Glen Aid Corporation Law
continued for so long a time that it has become of consequence
Atty. Barot
The Corporation Code – Campos
Contract theory of corporation law – the articles of incorporation is in
the nature of a contract; 3 contracts –
B/w the corp and the SHs
B/w the corp and the State
Among SHs
FORMATION & ORGANIZATION OF CORPORATION
Articles of incorporation [AoI] [Sec. 14, CC] [notes for arts. 7, 8, & 9 are
dubious]
1st article; corporate name – through it, corps can sue and be sued and
perform all legal acts; means of identity
Code does not allow it to adopt a name –
- Identical or deceptively or confusingly similar to that of any existing
corp; or
- Contrary to laws
Philips Export BV vs. CA [1992] - A corp’s right to use its corporate and
trade name is a property right, a right in rem, which it may assert and
protect against the world
- In determining the existence of confusing similarity in corporate
name, the test is whether the similarity is such as to mislead a
person using ordinary care and discrimination
- Proof of actual confusion need not be shown; It suffices that
confusion is probably or likely to occur
Lyceum vs. CA [1993] – dispute b/w Lyceum of the Phil. and Lyceum of
Apari
- Both are educational institutions
- Doctrine of secondary meaning - a word or phrase originally
incapable of exclusive appropriation with reference to an article in
the market, because geographical or otherwise descriptive might
nevertheless have been used for so long and so exclusively by one
producer with reference to this article that, in that trade and to that
group of purchasing public, the word or phrase has come to mean
that the article was his produce. The doctrine cannot be made to
1
apply where the evidence didn't prove that the business has
and acquired good will of considerable value such that its articles
and produce have acquired a well-known reputation, and confusion
will result by the use of the disputed name.
- Lyceum of the Philippines has not gained exclusive use of
“Lyceum” by long passage of time; it didn't present evidence, which
provided that the word “Lyceum” acquired secondary meaning
It would be practical for the incorporators, before adopting a name in their
AoI, to first inform the SEC of the name; in any case, SEC requires
incorporators to submit a written undertaking to change the corporate
name in case of a possible conflict; if the name is legally permissible the
incorporators may be allowed by SEC to reserve it for a reasonable period;
the law requires the corps to append the word “Corporation” or “Inc.” to its
chosen name; corp may amend such name in accordance w/ the Code
2nd; purpose clause – a corp has only such powers as are expressly
granted to it by law and by its AoI, those incidental to such conferred
powers, those reasonably necessary to accomplish its purpose, and those
w/c may be incidental to its existence
A corp may have as many purposes as it may wish to include in its AoI,
subject to the ff. conditions –
- The AoI must specify w/c is the primary purpose and w/c are the
secondary purposes; not required that the secondary be related to
the main
- Corps governed by special laws can have only the purpose
peculiar to them and no other; educational corps cannot engage in
the export/import business; neither insurance corp be at the same
time a commercial bank
- Purpose/s must be lawful
- A corp may not be formed for the purpose of practicing a profession
like law, medicine, or accountancy
3rd; principal office of the corp – must be w/in the Phil.; it’s just the
principal office; does not mean the place wherein business is conducted
Significance of determining the principal office – purposes of venue
requirement in suits, since it is considered the residence of the corp
- Determining the province where a chattel mortgage of shares
should be registered
- Meeting place of SHs
Corpo Glen Aid
4th; term of existence [Sec. 11, CC] - original term specified in the AoI The AoI must show the names, nationalities, & residences of the original
should not exceed 50 years, although extendable for unlimited number of subscribers, the amount subscribed by each, & how much each has paid
times by amendment thereof, provided each extension does not exceed on his subscription; if non-stock corp, the amount of its capital, w/ the
50 yrs.; 50 years counted from the date of incorporation [when the names, nationalities, & residences of the contributors as well as the
certificate of incorporation is issued]; no extension can be made earlier amount contributed by each
than 5 years prior to the expiry date, except for justifiable reasons
5 scenarios –
determined by SEC
A. If there is par value – AKS in peso amount, # of shares per par
5th; incorporators; number & qualifications -
a. Ex. AKS = P1M, divided into 1M shares, at 1P par value
At least 5 incorporators – incorporators must be signatories to the AoI each
B. If no par value shares –
- Natural persons
a. Ex. AKS = # of shares only [impliedly issued at P5 each;
- Must be of legal age
issued value]
- Majority are residents of the Phil.
C. Where there are both par shares and no par shares – A + B
- No citizen requirements, except if the corp is for public utility, retail
D. AKS = Different classes of shares [preferred shares, common
trade, banks, investment houses, etc.
shares, etc.]
The AoI must give the names, nationalities, & residences of the a. P1M
incorporators, and the directors/trustees who will act as such until the 1st i. P500k, prefs 5k, P100 each
regular directors/trustees are elected ii. P500k, comms 10k, P50 each
E. AKS = D + A + B
It seems that the AoI may be amended after incorporation to increase the
a. AKS = 2+ groups/combination
# of its directors to more than 15
i. With par value – P1M, 5k prefs, P100 each, and/or,
An incorporator/ director must own at least one share of stock P1M, 10k comms, P50 each
ii. No par – P1M with 500k prefs no par, and, 500k
- * In wholly owned subsidiary, the whole 25% subscription is
comms no par
practically owned by the parent company; 4 shares are distributed
equally to the other 4 incorporators in trust, in compliance with 1 * You can combine prefs/comms with par/ no par
share per incorporator; keyword is trust
8th; subscription –
AoI must also name the treasurer who will act as such until his successor
25% of AKS must be subscribed
is duly elected
A. 250k subscribed at P1
6th; directors/trustees – Not less than 5, not more than 15
B. 250k subscribed no par
No nationality requirements; except for businesses partially nationalized C. 250k subscribed at 1P par, and 250k subscribed no par
D. P125k for 1,250 prefs at P1, and P125k for 2,500 comms at P50
Residence requirements – same as that of incorporators’
a. The P125k resulted from looking at the P1M; 25% of P1M
Directors need not be the same persons as the incorporators b. Note – the equal subscription for each class of share need
not be followed; subscription to other class of shares may
Directors need not sign the articles of incorporation
be loaded compared to others
7th; authorized capital stock [VERY IMPORTANT] c. In complying w/ the 25% subscription – when there’s par
value, look at the peso sign; if no par value, look at the # of
Authorized capital stock – the maximum number of shares that a corp is
shares
legally permitted to issue, as specified in its AoI
E. Same as D, and, 250k no par

2
Corpo Glen Aid
25 – 25 rule – before incorporation, at least 25% of the authorized capital
stock of the proposed corp should be subscribed and at least 25% of such
subscription should be paid; P5,000 is the minimum to be paid
In case of no par value – in cases B C and E –
- AKS = P1M 25 – 25 rule applies; but the 2nd 25 is not applicable to
no par shares; b/c in no par value shares, subscribed means paid
9th; payment – 25% of the total subscription shall be paid; at least P5,000
A. P62, 500 at P1 each
B. 62, 000 shares
C. P62, 500, and 62,000 shares
D. P31,250, and P31,250
E. Should be easy
The 1 share per incorporator need not split the subscription equally
amongst themselves
* 80k AKS is the minimum AKS which will produce a good 25-25 rule;
anything lower than 80k will produce paid subscription lower than the limit
of at least 5k
10th; name of treasurer – TIT [treasurer in trust]
+ Treasurer’s Affidavit – certifying to the fact that the 25-25 rule has been
complied with
Grounds when AoI or amendment thereof may be rejected [Sec. 17]
- Not substantially in accordance w/ the prescribed form
- Purpose/s patently unconstitutional, illegal, immoral, or contrary to
gov’t rules & regs
- Treasurer’s Affidavit w regard to amount of capital stock
subscribed and/or paid is false
- W/ regard to some corps [governed by special laws], when
required percentage of ownership of capital stock to be owned by
citizens of Phil. not been complied w/
By-laws – [Sec. 36, par. 5, Sec. 46, Sec. 47]
- Product of the agreement of the SHs/members and establish the
rules for the internal government of the corp
- By-laws are subordinate to the AoI as well as to the Corp Code and
related statutes; it should not be inconsistent with any of them;
otherwise, no binding effect
3
- Although it may provide for the time, place, & manner for director’s
meeting, it can ONLY provide for time and manner for SH’s
meeting [SH’s meeting should be at the principal office of the corp]
- Should provide for officers specifying their qualifications; law
requires at least 3 – Pres., Sec., & Treasurer; by-laws may provide
for additional officers
- Code allows adoption & filing of by-laws prior to incorporation but
must be approved by ALL the incorporators and be submitted to
SEC w/ the AoI
o Otherwise, corp must do so w/in 1 month after receipt of
notice of certificate of incorporation; failure to do so may
result in suspension or revocation of certificate of
registration; vote required in this case is at least majority of
the OCS or of the members
- By-laws shall be effective only upon issuance by the SEC of a
certification that they are not inconsistent w/ the code; same
applies for amendment of the by-laws
- SC – contracts entered into w/o strict compliance w/ the by-laws
may, due to long acquiescence and usage, be binding on the corp,
w/c may be deemed to have waived such compliance
- By-laws cannot affect/prejudice 3rd persons who deal w/ the corp,
unless they have knowledge of the same
Loyola Grand Villas Homeowners vs. CA [1997]
- There can be no automatic corporate dissolution simply b/c the
incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corp Code.
- There is no outright “demise” of corporate existence. Proper notice
and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the
incorporators must be given the chance to explain their neglect or
omission and remedy the same. Non-filing of the by-laws will not
result in automatic dissolution of the corp. In fact, under the rules
and regulations of the SEC, failure to file the by-laws on time may
be penalized merely with the imposition of an administrative fine
w/o affecting the corporate existence of the erring firm.
Commencement of corporate existence [Sec. 19] – upon issuance of
certificate of incorporation by SEC
Juridical personality distinct and separate from that of the SHs
Cranson vs. IBM [1964]
Corpo Glen Aid
 - A de-facto corp may be formed if there is a good faith effort to an action for and in behalf of its SHs/members for the recovery of
incorporate, and actual exercise of corporate property w/c belongs to them in their personal capacities
powers. Furthermore, under the doctrine of estoppel, a person - Corp, as juridical person, is entitled to immunity against
seeking to hold a corporate officer personally liable may not do so unreasonable search & seizure; the legality of contested warrants
if he has dealt with the association as if it were a legally-existing & seizures cannot be assailed b its individual SHs
corp. IBM dealt with the business as if it were a legitimate corp, - Residence of the president is not the residence of the corp
and relied on its credit rather than that of Cranson. Thus, it is
Stockholders of F. Guanzon and Sons, Inc. vs. Register of Deed [1962]
estopped to assert that the business was not incorporated.
- W/n that certificate merely involves a distribution of the corp’s
Palay Inc. vs. Clave [1983]
assets or should be considered a transfer or conveyance.
- Palay Inc., through its president, Onstott executed a contract of - SC: A transfer or conveyance.
sale w/ resp, Dumpit a parcel of land. A down payment was to be - The act of liquidation made by the SHs of the F. Guanzon and
made and the remaining balance would be paid in monthly Sons, Inc. of the latter's assets is not and cannot be considered a
instalments. partition of community property, but rather a transfer or
- Under the terms of the contract, Par. 6 states an automatic conveyance of the title of its assets to the individual SHs.
extrajudicial recession upon default of payment after the lapse of - The purpose of the liquidation, as well as the distribution of the
90 days following the grace period of 1 month assets of the corp, is to transfer their title from the corp to the SHs
- In the case of UP, the SC said that one must first send a recession in proportion to their shareholdings, and this is in effect the purpose
notice; one cannot unilaterally rescind which they seek to obtain from the RoD of Manila; that transfer
- SC: It is well settled that a corp has a distinct and separate cannot be effected w/o the corresponding deed of conveyance
personality with its SHs and vice versa. “However, the veil of from the corp to the SHs
corporate fiction may be pierced when it is used as a shield to - Where the purpose of the liquidation, as well as the distribution of
further an end subversive of justice; or for purposes that could not the assets of the corp, is to transfer their title from the corp to the
have been intended by the law that created it; or to defeat public SHs in proportion to their shareholdings, that transfer cannot be
convenience, justify wrong, protect fraud, or defend crime; or to effected w/o the corresponding deed of conveyance from the corp
perpetuate fraud or confuse legitimate issues; or to circumvent the to the SHs, and the certificate should be considered as one in the
law or perpetuate deception; or as an alter ego, adjunct or business nature of a transfer or conveyance
conduit for the sole benefit of the SHs.” [principle of piercing the
De facto corporation– Sec. 20; quo warranto
corporate veil]
Elements of a de facto corp –
Corporate entity theory –
- Valid law under w/c the corp may be formed
- A corp has a personality distinct & separate from its individual SHs
or members, and is not affected by the personal rights, obligations, - Colorable compliance w/ the legal requirements in good faith
& transactions of the latter
- User of corporate powers; transaction of business as if it were a
- Corporate property is owned by the corp and the SHs have no
corp –
claim on it as owners, but have merely an expectancy or inchoate
right to the same should any of it remain upon dissolution of the o just a slight evid of conducting business as a corp is
corp after all corporate creditors have been paid deemed sufficient; although mere election of directors &
- Neither can the SH’s property be levied upon for an obligation of officers would not be “user of corporate powers”
the corp, even if he be its President
The due incorporation cannot be collaterally attacked; may be directly
- Corp has no interest in the individual property of its SHs, unless
attack by the state in a quo warranto proceeding
transferred to the corp; corp does not gave the personality to bring
Municipality of Malabang vs. Benito [1969]

4
Corpo Glen Aid
 - 1960 – EO386 created municipality of Balabagan, in accordance
w/ the power granted by Sec. 68 of Admin Code to Pres. to create
municipality
- SC promulgated Pelaez repealing Sec. 68 of Admin Code
- SC – no de facto law; 1st element missing; no valid law
o No de facto law nor a de jure one; operative fact doctrine
applied
Hall vs. Piccio [1950]
Chiang Kai Shek vs. CA [1989]
- Quo warranto proceeding; most of the time brought by the
government
- SC: Even the existence of a de jure corp may be terminated in a
private suit for its dissolution b/w SHs, w/o the intervention of the
state
Corporation by estoppel; Sec. 21
- Although there may not be a de facto corp b/c of serious defects in
Piercing the corporate veil – p. 149-151 Campos
incorporation, still possible that a party may be estopped from
denying corp existence; doctrine of corp by estoppel may apply to
a 3rd party or the alleged corp
- 3rd party who dealt w/ an unincorporated association as a corp may
be precluded form denying its corp existence on a suit BY the
ALLEGED CORP, even if he was ignorant of the defective
incorporation – he is deemed to have admitted the existence of the
corp by the fact he dealt w/ it as a corp
- But when business associates fraudulently misrepresent the
existence of a corp, and a 3rd party contracts w the association as
a corp, w/o knowledge of the serious defect in its incorporation,
such 3RD PARTY MAY BRING A SUIT against the associates as if
they were general partners and the latter cannot claim that the
plaintiff-3rd party is estopped
- Where the associates were ignorant of the defective incorporation,
and a likewise innocent 3rd person dealt w/ the corp as such, latter
cannot hold the associates personally liable
o But if the 3rd person knew, he is deemed to have chosed to
deal w/ the corp as such and therefore should not be
allowed to recover from the individual associates but
should be limited in his recovery to the corporate assets
- Estoppel doctrine applies even if alleged corp did not deal w/ the
Marvel Building Corporation vs. David [1954; important]
plaintiff who is suing on a tort; the fact that the associates held
5
themselves out as a corp is sufficient to impose corp liability on a
tort, and reliance or nonreliance by the injured party is irrelevant
- De facto corp doctrine vs. corp by estoppel doctrine
o Where all requisites of a de facto corp are present, then the
corp has the status of a de jure corp in all cases brought by
or against it, except only as to the State in a direct
proceeding
o If any of the requisites is absent, then estoppel doctrine
applies as illustrated above
- Having contracted w/ the resp every year for 32 years and thus
represented itself as possessed of juridical personality to do so,
the pet is now estopped from denying such personality to defeat
her claim against it. Art. 1431 of the Civil Code – “through estoppel
an admission or representation is rendered conclusive upon the
person making it and cannot be denied or disproved as against the
person relying on it”
- No hard & fast rule to cover all cases where the cop entity theory
cannot be availed of; each case will have to be considered on its
merits
- US juris – a corp will be looked upon as a legal entity as a general
rule; but when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corp as an association of persons
- SC – separate personality of the corp should be disregarded where
the corp entity was used to evade taxes or other requirements of
law, to confuse the legitimate issue of employer-employee
relationship, or to escape liability to 3rd parties
- Main effect – SHs will be held personally liable for the acts and
contracts of the corp whose existence, at least for the purpose of
the particular situation involved, is ignored
- Piercing the corp veil vs. de facto corp doctrine
o In the former, it is not its due incorporation w/c is
questioned but its use of the privileges w/c attach to the
corp entity; the court does not deny the corp existence for
all purposes, but merely refuses to allow the corp to use
the corp privilege for the particular purpose involved
Corpo Glen Aid
 - Piercing the corporate veil is a matter of evidence; here it was
sufficiently established that Maria owned the whole business; even
though the number of shares are spread among other individuals
as embodied in the papers, the fact that the certificates of shares
of stocks are in her sole possession was held sufficient to hold that
she owns the company
Claparols vs. CIR [1975; w/ piercing]
- The existence of endorsed certificates discovered by internal
revenue agents b/w 1948 and 1949 in the possession of the
Secretary-Treasurer of a supposed corp; the fact that twenty-five
certificates were signed by its president for no justifiable reason;
the fact that two sets of certificates were issued; the undisputed
fact that its principal SH had made enormous profits and, therefore,
had a motive to hide them to evade the payment of taxes; the fact
that the other subscribers had no incomes of sufficient magnitude
to justify their big subscriptions; the fact that the subscriptions were
not receipted for and deposited by the treasurer in the name of the
alleged corp but were kept by the principal SH herself; the fact that
the SHs or the directors never appeared to have ever met to
discuss the business of the corp; the fact that she advanced big
sums of money to the corp w/o any previous arrangement or
accounting; and the fact that the books of accounts were kept as if
they belonged to her alone—are circumstantial evidence which are
not only convincing but conclusive that she is the sole and
Kukan International Corp. vs. Reyes [2010; COMPARE FACTS w/
exclusive owner of all the shares of stock of the corp and that the
CLAPAROLS; no piercing]
other partners are her dummies.
Concept Builders Inc. vs. CA [1996; instrumentality test]
- The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
o Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
o Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and
o The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of
- The absence of any one of these elements prevents piercing the
corporate veil. in applying the instrumentality or alter ego doctrine,
the courts are concerned with reality and not form, with how the
6
corp operated and the individual defendants relationship to that
operation
- The separate personality of the corp may be disregarded or the veil
of corporate fiction pierced when the corp is merely an adjunct, a
business conduit or an alter ego of another corp
- A complaint for unfair labor practice was filed by resps workers
against Claparols et al on account of the dismissal of resps from
Claparols Steel and Nail Plant; Claparols Steel and Nail Plant
was succeeded by Claparols Corporation; it is very clear that the
latter corp was a continuation and successor of the first entity, and
its emergence was skillfully timed to avoid the financial liability that
already attached to its predecessor, the Claparols Steel and Nail
Plant
- The 2nd corp seeks the protective shield of a corporate fiction
whose veil could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its
employees. When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corp as an association or persons, or, in the case of
2 corps, will merge them into 1
- When two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that 2 corps are distinct entities and treat them as identical
or as one and the same. Whether the separate personality of the
corp should be pierced hinges on obtaining facts appropriately
pleaded or proved
- To justify the piercing of the veil of corporate fiction, it must be
shown by clear and convincing proof that the separate and distinct
personality of the corp was purposefully employed to evade a
legitimate and binding commitment and perpetuate a fraud or like
wrongdoings
- Mere ownership by a single SH or by another corp of a substantial
block of shares of a corp does not, standing alone, provide
sufficient justification for disregarding the separate corporate
personality
- The circumstance that a single SH owns 40% of the outstanding
capital stock of 2 corps, standing alone, is insufficient to establish
Corpo Glen Aid
 identity—there must be at least a substantial identity of SHs for
both corps in order to consider this factor to be constitutive of
corporate identity
- Piercing the veil of corporate fiction is frowned upon
Promoters’ contracts prior to incorporation – p 241 Campos
Personal liability of promoter on pre-incorporation contracts – p. 258
Campos
Cagayan Fishing vs. Sandiko [1937]
- The transfer made by T to the C, F. D. Co,, Inc., was effected on
May 31, 1930 and the actual incorporation of said company was
effected later on October 22, 1930. In other words, the transfer was
made almost five months before the incorporation of the company.
Unquestionably, a duly organized corp has the power to purchase
and hold such real property as the purposes for which such corp
was formed may permit and for this purpose may enter into such
contracts as may be necessary. But before a corp may be said to
be lawfully organized, many things have to be done. Among other
things, the law requires the filing of articles of incorporation.
Although there is a presumption that all the requirements of law
have been complied with in the case before us it cannot be denied
that the plaintiff was not yet incorporated when it entered into the
contract of sale. It was not even a de facto corp at the time. Not
being in legal existence then, it did not possess juridical capacity
to enter into the contract.
- A corp, until organized, has no life and, therefore, no faculties. This
is not saying that under no circumstances may the acts of
promoters of a corp be ratified by the corp if and when
subsequently organized. There are, of course, exceptions, but
under the peculiar facts and circumstances of the present case the
doctrine of ratification should not be extended because to do so
would result in injustice or fraud to the candid and unwary
Gov’t vs. El Hogar [1927; IMPORTANT]
- 2 advantages/concessions for the building and loan associations
o 1st – exemption from usury
o 2nd - ?? might be asked in the exams
- The circumstance that one of the provisions contained in the by-
laws of a building and loan association is invalid as conflicting with
the express provision of statute is not a misdemeanor on. the part
of the corp for w/c the association can be penalized by the forfeiture
of its charter
7
- The circumstance that the SHs of a building and loan association
do not attend the annual meetings in sufficient number to constitute
a quorum does not render the corp subject to dissolution
- Where a building and loan association makes a contract with its
promoter and manager—which contract is expressly ratified in the
by-laws of the association,—by which the association concedes to
him, in consideration of valuable services rendered and to be
rendered, a right to receive 5 per centum of the net earnings of the
association, this court will not, in a quo warranto proceeding where
there is no allegation that the contract was ultra vires or vitiated 'by
fraud, order the dissolution of the corp for entering into such
contract, on the mere ground that the compensation granted is
excessive; nor will the court enjoin the association from performing
the same
- While the creation of building and loan associations was intended
to serve the beneficent purpose of enabling people to procure
homes of their own, and such associations have been fostered with
this end in view, nevertheless the lawmaker in this jurisdiction has
not limited the activities of building and loan associations to the
exclusive function of making loans for the building of homes. Home
building is only one of several purposes proposed in the creation
of such associations; and a building and loan association cannot
be dissolved in a quo warranto proceeding. on the ground that it
has made loans w/o reference to the purpose for which the money
was intended to be used
NATIONALIZED ACTIVITIES & FOREGN INVESTMENTS
In terms of timeline –
Constitution, Art. XII, sec. 11
RA 7042 – Foreign Investments Act
Anti-Dummy Law
DOJ and SEC Opinions
2011: PLDT case [Gamboa vs. Teves]
o 2013: SEC Memorandum Circular No. 8
60-40 voting or non-voting applies
2012: Bayantel case [Express Investments vs. Bayantel]
2014: Narra Nickel vs. Redmont
RA 7042 – Foreign Investments Act as amended by RA 8179
- Philippine national [Sec. 3(a)] in re sec. 15, art. 7 of Corpo Code
o Voting right [Sec. 6 of Corpo Code] 1st paragraph & last 2
paragraphs
Corpo Glen Aid
 o A corp organized abroad and registered as doing business o Sale to DMCI
in the Phil. under the Corp Code of which one hundred
In control test and grandfather rule, there must always be a holding
percent (100%) of the capital stock outstanding and
company [corporate SH]
entitled to vote is wholly owned by Filipinos
o A trustee of funds for pension or other employee retirement Before these 3 cases, DOJ & SEC Opinions state that the grandfather
or separation benefits, where the trustee is a Philippine should be used
national and at least sixty percent (60%) of the fund will
Today, the grandfather rule will not be used unless there is doubt in the
accrue to the benefit of Philippine nationals
applicability of control test – in both, just consider the shares w/ voting
o Provided, That where a corp and its non-Filipino SHs own
rights
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the Corporate Powers; Corporate powers in general [Sec. 36; rights,
capital stock outstanding and entitled to vote of each of prerogatives, powers]
both corps must be owned and held by citizens of the
- 2 general restrictions on power of any corp to purchase and hold
Philippines and at least sixty percent (60%) of the
properties, whether real or personal
members of the BoD of each of both corps must be citizens
o Such property must be reasonably and necessarily
of the Philippines, in order that the corp, shall be
required by the transaction of its lawful business
considered a "Philippine national."
o Subject to the limitations prescribed by law & the Consti
Gamboa vs. Teves [2011] Consti – corp cannot acquire available public lands
except by leas of not more than 1k hectres;
- PLDT had common shares [has voting rights] and preferred shares
exploration, development, exploitation, & utilization
[no voting right; although there may be instances where preferred
of natural resources are limited to citizens and
shares have voting rights]
corps at least 60% of the capital of w/c is owned by
- SC: when you determine w/n the company violated the
citizens, and only in a joint venture w/ the State
constitutional limitations, focus only on shares w/ voting rights
- General powers granted by Sec. 36 are, under Sec. 23, to be
[control test]
exercised by the BoD, unless otherwise provided by the Code
Express Investments vs. Bayantel [2012] o Power to decide whether the corp should sue or not
belongs to the board
- Grandfather rule applied – Holding Company 1; Holding Company
o Power to amend the AoI & the by-laws belong to the
2; Bayantel
SHs/members
- Formula – multiply the line for Filipino ownership in the public utility
company; if above 60%, good, otherwise, bad Stonehill vs. Diokno [1967]
- If HC1 is 70-30; HC2 is 58-42; 70 x 58 = Filipino ownership in the
- Power to sue; not by the officers, but the corp [Sec. 36, 1]
subject company
- Officers of certain corps, from which documents, papers and things
- Shares w/ voting rights – meaning right to vote in the election of Ds
were seized by means of search warrants, have no cause of action
Narra Nickel vs. Redmont [2014] [when in doubt, use grandfather rule] to assail the legality of the seizures because said corps have
personalities distinct and separate from those of said officers. The
- Use grandfather rule when “in doubt” – indicia of doubt [not
legality of a seizure can be contested only by the party whose rights
exclusive list]
have been impaired thereby. The objection to an unlawful search
o Source of funds
is purely personal and cannot be availed of by third parties
o Technological support
o Management and preparation of economic viability studies Harden vs. Benguet Consolidated Mining Company [1933]
o More foreign capital
- Where one mining corp acquires a prohibited interest in another
o High par/ low par
such corp, the SHs of the latter cannot maintain an action to annul
8
Corpo Glen Aid
 the contract by which such interest was acquired. The remedy
must be sought in a criminal proceeding or quo warranto action
instituted by the Government. Until thus assailed in a direct
proceeding the contract by which the interest was acquired will be
treated as valid, as b/w the parties
- Harden, the SH, has no cause of action; it is the government
instead who has [Sec. 36, 2]
- Not a hard and fast rule; in re derivative actions [to be discussed
laterz]
Sec. 36, 3 [use of seal; not mandatory]
- Seen in stock certificates; used by corporate secretary
Republic of the Phil. vs. Acoje Mining Company, Inc. [1963]
Sec. 36, 6
- Contemplates the sale of stocks to investors, not among SHs
Pirovano vs. De la Rama [1954] [Sec.36, 9]
- The issue on donation then is irrelevant today; making donation is
a prerogative expressly granted to corps
o Except in aid of any political party or candidate or for
purposes of partisan political activity
Ultra vires acts [Sec. 45]
- Acts w/c are clearly beyond the powers of the corp
- Legal consequences
o On the corp itself – under the RoC, corp may be dissolved
under a quo warranto proceeding instituted by the Sol-Gen
Implied powers Sec. 38, par. 11 – essential or necessary to carry out its
SC in most cases merely enjoined the further
purpose(s) as stated in the AoI
commission of the ultra vires acts
SEC may suspend/revoke certificate of registration
o On the immediate parties to the ultra vires contract –
Where the contract is fully executed on both sides,
parties will be left as they are; no rescission of
NPC vs. Vera [1989]
contract will be granted
If contract is executory on both sides, generally,
neither party can ask for specific performance
Where 1 party has performed his part, whether
partly or completely, and the other has not, the
latter, having benefited from the former’s
performance, is estopped from claiming that the
contract is ultra vires; the contract shall be
enforced, provided it is lawful
o On the rights of SHs –
9
A SH may bring either an individual or derivative
suit to enjoin a threatened ultra vires act
If already performed, a derivative suit against the
Ds may be filed, but their liability will depend on
whether they acted in good faith and w/ reasonable
diligence in entering into the contracts; if they did,
then an honest mistake committed in the exercise
of their business judgment will not give rise to
liability
- Ultra vires acts may become binding by the ratification of ALL the
SHs, unless 3rd parties are prejudiced, or unless the act is illegal
- There are certain corporate acts that may be performed outside of
the scope of the powers expressly conferred if they are necessary
to promote the interest or welfare of the corp, such as the
establishment of a local post office in a mining camp which is far
removed from the postal facilities or means of communications
accorded to- people living in a city or municipality
- Ultra vires – voidable [can be enforced by performance, ratification
or estoppel, or on equitable grounds]
- Illegal act – void act [cannot be cured]
- In the present case the validity of the resolution of the BoD of the
corp accepting full responsibility in connection w/ funds to be
received by its postmaster, should be upheld on the ground of
estoppel
- Corp is presumed to act w/in its powers and when a contract is not
on its face necessarily beyond its authority, it will, in the absence
of proof to the contrary, presumed to be valid
- The Court must decide whether or not a logical and necessary
relation exists b/w the act questioned and the corporate purpose
expressed in the NPC charter. For if that act is one which is lawful
in itself and not otherwise prohibited, and is done for the purpose
of serving corporate ends, and reasonably contributes to the
promotion of those ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the corp’s charter
powers
Corpo Glen Aid
 - In the instant case, it is an undisputed fact that the pier located at Election of directors/trustees [Sec. 24]
Calaca, Batangas, which is owned by NPC, receives the various
- Campos “entitled to vote” applies to both owners of a majority of
shipments of coal which is used exclusively to fuel the Batangas
the outstanding capital stock and members; De Leon says it only
Coal-Fired Thermal Power Plant of the NPC for the generation of
applies to members
electric power. The stevedoring services which involve the
unloading of the coal shipments into the NPC pier for its eventual Cumulative voting –
conveyance to the power plant are incidental and indispensable to
- [(XxY)/(Y+1)]+1 = number of VOTES to elect 1 Director
the operation of the plan
o X = no. of shares/stocks of the present SHs in the meeting
- A corp is not restricted to exercise only those powers expressly
o Y = no. of Directors to be elected; vacant seats in the board
conferred upon it by its charter, it may also exercise those powers
basing on the no. of Directors in the AoI
which are reasonably necessary or proper to promote its interests
- After getting the number of VOTES to elect 1 Director, divide it by
and welfare
Y to get no. of SHARES to elect 1 Director [this is the one’s
Madrigal & Co. vs. Zamora [1987; Corporate power to reduce authorized important]
capital stock] - Cumulative voting is mandatory for stock corps
- Madrigal’s employees held a strike As against straight voting –
- Madrigal invoked corporate power to decrease authorized capital
- The one with the highest no. of shares will always get to vote;
stock; reason of Madrigal was b/c of the stoppage in the operation
minority SHs will be sad
- SC: such reason is untenable; Madrigal only made such reduction
- Forbidden; illegal
for retrenchment against the union; such right must be exercised
in good faith; what is due [back wages] to the laborers must be Corporate officers, quorum [Sec. 25]
respected
1st par. – 3 statutory officers [as distinguished from by-laws officers] –
CONTROL & MANAGEMENT OF THE CORPORATION
o President – must be a Director [must own at least a stock];
The board of directors/trustees; corporate power [Sec. 23] term of office is coterminous w/ his term as director
o Secretary – must be a resident & citizen of the Philippines
- The board exercises the corporate powers [sec. 23 in re sec. 36]
o Treasurer
o The business, control of properties – buying/selling land
- No one shall be president & sec or president & treasurer at the
requires a board resolution
same time; an officer may be the sec & treasurer at the same time
- BoD/T to be elected from among SHs/members
- In businesses/industries partially or totally reserved for Filipino
- Every director must own at least 1 share of the capital stock of the
citizens, no alien may be elected as officer, although the law
corp of which he is a director; any director who ceases to be the
permits aliens in the BoD in a number proportional to the alien
owner of at least 1 share of the capital stock of the corp of which
equity allowed in the particular business/industry
he is a director shall thereby cease to be a director
- By-laws may provide for additional officers
o Ownership of 1 share of stock is required at the time the
director assumes office, not at the time of election [tricky] Functions
- Trustees of non-stock corps must be members thereof
- President – presides over all meetings, Board and SHs/members;
- A majority of the directors/trustees of all corps organized under this
by-law may provide for a chairman to perform such function;
Code must be residents of the Phil.
president may be the general manager at the same time
In the corporate hierarchy, there are 3 levels of control - Vice-president – takes over when president is absent or when the
latter’s office is vacant; often times, he is also the general manager
- BoD/T
- Secretary – keeps the corp records; his duties are ministerial and
- Corporate officers
cannot bind the corp by contract, unless named general manager
- SHs/ members
10
Corpo Glen Aid
 - Treasurer – receive & keep funds of the corp, and disburse them
w/in the authority given to him; limited powers; cannot bind the
corp, unless authorized to do so
- General manager – day-to-day affairs of the corp
2nd par. –
If a joint venture b/w A & B w/ 15 BoD –
1st part –
- Quorum shall be 8; at least 1 shall be representing A/B
- It is the # fixed in the AoI that will be the reckoning point for the
quorum, unless the AoI or the by-laws provide for a greater majority
o If 15 BoD is fixed in the AoI, but only 9 were elected, the
quorum is still 8; if only 7 are elected, there can be no
quorum – there shall be a SHs/members meeting again
2nd part –
- With regard to any corporate act, favorable vote of majority of
quorum is required
- Except if election of corporate officers [ex. corporate secretary],
favorable vote of majority of ALL the presently incumbent members
of the board is required
Yu Chuk v Kong Li Po [1924]
- W/n the GM has the power to bind the contract he entered into
- No. The general rule is that the power to bind a corp by contract
lies with its BoD/T, but this power may either expressly or impliedly
be delegated to other officers or agents of the corp
- Except where the authority to employ servants & agents is
expressly vested in the BoD/T, an officer or agent who has general
control & management of the corp’s business or a specific part
thereof, may bind the corp by reasonable contracts of employment
of such agents & employees as are usual and necessary in the
conduct of such business
- The business manager of the resp had no implied authority to
employ printers for the corp's newspaper for the term of 3 years
and upon conditions otherwise so onerous to the corp that the
possibility of it being insolvent was expressly contemplated in the
contract of employment
- Before a contract can be ratified, knowledge of its existence must
be brought home to the parties who have the authority to ratify it or
11
circumstances must be shown from w/c such knowledge may be
presumed. Ordinarily, the president of a corp has no implied power
by ratification to validate a contract w/c has been improvidently
entered into on behalf of the corp by an unauthorized
agent/employee. The fact that the president, by the by-laws of the
corp, is required to sign the documents evidencing contracts of the
corp, does not give him the power to make contracts
Business judgment rule –
- If due to the Ds’ fault or negligence, the assets of the corp are
wasted or lost, each of them may be held responsible
- HOWEVER, they cannot be held liable for mistakes or errors in the
exercise of their business judgment, provided they have acted in
good faith and w/ due care and prudence
- Contracts intra vires entered into by the board are binding upon the
corp and the courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority
- In determining whether reasonable diligence was exercised, the
particular circumstances of each case must be considered; the
NATURE of the business is an important factor
Board of Liquidators vs. Heirs of Kalaw [1967; important]
- Pet sues resp alleging that the latter entered into a contract w/o
prior approval by the board as required by the by-laws; Nacoco
incurred losses
- A corporate officer entrusted w/ the general management and
control of its business, has implied authority to make any contract
or do any other act which is necessary or appropriate to the
conduct of the ordinary business of the corp. As such officer, he
may, w/o any special authority from the BoD perform all acts of an
ordinary nature, which by usage or necessity are incident to his
office, and may bind the corp by contracts in matters arising in the
usual course of business.
- Where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general
manager may bind the company w/o formal authorization of the
BoD. Existence of such authority is established, by proof of the
course of business, the usage and practices of the company and
by the knowledge which the BoD has, or must be presumed to
have, of acts and doings of its subordinates in and about the affairs
of the corp
Corpo Glen Aid
 - Where the practice of the corp has been to allow its GM to
negotiate and execute contracts in its copra trading activities for
and in Nacoco's behalf w/o prior board approval, and the board
itself, by its acts & through acquiescence, practically laid aside the
by-law requirement of prior approval. The contracts of the GM,
under the given circumstances, are valid corp acts
- Ratification by a corp of an unauthorized at or contract by its
officers or others relates back to the time of the act or contract
ratified and is equivalent to original authority. The corp and the
other party to the transaction are in precisely the same position as
if the act or contract had been authorized at the time. The adoption
or ratification of a contract by a corp is nothing more nor less than
the making of an original contract. The theory of corp ratification is
predicated on the right of a corp to contract, and any ratification or
adoption is equivalent to a grant of prior authority
- Business judgment rule – The directors hold such office charged
with the duty to act for the corp according to their best judgment,
and in so doing they cannot be controlled in the reasonable
exercise and performance of such duty. Whether the business of a
corp should be operated at a loss during a business depression, or
closed down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corp and not by
the court. It is a well-known rule of law that questions of policy of
management are left solely to the honest decision of officers and
directors of a corp, and the court is w/o authority to substitute its
judgment for the judgment of the BoD; the board is the business
manager of the corp and so long as it acts in good faith its orders
are not reviewable by the courts
Gokongwei vs. SEC [1979; important; distinguish from Kalaw]
- Business judgment rule – whether the by-law is in conflict w/ the
law of the land, or w/ the charter of the corp, or is in a legal sense
unreasonable and therefore unlawful is a question of law; this rule
is subject, however, to the limitation that where the reasonableness
of a by-law is a mere matter of judgment, and one upon w/c
reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment insead of the judgment of
those who are authorized to make by-laws and who have exercised
their authority
- A corp may prescribe in its by-laws the qualifications, duties and
compensation of directors, officers and employees. This must
necessarily refer to a qualification in addition to that "every director
12
must own in his right at least one share of the capital stock of the
stock corp of which he is a director”
- Another reason for upholding a by-law provision that forbids a
competitor to be elected as corporate director are the laws
prohibiting cartels
- Every SH has the right to inspect corporate books and records.
- The right of SH to inspect corporate books extends to a wholly-
owned subsidiary.
- Purely ultra vires corporate acts of corporate officers to invest
corporate funds in another business or corp, i.e., acts not contrary
to law, morals, public order as public policy, may be ratified by the
SHs holding 2/3 of the voting power
Report of election of directors, trustees and officers [Sec. 26]
- W/in 30 days after the election of the directors, trustees and officers
of the corp, the secretary, or any other officer of the corp, shall
submit to the SEC, the names, nationalities and residences of
those elected
- General information sheet [GIS]
- 30 day deadline is strictly observed by SEC
Vacancies in the office of director or trustee [Sec. 29]
AoI – 15D; quorum is 8
If presently remaining Ds – 13D/ 2V
Present at the BoD Mtg – 8D
- To fill the vacancy, 7 favorable votes from the quorum of 8Ds are
required [7 b/c majority of the presently remaining Ds, w/c is 13]
So, if presently – 11D/ 4V
- To fill the vacancy, 6 favorable votes from the quorum of 8 are
required
^ In filling the vacancy, the majority votes of the remaining Ds is required,
provided they still constitute quorum
2nd part – filling vacancy due to increase in the # of Ds; SHs will only vote
for the D who is in excess provided that the remaining Ds cannot constitute
quorum
- Held in a regular/special meeting for that purpose or at the meeting
increasing the # of Ds if so stated in the notice of meeting
EPG Construction vs. CA [1992]
Corpo Glen Aid
 - A corp is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any
other entity to which it may be related. Mere ownership by a single
SH or by another corp of all or nearly all of the capital stock of a
corp is not of itself sufficient ground for disregarding the separate
corporate personality. The general manager of a corp therefore
should not be made personally answerable for the payment of the
employee’s back wages unless he had acted maliciously or in bad
faith in terminating the services of the employee
Ramirez vs. Orientalist Co. & Fernandez [1918]
- See p 348 – 349 Campos for the problem [2 signs of Fernandez]
- The written contract which was the subject of this action contained
the corporate name signed at the lower right-hand corner of the
contract, in the manner usual with a party signing in the character
of principal obligor. The name of another individual was signed
somewhat below and to the left of the corporate signature, after the
customary manner of those who sign in a subsidiary capacity; but
no words were written to indicate clearly whether this individual
signed as a principal obligor or as surety. Held: That parol evidence
was admissible to show that the intention was that he should be
bound as surety and not jointly with the other party
- The power to make corporate contracts resides primarily in the
company's BoD; but the board may ratify an unauthorized contract
made by an officer of the corp. Ratification in this case is held to
have occurred when the board, with knowledge that the contract
had been made, adopted a resolution recognizing the existence of
the contract and directing that steps be taken to enable the corp to
utilize its benefits
- Where a corporate contract has been effected with the approval of
the BoD, a resolution adopted at a meeting of SHs refusing to
recognize the contract or repudiating it is w/o effect
Boyer-Roxas vs. CA [1992]
- F. Roxas was the majority & controlling SH; he assigned family
members as officers but in reality, he calls the shots; he died; family
members passed a board reasolution going against F. Roxas
decisions of tolerating 2 families to stay w/in the premises of
Hidden Valley
- SC – F. Roxas had the authority to do that; but such stay cannot
be permanent; the board resolution must be respected
- Properties registered in the name of the corp are owned by it as an
entity separate and distinct from its members. While shares of
13
stock constitute personal property, they do not represent property
of the corp. The corp has property of its own which consists chiefly
of real estate. A share of stock only typifies an aliquot part of the
corp’s property, or the right to share in its proceeds to that extent
when distributed according to law and equity, but its holder is not
the owner of any part of the capital of the corp. Nor is he entitled to
the possession of any definite portion of its property or assets. The
SH is not a co-owner or tenant in common of the corporate
property.
- The resp corp has a distinct personality separate from its
members. The corp transacts its business only through its officers
or agents. Whatever authority these officers or agents may have is
derived from the BoD or other governing body unless conferred by
the charter of the corp. An officer’s power as an agent of the corp
must be sought from the statute, charter, the by-laws or in a
delegation of authority to such officer, from the acts of the BoD,
formally expressed or implied from a habit or custom of doing
business
- Doctrine of piercing the veil of corporate fiction; The separate
personality of the corp may be disregarded only when the corp is
used as a cloak or cover for fraud or illegality or to work injustice
or where necessary to achieve equity or when necessary for the
protection of the creditors
Benguet Electric Coop vs. NLRC [1992]
- The Board members and officers of a corp who purport to act for
and in behalf of the corp, keep within the lawful scope of their
authority in so acting, and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts.
Those acts, when they are such a nature and are done under such
circumstances, are properly attributed to the corp alone and no
personal liability is incurred by such officers and Board members
Prime White Cement vs. IAC [1993]
- A board director or other corporate officer cannot readily enter into
a contract with his own corp; Exceptions.—A director of a corp
holds a position of trust and as such, he owes a duty of loyalty to
his corp. In case his interests conflict with those of the corp, he
cannot sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the
maximum amount of profits for the corp. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact
Corpo Glen Aid
 that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the SHs."
- On the other hand, a director's contract with his corp is not in all
instances void or voidable. If the contract is fair and reasonable
under the circumstances, it may be ratified by the SHs provided a
full disclosure of his adverse interest is made
Grace Christian High School vs. CA [1997]
- The BoD of corps must be elected from among the SHs or
members
- No provision of the by-laws can be adopted if it is contrary to law
- Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law
Woodchild Holdings Inc. vs. Roxas Electric & Construction Inc [2004]
- The property of the corp is not the property of its SHs or members
and may not be sold by the SHs/members w/o express
authorization from the corp’s BoD
- Acts done by corporate officers beyond the scope of their authority
cannot bind the corp unless it has ratified such acts expressly or
tacitly, or is estopped from denying them
Cosare vs. Braodcom Aisa, Inc. [2014]
- An intra-corporate controversy, which falls within the jurisdiction of
regular courts, has been regarded in its broad sense to pertain to
disputes that involve any of the following relationships: (1) b/w the
corp, partnership or association and the public; (2) b/w the corp,
partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; (3) b/w the corp,
partnership or association and its SHs, partners, members or
officers; and (4) among the SHs, partners or associates,
themselves
- When the dispute involves a charge of illegal dismissal, the action
may fall under the jurisdiction of the Labor Arbiters upon whose
jurisdiction, as a rule, falls termination disputes and claims for
damages arising from employer-employee relations as provided in
the Labor Code
- Corporate officers’ in the context of PD 902-A are those officers of
the corp who are given that character by the Corp Code or by the
corp’s by-laws
- It is only when the officer claiming to have been illegally dismissed
is classified as such corporate officer that the issue is deemed an
14
intra-corporate dispute which falls within the jurisdiction of the trial
courts
- The BoD has no power to create other corporate offices w/o first
amending the corporate by-laws so as to include therein the newly
created corporate office
- In determining the existence of an intra-corporate dispute, the
status or relationship of the parties and the nature of the question
that is the subject of the controversy must be taken into account
Lopez vs. Ericta [1972]
- 12 members of Board of Regents; 7 majority votes to effect Dr.
Blanco’s appointment
- 3 voted for Dr. Blanco, 5 against, 4 abstained
- Issue: what is the legal effect of the abstentions? Since it is critical
- An affirmative act is necessary to effect a positive vote; since Dr.
Blanco did not garner the required positive votes, her appointment
cannot be effected; the nature of an abstention vote shall not be
further delved into
Executive committee [Sec. 35] p. 407-408 Campos
- Committee of the board
If AoI – 15
Ex Comm – 7
- Quorum of excomm is 4; vote required is 4; “majority vote of all its
members”
- May act, by majority vote of all its members, on such specific
matters w/in the competence of the board, as may be delegated to
it in the by-laws or on a majority vote of the board, except
[memorize these 5; AFAAD]
o (1) approval of any action for which SHs’ approval is also
required;
o (2) the filing of vacancies in the board;
o (3) the amendment or repeal of by-laws or the adoption of
new by-laws;
o (4) the amendment or repeal of any board resolution which
by its express terms is not so amendable or repealable;
and
o (5) a distribution of cash dividends to the SHs.
3 types of dividends; cash, stock, & property
Obligations of Directors, Trustees, or Officers – Sec. 31
Corpo Glen Aid
Ds/Ts who willfully and knowingly vote for or assent to patently unlawful
acts of the corp or who are guilty of gross negligence or bad faith in
directing the affairs of the corp or acquire any personal or pecuniary
interest in conflict with their duty shall be liable jointly and severally for all
damages suffered by the corp, its SHs/members and other persons
“Other persons” – labor, etc.
“willfully and knowingly”
Pool vs. Pool [1945]
- Resps cannot be said to have been negligent under the
circumstances. They did not know that the earnings in dividends
had to be distributed before a certain date and that failure to
distribute said earnings would lead to their paying surtax.
Defendants had a right to rely upon the advice of a certified public
accountant and a lawyer whom they had employed to look after
these legal and technical matters.
- Pet as a director himself has a duty to inform his co-directors of the
consequence of non-distribution of earnings. This he failed to do
and he cannot burden the other directors of reimbursing him the
Steinberg vs. Velasco [1929]
surtax he paid.
“gross negligence or bad faith”
Strong vs. Repide [1906; important; see mi digest]
- US SC 1909 – Even though a director may not be under the
obligation of a fiduciary nature to disclose to a SH his knowledge
affecting the value of the shares, that duty may exist in special
cases, and it did exist upon the facts in this case
o Special facts doctrine
Under this doctrine, Repide had the responsibility
to disclose to Strong, failure of which constituted
fraud
2nd par.
Gokongwei vs. SEC [1979]
- A director stands in a fiduciary relation to the competition and its
PSE vs. CA [1997; business judgment rule extended]
SHs. The disqualification of a competition from being elected to the
BoD is a reasonable exercise of corporate authority
- It is obviously to prevent the creation of an opportunity for an officer
or director of San Miguel Corp, who is also the officer or owner of
competing corp, from taking advantage of the information which he
acquires as director to promote his individual or corporate interests
15
to the prejudice of San Miguel Corp and its SHs, that the
questioned amendment of the by-laws was made. Certainly, where
two corps are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty to both corps
and place the performance of his corporate duties above his
personal concerns
- Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary duty
to loyalty may well require that he disclose this information to a
competitive rival. These dangers are enhanced considerably
where the common director such as the petitioner is a controlling
SH of two of the competing corps. It would seem manifest that in
such situations, the director has an economic incentive to
appropriate for the benefit of his own corp the corporate plans and
policies of the corp where he sits as director.
- Another reason for upholding a by-law provision that forbids a
competitor to be elected as corporate director are the laws
prohibiting cartels
- The creditors of a corp have the right to assume so long as there
are debts and liabilities, the BoD of the corp will not use its assets
to purchase its own stock or to declare dividends to its SHs when
the corp is insolvent.
- The directors of a corp are bound to care for its property and
manage its affairs in good faith, and for a violation of their duties
resulting in waste of its assets or injury to its property, they are
liable to account the same as any other trustee.
- If the directors of a corp do acts clearly beyond their power, by
reason of which a loss ensued, or dispose of its property w/o
authority, they will be required to make good the loss out of their
private estate.
- A director of a corp is bound to exercise ordinary skill and judgment
and cannot excuse his negligence or unlawful acts on the ground
of ignorance or inexperience
- Questions of policy and of management are left to the honest
decision of the officers and directors of a corp, and the courts are
w/o authority to substitute their judgment for that of the BoD—the
board is the business manager of the corp, and so long as it acts
in good faith, its orders are not reviewable by the courts.
Corpo Glen Aid
 - Notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE’s decision in matters
of application for listing in the market, the SEC may exercise such
power only if the PSE’s judgment is attended by bad faith
- The SEC had acted arbitrarily in arrogating unto itself the discretion
of approving the application for listing of Puerto Azul Land, Inc.,
since this is a matter addressed to the sound discretion of the PSE,
a corporate entity, whose business judgments are respected in the
absence of bad faith
- The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the PSE is not
for the Supreme Court to determine, but is left to the sound
discretion of the SEC
Otis & Co. vs. Pennsylvania R. Co. [1944; ???]
- Business judgment rule applied; ruled in favor of the directors
Litwin vs. Allen [1940]
- The transaction was tainted w/ improvidence; no win case, sure
loss
- It is against public policy for a bank to purchase securities and give
the seller the option to buy them back at the same price thereby
incurring the entire risk of loss with no possibility of gain other than
the interest derived from the securities in the interim. Any benefit
of a rise in price is assured to the seller and any risk of heavy loss
is inevitably assumed by the bank
- The ratification by the directors is equivalent to prior acquiescence
and should result in liability
Montelibano vs. Bacolod-Murcia Milling Co., Inc. [1962]
- It is a question, therefore, in each case, of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not
in a remote and fanciful, sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corp’s
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corp has the power to do it;
otherwise, not.
16
- Whether or not a valid and binding resolution passed by the BoD,
will cause losses or decrease the profits of the corp, may not be
reviewed by the courts
Sec. 32 [Dealings of Ds, Ts, or officers w/ the corp] – a contract of the copr
w/ 1 or more of its Ds or Ts or officers is voidable, at the option of such
corp, unless all the following conditions are present –
- The presence of such D or T in the board mtg in w/c the contract
was approved was not necessary to constitute a quorum
- The vote of such D or T was not necessary for the contract’s
approval
- The contract is fair and; and
- In case of an officer, the contract has been previously authorized
by the BoD/BoT
^ Where any of the 1st 2 conditions is absent, in the case of a contract with
a D or T, such contract may be ratified by the vote of the SHs representing
at 2/3 of the OCS or of at 2/3 of the members in a meeting called for the
purpose – disclosure of the adverse interest of the Ds or Ts involved must
be made at such mtg.
WHEN STOCKHOLDERS’ ACTION IS NECESSARY [make table 4 this]
Election of Directors [Sec. 24]
Board vote – n/a
Quorum in meetings [Sec. 52] – majority of outstanding capital stock
o Example –
AKS [authorized] = P1M, 1M shares, 1Php/share
OCS [outstanding] = 500K shares – the quorum will
be 250,001 shares
- Quorum and attendance are 2 different terms
- Once quorum is established, it continues until the end of the
meeting
SHs’ vote – cumulative voting
Non-voting shares [relate to art. 7 of AoI] – they don’t vote, but they can
attend meetings
Meeting required? Yes
W/n the subscription is fully paid, it is still considered outstanding capital
stock
Corpo Glen Aid
 - In the example above, if only 125k of the 500k subscribed shares Meeting required? – yes
have been paid, the 500k shares will still be considered as OCS;
Appraisal right – no
there may still be quorum
Others – this concerns compensation other than per diem;
Appraisal right – right to be paid for his investments; stockholders have no
right Directors contract w/ the corporation itself Sec. 32 & 33
Others – by ballot, if requested by any voting SH Board vote – see others (1)
Removal of Directors [Sec. 28] Quorum – 2/3 of OCS [entitled to vote]
Board vote – n/a SHs’ vote – 2/3 of OCS [entitled to vote]
Quorum – 2/3 of outstanding capital stock [entitled to vote] Non-voting shares – no
Stockholders’ vote – 2/3 of OCS [entitled to vote]; no cumulative voting Meeting required? yes
Non-voting shares – no Appraisal right no
Meeting required? Yes Others – 1) applies only if corp cannot muster quorum and vote at board
level b/c affected director not counted 2) full disclosure of director’s
Appraisal right – no
adverse interest 3) contract fair & reasonable 4) see sec. 33 on contracts
Others – Removal shall be for a cause, if director elected by minority [???] b/w corps w/ interlocking directors
Vacancy in the board [Sec. 9] Directors’ acquisition of business opportunity Sec. 34
Board vote – see others Board vote – majority of present, provided there’s quorum
Quorum – Majority of OCS [entitled to vote] Quorum – 2/3 OCS [entitled to vote]
SHs’ vote – cumulative voting SH’s vote – 2/3 OCS [entitled to vote]
Non-voting shares – no Non-voting shares – no
Meeting required? yes Meeting required? – yes
Appraisal right – no Appraisal right – no
Others – vacancy may be filled up by remaining Directors, if there’s still Others
quorum. But not if vacancy is due to –
Amendment of AoI Sec. 16
(i) Articles amendment increasing # of Directors; or
Board vote – majority
(ii) Removal of Director; or
(iii) Expiration of term Quorum – 2/3 of ALL OCS
Directors’ compensation – Sec. 30 Stockholders’ vote – 2/3 of ALL OCS [Sec. 6]
Board vote – n/a Non-voting shares – yes [Sec. 6]
Quorum – majority of OCS [entitled to vote] - AKS = P2M, 1M shares, 1Php/share – COMMON
10M shares, 0.10/share – PREF
SHs’ vote – majority of OCS [entitled to vote]
11M OCS
Non-voting shares – no Quorum = 2/3 of 11M = 7.26M shares

17
Corpo Glen Aid
 If attendance is 9M, 7.26M shares is the majority vote [b/c 2/3 Appraisal right – Yes [Sec. 81(1)]
of ALL OCS]
Others – Regulatory approvals [primary regulator, and SEC]
Meeting required? No. Written assent is ok. Exceptions –
Voluntary – no creditors affected [???]
- (a) increase/decrease of capital stock [art. 7]
Same as previous except, NO appraisal right
- (b) extension or shortening of corporate term
Voluntary – creditors affected Sec. 119
Appraisal right – yes for certain amendments [Sec. 81(1)]
Same as previous except – there’s petition hearing and SEC approval
Others – regulatory approvals [primary regulator and SEC]; there are some
provisions in the AoI that are not subject to amendment – names of Amendment of by-laws Sec. 48
incorporators, etc.; see sec. 17
Board vote – majority
Increase/decrease of capital stock; bonded indebtedness [Sec. 38]
Quorum – majority of ALL OCS
- What it contemplates is an amendment to art. 7, and not merely
SHs’ vote – majority of ALL OCS
increase decrease of what has already been authorized [careful]
Non-voting shares – yes [Sec. 6]
Board vote – majority [in practice, majority of the board as PRESENTLY
CONSTITUTED, not of the attending directors, and not of the # of directors Meeting required? Yes
indicated in AoI]
Appraisal right – no
Quorum – 2/3 of ALL OCS
Others – regulatory approvals [primary regulator & SEC];
SHs’ vote – 2/3 of ALL OCS [Sec. 6]
- 2/3 of outstanding shares may delegate to Board; revoke
Non-voting shares – yes [Sec. 6] delegation by majority
Meeting required? Yes SLEMPO [sale, lease, exchange, mortgage, pledge or other
disposition] of all assets [Sec. 40]
Appraisal right – No. exception – if increase in capital stock includes
preference superior to outstanding shares [Sec. 81(2)] - “all assets” – qualitative standard [as to render the corp unable to
pursue its line of business], not quantitative standard
Others – regulatory approvals [primary regulator, and SEC]; when
amended, 25-25 rule shall be complied with again for the increase [new Board vote – majority
shares]
Quorum – 2/3 of ALL OCS
Dissolution – 3 types
SHs’ vote – 2/3 of ALL OCS
By shortening corporate term [Sec. 120, 16]
Non-voting shares – Yes [Sec. 6]
- Amending art. 4 of AoI
Meeting required? Yes
- Ex. From 50 years to 16 years
Appraisal right – yes [Sec. 40, 81(2)]
Board vote – majority
Others – illegal combinations and monopolies [anti-trust, competition laws]
Quorum – 2/3 of ALL OCS
Investment in another business or corporation [Sec. 42]
SHs’ vote – 2/3 of ALL OCS [Sec. 6]
- If the investment covers the primary purpose of the investing
Non-voting shares yes [Sec. 6]
company, only BoD majority is needed [majority of the present
Meeting required? Yes directors at the meeting, provided there is a quorum]
18
Corpo Glen Aid
 - If the investment covers the secondary purpose, SHs’ action is Management contract [Sec. 44; applies to both corps]
needed; majority of the presently constituted board, together with
Board Vote – majority of present, provided quorum
2/3 of shares even non-voting
- If investment covers neither primary or secondary purpose, it is an Quorum – see SHs’ vote
ultra vires act [Sec. 45]; it cannot invest in such company, unless
SHs’ Vote – majority of OCS [entitled to vote]
they amend the AoI
- But if same interest controls 1/3 of managing corp – majority of
Board Vote – majority
OCS [entitled to vote] of MANAGING corp
Quorum – 2/3 of ALL OCS - If interlock of majority directors – 2/3 of OCS [entitled to vote] of
MANAGED corp
SHs’ Vote – 2/3 of ALL OCS
Meeting required – yes
Non-voting shares – Yes [Sec. 6]
Appraisal right – note
Meeting required – yes
Others – maximum term = 5 years
Appraisal right – yes [Sec. 42]
Consideration for no-par shares [Sec. 62]
Others – but see also Sec. 36(7)
Board Vote – majority of present, provided quorum
Merger or consolidation [Sec. 77]
Quorum – majority of OCS [entitled to vote]
- Merger – Corp A + Corp B = Corp A [surviving corp]
- Consolidation – Corp A + Corp B = Corp C SHs’ Vote – majority of OCS [entitled to vote]
Board Vote – majority Non-voting shares – no
Quorum – 2/3 of ALL OCS Meeting required – yes
SHs’ Vote – 2/3 of ALL OCS Appraisal right – no
Non-voting shares – Yes [Sec. 6] Others – only if issue prices is not fixed (i) in the AoI, or (ii) by the Board
pursuant to authority under AoI or By-Laws [the 2 must be absent for Sec.
Meeting required – yes
62 to apply]
Appraisal right – yes [Sec. 40, 81(3)]
- This is also a control device
Others – regulatory approvals [primary regulator, SEC] [Sec. 79]
Where non-voting shares are entitled to vote [8 instances] –
- Illegal combinations and monopolies [Anti-trust, competition laws]
- Amendment of the AoI
Stock dividends [Sec. 43] - Adoption and amendment of by-laws;
- SLEMPO of all or substantially all of the corporate property;
Board Vote – majority of preset at the meeting, provided quorum
- Incurring, creating or increasing bonded indebtedness;
Quorum – 2/3 of OCS [entitled to vote] - Increase/decrease of capital stock;
- Merger/consolidation
SH’s vote – 2/3 of OCS [entitled to vote]
- Investment of corporate funds in another corp or business in
Non-voting shares – no accordance with the Code
- Dissolution
Meeting required – yes
CONTROL DEVICES
Appraisal right – no

19
Corpo Glen Aid
Proxy [Sec. 58] – may refer to – o Kept at its principal office
o Minutes – intimate details or summary of meetings of
- The person
SHs/members/BoD/BoT
- The document
- Stock and transfer books
It’s like an agent, but may not be valid for more than 5 years – remedy, to o Only PCD Nominee Corporation [not open for public] ???
renew the proxy w/ stock certificate ???
o Does not reflect transactions in PSE
- General proxy [at liberty]
o 1st part – journal
- Limited proxy [w/ constraints]
o 2nd part – ledger [payments, alienation, dates, who
Formalities – buyer/seller]
- In writing Refusing officer, or director who voted to refuse will be held liable; except
- Signed by the SH/member [defenses for refusing] –
- Filed before the scheduled meeting w/ the Corp Sec
- Demander has improperly used any info secured through any prior
Proxy is revocable, except if coupled w/ interest [???] examination of the records/minutes; or
- Not acting in good faith or for a legitimate cause
Voting trusts [Sec. 59] [see Sec. 20 of SRC and rule 20 of IRR]
Sec. 75 – 2 financial statements only; but SEC actually requires 4
- Not exceeding 5 years; except loan [automatically expires upon full
payment] - Balance sheet
- P&L statement [profit & loss]
Formalities –
- Cash flow
- In writing - Changes in equity
- Notarized
Pardo vs. Hercules Lumber Co. [1924]
- Agreement [VTA] filed w/ the corp and SEC
- A resolution of the BoD of a corp limiting the right of SHs to inspect
Consequences
its records to a period of ten days shortly prior to the annual SHs’
- Legal title [held by trustee] vis-à-vis beneficial title [held by meeting is an unreasonable restriction on the right of inspection;
transferor] evidenced by VTA certificate the right of inspection can be exercised "at reasonable hours." This
- Stock certificates will be canceled and new stock certificates means that the right of inspection may be exercised at reasonable
issued to the trustee hours on business days throughout the year, and not merely during
- If there’s a supplement to the VTA, the conditions in the original an arbitrary period of a few days chosen by the director
will apply to the subsequent
Gonzales vs. PNB [1983]
Founders’ shares [Sec. 7]
- It is now expressly required as a condition for such examination
Hierarchy of shares as to voting rights – Founders’ shares [Sec. 7] > that the one requesting it must not have been guilty of using
Common shares > Preferred shares improperly any information secured through a prior examination,
and that the person asking for such examination must be “acting in
THE RIGHT TO INSPECT; CORPORATE BOOKS & RECORDS
good faith and for a legitimate purpose in making his demand.”
Sec. 74 – Director/trustee/SH/members may inspect at reasonable hours - SH has the duty of showing good motive or purpose for demanding
on business days an examination of corporate books. One who acquired one share
of stock of a bank to be able to examine its books can hardly be
2 books
said to have been motivated with good faith or proper purpose in
- Record of all business transaction and minutes

20
Corpo Glen Aid
 demanding inspection of the bank’s transactions before he became
a SH
Veraguth vs. Isabela Sugar Co. [1932]
- Board resolution requiring prior approval/permission from the
president before exercising the right to inspect is invalid
WG Philpotts vs. Phil. Manufacturing Co. & Berry [1919]
- The right of examination into corporate affairs may be exercised
either by the SH in person or by any duly authorized representative,
considering that the technicalities of such records may require the
interpretation skills of experts like accountants, lawyers, etc.
Gokongwei vs. SEC [979]
- The right of SH to inspect corporate books extends to a wholly-
owned subsidiary
- Considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corp and, therefore, under its control, it
would be more in accord with equity, good faith and fair dealing to
construe the statutory right of petitioner as SH to inspect the books
and records of the corp as extending to books and records of such
wholly owned subsidiary which are in respondent corp’s
possession and control
Slay vs. Polania Publishing Co. [1930; ???]
Yujuico vs. Quaimbao [2007]
- The second and fourth paragraphs of Section 74, including the first
paragraph of the same section, can only be violated by a corp. It is
clear then that a criminal action based on the violation of the
second or fourth paragraphs of Section 74 can only be maintained
against corporate officers or such other persons that are acting on
behalf of the corporation
- Violations of the second and fourth paragraphs of Section 74
contemplates a situation wherein a corp, acting thru one of its
officers or agents, denies the right of any of its SHs to inspect the
records, minutes and the stock and transfer book of such corp

21
Corpo Glen Aid
CORPORATE GOVERNANCE: DERIVATIVE SUITS
Suits by SHs /members of a corp based on wrongful or fraudulent acts of
Ds or other persons may be classified into –
- Individual suits [denial of the right of inspection; such right is
personal to each SH]
- Class suits [wrong is done to a group of SHs; where preferred SH’s
rights are violated]
- Derivative suits [see cases below]
General principles/requisites
- SH/member bringing the suit must have exhausted his remedies
w/in the corp
- SH/member must have been one at the time the transaction or act
complained of took place
- Any benefit recovered by the SH/member as a result of the
derivative suit must be accounted for to the corp, the real party in
interest
- If the suit is successful, plaintiff is entitled to reimbursement from
the corp for the reasonable expenses of litigation including
attorney’s fees
Liken vs. Shaffer [1946]
- 3 types of SH action
o Individual suit
o Derivative suit [SH on behalf of the corp]
o Class suit
- Derivative suit –
o The corp itself had sued
o If there’s no cause of action, no recovery
o Any defense good against the corp is good against the SH
o Conduct of a particular SH is not material – courts will
refuse relief to those suitors who do not come into equity
w/ clean hands, or who have ratified or acquiesced in the
wrong complained of [guilty of laches]; the fact that one SH
has discovered fraud and is guilty of laches does not
prevent another SH who is not guilty of laches from
instituting a SH’s derivative suit
SMC vs. Kahn [1989; IMPORTANT]
- Requisites of a derivative suit
22
o The party bringing suit should be a SH as of the time of the
act or transaction complained of, the number of his shares
not being material
Exception – transfers by operation of law
[succession; Pascal vs Orozco]
AND at the time the suit is filed [AM No. 01-2-04-
SC; interim rules governing commercial cases;
Rule 8, Sec. 1(1)]
o He has tried to exhaust intra-corporate remedies, ex. – has
made a demand on the BoD the appropriate relief but the
latter has failed or refused to heed his plea
o The cause of action actually devolves on the corp, the
wrongdoing or harm having been, or being caused to the
corp and not to the particular SH bringing the suit
- Number of shares is immaterial in re harassment/ nuisance suits
[AM No. 01-2-04-SC; Rule 1, Sec. 1(b)]; the court shall consider
the ff. –
o Extent of the shareholding or interest of the initiating SH or
member
o Subject matter of the suit
o Legal and factual basis of the complaint
o Availability of appraisal rights for the act or acts complained
of
o Prejudice or damage to the corp in re to the relief sought
- Jurisdiction is vested in regular courts and not in SEC; RTC w/c
has jurisdiction over the principal office of the corp [AM No. 01-2-
04-SC, Rule 1, Sec. 5]
Pascual vs. Orozco [1911]
- Even the innocent transferee from an equally innocent transferor
has no right to bring a derivative suit; the plaintiff must have been
a SH at the time the transaction complained of took place
- Exception to the rule that the SH must have been a SH at the time
the act/transaction complained of occurred – transfers by operation
of law [succession]
- Notwithstanding the compliance with the rule that the SH must
have been a SH at the time the act/transaction complained of
occurred, it will not be entertained if the SH’s purpose of owning
such stocks is to harass the corp
Evangelista vs. Santos [1950]
Corpo Glen Aid
 - The SHs have brought the action not for the benefit of the corp but
for their own benefit, since they ask that the defendant make good
the losses occasioned by his mismanagement and pay to them the
value of their respective participation in the corporate assets on the
basis of their respective holdings. Clearly, this cannot be, done
until all corporate debts, if there be any, are paid and the existence
of the corp terminated by the limitation of its charter or by lawful
dissolution
- Since the pet SHs themselves were asking for the value that has
been dissipated, it violates the trust fund doctrine – creditors must
be paid first, not SHs
- The pets should have amended the complaint and sought relief on
behalf of the corp
Republic Bank vs. Cuaderno [1967]
- A suit need not be authorized by the corp where its objective is to
nullify the action taken by its manager and the BoD, in w/c case
any demand for intra-corporate remedy would be futile
- In a derivative suit filed by a SH, whether the corp should be joined
as a plaintiff or a defendant is not important. What is important is
that the corp should be made a party in order to make the court’s
judgment binding upon it and thus bar future relitigations of the
issues
Reyes vs. Tan [1961]
- The importation of textiles instead of raw materials as well as the
failure of the BoD to take actions against those directly responsible
for the misuse of the dollar allocations constitute fraud or consent
thereto on the part of the directors. Therefore, a breach of trust was
committed which justifies the minority SHs to institute a derivative
suit on behalf of the corp
- Where corporate directors are guilty of a breach of trust — not of
mere error of judgment or abuse of discretion — and intracorporate
remedy is futile or useless, a SH may institute a suit in behalf of
himself and other SHs and for the benefit of the corp, to bring about
a redress of the wrong inflicted directly upon the corp and indirectly
upon the SHs
- The claim that resp did not take steps to remedy the illegal
importation for a period of 2 years is also w/o merit. During that
period of time, resp had the right to assume and expect that the
directors would remedy the anomalous situation of the corp
23
brought about by their own wrong doing. Only after such period of
time had elapsed could resp conclude that the directors were
remiss in their duty to protect the corp property and business
[applicability of estoppel]
- As regards the exhaustion of intra-corporate remedies, it is
sufficient to allege that there was an actual exhaustion or that it is
futile to resort to such remedy
Cua vs. Tan [2009; good read to see corp transactions]
- Backdoor listing – occurs when a privately-held company that may
not qualify for the public offering process purchases a publicly-
traded company; the privately-held company avoids the public
offering process and gains automatic inclusion on a stock
exchange; occurs when a private company acquires a publicly
traded company and thus “goes public” w/o an initial public offering
- Requisites for filing a derivative suit [Rule 8, Section 1 of the Interim
Rules of Procedure for Intra-Corporate Controversies (IRPICC)]
o He was a SH/member at the time the acts or transactions
subject of the action occurred and at the time the action
was filed;
o He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws
or rules governing the corp or partnership to obtain the
relief he desires;
o No appraisal rights are available for the act or acts
complained of; and
o The suit is not a nuisance or harassment suit
- The right to information which includes the right to inspect
corporate books and records is a right personal to each SH
- The corp is the real party in interest in a derivative suit and the
suing SH is only a nominal party
o For a derivative suit to prosper, it is required that the
minority SH suing for and on behalf of the corp must allege
in his complaint that he is suing on a derivative cause of
action on behalf of the corp and all other SHs similarly
situated who may wish to join him in the suit
Holmes vs. Camp [1917; US case]
- 3 corps
- Doe Rum Lead owned 97% by St. Joseph, subsidiary of Doe Rum
- Plaintiffs are SHs in Doe Rum
Corpo Glen Aid
 - US SC – the SHs of Doe Rum may file a derivative suit w/ respect
to alleged anomalies committed in St. Joseph [remember, this is
not the case in the Phil.]
Gamboa vs. Victoriano [1979]
- An individual SH is permitted to institute a derivative suit on behalf
of the corp wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corp refuse to sue,
or are the ones to be sued or hold the control of the corp. In such
actions, the suing SH is regarded as a nominal party, with the corp
as the real party in interest. Here, however, the plaintiffs are
alleging and vindicating their own individual interests or prejudice,
and not that of the corp
- The well-known rule is that courts cannot undertake to control the
discretion of the BoD about administrative matters as to w/c they
have legitimate power of action, and contracts intra vires entered
into by the BoD are binding upon the corp and courts will not
interfere UNLESS such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of the rights of
the minority
- Pre-emptive right – ability of the SH to subscribe/buy new shares
in proportion to his shares before new shares are issued to another
entity; this right is personal to the SH
CORPORATE FINANCE
Sources of Financing –
- Contributions of its SHs [equity of SHs/ equity investment]
- Loans/advances by creditors
- Profits w/c the corp may earn
Capital structure of the corp refers to the aggregate of the securities issued
by the corp – 2 types
- Shares of stock
- Debt securities
Capital stock vs. capital
- Authorized capital stock – the maximum number of shares that a
corp is legally permitted to issue, as specified in its AoI
- Capital stock – amount fixed, usually by the corporate charter, to
be subscribed and paid in or secured to be paid in by the SHs of a
corp, either in money or property, labor, or services, at the
24
organization of the corp or afterwards, and upon w/c it is to conduct
its operations
o Remains the same unless the AoI are amended to increase
or decrease it
- Outstanding capital stock – total shares of stock issued under
binding subscription agreements to subscribers or SHs, w/n fully
or partially paid, except treasury shares
- Capital – actual property of the corp, including cash, real &
personal property
Equity securities / Shares of stocks; Kinds
A share of stock represents the interest of the holder thereof to participate
in the management of the corp, to share proportionally in the profits of the
business and, upon liquidation, to obtain an aliquot part of the corporate
assets after all corporate debts have been paid
- The holding/owning of a stock does not make him the owner of any
specific property of the corp, nor a creditor of such corp
- His shares are his own personal property w/c he may SLEMPO
Certificate of stock / stock certificate – different from a share of stock;
merely evidence the interest of the SH in the corp
Founders’ vs. common vs. preferred shares
- Hierarchy of economic rights
o Preferred [senior]
o Founders’ [5 years only]
o Common
- Hierarchy of voting rights
o Founders’ – exclusive right to vote or be voted for; 5 years
only
o Common – always have voting rights except when there
are founders’ shares [5 years]
o Preferred
Preferred stocks – PAID AHEAD of common shares – note: most of the
features of preferred shares may be present in hybrids
- 2 limitations [Sec. 6] –
o Must always have par value
o Preferences must be in AoI and stock certificate
AoI may authorize the BoD to fix the terms &
conditions of preferred stocks, provided that these
shall become effective only upon the filing of a
certificate thereof w/ the SEC
Corpo Glen Aid
- Preference –
o As to dividends [to be paid, the income must be truly
realized; cannot be income on paper; issued only when
there are unrestricted realized earnings; BoD has the
discretion to determine w/n dividends are to be declared]
Cumulative vs. non-cumulative
Always going to be paid whether there’s
delay or not; not going to be paid if the corp
fails to pay in the prior year
If in any given year/s no dividends are
declared, regardless of the reason, the
arrears for such year/s have to be made up
in subsequent years before any dividends
can be paid to the common stocks [corp w/
steady cash flow]; dividends depend upon
the existence of profit for the year. If there
were no profits in a previous year, the
“dividends” w/c could not be given for that
year do not have to be made up in later
years [corp w/ volatile cash flow]
In the absence of any express stipulation,
preferred stocks are deemed cumulative
Participating vs. non-participating – dividends of
preferred will be paid first, then common, then –
The remaining will be divided b/w the 2; the
remainder will all go to the common SHs
Preferred stocks are non-participating,
unless expressly otherwise provided
o As to voting rights
Preferred stocks are usually denied the right to
vote, unless such right is clearly withheld
Non-voting stocks have the right to vote in
specified instances involving major changes in the
corp – *See ^ “WHEN STOCKHOLDERS’ ACTION
IS NECESSARY”
AoI may include provisions w/c will subject a non-
voting share to a suspensive condition to convert it
to voting share
Voting feature cannot be a feature of hybrids
o Upon liquidation [at the end of corporate life]
25
A preferred SH may also be given preference in the
distribution of the corporate assets upon
liquidation; in the absence of any provision granting
such preference, he participates pro rata w/ the
common SHs
If the preferred stock is cumulative, the liquidation
preference oftentimes includes arrears in
cumulative dividends
FIRST, unpaid dividends are paid
SECOND, the value of the share – Par [P5]
vs. issue price [anything higher than P5]
THIRD, w/ regard to excess; participating
vs. non-participating
o Prefs will have a share in the
excess; no share to the excess [all
to the common]
- Preferred SH is not a creditor; he can get his investment back only
upon liquidation of the corp, provided there are enough assets left
after paying all creditors
- Convertible securities; stock options – contract of security holder
may give him the privilege to exchange his class of securities w/
another class; will usually provide for the ratio of conversion and
the period w/in w/c the privilege may be exercised
o Ex. from preferred stocks or bonds to common stocks
- May be classified into series & sub-series
o A – 1, A – 2, etc. 2 – E, 2 – F
Common stocks – most commonly issued by corps
- Entitles the owner to an equal pro rata division of profits, if there be
any, one SH has no advantage, priority, or preference over any
other SH in the same class
- In the presence of preferred stocks, the common stocks are usually
vested w/ the exclusive right to vote and have the residuary rights
to the profits [passive income] and the net assets upon liquidation,
after the preferences have been complied with
Par vs. no-par
- Par – par value of a share is fixed in the AoI, and is the minimum
issue price of such share; value must be stated in the stock cert,
w/c cannot be issued until subscription is paid in full; cannot be
issued/sold at less than par, otherwise, “watered stock” and the SH
Corpo Glen Aid
 would still be liable for the difference; they may be issued/sold at
higher than par
- No-par – issued price is not stated in the cert, but may be fixed in
the AoI, or by the BoD when so authorized by the AoI or by-laws,
or in the absence thereof, by the SHs
o Limitations on the issuance of no-par stock
Once issued, deemed fully paid; corp can no longer
increase the price of issued no-par shares
Consideration cannot be less than P5
Cannot be issued as preferred shares; no-par only
applies to common stocks
Cannot be issued by –
Banks
Trust companies
Insurance companies
Public utilities
Building & loan associations
AoI must state the fact that the corp issues no-par
shares, and the no. of such shares
- Whether the shares are w/ or w/o par value, the subscriber must
pay its full consideration for them to be issued
- To see the advantages of both types of shares, see p. 30-31
Campos, Corpo Code, Vol. II
Stock Split / Reverse Stock Split – relevant only for par-value shares
- AKS = P100M; 100m shares; P1.00/share
- Stock split = P100m; 200m shares; P.50/share
- Reverse stock split = P100m; 50m shares; P2/share
Treasury shares [Sec. 9]
- Shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corp by purchase,
redemption, donation or through some other lawful means [ex.
exercise of appraisal right]
- While in treasury, they don’t have dividend or voting rights
- May be reissued, even less than par, since they’ve previously been
fully paid
- Can be declared as STOCK dividends ???
Outstanding Capital Stock – OCS [Sec. 137]
26
- Total shares of stock issued under binding subscription
agreements to subscribers or SHs, whether or not fully or partially
paid, except treasury shares
Issued – includes treasury shares; includes partially paid shares
Redeemable shares [Sec. 8] – like a share w/ a term
- May be issued by the corp when expressly provided in the AoI
- May be purchased by the corp upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings, and
upon such terms & conditions provided in the AoI w/c must also be
stated in the certificate of stock
o However, SEC ruled that there must remain in the corp
sufficient assets to cover debts & liabilities, inclusive of
capital stock
Founders’ shares [Sec. 7] – exclusive right to vote and be voted for in the
election of directors
- Not to exceed 5 years subject to the approval of the SEC; 5-year
starts from the date of the SEC approval
Valuation of shares
- Par value
- Book value [unlisted shares]
- Market value [listed shares]
Valuation methodologies – done by the experts – chartered financial
analysts, appraisers, auditors, accountants [certificate of valuation]
Valuation of assets, businesses, etc.
Debt Securities
Debt securities [most senior papers]
- Notes
- Bonds [usually secured by a mortgage/pledge of corporate
property]
- Debenture [issued on the general credit of the corp]
Hybrid securities; “perps” [2nd most senior]
- B/c preferred shares and bonds are created by contract, it is
possible to create stock w/c approximates the characteristics of
Corpo Glen Aid
 debt securities; the determination w/n the hybrid security is truly a
bond or just another kind of preferred share may be crucial for –
o Tax purposes
o Leverage [???]
Trust indenture – similar to loan agreements; 3 parties
- Debtor-corp
- Creditor-bondholder
- Trustee as representative of all the bondholders
Documentation of bonds and hybrids [BP 178; Revised Securities Act]
- Subject to certain exemptions, the Securities Act requires the
registration of securities w/ the SEC before a corp can offer them
for sale [applicable only to securities to be offered publicly]
- Securities include, among others, shares of stock, bonds,
debentures, investment contracts, voting trust certs., etc.
- Registration of brokers, dealers, and salesmen
- Registration of stock exchange [any org w/c provides/maintains a
market place of facilities for bringing together purchasers and
sellers of securities]
Underwriting securities – underwriting is the act/process of guaranteeing
the distribution and sale of securities of any kind issued by another corp; 3
ways [see p. 138, Campos, Vol. II]
SUBSCRIPTION CONTRACT [Sec. 60]
- 2 ways how one becomes a SH of a corp –
o Subscription
o Acquisition of already issued shares from a SH
- Subscription – a contract; in re art. 8th & 9th ; for the acquisition of
unissued stock of a corp whether existing or still to be formed; in
effect, the contribution or promised contribution of a person to the
capital of the corp
- Subscribe/subscription – newly issued securities that an investor
has agreed or stated his or her intent to buy prior to the issue date;
mutual agreement of subscribers to take and pay for the stock of a
corp
- Subject matter is the unissued stocks/shares; different from
acquiring issued shares w/c fall under purchase of shares
- Timeline – Certification of Incorporation; applicable to corps still to
be formed and to corps already existing
27
o Before CoI, the parties are the incorporators
o Subject to suspensive condition [approval by SEC]
- Must be in writing as can be implied from various provisions of the
Code
- Subscription price need not be paid in full at the time of the contract
- Partial payment can only apply to par-shares; although par-shares
may also be fully paid; no-par shares must always be fully paid
- No interest is payable, unless the by-laws so provide
o Rate either fixed in by-laws or, in the absence thereof, the
legal rate
- Once a subscription contract is perfected the SH becomes a debtor
to the corp and may be liable to pay any unpaid portion thereof
upon call by the BoD
- Delinquency [Sec. 67-68]
Pre-incorporation subscription [Sec. 61 in re Sec. 13] – irrevocable for at
least 6 months [may stipulate for a longer period, but not shorter] from the
date of subscription, unless –
o ALL of the other subscribers consent to the revocation; or
o Incorporation of said corp fails to materialize
- Provided, that no pre-incorporation subscription may be revoked
after the submission of the AoI to the SEC
- Sec. 13 – 25-25 rule; paid-up capital shall not be less than P5,000
- After the 6-month or agreed longer period, a pre-incorporation
subscriber may revoke his subscription agreement w/o the consent
of the other subscribers, provided, the AoI have not yet been
submitted to the SEC for approval
After subscription is fully paid, stock certificate signed by the Pres. OR VP,
countersigned by the secretary or assistant secretary, and sealed with the
seal of the corp shall be issued in accordance with the by-laws [Sec. 63]
- If subscription agreement is Jan. 1, but stock cert. issued on Aug.
1, stock and transfer book should reflect Aug. 1 – 2 entries; journal
entry and ledger entry; done by the corporate secretary
o Stock transfer agent is like the Register of Deeds
Sec. 64 – stock cert. is not issued until subscription is fully paid
- Read this in re last par. of sec. 63 - No shares of stock against
which the corp holds any unpaid claim shall be transferable in the
books of the corp
- Remedy – you can divide the subscription contract
Corpo Glen Aid
 o You can divide the P1M subscription to 5 subscriptions of
P200k each; consideration – if stocks are issued, the
holder reaps its benefits, + appreciation
CONSIDERATION FOR ISSUANCE OF SHARES [Sec. 62]
- Cash
- Property, tangible or intangible [trademarks, patents, etc.], actually
received by the corp and necessary or convenient for its use and
lawful purposes [need not be actually used by the corp] at a fair
valuation [valuation methodologies] equal to the par or issued
value of the stock issued
o Does not need to be equal to par; it can be higher – but not
lower, otherwise, it would be a case of watered stocks
o Watered stock – issuing shares lower than the par value;
absolutely not allowed; otherwise there will be liability on
the part of the SH concerned & directors/officers, except
for those who did not consent AND immediately expressed
their objection in writing, filed w/ the corp-sec [Sec. 65 –
liability therefor]
o Additional paid-in capital [APIC; difference b/w the par
value and the issue value; higher issue value than par
value; legal; important concept]
- Labor/ services ALREADY performed –
o Applies only to unissued shares, if the transferee is not a
SH
o If transferee is a SH, such restriction ^ will not apply; SH
may receive stock dividends
- Shares of stock shall not be ISSUED in exchange for promissory
notes or future service
o If A issues PN to XYZ corp for the latter can issue shares
to A, this is not allowed
o However, if XYZ owes A, and issues a PN in favor of A,
and A wants XYZ to issue shares to him, this is allowed
o In sum, this restriction only applies if the issuer of the PN
is the investor
o If par value is P500; P1 cash, 499 PN; this is still valid
subscription contract, although the stock shall not yet be
issued
- Part of the par or issued value may be paid in cash and the rest in
property, or in services previously rendered
- Promissory notes and future services are not allowable
consideration b/c their realization is not certain
- Previously incurred indebtedness of the corp
28
- Amounts transferred from unrestricted retained earnings to stated
capital – stock dividends
- Outstanding shares exchanged for stocks in the event of
reclassification or conversion in re convertibility features or options
- Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the
BoD, subject to approval by the SEC
Liability on watered stocks [Sec. 65]
- Watered stocks – those w/c are issued as fully paid up in
consideration of property at an overvaluation
- SHs of watered stocks are liable to the corp and its creditors and
makes the directors or officers who consented to the issuance of
such stocks solidarily liable w/ them
o Except for those who did not consent AND immediately
expressed their objection in writing w/ the corp-sec
- Liability will be to ALL creditors, whether they became such prior
or subsequent to the issuance of the watered stocks
- Fraud is not made an element of liability
- Even no-par stocks can be watered stocks where they are issued
for less than their issued value as fixed by the corp
PRE-EMPTIVE RIGHT [Sec. 39]
- All SHs of a stock corp shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the
AoI or an amendment thereto
- Personal to the SH; Remedies for injunction and mandamus may
be initiated through a personal or class suit
- “all issues or disposition” – includes –
o New shares issued in pursuance of an increase of capital
stock
o Issue of previously unissued shares w/c form part of the
existing AKS
o Disposition of treasury shares
- Pre-emptive right shall not extend to [Sec. 39] –
o Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public;
or
o Shares to be issued in good faith with the approval of the
SHs representing 2/3 of the OCS [non-voting shares not
included], w/c must be –
Corpo Glen Aid
 in exchange for property needed for corporate
purposes; or
in payment of a previously contracted debt
- Purpose – to avoid dilution of the SH’s interest in the corp by the
subsequent issuance of shares
- Amendment to the AoI requires 2/3 of the OCS including non-
voting shares
- “any class” in re preferred SHs vis-à-vis- common SHs; where the
capital structure of a corp is complex, w/ several classes of shares,
practical difficulties can be avoided by an express denial/limitation
of the right in the AoI
- Waiver of preemptive right must be reflected in the AoI to bind all
the SHs, even subsequent ones; if ALL the SHs unanimously
agree to a waiver, although for some reason no amendment of the
AoI is made, no one among them can later complain by estoppel,
but it would not bind future SHs
- Even if preemptive right does not exist, an issue of shares may still
be objectionable if the Ds have acted in breach of trust
TRUST FUND DOCTRINE – the capital stock of a corp is a trust fund for
the payment of its debts, and as substitute for the lack of personal liability
of the SH for such debts; fund for the benefit of the corp’s creditors;
corporate officers have a fiduciary duty to deal w/ them properly – applies
only to capital stock + APIC
Capital stock, SH equity, properties, & other assets of a corp forms part of
the trust fund [equity held in trust for the payment of corporate creditors]
Ex.
P1M at P1/par share; issued at P5/share
Capital stock 1M shares = P1M
APIC – P4M
Restricted earnings [amount of equity that must stay in the
company] – P3M
- The trust fund doctrine contemplates capital stock + APIC =, does
not include RE
Hay vs. Hay – [US case; 1951; ???]
- Dividend in re liquidation
Garcia vs. Lim Chu Sing [1934]
29
- Chu Sing was a SH of a bank and a Guarantor/surety for a debt in
favor of the bank; he claims compensation/ set-off
- The shares of stock of a banking corp do not constitute an
indebtedness thereof to the SH and, therefore, the latter is not a
creditor of the former for such shares
- A SH’s indebtedness to a banking corp cannot be compensated w/
the amount of his shares in the same institution, there being no
relation of creditor and debtor w/ regard to such shares
- A capital stock is a trust fund
o Trustor – SHs
o Trustee – corp
o Beneficiary – creditors
Datu Benito vs. SEC [1983]
- Case was before the Corp Code
- SC then – 2 kinds of shares
o Authorized but unissued – no pre-emptive right
o Increased capital stock – w/ pre-emptive right
- TODAY, Sec. 39 will apply; pre-emptive right applies to all issued
shares; even authorized but unissued shares have pre-emptive
right
Dunlay vs. Avenue M. Garage [US case; 1930]
- In re to this case, in the Phil. TODAY, Sec. 39 of Corp Code will
apply; all issued shares have pre-emptive right, subject to some
exceptions
- US SC had a different approach [???]
Jordan Co. vs. Allen, CIR [US case 1949; ???]
- Classifying a security as whether debt or equity has tax
implications
- Debenture stock is a debt security
Bayla vs. Silang Traffic Co. [1942]
- Subscription contract vs. purchase contract
o Unissued shares; issued shares
- Such distinction is not relevant anymore under Corp Code; relevant
only in re treasury shares
Meritt-Chapman & Scott Corp. vs. New York Trust Co [US case; 1950; ???]
- Warrant – option to buy unissued shares
o The contention is that upon issuance, there will be dilution
- SC – ???
Corpo Glen Aid
 o One Justice recommended to adjust the purchase price
[Barot: prevailing practice now]
Miranda vs. Tarlac Rice Mill Co., Inc. [1932]
- Alberto Miranda paid P10k for subscription in the company;
administratrix sought to recover the paid amount due to the
violation of the corp officers of the terms of the power of attorney
in mortgaging the land
- “Call” important concept in corporate finance – directors asking
SHs to pay any subscriptions that remain unpaid; BoDs of every
corp may at any time declare due and payable to the corp unpaid
subscriptions to the capital stock and may collect the same w/
interest accrued thereon or such percentage of said unpaid
subscriptions as it may deem necessary
- SC – since Alberto prepaid the subscription before their due date,
he cannot anymore recover; no call was made or is needed, since
the installment payment dates were already specified in the
contract; “on or before” – if debtor pays prior to the date, creditor
has the right to keep the payment [oblicon]; neither the fact that the
corp has ceased to do business, nor the fact that the other SHs
have not been required to pay for their shares, in accordance with
their subscription agreement, would justify an order re-quiring the
corp to return to the plaintiff the amount paid by the SH
Da Silva vs. Aboitiz & Co., Inc [1923]
- 2 remedies of the corp in case of delinquency
o Sell the delinquent share [foreclose; delinquency sale]
o Sue on the principal obligation [debt; collection suit]
COURT ACTION TO RECOVER UNPAID SUBSCRIPTION [Sec. 70]
W/o stipulation as to when the subscription should be paid, it should be
due upon –
- Call – by the BoD [business judgment]
o Equal treatment w/ regard to SHs
o Ex. – A,B,C,D,E subscribed for 25 shares each worth P25
each; they already paid P6.25 [25%]; unpaid is P18.75; on
Jan. 1, BoD made a call to pay P1.25 before Feb. 1, and
only A&C paid, B,D,E’s subscription will be declared
delinquent
B,D,E will be given 30 days [until March 3] to pay,
otherwise, the corp may then sell their delinquent
subscription
30
In the meantime, [effect of delinquency; from Feb.
1 – March 3], if A, B,C,D,E receives cash dividends,
B,D,E’s dividends will be applied to their
subscription’s unpaid portion [P18.75]; if they
received stock dividends, B,D,E’s share will be
withheld; also, they cannot vote; BDE cannot have
any transfer of their shares registered in the
corporate books
Remember, unless the shares have become
delinquent, holders of unpaid shares enjoy all the
privileges of a SH
** subscription contracts are INDIVISIBLE
If the delinquent is a director, he will stay as such
until the delinquency sale [majority &
academicians’ view]
The delinquency sale will be held through a public
bidding for 25 shares [whole amount; b/c
subscription contracts are indivisible]
Delinquency sale [Sec. 68]; if B’s share is to be sold
in public auction, and X bids for 20 shares, Y – 15,
& W – 25, Y wins [lowest # of shares]; he pays
P18.75 for 15 shares; the 10 [remaining] is credited
to the delinquent [B]
Sec. 68 should be related to Sec. 41; If corp has
unrestricted retained earnings, the corp may buy
back its own shares; it forms part of the treasury
shares w/c may be subsequently disposed of by
the corp [it should be for the whole unpaid shares;
25]; delinquent B will not get anything
If corp has no unrestricted retained
earnings, corp can go to court for collection
suit, or conduct subsequent biddings
Sec. 41 is not exhaustive – corp can also buy back its own shares through
redemption [Sec. 8]
- Difference b/w Sec. 8 & 41 – 41 needs unrestrained retained
earnings; 8 operates regardless
- Redeemable shares shall be specified in the AoI [Sec. 8]
- If capital stock is made up only of common shares & redeemable
shares, the common shares are the only ones covered by the trust
fund doctrine
Under Sec. 41, there are 3 instances for the corp to buy back shares
Corpo Glen Aid
 - To eliminate fractional shares [corp buys the fraction part]
o Fractional shares may result from
stock dividends
reverse stock split
delinquency share
- To purchase delinquent shares
- To pay dissenting SHs who exercise their appraisal right
Lost or destroyed certificates [Sec. 73]
2 remedies
- Wait for 1 year for the corp to issue anew
- Post bond/ other security even before the 1 year [more common;
since transferability is valuable]
If there is contest, issuance of a new cert. will be suspended until final
decision of the court
DIVIDENDS – portion of corporate profits set aside for distribution to the
SHs in proportion to their subscription to the capital stock of the corp
Form of dividends
- Cash – most common form
- Property
- Stock – corporate profits/earnings are transferred to capital stock
and shares of stock representing the increase in capitalization are
distributed
o Stock dividends cannot be declared w/o first increasing the
capital stock, unless there are available unissued shares
of the corp
o New shares are then issued to the SHs in proportion to
their interests
o Cannot be issued in favor of persons other than SHs
Treasury shares cannot be stock dividends; if the corp declared them as
dividends, they are considered property dividends ???
Sec. 60 in re 62(5) – only newly issued shares may be stock dividends
- Ex. – AKS = 400
o If subscribed/paid is 100; the unissued 300 shares may be
stock dividends; they may also be subscribed
If corp declares 50% stock dividends, there will be
currently 150 issued shares; [50% of 100 issued]
31
o If subscribed/paid is 300; then corp declares 50% stock
dividends, 150 will be newly issued; since there is excess,
25-25 rule shall be complied with for the increase of AKS
Modern view – APIC cannot be declared as dividend [any kind of dividend]
Sec. 43 – Power to declare dividends is lodged w/ the Board in re business
judgment
- If the BoD decides that the corporate earnings should be used to
expand the business, or any other matters, provided they are not
tainted w/ bad faith, fraud, or gross negligence, SHs have no right
to complain
- Limitation –
o If the BoD, in deciding to capitalize profits, will issue stock
dividends, prior approval of the SHs representing at least
2/3 of the OCS would be needed
o Cannot use surplus profits unreasonably [w/ bad faith,
fraud, or gross negligence]
o Surplus profits cannot exceed 100% of the corp’s paid in
capital stock [Sec. 43]; except
When justified by corporate expansion/projects
approved by the BoD
When the corp is prohibited under any loan
agreement from declaring dividends w/o creditor’s
consent, and its/his consent has not yet been
secured
When it clearly shows that such retention is
necessary under special circumstances [ex.
special reserve for probable contingencies]
Retained earnings; a.k.a earned surplus – net accumulated earnings of the
corp out of transactions w/ individuals or firms outside of the corp
- Limitations on appropriation of retained earnings
o Trust fund doctrine – a corp has no power to declare
dividends unless its legal or stated capital is maintained;
for the protection of creditors
o Agreements w/ creditors
o Impositions by law or SEC
- Do not include –
o APIC [additional paid in capital; a.k.a. premium on par
stock; difference b/w the par value and the higher price for
w/c the stock is sold by the corp]
Nevertheless, SEC has allowed the declaration of
stock dividends out of such premium, since stock
Corpo Glen Aid
 dividend does not involve any distribution of
corporate assets to the SHs but merely gives them
tangible evidence of the increase in their equity
o Transactions involving treasury stock
o Donations
o Appreciation of assets
Unrestricted retained earnings – retained earnings w/c are not so
appropriated; only fund out of w/c dividends can be legally paid
The amount of w/c each SH receives as his share of the dividends is based
on the amount of stock held by him, regardless of w/n he has paid his full
subscription
- However, if his shares became delinquent, any cash dividends due
his shares will first be applied to the amount of the delinquency +
costs & expenses. If the dividends consist of stock, the SH will not
get the same until he has paid his full subscription [applies only to
delinquent SH]
- If he is not delinquent, he gets all his stock dividends, although he
has not fully paid his subscription
o No-par shares must be fully paid in order to be considered
as issued; thus, until they are fully paid, the holders thereof
are not entitled to dividends
Keough vs. St. Paul Milk Co. [US case; 1939]
- W/n a dividend may be compelled by the Court over objection of
those in control of corporate affairs? Yes
- General rule – SC will not interfere w/ the declaration of dividends
o Except – judicial review may be secured when abuses
contravening the SHs’ rights manifest themselves; A court
would only compel a dividend when the Ds act fraudulently,
unjustly or unreasonable so as to impair the rights of the
complaining SHs to their just proportion of corporate profit
- Generally, a large corporate surplus that exist does not warrant an
automatic equitable intervention. The test resolves itself into an
examination of good faith and reasonableness of the policy of
retainings that w/c otherwise is available for dividends
- Based on the facts, it is clear that the corp did not have a
reasonable need for the large surplus accumulated. There were no
substantial obligations to be met. In short, the surplus was easily
available for dividends, if the Ds so elected.
Dodge vs. Ford Motor Co. [US case; 1919]
32
- Regular [annual] and special dividends [dividends on top of the
annual] were being issued by Ford; Dodge wanted special
dividends
- Can Ford be compelled to declare special dividends instead of
regular dividends
- SC – yes; corp’s earnings are for the SHs; the corp should not get
dividends from its SHs for the benefit of the public; basically a corp
is for the maximum profit of SHs and is not a charity
- Regarding the expansion of Ford Motor, the court cannot exercise
authority over it b/c such business decision of expansion is vested
to the Ds, therefore a valid exercise of their function and judges are
not business experts to intervene w/ the business decisions of
corps.
Nielson & Company, Inc. v Lepanto Consolidated [1968]
- Nature of stock dividends – can be issued only to SHs; it is like SH
are forced to buy shares of stock of the corp
SALE OF SHARES
- Primary sales of shares – unissued stock
- Secondary sales of shares – sale of already issued stock
o Resale
The endorser is always the SH; or the attorney-in-
fact
o Sale in stock exchange
Purchase by corp of its own shares
- The corp should have adequate amount of unrestricted earnings to
support the cost of redemption/repurchase, except –
o For redeemable shares or reqcquisition pursuant to the
conversion right of convertible shares, expressly provided
for in its AoI and certificates of stock;
o When shares are reacquired to effect a decrease in the
capital stock of the corp as approved by SEC
o When the shares are reacquired by a close corp pursuant
to the order of the SEC acting to arbitrate a deadlock
Santamaria vs. HSBC [1951; ???]
- If the shares of stock become valueless, the negligent party bears
the loss [oblicon & negotiable instruments principle]
- Santamaria delivered the stock certificates to a 3rd person w/
endorsement [Santamaria was negligent]
Delos Santos & Astraquillo vs. Republic [1955; compare w/ Santamaria]
Corpo Glen Aid
 - Shares of stock are personal property and may be transferred by
endorsement of the corresponding stock certificate, coupled with
its delivery. However, the transfer shall not be valid, except as b/w
the parties, until it is entered and noted upon the books of the corp
- Where the plaintiffs were, at the time of the alleged sales in their
favor of the shares stock in question, aware of sufficient facts to
put them on notice of the need of inquiring into the regularity of the
transactions and the title of the opposed vendors, they cannot
validly claim, against the registered SH, the status of purchasers in
good faith
Chua Guan vs. Samahang Magsasaka, Inc. [1935]
- Chattel mortgage must be registered in the Register of Deeds of
the place where the principal office of the business is AND where
the personal property may be found
- Shares of stock is deemed to be located in the principal place of
business of the corp
- W/ regard to pledge, see NCC
POWERS & FUNCTIONS of the SEC [RA 8799; Securities Regulation
Code; ]
Regulator and adjudicative [Sec. 70]
PSE vs. CA, Puerto Azul [1997]
- The SEC is the entity with the primary say as to w/n securities,
including shares of stock of a corp, may be traded or not in the
stock exchange
- The PSE’s management prerogatives are not under the absolute
control of the SEC, for the PSE is, after all, a corp authorized by its
corporate franchise to engage in its proposed and duly approved
business
- Notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE’s decision in matters
of application for listing in the market, the SEC may exercise such
power only if the PSE’s judgment is attended by bad faith
- As the primary market for securities, the PSE had established its
name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities; The concept of gov’t
absolutism is a thing of the past, and should remain so
- The SEC had acted arbitrarily in arrogating unto itself the discretion
of approving the application for listing of Puerto Azul Land, Inc.,
since this is a matter addressed to the sound discretion of the PSE,
33
a corporate entity, whose business judgments are respected in the
absence of bad faith
- The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the PSE is not
for the SC to determine, but is left to the sound discretion of the
SEC
- In registration of securities w/ SEC, full disclosure [policy] of
material facts and information is applied [Sec. 12]
- PSE continues to adopt the suitability rule [they have certain
standards]
- Atty. Barot – the more monopolistic power the entities have, the
more State invention is going to happen – PSE is a monopoly
o PSE is an equity securities exchange company [stocks];
PDEX is a debt securities exchange [bonds]
Securities
Registration [Secs 8 & 12]
- 8.1 – Securities shall not be sold/offered for sale or distribution w/in
the Philippines, w/o a registration statement duly filed with and
approved by the Commission; applies only to shares offered to the
PUBLIC
Exempt Securities [Sec. 9]
Exempt Transactions [Sec. 10]
- 10(e) talks about shares w/ pre-emptive right
o If not all shares subject to pre-emptive right are bought;
underwriting – group of banks commit that whatever is not
bought will be bought by them w/ charges/fees against the
corp
Carlos vs. Mindoro Sugar [1932]
- Mindoro Sugar [bankrupt entity] issued “junk” bonds, and
transferred all its assets to Philtrust; Philtrust sold the bonds to the
public and guaranteed them
- SC – even a holder of the bonds selling it to public are registerable
under SRC
o But since Philtrust is a bank, it is exempted under Sec. 9 in
re S8 of the SRC w/ regard to registration
Securities Exchanges, Brokers, Dealers – [Secs 3, 33]
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 - 3.3 – Broker – person engaged in the business of buying/selling o Periodically/quarterly reports; and
securities for the account of others o Current reports on significant developments [current
- 3.4 – Dealer – any person who buys/sells securities for his/her own events]
account in the ordinary course of business.
Independent Directors – Sec. 38
- 3.7 – Exchange – organized market place or facility that brings
together buyers and sellers and executes trade of securities and/or - At least 2 independent directors are required
commodities.
MERGERS & ACQUISITIONS [M&As] Corpo Code Secs 76-80
- 33 – registration of exchanges
Sec. 76 – statutory merger – ex. Corp A & Corp B
Fraud, Manipulation, Insider Trading – [Secs 3.8, 24, 26, 27]
- Consideration
Insider trading – selling of shares prior to the bad news/info being publicly
o In merger – Corp A [surviving corp] issues shares to SHs
announced; but what if it is beneficial [buying of shares b/c of a prospect
of Corp B [absorbed company]
rise of shares’ value]? Atty. Barot thinks the rules must be amended
o In consolidation – Corp C is formed; Corp C issues shares
Protection of Investors to SHs of Corp A & Corp B
o In sale of assets [Sec. 40] – the subject is the assets;
Tender offer – Sec. 19
consideration is –
- A tender offer is an offer by the acquiring person to SHs of a public Money
company for them to tender their shares therein on the terms Stocks of Corp A [buying corp] to Corp B [B
specified in the offer [Cemco] becomes SH of Corp A]
- To protect minority SHs against any scheme that dilutes the share Bonds of Corp A to Corp B
value of their investments. It gives the minority SHs the chance to Corp A assumes liabilities of Corp B
exit the company under reasonable terms, giving them the
Sec. 77 – Mergers – approvals needed
opportunity to sell their shares at the same price as those of the
majority SHs [Cemco] - BoDs of each corp [majority of the present BoD; each corp needs
the required majority]
Cemco Holdings vs. National Life [2007; not necessarily a good law]
- SHs of each corp [2/3 vote; even non-voting participates]
- Sec. 19 [tender offers] talks only about shares of listed companies - Regulator [if regulated]
- SEC
- SC – but even on unlisted company, tender offer may still apply b/c
of Sec 5.1(n) [powers of SEC]– Exercise such other powers as may ^ embodied in the Plan of Merger
be provided by law as well as those w/c may be implied from, or
- Corpo Code does not provide for the statement of share swap ratio
w/c are necessary or incidental to the carrying out of, the express
b/w the merging corps
powers granted the Commission to achieve the objectives and
- Share swap ratio – exchange rate of the shares of the corps that
purposes of these laws
would undergo a merger [also embodied in the plan of merger]
o A public company is defined as a corp w/c is listed on an
Relevant documents [PARC]
exchange, OR a corp w/ assets exceeding P50M and with
200 or more SHs, at least 200 of them holding not less than - Plan of merger/consolidation [BoD level]
100 shares of such company o Includes – amendment to the AoI of the surviving corp, if
any; AoI if consolidation
- Atty. Barot – registration is w/ SEC; listing is w/ PSE
- Articles of merger/consolidation [SHs level]; 2/3 vote of SHs
Disclosure rules – Sec. 17, 18, 23 representing the OCS
o Both SHs of corps whether in merger or consolidation have
- Sec. 17 – Disclosure
Appraisal Right
34
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 - Recommendation/endorsement [Regulator level; ex. BSP]
- Certificate of merger/consolidation [SEC level]
o Merger/consolidation shall be effective only upon issuance
of the certificate
Bank of Commerce vs. Radio Philippines Network, Inc. [2014]
- W/n Bank of Commerce is liable for the debts & liabilities of the
transferor in re sec. 80(3) assuming of liability by the surviving corp
o Only recommendation/endorsement has been complied
with; cannot be considered a merger; Bank of Commerce
cannot be held liable
- P&A [purchase & assumption] / Asset Purchase Agreement [Sec.
40]; for the assuming corp to be liable –
o The purchaser expressly or impliedly agrees to assume
such debts;
o Transaction amounts to a consolidation/merger
o Purchasing corp is merely a continuation of the selling
corp; and
o Transaction is entered into fraudulently in order to escape
liability for such debts
Merger vs. consolidation
- Merger – 1 corp is absorbed by the surviving corp
o Absorbed corp has to give up their shares [dissolved] for
the shares of the surviving corp
- Consolidation – both corps ceases to exist [dissolved] and form 1
new corp [consolidated corp]
o Shares of both corps are given up for new shares
- In both, there is no liquidation of the assets of the dissolved corps
- In both, the surviving/consolidated corp assumes the liabilities of
the dissolved corps, regardless of whether the creditors have
consented or not to such merger/consolidation
- Parties to a merger/consolidation – constituent corps
- Transfer/exchange of shares pursuant to a merger/consolidation is
exempt from registration under the Securities Act
Nell vs. Pacific Farms [1965]
- Generally, where one corp sells or otherwise transfers all of its
assets to another corp, the latter is not liable for the debts and
liabilities of the transferor, except:
o (1) where the purchaser expressly or impliedly agrees to
assume such debts;
35
o (2) where the transaction amounts to a
consolidation/merger of the corps;
o (3) where the purchasing corp is merely a continuation of
the selling corp; and
o (4) where the transaction is entered into fraudulently in
order to escape liability f or such debts
P&A [purchase & assumption] / Asset Purchase Agreement [Sec. 40];
requirements –
- BoD resolution of both corps [to buy/sell]
- SHs – only resolution of selling corp is required; only SHs of selling
corp have appraisal rights
- Recommendation [if applicable]
APPRAISAL RIGHT [Sec. 81] – a SH who dissented and voted against
the proposed corporate action may choose to get out of the corp by
demanding payment of the fair value of his shares
Instances of appraisal right [sec. 81]– [ASIM]
- Amendment of AoI w/c has the effect of –
o Changing/restricting the rights of any SH or class of
shares;
o Authorizing preferences in any respect superior to those of
outstanding shares of any class; or
o Extending/shortening the term of corporate existence
- Sale or other disposition of substantially all corporate assets
- Investment in another business or corp for EITHER primary or
secondary purpose [Sec. 42]
o If the investment is neither for the primary nor secondary
purpose, it is not covered by the appraisal right; SH can
assail such act for being ultra vires
- Merger & consolidation
Sec. 81(1) – mere increase in capital stock does not give rise to the
exercise of appraisal right; EXCEPT – if increase in capital stock includes
preference superior to outstanding shares; ex. –
o Non-voting preferred – 500 shares
o Voting common – 500 shares
- If 500 preferred is increased to 1000, it won’t give rise to appraisal
right
- However, if preferred shares are pegged at 10% dividend rate, and
the additional shares will have 15% dividend rate, then it gives right
to appraisal right
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2 Elements
- SH must dissent either by attending SH meeting or via his proxy
[agent]
- There must be unrestricted retained earnings to cover it
Marcus vs. RH Macy [US case; 1947]
- Here, the ground for the exercise of appraisal right was 81(1) –
o Here, amendment granting the right to vote to holders of
preferred shares; holders of common shares will have
Reminders
weaker voting power [restricting the rights of any SH]
Sec. 82 – 86 – how right is exercised
- SH mtg – Jan. 1
- Stock cert. notation – Jan. 10
- Written demand – Jan. 30
o b/w Jan. 1 – 30, he receives dividend; he has right to vote
- Starting Jan. 31 – voting & dividend rights are suspended
- How price is determined
Docs required
o Corp may offer a price, SH accept; or SH may offer, corp
accept [consensual]
o Appraisal Team [dispute resolution]
o Courts
- March 1 – award date
- March 30 – payment; voting & dividend rights are lost; shares
become treasury shares [there must be unrestricted retained
earnings in re trust fund doctrine]; so if there is no URE, tell the
Increase of capital stock
dissenting SH that do not dissent, b/c he will not get paid
- If SEC does not approve the merger, all things go back to where
they come from; even if the shares have already become part of
the treasury shares, the previous holder will then be again a SH of
the corp
CORPORATE POWERS & CHARTER AMENDMENTS
Contract theory – the AoI is a contract b/w or among –
- SHs
- Corp & State
o How the State acts – Congress, through new legislations,
has the power to make changes in existing corps
o Corps may opt for dissolution if they do not want the new
law
- Corp & SHs
Grounds for rejection [see p. 3]
36
Effectivity of amendment
- Upon approval thereof by the SEC
o But approval/rejection by the SEC must be made w/in 6
months of the filing of the amendment, otherwise it shall
take effect even w/o such approval, unless delay is due to
a cause attributable to the corp
o In the absence of approval/rejection w/in 6 months, the
amendment takes effect as of the date of filing
- Sec. 16 in re Sec. 42 – corp’s power to add a purpose entirely
different form its original one; however, will not automatically allow
the corp the right to invest in the new business w/o approval of the
SHs, unless the new purpose has, by the amendment, become the
primary purpose of the corp
- Amendment to increase/decrease capital stock and
extend/shorten corporate term require a meeting
- Certificate of Amendment – amended AoI [from the corp]
- Certificate of Increase [Sec. 38]
o Treasurer’s Affidavit
- Recommendation [in case of corps governed by special laws]
- Certificate of Filing of Amendment of AoI [from SEC]
o Certificate of Increase/Decrease
- Cannot take effect w/o prior approval by SEC; approval – issuance
of a cert. that the cert. of increase/reduction of capital stocks has
been duly filed w/ SEC
- Cert. of increase/reduction must be attached BY THE SEC to the
orig. AoI; corp need not file a copy of the amended AoI
- Cert. of increase will not be accepted unless accompanied by the
treasurer’s affidavit attesting tot the matters required by law
- Sec. 38 – requires that at least 25% of the PROPOSED
INCREASE must be subscribed and 25% of such subscription
must be paid
- 3 ways of increasing stock
Par value increased w/o increasing # of shares
# of shares increased w/o increasing par value
Increase in both
o ^ no appraisal right, but SHs have preemptive right; but if
the increase would result in the creation of shares w/
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 preferences superior to those of existing one, a dissenting - Capital stock divided into shares; and
SH would have appraisal right - Authorized to distribute to its SHs dividends out of its surplus profits
on the basis of the shares held
Reduction of capital stock – the corp may have a capital deficit w/c may be
o Even if such distribution of surplus profits be at the time of
wiped out by such reduction thus creating the possibility of earnings out of
the dissolution, it is still a stock corp
w/c future dividends may be paid
Non-stock corp –
Phil. Trust Co. vs. Rivera [1923]
- Unable to declare/distribute dividends from surplus profits [Sec. 87;
- Filing of the certificate with the Bureau of Commerce and Industry
main difference/distinction from stock corp]
was not complied with; hence, no valid reduction of capital stock;
- AoI/by-laws may provide for the distribution of its assets among its
as against creditors a reduction of the capital stock can take place
members upon its dissolution
only in the manner an under the conditions prescribed by the
- May have shares of stock [sec. 87]
statute or the charter or the AoI; strict compliance w/ the statutory
- Sec. 15 [forms of AoI] refers to both stock & non-stock corps
regulations is necessary
o Art. 7 [no-par shares] – can be adopted by non-stock corps
- Decrease in capital stock shall not prejudice the rights of the
- Sec 88 – Purposes [not exclusive list]
creditors – there can be no reduction of capital stock w/c will in
o Religious, educational, charitable, trade, agricultural, etc.
effect release the SHs from the payment of the balance of their
subscription if it will adversely affect the right of creditors in CIR vs. Club Filipino [1962]
collecting their claims
- The bar inside the club was used incidental to its primary purpose
QUASI-REORGANIZATION [???] [bowling, golf, etc.]; the earnings earned therefrom is only
incidental to its primary purpose
Ex. –
- A non-stock non-profit corp is not prohibited from realizing profits,
Corp A
provided –
- Assets – P800k
o It is only incidental to its primary purpose
- Liabilities – 0 o No distribution of its profits to its members
- Capital stock – P1M
Corporations w/ special charter [Sec. 4]
o Shares – 100k
o Par – P10 - Governed by special charters made by Congress, supplemented
- Deficit – P200k by the provisions of the Corp Code
- Public interest is involved
1st part – par will be decreased to P1 = 100k shares = P100k capital stock;
- GOCCs
in re art. 7 to be amended
Close corporation [Sec. 96]
- APIC = P900k – P200k [deficit] = P700k
o Dividends must be earned income; APIC is contributed - Restrictions on transfer of shares
capital, not counted as earnings - # of SHs is limited to 20
- Normally used in Joint Ventures
2nd part – [???]
Special corps [Title XIII]
All these in compliance with Sec. 38
- Educational corps [Secs. 106-108]
TYPES OF CORPORATIONS
- Religious corps
Stock corp; 2 Elements – o Corporation sole [Secs. 110, 111]
o Religious societies [Sec. 116]
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NON-STOCK CORPORATIONS Sec. 3 & 87; Title XI
Legal relevance of characterizations of corps into stock & non-stock corp
- Applicability of mandatory and permissive [default rule] laws
Sec. 93 – While SHs’ meeting must be conducted in the principal place of
business of the corp; members may meet anywhere, provided it is w/in the
Phil. and there is notice [date, time, place]
Sec. 92 – AoI may provide for more than 15 members in the BoT
Default rule – the board in a non-stock corp is called Board of Trustees;
Sec. 138 allows any other name
Voting rights [Sec. 89] –
- Default rule: 1 member, 1 vote
o But AoI or by-laws may broaden, limit, or deny voting rights
Broaden [ex. voting shares]
- Sec. 6, 6th par. [where non-voting shares are entitled to vote]
applies to non-voting shares of non-stock corps
- Sec. 24 [ELECTION of TRUSTEES] –
o Majority of the members entitled to vote must be present
[they may use proxy]
o Default rule – members may cast as many votes as there
are trustees to be elected but may not cast more than 1
vote for 1 candidate
Unless otherwise provided in the AoI/by-laws
AoI or by-laws of non-stock corps may even allow
cumulative voting to apply
o In stock corps, cumulative voting is mandatory
Sec. 15, art. 8 – in practice, in re 25-25 rules, the 2nd 25 does not apply to
non-stock corps; in practice, full payment of subscription is almost always
required
While non-stock corps are prohibited from distributing dividends out of
surplus profit, it is still possible that members may earn profit; through
secondary sale of shares [Makati Sports Club case]
Sec. 92 – election and term of trustees
- Default rule – trustees elect officers
o The AoI/by-laws/BoT may provide that members may elect
officers
- In stock corps, it is mandatory that the directors elect the officers
- To be elected as trustee, one must be a member
38
Doctrine of piercing the corporate veil applies to non-stock corps
Sec. 28 [removal of trustees] –
- May be removed from office by vote of at least 2/3 of the members
entitled to vote at a regular/special meeting w/ notice to members
for such purpose of removal
- Special meeting for such purpose must be called by the Sec. upon
written demand of the majority of the members entitled to vote
- Removal may be w/ or w/o cause; provided removal w/o cause may
not be used to deprive minority SHs/members of the right of
representation to w/c they may be entitled under Sec. 24 [election
of Ds & Ts]
Sec. 31-32 [obligations & dealings of Ts w/ the corp] applies to non-stock
corps [see p. 13 & 15, respectively]
Sec. 33 [contracts b/w corps w/ interlocking Ds] – notwithstanding the lack
of mention, it still applies to non-stock corps
Sec. 34 [disloyal Ds] – also applies to non-stock corps
Merger/consolidation also applies to non-stock corps
Appraisal right does not apply to non-stock corps – payment of appraisal
are rights come from unrestricted retained earnings; since, non-stock corps
don’t have URE, there can be no appraisal rights
Term of office of Trustees – 3 years
- Default rule – election of Ts is made annually; the term of 1/3 of
the Board expires annually; meaning, 1/3 of the Board will be
elected annually
o But AoI/by-laws may provide otherwise
SPECIAL CORPORATIONS
Educational corps [Secs. 106-108]
- Governed by [in order] –
o Special laws
o Special provisions of Corp Code
o General provisions of Corp Code
- May be stock / non-stock
- At least 60% of the capital stock must be owned by Filipino citizens;
Congress may increase this requirement [Consti, Sec. 4(2)];
control & administration of these corps must be vested exclusively
in Phil. citizens; no alien may be elected as member of the Board,
nor be appointed as principal thereof
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Sec. 107 similar w/ Sec. 17 – favorable recommendation of Ministry of - Family businesses
Education & Culture is required before approval of the AoI/by-laws by the - Joint venture corps [2 or more distinct entities]
SEC
Requirements [Sec. 96; 4 mandatory requirements]; always a stock corp
Sec. 108 [Board of Trustees] – cannot be less than 5, or more than 15;
- No more than 20 SHs
must be multiples of 5 [5,10,15; applicable only to educational non-stock
- Stocks are subject to one or more specified restrictions on transfer
corps]
- Shall not list in any stock exchange or make any public offering of
- Term of office – 5 years; 1/3 of the Board will be elected every year any of its stock
[default rule]; but the corp may express in their AoI/by-laws - Shall not be deemed a close corp when at least 2/3 of its voting
otherwise stock or voting rights is owned or controlled by another corp w/c is
- Unless otherwise provided in the AoI/by-laws, the BoT of not a close corp
educational institutions, as soon as organized, so classify
Sec. 98 [Validity of restrictions on transfer of shares; right of first refusal;
themselves that the term of office of 1/5 of their number shall expire
ROFR] – formal and substantial requirements
every year
- For educational institutions organized as stock corps, the number - Formal – must appear in the AoI, by-laws, and in the certificate of
& term of Ds shall be governed by the provisions on stock corps stock; otherwise, not be binding on any purchaser in good faith
- Substance – shall not be more onerous than granting the existing
Preemptive right in re non-stock corps
SHs or the corp the option to purchase the shares of the
Default rule [Sec. 39] – they have such right; unless denied in AoI transferring SH w/ such reasonable terms, conditions or period
stated therein
Religious corps
Types of share transfer restrictions [does not only apply to close corps]
Corporation sole [Secs. 109-115]
- Absolute; lock-up [generally not allowed]
- Purpose – administering & managing the affairs, property, and
- Put/call options –
temporalities of the religious institution
o Put – seller may compel buyer to buy
- No Trustee or Director; only 1 corporation sole [bishop, priest,
o Call – buyer may compel seller to sell
minister, or presiding elder of a religious sect, etc.]
- Right of first refusal [ROFR]
- Has a different kind of AoI
o AoI may provide for 1st, 2nd, so on rounds to exercise such
- No annual SH meeting to elect a corp sole; has its own rules on
right; ex. –
succession; succession must be filed w/ the SEC
19 shares to be sold to the other SHs; 10 was
- It is not the nationality of the corp sole that determines the
bought in 1st round; those 10 buyers may further
nationality of the corp, but the nationality of its members
participate in the 2nd or 3rd round until the shares
Religious society [Sec. 116] have all been bought
o Pre-emptive right vs. ROFR
- Same purpose ^; state will not step in to rule on religious matters
Both pro rata
- AoI does not follow Sec. 15 [form of AoI]; it has its own
In pre-emptive right, corp is the seller; in ROFR, the
- BoT – 5-15 members
SH sells
- At least 2/3 of its membership must have given their written
In pre-emptive right, corp’s value increases; in
consent or have voted to incorporate, at a duly convened mtg. of
the body ROFR, the corp’s value stays the same
o Right of first offer – no buyer yet, but there are already
CLOSE CORPORATIONS [Sec. 96] conditions; contractual obligation by the owner of an asset
Possible purposes to a rights holder to negotiate the sale of an asset w/ the
rights holder before offering the asset for sale to 3rd parties.
39
Corpo Glen Aid
 If the rights holder is not interested in purchasing the asset
or cannot reach an agreement w/ the seller, the seller has
no further obligation to the rights holder and may sell the
asset freely
- Tag-along rights – [similar w/ put] – The right assures that if the
majority SH sells his stake, minority holders have the right to join
the deal and sell their stake at the same terms & conditions as
would apply to the majority SH. This right protects minority SHs
- Bring-along rights – [similar w/ call] – The right assures that if the
majority SH sells his stake, minority holders are forced to join the
deal. This right protects majority SHs
- No restrictions
Permissive provisions [Sec. 97] – AoI of close corp may provide for –
- Classification of shares or rights and the qualifications for owning
or holding the same and restrictions on their transfers
o Ex. – family line
- Classification of Ds into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock
o May make cumulative voting applicable for each class
- Quorum for close corps
o Usually, it is required that each class of Director
representing a class of shares should be present
- AoI of a close corp may provide that the business of the corp shall
be managed by the SHs of the corp rather than by a BoD
o Close corp need not have BoD
- AoI may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by
the SHs, instead of by the BoD
Sec. 98 – 3 docs embodying the restriction on transfer of shares
- AoI
- By-laws
- Certificate of stock
Sec. 99 [Effects of issuance or transfer of stock in breach of qualifying
conditions] –
- If a stock certificate of any close corp conspicuously shows a
restriction on transfer of stock of the corp, the transferee of the
stock is conclusively presumed to have notice of the fact that he
has acquired stock in violation of the restriction, if such acquisition
violates the restriction
40
o If there’s violation, the corp may, AT ITS OPTION, refuse
to register the transfer of stock in the name of the
transferee
^ will not apply if consent of all SHs is had, or AoI
is amended
Sec. 101 – When board meeting is unnecessary; Ds of a close corp may
validly act even w/o a meeting if –
- Before/after such action is taken, written consent thereto is signed
by all the Ds; or
o Usually, the signing is made after [for safety purposes]
- All the SHs know of the action and make no written objection
thereto;
- Such Ds have been accustomed to do so w/ the acquiescence of
all SHs; or
- All Ds have express/implied knowledge of the action and none of
them promptly objects in writing
Sec. 102 – Pre-emptive right in close corps
- Difference w/ ordinary corp – the 2 exceptions in sec. 39 is not
applicable; pre-emptive right in close corps is broader
- Exceptions in sec. 39
o Property needed for corp purposes
o Payment of a previously contracted debt
- The preemptive right of SHs in close corps is broadened to include
all issues, w/o exception, unless otherwise denied/limited by the
AoI
Sec. 105 – withdrawal of SH; versus ordinary corp
- for ANY reason, SH of a close corp may compel the corp to buy his
share
o In ordinary corps, SHs may compel the corp only if
appraisal right is applicable
- ^^ provided, when the corp has sufficient assets to cover its debts
and liabilities exclusive of capital stock
o In ordinary corps, URE is required
Sec. 104 – Deadlocks [the votes BoD/SHs required for any corporate
action cannot be obtained, w/ the consequence that the business and
affairs of the corp can no longer be conducted to the advantage of the SHs]
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 - The SEC, upon written petition by any SH, shall have the power to
arbitrate the dispute; SEC has the authority to make such order as
it deems appropriate
- Among others, SEC may appoint a provisional director
o Impartial person who is neither a SH nor a creditor of the
corp or of any subsidiary or affiliate of the corp;
qualifications may further be determined by SEC; he has
all the rights & powers of a duly elected director of the corp
FOREIGN CORPORATIONS
Sec. 123 [Definition & rights of foreign corps]
- One formed, organized or existing under any laws other than those
of the Phil.; and whose laws allow Filipino citizens and corps to do
business in its own state
- Shall have the right to transact business in the Phil. after it shall
have obtained a license to transact business in this country in and
a certificate of authority from the appropriate gov’t agency
o Certificate of reciprocity – will have to pass through the
Phil. consular officer who has jurisdiction in the alien
country
Sec. 133 [Doing business w/o a license] –
- Not permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Phil.
- But the foreign corp may be sued
Important concepts [check cases below]
- Doing business
- Isolated transaction
Marshall-Wells Co. vs. Elser [1924]
- A state may restrict the right of a foreign corp to engage in business
w/in its limits, and to sue in its courts
Columbia Pictures vs. CA [1996]
- It is not the absence of the prescribed license but “doing business”
in the Phil. w/o such license which debars the foreign corp from
access to our courts
- No general rule or governing principles can be laid down as to what
constitutes “doing” or “engaging in” or “transacting” business. Each
case must be judged in the light of its own peculiar environmental
circumstances
41
- The true tests, however, seem to be whether the foreign corp is
continuing the body or substance of the business or enterprise for
w/c it was organized or whether it has substantially retired from it
and turned it over to another
- Jurisprudence has, however, held that the term implies a continuity
of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of
some of the functions normally incident to or in progressive
prosecution of the purpose and subject of its organization
- There is no showing that pets are doing, transacting, engaging in
or carrying on business in the Philippines as would require
obtention of a license before they can seek redress from our courts
- A foreign corp will not be regarded as doing business in the State
simply because it enters into contracts with residents of the State,
where such contracts are consummated outside the State
- The mere institution and prosecution or defense of a suit, do not
amount to the doing of business in the State
General Garments vs. Dir of Patents [1971]
- A foreign corp w/c has never done business in the Phil. and w/c is
unlicensed and unregistered to do business here, but is widely and
favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to
maintain an action in the Islands
Le Chemise Lacoste vs. Fernandez [1984]
- Pet is not doing business in the Philippines. Rustan is actually a
middleman acting and transacting business in its own name and/or
its own account and not in the name or for the account of the pet
- A foreign corp not doing business in the Phil. needs no license to
sue in the Phil. for trademark violations
Litton Mills vs. CA [1996]
- A court need not go beyond the allegations in the complaint to
determine w/n a defendant foreign corp is doing business for the
purpose of R14, S14 [Service upon defendant whose identity or
whereabouts are unknown]
- ”Doing Business” – where a single act or transaction of a foreign
corp is not merely incidental or casual but is of such character as
distinctly to indicate a purpose on the part of the foreign corp to do
other business in the state, such act will be considered as
constituting doing business
Corpo Glen Aid
 - A foreign corp’s act of purchasing soccer jerseys is w/in its ordinary
course of business where it is engaged in the manufacture of
uniforms
- Service of summons made through a foreign corp’s agent in the
Phil. is valid
- No voluntary appearance by a foreign corp can be inferred from
the acts of a lawyer who filed an answer for such corp, where the
latter does not claim to have directly conferred w/ the former, there
is no evidence to show that he notified it of his appearance in its
behalf, or that he furnished it with copies of pleadings or the answer
he filed
Merryl Lynch Futures, Inc. vs. CA [1992]
Mentholatum vs. Mangaliman [1941]
- Concept of continuity in business transactions; continuity test
- No general rule or governing principles can be laid down as to what
constitutes "doing" or "engaging in" or "transacting" business.
Top Weld Manufacturing, Inc. vs. ECED [1985]
Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be
whether the foreign corp is continuing the body or substance of the
business or enterprise for w/c it was organized or whether it has
substantially retired from it and turned it over to another. The term
implies a continuity of commercial dealings and arrangements, and
contemplates to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its
organization
- The Mentholatum Co., Inc., being a foreign corp doing business in
the Phil. w/o the required license, it may not prosecute this action
for violation of trade mark and unfair competition. Neither may the
Philippine-American Drug Co., Inc. maintain the action here for the
reason that the distinguishing features of the agent being his
representative character and derivative authority, it cannot now, to
the advantage of its principal, claim an independent standing in
court
Agilent Technologies Singapore Ltd. v Integrated Silicon Technology
Philippines Corporation [2004; IMPORTANT]
- The principles regarding the right of a foreign corp to bring suit in
Phil. courts condensed in 4 statements:
o (1) if a foreign corp does business in the Phil. w/o a license,
it cannot sue before the Phil. courts;
o (2) if a foreign corp is not doing business in the Phil., it
needs no license to sue before Philippine courts on an
Cargill, Inc. vs. Intra Strata Assurance Corporation [2010]
42
isolated transaction or on a cause of action entirely
independent of any business transaction
o (3) if a foreign corp does business in the Phil. w/o a license,
a Phil. citizen or entity which has contracted w/ said corp
may be estopped from challenging the foreign corp’s
corporate personality in a suit brought before Phil. courts;
and
o (4) if a foreign corp does business in the Phil. w/ the
required license, it can sue before Philippine courts on any
transaction.
- Estoppel – a foreign corp doing business in the Phil. may sue in
Phil. courts although not authorized to do business here against a
Phil. citizen who had contracted w/ and been benefited by said corp
- It is incumbent upon the local counter-party to check w/n a foreign
corp is licensed or not; if it continues to deal w/ a foreign corp w/o
a license despite such knowledge, and tries to raise as a defense
the lack of the foreign corp’s personality, it will not be upheld [in
pari delicto]
- A contract entered into by a Phil. corp w/ a foreign corp for
manufacture and marketing of the latter’s product is illegal if the
same was not previously licensed with the BOI under R.A. 5455.
For being in pari delicto, the Phil. corp cannot ask our courts to
prohibit the foreign corp from terminating their contract and giving
the license to produce and market its products to another
- A foreign corp w/ a settling agent in the Phil. w/c issued 12 marine
policies covering different shipments to the Phil., and a foreign corp
w/c had been collecting premiums on outstanding policies were
regarded as doing business here.
- ^ The acts of these corps should be distinguished from a single or
isolated business transaction or occasional, incidental and casual
transactions w/c do not come within the meaning of the law. Where
a single act or transaction, however, is not merely incidental or
casual but indicates the foreign corp’s intention to do other
business in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting” business in the
Phil.
- A foreign corp doing business in the Phil. must secure a prior
license from the BOI under R.A. 5455
Corpo Glen Aid
 - Where a foreign corp does business in the Phil. w/o the proper
license, it cannot maintain any action or proceeding before Phil.
Courts
- The determination of whether a foreign corp is doing business in
the Phil. must be based on the facts of each case; Court gives
emphasis to the importance of the element of continuity of
commercial activities to constitute doing business in the Phil.
- To constitute “doing business,” the activity undertaken in the Phil.
should involve profit-making; “Soliciting purchases” has been
deleted from the enumeration of acts or activities which constitute
“doing business.”
- A foreign corp that merely imports goods from a Phil. exporter, w/o
opening an office or appointing an agent in the Phil. is not doing
business in the Phil.
Antam Consolidated vs. CA [1986]
- Where the 3 transactions indicate no intent by foreign corp to
engage in a continuity of transactions, they do not constitute doing
business in the Phil.
- 1 agreement does not constitute continuity; it is an isolated
transaction
- Foreign corp. not doing business in the Phil., not required to obtain
a license to do business to have capacity to sue
DISSOLUTION – Title XIV
Instances/methods of dissolution –
- Expiration of corporate term
- Merger [absorbed corp]; consolidation [both corps]
- By voluntary surrender
- Revocation of its registration or certificate of incorporation by SEC
o Failure to organize & commence business w/in 2 years
from incorporation [not automatic; there’s a procedure w/
SEC to declare it to dissolve]
o Not filing of reportorial documents w/ the SEC
o Non-compliance w/ 25-25 rule
o Continuously inoperative for a period of at least five (5)
years
o Etc.; grounds provided by law
o In all cases of revocation, notice & hearing are required
- Quo warranto proceedings
Financing Corporation of the Phil. vs. Teodoro [1953]
43
- General rule – minority SHs of a corp cannot sue and demand its
dissolution
o Exception – if such minority are unable to obtain redress
and protection of their rights w/in the corp; wherein the
intervention of the State, for one reason or another, cannot
be obtained, as when the State is not interested because
the complaint is strictly a matter b/w the SHs
Sec. 120 [Dissolution by shortening corporate term] –
- Amend AoI
- SEC requires tax clearance [from BIR]
Rules –
- If the shortened term expires before the approval by SEC, the corp
will dissolve only upon approval by SEC
- If SEC approves before such shortened term expires, dissolution
takes effect only upon the expiration of such shortened period
- If SEC fails to act w/in 6 months from the filing of the amended AoI
and the shortened term does not expire until after 6 months, corp
will dissolve when the term expires
o Unless the lack of action on the part of SEC was due to the
fault of the corp, in w/c case, corp will not dissolve even
after the expiration of the shortened period [in re Sec. 16,
last par.]
- When shortened term expires before the end of 6-month period,
corp will not be dissolved until the end of the 6-month period
o Unless the lack of action on the part of SEC was due to the
fault of the corp, in w/c case, corp will not dissolve even
after the expiration of the shortened period [in re Sec. 16,
last par.]
- Appraisal right is available to a SH dissenting to the
extension/shortening of the corporate term
Ex. – Corp amended AoI – corporate term until Dec. 31, 2016
- If SEC approves on Nov. 1, corp will be dissolved on Dec. 31, 2016
[Sec. 120, last sentence]
- If SEC approves on Feb. 1, 2017, corp will dissolve on Feb. 1, 2017
Sec. 118 [Voluntary dissolution where no creditors are affected] –
Corpo Glen Aid
 - Directors’ certificate [signed by Ds & corp-sec]
o Board Resolution [majority vote]
o SH resolution [2/3 of OCS vote]
- SEC then issues certificate of dissolution
Sec. 119 – [Voluntary dissolution where creditors are affected] –
- Petition for dissolution
o Board resolution [majority vote]
o SH resolution [2/3 of OCS vote]
- Claims/Hearing
- Judgment
- Not exclusive forum for instituting claims against the corp
China Banking Corp. vs. Michelin [1933]
- Appointment of a receiver upon voluntary dissolution is permissive,
not mandatory
- If Michelin wanted to be a preferred creditor, it could file for
involuntary dissolution and invoke provisions on preference &
concurrence of credit [credtrans]
Republic vs. Bisaya Land Transportation Co., Inc. [1978]
- SC found that the controversy b/w the parties was more personal
than anything else and did not at all affect public interest – quo
warranto dissolution of the private corp opposed by the OSG
- Solicitor General’s power to discontinue State’s litigation and to
have quo warranto against private corp dismissed is subject to
court approval and exceptions [ex. – where the answer sets up a
counterclaim which cannot stand independently of the main action]
Sec. 122 [liquidation after dissolution] –
- After dissolution, corp shall nevertheless be continued as a body
corporate for 3 years, for the purpose of prosecuting/defending
suits by or against it and enabling it to settle and close its affairs,
to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing its business
- During the 3 years, corp may convey its properties to trustees
[trust] –
o Trustor – corp
o Trustee – recipient of the assets
44
o Beneficiary – claimants [SHs, members, creditors and
others in interest]
- Any asset distributable to any creditor/SH/member who is unknown
or cannot be found shall be escheated [transferred] to the
city/municipality where such assets are located
- Except by decrease of capital stock and as otherwise allowed by
the Code, no corp shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts &
liabilities
Gonzales vs. Sugar Regulatory Administration [1989]
- The termination of the life of a juridical entity does not by itself imply
the diminution or extinction of rights demandable against such
juridical entity
- The abolition of the PHILSUCOM and the transfer of its assets to
the Sugar Regulatory Administration by virtue of EO 18 should not
impair contractual obligations entered into by PHILSUCOM before
its abolition; claimants of Philsucom have a right to follow
Philsucom’s assets in the hands of the Sugar Regulatory
Administration
- SC – To avoid such a result, we believe and so hold that should
the assets of Philsucom remaining in Philsucom at the time of its
abolition not be adequate to pay for all lawful claims against
Philsucom, respondent SRA must be held liable for such claims
against Philsucom to the extent of the fair value of assets actually
taken over by the SRA from Philsucom, if any. To this extent,
claimants against Philsucom do have a right to follow Philsucom’s
assets in the hands of SRA or any other agency for that matter
Pepsi-Cola Products Phil. Inc., vs. CA [2004]
- If the 3-year extended life has expired w/o a trustee or receiver
having been expressly designated by the corp, w/in that period, the
BoD/T itself, may be permitted to so continue as “trustees” by legal
implication to complete the corporate liquidation
National Abaca & Other Fibers Corporation vs. Pore [1961]
- In the absence of statutory provision to the contrary, pending
actions by or against a corp are abated upon expiration of the
period allowed by law for the liquidation of its affairs
Corpo Glen Aid
 - The 3-year period of liquidation extends beyond that time by
transferring of corporate assets to a trustee [here, the Board of
Liquidators]
Republic vs. Marsman Development Company [1972]
- While Sec. 77 of the Corporation Law provides for a 3-year period
for the continuation of the corporate existence of the corp for
purposes of liquidation, there is nothing in said provision w/c bars
an action for the recovery of the debts of the corp against the
LIQUIDATOR thereof, after the lapse of the said three-year period
Tan Tiong Bio vs. CIR [1962]
- The creditor of a dissolved corp may follow its assets once they
passed into the hands of the SHs
- That the hands of the government cannot, of course, collect taxes
from a defunct corp, it loses thereby none of its rights to assess
taxes which had been due from the corp, and to collect them from
persons who, by reason of transactions w/ the corp, hold property
against which the tax can be enforced and that the legal death of
the corp no more prevents such action than would the physical
death of an individual prevent the gov’t from assessing taxes
against him and collecting them, from his administrator who holds
the property w/c the decedent had formerly possessed
- A corporation sole is already a trustee; when dissolved, another
trustee MUST be named to take over; in ordinary corp,
appointment of trustee is permissible
- W/ regard to educational corps, it depends whether it is a stock or
non-stock [pertinent provisions apply]
Dissolution of a foreign corporation [Sec. 136]
- Withdrawal of license; no certificate of withdrawal shall be issued
by the SEC unless all the ff. requirements are met –
o All claims which have accrued in the Phil. have been paid,
compromised or settled;
o All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Phil. Gov’t have been paid; and
o The petition for withdrawal of license has been published
once a week for 3 consecutive weeks in a newspaper of
general circulation in the Phil.
- If absorbed corp is foreign, it files a petition for withdrawal of license

Dissolution of non-stock corporations [Sec. 94]

Dissolution of close corporations [Sec. 105]
- Any SH may, by written petition to the SEC, compel the dissolution
of such corp whenever any of acts of the Ds, officers or those in
control of the corp is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corp or any SH, or
whenever corporate assets are being misapplied or wasted
- When there’s deadlock, [votes required for any corporate action
cannot be obtained, with the consequence that the business and
affairs of the corp can no longer be conducted to the advantage of
the SHs] the SEC may, upon written petition by any SH, order the
dissolution of the corp

Dissolution of special corporations [Sec. 115]

45
Corpo Glen Aid
*De Leon –
- p.139 middle part #1 is a wrong!
- p.327 power to acquire shares & securities.. 1(b) 2nd sentence..
“the shares must be limited.. only natural..” is a wrong! (c) [last par.]
paid in full, no par is correct. w/ par, 25% only!
- Read 928 or 982 for remedies

46
Corpo Glen Aid