 Limited Shareholder’s Liability

o Advantage: An individual SH may contribute as much or as little as he sees fit and

this is the limit of his liability since SHs are not personally liable for the debts of
the corp.
o Disadvantage: It tends to limit the credit facility available to the corp as a
separate legal entity.
 Transferability of Shares
o Advantage: Shares of stock, being personal properties, can be transferred by the
owner without the consent of the other SHs.
o Disadvantage: It may result to uniting incompatible and conflicting interests.

 Non stock corporations primarily exist for a purpose other than for profit. Although,
they can make profits as an incident to their operations BUT NOT to distribute it as
dividends to its members, unlike in stock corporation. Profits are used only for the
furtherance of their purpose.
 The fact that capital was divided into shares does not ipso facto render it a stock
corporation. What is determinative is what purpose or object is contained in the AOI or
BL. (CIR v. Club Filipino)
 Corporations created by special law or charter are primarily governed by the law of their
creation. A GOCC created by a special charter is governed by the Civil Service Law and
that created by the general corporation law is governed by the Labor Code.

 Corporate term – must not exceed 50 years; renewable for another fifty years; cannot
be extended earlier than 5 years prior to the original or subsequent expiration UNLESS
justifiable reasons exist as determined by the SEC

 Incorporators – not less than 5, not more than 15, of legal age, majority should be
residents of the Philippines; each must own or be a subscriber to at least one share of
the capital stock – natural persons!!
 Corporations and partnerships cannot be incorporators but may be
stockholders/corporators. EXCEPT: cooperatives and corporations primarily organized to
hold equities in rural banks and may rightfully become incorporators thereof.
 ONLY RESIDENCY REQUIREMENT TO BE AN INCORPORATOR; NOT CITIZENSHIP.

 Directors/Trustees – not less than 5, not more than 15. EXCEPTIONS: 1) educational
corporations registered as non-stock whose number of trustees, though not less than 5
not more than 15 should be divisible by 5 i.e. 5, 10, 15; 2) close corporations where all
the stockholders are considered as members of the BOD thereby effectively allowing 20
members of the board.
 Must own at least one share which shall stand in his name in the book of the
corporation; majority of directors/trustees must be residents of the PH.
 Disqualification: convicted of final judgment of an offense punishable by imprisonment
for a period exceeding six years or a violation of this Code committed within 5 years
prior to the date of his election or appointment
 Under the old Law/Code, a director must be both a beneficial and legal owner of his
shares to qualify as such director. Under the new law, in order to be eligible as a
director, what is material is the legal title to, not the beneficial ownership of the stock as
appearing on the books of the corporation. (Lee v. CA)

 Capitalization – 25% of the authorized capital stock must be subscribed to and 25% of
the subscription must be paid up; ACS – maximum number of shares corp can issue;
minimum? YES. THOUGH THE LAW DOES NOT PROVIDE FOR A MINIMUM ACS, IT DOES
PROVIDE THAT THE PAID-UP CAPITAL MUST NOT BE LESS THAN Php 5, 000. It logically
follows that the ACS must not also be less than Php 5,000.
 No par value shares are deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors; may not be issued for a
consideration less than 5pesos/share; the entire consideration received shall be
treated as capital and shall not be available for distribution as dividends; since deemed
fully paid and non-assessable, there is a disappearance of personal liability on the part
of the holder for unpaid subscription

 Memorize Section 6 penultimate paragraph

 Where the AOI and the Cert of Stock are silent on the question of voting rights, all
issued and outstanding shares shall be considered to have the right to vote and to be
voted for.

 The Omnibus Investment Code of 1987 and the Foreign Investment Act carry the
definition of Philippine national as a citizen of the Philippines or a domestic partnership
or corporation organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote, is owned and held by citizens of the
Philippines.

 No share may be deprived of voting rights except those classified as preferred or

redeemable shares, UNLESS OTHERWISE PROVIDED IN THIS CODE – THE EXISTENCE OF
FOUNDER’S SHARES (given the exclusive right to vote and be voted for in the election of
directors which must be for a limited period not to exceed 5 years subject to the
approval of the SEC).

 Treasury shares may be re-issued for a price even less than par and the purchaser will
not be liable since the full value has previously been paid. While in the possession of the
corporation, it has no dividend and voting rights since these rights are granted only to
outstanding shares of stock. It may, however, be declared as dividends since it is a
property of the corporation.
  It participates neither in dividends because dividends cannot be declared by the
corporation to itself, nor in meetings of the corporation as voting stock for otherwise
equal distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation.

De Facto Corp
 There is a valid statute under which corp could have been validly created as de jure;
attempt in good faith to form a corp; user of corporate powers; good faith in claiming to
be and doing business as a corporation.

Corp by Estoppel
 General partners may be held liable even beyond the amount they promised.
 If there is no third party, there is no corp by estoppel because as between the SH, the
corp does not exist; but by virtue of their agreement, admission, or conduct, it does.
 EXCEPTIONS: 1) when fraud takes part in the transaction; 2) when the third party
dealing with the corp does not escape liability

Instrumentality Rule/test in determining the applicability of the Doctrine of Piercing the Veil of
Corporate Fiction:
 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;
 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 plaintiff’s legal rights;
 The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of

 The Corporate Entity Theory is disregarded only if it is sought to hold the SHs or officers
directly liable for the corporate debt or obligation. Otherwise, piercing the veil would
not be available nor justified.

 Corporate powers such as the power to enter into contracts are exercised by the Board
of Directors. However, the board may delegate such powers to either an executive
committee or officials or contracted managers. The general rule is that a corp is bound
by the acts of its corp officers if they act within the scope of the 5 classification of
powers of corp agents: 1) expressly conferred or granted by the AOI, BL, or official acts
of the BOD; 2) incidental; 3) inherent; 4) apparent; 5) arising out of customs, usage, or
emergency
 Doctrine of Secondary Meaning – word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because of geographically or
otherwise descriptive, might nevertheless have been used so long and so exclusively by
one producer with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has become to mean that the article was his
product.

 Term is fixed by law, a matter of right, and does not change simply because the office
may have become vacant, nor the incumbent holdover in office beyond the end of the
term due to the fact that a successor has not been elected and/or has failed to qualify.
Tenure is the term during which the incumbent actually holds office. It may be a shorter
or longer duration e.g. resignation before the term expires or acts as an officer in a
holdover capacity.

 Cumulative Voting – gives the SH entitled to vote the right to give a candidate as many
votes as the number of directors to be elected multiplied by the number of his shares
shall equal. # of shares x # of directors to be elected = # of votes
 Cumulative voting is granted to SH of stock corporations to allow the minority to have a
rightful representation in the BOD.

 QUORUM: for a valid board meeting, there must be present a majority of the number of
the board as fixed in the AOI.
 EXCEPTIONS: 1) when the AOI or the BL provide for a greater majority; 2) in election of
officers where the requirement is a majority of all the members of the board
 To have a valid corporate act, the decision of at least a majority of the directors or the
trustees present at a meeting AT WHICH THERE IS A QUORUM is required.
 Any action of the board without a meeting and without the required voting and quorum
requirement will not bind the corp UNLESS subsequently ratified, expressly or impliedly.
 There is no voting requirement, only quorum requirement. (In election of directors or
trustees) What is needed to win is to receive the highest number of votes.

 Individual directors can rightfully be considered as agents of the corp and although they
cannot bind the corp by their individual acts, there are exceptions: 1) by delegation of
authority; 2) where expressly conferred; or 3) where the officer or agent is clothed with
actual or apparent authority (Doctrine of Apparent Authority).

 The remaining directors cannot fill up vacancies in the following instances: 1) removal by
the SH/members; 2) expiration of term; 3) increase in the number of directors/trustees
 The board cannot fill up a vacancy created by resignation of a holdover director since
the term already expired in this case. The holdover is not a part of his term.

 In the absence of any provision in the BL fixing compensation, the directors shall not
receive any compensation, AS SUCH DIRECTORS, except for reasonable per diems. Any
 such compensation other than per diems may be granted by the vote of SH representing
at least a majority of the OCS at a regular/special meeting. The total yearly
compensation of directors, AS SUCH DIRECTORS, cannot exceed 10% of the net income
before income tax.
 This means that directors are not entitled to compensation in the absence of provision
in the BL fixing such when THE COMPENSATION IS IN RELATION TO THEIR DUTIES AS
DIRECTORS. Also, if said compensation is allowed/given, it is not allowed to exceed 10%
of the net income ONLY, AGAIN, WHEN GIVEN IN RELATION TO DUTIES AS DIRECTORS.
VERY IMPT: “AS SUCH DIRECTORS”
 The non-compensation does not apply if the director concerned performs special or
extra-ordinary service.
 THEREFORE, directors may receive compensation when: 1) there is a provision in the BL
to that effect; 2) when the SHs, by a majority vote of the OCS, grant the same; or 3) if
the director renders extra-ordinary or unusual service.

 LIABILITY OF CORPORATE OFFICERS

 The general rule is that, unless the law specifically provides, a corporate officer or agent
is not civilly or criminally liable for acts done by him as such officer or agent.
 Except:
1. He assents:
a) To a patently unlawful act of the corp;
b) For bad faith or gross negligence in directing its affairs
c) For conflict of interest, resulting in damages to the corp, it SHs or other
persons
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corp secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the corp; or
4. He is made, by a specific provision of law, to personally answer for his corporate
action
 Number 4 applied: Llamado v. CA – “Where the check is drawn by a company, corp, or
entity, the person/s who actually signed the check in behalf of such drawer shall be
liable under this Act. – BP 22”

 In order that a Derivative Suit may proceed or prosper:

1. The party bringing the suit should be a SH as of the time the act or transaction
complained of took place, or whose shares have evolved upon him since by
operation of law. (The number of shares is immaterial since he is not suing in his
own behalf but in behalf and for the benefit of the corp.)
2. He has tried to exhaust intra-corporate remedies, i.e. he had made a demand on
the BOD for appropriate relief but the latter failed or refused to heed his plea.
Demand is not required if the company is under complete control of the
 directors who are the very ones to be sued (or where it becomes obvious that a
demand upon them would have been futile and useless).
3. The SH bringing the suit must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corp and all other SH similarly
situated, otherwise, the case is dismissible.
4. The corp is made a party, either as party-plaintiff or defendant, in order to make
the court’s judgment binding upon it. On what side the corp appears loses
importance when it is considered that it lay within the power of the court to
direct the making of amendment of the pleading, by adding or dropping parties.
5. Any benefit or damages recovered shall pertain to the corp.
6. Provided the suit is successful, the SH is entitled to reasonable expenses
including cost of suit & attorney’s fees.

 Executive Committee: A SH who is not a director cannot be a member of the Exec Comm
since the Comm performs powers and functions within the competence of the board. To
exercise such, one must be a director. Otherwise, it constitutes undue delegation of
corporate powers and/or authority.

 Service of Summons
1. President
2. Managing Partner – partnership
3. General manager
4. Corporate secretary
5. Treasurer
6. In-house counsel
 This rule will hold true of the corp sued by a third party. It is not applicable in intra-
corporate controversies wherein if the defendant is a domestic corp, service shall be
deemed adequate if made upon any of the statutory or corporate officers as fixed in the
BL or their respective secretaries.

 Pre-emptive Right
o May be denied by:
 AOI
 AOI amendment
o Even without provision in AOI or its amendment, it may still be denied in the ff
instances:
1. When the shares to be issued is in compliance with laws requiring stock
offerings or minimum stock ownership by the public;
2. Shares to be issued in good faith with the approval of the SHs
representing 2/3 of the OCS either:
a) In exchange for property needed for corporate purpose
b) In payment of a previously contracted debt
 The exceptions do not apply to SHs of a Close Corp, unless the AOI provides otherwise.
Ratio: The Code provides that “pre-emptive right of a SH in a Close Corp shall extend to
 all stock to be issued, including reissuance of treasury shares, whether for money,
property, or personal services or in payment of a corporate debt, unless the AOI
provides otherwise.”

 Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, EXCEPT:
NELL DOCTRINE
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the
corporations;
3. Where the purchasing corp is merely a continuation of the selling corp;
4. Where the transaction is entered into fraudulently in order to escape liability for
such debts

 General Rule: The corporation must have URE for the exercise of its right to Acquire its
Own Shares.
 Exceptions:
1. Redemption of redeemable shares;
2. In a close corporation, where the SH exercises his right to compel the corp to
purchase his shares, for ANY REASON, PROVIDED that the corp has sufficient
assets in its book to cover its debts and liabilities exclusive of capital stock;
3. In cases of deadlock in a Close Corporation

Power to Sell or Dispose of Assets

 Sale or disposition of all or substantially all of the corporate property and assets – if the
corp would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated
 If the sale or disposition is in the usual and regular course of business, Sec 40 will not
apply.
 E.G. A corp engaged in realty where the normal business would be acquisition and sale
of real properties, may validly sell its ONLY ASSET which is in the form of realty without
the consent of its SHs since this is the very purpose of its existence.
 For Sec 40 to apply, the sale of disposition must be such as to render the corp incapable
to carry out the purpose of its organization OR that the proceeds thereof will NOT BE
USED for the CONDUCT OF THE REMAINING BUSINESS. OTHERWISE, 2/3 vote of OCS is
not necessary.

Power to Invest Funds

 A corp may invest its funds in any other corp or business or for any purpose OTHER
THAN ITS PRIMARY PURPOSE when APPROVED BY A MAJORITY OF THE BOARD AND
RATIFIED by the SHs representing at least 2/3 of the OCS, or 2/3 of the members in a
non-stock corp, at a SHs/member’s meeting duly called for the purpose.
  Where the investment by the corp is reasonably necessary to accomplish its primary
purpose as stated in the AOI, the approval of the SHs/members shall not be necessary.
 The requirement re ratification/approval of SHs is not absolute and applies only to
investments that are beyond the primary purpose or outside the express/implied
powers of the investing corp. Where the investment is reasonably necessary, or has
logical connection, to its primary purpose, the approval of SHs or members is not
required.

Power to Acquire or Alienate Real or Personal Property

 Limitations/restrictions:
o “as the transaction of the lawful business of the corp may reasonably and
necessarily require”
o subject to the limitations imposed by law and the Constitution
 E.G.
o 2 RCBC towers
o only uses 1/8 for banking which is its only purpose
o leases out majority of the spaces to third persons
o Is this a transaction of the lawful business of the corp that may reasonably and
necessarily be required? – NO
o May it nonetheless be valid? – YES, Sec 42 (Power to Invest Funds), it may be
ratified
o May it be valid per se? – YES, if approved by the Board and ratified by 2/3 OCS
o What if not followed (approval and ratification)? – Ultra-vires
o May it be ratified (the ultra-vires act)? – YES, Sec 45; if not illegal, it may be
ratified (express, implied, estoppel) (ratification, estoppel, on equitable
grounds)

Power to Declare Dividends

 Dividends are declared out of URE.
 NOTE: When no-par value shares have been issued by the corp, IT IS CONSIDERED PART
OF THE CAPITAL, NOT URE, WHICH THEREFORE MEANS THAT IT CANNOT BE
DISTRIBUTED AS DIVIDENDS.
 Recit questions:
o Who has the authority to determine whether or not dividends will be declared?
 BOD
o Will the SH have nothing to do with it?
 In declaration of stock dividends, the approval of at least 2/3 of OCS is
required.
o Where do dividends come from?
 URE – surplus profits
 Can’t use capital stock for the purpose of declaration of dividends
o 2M ACS, 1M subscribed, 1.5M URE. May the entire 1M be declared as
cash/property dividends?
  YES. All or any portion may be declared, as a general rule.
o 2M ACS, 1M subscribed, 1.5M URE. May the board declare the entire 1.5M URE
as stock dividend?
 NO. The declaration of stock dividends increases the number of shares,
the subscribed and paid-up capital, and it will also form part of the ACS.
This is known as the “capitalization of surplus profits.”
 If the entire 1.5M URE is declared, the ACS will now be 2.5M. They only
have 2M ACS (maximum number of shares corp can issue) so this will be a
violation of the corp’s franchise.
 There must be a free portion.
 The corp can only declare 1M as stock dividends and can declare the
remaining URE as cash/prop dividends since the latter does not result in
the increase in ACS.
 Such declaration of the URE which is in excess of the ACS will be
considered as “over-issuance of shares.”
o 1.5M URE, 1M subscribed. May a SH compel the corp to declare dividends?
 YES, THE BASIS IS THE PAID-IN CAPITAL, NOT THE SUBSCRIBED CAPITAL.
 Corp can’t retain more than 100% of the PAID-IN CAPITAL (Sec 43).
o 1M paid-in capital, 1M URE. May a SH compel the corp to declare dividends?
 YES, IF MANDATORY-IF-EARNED TYPE (classification of shares page 54). In
this type of preferred shares, the corp is bound to declare dividends
every year.
o Each SH receives his share in the dividends based on the stock held by him
REGARDLESS of whether he has paid his subscription in full.
o However, if his shares have become delinquent, any cash dividend due to his
shares shall first be applied to his delinquency plus cost and expenses.
o If the dividends consist of stock, the delinquent SH will not be entitled thereto
until he has paid his subscription in full.
o The declaration of cash or property dividends have the effect of reducing
corporate assets to the extent of dividends declared.
o In stock dividends, there is no such effect to the corporate assets. Neither will it
increase the proportionate interest of the SH.
o It will, however, have the effect of increasing the subscribed and paid-up capital.
o It gives the SHs nothing in the way of distribution of assets but merely divides his
existing shares into smaller units.
o When do dividend rights vest?
 Upon declaration by the BOD (pero sabi ni sir mas appropriate if sabihin
na “WHEN OFFICIALLY COMMUNICATED”).
o C fully paid his subscription. A stock cert was issued to C. A dividend was
declared on March 5. He sold his shares to B on March 8. B went to the corp on
March 10, surrendered the stock cert he got from C and a new stock cert was
issued in his name. On March 15, the corp paid B the dividend declared in the
amount of 100T. Who has the better right to the dividends?
 C has the better right.
  Whoever owns the shares at the time of declaration of dividends also
own the dividends already declared but not paid, unless there is an
agreement to the contrary.
 C has the better right because at the time the corp declared the
dividends, he was still the owner of his shares, regardless of the fact that
thereafter, he sold his shares to B, unless C and B had an agreement that
B will be entitled to the dividends.
 Corporations are prohibited from retaining surplus profits in excess of 100% of their
paid-in capital stock. EXCEPT:
1. When justified by definite corporate expansion projects or programs approved by
the BOD;
2. When the corp is prohibited under any loan agreement with any financial institution
or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corp, such as when there is need for special reserve
for probable contingencies

Ultra-Vires Acts
 Ultra-vires acts or those which are not illegal and void ab initio, but are merely beyond
the scope of the AOI, are merely voidable and may become binding and enforceable
when ratified by the SH. (ratification, estoppel, on equitable grounds)

By-Laws
 Elements of a valid BL:
1. It must not be contrary to law, public policy, or morals
2. It must not be inconsistent with the AOI
3. It must be general and uniform in its effect or applicable to all alike or those similarly
situated
4. It must not impair obligations and contracts or vested rights
5. It must be reasonable

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