

A: Unless there has been an evident attempt to


. . . The due incorporation of any
comply with the law the claim to be a corporation
corporations claiming in good faith
"under this act" could not be made "in good faith."
to be a corporation under this Act
and its right to exercise corporate
Here, they have not obtained the certificate of
powers shall not be inquired into
incorporation. The FAR EASTERN LUMBER could not
collaterally in any private suit to
probably claim "in good faith" to be a corporation.
which the corporation may be a
party,
Q: So the corporation is not even a de facto? What
makes a de facto corporation—a de facto
but such inquiry may be had at corporation?
the suit of the Insular Government
on information of the Attorney- A: There must be a good faith compliance
General.
Q: So Meron na silang certificate, wala pa?
There are least two reasons why this section
does not govern the situation. A: Wala pa.

Q: So they can’t even be a de facto, tama? So


[1] Not having obtained the certificate of what is the difference now [between] the de jure
incorporation, the Far Eastern Lumber and and the de facto? Kase sabi nila, they did not have
Commercial Co. — even its stockholders a certificate to be even considered a de facto, so
— may not probably claim "in good faith" what is the difference now between de facto and
to be a corporation. de jure?

Under our statue it is to be noted25 We say that “[i]t is the issuance of certificate that
that it is the issuance of a grants you personality as a corporation.” So, wala
certificate of incorporation by the palang pinagkaiba? Pareho lang pala si de jure at
Director of the Bureau of si de facto. Kase kung de facto kailangan mo rin ng
Commerce and Industry which certification—certificate of incorporation.
calls a corporation into being.
So once ma-issue-han ka ng certificate of
incoroporation, di’pala tapos. Di pa pala
The immunity if collateral attack is

Business Organization 2 [Corporation Law]—1st exam coverage


considered na de jure ka, because it could be that
granted to corporations "claiming you are de facto—based on that case.
in good faith to be a corporation
under this act." BY FAILURE TO SUBMIT ITS BY-LAWS ON TIME IT MAY
BE CONSIDERED A DE FACTO CORPORATION
Such a claim is compatible with
the existence of errors and SAWADJAAN, V. CA
irregularities; but not with a total or June 8, 2005]
substantial disregard of the law.
FACTS:
Unless there has been an evident SAWADJAAN was an employee of the
attempt to comply with the law the Philippine Amanah Bank (PAB) when it was
claim to be a corporation "under created by virtue of PD. No. 264.
this act" could not be made "in
good faith." While still designated as appraiser/investigator,
SAWADJAAN was assigned to inspect the
[2] Second, this is not a suit in which the properties offered as collaterals by CAMEC.
corporation is a party. On the basis of his Inspection and Appraisal
Report, the PAB granted the loan application.
This is a litigation between stockholders of Congress passed RA 6848 [January 1990]
the alleged corporation, for the purpose creating the AIIBP and repealing P.D. No. 264
of obtaining its dissolution. Even the (which created the PAB). All the existing
existence of a de jure corporation may be personnel of the PAB were to continue to
terminated in a private suit for its discharge their functions unless discharged. In
dissolution between stockholders, without the ensuing reorganization, SAWADJAAN was
the intervention of the state. among the personnel retained by the AIIBP.

When CAMEC failed to pay despite the given


extension, the bank, now referred to as the
25
(Corporation Law, sec. 11)
AIIBP, discovered that the TCT was spurious, the 2
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property described therein non-existent, and main office where it conducts business, has
that the property covered by another TCT had shareholders, corporate officers, a board of
a prior existing mortgage. directors, assets, and personnel. It is, in fact,
here represented by the Office of the
Government Corporate Counsel, the principal
Investigating Committee rendered a decision
law office of government-owned corporations,
finding that SAWADJAANS failed to perform his
one of which is respondent bank.
duties and assigned tasks as
appraiser/inspector, which resulted to the At the very least, by its failure to submit its by-
prejudice and substantial damage to the laws on time, the AIIBP may be considered
Bank, respondent should be held liable a de facto corporation whose right to exercise
therefore. corporate powers may not be inquired into
collaterally in any private suit to which such
The Board of Directors of the Islamic Bank corporations may be a party.
[AIIBP] adopted Resolution finding
SAWADJAANS guilty of Dishonesty in the Moreover, a corporation which has failed to
Performance of Official Duties and/or Conduct file its by-laws within the prescribed period
Prejudicial to the Best Interest of the Service does not ipso facto lose its powers as such.
and imposing the penalty of Dismissal from the
Service. Comment:

On reconsideration, the Board of Directors of That is an example of a de facto corporation: you


the Islamic Bank [AIIBP] adopted the have to have been at least issued a certificate of
Resolution reducing the penalty imposed on incorpation. So, after kase ng issuance ng
petitioner from dismissal to suspension for a certificate of incorpation, you have 30 days to file
period of six (6) months and one (1) day. your by-laws. Kase kung hindi ka nag-file, then you
can be considered at least a de facto corporation.
Meaning, once you have a certificate of
SAWADJAAN alleged that
incorporation hindi pa tapos di’ ka pa na-i-
[1] at the time his employment was incorporate, kase pwedeng your due obligations
terminated, the AIIBP had not yet upon money involved, so pwede kang magpa-
adopted its corporate by-laws. amend
[2] He attached a Certification by the
Securities and Exchange Commission But that is the only example here in the Philippines
(SEC) that it was only on 27 MAY 1992 that na nasinabi ng court na de facto siya.

Business Organization 2 [Corporation Law]—1st exam coverage


the AIIBP submitted its draft by-laws to the
SEC, and PURPOSE OF DE FACTO DOCTRINE
[3] that its registration was being held in
abeyance pending certain corrections The de facto corporation doctrine is meant to
being made thereon. protect the enforceability of corporate dealings
[4] that since the AIIBP failed to file its by-laws and contracts, to allow the public to take at least
within 60 days from the passage of Rep. reasonable face value the authority of the
Act No. 6848, as required by Sec. 51 of the corporation and its officer to enter into valid and
said law, the bank and its stockholders binding contracts, thereby providing a healthy
had already forfeited its franchise or system by which to encourage the public to deal
charter, including its license to exist and with corporate entities. The de facto corporation
operate as a corporation, and thus no doctrine is therefore meant to apply to the level of
longer have the legal standing and existence that pertains to the relationship of the
personality to initiate an administrative corporation with the dealing public; and is not
case. meant to govern nor be applicable to other levels
of existence.
ISSUE: Comment: It is actually to protect third person. So
hanggang doon lang ang level niya. As to the
Did the Islamic Bank lost its juridical personality internal rights of a member, di na applicable ang
as a corporation by its failure to submit its by- de facto [doctrine].
laws, and resultantly lost personality to initiate
an administrative case? Q: Bakit kailangan i-emphasize ng Revised
Corporation Code?
HOLDING:
A: Kase, once you are a de-facto, you cannot be
attacked collaterally. Hindi pwedeng “question of
No. your existence collaterally.” It has to be by a direct
suit by the Solicitor General in a quo warranto
The AIIBP was created by RA No. 6848. It has a proceeding.
2
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This is meant to protect the manner of [how] the


corporation [has] been made of. SEC. 20. Corporation by estoppel. — All
persons who assume to act as a
Another instances according to Villanueva, the only corporation knowing it to be without
one which has been established by the authority to do so shall be liable as
jurisprudence, is the failure of the party to file the general partners for all debts, liabilities
by-laws. Sabi niya: and damages incurred or arising as a
result thereof:
“Corporate name—the name of the
corporation closely resembles that of a Provided, however, That when any such
pre-existing corporation that it will tend ostensible corporation is sued on any
to deceive the public.” transaction entered by it as a corporation
or on any tort committed by it as such, it
This is one of the ground na magiging de facto. But, shall not be allowed to use its lack of
to my mind, hindi ka naman i-a-uphold kung meron corporate personality as a defense.
kang name na kapareha.
Anyone who assumes an obligation to an
Ineligibility of the incorporators, ostensible corporation as such cannot
resist performance thereof on the ground
Again di ka naman i-issue-han ng certificate kung that there was in fact no corporation.
ineligible.

Defect in the execution of incorporation


papers Comment: So, ni-reword lang siya.

Again, di ka naman i-issue-han ng certificate ASIA BANKING CORPORATION V. STANDARD


kung may defect ang execution of PRODUCTS, CO., INC.
incorporation papers. [September 11, 1924]

The only feasible in practice, [for example], is


FACTS:
when there is failure to file by-laws. Because all
of the examples given by Villanuava is actually
very difficult, kase dito di ka mai-isue-han ng STANDARD PRODUCTS, through its President
certificate of incorporation if ito yung mga obtained a loan from ASIA BANKING as
errors mo. evidenced by a promissory note.

Business Organization 2 [Corporation Law]—1st exam coverage


[10] CORPORATION BY ESTOPPEL DOCTRINE This action is brought to recover the sum, the
balance due on the said promissory note.

Section 21. Corporation by estoppel. – All The court below rendered judgment in favor
persons who assume to act as a of the ASIA BANKING for the sum demanded
corporation knowing it to be without in the complaint
authority to do so shall be liable as general
partners for all debts, liabilities and
damages incurred or arising as a result From this judgment the STANDARD
thereof: PRODUCTS appealed because at the trial of
the case, ASIA BANKING failed to prove
affirmatively the corporate existence of the
Provided, however, That when any such parties and the STANDARD PRODUCTS insists
ostensible corporation is sued on any that under these circumstances, the court
transaction entered by it as a corporation erred in finding that the parties were
or on any tort committed by it as such, it corporations with juridical personality.
shall not be allowed to use as a defense its
lack of corporate personality.
ISSUE: Is STANDARD PRODUCTS estopped
from denying ASIA BANKING’s and its own
On who assumes an obligation to an corporate existence?
ostensible corporation as such, cannot
resist performance thereof on the ground
that there was in fact no corporation. (n) HOLDING: Yes
[BP. Blg. 68]
The general rule is that in the absence of
fraud a person who has contracted or
otherwise dealt with an association in such a
way as to recognize and in effect admit its
legal existence as a corporate body is
thereby estopped to deny its corporate 2
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3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

existence in any action leading out of or


involving such contract or dealing, unless its PAZ sent a third letter, this time, addressed
existence is attacked for cause which have to "MR. CLARKE, CEO, NEW
arisen since making the contract or other INTERNATIONAL
dealing relied on as an estoppel and this ENVIRONMENTAL UNIVERSITY, Inc. …"
applies to foreign as well as to domestic demanding that the latter vacate the
corporations. premises due to the damage caused by
an Isuzu van driven by its employee to the
left wing of an aircraft parked inside the
The STANDARD PRODUCTS having
hangar space, which Capt. Clarke had
recognized the corporate existence of the
supposedly promised to buy, but did not.
ASIA BANKING by making a promissory note
in its favor and making partial payments on
PAZ sent a final letter addressed to "MR.
the same is therefore estopped to deny said
CLARKE, Chairman, CEO, NEW
ASIA BANKING's corporate existence. It is, of
INTERNATIONAL
course, also estopped from denying its own
ENVIRONMENTAL UNIVERSITY, INC. x x x,"
corporate existence.
strongly demanding the latter
to immediately vacate the hangar space.
Under these circumstances it was He further informed CAPT. CLARKE that
unnecessary for the plaintiff to present other the company will "apply for immediate
evidence of the corporate existence of electrical disconnection with the Davao
either of the parties. It may be noted that Light and Power Company (DLPC)[,] so as
there is no evidence showing circumstances to compel [the latter] to desist from
taking the case out of the rules stated. continuing with [the] works" thereon.

NEW INTERNATIONAL ENVIRONMENTAL


UNIVERSALITY, INC. filed a complaint
PAZ v. NEW INTERNATIONAL ENVIRONMENTAL against PAZ for breach of contract.
UNIVERSALITY, INC.
[April 20, 2015] PAZ alleged that NEW INTERNATIONAL
had no cause of action against PAZ as
FACTS: the MOA was executed between PAZ
and CAPT. CLARKE in the latter's personal
PAZ, officer-in-charge of the Aircraft capacity.
Hangar at the Davao International Airport

Business Organization 2 [Corporation Law]—1st exam coverage


entered into a Memorandum of RTC:
Agreement [MOA] with CAPTAIN CLARKE,
INTERNATIONAL ENVIRONMENTAL NEW INTERNATIONAL was issued a
UNIVERSITY’s President, whereby PAZ shall Certificate of Incorporation on SEPTEMBER
allow INTERNATIONAL to use the aircraft 3, 2001 as NEW INTERNATIONAL
hangar space at the said Airport ENVIRONMENTAL UNIVERSALITY, INC. but,
"exclusively for company subsequently, when it amended its Articles
aircraft/helicopter." of Incorporation on November 14, 2001
and July 11, 2002, the SEC Extension Office
PAZ complained in a letter addressed to in Davao City erroneously used the
MR. CLARKE, INTERNATIONAL name NEW INTERNATIONAL
ENVIRONMENTAL UNIVERSALITY, Inc. …" ENVIRONMENTAL UNIVERSITY, INC.
that the hangar space was being used
"for trucks and equipment, vehicles The name “NEW INTERNATIONAL
maintenance and fabrication," instead of ENVIRONMENTAL UNIVERSITY, INC. “ was
for "company helicopter/aircraft" only, used by NEW INTERNATIONAL when it filed
and thereby threatened to cancel the its amended complaint on September 11,
MOA if the "welding, grinding, and 2002 and the petition for indirect
fabrication jobs" were not stopped contempt against PAZ on October 24,
immediately.9 2003 believing that it was allowed to do
so, as it was only on April 11, 2005 when
PAZ sent another letter to "MR. CLARKE, the SEC directed it to revert to its correct
INTERNATIONAL name.
ENVIRONMENTAL UNIVERSALITY, Inc. …"
reiterating that the hangar space "must That the MOA, which was "made and
be for aircraft use only," and that he will executed by and between PAZ, Officer-In-
terminate the MOA due to the safety of Charge of Aircraft Hangar at Davao
the aircrafts parked nearby. He further International Airport, [a]nd CAPT.
offered a vacant space along the airport CLARKE[,] President of INTERNATIONAL
road that was available and suitable for
Capt. Clarke's operations.
ENVIRONMENTAL UNIVERSITY was
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executed by the parties not only in their final letter, where he reiterated and
personal capacities but also in strongly demanded the former to
representation of their respective immediately vacate the hangar space his
corporations or entities. "company is occupying/utilizing."

CA: One who assumes an obligation to an


ostensible corporation, as such, cannot
While there was no corporate entity at the resist performance thereof on the ground
time of the execution of the MOA on that there was in fact no corporation.
March 1, 2000 when CAPT. CLARKE signed [Section 21 of the Corporation Code 26]
as "President of International
Environmental University," PAZ is Clearly, PAZ is bound by his obligation
nonetheless estopped from denying that under the MOA not only on estoppel but
he had contracted with NEW by express provision of law.
INTERNATIONAL as a corporation, having
recognized the latter as the "Second As aptly raised by NEW INTERNATIONAL, it
Party" in the MOA that "will use the hangar is futile to insist that PAZ issued the receipts
space exclusively for rental payments in NEW
for company aircraft/helicopter." INTERNATIONAL's name and not with
CAPT. CLARKE's, whom PAZ allegedly
PAZ was likewise found to have issued contracted in the CAPT. CLARKE's
checks to NEW INTERNATIONAL from May personal capacity, only because it was
3, 2000 to October 13, 2000, which belied upon the instruction of an employee.
his claim of contracting with CAPT.
CLARKE in the latter's personal capacity. Indeed, it is disputably presumed that a
person takes ordinary care of his
ISSUE: Does NEW INTERNATIONAL lack concerns, and that all private transactions
legal capacity? have been fair and regular. Hence, it is
assumed that PAZ, who is a pilot, knew
what he was doing with respect to his
HOLDING: No. PAZ is estopped from
business with NEW INTERNATIONAL.
claiming that NEW INTERNATIONAL lacks
legal capacity. CAPT. CLARKE acted
merely as NEW INTERNATIONAL’S agent.

CAPT. CLARKE, AN AGENT: [11] CAPITAL STRUCTURES

Business Organization 2 [Corporation Law]—1st exam coverage


Whether CAPT. CLARKE should have been
impleaded as an indispensable party was
correctly resolved by the CA which held CAPITAL STRUCTURE
that the former was merely an agent of
respondent. ILLUSTRATION:
CORPORATION X:
While Capt. Clarke's name and signature
appeared on the MOA, his participation
was, nonetheless, limited to being a
representative of respondent. As a mere
representative, Capt. Clarke acquired no
rights whatsoever, nor did he incur any
liabilities, arising from the contract
between petitioner and respondent.
Therefore, he was not an indispensable CAPITAL
party to the case at bar. [IN
LIABILITIES
ASSETS = BROAD
PAZ, ESTOPPED FROM DENYING THE CAPITAL
SENSE]
CORPORATE EXISTENCE OF NEW
INTERNATIONAL

From the very language itself of the MOA


entered into by PAZ whereby he
obligated himself to allow the use of the
hangar space “Capital structure”— is the mixture of your capital.
"for company aircraft/helicopter," PAZ
cannot deny that he contracted with
NEW INTERNATIONAL.

PAZ further acknowledged this fact in his 26


Corporation by estoppel 2
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Broadly termed, this is your capital in the broad which is tax deductible. So meron kang shield. You
sense huh. Kase ang meaning ng capital in your can further bring your income down.
broad sense: everything that finances your assets.

RISKS OF DEBT FINANCING


Pag-gagawa ka ng corporation, lahat ng nag-fi-
finance ng assets mo yun yung capital in the broad But what are the risks? For one, wala ding
sense. It could either be debt—“debt financing.” So magpapautang na bangko kung hindi funded.
kung capital ka, it could be financed by its Minsan, tinitingnan nila yung capital. Pag-tingin nila
investment (shares). Kung uutang ka, yun, it could na konti yung capital, they will require an
be debt financing, either by bank. undertaking to increase the capital, because it’s
very risky. Your bankruptcy cost in an indebtedness
is really big.
“THIN CAPITALIZATION”
So when we say capital structure, it is the mixture of
Thin capitalization— is the ratio of liability in capital liabilities and capital.
in capitalization. There are some jurisdiction, e.g., in
Thailand: They have this minimum ratio of their debt,
na dapat, let’s say 20% of your total capital should HYBRID CAPITALIZATION
be by debt, and 80% should be financed by
investment. Meron rin namang hybrid: Merong capital and
liability, ito yung mga convertible— yung liability mo
pwede mo pang ma-convert into shares.
Illustration:
To give you the overview of capital structuring: that
20% debt is the nature of how you will structure your capital to
CAPITALIZATION = finance your corporation. You have to weigh it
against your tax, cost, savings and all others.
80% investment
“INVESTMENT”

% debt THE PRESIDENT OF PDIC V. REYES


[June 21, 2005]

PURPOSE OF THIN CAPITALIZATION FACTS:

Business Organization 2 [Corporation Law]—1st exam coverage


Pacific Banking Corporation [PaBC] was
Bakit kailangan ng thin capitalization? Because
placed under receivership on the ground
kapag heavy ka on debt, imagine if you are a
of insolvency. Subsequently, it was placed
corporation which is largely financed by utang
under liquidation.
there is that risk [for] bankruptcy. That’s why in some
jurisdiction there is thin capitalization which limits the The Central Bank of the Philippines,
debt financing for purposes of establishing a through the OSG, filed a petition for
corporation. assistance in the liquidation of PaBC.

LIQUIDATING COURT
NO THIN CAPITALIZATION IN THE PHILIPPINES
JOO ET AL. [SINGAPOREANS] filed their
Now, sa atin wala. You have no thin capitalization. claim before the liquidating court.
In other words, you can actually, upto ₱25,000 lang Citing Investment Incentives Act, they
yung capital mo, subject to the limitations under claimed to be preferred creditors and
your Corporation Code, pwedeng all the rest could prayed for the return of their equity
be by debt financing. investment in the amount of
US$2,531,632.18 with interest until the
closure of the PaBC.
PREFERENCE FOR DEBT FINANCING The LIQUIDATION COURT issued an order
that [t]he claimants who are foreign
What happens kapag meron kang loan, why is that investors should already be paid. The
most people would want to have more debt doubt should be resolved in favor of
financing, well for one , they cannot expend na claimants since it is of judicial notice that
magbigay ng pera. government adopted the policy to entice
foreign investors to help boost the
For another thing, ano pa? economy. Claimants who are foreign
investors should be treated with liberality
Debt financing, anong cost nito? You have interest. such that they should be categorized
Which[is] magkakaroon ka ng capital expense among preferred creditors.
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when the Singaporeans bought their


The LIQUIDATOR OF PABC is ordered to shares in PaBC, the 6% interest rate
pay the SINGAPOREANS their total should be reckoned from 26 June
investment of US$2,531,632.18 as preferred 1992, the date the Singaporeans filed
creditors. Dividends and/or interest that their claim in the liquidation court.
accrued in favor of claimants is hereby
deferred pending study by the Liquidator. [5] That there is already an overpayment
of accrued dividends or interests. The
The LIQUIDATION COURT’S order became liquidation courts Order awarded an
final and executory. interest of 12% per annum to be
computed from 15 October 1981 (the
LIQUIDATING COURT, Through Reyes, date of actual remittance of the
issued an Order directing the President of investment) until full payment.
the Land Bank of the Philippines (LBP) to
release the garnished amount of
US$2,531,632.18 or its peso equivalent CA: modified the decision and awarded
computed to be paid to the an interest of 6% per annum from 15
Singaporeans. October 1981 up to PaBCs closure, as well
as an interest of 12% per annum from 11
LIQUIDATING COURT, Judge Reyes ordered October 1992, when the 11 September
the payment of accrued legal interest on 1992 Order became final and executory,
the Singaporeans equity investment of until 17 April 1998, when the equity
US$2,531,632.18 at the rate of 12% per investment of US$2,531,632.18 was fully
annum computed from the date the paid.
outward remittance and the investment
were actually made, until its full payment, ISSUE:
at the exchange rate prevailing at the
time of payment.
[1] Whether the SINGAPOREANS equity
CONTENTIONS: investment with closed PaBC is
entitled to payment of interest.
LIQUIDATOR:
[2] Whether Eastern Shipping Lines, inc. v.
[1] interprets the affirmation by the CA CA guidelines are applicable [in
Order of Judge Reyes as amounting
fixing the rates of interest and/or
to an unlawful grant of undeclared
dividends that allegedly accrued on

Business Organization 2 [Corporation Law]—1st exam coverage


dividends.
the equity investment of the
singaporeans on PaBC]27
[2] that the only fruits that can arise from
an equity investment are dividends
declared from unrestricted retained HOLDING:
earnings by the Board of Directors in
ORIGINAL REMITTANCE OF THE
accordance with the Corporation
SINGAPOREANS WAS IN THE NOT IN A
Code. Absent a declaration in this
NATURE OF A LOAN OR FORBEARANCE OF
case, the interest awarded has no
MONEY, GOODS, OR CREDIT. IT IS AN
legal basis.
INVESTMENT.
[3] that no actual damages can arise The LIQUIDATION COURT awarded interest
from the closure of the bank. The not as a form of accrued dividends or
ruling in Eastern Shipping Lines, Inc. v. return of investment, but as actual and
Court of Appeals is not applicable compensatory damages. Categorically,
because that case clearly refers to an the order states:
award of interest in the concept of
actual and compensatory damages The December 16, 1993 CA
in case of breach of an obligation. ruled that the remittance of
earnings of this type of foreign
[4] The failure of PaBC to return the investment is guaranteed.
Singaporeans equity investment Legal interests are earnings
because of its closure is not a breach and they are provided for by
of an obligation the closure being law arising from the
akin to a force majeure. If indeed withholding of funds due to a
PaBC is liable to the Singaporeans for party. They are not computed
actual and compensatory damages, on the amount of earnings of
accrual thereof should be reckoned
from the date of demand pursuant to
Article 1169 of the Civil Code. Instead 27
Note: Eastern Shipping Lines, inc. v. CA ruling has already been
of running from 15 October 1981
modified by Nacar v. Gallery Frames.
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a business. may produce a revenue or income.

When the trial court, in its Order of 11 Thus, unlike a deposit of money or a loan
September 1992, declared the that earns interest, the investment of the
Singaporeans to have the status of Singaporeans cannot be assured of a
preferred creditors, it did so only for the dividend or an interest on the amount
purpose of giving them priority in the order invested. For, interests or dividends are
of payment upon the liquidation of the granted only after profits or gains are
PaBC. Relying only on the Investment generated.
Incentive Act, the trial court did not
decide whether the Singaporeans RESULTANTLY, GUIDILENES IN EASTERN
investment was a loan or equity. Since the SHIPPING CASE IN RELATION TO INTEREST IS
Singaporeans were declared preferred NOT APPLICABLE.
creditors for a limited purpose, it does not
We therefore agree with the Court of
follow that the court likewise implied that
Appeals in holding that the amount of
the original remittance of the
US$2,531,632.18 remitted by the
Singaporeans was in the nature of a loan
Singaporeans to PaBC was not a loan or
or forbearance of money, goods, or credit.
forbearance of money in favor of PaBC.
CA: the equity investment of Hence the guidelines in Eastern Shipping
US$2,531,632.18 was not a loan or Lines does not come into play.
forbearance of money; hence, Central
Neither can we apply Central Bank
Bank Circular No. 416, prescribing 12%
Circular No. 416, which imposes the rate of
interest per annum on loans or
12% per annum on loans and forbearance
forbearance of money, goods, or credit is
of money. Nor can guidelines be invoked
inapplicable. It applied Article 2209 of the
because, as correctly pointed out by the
Civil Code, which provides for the legal
Liquidator, the closure of the PaBC did not
interest of 6% per annum in the absence of
constitute a breach of obligation. Article
a stipulation to the contrary. Thus, the CA
2209 of the Civil Code, which was relied
modified the Order of 12 May 1998 and
upon by the Court of Appeals, does not
reduced the rate of interest on the
find application either. That Article, which
investment of US$2,531,632.18 from 12% to
provides for 6% interest per annum,
6% to run from 15 October 1981 when the
governs when there is a delay in the
outward remittance and equity investment
payment of a sum of money. Such is not
was actually made up to the closure of
the case here.
PaBC. Also, following Eastern Shipping

Business Organization 2 [Corporation Law]—1st exam coverage


Lines, Inc. v. Court of Appeals it upheld the Thus, the Court of Appeals award of 6%
grant of 12% interest on the monetary interest on the Singaporeans equity
award of US$2,531,632.18 to run from the investment as actual or compensatory
date of the finality of the 11 September damages from the date of its remittance
1992 Order until its satisfaction. until the closure of PaBC has no leg to
stand on and must, therefore, be deleted.
It is undisputed that the amount of
US$2,531,632.58 remitted by the
Singaporeans represented the 154,462 Comment:
PaBC common shares previously issued to,
and owned by, Mandarin Development The Singaporean has an investment here, tapos
Corporation bought by the Singaporeans ni-require din na magbayad ng interest [yung
at the price of US$16.39 per share. The
corporation to the Singaporean].
investment was approved by the Central
Bank under Monetary Board Resolution No.
Sabi ng court, no! Since an investment is a
323 and constituted about 11% of the total
subscribed capital stock of PaBC. Clearly, capital invested to purchase their assets for them
the amount remitted to PaBC by the to generate their revenue. It is not similar to a
Singaporeans was an investment. fund retained to earn interest rates.

An investment is an expenditure to acquire So they cannot compel the investment to earn


property or other assets in order to interest28 kase you can only earn interest if there
produce revenue. It is the placing of is forebearance.
capital or laying out of money in a way
intended to secure income or profit from
its employment.

To invest is to purchase securities of a more 28


or less permanent nature, or to place unlike a deposit of money or a loan that earns interest, the
money or property in business ventures or investment of the Singaporeans cannot be assured of a
real estate, or otherwise lay it out, so that it
dividend or an interest on the amount invested. For, interests 2
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The difference between this two, so kung ikaw ang


nagpautang, you will earn interest. Kung ikaw
naman ang nagbigay ng capital, as an investor—
di nagpautang, depende kung kumikita yung
company, kase kung losing yung company, you will
get that risk, wala ka namang kita, kung kumita
naman siya, merong papasok na investment,
pwede kang magkaroon ng dividends— meron
kang dividends. Whereas kung ikaw lang ang [nag-
finance] your finance, with that financIing meron
kang percentage of interest, whether kumita man
or hindi.

Business Organization 2 [Corporation Law]—1st exam coverage

or dividends are granted only after profits or gains are

generated. [The President of PDIC v. Reyes]

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The capital subscribed is the total


amount of the capital that persons
(subscribers or shareholders) have agreed to
take and pay for, which need not necessarily by,
and can be more than, the par value of the
shares. In fine, it is the amount that the
corporation receives, inclusive of the
premiums if any, in consideration of the
original issuance of the shares. In the case of
stock dividends, it is the amount that the
corporation transfers from its surplus profit
account to its capital account. It is the same
amount that can be loosely termed as the trust
fund of the corporation. The Trust Fund doctrine
considers this subscribed capital as a trust fund for
the payment of the debts of the corporation, to
Dec. 14, 2018 [Vallente] which the creditors may look for satisfaction. Until
the liquidation of the corporation, no part of the
subscribed capital may be returned or released to
SHARES the stockholder (except in the redemption of
redeemable shares) without violating this
principle. Thus, dividends must never impair the
subscribed capital; subscription commitments
Section 174. Outstanding Capital Stock. Defined. cannot be condoned or remitted; nor can the
corporation buy its own shares using the
The term “outstanding capital stock”, as used in this Code, means subscribed capital as the considerations therefor.
the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether fully or Dividends, regardless of the form these are declared, that is, cash,
partially paid, except treasury shares. (previously Section 137) property or stocks, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of a
corporation. Thus, the value of the declaration in the case of a
stock dividend is the actual value of the original issuance of said
Section 174 defines what Outstanding Capital Stock is. This is stocks.
the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether fully or
partially paid, except treasury shares.
Ang contention, wala namang consideration diyan kasi it’s
PLDT vs NTC declared by the company itself. So wala na siya dapat sa
(539 SCRA 365) subscribed and paid for.

Business Organization 2 [Corporation Law]—1st exam coverage


Section 40 (e) of the Public Service Act (PSA) authorized the NTC FT: It cannot be said that no consideration is involved in the
to collect from public telecommunications companies Supervision issuance of stock dividends. In fact, the declaration of stock
and Regulation Fees (SRF) of:
dividends is akin to a forced purchase of stocks. By declaring
“PhP 0.50 for every PhP 100 or a fraction of the capital and stock dividends, a corporation ploughs back a portion or its
stock subscribed or paid for of a stock corporation, partnership entire unrestricted retained earnings either to its working
or single proprietorship of the capital invested, or of the property capital or for capital asset acquisition or investments. It is
and equipment, whichever is higher.” simplistic to say that the corporation did not receive any
actual payment for these. When the dividend is distributed, it
NTC sent SRF assessments to petitioner (PLDT) starting sometime ceases to be a property of the corporation as the entire or
in 1988. The SRF assessments were based on the market value
portion of its unrestricted retained earnings is distributed pro
of the outstanding capital stock, including stock dividends,
of PLDT. PLDT protested the assessments contending that the SRF rata to corporate shareholders.
ought to be based on the par value of its outstanding capital
stock excluding stock dividends. So saan galling ang bayad? Sa corporation mismo. In other
words, the consideration is from the corporation. It is a forced
PLDT contends that capital subscribed and stock dividends are purchase.
different to the effect that the latter are not included in the
concept of capital stock subscribed because subscribers or
shareholders do not pay for their subscriptions as no amount is In essence, therefore, the stockholders by receiving stock
received by the corporation in consideration of such issuances dividends are forced to exchange the monetary value of their
since these are effected as mere book entries, that is, the transfer dividend for capital stock, and the monetary value they forego
from the retained earnings account to the capital or stock account. is considered the actual payment for the original issuance of
the stocks given as dividends.
To bolster its position, PLDT repeatedly used the phrase actual
payments received by a corporation as a consideration for
Saan galling si dividends?
issuances of shares which do not apply to stock dividends.

Issue: Are stock dividends included in “capital stock subscribed To simplify. What finances your assets? Depende. It could be
and paid for” your liabilities or capital.

Ruling: Yes
Assets = Liabilities + Capital
In NTC vs CA, the court held:
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3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

Now your capital is composed of your capital stock and


retained earnings. Assets = Liabilities + Capital

Assets = Liabilities + Capital Fund in Retained


Capital
trust earnings Stock
Stock
of
Retained creditors
Capital
Cash
Stock earnings
TRUST FUND
DOCTRINE Property

Let’s say may profit ka na 100 from Year 0 to year 1. Yung


profit mapupunta sa retained earnings. Kaya siya “retained In stock dividends, instead of distributing cash or properties,
earnings” kasi it is your earnings that is being retained by the ang dini-distribute is ang shares. It’s just a re-classification,
company. kinonvert into capital stock. May natanggap ka ba sa stock
holders? Wala. Ang natanggap nya shares. Wala syang
PROFIT: Year 0 – Year 1 natangap na assets. Umincrease ang kanyang shareholdings
100
kasi there was a conversion.

Assets = Liabilities + Capital PROFIT: Year 0 – Year 1


100

Capital Retained Assets = Liabilities + Capital


Stock earnings

Fund in Retained
Capital
trust earnings Stock
Stock
of
Pag mag de-declare ka ng dividends, let’s say mag di- creditors
distribute ka ng dividends, you can only declare dividends Conversion Cash
from your retained earnings. In other words, if you are TRUST FUND
investor, you are only entitled to dividends kapag may kita DOCTRINE Property
ang company. You cannot declare dividends out of the capital

Business Organization 2 [Corporation Law]—1st exam coverage


stock because this is reserved for the creditors. This is under
the Trust Fund doctrine. Your capital stock is a fund in trust of
your creditors.
So sa PLDT vs NTC, it is as if nag declare ng cash dividends
tapos binili ng shares. The value declared from the RE
PROFIT: Year 0 – Year 1
100 (retained earnings), that is what is considered as “paid for
and subscribed”.

Assets = Liabilities + Capital Capital Stock

Fund in Retained
Capital What constitutes capital stock? Capital stock is composed of
trust earnings
Stock your paid-up capital.
of
creditors

Authorized Capital Stock


TRUST FUND
DOCTRINE
Subscription (Collectible)

Paid Up Capital

Ang question bakit ang stock dividends kasama sa “capital


paid for and subscribed” na covered ng SRF? (Based on the
PLDT vs NTC ruling). What are the kinds of dividends na
pwede ideclare? Cash, property, stock dividends. Pinaka
Capital stock is composed of the paid up pati subscribed.
common, cash dividends. Pwede rin Property dividends.

Subscription Contract
PROFIT: Year 0 – Year 1
100
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What’s the nature of a subscription contract? Eto, binili ko this But the Board held that the paid-up capital of MSCI on was
share, akin nay an pero pwede naman na di ko pa bayaran in actually P64,688,528.00 and not P5 million and, thus, the
full, partial lang. Now, it is a principle that Subscription established losses amounting to P3,400,738.00 constitute an
contract is indivisible. You cannot divide the subscription. Kasi impairment of only 5.25% of the true paid-up capital of P64
million plus, which losses are not enough to meet the
anong nangyayari kapag dinidivide? This is not written in Law
required 25% impairment requirement. This conclusion is
books. anchored on the belief of the Board that the value of the
assets of ASCI, party to the Memorandum of Agreement,
Situation: transferred to MSCI on March 28, 1990 should be taken into
consideration in computing the paid-up capital of MSCI to
I will subscribed P500,000. Tapos binayaran ko ng P250,000. reflect its true financial structure.
Tapos I cannot pay anymore.
Issue: What is the correct paid up capital of MSCI?

Ruling: P5 Million declared by MSCI


Subscription Paid 250k
500k
Sections 12 and 13 of BP Blg. 68 or the Corporation Code
would be very helpful, viz:
Unpaid 250k

"Sec. 12. Minimum capital stock required of stock


corporations. Stock corporations incorporated under
this Code shall not be required to have any minimum
Pwede ba na ibenta ko ang unpaid 250k kay A and B? No, authorized capital stock except as otherwise
because subscription is indivisible. You cannot apportion the specifically provided for by special law, and subject to
subscription because that will be tantamount to you the provisions of the following section."
defrauding the corporation. The subscription contract is
between you only and the corporation. You cannot have "Sec. 13. Amount of capital stock to be subscribed
someone pay for your insufficiency. Pag siningil ka na ng and paid for purposes of incorporation. At least
corporation tapos hindi ka na makabayad, in that case, twenty-five (25%) percent of the authorized capital
magbi-bid ang mga tao. That’s the only time na madi-divide stock as stated in the articles of incorporation must
ang subscription. be subscribed at the time of incorporation, and at
least twenty-five (25%) percent of the total
subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the
MSCI-NACUSIP Local Chapter vs NWPC
contract of subscription without need of call, or in the
Asturias Sugar Central, Inc. (ASCI, for brevity), absence of a fixed date or dates, upon call for
executed a Memorandum of Agreement with Monomer payment by the board of directors: Provided,

Business Organization 2 [Corporation Law]—1st exam coverage


Trading Industries, Inc. (MTII, for brevity), whereby MTII however, That in no case shall the paid-up capital be
shall acquire the assets of ASCI by way of a Deed of less than five thousand (P5,000.00) pesos. (n)"
Assignment provided that an entirely new organization in
place of MTII shall be organized, which new corporation shall By express provision of Section 13, paid-up capital is
be the assignee of the assets of ASCI. By virtue of this that portion of the authorized capital stock which has
Agreement, a new corporation was organized and been both subscribed and paid. To illustrate, where the
incorporated under the corporate name Monomer Sugar authorized capital stock of a corporation is worth P1 million
Central, Inc. or MSCI. and the total subscription amounts to P250,000.00, at least
25% of this amount, namely, P62,500.00 must be paid up per
MSCI applied for exemption from the coverage of Wage
Section 13. The latter, P62,500.00, is the paid-up capital or
Order No. RO VI-01 issued by the Board on the ground that it
what should more accurately be termed as "paid-up capital
is a distressed employer.
stock."
The petitioner, MSCI-NACUSIP Local Chapter (Union,
for brevity), maintained that MSCI is not distressed and that MSCI was organized and incorporated on February 15, 1990
MSCI has not complied with the requirements for exemption. with an authorized capital stock of P60 million, P20 million of
which was subscribed. Of the P20 million subscribed capital
Based on NWPC Guidelines No. 01, the criteria for the stock, P5 million was paid-up. This fact is only too glaring for
exemption for Distressed Establishments: the Board to have been misled into believing that MSCI's
paid-up capital stock was P64 million plus and not P5 million.

a.1 When accumulated losses for the last 2 full


accounting periods and interim period, if any, Not all funds or assets received by the corporation can be
immediately preceding the effectivity of the Order considered paid-up capital, for this term has a technical
have impaired by at least 25% the: signification in Corporation Law. Such must form part of the
authorized capital stock of the corporation, subscribed and
then actually paid up.
Paid-up capital at the end of the last full accounting
period preceding the effectivity of the Order, in the
case of corporations. Paid-up capital is that portion of the authorized capital stock
which has been both subscribed and paid. Question, can the
MSCI claimed in its application for exemption, that its paid up subscription be greater than the authorized? If subscription is
capital is P5 million and the established losses amounts to greater than the authorized, what happens to the excess?
P3,400,738.00.
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rights, privileges, or restrictions, and their stated par value, if


Excess any, must be indicated in the articles of incorporation. Each
share shall be equal in all respects to every other share,
Authorized Capital Stock except as otherwise provided in the articles of incorporation
and in the certificate of stock.

Subscription (Collectible) The shares in stock corporations may be divided into classes
of series of shares, or both. No share may be deprived of
voting rights except those classified and issued as “preferred”
Paid Up Capital or “redeemable” shares, unless otherwise provided in this
Code: Provided, that there shall always be a class or series of
shares with complete voting rights.

Holders of non-voting shares shall nevertheless be entitled to


vote on the following matters:
The excess is void. The corporation is not authorized to issue
that shares. 1) Amendment of the articles of incorporation;

2) Adoption and amendment of by-laws;


When there is over issuance of shares in excess of the
Authorized capital stock, both the increase in the capital stock 3) Sale, lease, exchange, mortgage, pledge, or other
and certificate of stock issued are void because of the fact disposition of all or substantially all of the corporate property;
that it is beyond the power of the corporation to create and
issue the additional stock. (Villanueva) 4) Incurring, creating or increasing bonded indebtedness;

Is it possible that Paid-up is equivalent to subscription? Yes, 5) Increase or decrease of capital stock
kung fully paid.
6) Merger or consolidation of the corporation with another
corporation or other corporation
Is it possible that the consideration received is the greater
than the subscribed capital? Pwede ba na ang binayad ni 7) Investment of corporate funds in another corporation or
stock holder sa corporation, the amount is greater than the business in accordance with this Code; and
capital stock?
8) Dissolution of the corporation

You have your share premium. Except as provided in the immediately preceding paragraph,
the vote required under the Code to approve a particular
The share premium is an equity account found on a corporate act shall be deemed to refer only to stocks with
company's balance sheet. The amount in the account voting rights.
represents the additional amount shareholders paid for their
The shares or series may or may not have a par value except

Business Organization 2 [Corporation Law]—1st exam coverage


issued shares that was in excess of the par value of
that banks, trust, insurance, and pre-need companies, public
those shares. (Investopedia)
utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the
But is your share premium part of your capital stock? Can you public, whether publicly listed or not, shall not be permitted
declare dividends out of your share premium? to issue no-par value shares of stocks.

It is possible that the consideration is greater than the Preferred shares of stock issued by a corporation may be
given preference in the distribution of dividends and in the
subscribed? Yes. Yung tinatawag na share premium. Kasi
distribution of corporate assets in case of liquidation, or such
pwede naman na P100 ang par value, per ang binaigay sayo other preferences: Provided, that preferred shares of stock
na consideration is P250. Kasi isipin mo naman, kung bibili ka may be issued only with a stated par value. The board of
ng shares, ibebenta ba yan ng corporation ng par value lang? directors, where authorized in the articles of incorporation,
Ofcourse not! Wala silang kita. may fix the terms and conditions of preferred shares of stock
or any series thereof: Provided further, that such terms and
conditions shall be effective upon filing of a certificate thereof
Now can we sell below par value? Let’s say the par value is
with the Securities and Exchange (hereinafter referred as
P100, pwede ba na ibenta ng P80? Lower than the par value.
“Commission”)
The share, lower than the par value, is generally not allowed.
Remember that this is in trust for the creditors. You will be Shares of capital stock issued without par value shall be
selling watered Stock. Sinasabing watered stock kasi gatubig deemed fully paid and non-assessable and the holder of such
raba. shares shall not be liable to the corporation or its creditors in
respect thereto: Provided, that no-par value shares must be
issued for a consideration of atleast five pesos (P5.00) per
Watered stock is stock that is issued at a price far higher
share. Provided further, that the entire consideration received
than the value of the issuer's assets. (Investopedia) by the corporation for its no-par value shares shall be treated
as capital and shall not be available for distribution as
Remember that you cannot sell lower than the par value. dividends.
There are exception ofcourse, which will be discussed in the
classification of shares. A corporation may further classify its shares for the purpose
of ensuring compliance with constitutional or legal
requirement.
Classification of Shares

Section 6. The classification of shares, their corresponding 3


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It must be indicated in both AOI (Articles of Incorporation) corporations authorized to obtain or access funds from the
and certificate of stock. Otherwise, that distinction is not public, whether publicly listed or not, shall not be permitted
valid. to issue no-par value shares of stocks.

“x x x
Pwede pa lang walang par value. But please take note except:
“The shares in stock corporations may be divided into classes
of series of shares, or both.” 1. Banks
2. Trust
3. Insurance
4. Pre-need associations
Pwede ba na isang shares marami kang classification? Pwede. 5. And other corporations authorized to obtain or
access funds from the public
“No share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares” These should always have par value.

“Preferred shares of stock issued by a corporation may be


So you can only deprive voting rights of preferred and given preference in the distribution of dividends and in the
distribution of corporate assets in case of liquidation, or such
redeemable shares. That’s why you have the case of Gamboa
other preferences: Provided, that preferred shares of stock
vs Teves wherein preferred shares are not allowed to vote
may be issued only with a stated par value.”
because it’s the type of shares in which you can deprive
voting rights.
Please take note, preferred share of stock may be issued only
“x x x Provided, that there shall always be a class or series of with a stated par value.
shares with complete voting rights.”

“The board of directors, where authorized in the articles of


incorporation, may fix the terms and conditions of preferred
You can have as many classifications as you want but there shares of stock or any series thereof: Provided further, that
should be atleast one which has complete voting rights. such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange
“Holders of non-voting shares shall nevertheless be entitled to (hereinafter referred as “Commission”)”
vote on the following matters”

(Sir just read the phrase above)


Even if non-voting yung share, you can nevertheless, be
entitled to vote in the following matters: “x x x

Business Organization 2 [Corporation Law]—1st exam coverage


1. Amendment of the articles of incorporation; “Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable”
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded Meaning wala na siyang subscription procedure. Whatever is
indebtedness; paid, that is considered fully paid and non-assessable.
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with “x x x and the holder of such shares shall not be liable to the
another corporation or other corporation corporation or its creditors in respect thereto:”
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and So lahat ng binayad niya, that is considered fully paid.
8. Dissolution of the corporation
“x x x Provided, that no-par value shares must be issued for a
Please memorize. This is exclusive. consideration of atleast five pesos (P5.00) per share.”

“x x x
Can you have a par value less than P5? Pwede ka bang
“Except as provided in the immediately preceding paragraph,
magkaroon ng par value na piso? Can you issue shares at P1
the vote required under the Code to approve a particular
each? It is only allowed if you issue par-value share. If it is a
corporate act shall be deemed to refer only to stocks with
voting rights. “ no-par value share, it must be atleast P5.

Par value is that amount that is indicated in the certificate of


shares. It is the designation of a particular share. Let’s say
Other than the mentioned particular matters, those who have my share is P50 per value. That is the face value of the share.
no voting rights, di sila makakavote nito. Parang pera, kuha ako ng P100, sa face value nakalagay doon
P100.
“The shares or series may or may not have a par value except
that banks, trust, insurance, and pre-need companies, public The issue is can you issue a share higher than the par value?
utilities, building and loan associations, and other Pwede naman. Kasi face value lang naman yun. Can you 3
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issue a share lower than the par value, hindi kasi that face order to reduce the company’s foreign exchange remittances
value is the basis of the trust fund doctrine. in case cash dividends are declared.

Here comes CIR assessing tax deficiency based on the


Kapag nag pa-par value ka, it gives you the freedom of P1
transactions of exchange and redemption of stocks.
per value share. Kasi it’s on the face. Made-determine how
much is the trust fund for the creditors. Pag no-par value, at Issue: whether ANSCORs redemption of stocks from its
least P5. Mas critical si no-par value. That is also the reason stockholder as well as the exchange of common with
why public utility must issue par value share because it gives preferred shares can be considered as essentially equivalent
you a definite fund which is in trust for the creditors. to the distribution of taxable dividend, making the proceeds
thereof taxable.
Now can you issue share premium as dividends?
Ruling:

Example: Par value: P100 = 1 share EXCHANGE OF COMMON SHARES WITH PREFERRED
SHARES- not taxable. There is no gain to speak of.
A) higher then par value- ALLOWED
P120 = the 20 is the share premium In exchange, there would be a shifting of the balance of
stock features, like priority in dividend declarations or
B) Lower than par value - not allowed absence of voting rights. But neither the reclassification nor
P80 = not allowed because of the trust fund doctrine exchange per se, yields realize income for tax purposes.

A common stock represents the residual ownership


interest in the corporation. It is a basic class of stock
“Provided further, that the entire consideration received by ordinarily and usually issued without extraordinary
the corporation for its no-par value shares shall be treated as rights or privileges and entitles the shareholder to a pro
capital and shall not be available for distribution as rata division of profits.
dividends.”
Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset
Meaning in no-par value, the entire consideration is distribution.
considered as capital and cannot be distributed as dividends.
In this case, the exchange of shares, without more, produces
no realized income to the subscriber. There is only a
So in reverse, in par value, what is considered as capital? It modification of the subscribers’ rights and privileges - which is
is the par-value. The par value as capital, yun lang yung di not a flow of wealth for tax purposes. The issue of taxable
pwede i-distribute. Those exceeding the par value, share dividend may arise only once a subscriber disposes of his
premium, can be declared as dividends. entire interest and not when there is still maintenance of
proprietary interest.
“A corporation may further classify its shares for the purpose
of ensuring compliance with constitutional or legal

Business Organization 2 [Corporation Law]—1st exam coverage


requirement.”
The term “legal capital” is different in corporation law as a law
subject and as an accounting subject. May mga law
A. COMMON SHARES commentators na sinasabi the legal capital includes
everything that is paid. Pero alam naman natin na in
CIR vs CA and A Soriano Corp accounting, sini-separate ang share premium.
301 SCRA 152
The difference between common shares and preferred shares
Facts: Don Andres Soriano formed a corporation, A. Soriano Y is in preferred shares, meron siyang benefits. Si Common
Cia, predecessor of ANSCOR, with an initial capitalization of shares wala.
P1,000,000.00 divided into 10,000 common shares at a par
value of P100/share. Don Andres subscribed to 4,963 shares
B. PREFERRED SHARES
of the 5,000 shares originally issued. When Don Andres died,
ANSCOR increased its capital stock to P20M and in 1966
further increased it to P30M. In the same year (December Republic Planters Bank vs Agana
1966), stock dividends worth 46,290 and 46,287 shares were 269 SCRA 1
respectively received by the Don Andres estate and wife Dona
Carmen from ANSCOR. Hence, increasing their accumulated ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION
shareholdings to 138,867 and 138,864 common shares each. (the corporation) secured a loan from Republic Planters Bank
(RPB). As part of the proceeds of the loan, preferred shares of
In 1967, Dona Carmen requested a ruling from the United stocks were issued to the Corporation. In other words,
States Internal Revenue Service (IRS), inquiring if an instead of giving the legal tender totaling to the full amount
exchange of common shares with preferred shares may be of the loan, which is P120,000.00, RPB lent such amount
considered as a tax avoidance scheme under Section 367 of partially in the form of money and partially in the form of
the 1954 U.S. Revenue Act. The IRS opined that the stock certificates.
exchange is only a recapitalization scheme and not tax
avoidance. Consequently, on March 31, 1968 Dona Carmen
Said certificates of stock bear the following terms and
exchanged her common shares for newly reclassified
conditions:
preferred shares. Also, some of the common shares of the
estate of Don Andres was exchanged to preferred shares.
"The Preferred Stock shall have the following rights,
As to ANSCOR, it redeemed common shares in the estate of preferences, qualifications and limitations, to wit:
Don Andres. ANSCOR’s business purpose for the redemption
of stocks is to partially retire said stocks as treasury shares in
1. Of the right to receive a quarterly 3
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dividend of One Per Centum insolvency or inability of the corporation to meet its debts as
(1%), cumulative and they mature.
participating.
xxx Issue: Can RPB be compelled to redeem the preferred shares
2. That such preferred shares may issued to the private respondent.
be redeemed, by the system of
drawing lots, at any time after RULING: No. While the stock certificate does allow
two (2) years from the date of redemption, the option to do so was clearly vested in the
issue at the option of the petitioner bank. The redemption therefore is clearly the type
Corporation. x x x." known as "optional". Thus, except as otherwise provided in
the stock certificate, the redemption rests entirely with the
The Corporation filed a complaint against RPB anchored on its corporation and the stockholder is without right to either
alleged rights to collect dividends under the preferred shares compel or refuse the redemption of its stock.
in question and to have RPB redeem the same under the
terms and conditions of the stock certificates. The redemption of said shares cannot be allowed. As pointed
out by the petitioner, the Central Bank made a finding that
ISSUE: Does the corporation have the right to colledt the said petitioner has been suffering from chronic reserve
dividends under the preferred shares? deficiency, and that such finding resulted in a directive,
issued on January 31, 1973 by then Gov. G. S. Licaros of the
Can RPB be compelled to redeem the shares? Central Bank, to the President and Acting Chairman of the
Board of the petitioner bank prohibiting the latter from
RULING: redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the
SC first discussed the nature of preferred shares and prejudice of its depositors and creditors.
redeemable shares.
Issue: Is the corporation entitled to collect dividends?
“A preferred share of stock, is one which entitles the
holder thereof to certain preferences over the holders of Ruling: No. Sec. 16 of the Corporation Law and Sec. 43 of the
common stock. The preferences are designed to induce present Corporation Code prohibit the issuance of any stock
persons to subscribe for shares of a corporation. Preferred dividend without the approval of stockholders, representing
shares take a multiplicity of forms. not less than two-thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called for the purpose.
The most common forms may be classified into two: These provisions underscore the fact that payment of
(1) preferred shares as to assets; and dividends to a stockholder is not a matter of right but a
(2) Preferred shares as to dividends. matter of consensus. Furthermore, "interest bearing stocks",
on which the corporation agrees absolutely to pay interest
The former is a share which gives the holder thereof before dividends are paid to common stockholders, is legal
preference in the distribution of the assets of the corporation only when construed as requiring payment of interest as
in case of liquidation; the latter is a share the holder of which dividends from net earnings or surplus only.
is entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the Clearly, the respondent judge, in compelling the petitioner to

Business Organization 2 [Corporation Law]—1st exam coverage


holders of common stock. There is no guaranty, however, redeem the shares in question and to pay the corresponding
that the share will receive any dividends. dividends, committed grave abuse of discretion amounting to
lack or excess of jurisdiction in ignoring both the terms and
The present Corporation Code provides that the board of conditions specified in the stock certificate, as well as the
directors of a stock corporation may declare dividends only clear mandate of the law.
out of unrestricted retained earnings. Thus, the declaration of
dividends is dependent upon the availability of surplus profit
or unrestricted retained earnings. Preferences granted to
preferred stockholders, moreover, do not give them a lien Preferences granted to preferred stockholders, moreover, do
upon the property of the corporation nor make them creditors
not give them a lien upon the property of the corporation nor
of the corporation, the right of the former being always
subordinate to the latter. Dividends are thus payable only make them creditors of the corporation, the right of the
when there are profits earned by the corporation and as a former being always subordinate to the latter. This is very
general rule, even if there are existing profits, the board of important. Just because you are a preferred stock holder, it
directors has the discretion to determine whether or not doesn’t make you at the same level of the creditors. So you
dividends are to be declared. cannot enforce the obligation to give you the dividends
because it is still subject to the condition that there is
Redeemable shares, on the other hand, are shares usually
unrestricted retained earnings. It’s just that when the time
preferred, which by their terms are redeemable at a fixed
date, or at the option of either issuing corporation, or the comes, when the corporation has declared dividends, you are
stockholder, or both at a certain redemption price. A preferred as against common.
redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. B.1 Cumulative and Non-cumulative Preferred Shares

The present Code allows redemption of shares even if there


Cumulative dividends entitle the holders thereof to
are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies payment not only of current dividends but also of back
the general rule that the corporation cannot purchase its own dividends not previously paid, when and if dividends are to
shares except out of current retained earnings. However, the extent agreed upon, before holders of common shares are
while redeemable shares may be redeemed regardless of the paid.
existence of unrestricted retained earnings, this is subject to
the condition that the corporation has, after such redemption,
Non-cumulative entitles the holders merely to the payment
assets in its books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be made where of current dividends that are paid from unrestricted earnings
the corporation is insolvent or if such redemption will cause
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and to lose whatever agreed rate of return in any year where non-participating. Kung non-participating ka, hindi na. If
there are no available unrestricted retained earnings. participating ka, you still have the right to participate in the
excess. In other words, cumulative refers to the period.
Let’s say you have 3 years. Sa year 1, di ka nag declare ng Participating refers to the participation of preferred shares in
dividends. Sa year 2, nag declare ka. Ano ang consequence the distribution of the dividends. So kung merong cumulative
sa cumulative and Non-cumulative? and participating, liliit yung share ni common shares.

Year 1 Year 2 Year 3 The question now is which is really beneficial? The preferred
no declaration declaration of dividends share holder or the common share holder? Talaga bang may
preference si preferred share? It really depends. If the
A) Cumulative: corporation is performing really well, it’s better to have
(revert to year 1)
common shares. Kasi wala kang limit. Pero if not performing
well, preferred shares nalang.
B) Non-Cumulative
The rationale for having preferred share holder, because it
gives you the middle point of being a creditor and a
shareholder at the same time. It gives you the assurance that
Sa Cumulative, mag re-revert ka sa year 1. Kasi Cumulative in the event na may kita, meron ka talagang matanggap na
siya. Meaning it accumulates. It entitles the holder thereof to certain percentage. You also have the right of a shareholder
payment not only of current dividends but also of back because you have both rights as a creditor and a shareholder.
dividends.
C. No Par value Shares
If cumulative preferred dividend is not paid in full in any year,
whether or not earned, the deficiency must be made up Delpher Trades Corp vs IAC
before any dividend may be paid on common stock. 157 SCRA 349
(Villanueva)
Pacheco siblings owned a parcel of land that was leased to
Hydro Pipes Philippines, Inc. Pursuant to their lease
Pag Non-Cumulative, sa year 2 ka lang entitled.
agreement, should the lessor decides to sell the property
leased, they shall first offer the same to the lessee. But a
B.2 Participating and Non-participating Preferred deed of exchange was executed between lessors, Pacheco
Shares siblings and defendant Delpher Trades Corporation whereby
the former conveyed to the latter the leased property. In
Participating preferred shares entitle the holders to participate exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher
with the holders of common shares in the retained earnings
Trades Corporation.
after the amount stipulated dividend has been paid to the

Business Organization 2 [Corporation Law]—1st exam coverage


preferred shares. Hydro Pipes Philippines, Inc., filed a complaint for
reconveyance of Lot. No. 1095 on the ground that it was not
Non-participating entitles the holders of preferred shares only given the first option to buy the leased property pursuant to
to the stipulated preferred dividends and no more. the proviso in the lease agreement,

According to Pacheco siblings, there was actually no transfer


Example, preferred shares ka 10%. What does that mean? of ownership of the subject parcel of land since the Pachecos
Kung mag declare ng dividend, let’s say P1M remained in control of the property as Delpher Trade
Corporation is a family corporation and they owned 55% of
Situation: the corporation. Hence, there was no transfer of ownership.

Declared Dividend: P1M ISSUE: Whether the "Deed of Exchange" of the properties
Your preferred share: 10% =100,000 executed by the Pachecos and Delpher Trades Corporation
Remaining shares = Common shares was a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property
included in the "deed of exchange."

Ruling: No. There was no sale and no transfer of ownership.


What was exchanged is the original unissued no par value
P100,000 will be given to the preferred share holder. All the
shares of stocks of the Delpher Trades Corporation.
rest is given to common shares.
A no-par value share does not purport to represent any stated
Let’s say Cumulative ka, so meron ka pang year 1. So meron proportionate interest in the capital stock measured by value,
ka pang P100,000. So magkano nalang naiwan sa iba? but only an aliquot part of the whole number of such shares
P800,000 nalang. of the issuing corporation. The holder of no-par shares may
see from the certificate itself that he is only an aliquot sharer
in the assets of the corporation. But this character of
If Cumulative: proportionate interest is not hidden beneath a false
Your preferred share: 10% =100,000 appearance of a given sum in money, as in the case of par
+ Year 1 accumulated share= P100,000 value shares.
Remaining shares= P800,000
The capital stock of a corporation issuing only no-par value
shares is not set forth by a stated amount of money, but
Does the preferred share holders have the right to participate instead is expressed to be divided into a stated number of
in the remaining P800, 000? Yan na yung participating and shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the 3
ALTISO│ ASTILLO│BALGOA│BORBE│ MASANGUID│UGDANG│VALLENTE
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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

assets of the corporation, no matter what value they may insolvency or inability of the corporation to meet its debts as
have, to the extent of 100/1,000 or 1/10. Thus, by removing they mature.” (Republic Planter Banks vs Agana)
the par value of shares, the attention of persons interested in
the financial condition of a corporation is focused upon the
What is redemption?
value of assets and the amount of its debts.

Since the Pacheco siblings obtained 55% of shares, they Redemption is repurchase, a reacquisition of stock by a
effectively have the control over Delpher Traders. Thus, there corporation which issued the stock in exchange for property,
was no transfer of ownership. whether or not the acquired stock is cancelled, retired or held
in the treasury. Essentially, the corporation gets back some of
its stock, distributes cash or property to the shareholder in
payment for the stock, and continues in business as before.
Which is more reflective of ownership? A par-value or no par The redemption of stock dividends previously issued is used
value? No par value. Kasi only in proportion. This character of as a veil for the constructive distribution of cash dividends.
proportionate interest is not hidden beneath a false (Republic Planter Banks vs Agana)
appearance of a given sum in money, as in the case of par
value shares. Nag issue ako ng shares tapos at a fixed period, kinuha ko pa
rin. Now, Can you re-issue redeemed shares? Ni-redeem ko
D. Founder’s Share ang shares, binili ko na sa stockholders, pwede ko bang i-
issue uli?
Section 7. Founders’ Share. - Founders’ Share may be given
certain rights and privileges not enjoyed by the owners of For the protection of the stockholders, all corporations which
other stocks.
have issued redeemable shares with mandatory redemption
Where the exclusive right to vote and be voted for in election features are required to set up and maintain a sinking fund
of directors is granted, it must be for a limited period not to which shall be deposited with a trustee bank and not be
exceed five (5) years from the date of incorporation or invested in risky or speculative ventures.
approval of increase of additional authorized capital stock.
Provided, that such exclusive right shall not be allowed if its Even if there is no requirement that there has to be
exercise will violate Commonwealth Act No. 108 or the Anti-
unrestricted earnings to buy redeemable shares, there has to
Dummy Law, Republic Act No. 7042 or the foreign Investment
be a sinking fund. Kaya hindi required ang unrestricted
Act and other pertinent laws.
earnings kasi there is a corresponding obligation to set up a
sinking fund.

Kung mag i-incorporate kayo, it gives you the limited right A sinking fund refers to a fund set up by the corporation
than other shares but it should not exceed 5 years. where cash is gradually set aside in order to accumulate the
amount necessary to meet the redemption price of

Business Organization 2 [Corporation Law]—1st exam coverage


E. Redeemable Shares redeemable shares at special dates in the future.

Section 8. Redeemable shares. - Redeemable shares are SEC rules also provide that redeemable shares reacquired
shares which may may be purchased by the corporation from shall be considered retired and no longer issuable. In other
the holders of such shares upon the expiration of a fixed words, you cannot re-issue redeemable shares.
period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such other
terms and conditions stated in the articles of incorporation
and the certificate of stock representing said shares, subject
to rules and regulations issued by the Commission. F. Treasury Shares

Section 9. Treasury Shares. - Treasury shares are the


What is redeemable Shares? shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation through
purchase, redemption, donation or some other lawful means.
“Redeemable shares, on the other hand, are shares usually Such shares may again be disposed of for a reasonable price
preferred, which by their terms are redeemable at a fixed fixed by the board of directors.
date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a How do we distinguish redeemable shares from treasury
repurchase of it for cancellation. shares?

The present Code allows redemption of shares even if there Redeemable shares cannot be reissued while treasury shares
are no unrestricted retained earnings on the books of the may be reissued or sold again. Any common shares may be
corporation. This is a new provision which in effect qualifies treasury shares. Also treasury shares can be issued lower
the general rule that the corporation cannot purchase its own than the par-value. This is the exception to the rule that you
shares except out of current retained earnings. However, cannot issue shares lower than the par value. It may be
while redeemable shares may be redeemed regardless of the disposed of for a reasonable price fixed by the board of
existence of unrestricted retained earnings, this is subject to directors.
the condition that the corporation has, after such redemption,
assets in its books to cover debts and liabilities inclusive of Since it can be issued lower than the par-value, will it violate
capital stock. Redemption, therefore, may not be made where the turst fund doctrine?
the corporation is insolvent or if such redemption will cause 3
ALTISO│ ASTILLO│BALGOA│BORBE│ MASANGUID│UGDANG│VALLENTE
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BUSINESS ORGANIZATION II [CORPORATION LAW]
3-Manresa [2018–2019] │A transcription based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA│

No. Re-issuance na to. Hindi na to yung unang issuance. The


trust fund doctrine refers to the initial issuance. The fact na
binigay mo yung property, ibig sabihin meron ka nang assets
for your liabilities.

Can you have issued shares greater than the outstanding


shares? Bakit kailangang may issued, may outstanding?
Anong meaning ng outstanding? Treasury shares are issued
but not outstanding. Hindi sya outstanding kasi bi-nuy back
ko lang. Ang treasury shares ay nasa kaban na ng
corporation. In other words, outstanding shares are those
outside the kaban of the corporation. Yun yung mga taken
and held by the stock holders. Pag binili yun ng corporation,
it’s no longer outstanding but it is still issued kasi considered
as originally issued.

How about redeemable shares? Is it outstanding? Is it still


issued? Ang redeemable shares, ni-reretire, hindi na ini-issue.
The only share na pwede mo i-reissue is the treasury shares.
In fact, pwede mo siyang ideclare as dividends.

“Lost in translation?”

-Atty. Ong (1:24, December 14, 2018)

Yes Sir. Haha!

Business Organization 2 [Corporation Law]—1st exam coverage

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