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c. To adopt and use a corporate seal; Service of summons upon persons other than those named
under than those named in the above provision is without force
d. To amend its articles of incorporation in accordance with and effect.
the provisions of this Code;
DELTA MOTOR SALES CORPORATION vs. HON.
e. To adopt bylaws, not contrary to law, morals or public JUDGE IGNACIO MANGOSING
policy, and to amend or repeal the same in accordance with
this Code; FACTS:
Herein respondent Pamintuan initiated an action against
f. In case of stock corporations, to issue or sell stocks to petitioner Delta Motors for the alleged defective Toyota car sold
subscribers and to sell treasury stocks in accordance with to him and for failure to fulfill the warranty obligation by not
the provisions of this Code; and to admit members to the repairing the car.
corporation if it be a nonstock corporation;
The summons was served on Dionisia Miranda, employee of
g. To purchase, receive, take or grant, hold, convey, sell, the petitioner. Delta Motors failed to answer the complaint and
lease, pledge, mortgage, and otherwise deal with such real was declared in default and evidence was presented and a
and personal property, including securities and bonds of decision was rendered against herein petitioner.
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily require, Petitioner filed a motion to lift the order of default and to set
subject to the limitations prescribed by law and the aside the judgment and for new trial, which was denied.
Constitution;
ISSUE:
h. To enter into a partnership, joint venture, merger, WON there was proper service of summons?
consolidation, or any other commercial agreement with
natural and juridical persons; HELD:
No. Rule 14 of the Revised Rules of Court provides:
i. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural, SEC. 13.
scientific, civic, or similar purposes: Provided, that no Service upon private domestic corporation or partnership. — If
foreign corporation shall give donations in aid of any defendant is a corporation organized under the laws of the
political party or candidate or for purposes of partisan Philippines or a partnership duly registered, service may be
political activity; made on the president, manager, secretary, cashier, agent, or
any of its directors.
j. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and employees; For the purpose of receiving service of summons and being
and bound by it, a corporation is identified with its agent or officer
who under the rule is designated to accept service of process.
k. To exercise such other powers as may be essential or "The corporate power to receive and act on such service, so far
necessary to carry out its purpose or purposes as stated in as to make it known to the corporation, is thus vested in such
the articles of incorporation. officer or agent."
e. The amount of stock represented at the meeting; and REASONS/PURPOSE FOR THE INCREASE:
1. Expansion;
f. The vote authorizing the increase or decrease of the capital 2. Payment of Debt Obligations;
stock, or the incurring, creating or increasing of any bonded 3. To acquire additional assets such as providing cars to
indebtedness. employees to distribute the goods;
Any increase or decrease in the capital stock or the incurring, Nothing in law prohibits increase of capital stock
creating or increasing of any bonded indebtedness shall require
prior approval of the Commission, and where appropriate, of REASONS FOR DECREASE:
the Philippine Competition Commission. The application with 1. To reduce or wipe out existing deficit where no creditors
the Commission shall be made within six (6) months from the would thereby by affected;
date of approval of the board of directors and stockholders, 2. When the capital is more than what is necessary to
which period may be extended for justifiable reasons. procreate the business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their
Copies of the certificate shall be kept on file in the office of the present actual value in case where there is a decline in the
corporation and filed with the Commission and attached to the value of the fixed assets of the corporation.
original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its TRUST FUND DOCTRINE:
certificate of filing, the capital stock shall be deemed increased The subscriptions to capital stock of the corporation constitute
or decreased and the incurring, creating or increasing of any a fund which the creditors have a right to look up for the
bonded indebtedness authorized, as the certificate of filing may satisfaction of their claims. Accordingly, if the decrease would
declare: Provided, That the Commission shall not accept for
affect the rights of creditors, the same would not be approved indications, just a mask for the purge of union members, who,
by the SEC. by then, had agitated for wage increases. In the face of the
petitioner company’s piling profits, the unionists had the right
PHILIPPINE TRUST COMPANY VS. RIVERA to demand for such salary adjustments.
FACTS: That the petitioner made quite handsome profits is clear from
Shortly after its incorporation, the stockholders of Cooperativa the records.
Naval Filipina, adopted a resolution to the effect that the capital
should be reduced This court is convinced that the petitioner’s capital reduction
by 50% and the subscribers be released from the obligation to efforts were, to begin with, a subterfuge, a deception as it were,
pay their unpaid balance. to camouflage the fact that it had been making profits, and
consequently, to justify the mass layoff in it employee ranks,
In the course of time, the company became insolvent and went especially the union members. They were nothing but a
into the hands of Philippine Trust Company (Philtrust), as premature and plain distribution of corporate assets to obviate a
assignee in bankruptcy, and by it this action was instituted to just sharing to labor of the vast profits obtained by its joint
recover ½ of the stock subscription of herein defendant who efforts with capital through the years. Surely, we can neither
subscribed to 450 of the 1,000 authorized capital stock. countenance nor condone this. It is an unfair labor practice.
It does not appear that the formalities under the Corporation POWER TO DENY PRE-EMPTIVE RIGHT
Code for the reduction of capital stock were observed and in
particular it does not appear that any certificate was at any time PRE-EMPTIVE RIGHT is a right granted by law to all
filed in the Bureau of Commerce and Industry, showing such existing stockholders of a stock corporation to subscribe to all
reduction. issues or disposition of shares of any class, in proportion to their
respective holdings, subject only to the limitation imposed
Respondent judge ruled in favor of Philtrust and directed under Sec. 38, which provides:
respondent to pay ½ of the subscription price of his shares.
SEC. 38. Power to Deny Preemptive Right.
ISSUE: All stockholders of a stock corporation shall enjoy preemptive
WON the reduction is valid and proper? right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless
HELD: such right is denied by the articles of incorporation or an
No. A corporation has no power to release an original subscriber amendment thereto: Provided, That such preemptive right shall
to its capital stock from the obligation of paying for his shares, not extend to shares issued in compliance with laws requiring
without a valuable consideration for such release; and as against stock offerings or minimum stock ownership by the public; or
creditors a reduction of the capital stock can take place only in to shares issued in good faith with the approval of the
the manner and under the conditions prescribed by the statute stockholders representing two-thirds (2/3) of the outstanding
or the charter or the AOI. Moreover, strict compliance with the capital stock, in exchange for property needed for corporate
statutory regulations is necessary. In the case before us, the purposes or in payment of a previously contracted debt.
resolution releasing the shareholders from their obligation to
pay 50% of their respective subscriptions was an attempted BASIS OF RIGHT:
withdrawal of so much capital from the fund upon which the The grant of this right is for the preservation, unimpaired and
company’s creditors were entitled ultimately to rely and, having undiluted, of the old stockholders’ relative and proportionate
been effected without compliance with the statutory voting strength and control, that is, the existing ratio of their
requirements, was wholly ineffectual. property interest and voting power in the corporation.
The Tandang Sora property, it appears from the records, b. To collect or compromise an indebtedness to the
constitutes the only property of the IDP. Hence, its sale to a corporation, arising out of unpaid subscription, in a
third-party is a sale or disposition of all the corporate property delinquency sale, and to purchase delinquent shares sold
and assets of IDP falling squarely within the contemplation of during said sale; and
Sec. 40. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by vote of at least c. To pay dissenting or withdrawing stockholders entitled to
2/3 of the bona fide members of the corporation should have payment for their shares under the provisions of this Code.
been obtained. These twin requirements were not met as the
Caprizo Groups which voted to sell the property was a fake The limitation that the corporation must at all times have
Board and those whose names and signatures were affixed by “unrestricted retained earnings” is a condition for the exercise
the Caprizo Group together with the sham Board Resolution of this power,
authorizing negotiation for the sale were, from all indications,
not bona fide members of the IDP as they were made to appear EXCEPT:
to be. 1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. corporation to purchase his shares for any reason under
(NELL DOCTRINE) Sec. 105 when the corporation has sufficient assets in its
book to cover its debts and liabilities exclusive of capital
FACTS: stock;
The appellant secured in a civil case against Insular Famrs, Inc. 3. In case of deadlocks under Sec. 104.
a judgment for the balance of the price of a pump sold by the
former to the latter. A writ of execution was issued but was Once purchased, the shares are considered as treasury shares
returned unsatisfied, saying that Insular Farms had no leviable and while they remain so, they have no voting rights and
property. Soon after appelant filed with the same Municipal dividend rights. The corporation may:
Court the present action against Pacific Farms claiming it to be
an alter ego of Insular Farms, which the court denied. On 1. re-issue them even below par;
appeal, the CFI and CA also denied the petition. 2. issue them as stock dividends;
3. retire or cancel them and thereby remove from issue
ISSUE: effectively reducing the number of shares issued stated in
WON Pacific Farms should answer for the liability of Insular the AOI.
Farms?
STEINBERG VS. VELASCO
HELD:
No. It appears on record that the appellee purchase 1,000 shares FACTS:
of stock of Insular Farms, and thereupon sold said shares of The Board of Directors of Trading Company approved and
stock to certain individuals, who forthwith reorganized said authorized the purchases of the capital stock of the company
corporation and that the board of directors thereof, as from its various stockholder, herein respondents, at par value
reorganized, then caused its assets, including its leasehold right amounting to P3,300. Petitioner assails the recovery of the
over a public land in Pangasinan to be sold to herein appellee. amount paid to such stockholders and the P3,000 dividends
These facts do not prove that the appellee is an alter ego of declared which were claimed to be made to the injury and in
Insular Farms, or is liable for its debts. fraud of its creditors. The complaint was dismissed.
NIELSON & COMPANY, INC., plaintiff-appellant, vs. The term "dividend" both in the technical sense and its ordinary
LEPANTO CONSOLIDATED MINING COMPANY, acceptation, is that part or portion of the profits of the enterprise
defendant-appellee which the corporation, by its governing agents, sets apart for
ratable division among the holders of the capital stock. It means
FACTS: the fund actually set aside, and declared by the directors of the
This is a motion for reconsideration filed by respondent corporation as dividends and duly ordered by the director, or by
Lepanto contending that the order of the SC to pay Nielson 10% the stockholders at a corporate meeting, to be divided or
of the stock dividends, declared by Lepanto during the distributed among the stockholders according to their respective
extension of the contract, as compensation for services under a interests.
management contract is in violation of the Corporation Law and
that it could not be the intention of the parties that the services It is Our considered view, therefore, that under Section 16 of
of Nielson should be paid in stock dividends. the Corporation Law stock dividends cannot be issued to a
person who is not a stockholder in payment of services
ISSUE: rendered. And so, in the case at bar Nielson cannot be paid in
WON Nielson & Co. is entitled to receive stock dividends? shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management
HELD: contract. We sustain the contention of Lepanto that the
No. The consideration for which shares of stock may be issued understanding between Lepanto and Nielson was simply to
are: (1) cash; (2) property; and (3) undistributed profits. Shares make the cash value of the stock dividends declared as the basis
of stock are given the special name "stock dividends" only if for determining the amount of compensation that should be paid
they are issued in lieu of undistributed profits. If shares of to Nielson, in the proportion of 10% of the cash value of the
stocks are issued in exchange of cash or property, then those stock dividends declared. And this conclusion of Ours finds
shares do not fall under the category of "stock dividends". A support in the record.
corporation may legally issue shares of stock in consideration
of services rendered to it by a person not a stockholder, or in POWER TO ENTER INTO MANAGEMENT
payment of its indebtedness. A share of stock issued to pay for CONTRACT
services rendered is equivalent to a stock issued in exchange of
property, because services is equivalent to property. Likewise, SEC. 43. Power to Enter into Management Contract.
a share of stock issued in payment of indebtedness is equivalent No corporation shall conclude a management contract with
to issuing a stock in exchange for cash. But a share of stock thus another corporation unless such contract is approved by the
issued should be part of the original capital stock of the board of directors and by stockholders owning at least the
corporation upon its organization, or part of the stocks issued majority of the outstanding capital stock, or by at least a
when the increase of the capitalization of a corporation is majority of the members in the case of a nonstock corporation,
properly authorized. In other words, it is the shares of stock that of both the managing and the managed corporation, at a meeting
are originally issued by the corporation and forming part of the duly called for the purpose: Provided, That (a) where a
capital that can be exchanged for cash or services rendered, or stockholder or stockholders representing the same interest of
property; that is, if the corporation has original shares of stock both the managing and the managed corporations own or
control more than one-third (1/3) of the total outstanding capital CONSEQUENCES:
stock entitled to vote of the managing corporation; or (b) where 1. On the Corporation itself: The proper forum may suspend
a majority of the members of the board of directors of the or revoke, after proper notice and hearing, the franchise or
managing corporation also constitute a majority of the members certificate of registration of the corporation for serious
of the board of directors of the managed corporation, then the misrepresentation as to what the corporation can do or is
management contract must be approved by the stockholders of doing to the great damage or prejudice of the general
the managed corporation owning at least two-thirds (2/3) of the public.
total outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in the case of a non-stock 2. On the rights of the Stockholders: A stockholder may bring
corporation. either an individual or derivative suit to enjoin a threatened
ultra-vires act or contract. If already performed, a
These shall apply to any contract whereby a corporation derivative suit against the directors may be filed, but their
undertakes to manage or operate all or substantially all of the liability will depend on whether they acted in good faith
business of another corporation, whether such contracts are and with reasonable diligence in entering into the contract.
called service contracts, operating agreements or otherwise:
Provided however, That such service contracts or operating 3. On the immediate parties:
agreements which relate to the exploration, development, a. If the contract is fully executed in both sides, the
exploitation or utilization of natural resources may be entered contract is effective and the courts will not interfere to
into for such periods as may be provided by the pertinent laws deprive either party of what has been acquired under
or regulations. No management contract shall be entered into it;
for a period longer than five (5) years for any one (1) term. b. If the contract is executory on both sides,, as a rule,
neither party can maintain an action for its non-
Notes: performance; and
This provision was inserted to assure not only technical c. Where the contract is executory on one side only, and
competence but continuity in management policy in running has been fully performed on the other, the courts differ
corporate affairs which can be achieved through a management as to whether an action will lie on the contract against
contract. the party who has received benefits of performance
under it. Majority of the courts, however, hold that the
REQUIREMENTS OF A VALID MANAGEMENT party who has received benefits from the performance
CONTRACT: is “estopped” to set up that the contract is ultra vires to
1. Resolution of the BOD; defeat an action on the contract.
2. Approval by the stockholders representing a majority of the
outstanding capital stock or majority of the members of PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO.
both the managing and the managed corporation;
3. The approval of the stockholders or members must be made FACTS:
at the meeting called for that purpose; and The Board of directors of defendant company adopted a
4. The contract shall not be for a period longer than 5 years resolution wherein the proceeds of the insurance taken on the
for any one term, except those which relate to exploration, life of its previous President and General Manager Enrico
development or utilization of natural resources which may Privano be set aside and used to purchase 4,000 shares to be
be entered into for such periods as may be provided by given to Privano’s heirs, which was approved by the
pertinent laws and regulations; stockholders in a meeting duly called for the purpose.
5. 2/3 of the stockholders or members would be required,
where: The donation of the shares was later on modified to transfer all
a. The stockholders representing the same interest of the proceeds directly to the heirs which would become a loan of
both the managing and the managed corporation own the company with 5% interest per annum and payable after the
or control more than 1/3 of the total outstanding capital settlement of its bonded indebtedness, and still later, modified
stock of the managing corporation; to be payable “whenever the company is in a position to meet
b. A majority f the members of the BOD of the managing said obligation”.
corporation also constitute a majority of the directors
of the managed corporation; On an opinion by the SEC, sought by the President of the
c. The contract would constitute the management or corporation, Sergio Osmena, Jr., it was opined by the SEC that
operation of all or substantially all of the business of the donation was void for being ultra vires. The Board planned
another corporation, whether such contracts are called to adopt a different resolution to effect the donation but failed
service contracts. If it will not constitute the to act on it. The heirs, through Mrs. Estefania R. Privano, acting
management of all or substantially all of the business as guardian, demanded the settlement of the obligation.
of another corporation, the first paragraph of Sec. 44
will apply and not that of the second, that is, only the ISSUE:
vote of the majority is required. WON the donation was an ultra vires act?
ISSUE:
WON the SEC erred in issuing the questioned order?
HELD:
No. The articles authorize collection of fees from members; but
they do not authorize the corporation to engage in the business
of registering and accepting war notes for deposit and collecting
fees from such services. This was the ruling of the Commission
and this we find to be correct.
FACTS:
The Vice-president of Mover Enterprises, Inc. issued a check
drawn against Traders Royal Bank, payable to petitioner
Ernestina Crisologo-Jose, for the accommodation of his client.
Petitioner-payee was charged with the knowledge that the check
was issued at the instance and for the personal account of the
President who merely prevailed upon respondent vicepresident
to act as co-signatory in accordance with the arrangement of the
corporation with its depository bank. While it was the
corporation's check which was issued to petitioner for the
amount involved, petitioner actually had no transaction directly
with said corporation.
ISSUE:
WON private respondent, one of the signatories of the check
issued under the account of Mover Enterprises, Inc., is an
accommodation party
under NIL and a debtor of petitioner to the extent of the amount
of said check?
HELD:
Yes. The liability of an accommodation party to a holder for
value, although such holder does not include nor apply to
corporations which are accommodation parties. This is because
the issue or indorsement of negotiable paper by a corporation
without consideration and for the accommodation of another is
ultra vires. One who has taken the instrument with knowledge
of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. By way
of exception, an officer or agent of a corporation shall have the
power to execute or indorse a negotiable paper in the name of
the corporation for the accommodation of a third person only if
specifically authorized to do so. Corollarily, corporate officers,
such as the president and vice-president, have no power to
execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no
legitimate concern. Since such accommodation paper cannot
thus be enforced against the corporation, especially since it is
not involved in any aspect of the corporate business or
operations, the signatories thereof (president and vice-
president) shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.