JERALD
SEC 3 CLASSES OF CORPORATION
Feliciano e al v Aranez GR 165641 Aug 25, 2010
Stock v. non-stock corporations (associations, foundations, membership
clubs)
Close corporations
Special corporations (educational, religious and one person corporations)
SEC 4 CORPORATIONS CREATED BY SPECIAL LAWS OR CHAPTERS
Bases Conversion and Dev Authority v CIR GR 205925 Jun 20, 2018
Liban et al v Gordon GR 175352 Jul 15, 2009
Chartered GOCCs v non-chartered GOCCs
Under special laws – Boy Scouts of the Philippines, Philippine National Red
Cross
DOCTRINE: Since the constitutional requirement of at least 60 percent
Filipino ownership applies not only to voting control of the corporation but also
to the beneficial ownership of the corporation, it is therefore imperative that
SEC 5 CORPORATIONS AND INCORPORATORS, STOCKHOLDERS AND
MEMBERS
Incorporators
Francisco Motors v CA GR 100812 Jun 25, 1999
Guillen v Arnado AC No. 10547 Nov 8, 2017
Stockholders, shareholders, members
Halley v Printwell Inc GR 157549 May 30, 2011
Stakeholders – creditors, employees, suppliers, customers
Nacpil v Intl Broadcasting Corp 379 SCRA 653 (2002)
MARGA
SEC 6 CLASSIFICATION OF SHARES
Must be indicated in the articles
Equality of shares -
Gamboa et al v Teves et al GR 176579 Oct 9, 2012 (Resolution)
such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of a
corporation.
FACTS:
In 1969, General Telephone and Electronics Corporation (GTE), sold 26
percent of the outstanding common shares of PLDT to Philippine
Telecommunications Investment Corporation (PTIC). In 1977, Prime
Holdings, Inc. (PHI) became the owner of 111,415 shares of stock of PTIC. In
1986, the 111,415 shares of stock of PTIC held by PHI were sequestered by
the Presidential Commission on Good Government (PCGG). The 111,415
PTIC shares, which represent about 46.125 percent of the outstanding capital
stock of PTIC, were later declared by this Court to be owned by the Republic
of the Philippines.
In 1999, First Pacific, a Bermuda-registered acquired the remaining 54
percent of the outstanding capital stock of PTIC. On 20 November 2006, the
Inter-Agency Privatization Council (IPC) of the Philippine Government through
a public bidding sold the same shares to Parallax Venture who won with a bid
of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first
refusal as a PTIC stockholder and buy the 111,415 PTIC shares by matching
the bid price of Parallax. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement
of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock
of PTIC, with the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government
of 46.125 percent of PTIC shares is actually an indirect sale of 12 million
shares or about 6.3 percent of the outstanding common shares of PLDT. With
the sale, First Pacific common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47 percent. This, according to petitioner,
violates Section 11, Article XII of the 1987 Philippine Constitution which limits
foreign ownership of the capital of a public utility to not more than 40 percent.
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the 111,415
PTIC shares.
Petitioner raises the following issues: (1) whether the consummation of the
then impending sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of common
shares to foreigners in excess of 40 percent of the entire subscribed common
capital stock violates the constitutional limit on foreign ownership of a public
utility. 8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion
for Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention. caIACE
Petitioners-in-intervention "join petitioner Wilson Gamboa . . . in seeking,
among others, to enjoin and/or nullify the sale by respondents of the 111,415
PTIC shares to First Pacific or assignee." Petitioners-in-intervention claim
that, as PLDT subscribers, they have a "stake in the outcome of the
controversy . . . where the Philippine Government is completing the sale of
government owned assets in [PLDT], unquestionably a public utility, in
violation of the nationality restrictions of the Philippine Constitution."
In G.R. No. 176579. June 28, 2011 (SC's FIRST DECISION): Considering that
common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in
Section 11, Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in the election of
directors, then the term "capital" shall include such preferred shares because
the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to shares
of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities.
WHEREFORE, we PARTLY GRANT the petition and rule that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers only to shares
of stock entitled to vote in the election of directors, and thus in the present
case only to common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares). Respondent Chairperson of the
Securities and Exchange Commission is DIRECTED to apply this definition of
the term "capital" in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a
violation of Section 11, Article XII of the Constitution, to impose the
appropriate sanctions under the law.
ISSUE: Whether or not the Court made an erroneous interpretation of the term
‘capital’ in its 2011 decision?
HELD: No. Motion denied with finality.
No change of any long-standing rule; thus, no redefinition of the term
"capital."
Movants contend that the term "capital" in Section 11, Article XII of the
Constitution has long been settled and defined to refer to the total outstanding
shares of stock, whether voting or non-voting. In fact, movants claim that the
SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in the Constitution and
various statutes, has consistently adopted this particular definition in its
numerous opinions. Movants point out that with the 28 June 2011 Decision,
the Court in effect introduced a "new" definition or "midstream redefinition" 9
of the term "capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not
interpreted or defined the term "capital" found in various economic provisions
of the 1935, 1973 and 1987 Constitutions. There has never been a judicial
precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to
claim that the Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of
stock, whether voting or non-voting. To repeat, until the present case there
has never been a Court ruling categorically defining the term "capital" found
in the various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.
ight to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership
required by the Constitution to engage in certain economic activities applies
not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with
the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is held by "a trustee of funds for pension or other employee
retirement or separation benefits," the trustee is a Philippine national if "at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1 (b) of the Implementing Rules of the FIA
provides that "for stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership
applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock 35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of
incorporation. 36
The Corporation Code allows denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to vote in the election
of directors, while preferred shares may be denied such right. Nonetheless,
preferred shares, even if denied the right to vote in the election of directors,
are entitled to vote on the following corporate matters: (1) amendment of
articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease,
mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other
than the primary purpose for which the corporation was organized; (6)
adoption, amendment and repeal of by-laws; (7) merger and consolidation;
and (8) dissolution of corporation. 37 HESAIT
Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election
of directors, are anyway still entitled to vote on the eight specific corporate
matters mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60 percent of
the preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of such
shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of
shares, whether common, preferred non-voting, preferred voting or any other
class of shares. This uniform application of the 60-40 ownership requirement
in favor of Filipino citizens clearly breathes life to the constitutional command
that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-
owned. Applying uniformly the 60-40 ownership requirement in favor of
Filipino citizens to each class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees effective Filipino control of public
utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino
citizens. This addresses and extinguishes Pangilinan's worry that foreigners,
owning most of the non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or majority vote of all
shareholders.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership
required by the Constitution to engage in certain economic activities applies
not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with
the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is held by "a trustee of funds for pension or other employee
retirement or separation benefits," the trustee is a Philippine national if "at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1 (b) of the Implementing Rules of the FIA
provides that "for stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership
applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock 35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of
incorporation. 36
The Corporation Code allows denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to vote in the election
of directors, while preferred shares may be denied such right. Nonetheless,
preferred shares, even if denied the right to vote in the election of directors,
are entitled to vote on the following corporate matters: (1) amendment of
articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease,
mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other
than the primary purpose for which the corporation was organized; (6)
adoption, amendment and repeal of by-laws; (7) merger and consolidation;
and (8) dissolution of corporation.
Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election
of directors, are anyway still entitled to vote on the eight specific corporate
matters mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60 percent of
the preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of such
shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of
shares, whether common, preferred non-voting, preferred voting or any other
class of shares. This uniform application of the 60-40 ownership requirement
in favor of Filipino citizens clearly breathes life to the constitutional command
that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-
owned. Applying uniformly the 60-40 ownership requirement in favor of
Filipino citizens to each class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees effective Filipino control of public
utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino
citizens. This addresses and extinguishes Pangilinan's worry that foreigners,
owning most of the non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or majority vote of all
shareholders.
Final Word
The Constitution expressly declares as State policy the development of an
economy "effectively controlled" by Filipinos. Consistent with such State
policy, the Constitution explicitly reserves the ownership and operation of
public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations
at least 60 percent of whose capital with voting rights belongs to Filipinos. The
FIA's implementing rules explain that "[f]or stocks to be deemed owned and
held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential." In effect, the FIA
clarifies, reiterates and confirms the interpretation that the term "capital" in
Section 11, Article XII of the 1987 Constitution refers to shares with voting
rights, as well as with full beneficial ownership. This is precisely because the
right to vote in the election of directors, coupled with full beneficial ownership
of stocks, translates to effective control of a corporation.
DISPOSITIVE: WHEREFORE, we DENY the motions for reconsideration
WITH FINALITY. No further pleadings shall be entertained. SO ORDERED.
CIR v CA, CTA and A. Soriano Corp, GR 108576 Jan 20, 1999
DOCTRINE: Under the doctrine of equality of shares — all stocks issued by
the corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences.
FACTS: Don Andres Soriano, a citizen and resident of the United States
formed in the 1930's the corporation "A Soriano Y Cia," predecessor of
ANSCOR. On December 30, 1964 Don Andres died. On June 30, 1968,
pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares
from Don Andres' estate. By November 1968, the Board further increased
ANSCOR's capital stock to P75M divided into 150,000 preferred shares and
600,000 common shares. About a year later ANSCOR again redeemed
80,000 common shares from Don Andres' estate, further reducing the latter's
common shareholdings. ANSCOR's business purpose for both redemptions
of stock is to partially retire said stocks as treasury shares in order to reduce
the company's foreign exchange remittances in case cash dividends are
declared. In 1973, after examining ANSCOR's books of account and records
Revenue Examiners issued a report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the
1939 Revenue Code for the year 1968 and the second quarter of 1969 based
on the transactions of exchange and redemption of stocks. Subsequently,
ANSCOR filed a petition for review with the Court of Tax Appeals assailing the
tax assessments on the redemptions and exchange of stocks. In its decision,
the CTA reversed the BIR's ruling after finding sufficient evidence to overcome
the prima facie correctness of the questioned assessments. In a petition for
review, the Court of Appeals affirmed the ruling of the CTA. Hence, the
present petition.
ISSUE:Whether ANSCOR's exchange of common shares can be considered
as equivalent to the distribution of taxable dividend making the proceeds
thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act?
HELD: No. Decision of the Court of Appeals is MODIFIED. Redemption is
taxable but exchage is not taxable.
The Supreme Court modified the decision of the Court of Appeals in that
ANSCOR'S redemption of 82,752.5 stock dividends is herein considered as
essentially equivalent to a distribution of taxable dividends for which it is liable
for the withholding tax-at-source. While the Board Resolutions authorizing the
redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Said purpose was not given
credence by the court in case at bar. Records show that despite the existence
of enormous corporate profits no cash dividends were ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early
1970's. Although a corporation under certain exceptions, has the prerogative
when to issue dividends, yet when no cash dividends are issued for about
three decades, this circumstance negate the legitimacy of ANSCOR's alleged
purposes. With regard to the exchange of shares, the Court ruled that the
exchange of common with preferred shares is not taxable because it produces
no realized income to the subscriber but only a modification of the subscriber's
rights and privileges which is not a flow of wealth for tax purposes.
EXCHANGE OF COMMON WITH PREFERRED SHARES
Exchange is an act of taking or giving one thing for another 122 involving
reciprocal transfer 123 and is generally considered as a taxable transaction.
The exchange of common stocks with preferred stocks, or preferred for
common or a combination of either for both, may not produce a recognized
gain or loss, so long as the provisions of Section 83(b) is not applicable. This
is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate
reorganizations. No taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified
its shares into common and preferred, and that parts of the common shares
of the Don Andres estate and all of Doña Carmen's shares were exchanged
for the whole 150,000 preferred shares. Thereafter, both the Don Andres
estate and Doña Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in their
proportional interest after the exchange. There was no cash flow. Both stocks
had the same par value. Under the facts herein, any difference in their market
value would be immaterial at the time of exchange because no income is yet
realized — it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which
case income tax may be imposed.
Reclassification of shares does not always bring any substantial alteration in
the subscriber's proportional interest. But the exchange is different — there
would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class
of stock ordinarily and usually issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division of profits. 126 Preferred
stocks are those which entitle the shareholder to some priority on dividends
and asset distribution.
Both shares are part of the corporation's capital stock. Both stockholders are
no different from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing
to share in the profits and losses of the enterprise. 128 Moreover, under the
doctrine of equality of shares — all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. 129 cdasia
In this case, the exchange of shares, without more, produces no realized
income to the subscriber. There is only a modification of the subscriber's rights
and privileges — which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire
interest and not when there is still maintenance of proprietary interest.
DISPOSTIVE: WHEREFORE, premises considered, the decision of the Court
of Appeals is MODIFIED in that ANSCOR's redemption of 82,752.5 stock
dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The
decision is AFFIRMED in all other respects.
Classes or series of shares (e.g. Class A, Class B, etc)
Voting v non-voting shares (only preferred or redeemable)
When non-voting stockholders may vote
Preferred shares –
Par v no par shares (not allowed for certain corporations; no par shares are
fully paid, non-assessable/not liable to corporation or creditors)
Castillo et al v Balinghasay et al GR 150976 Oct 18, 2004
DOCTRINE: Under Section 6 of B.P. Blg. 68, the requirements and
restrictions on voting rights were explicitly provided for, such that "no share
may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code"
and that "there shall always be a class or series of shares which have
complete voting rights."
FACTS: Petitioners and the respondents are stockholders of MCPI, with the
former holding Class "B" shares and the latter owning Class "A" shares. MCPI
is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat,
Parañaque City. It was organized sometime in September 1977. At the time
of its incorporation, Act No. 1459, the old Corporation Law was still in force
and effect. Article VII of MCPI's original Articles of Incorporation, as approved
by the Securities and Exchange Commission (SEC) on October 26, 1977,
reads as follows:
SEVENTH. That the authorized capital stock of the corporation is TWO
MILLION (P2,000,000.00) PESOS, Philippine Currency, divided into TWO
THOUSAND (2,000) SHARES at a par value of P100 each share, whereby
the ONE THOUSAND SHARES issued to, and subscribed by, the
incorporating stockholders shall be classified as Class A shares while the
other ONE THOUSAND unissued shares shall be considered as Class B
shares. Only holders of Class A shares can have the right to vote and the right
to be elected as directors or as corporate officers. 2 (Emphasis supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was
amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is FIVE
MILLION (P5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00
"B" 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the right to be
elected as directors or as corporate officers. 3 (Emphasis supplied)
The foregoing amendment was approved by the SEC on June 7, 1983. While
the amendment granted the right to vote and to be elected as directors or
corporate officers only to holders of Class "A" shares, holders of Class "B"
stocks were granted the same rights and privileges as holders of Class "A"
stocks with respect to the payment of dividends. EITcaD
On September 9, 1992, Article VII was again amended to provide as follows:
SEVENTH: That the authorized capital stock of the corporation is THIRTY
TWO MILLION PESOS (P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00
"B" 31,000 1,000.00
Except when otherwise provided by law, only holders of Class "A" shares have
the right to vote and the right to be elected as directors or as corporate officers
4 (Stress and emphasis supplied).
The SEC approved the foregoing amendment on September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual
stockholders' meeting and election for directors. During the course of the
proceedings, respondent Rustico Jimenez, citing Article VII, as amended, and
notwithstanding MCPI's history, declared over the objections of herein
petitioners, that no Class "B" shareholder was qualified to run or be voted
upon as a director. In the past, MCPI had seen holders of Class "B" shares
voted for and serve as members of the corporate board and some Class "B"
share owners were in fact nominated for election as board members.
Nonetheless, Jimenez went on to announce that the candidates holding Class
"A" shares were the winners of all seats in the corporate board. The petitioners
protested, claiming that Article VII was null and void for depriving them, as
Class "B" shareholders, of their right to vote and to be voted upon, in violation
of the Corporation Code (Batas Pambansa Blg. 68), as amended.
On March 22, 2001, after their protest was given short shrift, herein petitioners
filed a Complaint for Injunction, Accounting and Damages, docketed as Civil
Case No. CV-01-0140 before the RTC of Parañaque City, Branch 258. Said
complaint was founded on two (2) principal causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made during the
February 9, 2001 Annual Stockholders' Meeting, and for the conduct of an
election whereat all stockholders, irrespective of the classification of the
shares they hold, should be afforded their right to vote and be voted for; and
b. Stockholders' derivative suit challenging the validity of a contract entered
into by the Board of Directors of MCPI for the operation of the ultrasound unit.
5 providing for exceptions to the exclusive grant of voting rights to Class "A"
Subsequently, the complaint was amended to implead MCPI as party-plaintiff
for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were deprived of
their right to vote and to be voted on as directors at the annual stockholders'
meeting held on February 9, 2001, because respondents had erroneously
relied on Article VII of the Articles of Incorporation of MCPI, despite Article VII
being contrary to the Corporation Code, thus null and void. Additionally,
respondents were in estoppel, because in the past, petitioners were allowed
to vote and to be elected as members of the board. They further claimed that
the privilege granted to the Class "A" shareholders was more in the nature of
a right granted to founder's shares. aHTcDA
In their Answer, the respondents averred that the provisions of Article VII
clearly and categorically state that only holders of Class "A" shares have the
exclusive right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended only as a privilege
granted to founder's shares, as no such proviso is found in the Articles of
Incorporation. The respondents further claimed that the exclusivity of the right
granted to Class "A" holders cannot be defeated or impaired by any
subsequent legislative enactment, e.g. the New Corporation Code,as the
Articles of Incorporation is an intra-corporate contract between the corporation
and its members; between the corporation and its stockholders; and among
the stockholders. They submit that to allow Class "B" shareholders to vote and
be elected as directors would constitute a violation of MCPI's franchise or
charter as granted by the State.
RTC: WHEREFORE, viewed in the light of the foregoing, the election held on
February 9, 2001 is VALID as the holders of CLASS "B" shares are not entitled
to vote and be voted for and this case based on the First Cause of Action is
DISMISSED. Action went straight to SC. Hence, the petition.
ISSUE: Whether or not holders of Class "B" shares of the MCPI may be
deprived of the right to vote and be voted for as directors in MCPI.
HELD: The petition is GRANTED. Class B shares have the right to vote and
be voted.
RATIO: When Article VII of the Articles of Incorporation of MCPI was
amended in 1992, the phrase "except when otherwise provided by law" was
inserted in the provision governing the grant of voting powers to Class "A"
shareholders. This particular amendment is relevant for it speaks of a law
stockholders. Which law was the amendment referring to? The determination
of which law to apply is necessary. There are two laws being cited and relied
upon by the parties in this case. In this instance, the law in force at the time of
the 1992 amendment was the Corporation Code (B.P. Blg. 68), not the
Corporation Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to Article VII
refers to the Corporation Code and no other law. At the time of the
incorporation of MCPI in 1977, the right of a corporation to classify its shares
of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act
No. 1459, B.P. Blg. 68, retained the same grant of right of classification of
stock shares to corporations, but with a significant change. Under Section 6
of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that "no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code" and that "there shall always be a class
or series of shares which have complete voting rights." Section 6 of the
Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class "B" shares of
MCPI stocks are clearly categorized to be "preferred" or "redeemable" shares,
the holders of said Class "B" shares may not be deprived of their voting rights.
Note that there is nothing in the Articles of Incorporation nor an iota of
evidence on record to show that Class "B" shares were categorized as either
"preferred" or "redeemable" shares. The only possible conclusion is that Class
"B" shares fall under neither category and thus, under the law, are allowed to
exercise voting rights.
One of the rights of a stockholder is the right to participate in the control and
management of the corporation that is exercised through his vote. The right
to vote is a right inherent in and incidental to the ownership of corporate stock,
and as such is a property right. The stockholder cannot be deprived of the
right to vote his stock nor may the right be essentially impaired, either by the
legislature or by the corporation, without his consent, through amending the
charter, or the by-laws. 11
Neither do we find merit in respondents' position that Section 6 of the
Corporation Code cannot apply to MCPI without running afoul of the non-
impairment clause of the Bill of Rights. Section 148 12 of the Corporation
Code expressly provides that it shall apply to corporations in existence at the
time of the effectivity of the Code. Hence, the non-impairment clause is
inapplicable in this instance. When Article VII of the Articles of Incorporation
of MCPI were amended in 1992, the board of directors and stockholders must
have been aware of Section 6 of the Corporation Code and intended that
Article VII be construed in harmony with the Code, which was then already in
force and effect. Since Section 6 of the Corporation Code expressly prohibits
the deprivation of voting rights, except as to "preferred" and "redeemable"
shares, then Article VII of the Articles of Incorporation cannot be construed as
granting exclusive voting rights to Class "A" shareholders, to the prejudice of
Class "B" shareholders, without running afoul of the letter and spirit of the
Corporation Code.
DISPOSITIVE: WHEREFORE, the petition is GRANTED. The Partial
Judgment dated November 26, 2001 of the Regional Trial Court of Parañaque
City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE.
No pronouncement as to costs.
SEC 7 FOUNDER’S SHARES
May have exclusive right to vote subject to 5 year limitation (from date of
incorporation); Other restrictions
Forest Hills Golf and Country Club Inc v Fil-Estate Properties Inc. et al
GR 206649 Jul 20, 2016
DOCTRINE: For a derivative suit to prosper, it is required that the minority
stockholder suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join
him in the suit.
FACTS: On March 31, 1993, Kingsville Construction and Development
Corporation (Kingsville) and Kings Properties Corporation (KPC) entered into
a project agreement with respondent Fil-Estate Properties, Inc. (FEPI),
whereby the latter agreed to finance and cause the development of several
parcels of land owned by Kingsville in Antipolo, Rizal, into Forest Hills
Residential Estates and Golf and Country Club, a first-class residential
area/golf-course/commercial center. 6 Under the agreement, respondent
FEPI was tasked to incorporate petitioner Forest Hills Golf and Country Club,
Inc. (FHGCCI) with an authorized stock of 3,600 shares; and to perform the
development and construction work and other undertakings as full payment of
its subscription to the authorized capital stock of the club. 7 As to the
remaining shares of the club, they agreed that these should be retained by
Kingsville in exchange for the parcels of land used for the golf course
development. 8
On July 10, 1995, respondent FEPI assigned its rights and obligations over
the project to a related corporation, respondent Fil-Estate Golf Development,
Inc. (FEGDI). 9
On July 19, 1996, Rainier L. Madrid (Madrid) purchased two Class "A" shares
at the secondary price of P380,000.00 each, and applied for a membership to
the club for P25,000.00. 10
Due to the delayed construction of the second 18-Hole Golf Course, Madrid
wrote two demand letters dated October 29, 2009 and March 15, 2010 to the
Board of Directors of petitioner FHGCCI asking them to initiate the appropriate
legal action against respondents FEPI and FEGDI. 11 The Board of Directors,
however, failed and/or refused to act on the demand letters. 12
Thus, on April 21, 2010, Madrid, in a derivative capacity on behalf of petitioner
FHGCCI, filed with the RTC of Antipolo City a Complaint for Specific
Performance with Damages.
n their Answer with Compulsory Counterclaim, 15 respondents FEPI and
FEGDI argued that there is no cause of action against them as petitioner
FHGCCI failed to state the contractual and/or legal bases of their alleged
obligation; that no prior demand was made to them; that the action is not a
proper derivative suit as petitioner FHGCCI failed to exhaust all remedies
available under the articles of incorporation and by-laws; and that petitioner
FHGCCI failed to implead its Board of Directors as indispensable parties.
RTC: Dismissed the case or lack of jurisdiction, without prejudice to the re-
filing of the same with the proper special commercial court sitting at
Binangonan, Rizal. Consequently, the motion for leave to amend the
Complaint was mooted. Feeling aggrieved, petitioner FHGCCI moved for
reconsideration 23 but the RTC denied the same in its Order. Hence, the
petition was directly filed before the SC.
ISSUE: Whether or not petitioner [fhgcci's] ordinary civil suit for specific
performance with damages against respondents is cognizable by the lower
court as a regular court or by the rtc-binangonan, branch 70, as a special
commercial court for intra-corporate controversies.
HELD: The Petition lacks merit. This case is cognizable by a special
commercial court.
RATIO:
The Complaint, denominated as a derivative suit for specific performance, falls
under the jurisdiction of special commercial courts.
Petitioner FHGCCI's main contention is that its Complaint, although
denominated as a derivative suit, does not fall under the jurisdiction of special
commercial courts, as it does not involve an intra-corporate controversy.
We do not agree.
Based on the foregoing allegations, it is clear that Madrid filed a derivative suit
on behalf of petitioner FHGCCI to compel respondents FEPI and FEGDI to
complete the golf course and country club project and to render an accounting
of all works done, existing work-in-progress and, if any, differential backlog.
The fact that petitioner FHGCCI denominated the Complaint as a derivative
suit for specific performance is sufficient reason for the RTC to dismiss it for
lack of jurisdiction, as the RTC where the Complaint was raffled is not a special
commercial court. Upon the enactment of RA No. 8799, jurisdiction over intra-
corporate disputes, including derivatives suits, is now vested in the RTCs
designated as special commercial courts by this Court pursuant to A.M. No.
00-11-03-SC promulgated on November 21, 2000. 39
Petitioner FHGCCI's contention that the instant case does not involve an intra-
corporate controversy as it was filed against respondents FEPI and FEGDI as
developers, and not as shareholders of the corporation holds no water.
Apparent in the Complaint are allegations of the interlocking directorships of
the Board of Directors of petitioner FHGCCI and respondents FEPI and
FEGDI, the conflict of interest of the Board of Directors of petitioner FHGCCI,
and their bad faith in carrying out their duties. Likewise alleged is that
respondent FEPI and, later, respondent FEGDI are shareholders of petitioner
FHGCCI which under the project agreement, respondent FEPI was tasked to
perform the development and construction work and other obligations and
undertakings of the project as full payment of its subscription to the authorized
capital stock of petitioner FHGCCI, which it later assigned to respondent
FEGDI. Considering these allegations, we find that, contrary to the claim of
petitioner FHGCCI, there are unavoidably intra-corporate controversies
intertwined in the specific performance case.
Moreover, a derivative suit is a remedy designed by equity as a principal
defense of the minority shareholders against the abuses of the majority. 40
Under the Corporation Code, the corporation's power to sue is lodged with its
board of directors or trustees. 41 However, when its officials refuse to sue, or
are the ones to be sued, or hold control of the corporation, an individual
stockholder may be permitted to institute a derivative suit to enforce a
corporate cause of action on behalf of a corporation in order to protect or
vindicate its rights. 42 In such actions, the corporation is the real party in
interest, while the stockholder suing on behalf of the corporation is only a
nominal party. 43 Considering its purpose, a derivative suit, therefore, would
necessarily touch upon the internal affairs of a corporation. It is for this reason
that a derivative suit is among the cases covered by the Interim Rules of
Procedure Governing Intra-Corporate Controversies.
The Complaint filed by petitioner FHGCCI failed to comply with the requisites
for a valid derivative suit.
Rule 8, Section 1 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies provides:
SECTION 1. Derivative action. — A stockholder or member may bring an
action in the name of a corporation or association, as the case may be,
provided, that:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) 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 corporation or partnership
to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
Corollarily, "for a derivative suit to prosper, it is required that the minority
stockholder suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join
him in the suit." 45 It is also required that the stockholder "should have exerted
all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires [and that such fact is alleged] with particularity
in the complaint." 46 The purpose for this rule is "to make the derivative suit
the final recourse of the stockholder, after all other remedies to obtain the relief
sought had failed." 47 Finally, the stockholder is also required "to allege,
explicitly or otherwise, the fact that there were no appraisal rights available for
the acts complained of, as well as a categorical statement that the suit is not
a nuisance or a harassment suit." 48
In this case, Madrid, as a shareholder of petitioner FHGCCI, failed to allege
with particularity in the Complaint, and even in the Amended Complaint, that
he exerted all reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, or rules governing the corporation; that no
appraisal rights are available for the acts or acts complained of; and that the
suit is not a nuisance or a harassment suit. Although the Complaint alleged
that demand letters were sent to the Board of Directors of petitioner FHGCCI
and that these were unheeded, these allegations will not suffice.
Thus, for failing to meet the requirements set forth in Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies, the
Complaint, denominated as a derivative suit for specific performance, must be
dismissed.
DISPOSITIVE: WHEREFORE, the Petition is hereby DENIED. The assailed
Orders dated May 14, 2012 and February 1, 2013 of the Regional Trial Court,
Branch 74, Antipolo City, in Civil Case No. 10-9042 are hereby AFFIRMED.
SEC 8 REDEEMABLE SHARES
Republic Planters Bank v Agana 269 SCRA 1 (1997)
DOCTRINE: The redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its
stock.
FACTS: On September 18, 1961, private respondent Corporation secured a
loan from petitioner in the amount of P120,000.00. As part of the proceeds of
the loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers then, private respondent Adalia F. Robes and
one Carlos F. Robes. In other words, instead of giving the legal tender totaling
to the full amount of the loan, which is P120,000.00, petitioner lent such
amount partially in the form of money and partially in the form of stock
certificates numbered 3204 and 3205, each for 400 shares with a par value of
P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock
certificates were in the name of private respondent Adalia F. Robes and
Carlos F. Robes, who subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by the system of drawing
lots, at any time after two (2) years from the date of issue at the option of the
Corporation. . . ."
On January 31, 1979, private respondents proceeded against petitioner and
filed a complaint anchored on private respondents' alleged rights to collect
dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock certificates.
Private respondents attached to their complaint, a letter-demand dated
January 5, 1979 which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the
following grounds: (1) that the trial court had no jurisdiction over the subject-
matter of the action; (2) that the action was unenforceable under substantive
law; and (3) that the action was barred by the statute of limitations and/or
laches.
On September 7, 1979, the trial court rendered the herein assailed decision
in favor of private respondents. In ordering petitioner to pay private
respondents the face value of the stock certificates as redemption price, plus
1% quarterly interest thereon until full payment.
ISSUE: Whether the court a quo's decision in ordering petitioner to redeem
the preferred share is proper?
HELD: No. Petition is granted.
RATIO: Redeemable shares are shares usually preferred, which by their
terms are redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows redemption of shares even if there are
no unrestricted retained earnings on the books of the corporation. This is a
new provision which in effect qualifies the general rule that the corporation
cannot purchase its own shares except out of current retained earnings.
However, while redeemable shares may be redeemed regardless of the
existence of unrestricted retained earnings, this is subject to the condition that
the corporation has, after such redemption, assets in its books to cover debts
and liabilities inclusive of capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature.
The petitioner argues that it cannot be compelled to redeem the preferred
shares issued to the private respondent. We agree. Respondent judge, in
ruling that petitioner must redeem the shares in question, stated that: "On the
question of the redemption by the defendant of said preferred shares of stock,
the very wordings of the terms and conditions in said stock certificates clearly
allows the same." What respondent Judge failed to recognize was that while
the stock certificate does allow redemption, the option to do so was clearly
vested in the petitioner bank. The redemption therefore is clearly the type
known as "optional." Thus, except as otherwise provided in the stock
certificate, the redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its
stock. Furthermore, the terms and conditions set forth therein use the word
"may." It is a settled doctrine in statutory construction that the word "may"
denotes discretion, and cannot be construed as having a mandatory effect.
We fail to see how respondent judge can ignore what, in his words, are the
"very wordings of the terms and conditions in said stock certificates" and
construe what is clearly a mere option to be his legal basis for compelling the
petitioner to redeem the shares in question.
The respondent judge also stated that since the stock certificate granted the
private respondents the right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating, it "clearly and unequivocably (sic)
indicates that the same are 'interest bearing stocks' or stocks issued by a
corporation under an agreement to pay a certain rate of interest thereon. As
such, plaintiffs (private respondents herein) become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of dividend."
There is no legal basis for this observation. Both Sec. 16 of the Corporation
Law and Sec. 43 of the present Corporation Code prohibit the issuance of any
stock dividend without the approval of stockholders, representing not less than
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. These provisions underscore the fact that payment
of dividends to a stockholder is not a matter of right but a matter of consensus.
Furthermore, "interest bearing stocks," on which the corporation agrees
absolutely to pay interest before dividends are paid to common stockholders,
is legal only when construed as requiring payment of interest as dividends
from net earnings or surplus only. Clearly, the respondent judge, in compelling
the petitioner to redeem the shares in question and to pay the corresponding
dividends, committed grave abuse of discretion amounting to lack or excess
of jurisdiction in ignoring both the terms and conditions specified in the stock
certificate, as well as the clear mandate of the law.
The redemption of shares in case at bar cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said petitioner has been
suffering from chronic reserve deficiency, and that such finding resulted in a
directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central
Bank, to the President and Acting Chairman of the Board of the petitioner bank
prohibiting the latter from redeeming any preferred share, on the ground that
said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors. Redemption of preferred shares was prohibited for
a just and valid reason. The directive issued by the Central Bank Governor
was obviously meant to preserve the status quo, and to prevent the financial
ruin of a banking institution that would have resulted in adverse repercussions,
not only to its depositors and creditors, but also to the banking industry as a
whole. The directive, in limiting the exercise of a right granted by law to a
corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the
obligation of contracts. It has, however, been settled that the constitutional
guaranty of non-impairment of obligations of contract is limited by the exercise
of the police power of the state, the reason being that public welfare is superior
to private rights.
DISPOSITIVE: WHEREFORE, the instant petition, being impressed with
merit, is hereby GRANTED. The challenged decision of respondent judge is
set aside and the complaint against the petitioner is dismissed.

SEC Rules Governing Redeemable and Treasury Shares
SEC 9 TREASURY SHARES
When and how may a corporation reacquire its shares – Sec 40
Voting right for treasury shares – Sec 56
Not included in “outstanding capital stock” – Sec 173
Lanuza et al v CA et al GR 131394 Mar 28, 2005
DOCTRINE: A stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it provides the only certain and
accurate method of establishing the various corporate acts and transactions
and of showing the ownership of stock and like matters. 32 However, a stock
and transfer book, like other corporate books and records, is not in any sense
a public record, and thus is not exclusive evidence of the matters and things
which ordinarily are or should be written therein.
FACTS: In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders' shares and seventy-six (76)
common shares as its initial capital stock subscription reflected in the articles
of incorporation. However, private respondents and their predecessors who
were in control of PMMSI registered the company's stock and transfer book
for the first time in 1978, recording thirty-three (33) common shares as the
only issued and outstanding shares of PMMSI. Sometime in 1979, a special
stockholders' meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares, representing
more than two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a
petition with the Securities and Exchange Commission (SEC) for the
registration of their property rights over one hundred (120) founders' shares
and twelve (12) common shares owned by their father. The SEC hearing
officer held that the heirs of Acayan were entitled to the claimed shares and
called for a special stockholders' meeting to elect a new set of officers. 3 The
SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book. acHITE
On 06 May 1992, a special stockholders' meeting was held to elect a new set
of directors. Private respondents thereafter filed a petition with the SEC
questioning the validity of the 06 May 1992 stockholders' meeting, alleging
that the quorum for the said meeting should not be based on the 165 issued
and outstanding shares as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed. 4
Appeal was made to the SEC En Banc, which granted said appeal, holding
that the shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. The SEC directed the
parties to call for a stockholders meeting on the basis of the stockholdings
reflected in the articles of incorporation for the purpose of electing a new set
of officers for the corporation. 5
Petitioners, who are PMMSI stockholders, filed a petition for review with the
Court of Appeals. 6 Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and
Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Banc's orders. The petitions were
thereafter consolidated. 7 The consolidated petitions essentially raised the
following issues, viz: (a) whether the basis for the outstanding capital stock
and accordingly also for determining the quorum at stockholders' meetings it
should be the 1978 stock and transfer book or if it should be the 1952 articles
of incorporation; and (b) whether the Court of Appeals "gravely erred in
applying the Espejo Decision to the benefit of respondents." 8 The "Espejo
Decision" is the decision of the SEC en banc in SEC Case No. 2289 which
ordered the recording of the shares of Jose Acayan in the stock and transfer
book.
The Court of Appeals held that for purposes of transacting business, the
quorum should be based on the outstanding capital stock as found in the
articles of incorporation. Hence, the petition.
ISSUE: What should be the basis of quorum for a stockholders' meeting —
the outstanding capital stock as indicated in the articles of incorporation or
that contained in the company's stock and transfer book?
HELD: Petition denied. Bais of quorum is the outstanding capital stock as
indicated in the articles of incorporation.
RATIO: We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the
charter of the corporation and the contractual relationships between the State
and the corporation, the stockholders and the State, and between the
corporation and its stockholders. 27 When PMMSI was incorporated, the
prevailing law was Act No. 1459, otherwise known as "The Corporation Law."
Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are
residents of the Philippines, may form a private corporation for any lawful
purpose or purposes by filing with the Securities and Exchange Commission
articles of incorporation duly executed and acknowledged before a notary
public, setting forth:
xxx xxx xxx
(7) If it be a stock corporation, the amount of its capital stock, in lawful money
of the Philippines, and the number of shares into which it is divided, and if
such stock be in whole or in part without par value then such fact shall be
stated; Provided, however, That as to stock without par value the articles of
incorporation need only state the number of shares into which said capital
stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares
of no-par stock actually subscribed, the amount or number of shares of no-par
stock subscribed by each and the sum paid by each on his subscription. . . .
28
A review of PMMSI's articles of incorporation 29 shows that the corporation
complied with the requirements laid down by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND
PESOS (P90,000.00) divided into two classes, namely:
FOUNDERS' STOCK 1,000 shares at P20 par value
P20,000.00
COMMON STOCK 700 shares at P100 par value
P70,000.00
TOTAL 1,700 shares
P90,000.00
xxx xxx xxx
8. That the amount of the entire capital stock which has been actually
subscribed is TWENTY ONE THOUSAND SIX HUNDRED PESOS
(P21,600.00)
There is no gainsaying that the contents of the articles of incorporation are
binding, not only on the corporation, but also on its shareholders. In the instant
case, the articles of incorporation indicate that at the time of incorporation, the
incorporators were bona fide stockholders of seven hundred (700) founders'
shares and seventy-six (76) common shares. Hence, at that time, the
corporation had 776 issued and outstanding shares. TAIEcS
On the other hand, a stock and transfer book is the book which records the
names and addresses of all stockholders arranged alphabetically, the
installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale
or transfer of stock made, the date thereof and by and to whom made; and
such other entries as may be prescribed by law. 31 A stock and transfer book
is necessary as a measure of precaution, expediency and convenience since
it provides the only certain and accurate method of establishing the various
corporate acts and transactions and of showing the ownership of stock and
like matters. 32 However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should be
written therein. 33 In fact, it is generally held that the records and minutes of
a corporation are not conclusive even against the corporation but are prima
facie evidence only, 34 and may be impeached or even contradicted by other
competent evidence. 35 Thus, parol evidence may be admitted to supply
omissions in the records or explain ambiguities, or to contradict such records.
36
In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code
of the Philippines" supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees. — At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled
to vote. . . .
Sec. 52. Quorum in meetings. — Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or majority of the members in the case
of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. — The term "outstanding capital
stock" as used in this code, means the total shares of stock issued to
subscribers or stockholders whether or not fully or partially paid (as long as
there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders' shares or common shares. 37
In the instant case, two figures are being pitted against each other — those
contained in the articles of incorporation, and those listed in the stock and
transfer book.
To base the computation of quorum solely on the obviously deficient, if not
inaccurate stock and transfer book, and completely disregarding the issued
and outstanding shares as indicated in the articles of incorporation would work
injustice to the owners and/or successors in interest of the said shares. This
case is one instance where resort to documents other than the stock and
transfer books is necessary. The stock and transfer book of PMMSI cannot be
used as the sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book.
As aptly stated by the SEC in its Order dated 15 July 1996: 38
It is to be explained, that if at the onset of incorporation a corporation has 771
shares subscribed, the Stock and Transfer Book should likewise reflect 771
shares. Any sale, disposition or even reacquisition of the company of its own
shares, in which it becomes treasury shares, would not affect the total number
of shares in the Stock and Transfer Book. All that will change are the entries
as to the owners of the shares but not as to the amount of shares already
subscribed. aTcSID
This is precisely the reason why the Stock and Transfer Book was not given
probative value. Did the shares, which were not recorded in the Stock and
Transfer Book, but were recorded in the Articles of Incorporation just vanish
into thin air? . . . . 39
As shown above, at the time the corporation was set-up, there were already
seven hundred seventy-six (776) issued and outstanding shares as reflected
in the articles of incorporation. No proof was adduced as to any transaction
effected on these shares from the time PMMSI was incorporated up to the
time the instant petition was filed, except for the thirty-three (33) shares which
were recorded in the stock and transfer book in 1978, and the additional one
hundred thirty-two (132) in 1982. But obviously, the shares so ordered
recorded in the stock and transfer book are among the shares reflected in the
articles of incorporation as the shares subscribed to by the incorporators
named therein.
DISPOSITIVE: WHEREFORE, the petition is DENIED and the assailed
Decision is AFFIRMED. Costs against petitioners.
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS
SEC 10 NUMBER AND QUALIFICATIONS OF INCORPORATORS
Care Best International, Inc. v SEC GR 215510 Mar 16, 2015
This is the FULL TEXT:
NOTICE
Sirs/Mesdames :
Please take notice that the Court, First Division, issued a Resolution dated
March 16, 2015 which reads as follows:
"G.R. No. 215510 (Care Best International, Inc. v. Securities and Exchange
Commission and its Compliance and Enforcement Division). — The
petitioner's motion for an extension of thirty (30) days within which to file a
petition for review on certiorari is GRANTED, counted from the expiration of
the reglementary period.
After a judicious review of the records, the Court resolves to DENY the instant
petition and AFFIRM the September 13, 2013 Decision 1 and November 17,
2014 Resolution 2 of the Court of Appeals (CA) in CA-G.R. SP No. 104364
for failure of Care Best International, Inc. (petitioner) to show that the CA
committed any reversible error in upholding the ruling of the Securities and
Exchange Commission revoking its Certificate of Registration on the ground
of fraud.
As correctly pointed out by the CA, incorporation is a mere grant of privilege
from the State and, in order to be entitled to such privilege, 3 the requirements
and procedures for the grant thereof must be complied with. Under Section 14
(5) of the Corporation Code, the articles of incorporation must state the names
of the incorporators and this must necessarily refer to their legal names, not
fictitious names or aliases which they have no authority to use, as in this case.
The fact that petitioner had for its clients various government agencies is
irrelevant as all corporations must comply with the provisions of the
Corporation Code.
SO ORDERED." SERENO, C.J., on official travel. BRION, J., designated
acting member per S.O. No. 1947 dated March 12, 2015.
Freddie Guillen v Atty. Audie Arnado AC 10547 Nov 8, 2017
DOCTRINE: The IBP Board thus aptly concluded that Arnado is guilty of
taking advantage of his knowledge of the law and of surreptitiously easing out
Guillen from their restaurant business partnership by registering a corporation
under a different but similar name and style, in the same line of business, and
using the same trade secrets.
FACTS: Complainant Freddie Guillen is the registered owner of the City Grill
Restaurant. He then invited respondent Atty. Audie Arnado and a certain
Cedric Ebo to join the restaurant business. Each of them had to shell out
P200,000.00 to make up a total capital of P600,000.00. A Memorandum of
Agreement (MOA) was therefore executed and the business was formally
launched in May 2003. At first, everything went smoothly, until Arnado's sister-
in-law and Ebo's son participated in the management, causing complications
in the business operations, which later forced Guillen and his wife to step
down as general manager and operations manager, respectively. Because of
the disagreements among the parties, Guillen offered that he would waive his
claims for profits, provided that Arnado would return the P200,000.00 that he
paid as capital. Arnado allegedly claimed that said refund would still be subject
to the billings of the Arnado and Associate Law Firm. Thereafter, Guillen was
surprised to find out that Arnado had already caused the incorporation of the
restaurant with the Securities and Exchange Commission (SEC), which was
approved on February 16, 2004. Guillen was likewise excluded from the
business without the aforementioned refund of his capital. He was further
charged with Estafa before the Office of the City Prosecutor of Cebu. Thus,
Guillen initiated the present administrative case.
For his part, Arnado admitted the existence and the contents of the MOA. He
also admitted that he caused the incorporation of City Grill--Sutukil Food
Corporation. However, he insisted that the same was done in accordance with
the requirements under the law. Guillen could not validly claim for a refund,
and if he was really entitled, he should simply file an action to that effect.
Arnado likewise contended that Guillen's refund would still be subject to the
legal compensation claim of his law firm.
On November 2, 2011, the Commission on Bar Discipline of the Integrated
Bar of the Philippines (IBP) recommended the censure of Arnado, thus:1
WHEREFORE, Taking into consideration the foregoing premises, it is with
deep regret to recommend to the Board of Governors that ATTY. AUDIE
ARNADO [of] Cebu City be CENSURED for his deceitful and dishonest act in
violation of Rule 1.01 of the Code or Professional Responsibility which
provides that - A lawyer shall not engage in an unlawful, dishonest, immoral
and deceitful conduct.
So Ordered.
RESPECTFULLY RECOMMENDED.
On January 3, 2013, the IBP Board of Governors passed Resolution No. XX-
2013-47,2 which adopted and approved the aforementioned
recommendation, hence:
RESOLVED to ADOPT and APPROVE, as it is hereby unanimously
ADOPTED and APPROVED the Report and Recommendation of the
Investigating Commissioner in the above-entitled case, herein made part of
this Resolution as Annex "A", and finding the recommendation fully supported
by the evidence on record and the applicable laws and rules, and considering
Respondent's violation of Rule 1.01 of the Code of Professional
Responsibility, Atty. Audie Arnado is hereby CENSURED.
Thereafter, Arnado moved for reconsideration of said Resolution. On March
23, 2014, the IBP Board of Governors passed another resolution, Resolution
No. XXI-2014-180,3 which denied said motion for reconsideration and
approved its 2013 Resolution.
ISSUES: 1. Whether the findings and recommendation of the IBP is proper?
YES.
2. Did Atty. Arnado commit dishonesty by violating trade secrets?
YES
RATIO: The Court finds no compelling reason to deviate from the findings and
recommendation of the IBP Board of Governors that Arnado should be
suspended from the practice of law.
At the onset, it must be pointed out that the business name City Grill
Restaurant registered under Guillen's name was never dissolved in
accordance with the law. Even Arnado failed to prove that the City Grill
Restaurant business had already been terminated. Although said business
name was only used for a short period of time, the same had already acquired
goodwill among the residents and customers in the locality.
On February 26, 2004, City Grill-Sutukil Food Corporation was registered with
the SEC. Although Arnado and Ebo were not included as incorporators, those
persons reflected in the articles of incorporation as the company's
incorporators were their relatives. It is clear that when Arnado caused the
incorporation of City Grill-Sutukil Food Corporation, he was fully aware that
City Grill Restaurant was still registered in Guillen's name. Obviously, he did
the same to take advantage of the goodwill earned by the name of City Grill
Restaurant. Arnado was likewise the one who actually notarized some of City
Grill-Sutukil Food Corporation's legal documents such as the Treasurer's
Affidavit and a letter addressed to the SEC.

The IBP Board thus aptly concluded that Arnado is guilty of taking advantage
of his knowledge of the law and of surreptitiously easing out Guillen from their
restaurant business partnership by registering a corporation under a different
but similar name and style, in the same line of business, and using the same
trade secrets. Arnado, although not reflected as one of the incorporators of
City Grill-Sutukil Food Corporation, has deceived the public into believing that
City Grill Restaurant and City Grill-Sutukil Food Corporation are one and the
same, clearly violating Rule 1.01 of the CPR, which prohibits a lawyer from
engaging in unlawful, dishonest, immoral, or deceitful conduct.
The Court has repeatedly emphasized that the practice of law is imbued with
public interest and that a lawyer owes substantial duties, not only to his client,
but also to his brethren in the profession, to the courts, and to the public, and
takes part in the administration of justice, one of the most important functions
of the State, as an officer of the court. Accordingly, lawyers are bound to
maintain, not only a high standard of legal proficiency, but also of morality,
honesty, integrity, and fair dealing.4
Here, Arnado has certainly fallen short of the high standard of morality,
honesty, integrity, and fair dealing required of him. On the contrary, he
employed his knowledge and skill of the law as well as took advantage of
Guillen to secure undue gains for himself and to inflict serious damage on
others.
DISPOSITIVE: WHEREFORE, IN VIEW OF THE FOREGOING, the Court
SUSPENDS Atty. Audie Arnado from the practice of law for a period of one
(1) year and WARNS him that a repetition of the same or similar offense shall
be dealt with more severely.
FRANCES
SEC. 11. Corporate Term. – A corporation shall have perpetual existence unless its
articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to the effectivity of this Code,
and which continue to exist, shall have perpetual existence, unless the corporation,
upon a vote of its stockholders representing a majority of its outstanding capital
stock,notifies the Commission that it elects to retain its specific corporate term
pursuant to its articles of incorporation: Provided,
That any change in the corporate term under this section is without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this Code.
A corporate term for a specific period may be extended or shortened by amending the
articles of incorporation: Provided, That no extension may be made earlier than three
(3) years prior to the original or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by the Commission: Provided,
further, That such extension of the corporate term shall take effect only on the day
following the original or subsequent expiry date(s)
A corporation whose term has expired may apply for a revival of its corporate existence,
together with all the rights and privileges under its certificate of incorporation and subject
to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the
Commission, the corporation shall be deemed revived and a certificate of revival
of corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.
No application for revival of certificate of incorporation of banks, banking and
quasibanking institutions, preneed, insurance and trust companies, non-stock savings
and loan associations (NSSLAs), pawnshops, corporations engaged in money service
business, and other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government
agency.
1. Default term
2. Notify SEC for a limited term
3. Curative provision for corporations with expired term
Alhambra Cigar v SEC 24 SCRA 269 (1968)
DOCTRINE: A corporation cannot extend its corporate existence during its
liquidation period; it must extend its corporation before the expiry of the term
fixed in its articles of incorporation.
FACTS: Petitioner Alhambra Cigar and Cigarette Manufacturing Company (simply as
Alhambra) was incorporated under Philippine laws on January 15, 1912. It was to exist
for 50 years from incorporation based on its articles of incorporation (AOI). Its term of
existence expired on January 15, 1962. On that date, it ceased transacting business,
entered into a state of liquidation. Thereafter, a new corporation. — Alhambra
Industries, Inc. — was formed to carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution, named Angel Gamboa trustee
to take charge of its liquidation. Within Alhambra's three-year statutory period for
liquidation – RA 3531 was enacted into law. It amended Section 18 of the Corporation
Law which empowered domestic private corporations to extend corporate life beyond
the period fixed by the AOI for a term not to exceed fifty years in any instance.
Previously, the maximum non-extendible term of such corporations was 50 years.
On July 15, 1963, at a special meeting, Alhambra's board of directors (BOD) resolved
to amend paragraph "Fourth" of its AOI to extend its corporate life for an additional 50
years, or a total of 100 years from its incorporation. Alhambra's stockholders,
representing more than two-thirds of its subscribed capital stock, approved it.
Subsequently, Alhambra's AOI were filed with respondent Securities and Exchange
Commission (SEC).
SEC’s Contention:
SEC, however, returned said AOI to Alhambra's counsel with the ruling that RA 3531
"which took effect only on June 20, 1963, cannot be availed of by the said corporation,
for the reason that its term of existence had already expired when the said law took
effect in short, said law has no retroactive effect."
Alhambra's counsel sought reconsideration of SEC's ruling aforesaid, refiled the AOI.
SEC denied the reconsideration sought. Alhambra relies on RA 3531, which amended
Section 18 of the Corporation Law.
ISSUE: May a corporation extend its life by amendment of its AOI effected during the
3-year statutory period for liquidation when its original term of existence had already
expired?
HELD: NO. It must be noted that when Alhambra made its attempt to extend its
corporate existence, its original term of 50 years had already expired (January 15,
1962); so it was in the midst of the three-year grace period statutorily fixed in Section
77 of the Corporation Law.
Plain from the language of the provision is its meaning: continuance of a "dissolved"
corporation as a body corporate for 3 years has for its purpose the final closure of its
affairs, and no other; the corporation is specifically enjoined from "continuing the
business for which it was established". The liquidation of the corporation's affairs set
forth in Section 77 became necessary precisely because its life had ended. For this
reason alone, the corporate existence and juridical personality of that corporation to do
business may no longer be extended.
RA 3531 is silent, it is true, as to when such act of extension may be made. But even
with a superficial knowledge of corporate principles, it does not take much effort to reach
a correct conclusion. For, implicit in Section 77 is that the privilege given to prolong
corporate life under the amendment must be exercised before the expiry of the term
fixed in the AOI. Silence of the law on the matter is not hard to understand. Specificity
is not really necessary. The authority to prolong corporate life was inserted by RA 3531
into a section of the law that deals with the power of a corporation to amend its AOI.
(For, the manner of prolongation is through an amendment of the articles.) And it should
be clearly evident that under Section 77 no corporation in a state of liquidation can act
in any way, much less amend its articles, "for the purpose of continuing the business
for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply because
when it attempted to do so, Alhambra was still in the process of liquidation. It is surely
impermissible for us to stretch the law — that merely empowers a corporation to act in
liquidation — to inject therein the power to extend its corporate existence.
Jurisprudence assents to this view. Fletcher has written: "Since the privilege of
extension is purely statutory, all of the statutory conditions precedent must be complied
with in order that the extension may be effectuated. And, generally these conditions
must be complied with, and the steps necessary to effect the extension must be taken,
during the life of the corporation, and before the expiration of the term of existence as
original fixed by its charter or the general law, since, as a rule, the corporation is ipso
facto dissolved as soon as that time expires. So where the extension is by amendment
of the articles of incorporation, the amendment must be adopted before that time.
x x x
When the corporate life of the corporation was ended, there was nothing to extend. The
law gives a certain length of time for the filing of records in this court, and provides that
the time may be extended by the court, but under this provision it has uniformly been
held that when the time was expired, there is nothing to extend, and that the appeal
must be dismissed... So, when the articles of a corporation have expired, it is too late to
adopt an amendment extending the life of a corporation; for, the corporation having
expired, this is in effect to create a new corporation ..."
True that the Alabama Supreme Court has stated in one case that a corporation
empowered by statute to renew its corporate existence may do so even after the
expiration of its corporate life, provided renewal is taken advantage of within the
extended statutory period for purposes of liquidation. That ruling, however, is inherently
weak as persuasive authority for the situation at bar for at least two reasons: First. That
case was a suit for mandamus to compel a former corporate officer to turn over books
and records that came into his possession and control by virtue of his office. It was there
held that such officer was obliged to surrender his books and records even if the
corporation had already expired. The holding on the continued existence of the
corporation was a mere dictum. Second. Alabama's law is different. Corporations in that
state were authorized not only to extend but also to renew their corporate existence.
On this point, we again draw from Fletcher: "There is a broad distinction between the
extension of a charter and the grant of a new one. To renew a charter is to revive a
charter which has expired, or, in other words, "to give a new existence to one which has
been forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to
increase the time for the existence of one which would otherwise reach its limit at an
earlier period". Nowhere in our statute — Section 18, Corporation Law, as amended by
Republic Act 3531 — do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extension of corporate
existence. And, as so understood, extension may be made only before the term
provided in the corporate charter expires.
DISPOSITIVE: FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8, 1964, both here
under review, are hereby affirmed.
CRMD v Ching Bee Trading Corp GR 205291 Nov 12, 2014
DOCTRINE: While the general rule is that a corporation ceases to exist upon the
expiration of the corporate term indicated in its AOI, it does not apply where the
delay is due to the neglect of the officer with whom the certificate is required to
be filed, or to a wrongful refusal on his part to receive the application. In such
case, the amendments shall take effect from the date the documents were filed
based on Section 17 which requires SEC to give the incorporators a reasonable
time within which to correct or modify the objectionable portions of the articles.
FACTS: CBTC was registered with the SEC on December 23, 1960. Its corporate
existence being limited to a period of only 50 years, it was to expire on December 23,
2010.
On December 22, 2010 or one (1) day before the last day of its corporate existence,
CBTC filed with the Company Registration and
Monitoring Department (CRMD) of SEC, an application seeking the approval of its
amended articles of incorporation (AOI) extending its term for another 50 years. CRMD,
however, refused to accept the application because of CBTC's failure to state in the
required Director's Certificate that the stockholders, owning and representing at least
two (2/3) of its capital stock, voted and approved the amendment. The CRMD processor
in the name of Erlinda Cabatic then verbally advised CBTC to submit a letter requesting
an extension to file the requirements.
On December 23, 2010, or just hours before CBTC's corporate personality expired,
such a letter was filed pursuant to the CRMD processor's suggestion. On January 6,
2011, however, the SEC denied the request, citing SEC Resolution No. 394,5 dated
November 13, 2008, as basis, which contained SEC's policy of denying the filing of any
amended AOI extending the corporate life of a corporation, whose original term had
expired.
On appeal to the SEC En Banc, the request was likewise denied. Thus, CBTC went to
the CA. CA ordered the SEC to admit CBTC's amended AOI. In reversing the SEC, CA
stated that CBTC should have been given reasonable time within which to correct or
modify any portion in the articles following Section 17 of the Corporation Code (Code),
which states as follows:
Sec.17. Grounds when articles of incorporation or amendment may be rejected or disapproved. -
The Securities and Exchange Commission may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in: 1) compliance with the requirements of this Code: Provided,
That the Commission shall give the incorporators a reasonable time within which to correct or modify
the objectionable portions of the articles or amendment.
SEC’s Contentions:
SEC contends that the CA erred in granting CBTC's prayer for an extension to file the
amended articles of incorporation. It points out that a corporation seeking to extend
corporate term must take all the necessary steps before its life expires at the end of the
50-year period. As basis, it cites Alhambra Cigar and Cigarette Manufacturing Company
v. SEC (read ratio of previous case). Considering that CBTC failed to file the amended
AOI and to seek the approval of SEC before the expiration of its term on December 23,
2010, SEC argues that no valid extension of its corporate existence could be allowed .
CBTC’s Contentions:
For its part, CBTC relies on Section 17 of the Code, interpreting the same as a statutory
mandate for the SEC to give reasonable time to an applicant within which to correct or
modify the objectionable portions of the proposed amendment. CBTC argued that when
the CRMD found that the amended CBTC AOI was non-compliant with the form
prescribed by the Code, SEC should have given CBTC reasonable time to complete the
requirements. Further, it rejects the application of Alhambra for not being in all fours
with this case, particularly because the issue raised therein finds no similarity in the
case at bench, and also the fact that the extension requested therein was made after
the corporate term had already expired.
ISSUE: Whether or not CBTC’s application (made before the expiry of its corporate life)
for extension of corporate life may be granted on the basis of Section 17 which
mandates SEC to give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles
HELD: YES. The Court denies the petition of SEC-CRMD and rules in favor of CBTC.
The general rule in this jurisdiction is that a corporation ceases to exist upon the
expiration of the corporate term indicated in its AOI. Once that occurs, all corporate acts,
except those conferred by law, are considered ultra vires, if not outright invalid. Thus,
the moment a corporation's right to exist as an "artificial person" ceases, its corporate
powers are terminated "just as the powers of a natural person to take part in mundane
affairs cease to exist upon his death." Nevertheless, corporate death may be avoided
as the State practically allows the unlimited perpetuation of a corporation by operation
of Section 11 of the Code. This privilege of extending corporate term must be done
within the limited period of five (5) years prior to the original or subsequent expiry date.
It is in this regard that the SEC argues that CBTC should have done it earlier, not one
day before the expiration of the term, and that the failure to do so constitutes negligence
with which the CBTC must bear the consequences, particularly the loss of its corporate
life.
The Court acts on the matter with liberality. The Code is silent as to how early within the
five (5) year period the application for extension should be made. Reading plainly from
Section 11 of the Code would reveal that an applicant may seek the approval of the
SEC for the extension of its life at any time within the given five year period.
In this case, CBTC sought to extend its corporate term by filing the required documents
with the CRMD on December 22, 2010 – obviously within the period allowed and
granted by the Code to seek for extension. It had a day to seek the approval of the
proposed extension ·of the corporate existence. Unfortunately, CRMD processor
refused to receive the application on the ground that there was failure to state in the
required Director's Certificate that the stockholders, owning and representing at least
2/3 of CBTC's capital stock, voted and approved the amendment. To SEC, the rejection
was valid as it was authorized under Section 17 of the Code if an applicant did not
substantially comply with the requirements of the Code as to the form. Under Section
17 of the Code, however, the SEC must give a reasonable time to an applicant within
which to make the necessary corrections should there be objectionable portions in the
amendment. As cited by the CA, a reasonable time is defined as so much time as is
necessary under the circumstances for a reasonably prudent and diligent man to do,
conveniently, what the contract or duty requires that should be done, having regard for
the rights and possibility of loss, if any to the other.
In this case, CRMD failed to at least provide CBTC a reasonable time within which
compliance with the requirements for extension may be made in full. Instead, the
processor only verbally advised CBTC to submit a letter-request asking for an extension
to file the deficient documentary requirements. What SEC should have done was to give
a formal notice to CBTC that the latter had one day to cure any defect before CBTC's
life would expire. That one (1) day, which was lost because of miscommunication, would
have been
enough to complete the process of filing the application within the period specified by
the Code and would have sufficed for the approval of the corporate extension being
requested. Therefore, CBTC remains entitled to a day to submit all the requirements
prescribed by the Code.
On this point, SEC points out that even assuming that CBTC had at least a day to
complete the requirements, such a time would not have been sufficient to extend
CBTC's corporate life. It is of the position that the approval of the extension must
likewise happen while CBTC is alive, albeit in fiction. Considering that CBTC had been
ipso facto dissolved after December 23, 2010, SEC submits that no more extension
could be granted.
This perspective seems to provide an expectation that a corporation seeking to extend
its corporate life must secure the SEC approval any time before the expiration of the
term - meaning that the corporation must make sure that SEC approves the
amendment. While the Court agrees that extension (including the SEC approval) must
happen before the expiration of the corporate term, the burden of doing so does not
only fall to the applicant, but also on the SEC. The requirement pronounced in
Alhambra, requiring that all steps must be undertaken while life still subsists, is both the
responsibility of the State, acting through the SEC, and the corporation. To say that the
corporation alone has this burden is unfair as the Code does not impose this obligation
solely on the corporation.
Accordingly, for as long as the corporation opts to extend its term while it is still alive
and during the period allowed by the Code, that is, the filing of the necessary
requirements, the burden shifts to the SEC to review, approve or disapprove the same
before the corporation breathes its last. If no approval is secured within that limited time,
the fault would have to be on the part of the SEC.
The problem here is the assertion of the SEC that nothing was even filed as the
application was rightly rejected by the CRMD. Then again, the Court believes that
despite that rightful rejection, CBTC was deprived of its right to a reasonable one (1)-
day period to complete the requirements in view of the suggestion made by the
processor to instead submit a letter requesting for extension. That suggestion caused a
misunderstanding as to the proper recourse that CBTC should have taken. Had the
processor notified CBTC about the urgency of fulfilling the requirements prior to the
expiration of the corporate term, it would have been likely that the requirements for the
filing would have been completed.
The Court takes notice of the fact that the deficiency has been remedied by the
submission of the amended December 23, 2010 Director's Certificate. And with this
compliance, it is but fair that CBTC be considered to have sufficiently complied in good
faith with all the requirements for a valid extension, as if such was made prior to the
expiration of its corporate life or, to be precise, on December 23, 2010. This ruling runs
in accord with the doctrine of relation. Under the said principle, where the delay is due
to the neglect of the officer with whom the certificate is required to be filed, or to a
wrongful refusal on his part to receive the application, such as in this case, the
amendments shall take effect from the date the documents were filed.
DISPOSITIVE: WHEREFORE, the petition is DENIED. SEC is ordered to act on the
application with dispatch.
Chua et al v People GR 216146 Aug 24, 2016
DOCTRINE: The corporation continues to be a body corporate for 3 years after its
dissolution for purposes of prosecuting and defending suits by and against it and
for enabling it to settle and close its affairs, culminating in the disposition and
distribution of its remaining assets. The termination of the life of a juridical entity
does not by itself cause the extinction or diminution of the rights and liabilities of
such entity nor those of its owners and creditors.
FACTS: Joselyn was a stockholder of Chua Tee Corporation of Manila. x x x Alfredo
was the president and chairman of the board, while Tomas was the corporate secretary
and also a member of the board of the same corporation. x x x Mercedes was the
accountant/bookkeeper tasked with the physical custody of the corporate records.
On or about August 24, 2000, Joselyn invoked her right as a stockholder pursuant to
Section 74 of the Corporation Code to inspect the records of the books of the business
transactions of the corporation, the minutes of the meetings of the BOD and
stockholders, as well as the financial statement/s of the corporation. She hired a lawyer
to send demand letters to each of the petitioners for her right to inspect to be heeded.
However, she was denied of such right to inspect.
Joselyn likewise hired the services of Mr. Velayo from the accounting firm of Guzman
Bocaling and Company to assist her in examining the books of the corporation. Armed
with a letter request, together with the list of schedules of audit materials, Mr. Velayo
and his group visited the corporation's premises for the supposed examination of the
accounts. However, the books of accounts were not formally presented to them and
there was no list of schedules, which would allow them to pursue their inspection. Mr.
Velayo testified that they failed to complete their objective of inspecting the books of
accounts and examine the recorded documents.
In her Complaint-Affidavit with QC Prosecutors' Office, Joselyn alleged that despite
written demands, petitioners conspired in refusing without valid cause the exercise of
her right to inspect Chua Tee Corporation of Manila's (CTCM) business transactions
records, financial statements and minutes of the meetings of both the BOD and
stockholders. In their Counter-Affidavits, petitioners denied liability. They argued that
the custody of the records sought to be inspected by Joselyn did not pertain to them.
Besides, the physical records were merely kept inside the cabinets in the corporate
office. Further, they did not prevent Joselyn from inspecting the records. What
happened was that Mercedes was severely occupied with winding up the affairs of
CTCM after it ceased operations. Joselyn and her lawyers then failed to set up an
appointment with Mercedes. Joselyn, through counsel, then sent demand letters to
inspect the records. Not long after, Joselyn filed two cases, one of which was civil and
the other, criminal, against the petitioners.
On July 4, 2001, an Information indicting petitioner for alleged violation of Section 74,
in relation to Section 144, of Corporation Code was filed before the MeTC of QC.
Petitioners filed before MeTC a Motion to Quash the Information filed against them.
They argued that CTCM had ceased to exist as a corporate entity since May 26, 1999.
Consequently, when the acts complained of by Joselyn were allegedly committed in
August of 2000, the petitioners cannot be considered anymore as responsible officers
of CTCM. Thus, assuming for argument's sake that the petitioners actually refused to
let Joselyn inspect corporate records, no criminal liability can attach to an omission to
perform a duty, which no longer existed. MeTC, however, denied the petitioners' Motion
to Quash. Arraignment, pre-trial and trial then ensued. The prosecution offered the
testimonies of Joselyn and Abednego Velayo (Velayo ). On the other hand, the
petitioners neither presented witnesses, nor filed any documentary evidence.
MeTC convicted petitioners, sentencing them to suffer the penalty of 30 days of
imprisonment, and directing them to pay the costs of suit. MeTC cited Ang-Abaya v.
Ang to stress that in this case, the prosecution had amply established the presence of
the elements of the offense under Section 74 of the Corporation Code, to wit: (a) a
stockholder's prior demand in writing for the inspection of corporate records; (b) refusal
by corporate officers to allow the inspection; and (c) proofs adduced by the corporate
officers of the stockholder's prior improper or malicious use of the records in the event
that the same is raised as a defense for the refusal to allow the inspection. Further
invoking Gokongwei, Jr. v. SEC, MeTC explained that a stockholder's right to inspect
corporate records is based upon the necessity of self-protection. Thus, the exercise of
the right at reasonable hours during business days should be allowed.
Petitioners filed an appeal, which RTC denied.
CA outrightly dismissed the petition on technical grounds.
ISSUE: Whether or not the petitioners’ conviction for alleged violation of Section 74, in
relation to Section 144, of the Corporation Code is proper
HELD: YES. The Court affirms the conviction but directs the payment of fine, in lieu of
the penalty of imprisonment imposed by the courts a quo. Despite the expiration of
CTCM's corporate term in 1999, duties as corporate officers still pertained to the
petitioners when Joselyn 's complaint was filed in 2000.
Yu, et al. v. Yukayguan instructs that: The corporation continues to be a body corporate
for 3 years after its dissolution for purposes of prosecuting and defending suits by and
against it and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. The termination of the life of a juridical entity
does not by itself cause the extinction or diminution of the rights and liabilities of such
entity nor those of its owners and creditors.
Further, as correctly pointed out by OSG, Sections 122 and 145 of the Corporation Code
explicitly provide for the continuation of the body corporate for 3 years after dissolution.
The rights and remedies against, or liabilities of, the officers shall not be removed or
impaired by reason of the dissolution of the corporation. Corollarily then, a stockholder's
right to inspect corporate records subsists during the period of liquidation. Hence,
Joselyn, as a stockholder, had the right to demand for the inspection of records. Lodged
upon the corporation is the corresponding duty to allow the said inspection.
Thus, while a cloud of doubt is cast upon the existence of criminal intent on the part of
the petitioners, it is jurisprudentially settled that proof of malice or deliberate intent
(mens rea) is not essential in offenses punishable by special laws, which are mala
prohibita.In the case at bar, the petitioners were charged with violations of Section 74,
in relation to Section 144, of the Corporation Code, a special law. Accordingly, since
Joselyn was deprived of the exercise of an effective right of inspection, offenses had in
fact been committed, regardless of the petitioners' intent. The Corporation Code
provides for penalties relative to the commission of offenses, which cannot be trivialized,
lest the public purpose for which they are crafted be defeated and put to naught.
DISPOSITIVE: WHEREFORE, IN VIEW OF THE FOREGOING, the conviction of
Alfredo Chua, Tomas Chua and Mercedes Diaz for violations of Section 74, in relation
to Section 144, of the Corporation Code is AFFIRMED, but MODIFIED to the extent that
in lieu of the penalty of thirty (30) days of imprisonment, a FINE of TEN THOUSAND
PESOS (₱10,000.00) each is imposed upon the petitioners.
Sec. 12. Minimum Capital Stock Not Required of Stock Corporations. – Stock
corporations shall not be required to have a minimum capital stock, except as otherwise
specifically provided by special law.
1. See Sec 14 which retains Seventh Article
Seventh: That the authorized capital stock of the corporation is ______________
PESOS
(P________), divided into _____ shares with the par value of ____________ PESOS
(P_______________) per share. (In case all the shares are without par value): That the
capital
stock of the corporation is __________________________ shares without par value.
2. See Sec 37 fourth par
Copies of the certificate shall be kept on file in the office of the corporation and filed with the
Commission and attached to the original articles of incorporation. After approval by the Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall be deemed
increased or decreased and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Commission shall not accept
for filing any certificate of increase of capital stock unless accompanied by a sworn statement of the
treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing
that at least twenty-five percent (25%) of the increase in capital stock has been subscribed and that
at least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the
corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided, further, That no decrease in capital
stock shall be approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Sec 13. Contents of Articles of Incorporation
1. Name; specific purpose; place of principal office; term; names, nationalities
and residence addresses of incorporators; number of directors v trustees;
authorized capital stock, number of shares, subscribed, paid up; if non-
stock, amount of capital; other matters;
2. Arbitration
3. Electronic document
4. Pre-incorporation Agreement
Fong v Duenas GR 185592 Jun 15, 2015
DOCTRINE: Under the Corporation Code, before a stock corporation may be
incorporated and registered, it is required that at least twenty five percent (25%)
of its authorized capital stock as stated in the articles of incorporation, be first
subscribed at the time of incorporation, and at least twenty five percent (25%) of
the total subscription, be paid upon subscription. To prove compliance with this
requirement, the SEC requires the incorporators to submit a treasurer’s affidavit
and a certificate of bank deposit, showing the existence of an amount compliant
with the prescribed capital subscription. In this light, Fong’s cash contributions
playS an indispensable part in Alliance’s incorporation. The process necessarily
requires the money not only to fund Alliance’s registration with the SEC but also
its initial capital subscription. Thus, Dueñas erred when he invested Fong’s
contributions in his two companies.
FACTS: Dueñas is engaged in the bakery, food manufacturing, and retailing business,
which are all operated under his two companies, D.C. DANTON, Inc. (Danton) and
Bakcom Food Industries, Inc. (Bakcom). He was an old acquaintance of Fong as they
were former schoolmates at DLSU.
Sometime in November 1996, Dueñas and Fong entered into a verbal joint venture
contract (JVA) where they agreed to engage in the food business and to incorporate a
holding company under the name Alliance Holdings, Inc. Its capitalization would be ₱65
Million, to which they would contribute in equal parts. The parties agreed that Fong
would contribute ₱32.5Min cash while Dueñas would contribute all his Danton and
Bakcom shares which he valued at ₱32.5M. Fong required Dueñas to submit the
financial documents supporting the valuation of these shares.
On November 25, 1996, Fong started remitting in tranches his share in the proposed
corporation’s capital. He made the remittances under the impression that his
contribution would be applied as his subscription to 50% of Alliance’s total
shareholdings. On the other hand, Dueñas started processing the Boboli international
license that they would use in their food business. On June 13, 1997, Fong sent a letter
to Dueñas informing him of his decision to limit his total contribution from ₱32.5M to
₱5M. Fong observed that despite his ₱5M contribution, Dueñas still failed to give him
the financial documents on the valuation of the Danton and Bakcom shares. Thus,
except for Dueñas’ representations, Fong had nothing to rely on to ensure that these
shares were really valued at ₱32.5 Million. Moreover, Dueñas failed to incorporate and
register Alliance with SEC.
These circumstances convinced Fong that Dueñas would no longer honor his
obligations in the JVA. Thus, on October 30, 1997, Fong wrote Dueñas informing him
of his decision to cancel the JVA. He also asked for the refund of the ₱5M that he
advanced. Dueñas admitted that he could not immediately return the money since he
used it to defray the business expenses of Danton and Bakcom.
To meet Fong’s demand, Dueñas proposed several schemes for payment of the ₱5M.
However, Fong did not accept any of these proposed schemes. On March 25, 1998,
Fong wrote a final letter of demand informing Dueñas that he would file a judicial action
against him should he still fail to pay after receipt of this written demand. Since Dueñas
did not pay, Fong filed a complaint against him for collection of a sum of money and
damages
RTC ruled in favor of Fong. It noted that Dueñas’ failure to furnish Fong with the financial
documents on the valuation of the Danton and Bakcom shares, as well as the almost 1
year delay in the incorporation of Alliance, caused Fong to rescind the joint venture
agreement. According to the trial court, these are adequate and acceptable reasons for
rescission.
CA granted the appeal and annulled the trial court’s ruling.
Fong’s Contentions:
Fong submits that CA erred when it ruled that his June 13, 1997 letter showed his intent
to convert his contributions from advance subscriptions to Alliance’s shares, to
investments in Dueñas’ two companies. Contrary to the CA’s findings, the receipts and
the letter expressly mentioned that his contributions should all be treated as his share
subscription to Alliance.26 Also, Fong argues that Dueñas’ unjustified retention of the
₱5 Million and its appropriation to his (Dueñas’) own business, amounted to unjust
enrichment; and that he contributed to fund Alliance’s capital and incorporation, not to
pay for Danton and Bakcom’s business expenses.27
Duenas’ Contentions:
Dueñas contends that he could no longer refund the ₱5M since he had already applied
it to his 2 companies; that this is proper since Danton and Bakcom’s shares would also
form part of his capital contribution to Alliance. Moreover, the incorporation did not push
through because Fong unilaterally rescinded the JVA by limiting his investment from
₱32.5M to ₱5M. Thus, it was Fong who first breached the contract, not he.
Consequently, Fong’s failure to comply with his undertaking disqualified him from
seeking the agreement’s rescission.
ISSUES:
1. Is Article 1191 or NCC applicable in the case at bar (pertaining to the
rescission of the JVA between the parties)? If yes, who is entitled to rescind?
2. Whether or not Duenas is justified in using Fong’s contribution to defray the
business expenses of Danton and Bakcom
3. Whether or not Duenas violated the JVA
HELD:
1) YES. Rescission under Art. 1191 is applicable in the present case. Fong may revoke
his pre-incorporation subscription.
Notwithstanding the aforesaid remittances, defendant failed for an unreasonable length
of time to submit a valuation of the equipment of D.C. Danton and Bakcom x x x. Worse,
defendant failed to accomplish the organization and incorporation of the proposed
holding company, contrary to his representation to promptly do so. x x x x Considering
that the incorporation of the proposed holding company failed to materialize, despite the
lapse of 1 year and 4 months from the time of subscription, plaintiff has the right to
revoke his pre-incorporation subscription. Such revocation entitles plaintiff to a refund
of the amount of ₱5M he remitted to defendant, representing advances made in favor
of defendant to be considered as payment on plaintiff’s subscription to the proposed
holding company upon its incorporation, plus interest from receipt by defendant of said
amount until fully paid.
Fong’s allegations primarily pertained to his cancellation of their verbal agreement
because Dueñas failed to perform his obligations to provide verifiable documents on the
valuation of the Danton’s and Bakcom’s shares, and to incorporate the proposed
corporation. These allegations clearly show that what Fong sought was the JVA’s
rescission. As a contractual remedy, rescission is available when one of the parties
substantially fails to do what he has obligated himself to perform. It aims to address the
breach of faith and the violation of reciprocity between two parties in a contract. Under
Article 1191 of the Civil Code, the right of rescission is inherent in reciprocal obligations.
Accordingly, when a decree for rescission is handed down, it is the duty of the court to
require both parties to surrender that which they have respectively received and to place
each other as far as practicable in his original situation.
2) NO. For his part, Dueñas explained that he could not immediately return the ₱5M
since he had invested it in his two companies. He found nothing irregular in this as
eventually, the Danton and Bakcom shares would form part of Alliance’s capital.
Dueñas’ assertion is erroneous.
The parties never agreed that Fong would invest his money in Danton and Bakcom.
Contrary to Dueñas’ submission, Fong’s understanding was that his money would be
applied to his shareholdings in Alliance. As shown in Fong’s June13, 1997 letter, this
fact remained to be true even after he limited his contribution to ₱5 Million. Moreover,
under the Corporation Code, before a stock corporation may be incorporated and
registered, it is required that at least twenty five percent (25%) of its authorized capital
stock as stated in the articles of incorporation, be first subscribed at the time of
incorporation, and at least twenty five percent (25%) of the total subscription, be paid
upon subscription.
To prove compliance with this requirement, the SEC requires the incorporators to submit
a treasurer’s affidavit and a certificate of bank deposit, showing the existence of an
amount compliant with the prescribed capital subscription.
In this light, we conclude that Fong’s cash contributions play an indispensable part in
Alliance’s incorporation. The process necessarily requires the money not only to fund
Alliance’s registration with the SEC but also its initial capital subscription. This is evident
in the receipts which Dueñas himself executed. Thus, Dueñas erred when he invested
Fong’s contributions in his two companies. This money should have been used in
processing Alliance’s registration. Its incorporation would not materialize if there would
be no funds for its initial capital. Moreover, Dueñas represented that Danton and
Bakcom’s shares were valued at ₱32.5 Million. If this was true, then there was no need
for Fong’s additional ₱5 Million investment, which may possibly increase the value of
the Danton and Bakcom shares.
3) YES. Under these circumstances, the Court agrees with the trial court that Dueñas
violated his agreement with Fong. Aside from unilaterally applying Fong’s contributions
to his two companies, Dueñas also failed to deliver the valuation documents of the
Danton and Bakcom shares to prove that the combined values of their capital
contributions actually amounted to ₱32.5 Million. These acts led to Dueñas’ delay in
incorporating the planned holding company, thus resulting in his breach of the contract.
On this basis, Dueñas’ breach justified Fong’s rescission of the joint venture agreement
under Article 1191.
However, the Court notes that Fong also breached his obligation in the joint venture
agreement. In his June 13, 1997 letter, Fong expressly informed Dueñas that he would
be limiting his cash contribution from ₱32.5M to ₱5M because of the following reasons
which we quote verbatim:
1. First, we were faced with the ‘personal’ factor which was explained to you one time.
This has caused us to turn down a number of business opportunities;
2. Secondly, since last year, the operation of Century 21 has been taking more time
from us than anticipated. That is why we decided to relinquish our original plan to
manage and operate ‘Boboli’ knowing this limitation. For us, it does not make sense
anymore to go for a significant shareholding when we cannot be hands on and
participate actively as originally planned.43 x x x.
Although these reasons appear to be valid, they do not erase the fact that Fong still
reneged on his original promise to contribute ₱32.5 Million. The joint venture agreement
was not reduced to writing and the evidence does not show if the parties agreed on
valid causes that would justify the limitation of the parties’ capital contributions. Their
only admission was that they obligated themselves to contribute ₱32.5 Million each.
Hence, Fong’s diminution of his capital share to ₱5 Million also amounted to a
substantial breach of the joint venture agreement, which breach occurred before Fong
decided to rescind his agreement with Dueñas. Thus, Fong also contributed to the non-
incorporation of Alliance that needed ₱65 Million as capital to operate. Fong cannot
entirely blame Dueñas since the substantial reduction of his capital contribution also
greatly impeded the implementation of their agreement to engage in the food business
and to incorporate a holding company for it.
As both parties failed to comply with their respective reciprocal obligations, we apply
Article 1192 of the Civil Code, which provides:
Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first in
fractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first
violated the contract, the same shall be deemed extinguished, and each shall bear his own damages.
[Emphasis supplied.]
As the Court cannot precisely determine who between the parties first violated the
agreement, we apply the second part of Article 1192 which states: "if it cannot be
determined which of the parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. "
In these lights, the Court holds that the JVA between Fong and Dueñas is deemed
extinguished through rescission under Article 1192 in relation with Article 1191 of the
Civil Code. Dueñas must therefore return the ₱5 Million that Fong initially contributed
since rescission requires mutual restitution.44 After rescission, the parties must go back
to their original status before they entered into the agreement. Dueñas cannot keep
Fong's contribution as this would constitute unjust enrichment.
No damages shall be awarded to any party in accordance with the rule under Article
1192 of the Civil Code that in case of mutual breach and the first infractor of the contract
cannot exactly be determined, each party shall bear his own damages.
DISPOSITIVE: WHEREFORE, premises considered, we hereby GRANT the petition
and reverse the September 16, 2008 decision and December 8, 2008 resolution of the
Court of Appeals in CA-G.R. CV No. 88396. Respondent Jose V. Dueñas is ordered to
RETURN Five Million Pesos to petitioner George C. Fong. This amount shall incur an
interest of six percent (6%) per annum from the date of finality of this judgment until fully
paid.45 The parties' respective claims for damages are deemed EXTINGUISHED and
each of them shall bear his own damages.
5. Purpose Clause
Leo Y. Querubin, et al v Comelec et al, GR 218787 Dec 8, 2015
DOCTRINE: While it is true that SMTC's AOI made specific mention of
the automation of the 2010 National and Local Elections as its primary
purpose, it is erroneous to interpret this as meaning that the
corporation's authority to transact business will cease thereafter.
Jurisprudence provides that the cessation of SMTC's business cannot
be assumed just because the May 10, 2010 polls have already
concluded. For clearly, SMTC's purpose—the "automation of the 2010
national and local elections"—is not limited to the conduct of the
election proper, but extends further to the fulfillment of SMTC's
contractual obligations that spring forth from the AES Contract during
the lifetime of the agreement (i.e. until the release of the performance
security), and even thereafter insofar as the surviving provisions of the
contract are concerned. In other words, regardless of whether or not
SMTC's performance security has already been released, establishing
even just one surviving provision of the AES Contract would be
sufficient to prove that SMTC has not yet completed its purpose under
its AOI, toppling petitioners' argument like a house of cards.
FACTS: On October 27, 2014, COMELEC en banc released the bidding
documents for the "Two-Stage Competitive Bidding for the Lease of Election
Management System (EMS) and Precinct-Based Optical Mark Reader (OMR)
or Optical Scan (OP-SCAN) System." Specified in the published Invitation to
Bid are the details for the lease with option to purchase, through competitive
public bidding, of 23,000 new units of precinct-based OMRs or OP-SCAN
Systems, with a total Approved Budget for Contract of P2,503,518,000, to be
used in the 2016 National and Local Elections. COMELEC Bids and Awards
Committee (BAC) set the deadline for the submission by interested parties of
their eligibility requirements and initial technical proposal on December 4,
2014.
The joint venture of Smartmatic-TIM Corporation (SMTC), Smartmatic
International Holding B.V., and Jarltech International Corporation (collectively
referred to as "Smartmatic JV") responded to the call and submitted bid for
the project on the scheduled date. Indra Sistemas, S.A. (Indra) and MIRU
Systems Co. Ltd. Also signified their interest in the project, but only Indra,
aside from Smartmatic JV, submitted its bid. During the opening of the bids,
Smartmatic JV informed the BAC that one of its partner corporations, SMTC,
has a pending application with SEC to amend its Articles of Incorporation
(AOI), attaching therein all pending documents. The amendments adopted as
early as November 12, 2014 were approved by SEC on December 10, 2014.
On even date, Smartmatic JV and Indra participated in the end-to-end testing
of their initial technical proposals for the procurement project before the BAC.
Upon evaluation of the submittals, BAC declared Smartmatic JV and Indra
eligible to participate in the second stage of the bidding process. BAC then
issued a Notice requiring them to submit their Final Revised Technical
Tenders and Price proposals on February 25, 2015, to which the eligible
participants complied. Finding that the joint venture satisfied the requirements
in the published Invitation to Bid, Smartmatic JV, on March 26, 2015, was
declared to have tendered a complete and responsive Overall Summary of
the Financial Proposal. Meanwhile, Indra was disqualified for submitting a
non-responsive bid.
Subsequently, for purposes of post-qualification evaluation, BAC required
Smartmatic JV to submit additional documents and a prototype sample of its
OMR. The prototype was subjected to testing to gauge its compliance with the
requirements outlined in the project's Terms of Reference (TOR). After the
conduct of post-qualification, BAC disqualified Smartmatic JV on two grounds,
viz:
Failure to submit valid AOI; and The demo unit failed to meet the technical
requirement that the system shall be capable of writing all data/files, audit log,
statistics and ballot images simultaneously in at least two (2) data storages.
The ruling prompted Smartmatic JV to move for reconsideration. In denying
the motion, BAC declared that Smartmatic JV complied with the requirements
of Sec. 23.1(b) of the Revised Implementing Rules and Regulations of RA
9184 (GPRA IRR), including the submission of a valid AOI, but was
nevertheless disqualified as it still failed to comply with the technical
requirements of the project.
Aggrieved, Smartmatic JV filed a Protest, seeking permission to conduct
another technical demonstration of its SAES 1800 plus OMR (OMR+), the
OMR Smartmatic JV presented during the public bidding before the
COMELEC en banc. Accordingly, on June 19, 2015, Smartmatic JV was
allowed to prove compliance with the technical specifications for the second
time, but this time before the electoral tribunal's Technical Evaluation
Committee (TEC). This was followed, on June 23, 2015, by another technical
demonstration before the Commission en banc at the Advanced Science and
Technology Institute (ASTI) at UP, Diliman, Quezon City.
COMELEC en banc granted the protest. It declared the Joint Venture of
Smartmatic-TIM Corporation, Total Information Management Corporation,
Smartmatic International Holding B.V., and Jarltech International Corporation,
as the bidder with the lowest calculated responsive bid in connection with the
public bidding for the lease with option to purchase of 23,000 new units of
precinct-based Optical Mark Reader or Optical Scan System for use in the
May 9, 2016 national and local elections. Hence, this petition.
In challenging the decision, petitioners, alleged that COMELEC en banc acted
with grave abuse of discretion amounting to lack or excess of jurisdiction in
declaring Smartmatic JV as the bidder with the lowest calculated responsive
bid. According to petitioners, Smartmatic JV cannot be declared eligible, even
more so as the bidder with the lowest calculated responsive bid, because one
of its proponents, SMTC, holding 46.5% of the shares of Smartmatic JV, no
longer has a valid corporate purpose as required under Sec. 14 of the
Corporation Code.
As proof, petitioners cite the primary purpose of SMTC as stated in the
company's AOI, which was submitted to the COMELEC on December 4, 2014
as part of the joint venture's eligibility documents. To quote SMTC's primary
purpose therein:
To do, perform and comply with all the obligations and responsibilities of, and
accord legal personality to, the joint venture of Total Information Management
Corporation ("TIM") and Smartmatic International Corporation ("Smartmatic")
arising under the Request for Proposal and the Notice of Award issued by the
Commission on Elections ("COMELEC") for the automation of the 2010
national and local elections ("Project"), including the leasing, selling, importing
and/or assembling of automated voting machines, computer software and
other computer services and/or otherwise deal in all kinds of services to be
used, offered or provided to the COMELEC for the preparations and the
conduct of the Project including project management services.
In concurrence with Commissioner Guia's opinion, petitioners argue that the
foregoing paragraph readily evinces that SMTC was created solely for the
automation of the 2010 National and Local Elections, not for any other
election. Having already served its purpose, SMTC no longer has authority to
engage in business, so petitioners claim. To allow SMTC then to have a hand
in the succeeding elections would be tolerating its performance of an ultra
vires act.
Petitioners hasten to add that without a valid purpose, the company could not
have submitted a valid AOI, a procurement eligibility requirement under Sec.
23.1 (b) of the IRR of RA 9184. For them, the SEC's subsequent approval, on
December 10, 2014, of the amendments to SMTC's AOI cannot cure the
partner corporation's ineligibility because eligibility is determined at the time
of the opening of the bids, which, in this case, was conducted on December
4, 2014.33
Finally, petitioners contend that SMTC misrepresented itself by leading the
BAC to believe that it may carryy out the project despite its limited corporate
purpose, and by claiming that it is a Philippine corporation when it is, allegedly,
100% foreign-owned. They add that misrepresentation is a ground for the
procuring agency to consider a bidder ineligible and disqualify it from obtaining
an award or contract.
ISSUES: Whether or not Smartmatic JV has a valid corporate purpose as
required under Sec. 14 of the Corporation Code
HELD: YES. Smartmatic JV has a valid corporate purpose as required under
Sec. 14 of the Corporation Code. Thus, Smartmatic JV may validly undertake
the project sought to be procured
SMTC still has the authority to conduct business even after the conduct of the
2010 national and local elections. A thorough reading of petitioners'
contention, however, would show that it is not only assailing Smartmatic JV's
ineligibility based on the alleged incompleteness of its documentary
requirements i.e. for non-submission of a valid AOI, but also because they
considered the subject of the procurement beyond the ambit of SMTCs
corporate purpose. Petitioners postulate that SMTC's authority to conduct
business ceased upon fulfillment of its primary purpose stated in its AOI-that
of automating the 2010 National and Local Elections, and this allegedly
rendered SMTC's subsequent involvement in the subject procurement project
an ultra vires act.
Petitioners' myopic interpretation of SMTC's purpose is incorrect. While it is
true that SMTC's AOI made specific mention of the automation of the 2010
National and Local Elections as its primary purpose, it is erroneous to interpret
this as meaning that the corporation's authority to transact business will cease
thereafter. Indeed, the contractual relation between SMTC and the COMELEC
has been the subject of prior controversies that have reached the Court, and
We have on these occasions held that even beyond the 2010 election
schedule, the parties remain to have subsisting rights and obligations relative
to the products and services supplied by SMTC to the COMELEC for the
conduct of the 2010 polls.
Based on Our ruling in Capalla, the cessation of SMTC's business cannot be
assumed just because the May 10, 2010 polls have already concluded. For
clearly, SMTC's purpose—the "automation of the 2010 national and local
elections"—is not limited to the conduct of the election proper, but extends
further to the fulfillment of SMTC's contractual obligations that spring forth
from the AES Contract during the lifetime of the agreement (i.e. until the
release of the performance security), and even thereafter insofar as the
surviving provisions of the contract are concerned. In other words, regardless
of whether or not SMTC's performance security has already been released,
establishing even just one surviving provision of the AES Contract would be
sufficient to prove that SMTC has not yet completed its purpose under its AOI,
toppling petitioners' argument like a house of cards.
Unfortunately for petitioners, one such surviving provision has already been
duly noted by the Court in the recent case of Pabillo v. COMELEC (Pabillo).
In Pabillo, the Court cited Art. 8.8 of the AES Contract, which significantly
reads:
8.8 If COMELEC opts to purchase the PCOS and Consolidation and
Canvassing System (CCS), the following warranty provisions indicated in the
RFP shall form part of the purchase contract:
Indubitably, the vinculum juris between COMELEC and SMTC remains solid
and unsevered despite the 2010 elections' inevitable conclusion. Several
contractual provisions contained in the 2009 AES Contract, as observed in a
review of our jurisprudence, continue to subsist and remain enforceable up to
this date. Pabillo, in effect, at least guaranteed that SMTC's purpose under its
AOI will not be fulfilled until May 10, 2020. Therefore, petitioners' theory—that
SMTC no longer has a valid purpose—is flawed. Otherwise, there would be
no way of enforcing the subsisting provisions of the contract and of holding
SMTC to its warranties after the conduct of the. May 10, 2010 elections.
DISPOSITIVE: WHEREFORE, in view of the foregoing, the petition is hereby
DISMISSED for lack of merit. The June 29, 2015 Decision of the COMELEC
en banc is hereby AFFIRMED.
Asuncion v De Ynarte 28 Phil 67 (1914)
DOCTRINE: The division of archives, through its officials, has authority to
determine not only the sufficiency as to form of the articles of incorporation
offered for registration, but also the lawfulness of the purposes of the
incorporation.
The purpose of the incorporation of a corporation must be lawful.
FACTS: The chief of the division of archives, the respondent De Ynarte,
refused to file the articles of incorporation (AOI) upon the ground that the
object of the corporation, as stated in the articles, was not lawful and that, in
pursuance of section 6 of Act No. 1459, they were not registerable.
The proposed incorporators began an action in the CFI of Manila to compel
the chief of the division of archives to receive and register said AOI and to do
any and all acts necessary for the complete incorporation of the persons
named in the articles. The court below found in favor of the defendant and
refused to order the registration of the articles mentioned, maintaining ad
holding that the defendant, under the Corporation Law, had authority to
determine both the sufficiency of the form of the articles and the legality of the
object of the proposed corporation. This appeal is taken from that judgment.
Appellant’s Contention:
The duties of the defendant are purely ministerial and that he has no authority
to pass upon the lawfulness of the object for which the incorporators propose
to organize. No authorities are cited to support this proposition and we are of
the opinion that it is not sound.
Section 6 of the Corporation Law reads in part as follows:
Five or more persons, not exceeding fifteen, a majority of whom are residents
of the Philippine Islands, may form a private corporation for any lawful purpose
by filing with the division of archives, patents, copyrights, and trademarks if
the Executive Bureau articles of incorporation duly executed and
acknowledged before a notary public, . . . .
ISSUE:
1) Whether or not the chief of the division of archives has authority,
under the Corporation for registration, to decide not only as to the
sufficiency of the form of the articles, but also as to the lawfulness of
the purpose of the proposed corporation
2) Whether or not the purposes of the corporation as stated in the AOI
are lawful within the meaning of the Corporation Law.
HELD:
1. YES. Simply because the duties of an official happen to be ministerial, it
does not necessarily follow that he may not, in the administration of his office,
determine questions of law.
The Court opined that it is the duty of the division of archives, when AOI are
presented for registration, to determine whether the objects of the corporation
as expressed in the articles are lawful. Court do not believe that, simply
because AOI presented for registration are perfect in form, the division of
archives must accept and register them and issue the corresponding
certificate of incorporation no matter what the purpose of the corporation may
be as expressed in the articles.
The Court do not believe that it was intended that the division of archives
should issue a certificate of incorporation to, and thereby put the seal of
approval of the Government upon, a corporation which was organized for base
of immoral purposes. That such corporation might later, if it sought to carry
out such purposes, be dissolved, or its officials imprisoned or itself heavily
fined furnished no reason why it should have been created in the first instance.
It seems to us to be not only the right but the duty of the divisions of archives
to determine the lawfulness of the objects and purposes of the corporation
before it issues a certificate of incorporation.
It having determined that the division of archives, through its officials, has
authority to determine not only the sufficiency as to form of the articles of
incorporation offered for registration, but also the lawfulness of the purposes
of leads us to the determination of the question whether or not the chief of the
division of archives, who is the representative thereof and clothed by it with
authority to deal subject to mandamus in the performance of his duties.
The Court also opined that he may be mandamused if he act in violation of
law or if he refuses, unduly, to comply with the law. While defendant has power
to pass upon the lawfulness of the purposes of the proposed corporation and
that he may, in the fulfillment of his duties, determine the question of law
whether or not those purposes are lawful and embraced within that class
concerning which the law permits corporations to be formed, that does not
necessarily mean, as we have already intimated, that his duties are not
ministerial. On the contrary, there is no incompatibility in holding, as we do
hold, that his duties are ministerial and that he has no authority to exercise
discretion in receiving and registering articles of incorporation. He may
exercise judgment — that is, the judicial function — in the determination of the
question of law referred to, but he may not use discretion. If, therefore, the
defendant erred in determining the question presented when the articles were
offered for registration, then that error will be corrected by this court in this
action and he will be compelled to register the articles as offered. If, however,
he did not commit an error, but decided that question correctly, then, of
course, his action will be affirmed to the extent that we will deny the relief
prayed for.
2. NO. The purpose of the incorporation as stated in the articles is: "That the
object of the corporation is (a) to organize and regulate the management,
disposition, administration and control which the barrio of Pulo or San Miguel
or its inhabitants or residents have over the common property of said residents
or inhabitants or property belonging to the whole barrio as such; and (b) to
use the natural products of the said property for institutions, foundations, and
charitable works of common utility and advantage to the barrio or its
inhabitants."
The municipality of Pasig as recognized by law contains within its limits
several barrios or small settlements, like Pulo or San Miguel, which have no
local government of their own but are governed by the municipality of Pasig
through its municipal president and council. The president and members of
the municipal council are elected by a general vote of the municipality, the
qualified electors of all the barrios having the right to participate.
The municipality of Pasig is a municipal corporation organized by law. It has
the control of all property of the municipality. The various barrios of the
municipality have no right to own or hold property, they not being recognized
as legal entities by any law. The residents of the barrios participate in the
advantages which accrue to the municipality from public property and receive
all the benefits incident to residence in a municipality organized by law. If there
is any public property situated in the barrio of Pulo or San Miguel not belonging
to the general government or the province, it belongs to the municipality of
Pasig and the sole authority to manage and administer the same resides in
that municipality. Until the present laws upon the subject are charged no other
entity can be the owner of such property or control or administer it.
The object of the proposed corporation, as appears from the articles offered
for registration, is to make of the barrio of Pulo or San Miguel a corporation
which will become the owner of and have the right to control and administer
any property belonging to the municipality of Pasig found within the limits of
that barrio. This clearly cannot be permitted. Otherwise municipalities as now
established by law could be deprived of the property which they now own and
administer. Each barrio of the municipality would become under the scheme
proposed, a separate corporation, would take over the ownership,
administration, and control of that portion of the municipal territory within its
limits. This would disrupt, in a sense, the municipalities of the Islands by
dividing them into a series of smaller municipalities entirely independent of the
original municipality.
What the law does not permit cannot be obtained by indirection. The object of
the proposed corporation is clearly repugnant to the provisions of the
Municipal Code and the governments of municipalities as they have been
organized thereunder. (Act No. 82, Philippine Commission.)
See Sec 34 for non-stock corporations
Principal Place of Business
SEC Circular No 3, Series of 2006 (repealed; if you want to read pa din:
http://www.sec.gov.ph/wp-content/uploads/2015/11/sec-memo-3s2006.pdf
but it is consolidated into SEC MC No. 6, series of 2016
http://www.sec.gov.ph/wp-
content/uploads/2016/03/2016_memo_circular_no.06.pdf)
Pilipinas Shell Petroleum Corp. v Royal Ferry Services Inc. GR 188146
Feb 1, 2017
DOCTRINE: The venue for a petition for voluntary insolvency proceeding
under the Insolvency Law is the CFI of the province or city where the insolvent
debtor resides. A corporation is considered a resident of the place where its
principal office is located as stated in its Articles. However, when it is
uncontroverted that the insolvent corporation abandoned the old principal
office, the corporation is considered a resident of the city where its actual
principal office is currently found.
FACTS: Royal Ferry Services Inc. (Royal Ferry) is a corporation duly
organized and existing under Philippine law. According to its AOI, Royal
Ferry's principal place of business is located at 2521 A. Bonifacio Street,
Bangkal, Makati City. However, it currently holds office at Room 203, BF
Condominium Building, Andres Soriano comer Solano Streets, Intramuros,
Manila.
On August 28, 2005, Royal Ferry filed a verified Petition for Voluntary
Insolvency before the RTC of Manila. It alleged that in 2000, it suffered serious
business losses that led to heavy debts. Efforts to revive the company's
finances failed, and almost all assets were either foreclosed or sold to satisfy
the liabilities incurred. Royal Ferry ceased its operations on February 28,
2002. In a special meeting on August 25, 2005, its Board of Directors
approved and authorized the filing of a petition for voluntary insolvency in
court.
RTC declared Royal Ferry insolvent.
On December 23, 2005, Pilipinas Shell Petroleum Corporation (Pilipinas
Shell) filed before RTC of Manila a Formal Notice of Claim and a Motion to
Dismiss. In the Notice of Claim, Pilipinas Shell asserted that Royal Ferry owed
them the amount of ₱2,769,387.67.17 In its Motion to Dismiss, Pilipinas Shell
alleged that the Petition was filed in the wrong venue. It argued that the
Insolvency Law provides that a petition for insolvency should be filed before
the court with territorial jurisdiction over the corporation's residence. Since
Royal Ferry's Articles of Incorporation stated that the corporation's principal
office is located at 2521 A. Bonifacio St., Bangkal, Makati City, the Petition
should have been filed before the RTC of Makati and not before RTC of
Manila.
On January 30, 2006, RTC of Manila issued the Order denying Pilipinas
Shell's Motion to Dismiss for lack of merit. It found Royal Ferry to have
sufficiently shown full compliance with the requirements of the Insolvency Law
on venue and that it had abandoned its Makati office and moved to Manila.
RTC also noted that when the Branch Sherriff confiscated Royal Ferry's books
and personal assets, the properties were taken from a Manila address, at
Room 203, BF Condominium Building, Andres Soriano comer Streets,
Intramuros, Manila.
Pilipinas Shell moved for reconsideration on February 24, 2006. RTC
reconsidered the denial of Pilipinas Shell's Motion to Dismiss. It held that a
corporation cannot change its place of business without amending its AOI.
Without the amendment, Royal Ferry's transfer did not produce any legal
effect on its residence. RTC granted the dismissal of the Petition for Voluntary
Insolvency.
Aggrieved, Royal Ferry filed a Notice of Appeal on October 26, 2006. On
November 7, 2006, RTC forwarded the records of the case to CA. CA
reinstated the insolvency proceedings. It held that the Motion to Dismiss failed
to comply with Section 81 of the Insolvency Law, which required the written
consent of all creditors before a petition for insolvency can be dismissed. It
overturned the grant of the Motion to Dismiss since Pilipinas Shell failed to
secure the written consent of all the creditors of Royal Ferry.
Pilipinas Shell’s Contentions:
CA should not have taken cognizance of respondent Royal Ferry's appeal
because it "failed to comply with Section 13, paragraphs (a), (c), (d), (e), (f),
and (h), Rule 44 of the Rules of Court." Petitioner claimed that CA erred when
it held that the "petition for voluntary insolvency [was filed] in the proper venue
since the cities of Makati and Manila are part of one region[.]" According to
petitioner, there was no reason to consider Makati and Manila as part of one
region or province for the purpose of determining venue.
Moreover, petitioner argued that since respondent's AOI stated that its
principal office was located at 2521 A. Bonifacio St., Bangkal, Makati City, the
Petition for Voluntary Insolvency should have been filed in Makati, not in
Manila. Petitioner cited Hyatt Elevators and Escalators Corporation v.
Goldstar Elevators Phils., Inc., where this Court held that a corporation's
residence was the place where its principal office was located as stated in its
Articles of Incorporation. Thus, the address in respondent's AOI should control
the venue.
ISSUE: Where is the proper venue of the Petition for Insolvency?
HELD: The Petition for Insolvency was properly filed before the Regional Trial
Court of Manila.
The first insolvency law, Republic Act No. 1956, was entitled "An Act Providing
for the Suspension of Payments, the Relief of Insolvent Debtors, the
Protection of Creditors, and the Punishment of Fraudulent Debtors
(Insolvency Law)". It was derived from the Insolvency Act of California (1895),
with few provisions taken from the United States Bankruptcy Act of 1898.76
With the enactment of Republic Act No. 10142, otherwise known as the
Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the Insolvency
Law was expressly repealed on July 18, 2010. The FRIA is currently the
special law that governs insolvency. However, because the relevant
proceedings in this case took place before the enactment of the FRIA, the
case needs to be resolved under the provisions of the Insolvency Law.
Insolvency proceedings are defined as the statutory procedures by which a
debtor obtains financial relief and undergoes judicially supervised
reorganization or liquidation of its assets for the benefit of its creditors.
Respondent argues that the Regional Trial Court of Manila obtained
jurisdiction because in its Petition for Voluntary Insolvency, respondent
alleged that its principal office was then found in Manila. On the other hand,
petitioner argues that filing the petition before the Regional Trial Court of
Manila was a patent jurisdictional defect as the Regional Trial Court of Manila
did not have territorial jurisdiction over respondent's residence. Petitioner
confuses the concepts of jurisdiction and venue. In City of Lapu-Lapu v. Phil.
Economic Zone Authority:
On the one hand, jurisdiction is "the power to hear and determine cases of the
general class to which the proceedings in question belong." Jurisdiction is a
matter of substantive law. Thus, an action may be filed only with the court or
tribunal where the Constitution or a statute says it can be brought. Objections
to jurisdiction cannot be waived and may be brought at any stage of the
proceedings, even on appeal. When a case is filed with a court which has no
jurisdiction over the action, the court shall motu proprio dismiss the case.
On the other hand, venue is "the place of trial or geographical location in which
an action or proceeding should be brought." In civil cases, venue is a matter
of procedural law. A party's objections to venue must be brought at the earliest
opportunity either in a motion to dismiss or in the answer; otherwise the
objection shall be deemed waived. When the venue of a civil action is
improperly laid, the court cannot motu proprio dismiss the case.80 (Citations
omitted)
Wrong venue is merely a procedural infirmity, not a jurisdictional impediment.
Jurisdiction is a matter of substantive law, while venue is a matter of
procedural law. Jurisdiction is conferred by law, and the Insolvency Law vests
jurisdiction in the CFI-now RTC.
Section 14 of the Insolvency Law specifies that the proper venue for a petition
for voluntary insolvency is the RTC of the province or city where the insolvent
debtor has resided in for six (6) months before the filing of the petition. In this
case, the issue of which court is the proper venue for respondent's Petition for
Voluntary Insolvency comes from the confusion on an insolvent corporation's
residence. Petitioner contends that the residence of a corporation depends on
what is stated in its AOI, regardless of whether the corporation physically
moved to a different location. On the other hand, respondent posits that the
fiction of a corporation's residence must give way to uncontroverted facts.
The law places a premium on the place of residence before a petition is filed
since venue is a matter of procedure that looks at the convenience of litigants.
In insolvency proceedings, this Court needs to control the property of the
insolvent corporation. In Metropolitan Bank and Trust Company v. S.F Naguiat
Enterprises, Inc.:
Conformably, it is the policy of Act No. 1956 to place all the assets and
liabilities of the insolvent debtor completely within the jurisdiction and control
of the insolvency court without the intervention of any other court in the
insolvent debtor's concerns or in the administration of the estate. It was
considered to be of prime importance that the insolvency proceedings follow
their course as speedily as possible in order that a discharge, if the insolvent
debtor is entitled to it, should be decreed without unreasonable delay.
"Proceedings of [this] nature cannot proceed properly or with due dispatch
unless they are controlled absolutely by the court having charge thereof."
To determine the venue of an insolvency proceeding, the residence of a
corporation should be the actual place where its principal office has been
located for six (6) months before the filing of the petition. If there is a conflict
between the place stated in the AOI and the physical location of the
corporation's main office, the actual place of business should control.
Requiring a corporation to go back to a place it has abandoned just to file a
case is the very definition of inconvenience. There is no reason why an
insolvent corporation should be forced to exert whatever meager resources it
has to litigate in a city it has already left. In any case, the creditors deal with
the corporation's agents, officers, and employees in the actual place of
business. To compel a corporation to litigate in a city it has already abandoned
would create more confusion. Moreover, the six (6)-month qualification of the
law's requirement of residence shows intent to find the most accurate location
of the debtor's activities. If the address in a corporation's articles of
incorporation is proven to be no longer accurate, then legal fiction should give
way to fact.
DISPOSITIVE: WHEREFORE, the Petition for Review on Certiorari is
DENIED. The assailed Decision dated January 30, 2009 and the Resolution
dated May 26, 2009 of the Court of Appeals in CA-G.R. CV No. 88320 are
AFFIRMED.
Golden Arches Dev Corp v St. Francis Square GR 183843 Jan 19, 2017
DOCTRINE: In personal actions, venue is fixed for the greatest possible
convenience of the plaintiff and his witnesses, and to promote the ends of
justice. A complaint for enforcement of contractual provisions and recovery of
damages, is in the nature of a personal action which, under Section 2, Rule 4
of the Rules of Court,7 shall be filed at the plaintiff’s residence.
FACTS: In June 1991, Golden Arches Development Corporation (petitioner)
entered into a lease contract over a property owned by Prince City Realty, Inc.
located at the corner of Julia Vargas Avenue and Bank Drive, Ortigas Center,
Mandaluyong City.
The lease contract commenced on June 27, 1991 and was to terminate on
February 27, 2008. On November 2, 2006, however, petitioner informed St.
Francis Square Holdings, Inc. (respondent), successor-in-interest of ASB
Holdings, Inc. by which Prince Realty, Inc. eventually became known, of its
intention to discontinue the lease.
Amicable negotiations between the parties having failed, respondent filed on
May 4, 2007 an action for breach of contract and damages against petitioner
before the RTC of Mandaluyong.
Petitioner filed a Motion to Dismiss for lack of cause of action and improper
venue. It claimed that respondent maintained its principal address in Makati
as records of SEC in 2007 show, viz: Cover Sheet of Amended Articles of
Incorporation1 (wherein it is stated that the business address of ASB Holdings
Inc. is at Makati), Company Relationship Information Sheet, and Director’s
Certificate dated February 3, 2007 stating that ASB Holdings, Inc., with
principal address at Makati, had amended its AOI by renaming it (ASB
Holdings, Inc.) to St. Francis Square Holdings, Inc., respondent herein, hence,
the complaint should have been filed in Makati. By filing the complaint in
Mandaluyong, petitioner concluded that respondent violated Section 2, Rule
4 of the Rules of Court which provides:
Sec. 2. Venue of personal actions. – All other actions may be commenced
and tried where the plaintiff or any of the principal plaintiff resides, or where
the defendant or any of the principal defendant resides, or in the case of a
non-resident defendant where he may be found, at the election of the plaintiff.
Opposing the Motion to Dismiss, respondent claimed that it had closed down
its office in Makati effective December 31, 2005 as it now holds office in
Mandaluyong City of which petitioner is aware.
RTC denied the motion to dismiss. Basic is the rule regarding propriety of
venue in actions involving private juridical entities that the principal place of
business of a corporation determines its residence or domicile such that the
place indicated in petitioner’s AOI becomes controlling in determining the
venue.
Petitioner moved to reconsider the denial of the motion, pointing out that
respondent violated SEC Memorandum Circular No. 03 dated February 16,
2006, the relevant portion of which reads:

In line with the "full disclosure" requirement of existing laws, all corporations
and partnerships applying for registration with the Securities and Exchange
Commission should state in their Articles of Incorporation or Articles of
Partnership the (i) specific address of their principal office, which shall include,
if feasible, the street name, barangay, city or municipality; and (ii) specific
residence address of each incorporator, stockholder, director, trustee, or
partner.
"Metro Manila" shall no longer be allowed as address of the principal office.
(emphasis and underscoring supplied)
Albeit in respondent’s Amended Articles of Incorporation which was filed in
2007, after the above-stated SEC circular had been issued, it still indicated its
principal office address to be "Metro Manila," the trial court just the same
denied petitioner’s motion for reconsideration by Order of November 12, 2007.
CA affirmed RTC’s order.
ISSUE: Where is the proper venue? RTC of Mandaluyong or RTC of Makati?
HELD: RTC of Mandaluyong. The petition fails. Venue, in essence, concerns
a rule of procedure. In personal actions, it is fixed for the greatest possible
convenience of the plaintiff and his witnesses, and to promote the ends of
justice.
Respondent’s complaint, being one for enforcement of contractual provisions
and recovery of damages, is in the nature of a personal action which, under
Section 2, Rule 4 of the Rules of Court,7 shall be filed at the plaintiff’s
residence. Specifically, with respect to a domestic corporation, it is "in a
metaphysical sense a resident of the place where its principal office is located
as stated in the articles of incorporation."
The letters of petitioner itself to respondent dated November 2, 2006,
December 18, 2006 and January 2, 2007 indicate the address of respondent
to be at St. Francis Square Mall, Julia Vargas, Ortigas Center, just as the
letters of respondent to petitioner before the filing of the complaint on May 4,
2007 indicate its (respondent’s) address to be at St. Francis Square Mall, Julia
Vargas, Ortigas Center. Petitioner was thus put on notice that at the
respondent’s filing of the complaint, the latter’s business address has been at
Mandaluyong.
IN FINE, although respondent’s Amended AOI of 2007 indicates that its
principal business address is at "Metro Manila", venue was properly laid in
Mandaluyong since that is where it had actually been "residing" (or holding its
principal office) at the time it filed its complaint. Section 2, Rule 4 of the Rules
of Court, quoted earlier, authorizes the plaintiff (respondent in this case) to
make a choice of venue for personal actions – whether to file the complaint in
the place where he resides or where defendant resides. Respondent’s choice
must be respected as "the controlling factor in determining venue for cases is
the primary objective for which said cases are filed." Respondent’s purpose in
filing the complaint in Mandaluyong where it holds its principal office is
obviously for its convenience and for orderly administration of justice.
Sy v Tyson Enterprises 119 SCRA 367 (1982)
DOCTRINE: The place of business of a corporation which for purposes of
venue is considered as its residence, because a corporation has a personality
separate and distinct from that of its officers and stockholders.
FACTS: On August 29, 1979, Tyson Enterprises, Inc. filed against John Sy
and Universal Parts Supply Corporation in CFI of Rizal, Pasig, a complaint for
the collection of P288,534.58 plus interest, attorney's fees and litigation
expenses.It is alleged in the complaint that John Sy, doing business under the
trade name, Universal Parts Supply, is a resident of Fuentebella Subdivision,
Bacolod City and that his co-defendant, Universal Parts Supply Corporation,
allegedly controlled by Sy, is doing business in Bacolod City.
Curiously enough, there is no allegation in the complaint as to the office or
place of business of plaintiff Tyson Enterprises, Inc., a firm actually doing
business at 1024 Magdalena, now G. Masangkay Street, Binondo, Manila.
What is alleged is the postal address or residence of Dominador Ti, the
president and general manager of plaintiff firm, which is at 26 Xavier Street,
Greenhills Subdivision, San Juan, Rizal. The evident purpose of alleging that
address and not mentioning the place of business of plaintiff firm was to justify
the filing of the suit in Pasig, Rizal instead of in Manila
Defendant Sy and Universal Parts Supply Corporation first filed a motion for
extension of time to file their answer and later a motion for a bill of particulars.
The latter motion was denied. Then, they filed a motion to dismiss on the
ground of improper venue.
They invoked the provision of section 2(b), Rule 4 of the Rules of Court that
personal actions "may be commenced and tried where the defendant or any
of the defendants resides or may be found, or where the plaintiffs or any of
the plaintiffs resides, at the election of the plaintiff." To strengthen that ground,
they also cited the stipulation in the sales invoice that "the parties expressly
submit to the jurisdiction of the Courts of the City of Manila for any legal action
arising out of" the transaction which stipulation is quoted in paragraph 4 of
plaintiff's complaint.

Plaintiff opposed the motion to dismiss on the ground that the defendants had
waived the objection based on improper venue because they had previously
filed a motion for a bill of particulars which was not granted. The trial court
denied the motion to dismiss on the ground that by filing a motion for a bill of
particulars the defendants waived their objection to the venue. That denial
order was assailed in a petition for certiorari and prohibition in the Court of
Appeals which issued on July 29, 1980 a restraining order, enjoining
respondent judge from acting on the case. He disregarded the restraining
order.
CA dismissed the petition. It ruled that the parties did not intend Manila as the
exclusive venue of the actions arising under their transactions and that since
the action was filed in Pasig, which is near Manila, no useful purpose would
be served by dismissing the same and ordering that it be filed in Manila.
ISSUE: Where is the proper venue?
HELD: The place of business of plaintiff Tyson Enterprises, Inc., which for
purposes of venue is considered as its residence, because a corporation has
a personality separate and distinct from that of its officers and stockholders.
Consequently, the collection suit should have been filed in Manila, the
residence of plaintiff corporation and the place designated in its sales invoice,
or it could have been filed also in Bacolod City, the residence of defendant Sy.
RTC and CA erred in ruling that the defendants, now the petitioners, waived
their objection to the improper venue. As the trial court proceeded in defiance
of the Rules of Court in not dismissing the case, prohibition lies to restrain it
from acting in the case. Section 4, Rule 4 of the Rules of Court provides that,
"when improper venue is not objected to in a motion to dismiss it is deemed
waived" and it can no longer be pleaded as an affirmative defense in the
answer (Sec. 5, Rule 16).
In this case, the petitioners, before filing their answer, filed a motion to dismiss
based on improper venue. That motion was seasonably filed. The fact that
they filed a motion for a bill of particulars before they filed their motion to
dismiss did not constitute a waiver of their objection to the venue. It should be
noted that the provision of Section 377 of the Code of Civil Procedure that "the
failure of a defendant to object to the venue of the action at the time of entering
his appearance in the action shall be deemed a waiver on his part of all
objection to the place or tribunal in which the action is brought" is not found in
the Rules of Court.
And the provision of section 4, Rule 5 of the 1940 Rules of Court that "when
improper venue is not objected to prior to the trial, it is deemed waived" is not
reproduced in the present Rules of Court.
To repeat, what section 4 of Rule 4 of the present Rules of court provides is
that the objection to improper venue should be raised in a motion to dismiss
seasonably filed and, if not so raised, then the said objection is waived.
Section 4 does not provide that the objection based on improper venue should
be interposed by means of a special appearance or before any pleading is
filed.
The rules on venue, like the other procedural rules, are designed to insure a
just and orderly administration of justice or the impartial and evenhanded
determination of every action and proceeding. Obviously, this objective will
not be attained if the plaintiff is given unrestricted freedom to choose the court
where he may file his complaint or petition.
The choice of venue should not be left to the plaintiff's whim or caprice. He
may be impelled by some ulterior motivation in choosing to file a case in a
particular court even if not allowed by the rules on venue.
DISPOSITIVE: WHEREFORE, the decision of CA and the order of respondent
judge denying the motion to dismiss are reversed and set aside. The writ of
prohibition is granted. Civil Case No. 34302 should be considered dismissed
without prejudice to refiling - it in the CFI of Manila or Bacolod City at the
election of plaintiff which should be allowed to withdraw the documentary
evidence submitted in that case. All the proceedings in said case, including
the decision, are also set aside. Costs against Tyson Enterprises, Inc.
Authorized capital stock
Central Textile Mills v NWPC, et al GR 104102 Aug 7, 1996
DOCTRINE: Paid advance subscriptions are not yet part of the paid-up capital
which is used as basis of capital impairment for exemption.
FACTS: On December 20, 1990, respondent Regional Tripartite Wages and
Productivity Board — NCR (the Board) issued Wage Order No. NCR-02 (WO
No. NCR-02), which took effect on January 9, 1991. Said wage order
mandated a P12.00 increase in the minimum daily wage of all employees and
workers in the private sector in the NCR, but exempted from its application
distressed employers whose capital has been impaired by at least twenty-five
percent (25%) in the preceding year.
The "Guidelines on Exemption from Compliance With the Prescribed
Wage/Cost of Living Allowance Increase Granted by the Regional Tripartite
Wage and Productivity Boards," issued on February 25, 1991, defined
"capital" as the "paid-up capital at the end of the last full accounting period (in
case of corporations)." Under said guidelines," an applicant firm may be
granted exemption from payment of the prescribed increase in wage/cost-of-
living allowance for a period not to exceed one (1) year from effectivity of the
Order . . . when accumulated losses at the end of the period under review
have impaired by at least 25 percent the paid-up capital at the end of the last
full accounting period preceding the application."
By virtue of these provisions, petitioner filed on April 11, 1991 its application
for exemption from compliance with WO No. NCR-02 due to financial losses.
In an order dated October 22, 1991, the Board’s Vice-Chairman, Ernesto
Gorospe, disapproved petitioner’s application for exemption after concluding
from the documents submitted that petitioner sustained an impairment of only
22.41%.
On February 4, 1992, petitioner’s motion for reconsideration was dismissed
by the Board for lack of merit. The Board, except for Vice-Chairman Gorospe
who took no part in resolving the said motion for reconsideration, opined that
according to the audited financial statements submitted by petitioner to them,
to SEC and to BIR, petitioner had a total paid-up capital of P305,767,900.00
as of December 31, 1990, which amount should be the basis for determining
the capital impairment of petitioner, instead of the authorized capital stock of
P128,000,000.00 which it insists should be the basis of computation.
The Board also noted that petitioner did not file with the SEC the August 15,
1990 resolution of its Board of Directors, concurred in by its stockholders
representing at least two-thirds of its outstanding capital stock, approving an
increase in petitioner’s authorized capital stock from P128,000,000.00 to
P640,000,000.00. Neither did it file any petition to amend its Articles of
Incorporation brought about by such increase in its capitalization.
Petitioner maintains in the instant action that its authorized capital stock, not
its unauthorized paid-up capital, should be used in arriving at its capital
impairment for 1990. Citing two SEC Opinions dated August 10, 1971, and
July 28, 1978, interpreting Section 38 of the Corporation Code, it claims that
"the capital stock of a corporation stand(s) increased or decreased only from
and after approval and the issuance of the certificate of filing of increase of
capital stock."
ISSUE: Whether or not its authorized capital stock, not its unauthorized paid-
up capital, should be used in arriving at its capital impairment
HELD: YES. The court agrees. The guidelines on exemption specifically refer
to paid-up capital, not authorized capital stock, as the basis of capital
impairment for exemption from WO. No. NCR-02. The records reveal,
however, that petitioner included in its total paid-up capital payments on
advance subscriptions, although the proposed increased in its capitalization
had not yet been approved by, let alone presented for the approval of, the
SEC. As observed by the Board in its order of February 4, 1992, "the
aforementioned (r)esolution (of August 15, 1990) has not been filed by the
corporation with the SEC, nor was a petition to amend its Articles of
Incorporation by reason of the increase in its capitalization filed by the same."
It is undisputed that petitioner incurred a net loss of P68,844,222.49 in 1990,
and its authorized capital stock as of that time stood at P128,000,000.00. 1
On August 15, 1990, a Board resolution increasing the capital stock of the
corporation was affirmed by the requisite number of stockholders. Although
no petition to that effect was ever submitted to the SEC for its approval,
petitioner already started receiving subscriptions and payments on the
proposed increase, which it allegedly held conditionally, that is, pending
approval of the same by the SEC. In its Memorandum, however, petitioner
admitted, without giving any reason therefor, that it indeed "received
‘subscriptions’ and ‘payments’ to the said proposed increase in capital stock,
even in the absence of SEC approval of the increase as required by the
Corporation Code." 2 Thus, by the end of 1990, the corporation had a
subscribed capital stock of P482,748,900.00 and, after deducting
P176,981,000.00 in subscriptions receivables, a total paid-up capital of
P305,767,900.00. 3 P177,767,900.00 of this sum constituted the
unauthorized increase in its subscribed capital stock, which are actually
payments on future issues of shares.
These payments cannot as yet be deemed part of petitioner’s paid-up capital,
technically speaking, because its capital stock has not yet been legally
increased. Thus, its authorized capital stock in the year when exemption from
WO No. NCR-02 was sought stood at P128,000,000.00, which was impaired
by losses of nearly 50%. Such payments constitute deposits on future
subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a certificate
of filing of increase of capital stock is approved and issued by the SEC. 4 As
a trust fund, this money is still withdrawable by any of the subscribers at any
time before the issuance of the corresponding shares of stock, unless there is
a pre-subscription agreement to the contrary, which apparently is not present
in the instant case. Consequently, if a certificate of increase has not yet been
issued by the SEC, the subscribers to the unauthorized issuance are not to
be deemed as stockholders possessed of such legal rights as the rights to
vote and dividends.
DISPOSITIVE: WHEREFORE, the petition is hereby GRANTED. The assailed
orders of the Regional Tripartite Wages and Productivity Board — National
Capital Region, dated October 22, 1991 and February 4, 1992, are
ANNULLED and SET ASIDE. Said Board is also hereby mandated to issue
another order granting the application of petitioner Central Textile Mills, Inc.
for exemption from Wage Order No. NCR-02 for the year ending December
31, 1990. No pronouncement as to cost.