Beruflich Dokumente
Kultur Dokumente
INTRODUCTION
A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent
on its will," it is "a creature without any existence until it has received the imprimatur of the state acting
according to law." A corporation will have no rights and privileges of a higher priority than that of its
creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet
Corporation)
(4) Has the powers, attributes, and properties as expressly authorized by law or incident to its
existence.
Stock v. Non-Stock
Corporations
Stock Non-Stock
Definition Corporations which have capital All other private corporations (§3)
stock divided into shares and
Purpose Primarily to make profits for its May be formed or organized for
shareholders charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic
service, or similar purposes like
trade, industry, agricultural and
like chambers, or any
combination thereof. (§88)
Scope of right to vote Each stockholder votes according Each member, regardless of
to the proportion of his shares in class, is entitled to one (1) vote
the corporation. No shares may UNLESS such right to vote has
be deprived of voting rights been limited, broadened, or
except those classified and denied in the AOI or by-laws.
issued as "preferred" or (Sec. 89)
"redeemable" shares, and as
otherwise provided by the Code.
(Sec. 6)
Voting by proxy May be denied by the AOI or the Cannot be denied. (Sec. 58)
by-laws. (Sec. 89)
Term of directors or Directors / trustees shall hold Board classified in such a way
trustees office for 1 year and until their that the term of office of 1/3 of
successors are elected and their number shall expire every
qualified (Sec. 23). year. Subsequent elections of
trustees comprising 1/3 of the
board shall be held annually, and
trustees so elected shall have a
term of 3 years. (Sec. 92)
Election of officers Officers are elected by the Board Officers may directly elected by
of Directors (Sec. 25), except in the members UNLESS the AOI or
close corporations where the by-laws provide otherwise. (Sec.
stockholders themselves may 92)
elect the officers. (Sec. 97)
Place of meetings Any place within the Philippines, Generally, the meetings must be
if provided for by the by-laws held at the principal office of the
(Sec. 93) corporation, if practicable. If not,
then anyplace in the city or
municipality where the principal
office of the corporation is
located. (Sec. 51)
HELD: The Club was organized to develop and cultivate sports of all class and denomination for the
healthful recreation and entertainment of its stockholders and members. There was in fact, no cash
dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants
used were to defray its overhead expenses and to improve its golf course.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the
distribution of its dividends or surplus profits.
partnerships
Number not less than 5; not more may be more than 15 for
than 15 non-stock corp. except
educational corp.
STEPS COMMENTS
c. Filing of articles; payment of AOI & the treasurer’s affidavit duly signed &
fees. acknowledged
Purpose Clause A corporation can only have one (1) primary purpose.
However, it can have several secondary purposes.
in case the shares are par value shares, the par value
of each,
Other matters Classes of shares into w/c the shares of stock have
been
divided; preferences of & restrictions on any such class;
minimum.
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
De Facto Corporations:
Requisites
A ‘de facto’ corporation is a defectively organized corporation, which has all the powers and
liabilities of a ‘de jure’ corporation and, except as to the State, has a juridical personality
distinct and separate from its shareholders, provided that the following requisites are
concurrently present:
(1) That there is an apparently valid statute under which the corporation with its
purposes may be formed;
(2) That there has been colorable compliance with the legal requirements in good
faith; and,
(3) That there has been use of corporate powers, i.e., the transaction of business in
some way as if it were a corporation.
No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation
transacted business as a corporation pending action by the SEC on its articles of
incorporation, the Court held that there was no ‘de facto’ corporation on the ground that the
corporation cannot claim to be in ‘good faith’ to be a corporation when it has not yet
obtained its certificate of incorporation.
WON a corporation organized under a statute subsequently declared void acquires status as ‘de
facto’ corporation.
No. A corporation organized under a statute subsequently declared invalid cannot acquire the
status of a ‘de facto’ corporation unless there is some other statute under which the supposed corporation
may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized
before the statute had been invalidated cannot conceivably make it a ‘de facto’ corporation since there is
no other valid statute to give color of authority to its creation.
Colorable compliance with the legal requirements in good faith.
The constitutive documents of the proposed corporation were deposited with the Register of Deeds
but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive
documents in the Register of Deeds.
Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a
‘de facto’ corporation?
No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the
right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no
immunity from individual liability is secured.
The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk
of court in the judicial district where the business was located. Arkansas law requires filing in both offices.
Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a
‘de facto’ corporation?
No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the
signing of the articles of incorporation which are not filed, where filing is requisite to create the
corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a
corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations
from their individual liability to pay them. There could be no incorporation or color of it under the law until
the articles were filed (requisites for valid incorporation).
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry must be through a quo
warranto proceeding made by the Solicitor General. (Sec. 20)
The ‘de facto’ doctrine differs from the estoppel doctrine in that where all the requisites of a ‘de
facto’ corporation are present, then the defectively organized corporation will have the status of a ‘de jure’
corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On
the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the defendant association is estopped
from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with
the plaintiff as a corporation and is deemed to have admitted its existence.
(De facto – has status of ‘de jure’ corpo, except separate personality against State, provided all requisites
are present)
(2) against third party? Third party cannot deny existence of corporation if it
Company was sued on a promissory note. Its defense was that at the time of its issuance, it was
defectively organized and therefore could not be sued as such.
The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by
setting up its own mistake affecting the original organization.
Corporation sued a partnership on a promissory note. The latter as defense alleged that the
plaintiff was not a corporation.
One who enters into a contract with a party described therein as a corporation is precluded, in an
action brought thereon by such party under the same designation, from denying its corporate existence.
The corporation sued another corporation a promissory note. The defense was that the plaintiff
was not able to prove the corporate existence of both parties.
The defendant is estopped from denying its own corporate existence. It is also estopped from
denying the other’s corporate existence. The general rule is that in the absence of fraud, a person who
has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped from denying its corporate existence.
CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964)
IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a
defectively organized company whose Articles were not yet filed when the obligation was contracted.
IBM, having dealt with the defectively organized company as if it were properly organized and
having relied on its credit instead of Cranson’s, is estopped from asserting that it was not incorporated. It
cannot sue Cranson personally.
Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and
damages against the corporation and its president for his share of the produce. Judgment against both
was obtained. President complains for being held personally liable.
He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on
behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the
transaction.
Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego,
its President, whereby University would pay plaintiff for the exclusive right to publish his revised
Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment
would render the rest of the payments due. When University failed to pay the second installment, Albert
sued for collection and won. However, upon execution, it was found that University was not registered
with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant.
University opposed, on the ground that Aruego was not a party to the case.
The Supreme Court found that Aruego represented a non-existent entity and induced not only
Albert but the court to believe in such representation. Aruego, acting as representative of such non-
existent principal, was the real party to the contract sued upon, and thus assumed such privileges and
obligations and became personally liable for the contract entered into or for other acts performed as such
agent.
The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up
against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation
that University had been duly organized and was existing under the law.
BY-LAWS (Sec. 46
& 47)
When adopted:
(a) No later than one (1) month after receipt from SEC of
official notice of issuance of Cert. of incorporation.
When effective: Only upon the SEC’s issuance of a certification that the by-laws
law.
trust companies
insurance companies
public utilities
educational institutions
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
1) the time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2) the time and manner of calling and conducting regular and special meetings of the
stockholders or members;
3) the required quorum in meetings of stockholders or members and the manner of voting
herein;
4) the form for proxies of stockholders and members and the manner of voting them;
7) the manner of election or appointment and the term of office of all officers other than
directors or trustees;
10) such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objective of the corporation and are not contradictory to the general policy of the laws
of the land. Under a statute authorizing by-laws for the transfer of stock, a corp. can do no more than
prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of
sale.
Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid?
No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits
forced surrender of unmatured stocks except in case of dissolution.
Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix
compensation lies with the corporation.
Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid?
Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors.
Where the SEC grants a license to a foreign corporation, it is deemed to have approved its
foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid
without SEC approval applies only to domestic corporations.
ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date
of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's
automatic dissolution.
RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It
only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534)
Incorporators must be given the chance to explain their neglect or omission and remedy the same.
Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim
on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon
the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation
has no interest in the individual property of its stockholders, unless transferred to the corporation.
Remember that the liability of the stockholders is limited to the amount of shares.
A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and may
not be sold by the stockholders or members without express authorization from the corporation's Board of
Directors.
In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation
treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was
authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even
though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation
since she was not the sole controlling stockholder.
Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute personal property, they do not represent
property of the corporation. A share of stock only typifies an aliquot part of the corporation's property or
the right to share in its proceeds to that extent when distributed according to law and equity, but its holder
is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any
definite portion of its property or assets.
The act of liquidation made by the stockholders of the corp of the latter’s assets is not and cannot
be considered a partition of community property, but rather a transfer or conveyance of the title of its
assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the
assets, is to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the
corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as
one in the nature of a transfer or conveyance.
The case of the unpaid compensation for the preparation of the project study.
The petitioners were not involved in the initial stages of the organization of the airline. They were
merely among the financiers whose interest was to be invited and who were in fact persuaded, on the
strength of the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corp and did not have a separate juridical
personality to justify making the petitioners, as principal stockholders thereof, responsible for its
obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized
by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no
justification to hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in late, and regardless of the amount of their shareholdings, would
be equally and personally liable also with the petitioner for the claims of the private respondent.
The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission.
The court found no badges of fraud on the part of the president of the corporation. The BOD had
literally and mistakenly relied on the default provision of the contract. As president and controlling
stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private
respondent. He cannot, therefore, be made personally liable because he appears to be the controlling
stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.
MAGSAYSAY V. LABRADOR (180 SCRA 266)
The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC
granting his sisters the right to intervene in a case filed by the widow against SUBIC.
The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in
the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact
alleged in the complaint, without the establishment of which plaintiff could not recover.
Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of
a right in the management of the corporation and to share in the profits thereof and in the properties and
assets thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corp, it
does not vest the owner thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners
of corporate property, which is owned by the corp as a distinct legal person.
PIERCING THE
CORPORATE VEIL
A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal
rights, obligations and transactions of the latter.
A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive
of justice, or for purposes that could not have been intended by law that created it or to defeat public
convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate
issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for
the sole benefit of the stockholders.
Q: What are the effects of disregarding the corporate veil?
(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence
at least for the purpose of the particular situation involved is ignored.
(2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to
use the corporate privilege for the particular purpose involved.
STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892)
Where the corporation was formed by and consisted of the members of a partnership whose
business and property was conveyed to the corporation for the purpose of continuing its business, such
corporation is presumed to have assumed partnership debts.
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be
pierced.
Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing
machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the
machine, having leased such to G.
Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate
entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never
engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability
to T.
Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of
AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it
did not have sugar to supply in the first place. N sues to recover sum of money plus damages.
Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was
used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade
liability.
Both predecessor and successor were owned and controlled by petitioner and there was no break in
the succession and continuity of the same business. All the assets of the dissolved Plant were turned over
to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its employees.
Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to
confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade
the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining
leverage).
SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly
liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere
fact that businesses were related, that some of the employees of Indophil are the same persons manning
and providing for auxiliary services to the other company, and that physical plants, officers and facilities
are situated in the same compound - not sufficient to apply doctrine.
Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization
and certain vested rights which had accrued in favor of the union. Second corporation sought the
protective shield of corporate fiction to achieve an illegal purpose.
A corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.
Where there is nothing on record to indicate the President and majority stockholder of a corporation
had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot
be held solidarily and personally liable with the corporation.
Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32
units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included
in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of
the sale, apply for any TPU service identical or competing with the buyer (Pantranco)."
Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the
wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the
Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49
buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of
the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were
levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor,
against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest
bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to
Pantranco, and they jointly submitted their contract of sale to the PSC for approval.
The PSC issued an order that pending resolution of the applications, Pantranco shall have the
authority to provisionally operate the service under the 2 CPCS that were the subject of the contract
between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment
of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the
CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging
that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is
qualified from operating the CPCs by virtue of the agreement entered into between Villarama and
Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they
were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual
owner of the business without regard to the rights of the stockholders. Villarama even admitted that he
mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he
was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus,
the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a
means of evading the obligation of his covenant. Where the Corporation is substantially the
alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined
from competing with the covenantee.
Close Corporations
The Cease plantation was solely composed of the assets and properties of the defunct Tiaong
plantation whose license to operate already expired. The legal fiction of separate corporate personality
was attempted to be used to delay and deprive the respondents of their succession rights to the estate of
their deceased father.
While originally, there were other incorporators of Tiaong, it has developed into a closed family
corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality.
It was his business conduit and an extension of his personality. There is not even a showing that his
children were subscribers or purchasers of the stocks they own.
This is the reverse of Cease; however, it does not modify the other cases. It stands on its own
because of the facts.
Parent-Subsidiary
Relationship
A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not
alone sufficient to justify their being treated as one entity.
(1) if the subsidiary was formed for the payment of evading the payment of higher taxes
(2) where it was controlled by the parent that its separate identity was hardly discernible
(3) parent corporations may be held responsible for the contracts as well as the torts of the
subsidiary
Q: What are the criteria by which the subsidiary can be considered a mere
4. the parent subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation
6. the parent pays the salaries and other expenses or losses of the subsidiary
7. the subsidiary has substantially no business except with the parent corp. or no assets
except those conveyed to or by the parent corp.
8. in the papers of the parent corp. or in the statements of its officers, the subsidiary is
described as a department or division of the parent corp. or its business or financial
responsibility is referred as the parent’s own
10. the directors or the executives of the subsidiary do not act independently in the interest of
the subsidiary but take their orders from the parent corp. in the latter’s interest
11. the formal legal requirements of the subsidiary are not observed
(Note: Sir Jack said that we must not stop after we’ve gone through the 11 points in order to determine
whether or not there is a subsidiary or instrumentality. We must go further and consider other
circumstances which may help determine clearly the true nature of the relationship. --- Em)
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)
This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car
Works. The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital
stock of Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the
latter was a mere adjunct or instrumentality of Southern.
The general rule is that stock ownership alone by one corporation of the stock of another does not
thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it
is but an instrumentality or adjunct of the dominant corporation.
In the case, it was found that there were two distinct operations. There was no evidence that
Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the
subsidiary, was in full control of the operation. He established prices, handled negotiations in CBAs, etc.
Lenoir paid local taxes, had local counsel and maintain a Workmen’s Compensation Fund. There was also
no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of its
requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to
other companies. Policy decisions remained in the hands of Marius. Hence, the complaint against
Southern Railway was dismissed.
This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines),
Inc. under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny
legal personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying
that in the transactions involved in the case, the public interest and convenience would be defeated and
would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard of the
corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a
representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g.
Cable expenses) and also those of its “principal”. Moreover, K-Phil’s share in the profits was left in the
hands of K-USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for
merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a
tax evasion of no mean proportion and the consequent commission of a grave injustice to the
Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be
done directly.
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the
Liddel Inc.’s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds.
The bulk of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued
no other activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the
general public.
To allow the taxpayer to deny tax liability on the ground that the sales were made through another
and distinct corporation when it is proved that the latter is virtually owned by the former or that they were
practically one and the same is to sanction the circumvention of tax laws.
The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single
business although with 2 trade names. It is a settled doctrine that the fiction of law of having the
corporate identity separate and distinct from the identity of the persons running it cannot be invoked to
further the end subversive of the purpose for which it was created. In the case at bar, the attempt to
make the two businesses appear as one is but a device to defeat the ends of the law governing capital and
labor relations and should not be permitted to prevail.
It must be noted, however, that the contract must be adopted in its entirety; the
corporation cannot adopt only the part that is beneficial to it and discard that which
is burdensome. Moreover, the contract must be one which is within the powers of
the corporation to enter, and one which the usual agents of the company have
express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be
expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its
authorized agents, as any similar original contract might be shown.
The right of agents to adopt an agreement originally made by promoters depends upon the
purposes of the corporation and the nature of the agreement. The agreement must be one which the
corporation itself could make and one which the usual agents of the company have express or implied
authority to enter into.
Whatever may be the proper legal theory by which a corporation may be bound by the contract
(ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is
necessary in all cases that the corporation should have full knowledge of the facts, or at least should be
put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts.
A promoter could not have acted as agent for a corporation that had no legal existence. A
corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality
to enter into a contract.
Should the other contracting party fail to perform its part of the bargain, the
corporation which has adopted or ratified the contract may either sue for:
The fact of bringing an action on the contract has been held to constitute sufficient
adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon themselves the whole thing, and
ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the
corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has
the right to sue for damages for the breach of contract.
The incorporation of (Morong) and its acceptance of the franchise as shown by this action in
prosecuting the application filed with the Commission for approval of said franchise, not only perfected a
contract between the municipality and Morong but also cured the deficiency pointed out by the petition.
The fact that Morong did not have a corporate existence on the day the franchise was granted does not
render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the
franchise.
GENERAL RULE: Promoters are personally liable on their contracts made on behalf
of a corporation to be formed.
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy machinery, receive them in their
possession and authorize one member to issue a note, in contemplation of organizing a corporation which
was not formed. (see Campos' notes p. 258-259). The agent is personally liable for contracts if there is no
principal. The making of partial payments by the corporation, when later formed, does not release the
promoters here from liability because the corporation acted as a mere stranger paying the debt of
another, the acceptance of which by the creditor does not release the debtors from liability over the
balance. Hence, there is no adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before incorporation, the promoters solely
are liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there
was here an intention of the parties to have a present obligor, because three-fourths of the payment are to
be made at the time the drawings or plans in the architectural contract are completed, with or without
incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or
agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the
creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did not have any
duty toward the creditor to form the corporation and give the corporation the opportunity to assume and
pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no obligation on them to form a
corporation and they were not named there as obligors/promissors. The creditor-plaintiff was aware of the
inexistence of the corporation but insisted on naming it as obligor because the planting season was fast
approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff-creditor to
look to the promoters for the performance of the obligation. This is an exception to the general rule that
promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.
OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it,
but he must pursue one of four courses to make the contract binding. These are: 1) provide an
independent board of officers in no respect directly or indirectly under his control, and make full disclosure
to the corporation through them; 2) make full disclosure of all material facts to each original subscriber of
shares in the corporation; 3) procure a ratification of the contract after disclosing its circumstances by vote
of the stockholders of the completely established corporation; or 4) be himself the real subscriber of all the
shares of the capital stock contemplated as a part of the promotion scheme. The promoter is liable, even if
owning all the stock of the corporation at the time of the transaction, if further original subscription to
capital stock contemplated as an essential part of the scheme of promotion came in after such transaction.
CORPORATE POWERS
Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
(NOTE: There are two (2) general restrictions on the power of the corp. to acquire
and hold properties:
To make reasonable donations, including those for the public welfare of for hospital,
charitable, cultural, scientific, civic, or similar purposes:
To establish pension, retirement and other plans for the benefit of its directors,
trustees, officers and employees; and
To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.
Specific Powers of
Corporation
A sale is deemed to substantially cover all the corporate property and assets if
such sale renders the corporation incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
Implied
Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range
of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it
is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily
beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.
The Ultra Vires
Doctrine
Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its
charter or laws of state of incorporation. The term has a broad application and includes not only acts
prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally
applied either when a corporation has no power whatever to do an act, or when the corporation has the
power but exercises it irregularly.
Parties to the ultra vires contract will be left as they are, if the contract has been fully
executed on both sides. Neither party can ask for specific performance, if the contract is
executory on both sides. The contract, provided that it is not illegal, will be enforced, where one
party has performed his part, and the other has not with the latter having benefited from the
former’s performance.
Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires
act or contract. If the act or contract has already been performed, a derivative suit for damages
against the directors maybe filed, but their liability will depend on whether they acted in good
faith and with reasonable diligence in entering into the contracts. When the suit against the
injured party who had no knowledge that the corporation was engaging in an act not included
expressly or impliedly in its purposes clause.
Ultra vires acts may become binding by the ratification of all the stockholders, unless third
parties are prejudiced thereby, or unless the acts are illegal.
While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred upon it by
law, there are however certain corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the corporation.
The BOD of the Phil Trust Co. adopted a resolution which authorized its president to purchase at par
and in the name of the corp. bonds of MSC. These bonds were later resold and guaranteed by PTC to third
persons. PTC paid plaintiff the corresponding interest payments until July 1, 1928 when it alleged that it is
not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was
illegal and void.
Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having received
money or property by virtue of the contract which is not illegal, it is estopped from denying liability. Even
if the then prevailing law (Corp. Law) prohibited PTC from guaranteeing bonds with a total value in excess
of its capital, with all the MSC properties transferred to PTC based on the deed of trust, sufficient assets
were made available to secure the payment of the corresponding liabilities brought about by the bonds.
(This case is an example of how the implied powers concept may be used to justify certain acts of a
corporation.)
A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it
of its corp. franchise.
1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will
not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable
requirements, held valid bec, it was found to be necessary and legally acquired and developed.
3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to
delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them.
Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is
more befitting of the business of a real estate agent or trust company and not of a building and loan
ass'n.
Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the
corp. or its SHs who may bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its
loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC,
the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the
expenses of installation and the property of the corp.
7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is
implied. All business enterprises encounter periods of gains and losses, and its officers would usually
provide for the creation of a reserve to act as a buffer for such circumstances.
8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not
invalid bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for
the purpose of bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The
word "person" is used on a broad sense including not only natural persons but also artificial persons.
Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with
illegality, therefore, the accompanying rights and obligations based on the contract of carriage between
them and the plaintiff cannot be avoided by raising such a defense.
This case involved the issue of whether or not the defendant corporation performed an ultra vires
act by donating the life insurance proceeds to the minor children of Pirovano, the deceased president of
the defendant company under whose management the company grew and progressed to become a multi-
million peso corporation.
Held: NO.
“(1) to invest and deal with moneys of the company not immediately required, in such
manner as from time to time may be determined; and
(2) to aid in any other manner any person, association or corporation of which any obligation
or in which any interest is held by this corporation or in the affairs of prosperity of which this
corporation has a lawful interest.”
From this, it is obvious that the corporation properly exercised within its chartered powers the act
of availing of insurance proceeds to the heirs of the insured and deceased officer.
A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and
technical expertise in exchange for capital shares in Balatoc. Harden was a SH of Balatoc and he contends
that this contract violated the Corp.Law which restricts the acquisition of interest by a
Board of directors or trustees- responsible for corporate policies and the general management of the
business and affairs of the corporation.
Stockholders or members- have residual power over fundamental corporate changes like amendments of
articles of incorporation.
The BOD is responsible for corporate policies and the general management of the business affairs of the
corporation. (See Citibank v Chua)
(a) Authority (Sec. 24)
(b) Requirements
(iii) Nationality
The formula for determining the number of shares needed to elect a given number of directors is as
follows:
X = Y x N1 +1
N+1
Removal may be with or without cause. However, removal without cause may not be used to
deprive minority SHs or members of the right of representation to which they may be entitled under
Sec. 24 of the Code.
If vacancy due to removal Must be filled by the SHs in a regular or special meeting
in number of directors meeting duly called for the purpose, or in the same
or trustees: meeting authorizing the increase of directors or trustees
All other vacancies: May be filled by the vote of at least a majority of the
quorum.
Note: Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.
(h) Liability (See subsequent discussion under Duties of Directors and Controlling
Stockholders.)
In this case, the board of directors, before the financial inability of the corporation to proceed with
the project was revealed, had already recognized the contracts as being in existence and had proceed with
the necessary steps to utilize the films. The subsequent action by the stockholders in not ratifying the
contract must be ignored. The functions of the stockholders are limited of nature. The theory of a
corporation is that the stockholders may have all the profits but shall return over the complete
management of the enterprise to their representatives and agents, called directors. Accordingly, there is
little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other
special powers defined by law. In conformity with this idea, it is settled that contracts between a
corporation and a third person must be made by directors and not stockholders.
In this case, the Board of Regents of the University of the Philippines terminated the ad interim
appointment of Dr. Blanco as Dean of the College of Education by not acting on the matter. In the
transcript of the meeting which was latter agreed to be deleted, it was found out that the BOR, consisting
of 12 members, voted 5 in favor of Dr. Blanco's appointment 3 voted against, and 4 abstained.
The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's appointment
or against it. The SC held that such abstentions be counted as negative vote considering that those who
abstained, 3 of which members of the Screening Committee, intended to reject Dr. Blanco's appointment.
The issue in this case is regarding the validity of the director's meeting at the company's laboratory
on December 8, 1937 wherein Zachary was removed as president of the company. Zachary that he was
not notified of the meeting thus, the action was void. On the other hand, the defendants contend that the
notice requirement was waived by Zachary's presence at the meeting.
The SC held that the validity of the meeting was not affected by the failure to give notice as
required by the by-laws, provided that the parties were personally present. Since all the parties were
present at the meeting of December 8, and understood that the meeting was to be a directors' meeting,
then the action taken is final and may not be voided by any informality in connection with its being called.
The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the
proposed lease since the quota was mortgaged to PNB, the latter certainly cannot escape liability for
observing, for the protection of the interest of the private respondents, that degree of care, precaution and
vigilance which the circumstances justly demand in approving or disapproving the lease of the said sugar
quota.
Any 2 or more positions may be held concurrently by the same person, except that no one
shall act as (a) president and secretary, or (b) president and treasurer at the same time.
- Violation of Corporation Code committed within 6 yrs. prior to the date of election or
appointment
(c) Liability in general (Sec. 31)
Stockholders)
The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank v. CA
(223 SCRA 350) where it was held that:
A bank is liable for the wrongful acts of its officers done in the interest of the
bank or in the course of dealings of the officers in their representative
capacity but not for acts outside the scope of their authority. A bank holding
out its officers and agents as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to perpetrate in the apparent
scope of their employment; nor will it be permitted to shrink from its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom.
Accordingly, a bank is liable to innocent third persons where the representation is made in the
course of its business by its agent acting within the general scope of his authority even though, in the
particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his
principal or some other person for his own ultimate benefit. Application of these principles is especially
necessary because banks have a fiduciary relationship with the public and their stability depends on the
confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do not
exercise strict care in the selection and supervision of its employees, resulting in prejudice to their
depositors.
The power to bind a corporation by contract lies with its board of directors or trustees. Such power
may be expressly or impliedly be delegated to other officers and agents of the corporation. It is also well
settled that except where the authority of employing servants or agents is expressly vested in the board,
officers or agents who have general control and management of the corporation's business, or at least a
specific part thereof, may bind the corporation by the employment of such agents and employees as are
usual and necessary in the conduct of such business. Those contracts of employment should be
reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the
business (3-year employment; shall receive salary even if corp. is insolvent).
THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20 SCRA 987; 1967)
Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had
implied authority to make any contract or do any act which is necessary for the conduct of the business.
He may, without authority from the board, perform acts of ordinary nature for as long as these redound to
the interest of the corporation. Particularly, he contracted forward sales with business entities. Long
before some of these contracts were disputed, he contracted by himself alone, without board approval. All
of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw.
He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself,
through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval.
Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO.
A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws,
shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it.
The following acts of the board constitute implied ratification:
1. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the President, GM,
Attorney, Auditor, etc.)
2. Two other directors approved his actions and expressed satisfaction with the advantages obtained by
him in securing the chattel mortgage.
3. The corporation took advantage of the benefits of the chattel mortgage. There were even partial
payments made with the knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526; 1967)
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would
be constituted as the latter's agent in Manila. Acuna diligently went about his business and even used
personal funds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna
was assured that there need not be any board approval for his constitution as agent for it would only be a
mere formality. Later on, the board disapproved the agency and did not pay him. The SC ruled that the
agreement was valid due to the ratification of the corp. proven by these acts:
2. He delivered P 20,000, performed his work with the knowledge of the board.
Board Committees
The By-laws of the corporation may create an executive committee, composed of not
less than 3 members of the Board, to be appointed by the Board. The executive committee
may act, by majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a
majority vote of the board.
(1) approval of any action for which shareholders' approval is also required;
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)
c) amended the by-laws by giving the President the sole authority to call a stockholder's meeting
and a board of directors meeting
No, because the Executive Commmittee usurped the powers vested in the board and the
stockholders. If their actions was valid, it would put the corp. in a situation wherein only two men, acting
in their own pecuniary interests, would have absorbed the powers of the entire corporation. "Full powers"
should be interpreted only in the ordinary conduct of business and not total abdication of board and
stockholders' powers to the ExeCom. "FULL POWERS" does not mean unlimited or absolute
power.
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board
of directors or trustees, their decision is not final, and approval of the stockholders or members would be
necessary:
(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;
In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be
entitled to vote. (Sec. 6)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil. 426; 1959)
Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26
posting not enough for March 28 election.
However, the proceedings can be nullified if the walkout was for a reasonable and justifiable cause.
In this case, F. Logan Johnston, who owned and/or represented more than 50% of the corporation's
outstanding shares, was prohibited from voting the shares of the Silos family (which he had validly
purchased) and of the minor children of Albert S. Johnston (of whom he was guardian) on the ground that
such shares must first be registered in the names of the wards, thereby prompting the walkout. The Court
of Appeals held that the walkout was neither unreasonable nor unjustifiable. It noted however that there
was no formal declaration of a quorum before the withdrawal from the meeting by F. Logan Johnston.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225; 1968)
The Corporation Law says that every director must own at least one (1) share of the capital stock of
the corporation.
Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the
qualifications, duties, and compensation of its directors.
A stockholder has no vested right to be elected director for he impliedly contracts that the will
of the majority shall govern.
Amended by-laws are valid for the corporation has its inherent right to protect itself.
Under the Law, directors can only be removed from office by a vote of the stockholders
representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority.
Court may appoint a receiver when corporate remedy is unavailable when board of directors
perform acts harmful to the corporation.
Generally, stockholders cannot sue on behalf of the corporation. The exception is when the
defendants are in complete control of the corporation.
The stockholders have an implied power to remove a director for cause. Even when there is
cumulative voting, stockholders can still remove directors for cause.
DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969)
A corporation may use its funds to invest in another corporation without the approval of the
stockholders if done in pursuance of a corporate purpose. However, if it is purely for investment, the vote
of the stockholders is necessary.
VOTIN
G
- Pledgors or mortgagors have the right to attend and vote at stockholders' meetings.
- Treasury shares have no voting right for as long as such shares remain in the Treasury.
- Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at
any one time.
- Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec.
59)
- It must be noted however that directors or trustees cannot vote by proxy at board
meetings. (Sec. 25)
- Note that in Sec. 89, non-stock corporations are permitted to waive the right to use
proxies via their AOI or by-laws.
- Voting trusts must be in writing, notarized, specifying the terms and conditions
thereof, certified copy filed with SEC. Failure to comply with this requirement renders the
agreement ineffective and unenforceable.
- As a general rule, voting trusts are valid for a period not exceeding 5 years at any one
time, and automatically expire at the end of the agreed period unless expressly renewed.
However, in the case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may exceed 5 years but shall automatically expire upon
payment of the loan.
- Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec.
59)
Pooling agreement
- Pooling agreements refer to agreements between 2 or more SHs to vote their shares
the same way. They are different from voting trust agreements in that they do not
involve a transfer of stocks but are merely private agreements between 2 or more SHs to
vote in the same way.
- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in
close corporations. Although there is no equivalent provision for widely-held
corporations, Justice and Prof. Campos are of the opinion that SHs of widely-held
corporations should not be precluded from entering into voting agreements if these are
otherwise valid and are not intended to commit any wrong or fraud on the other SHs that
are not parties to the agreement.
ITF shares
- Any one of the joint owners can vote said shares or appoint a proxy thereof.
Devices Affecting
Control
Proxy Device
Sec 58. Proxies. – Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer
than five (5) years at any one time.
Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by
death, except when coupled with interest or is a security.
Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the
voting right until the by-law requiring recording of transfer in the transfer book is complied with. Thus, a
proxy given by the stockholder of record even if he has already sold the share/s of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945)
The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The
exceptions are: (a) when authority is coupled with interest; (b) where authority is given as part of a
security and is necessary to effectuate such a security. It is coupled with interest when there is interest in
the share themselves (such as a right of first refusal in case of sale) and the rights inherent in the shares
(such as voting rights; capacity to obtain majority).
Where a stockholder’s meeting was validly convened, the proxies must be deemed present even if
the proxies were not presented, provided: (a) their existence is established; (b) the agents were so
designated to attend and act in SH’s behalf; (c) the agents were present in the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128 N.E. 2d 291; 1955), it was held that
in a contest over policy (as opposed to a purely personal power contest), corporate directors have the right
to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly challenged,
from the corporate treasury for the purpose of persuading the SHs of the correctness of their position and
soliciting their support for policies which the directors believe, in all good faith, are in the best interests of
the corporation. The SHs, moreover, have the right to reimburse successful contestants for the reasonable
and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny.
However, where it is established that such monies have been spent for personal power, individual gain
or private advantage, and not in the belief that such expenditures are in the best interest of the
stockholders and the corporation, or where the fairness and reasonableness of the amounts allegedly
expended are duly and successfully challenged, the courts will not hesitate to disallow them.
In a contest over policy, as compared to a purely personal power contest, corporate directors have
the right to make reasonable and proper expenditures. Reason: in these days of giant corporations with
vast numbers of SH’s, if directors are not allowed to authorize reasonable expenses in soliciting proxies,
corporate business may be hampered by difficulty in procuring quorum; or corporations may be at the
mercy of persons seeking to wrest control for their purposes if the directors may not freely answer their
challenge. But corp expense may be disallowed by courts where money was shown to have been spent for
personal power, individual gain or private advantage, or where fairness and reasonableness of amount
spent has been successfully challenged.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is
separated from the voting rights, the usual aim being to insure the retention of incumbent directors and
remove from the stockholders the power to change the management for the duration of the trust.
Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the
BOD or at least a spokesperson during stockholders’ meetings.
Continuity of management.
Ensures that the required number of stockholders is met thereby facilitating smooth corporate
operations.
Disadvantages
Stockholders give up rights (voting and naked title)
Susceptible to abuse
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the
trustee:
Voting rights
(1) A VTA is prepared in writing, notarized, and filed with the corporation and SEC.
(2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust
certificates) are issued in the name of the trustee/s stating that they are issued pursuant to the
VTA.
(5) At the end of the period of the VTA (or the full payment of the loan to which the VTA is made
a condition, as the case may be), in the absence of any express renewal, the voting trust
certificates as well as the certificates of stock in the name of the trustee/s shall be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors.
This case illustrates how VTA can give rise to effective control and how it can be abused. Original
stockholders can set aside the VTA when their rights are trampled upon by the trustee.
Want of consideration
Fraud
A VTA transfers only voting or other rights pertaining to the shares subject of the agreement, or
control over the stock. Stockholders of a corp. that lost all its assets through foreclosures cannot go after
those properties. PNB-NIDC acquired those properties not as trustees but as creditors.
Pooling and voting agreements
Advantages:
Disadvantages:
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will
of the parties may not be carried out due to non-compliance with the pooling agreement.
Generally, agreements and combinations to vote stock or control corporate fiction & policy are valid
if they seek without fraud to accomplish only what parties might do as stockholders and do not attempt it
by illegal proxies, trusts or other means in contravention of statutes or law.
If the enforcement of a particular contract damages nobody-not even the public, there is no reason
for holding it illegal. Test is WON it causes damage to the corporation and stockholders.
Methods of Voting
1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall
multiply 100 by five (equals 500) and distribute equally among the five
candidates without preference
2. Cumulative voting: If A has 100 shares and there are 5 directors to be elected, he shall
(one candidate) multiply 100 by five (equals 500) and he can vote the 500 for only one
candidate.
3. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.
X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1
2. Baker & Cary’s formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
X= Y x D + 1
D' + 1
NOTES
Levels playing field or at least ensures that the minority can elect at least one
representative to the board of directors (BOD)
Cannot of itself give the minority control of corporate affairs, but may affect and limit the
extent of the majority’s control
By-laws cannot provide against cumulative voting since this right is mandated by law in
Section 24.
Type of shares
2. Preferred: share has preference over dividends and distribution of assets upon liquidation;
3. Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed
NOTES
Even though the right to vote of preferred and redeemable shares may be restricted,
owners of these shares can still vote on certain matter provided for in Sec. 6.
SEC requires that where no dividends are declared for three consecutive years, in spite of
available profits, preferred stocks will be given the right to vote until dividends are declared.
Provision granting right to vote to preferred stock previously prohibited from voting, constitutes
diminution of the voting power of common stock.
Provision in the articles of incorporation granting holders of preferred stock right to vote in case of
default in payment of dividends after July 1, 1951 was construed as denial by necessary implication of
the right to vote even prior to July 1, 1951.
Most common restriction: granting first option to the other stockholders and/or the
corporation to acquire the shares of a stockholder who wishes to sell them.
This gives to the corporation and/or to its current management the power to prevent the
transfer of shares to persons who they may see as having interests adverse to theirs.
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly
deprive the minority of their rightful representation in the BOD, such provisions are within the
power of the majority to provide in the by-laws.
According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide
for the disqualification of anyone in direct competition with the corporation.
Founder’s shares
Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and
redeemable shares
If founder’s shares enjoy the right to vote, this privilege is limited to 5 years upon SEC’s
approval, so as to prevent the perpetual disqualification of other stockholders.
Contract to manage the day-to-day affairs of the corporation in accordance with the policies
laid down by the board of the managed corporation.
BOD can and usually delegate many of its functions but it can’t abdicate its responsibility to
act as a governing body by giving absolute power to officers or others, by way of a management
contract or otherwise. It must retain its control over such officers so that it may recall the
delegation of power whenever the interests of the corporation are seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930)
Although corporations may, for a limited period, delegate to a stranger certain duties usually
performed by the officers, there are duties, the performance of which may not be indefinitely delegated to
outsiders.
UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close corporations])
In exchange for the numerical majority in the BOD, minority can ask for a stronger veto
power in major corporate decisions.
A requirement that there shall be no election of directors at all unless every single vote be cast for
the same nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes
entitles a nominee to election. (See Sec. 24)
Requiring unanimity before the BOD can take action on any corporate matter makes it impossible
for the directors to act on any matter at all. In all acts done by the corporation, the major number must
bind the lesser, or else differences could never be determined nor settled.
The State has decreed that every stock corporation must have a representative government, with
voting conducted conformably to the statutes, and the power of decision lodged in certain fractions,
always more than half, of the stock. This whole concept is destroyed when the stockholders, by
agreement, by-law or certificates of corporation provides for unanimous action, giving the minority an
absolute, permanent and all-inclusive power of veto.
The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have been
adopted, the matter of amending them is no concern of the State.
Unusual voting and MINORITY: gives them stronger Subject to the limitations in
quorum requirements veto power in certain corp. Sec. 103.
affairs
MEETINGS
Meetings of Directors /
Trustees
SPECIAL: At any time upon call of the president or as provided in the by-
laws.
NOTICE: Must be sent at least 1 day prior to the scheduled meeting, unless otherwise
provided by the by-laws.
WHERE: Anywhere in or outside the Philippines, unless the by-laws provide otherwise.
Exceptions:
WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)
Meetings of Stockholders /
Members
WHERE: In the city of municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation. Metro
Manila is considered a city or municipality. (Sec. 51)
WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)
Generally, the proceedings had and/or any business transacted shall be void.
However, the proceedings and/or transacted business may still be deemed valid if:
(1) Such proceedings or business are within the powers or authority of the
corporation; and
(2) All the stockholders or members of the corporation were present or duly
represented at the meeting. (Sec. 51)
(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act only within corporate powers and are liable for damages if they acted
beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still
arise if they have not observed due diligence or have been disloyal to the corporation.
(1) willfully and knowingly vote for or assent to patently unlawful acts of the
corporation; or
(2) are guilty of gross negligence of bad faith in directing the affairs of the
corporation; or
(3) acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees.
In such cases, the directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and other
persons.
In addition to this general liability, the Corporation Code provides for specific rules to
govern the following situations:
As a general rule, directors and trustees of the corporation cannot be held liable for
mistakes or errors in the exercise of their business judgment, provided they have acted in
good faith and with due care and prudence. Contracts intra vires entered into by the board
of directors are binding upon the corporation, and the courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to a wanton destruction of the
rights of the minority.
However, if due to the fault or negligence of the directors the assets of the
corporation are wasted or lost, each of them may be held responsible for any amount of loss
which may have been proximately caused by his wrongful acts or omissions. Where there
exists gross negligence or fraud in the management of the corporation, the directors,
besides being liable for damages, may be removed by the stockholders in accordance with
Sec. 28 of the Code. (Campos & Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.
Directors are expected to manage the corporation with reasonable diligence, care and
prudence, i.e. the degree of care and diligence which men prompted by self-interest
generally exercise in their own affairs. Thus, they can be held liable not only for willful
dishonesty but also for negligence.
Although they are not expected to interfere with the day-to-day administrative details of
the business of the corporation, they should keep themselves sufficiently informed about the
general condition of the business.
The nature of the business, as well as the particular circumstances of each case. The
court should look at the facts as they exist at the time of their occurrence, not aided or
enlightened by those which subsequently took place. (Litwin v. Allen)
In the present case, the bond issue was adequately deliberated and planned, properly negotiated
and executed; there was no lack of good faith; no motivation of personal gain or profit; there was no lack
of diligence, skill or care in selling the issue at the price approved by the Commission and which resulted in
a saving of approximately $9M to the corporation.
The Bacolod-Murcia Milling Co. adopted a resolution which granted to its sugar planters an increase
in their share in the net profits in the event that the sugar centrals of Negros Occidental should have a
total annual production exceeding one-third of the production of all sugar central mills in the province.
Later, the company amended its existing milling contract with its sugar planters, incorporating such
resolution. The company, upon demand, refused to comply with the contract, stating that the stipulations
in the resolution were made without consideration and that such resolution was, therefore, null and void
ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors
to adopt. This is an action by the sugar planters to enforce the contract.
The terms embodied in the resolution were supported by the same cause and consideration
underlying the main amended milling contract; i.e., the premises and obligations undertaken thereunder
by the planters, and particularly, the extension of its operative period for an additional 15 years over and
beyond the thirty years stipulated in the contract.
As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the court has no
authority to review them. They hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing, they cannot be controlled in the reasonable exercise and
performance of such duty. It is a well-known rule of law that questions of policy or of management are left
solely to the honest decision of officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by the courts.
FACTS: Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to raise money to
pay the balance of the purchase price but could not directly borrow money due to a borrowing limitation in
its charter. Thus, it sold Missouri Pacific bonds to J.P. Morgan and Co. worth $IOM. J.P. Morgan, in turn,
sold $3M worth of the bonds to Guaranty Trust Company. Under the contract, the seller was given an
option to repurchase at same price within six months.
HELD: Option given to seller is invalid. It is against public policy for a bank to sell securities and
buy them back at the same price; similarly, it is against public policy for the bank to buy securities and
give the seller the option to buy them back at the same price because the bank incurs the entire risk of
loss with no possibility of gain other than the interest derived from the securities during the period that the
bank holds them. Here, if the market price of the securities rise, the holder of the repurchase option would
exercise it to recover the securities at a lower price at which he sold them. If the market price falls, the
seller holding the option would not exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an express trust who, regardless of good faith, are
personally liable. In this case, the directors are liable for the transaction because the entire arrangement
was improvident, risky, unusual and unnecessary so as to be contrary to fundamental conceptions of
prudent banking practice. Yet, the advice of counsel was not sought. Absent a showing of exercise of
good faith, the directors are thus liable.
FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note
executed by Avram and endorsed by Lacey. The loan was not authorized by any meeting of the board of
directors and was not for the benefit of the corporation. The note was dishonored but defendant-directors
did not protest the note for non-payment; thus, Lacey, the indorser who was financially capable of meeting
the obligation, was subsequently discharged.
HELD: Directors are charged not with misfeasance, but with non-feasance, not only with doing
wrongful acts and committing waste, but with acquiescing and confirming the wrong doing of others, and
with doing nothing to retrieve the waste. Directors have the duty to attempt to prevent wrongdoing by
their co-directors, and if wrong is committed, to rectify it. If the defendant knew that an unauthorized loan
was made and did not take steps to salvage the loan, he is chargeable with negligence and is accountable
for his conduct.
FACTS: The board of directors of Sibuguey Trading Company authorized the purchase of 330 shares
of stock of the corporation and declared payment of P3T as dividends to stockholders. The directors from
whom 300 of the stocks were bought resigned before the board approved the purchase and declared the
dividends. At the time of purchase of stocks and declaration of dividends, the corporation had accounts
payable amounting to P9,241 and accounts receivable amounting to P12,512, but the receiver who made
diligent efforts to collect the amounts receivable was unable to do so.
It has been alleged that the payment of cash dividends to the stockholders was wrongfully done
and in bad faith, and to the injury and fraud of the creditors of the corporation. The directors are sought to
be made personally liable in their capacity as directors.
HELD: Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not
declare dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an actual bona fide surplus from which
dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the stock from
the corporation and declared the dividends on the stock at the same Board meeting, and that the directors
were permitted to resign so that they could sell their stock to the corporation. Given all of this, it was
apparent that the directors did not act in good faith or were grossly ignorant of their duties. Either way,
they are liable for their actions which affected the financial condition of the corporation and prejudiced
creditors.
A complaint was filed against a corporate director for failing to give adequate attention (he relied
solely on the President’s updates on the status of the corp) to the affairs of a corporation which suffered
depletion of funds.
The director was not liable. The court said that despite being guilty of misprision in his office, still
the plaintiff must clearly show that the performance of the director’s duties would have avoided the losses.
When a business fails from general mismanagement, business incapacity, or bad judgment, it is difficult to
conjecture that a single director could turn the company around, or how much dollars he could have saved
had he acted properly.
Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the same to
himself. Minority stockholders filed suit against Bowen, the corporation's President, to recover for company
losses arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or
fraudulent; (2) Cushing performed personal work such as keeping the facility in repair which redounded to
the benefit of the company and even increased its income; (3) Bowen did not profit personally through
Cushing's lease; and (4) the issue of the possible illegality of the lease was put before the Board of
Directors, but the Board did not act on it but instead moved on to the next item on the agenda. Absent
any bad faith on Bowen's part, and a showing that it was a reasonable exercise of judgment to take no
action on the lease agreement at the time it was entered into, Bowen was not liable.
Lowell Hoit & Co. V. Detig (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against directors of a cooperative grain company for an alleged willful
conversion by the manager of grain stored in the company facility. The court said that the directors were
not personally liable. There was no evidence that the directors had knowledge of the transaction between
the manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single act of fraud on the part of a
subordinate officer/agent. But directors could be held liable if the act of fraud was habitual and openly
committed as to have been easily detected upon proper supervision. To hold directors liable, he must have
participated in the fraudulent act; or have been guilty of lack of ordinary and reasonable supervision; or
guilty of lack of ordinary care in the selection of the officer/agent.
Coleman, an employee of the bank, was able to divert bank finances for his benefit, resulting in
huge losses to the bank. The receiver sued the president and the other directors for the loss.
The court said that the directors were not answerable as they relied in good faith on the cashier’s
statement of assets and liabilities found correct by the government examiner, and were also encouraged
by the attitude of the president that all was well (the president had a sizable deposit in the bank). But the
president is liable. He was at the bank daily; had direct control of records; and had knowledge of incidents
that ordinarily would have induced scrutiny.
A self-dealing director is one who enters into a contract with the corporation of which he is a director.
However, such contract may be upheld by the corporation if all of the following
(1) The presence of the self-dealing director or trustee in the board meeting for
which the contract was approved was not necessary to constitute a quorum for
such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the
approval of the contract;
(4) In the case of an officer, the contract has been previously authorized by the
Board of Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was necessary
for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all
of the members, in a meeting called for the purpose. Full disclosure of the adverse interest
of the directors or trustees involved must be made at such meeting.
DOCTRINE: A director of a corporation holds a position of trust and as such, he owes a duty of
loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of the property interests of the
stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)
The articles of inc. of respondent included a provision that relieves any director of all responsibility
for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be
for his benefit or for the benefit of any other person, firm, association or partnership in which he may be
interested, except in case of fraud.
SC: This is in direct contravention of the Corp Law, of the traditional fiduciary relationship between
directors and the SH. The implication is that they can do anything short of fraud, even to their benefit, and
with immunity.
Note: This case was decided in 1966 under the Corporation Law, which had no
Issue: validity of sale of corp. property and assets to the directors who approved the same.
Gen Rule: When purely private corporations remain solvent, its directors are agents or trustees for the SH.
Exception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they
are members of the corp. or not, and must manage its property and assets with strict regard to their
interest; and if they are themselves creditors while the insolvent corp is under their management, they will
not be permitted to secure to themselves by purchasing the corp property or otherwise any personal
advantage over the other creditors.
Exception to Exception: A director or officer may in good faith and or an adequate consideration
purchase from a majority of the directors or SH the property even of an insolvent corp, and a sale
thus made to him is valid and binding upon the minority.
In the case at bar, the sale was held to be valid and binding. Company was losing. 4 directors
present during meeting all voted for the sale. They likewise constitute majority of SH. Contract was found
to be fair and reasonable.
Prime White Cement Corp. (through the President and Chairman of the Board) and Alejandro Te, a
director and auditor of the corporation, entered into a dealership agreement whereby Te was obligated to
act as the corporation's exclusive dealer and/or distributor of its cement products in the entire Mindanao
area for 5 years. Among the conditions in the dealership agreement were that the corporation would sell
to and supply Te with 20,000 bags of white cement per month, and that Te would purchase the cement
from the corporation at a price of P 9.70 per bag.
Relying on the conditions contained in the dealership agreement, Te entered into written
agreements with several hardware stores which would enable him to sell his allocation of 20,000 bags per
month. However, the Board of Directors subsequently imposed new conditions, including the condition
that only 8,000 bags of cement would be delivered per month. Te made several demands on the
corporation to comply with the dealership agreement. However, when the corporation refused to comply
with the same, Te was constrained to cancel his agreements with the hardware stores. Notwithstanding
the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a
certain Napoleon Co for marketing of corporation's products in Mindanao. The lower court held that Prime
White was liable to Te for actual and moral damages for having been in breach of the agreement which
had been validly entered into.
On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for
not having been fair and reasonable: the agreement protected Te from any market increases in the price
of cement, to the prejudice of the corporation. The dealership agreement was an attempt on the part of
Te to enrich himself at the expense of the corporation. Absent any showing that the stockholders had
ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid
and Te could not be allowed to reap the fruits of his disloyalty.
USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at all to stockholders
in relation to transactions whereby the officers and directors buy for themselves shares of stock from the
stockholders?
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the US case
of Pepper v. Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the intervention of a
corporate entity violate the ancient precept against serving two masters … He cannot utilize his inside
information and his strategic position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at
all times subject to the equitable limitation that it may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."
If a director acquires for himself, by virtue of his office, a business opportunity which
should belong to the corporation, thereby obtaining profits to the prejudice of the
corporation, he must account to the corporation for all such profits by refunding the same.
However, if his act was ratified by 2/3 stockholders' vote, he need not refund said profits.
This provision applies even though the director may have risked his own funds in the
venture.
In this case, it was held that the general allegations in the complaint of conspiracy of the directors
to obtain corporate opportunity were deficient. The complaint should state specific transactions.
Directorship in 2 competing corporations does not in and of itself constitute a wrong. It is only
when a business opportunity arises which places the director in a position of serving two masters, and
when, dominated by one, he neglects his duty to the other, that a wrong has been done.
Fiduciary duty applies even if the corporation is unable to enter into transactions itself.
Litwin v Allen (25 N.Y.S. 2d 667; 1940)
In this case, it was held that the common stock purchased by the defendants wasn’t a business
opportunity for the corporation. Having fulfilled their duty to the corporation in accordance with their best
judgment, the defendant directors were not precluded from a transaction for their own account and risk.
Interlocking directors
Except in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between 2 or more corporations having interlocking directors shall
not be invalidated on that ground alone. This practice is tolerated by the Courts because
such an arrangement oftentimes presents definite advantages to the corporations involved.
However, if the interest of the interlocking director in one corporation is substantial
(i.e., stockholdings exceed20% of the OCS) and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the conditions stated in Sec. 32, i.e.,
for the contract not to be voidable, the following conditions must be present:
(1) The presence of the self-dealing director or trustee in the board meeting
for which the contract was approved was not necessary to constitute a
quorum for such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for
the approval of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by
the Board of Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was necessary
for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all
of the members, in a meeting called for the purpose. Full disclosure of the adverse interest
of the directors or trustees involved must be made at such meeting.
Globe Woolen Co. v. Utica Gas & Electric (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas, obtained a cheap,
10-year contract for Utica to supply power. Maynard did not vote during the meeting for the approval of
the contract.
Can Globe seek to enforce contract? The Supreme Court held that Globe could not enforce the
contract and that said contract was voidable at the election of Utica. It was found that based on the facts
of the case, the contract was clearly one-sided. Maynard, although he did not vote, exerted a dominating
influence to obtain the contract from beginning to end.
The director-trustee has a constant duty not to seek harsh advantage in violation of his trust.
(1) consenting to the issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than cash, valued in
excess of its fair value, or
(2) who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporation secretary
shall be solidarily liable with the stockholders concerned to the corporation and its creditors
for the difference between the fair value received at the time of the issuance of the stock
and the par or issued value of the same.
GENERAL RULE: Directors as such are not entitled to compensation for performing services
ordinarily attached to their office.
EXCEPTIONS: (1) If the articles of incorporation or the by-laws expressly
so provide;
WHO FIXES THE COMPENSATION? The stockholders only (majority of the OCS)
MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors shall not
exceed 10% of the net income before income tax of the corporation during the
preceding year (Sec. 30)
GOV'T OF THE PHILIPPINES vs. EL HOGAR FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which stipulated that 5% of
the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the
attendance at board meetings is valid. The Corporation Law does not prescribe the rate of compensation
for the directors of a corporation. The power to fix it , if any is left to the corporation to be determined in
its by-laws. In the case at bar, the provision in question even resulted in extraordinarily good attendance.
This action was brought by the directors of defendant corporation to recover 1% from each of the
plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision which grants the directors
the right to receive a life gratuity or pension in such amount for the corporation.
The SC held that the by-law provision is not valid. Such provision is ultra vires for a mutual loan and
building association to make. It is not merely a provision for the compensation of directors. The authority
conferred upon corporations refers only to providing compensation for the future services of directors,
officers, and employees after the adoption of the by-law in relation thereto. The by-law can't be held to
authorize the giving of continuous compensation to particular directors after their employment has
terminated for past services rendered gratuitously by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC vs. TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated the funds of the corporation for different expenses
of the directors are contrary to the by-laws of the corporation; thus they are not within the board's power
to enact. Sec. 8 of the by-laws explicitly reserved to the stockholders the power to determine the
compensation of members of the board and they did restrict such compensation to actual transportation
expenses plus an additional P30 per diems and actual expenses while waiting. Hence, all other expenses
are excluded. Even without the express reservation, directors presumptively serve without pay and in the
absence of any agreement in relation thereto, no claim can be asserted therefore.
A retirement plan which provides a very large pension to an officer who has served to within one
year of the retirement age without any expectation of receiving a pension would seem analogous to a gift
or bonus. The size of such bonus may raise a justifiable inquiry as to whether it amounts to wasting of the
corporate property. The disparity also between the president's pension plan and that of even the nearest
of the other officers and employees may also be inquired upon by the courts.
This is an appeal filed to enjoin the California Eastern Airways from putting into effect a stock option
plan and a profit-sharing plan. The SC held that the stock option plan was deficient as it was not
reasonably created to insure that the corporation would receive contemplated benefits. A validity of a
stock option plan depends upon the existence of consideration and the inclusion of circumstances which
may insure that the consideration would pass to the corporation. The options provided may be exercised
in toto immediately upon their issuance within a 6 month period after the termination of employment. In
short, such plan did not insure that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it was reasonable and was ratified
by the stockholders pending the action.
Close
Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the
stockholders rather than the BoD. So long as this provision continues in effect:
Generally, stockholders deemed to be directors for purposes of this Code, unless the
context clearly requires otherwise;
Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that
all officers or employees or that specified officers or employees shall be elected or appointed by
the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
They shall be personally liable for corporate torts (unlike ordinary directors liable only upon
finding of negligence)
If however there is reasonable adequate liability insurance, injured party has no right of
action v. stockholders-managers
Duty of Controlling
Interest
A SH/director is still entitled to vote in a stockholder’s meeting even if his interest is adverse to a
corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp.
and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard such as
their own personal property to dispose at their whim.
Disposal by controlling SH of his stock at any time & at such price he chooses
Selling corp. office or management control by itself, that is NOT accompanied by stocks or
stocks are insufficient to carry voting control;
Transferring office to persons who are known or should be known as intending to raid the
corporate treasury or otherwise improperly benefit themselves at the expense of the corp.
(Insuranshares Corp. V. Northern Fiscal);
The corp. is suing its former directors to recover damages as a result of the sale of its control to a
group (corporate raiders) who proceeded to rob it of most of its assets mainly marketable securities.
Are previous directors who sold corp. control liable? Yes, they are under duty not to sell to raiders.
Owners of corp. control are liable if under the circumstances, the proposed transfer are such as to
awaken a suspicion or put a prudent man on his guard. As in this case, control was bought for so much
aside from being warned of selling to parties they knew little about, and also from fair notice that such
outsiders indeed intended to raid the corp.
Duty to
Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for
mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore
manage its assets with due consideration to the creditor’s interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage over
other creditors.
Personal Liability of
Directors
III. Agrees to hold himself personally and solidarily liable with the corporation;
IV. Is made, by a specific provision of law, to personally answer for his corporate
action.
In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation
for the termination of employment of corporate employees done with malice or in bad faith.
In the instant case, there was a showing of bad faith: the Board Resolution retrenching the
respondents on the feigned ground of serious business losses had no basis apart from an unsigned and
unaudited Profit and Loss Statement which had no evidentiary value whatsoever.
AND
Installments paid and unpaid on all stock for which subscription has been
made, and the date of any installment;
The stock and transfer book shall be kept in the principal office of the corporation or in the
office of its stock transfer agent, and shall be open for inspection by any director or
stockholder of the corporation at reasonable hours on business days.
In the absence of any provision to the contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes
the proper and necessary entries. (Torres, et al. vs. CA, 278 SCRA 793; 1997)
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how
business affairs of the corp. are run by the directors. The law therefore gives them the right to know not
only the financial health of the corp. but also how its affairs are managed so that if they find it
unsatisfactory, they can seek the proper remedy to protect their investment.
What Records
Covered
This includes book of inventories and balances, journal, ledger, book for copies of letters
and telegrams, financial statements, income tax returns, vouchers, receipts, contracts,
papers pertaining to such contracts, voting trust agreements (sec. 59)
2. By-laws
These are expressly required to be open to inspection by SH/members during office hours
(Sec. 46). Note: There is no similar provision as to AOI, but these are filed with the SEC
anyway.
This is to inform stockholders of Board policies. Such right arises only upon approval of the
minutes, however.
These are records of all stocks in the names of the stockholders alphabetically arranged.
contain all names of the stockholders of record. Useful for proxy solicitation for elections.
SEC has however ruled that a SH cannot demand that he be furnished such a list but he is
free to examine corp. books.
6. Most recent financial statement
Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a
written request from any stockholder or member, the corporation must furnish the
requesting party with a copy of its most recent financial statement, which shall include a
balance sheet as of the end of the last taxable year and a profit or loss statement for said
taxable year.
Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation
are NOT open to inspection, EXCEPT under the following circumstances:
official; and
(4) In cases where the money deposited / invested is the subject matter
of litigation
(5) Upon order of a competent court in cases of unexplained wealth
under RA 3019 or the Anti-Graft and Corrupt Practices Act
1. The exercise of this right is subject to reasonable limitations similar to a citizen’s exercise of the
right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to
the prejudice of SHs.
2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and
46).
3. A corp. may regulate time and manner of inspection but provisions in its by-law which gives
directors absolute discretion to allow or disallow inspection are prohibited.
5. Inspection should be made in such a manner as not to impede the efficient operations
6. Place of inspection: Principal office of the corp. SH cannot demand that such records be taken
out of the principal office.
7. As to purpose:
PRESUMPTION: that SH’s purpose is proper. Corp. cannot refuse on the mere belief that
his motive is improper (sec 74).
BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.
To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the
stockholder as such, and it is not contrary to the interests of the corporation.
Belief in good faith that a corp. is being mismanaged may be given due course even if
later, this is proven unfounded.
(Gokongwei v. SEC)
Writ should be directed against the corporation. The secretary and the
president may be joined as party defendants.
(2) Injunction
(3) Action for damages against the officer or agent refusing inspection. Also, penal
(1) The person demanding has improperly used any information secured through any
prior examination; or
BOD/Officers may deny inspection when sought at unusual hours or under improper conditions. But
they cannot deprive the stockholders of the right altogether. In CAB, by-law provided that the inspection
be made available only for a few days in a year, chosen by the directors. This is void.
G acquired 1 share of stock purposely to be able to exercise right to inspection with respect to
transactions before he became a SH. G not in good faith. His obvious purpose was to arm himself with
materials which he can use against the bank for acts done by the latter when G was a total stranger to the
same. Right not available here.
There was nothing improper in the secretary’s refusal since the minutes of these prior meetings
have to be verified, confirmed and signed by the directors then present. Hence, Veraguth has to wait until
after the next meeting.
The law takes from the SH the burden of showing impropriety of purpose and places upon the
corporation the burden of showing impropriety of purpose and motive.
Considering that the foreign subsidiary is wholly owned by SMC and therefore under its control, it
would be more in accord with equity, good faith and fair dealing to construe the statutory right of
Gokongwei as petitioner as SH to inspect the books and records of such wholly subsidiary which are in
SMC’s possession and control.
DERIVATIVE SUITS
a. Individual suits - wrong done to stockholder personally and not to other stockholders
But since the directors who are charged with mismanagement are also the
ones who will decide WON the corp. will sue, the corp. may be left without
redress; thus, the stockholder is given the right to sue on behalf of the
corporation.
Suing stockholder is merely the nominal party and the corp. is actually the
party in interest.
A SH can only bring suit for an act that took place when he was a stockholder;
not before. (Bitong v. CA, 292 SCRA 503)
Requirements Relating to
Derivative Suits
1) Stockholder/ member must have exhausted all remedies within the corp.
3) Any benefit recovered by the stockholder as a result of bringing derivative suit must be
accounted for to the corp. who is the real party in interest.
4) If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses
including attorneys' fees.
The injury complained of is against the corporation and thus the action properly belongs to the
corporation rather than the stockholders. It is a derivative suit brought by the stockholder as a nominal
party plaintiff for the benefit of the corporation, which is the real party in interest. In this case, plaintiffs
brought the suit not for the benefit of the corporation's interest, but for their own. Plaintiffs here asked
that the defendant make good the losses occasioned by his mismanagement and to pay them the value of
their respective participation in the corporate assets on the basis of their respective holdings. Petition
dismissed for venue improperly laid.
In a derivative suit, the corporation is the real party in interest, and the stockholder merely a
nominal party. Normally, it is the corp. through the board of directors which should bring the suit. But as
in this case, the members of the board of directors of the bank were the nominees and creatures of
respondent Roman and thus, any demand for an intra-corporate remedy would be futile, the stockholder is
permitted to bring a derivative suit.
Should the corporation be made a party? The English practice is to make the corp. a party plaintiff
while the US practice is to make it a party defendant. What is important though is that the corporation
should be made a party in order to make the court's ruling binding upon it and thus bar any future re-
litigation of the issues. Misjoinder of parties is not a ground to dismiss the action.
The importation of textiles instead of raw materials, as well as the failure of the board of directors
to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud,
or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified
the suit by a minority stockholder of the corporation.
The claim that plaintiff Justiniani did not take steps to remedy the illegal importation for a period of
two years is also without merit. During that period of time plaintiff had the right to assume and expect
that the directors would remedy the anomalous situation of the corporation brought about by their wrong-
doing. Only after such period of time had elapsed could plaintiff conclude that the directors were remiss in
their duty to protect the corporation property and business.
The power to sue and be sued in any court by a corporation even as a stockholder is lodged
in the Board of Directors that exercises its corporate powers and not in the president or officer
thereof.
It was JAKA's Board of Directors, not Senator Enrile, which had the power to grant
Bitong authority to institute a derivative suit for and in its behalf.
The basis of a stockholder's suit is always one in equity. However, it cannot prosper without
first complying with the legal requisites for its institution. The most important of these is the
bona fide ownership by a stockholder of a stock in his own right at the time of the transaction
complained of which invests him with standing to institute a derivative action for the benefit of
the corporation.
Sources of
Financing
Capital
Structure
This refers to the aggregate of the securities -- instruments which represent relatively long-term
investment -- issued by the corporation. There are basically 2 kinds of securities: shares of stock and
debt securities.
DEFINITION the amount fixed, usually by the actual property of the corporation,
corporate charter, to be subscribed including cash, real, and personal
and paid in or secured to be paid property. Includes all corporate
in by the SHS of a corporation, and assets, less any loss which may
upon which the corporation is to have been incurred in the
conduct its operation business.
DEFINITIO Stock which Stock which Shares that Shares issued Special
N entitles the entitles the have been by the shares
owner of holder to issued and corporation whose
such stocks some fully paid but that may be exclusive
to an equal preference subsequently taken up by rights and
pro rata either in the reacquired the privileges
division of dividends or by the corporation are
profits distribution of issuing upon determined
assets upon corporation expiration of a by the AOI.
liquidation, or by lawful fixed period.
in both means.
regardless of
the existence
of
unrestricted
retained
earnings
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation
Code)
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance
companies, public utilities, building & loan association (Sec. 6)
Nature of Subscription
Contract
It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed. This is notwithstanding the fact that the parties refer to it as a purchase or some other contract.
(Sec. 60)
Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of
their claims.
The assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts.
A subscription contract subsists as a liability from the time that the subscription is made
until such time that the subscription is fully paid.
A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of
indebtedness and therefore, it is not a credit. Stockholders as such are not creditors of the corporation.
The capital stock of a corporation is a trust fund to be used more particularly for the security of the
creditors of the corporation who presumably deal with it on the credit of its capital.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a
continuing offer to the corporation, but also to have contracted with each other as well. Thus, no one may
revoke the contract even prior to incorporation without the consent of all the others.
2) After the AOI have been submitted to the SEC (Sec. 61)
Utah Hotel Co v. Madsen (43 utah 285, 134 pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders “to regulate the mode of making
subscriptions to its capital stock and calling in the same by-laws or by express contract.”
Since it may be done by express contract, this shows that it was intended that a contract to that effect
may be entered into even before the corporation is organized, and the contract agreement is enforced if
the corporation is in fact organized.
Wallace v. Eclipse Pocahontas Coal Co (98 S.E. 293; 1919)
One who has paid his subscription to the capital stock of the corporation may compel the issuance
of proper certificates therefor.
Post-incorporation subscription
NOTE: Under the Corporation Code, there is no longer any distinction between a
subscription and a purchase. Thus, a subscriber is liable to pay for the shares even
To protect existing stockholder equity. If the right is not recognized, the SH’s interest in the
corporation will be diluted by the subsequent issuance of shares.
This common law principle which was generally understood to be applicable in this jurisdiction has
now to give way to the express provisions of the Corporation Code on the matter.
shareholdings.
LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)
2) Issuance of shares in exchange for property needed for corporate purposes, including
cases wherein an absorbing corporation issues new stocks to the SH’s in pursuance to the
merger agreement (Sec. 39)
Why? (a) Because it is beneficial for the corporation to save its cash;
(b) Corporation does not have to shell out money to fulfill its
obligations;
(c) Money that would have otherwise been used for interest
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-issuance
of treasury shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the limitations in Sec.
39 do not apply.
The waiver of the preemptive right must appear in the Articles of Incorporation or an amendment
thereto in order to be binding on ALL stockholders, particularly future stockholders. (Sec. 39)
If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously agreed to by
all existing stockholders:
The existing stockholders cannot later complain since they are all bound to their
private agreement.
The issue of shares may still be objectionable if the Directors have acted in breach of trust and their
primary purpose is to perpetuate or shift control of the corporation, or to “freeze out” the minority interest.
WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS UNLAWFULLY DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties are prejudiced)
The directors were under the legal obligation to give the SH-plaintiff an opportunity to purchase at
the price fixed before they could sell his property to a third party. By selling to strangers without first
offering to sell to him, the defendant wrongfully deprived him of his property and is liable for such
damages as he actually sustained.
Preemptive right is not to be denied when the property is to be taken as consideration for the stock
except in those peculiar circumstances when the corporation has great need for the particular property,
and the issuance of stock is the only practical and feasible method by which the corp. can acquire it for the
best interest of the SHs. Ground: practical necessity. [cf. Sec. 39]
If the issue of shares is reasonably necessary to raise money to be issued in the business of the
corporation rather than the expansion of such business beyond original limits, the original SHs have no
right to count on obtaining and keeping their proportional part of original stock.
But even if preemptive right does not exist, the issue of shares may still be objectionable if the
directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the
corporation, or to ‘freeze out’ minority interest.
The doctrine of preemptive right is not affected by the identity of the purchasers. What it is
concerned with is who did not get it. But when officers and directors sell to themselves and thereby gain
an advantage, both in value and in voting power, another situation arises. In the case at bar, the directors
were not able to prove good faith in the purchase and equity of transaction, since the corp. was a financial
success. There was constructive fraud upon the other SHs.
Debt
Securities
Borrowings
NOTE: Under the SEC rules, stock option must first be approved by the SEC.
Also, if the stock option is granted to non-stockholders, or to directors,
officers, or managing groups, there must first be SH approval of 2/3 of the
OCS before the matter is submitted to the SEC for approval.
Of course it goes without saying that the corporation must set aside
enough of the junior securities in case the holders of the option decide to
exercise such option.
Merritt-Chapman & Scott Corp. vs. New York Trust Co. (184 F. 2d 954; 1950)
If the corporation is allowed to declare stock dividends without taking account of the warrant
holders (who have not yet exercised their warrant), the percentage of interest in the common stock capital
of the corporation which the warrant holders would acquire, should they choose to do so, could be
substantially reduced/diluted. Thus, the corporation is wrong in contending that a warrant holder must first
exercise his warrant before they may be issued stock dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which
approximates the characteristics of debt securities. Hybrid securities, as the name implies, therefore
combine the features of preferred shares and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts use the
following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate to
them?
BONDS STOCK
John Kelly vs. CIR Talbot Mills vs. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on indebtedness (therefore, a bond is
held) because there were sales of the debentures as well as exchanges of preferred stock for debentures,
a promise to pay a certain annual amount if earned, a priority for the debentures over common stock and
a definite maturity date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest (therefore,
shares are held), because of the presence of fluctuating annual payments with a 2% minimum, and the
limitation of the issue of notes to stockholders in exchange only for stock. Besides, it is the Tax Court
which has final determination of all tax issues which are not clearly delineated by law.
The payments made, regardless of what they are called, are in fact dividends (on stocks) because
of the absence of a maturity date and the right to enforce payment of the principal sum by legal action,
among other factors.
The following criteria should be used in determining whether a payment is for interest or dividends:
(4) uniform rate of interest payable or income payable only out of profits;
(1) debtor-corporation
(2) creditor-bondholder
The rights of bondholders are to be determined by their contract and courts will not make or
remake a contract merely because one of the parties may become dissatisfied with its provisions. If the
contract is legal, the courts will interpret and enforce it.
In the deed of trust and bonds in this case, there are provisions empowering bondholders of 2/3 of
the principal amount or more, by agreement with the company, to modify and extend the date of payment
of the bonds provided such extension affected all bonds alike. When this was done, the bondholders only
followed such provisions in good faith. The company benefited because of such move, and the bondholders
were not necessarily prejudiced, as defendants Joneses in this case were themselves owners of 72% of the
bond issue.
CONSIDERATION FOR ISSUANCE OF SHARES
Form of
Consideration
cash;
property actually received by the corporation: must be necessary or convenient for its
use and lawful purposes;
future services
promissory notes
(3) In the absence of the foregoing, by the SHs representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose (Sec. 62)
IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE VALUE THEREOF DETERMINED?
It is initially determined by the incorporators or the Board of Directors, subject to approval by the
SEC. (Sec. 62)
Watered
Stocks
NOTE: No-par shares CAN be watered stock: when they are issued for less
than their issued value as fixed by the corp. in accordance with law.
(1) Gratuitously, under an agreement that nothing shall be paid to the corporation;
(2) Upon payment of less than its par value in money or for cost at a discount;
(3) Upon payment with property, labor or services, whose value is less than the par value of
the shares; and
(4) In the guise of stock dividends representing surplus profits or an increase in the value of
property, when there are no sufficient profits or sufficient increases in value to justify it.
Directors and officers who consented to the issuance of watered stocks are solidarily liable with the
holder of such stocks to the corp. and its creditors for the difference between the fair value received at
the time of the issuance and the par or issued value of the share.
The liability will be to all creditors, whether they became such prior or subsequent to the issuance of
the watered stock. Reliance by the creditors on the alleged valuation of corporate capital is immaterial and
fraud is not made an element of liability.
PRIVATE Triplex Shoe v. Rice & Hutchinstc \l 1 "Triplex Shoe v. Rice & Hutchins" (72 A.L.R. 932; 1930)
In this case, the stocks issued to the Dillman faction were no par value shares, the consideration for
which were never fixed as required by law. Hence, their issuance was void. Moreover, the stocks were issued
to the Dillmans for services rendered and to be rendered. Future services are not lawful consideration for the
issuance of stock.
McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the balance due
to be evidenced by a note. McCarty failed to pay a big portion of the balance. The Court affirmed the
judgement against McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits the issuance of stock. If it is
understood that the stock will not be issued to the subscriber until the note is paid, the contract is valid and
not illegal.
If a security such as a note, which is not a valid consideration, is accepted, the law does not say that
such note, or the stock issued for it, shall be void. What is void by express provision of law is the fictitious
increase of stock or indebtedness. The law was designed for the protection of the corporation and its
creditors. It emphasizes the stockholder’s obligations to make full and lawful payment in accord with its
mandate, rather than furnish him with a defense when he has failed in that obligation. Its purpose is to give
integrity to the corporation’s capital. None of these objects would be promoted by declaring a note given by a
subscriber for stock uncollectible in the hands of a bona fide stockholder.
This case involves an action to collect unpaid balances on par value of shares. It was held that
innocent transferees of watered stock cannot be held to answer for the deficiency of the stocks even at the
suit of the creditor of the company. The creditor’s remedy is against the original owner of the watered stock.
A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the
balance.
Holders of watered stock are generally held liable to the corporation’s creditors for the difference
between the par value of the stock and the amount paid in.
Under the misrepresentation theory, the creditors who rely on the misrepresentation of the
corporation’s capital stock are entitled to recover the “water” from holders of the watered stock. Reliance of
creditors on the misrepresentation is material. However, under the statutory obligation theory, reliance
of creditors on the capital stock of the corporation is irrelevant. (It must be noted that here in the Philippines,
it is the statutory obligation theory which is prevailing.)
Issuance of
Certificate
Certificate of stock
2. date of issuance
(1) The certificates must be signed by the President / Vice-President, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation.
There is no issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person whose name is inserted
therein has no control over the books of the company. (Bitong v. CA, 292 SCRA 503)
(3) Par value of par value shares / Full subscription of no par value shares must be fully paid.
(4) Surrender of the original certificate if the person requesting the issuance of a certificate is a
transferee from a SH.
Stock issued without authority and in violation of law is void and confers no rights on the person to
whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is
estopped to question its validity since an estoppel cannot operate to create stock which under the law
cannot have existence.
Unpaid
Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation
for payment. (Sec. 67)
Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-
laws. If there is none, it shall be the legal rate. (Sec. 66)
(1) Call for payment as necessary, i.e. the BOD declares the unpaid subscriptions due and
payable (Sec. 67);
Poizat subscribed to 20 shares but only paid for 5. Board made a call for payment through a
resolution. Poizat refused to pay. Corporation became insolvent. Assignee in insolvency sued Poizat
whose defense was that the call was invalid for lack of publication.
It was held that the Board call became immaterial in insolvency which automatically causes all
unpaid subscriptions to become due and demandable.
Company’s president subscribed to shares and paid partially. The Board made a call for payment
through a resolution. However, the president refused to pay, prompting the corporation to sue. The
defense was that the call was invalid for lack of publication.
It was held that the call was void for lack of publication required by law. Such publication is a
condition precedent for the filing of the action. The ruling in Poizat does not apply since the company here
is solvent.
Da Silva subscribed to 650 shares and paid for 200. The company notified him that his shares will
be declared delinquent and sold in a public auction if he does not pay the balance. Da Silva did not pay.
The company advertised a notice of delinquency sale. Da Silva sought an injunction because the by-laws
allegedly provide that unpaid subscriptions will be paid from the dividends allotted to stockholders.
The Court held that by-laws provide that unpaid subscriptions may be paid from such dividends.
Company has other remedies provided for by law such as a delinquency sale or specific performance.
Dexter subscribed to 300 shares. The subscription contract provided that the shares will be paid
solely from the dividends. Company became insolvent. Assignee in insolvency sued Dexter for the
balance. Dexter's defense was that under the contract, payment would come from the dividends. Without
dividends, he cannot be obligated to pay.
The Court held that the subscription contract was void since it works a fraud on creditors who rely
on the theoretical capital of the company (subscribed shares). Under the contract, this theoretical value
will never be realized since if there are no dividends, stockholders will not be compelled to pay the balance
of their subscriptions.
Lumanlan had unpaid subscriptions. Company’s receiver sued him for the balance and won. While
the case was on appeal, the company and Lumanlan entered into a compromise whereby Lumanlan would
directly pay a creditor of the company. In exchange, the company would forego whatever balance
remained on the unpaid subscription. Lumanlan agreed since he would be paying less than his unpaid
subscription. Afterwards, the corporation still sued him for the balance because the company still had
unpaid creditors. Lumanlan’s defense was the compromise agreement.
The Court held that the agreement cannot prejudice creditors. The subscriptions constitute a fund
to which they have a right to look to for satisfaction of their claims. Therefore, the corporation has a right
to collect all unpaid stock subscriptions and any other amounts which may be due it, notwithstanding the
compromise agreement.
Holders of subscribed shares not fully paid which are not delinquent shall have
all the rights of a stockholder. (Sec. 72)
Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00, paying the sum of
P25,000.00, 50% of the subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of P25,000.00. In the meantime, Chua Soco's interest in the 500
shares were attached and levied upon to satisfy his debt with China Banking Corp. Fua Cun brought an
action to have himself declared to hold priority over the claim of China Bank, to have the receipt for the
shares delivered to him, and to be awarded damages for wrongful attachment, on the ground that he was
owner of 250 shares by virtue of Chua Soco's payment of half of the subscription price.
The Court held that payment of half the subscription price does not make the holder of stock the
owner of half the subscribed shares. Plaintiff's rights consist in an equity in 500 shares and upon payment
of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for the
said 500 shares in his favor.
Baltazar v. Lingayen Gulf Electric Power (14 SCRA 522; 1965)
Baltazar, et al. subscribed to a certain number of shares of Lingayen Gulf Electric Power. They had
made only partial payment of the subscription but the corporation issued them certificates corresponding
to shares covered by the partial payments. Corporation wanted to deny voting rights to all subscribed
shares until total subscription is paid.
The Court held that shares of stock covered by fully paid capital stock shares certificates are
entitled to vote. Corporation may choose to apply payments to subscription either as: (a) full payment for
corresponding number of stock the par value of which is covered by such payment; or (b) as payment pro-
rata to each subscribed share. The corporation chose the first option, and, having done so, it cannot
unilaterally nullify the certificates issued.
Note: The Camposes are of the opinion that § 64 of Corporation Code makes
Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at P100.00 a share for a total of
P8,000.00. He, however, paid only P2,000.00 corresponding to 20 shares or 25% of total subscription.
Nava bought 20 shares from Co and sought its transfer in the books of the corporation. The corporation
refused to transfer said shares in its books.
It was held that the transfer is effective only between Co and Nava and does not affect the
corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because, unlike in Lingayen Gulf, no
certificate of stock was issued to Co.
Effect of
delinquency
Stock that remains unpaid 30 days after the date specified in the subscription
contract or the date stated in the call made by the Board.
WHAT ARE THE EFFECTS OF DELINQUENCY?
1. The holder thereof loses all his rights as a stockholder except only the rights to dividends;
2. Dividends will not be paid to the stockholder but will be applied to the unpaid balance of
his subscription plus costs and expenses. Also, stock dividends will be withheld until full
payment is made.
3. Such stockholder cannot vote at the election of directors or at any meeting on any matter
proper for stockholder action.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68)
The BOD issues a resolution ordering the sale of delinquent stock, specifically
stating the amount due on each subscription plus all accrued interest, and the
date, time and place of the sale.
Note: The sale shall not be less than 30 days nor more than 60 days from the
date the stocks become delinquent.
Notice of the date of delinquency sale and a copy of the resolution is sent to
every delinquent stockholder either personally or by registered mail. The notice
is likewise published once a week for 2 consecutive weeks in a newspaper of
general circulation in the province or city where the principal office of the
corporation is located.
If the delinquent stockholder fails to pay the corporation on or before the date
specified for the delinquency sale, the delinquent stock is sold at public auction to
such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share.
(4) Transfer and issuance of certificate of stock
The stock so purchased is transferred to such purchaser in the books of the
corporation and a certificate of stock covering such shares is issued.
If there is no bidder at the public auction who offers to pay the full amount of the
balance on the subscription and its attendant costs, the corporation may bid for the
shares, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the Code.
Yes. This is done by filing a complaint within 6 months from the date of sale, and
paying or tendering to the party holding the stock the sum for which said stock was sold,
with interest at the legal rate from the date of sale. No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the
sale itself of the delinquent stock unless these requirements are complied with.
Lost or Destroyed
Certificate
WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE STOLEN, LOST
OR DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate with the corporation. The affidavit must state the
following:
(a) Circumstances as to how the certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation
(2) The corporation will publish notice after the affidavit and other information and
evidence have been verified with the books of the corporation, (Note however that this is
not mandatory. The corporation has the discretion to decide whether to publish or not.)
NOTE: One-year period will not be required if the applicant files a bond good for
1 year.
NOTE: Even if the above procedure was followed, if there was fraud, bad faith, or
negligence on the part of the corporation and its officers, the corporation may be
held liable.
TRANSFER OF SHARES
(1) Delivery;
A corporation, either by its board, its by-laws or the act of its officers, cannot create restrictions in
stock transfers.
A by-law which prohibits a transfer of stock without the consent or approval of all the SHs or of the
President or Board of Directors is illegal as constituting undue limitation on the right of ownership and in
restraint of trade (citing Fleisher v. Botica Nolasco Co., Inc., 47 Phil. 583)
While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to determine
in the by-laws the "manner of issuing certificates" of shares of stock, however, the power to regulate is not
the power to prohibit, or to impose unreasonable restrictions of the right of SHs to transfer their shares.
To uphold the cancellation of a stock certification as null and void for lack of delivery of the cancelled
"mother" certificate whose endorsement was deliberately withheld by petitioner, is to prescribe certain
restrictions on the transfer of stock in violation of the Corporation Code as the only law governing transfer
of stocks.
Toribia Uson filed a civil action for debt against Vicente Dioisomito. Upon institution of said action,
an attachment was duly issued and D's property was levied upon, including 75 shares of the North Electric
Co., which stood in his name on the books of the company when the attachment was levied on 18 January
1932. The sheriff sold said shares at a public auction with Uson being the highest bidder. Jollye claims to
be the owner of said certificate of sock issued to him by the co. on 13 February 1933.
There is no dispute that Diosomito was the original owner of said shares, which he sold to
Barcelon. However, Barcelon did not present these certificates to the corporation for registration until 19
months after the delivery thereof by Barcelon, and 9 months after the attachment and levy on said
shares. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in Barcelon's
name.
Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp., valid as
against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the
defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on 18
Jan. 1932, the date on which she obtained her attachment lien on said shares of stock which still stood in
the name of Diosomito on the books of the corp. Sec. 35 says that No transfer, however, is valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
All transfers of shares not so entered are invalid as to attaching or execution creditors of the
assignors, as well as to the corporation and to subsequent purchasers in good faith, and indeed, as to all
persons interested, except the parties to such transfers.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Sec. 63)
The proper remedy is a petition for a writ of mandamus to compel the corporation to
record the transfer or issue a new certificate in favor of the transferee, as the case may be.
The writ will be granted provided it is shown that he transferee has no other plain, speedy
and adequate remedy and that there are no unpaid claims against the stocks whose transfer
is sought to be recorded. It must be noted that unless the latter fact is alleged, mandamus
will be denied due to failure to state a cause of action. (Campos & Campos)
It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor SH may rightfully bring suit to compel performance.
Note: In this case, Judge Torres had no right to enter the assignments (conveyances) of
his shares himself in the corporation's stock and transfer book since he was not corporate
secretary.
Isamu Akasako, a Japanese national who was allegedly the real owner of the shares of stock in the
name of one Aquilino Rivera, a registered SH of Fujuyama Hotel and Restaurant, Inc., sold 2550 shares of
the same to Milagros Tsuchiya along with the assurance that Tsuchiya would be made President of the
corporation after the purchase. Rivera assured her that he would sign the stock certificates because
Akasako was the real owner. However, after the sale was consummated and the consideration paid,
Rivera refused to make the indorsement unless he is also paid.
Tsuchiya, et al. attempted several times to have the shares registered but were refused compliance
by the corp. They filed a special action for mandamus and damages.
The Supreme Court held that mandamus was improper in this case since the shares of stock were
not even indorsed by the registered owner who was specifically resisting the registration thereof in the
books of the corporation. The rights of the parties would have to be threshed out in an ordinary action.
The restrictions imposed shall be no more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or period
stated therein. If this option is not exercised upon the expiration of the
period, the transferring stockholder may sell his shares to any third person.
(Sec. 98)
The corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee. (Sec. 99.4) However, this shall not be applicable if the transfer, though otherwise
contrary to subsections (1), (2) and (3) of Sec. 99, has been consented to by all the stockholders of
the close corporation, or if the close corporation has amended its AOI in accordance with Title XII of
the Code.
For his part, the transferee may rescind the transfer or recover from the transferor under
any applicable warranty, whether express or implied.
UNAUTHORIZED
TRANSFERS
This proceeds from the theory of quasi-negotiability which provides that in endorsing a
certificate in blank, the real owner clothes the possessor with apparent authority, thus,
estopping him later from asserting his rights over the shares of stock against a bona fide
purchaser.
Forged Transfers
In case where the certificate so issued comes into the hands of a bona fide purchaser
for value from the original purchaser, the corporation is estopped from denying its liability. It
must recognize both the original and the new certificate. But if recognition results to an
over-issuance of shares, only the original certificate may be recognized, without prejudice to
the right of the bona fide purchaser to sue the corporation for damages.
Santamaria secured her order for a number of shares with Campos Co. with her stock certificate
representing her shares with Batangas Minerals. The said certificate was originally issued in the name of
her broker and endorsed in blank by the latter. As Campos failed to make good on the order, Santamaria
demanded the return of the certificate. However, she was informed that Hongkong Bank had acquired
possession of it inasmuch as it was covered by the pledge made by Campos with the bank. Thereafter, she
instituted an action against Hongkong Bank for the recovery of the certificate. Trial court decided in her
favor. The bank appealed.
Issues: 1) WON Santamaria was chargeable with negligence which gave rise to the case
2) WON the Bank was obligated to inquire into the ownership of the certificate
(1) The facts of the case justify the conclusion that she was negligent. She delivered the certificate,
which was endorsed in blank, to Campos without having taken any precaution. She did not ask the
Batangas Minerals to cancel it and instead, issue another in her name. In failing to do so, she clothed
Campos with apparent title to the shares represented by the certificate. By her misplaced confidence in
Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it
is well-settled that “where one of the innocent parties must suffer by reason of a wrongful or unauthorized
act, the loss must fall on the one who first trusted the wrongdoer.”
(2) The subject certificate is what is known as a street certificate. Upon its face, the holder is
entitled to demand its transfer into his name from the issuing corporation. The bank is not obligated to
look beyond the certificate to ascertain the ownership of the stock. A certificate of stock, endorsed in
blank, is deemed quasi-negotiable, and as such, the transferee thereof is justified in believing that it
belongs to the transferor.
De los Santos filed a claim with the Alien Property Custodian for a number of shares of the Lepanto
corporation. He contended that said shares were bought from one Campos and Hess, both of them dead.
The Philippine Alien Property Administrator rejected the claim. He instituted the present action to establish
title to the aforementioned shares of stock.
The US Attorney General, the successor of the Alien Property Administrator, opposed the action on
the ground that the said shares of stock were bought by one Madrigal, in trust for the true owner, Matsui,
and then delivered to the latter indorsed in blank.
De los Santos’ sole evidence that he purchased the said shares was his own unverified testimony.
The alleged vendors of the stocks who could have verified the allegation, were already dead. Further, the
receipt that might have proven the sale, was said to have been lost in a fire. On the other hand, it was
shown that the shares of stock were registered in the records of Lepanto in the name of Madrigal, the
trustee of Matsui; that Matsui was subsequently given possession of the corresponding stock certificates,
though endorsed in blank; and, that Matsui had neither sold, conveyed nor alienated these to anybody.
It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no title is
acquired by an innocent purchaser of value. This is so because even though a stock certificate is regarded
as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, the
holder thereof takes it without prejudice to such rights or defenses as the registered owner or credit may
have under the law, except in so far as such rights or defenses are subject to the limitations imposed by
the principles governing estoppel.
Collateral
Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However,
such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books.
Where a certificate is delivered to the creditor as a security, the contract is considered a pledge,
and the Civil Code will apply.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of
deeds of the province where the principal office of the corporation is located, and in case where the
domicile of the stockholder is in a different province, then registration must also be made there.
In a situation where, the chattel mortgage having been registered, the stock certificate was not
delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide
purchaser for value is bound by the registration in the chattel mortgage registry. It is said that such a rule
tends to impair the commercial value of stock certificates.
To guarantee payment of a debt, Co mortgaged his shares of Samahang Magsasaka stock to Chiu.
The said mortgage was duly registered in the City of Manila. Chiu later assigned his rights in the mortgage
to Guan who soon foreclosed the same after Co failed to pay. Guan won in the public bidding. He
requested the corporation that new certificates be issued in his name. The corporation refused because
apparently prior to Guan’s demand, several attachments against the shares covered by the certificates
had been recorded in its books.
Did the chattel mortgage in the registry of deeds of Manila gave constructive notice to the attaching
creditors?
The Chattel Mortgage Law provides two ways of executing a valid chattel mortgage: 1) the
possession of mortgaged property is delivered and retained by the mortgagee; and, 2) without delivery,
the mortgage is recorded in the register of deeds. But if chattel mortgage of shares may be made validly,
the next question then becomes: where should such mortgage be properly registered?
It is the general rule that the situs of shares is the domicile of the owner. It is also generally held
that for the purpose of execution, attachment, and garnishment, it is the domicile of the corporation that is
decisive. Going by these principles, it is deemed reasonable that chattel mortgage of shares be registered
both at the owner’s domicile and in the province where the corporation has its principal office. It should be
understood that the property mortgaged is not the certificate but the participation and share of the owner
in the assets of the corporation.
It is recognized that this method of hypothecating shares of stock in a chattel mortgage is rather
tedious and cumbersome. But the remedy lies in the legislature.
Note: The provision of the Chattel Mortgage Law (Act No. 1508) providing for
delivery of mortgaged property to the mortgagee as a mode of constituting a chattel
mortgage is no longer valid in view of the Civil Code provision defining such as a
pledge.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is
personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The court
may not strip him of his membership without cause. (Sec. 90)
Form of
Dividends
1. Cash
2. Property
scrip - certificate issued to SHs instead of cash dividends which entitles them to a
certain amount in the future
3. Stock dividends
Stock dividends are distribution to the SHs of the company’s own stock.
Stock dividends cannot be declared without first increasing the capital stock
unless unissued shares are available.
New shares are issued to the SHs in proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result, corp may pay in cash or issue fractional share
warrants.
Can this be issued No. (Sec. 35) No, since this requires SH
by Executive approval. (Sec. 35)
Committee?
Stock dividends are issued only to SHs This is so because only stockholders are entitled to
dividends. A stock dividend really adds nothing to the interest of each stockholder; the proportional
interest of each stockholder remains the same. If a stockholder is deprived of his stock dividends - and
this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder -
then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares belong the civil fruits.
FROM WHERE CAN DIVIDENDS BE SOURCED?
Dividends can be sourced only out of the unrestricted retained earnings of the
corporation.
Retained earnings has been defined as "net accumulated earnings of the corporation out
of transactions with individuals or firms outside the corporation." (Simmons, Smith, Kimmel,
Intermediate Accounting, 1977, ed. P. 635) The term implies the limitation that no
corporation can declare dividends unless its legal or stated capital is maintained. It does not
include:
premium on par stock i.e. difference between par value and selling price
of stock by corp since this is regarded as paid-in capital; but SEC allowed
declaration of stock dividends out of such premiums
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock
is an asset, and as long as the net capital asset (after payment of liabilities) including this
unpaid portion is at least equal to the total par value of the subscribed shares, any excess
would be surplus or earnings from which dividends may be declared. However, if a deficit
exists, subsequent profits must first be applied to cover the deficit.
Dividends can only be declared only from the surplus, i.e. the excess in the value of the assets over
the liabilities and the issued capital stock. To do otherwise would be illegal The object of the prohibition is
to protect the creditors in view of the limited liability of the SHs and also to protect the SHs by preserving
the capital so that the purposes of the corp. may be performed.
Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for
its existence upon a theoretical estimate of an appreciation in the value of the company’s assets.
The prohibition does not apply, however, to stock dividends because creditors and SHs will not be
affected by their declaration since they do not decrease the company’s assets.
Dividends on non-cumulative preferred stock are payable only out of net profits and for the years in
which said net profits are actually earned.
The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in the
business.
If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes, such as
payment of debts, reduction of deficits and restoration of impaired capital, the right of non-cumulative
preferred stockholders to the payments of dividends is lost. If they are applied against prior losses and
thereby completely absorbed, there are no net profits from which dividends may be lawfully paid.
1. BOD has discretion whether or not to declare dividends and in what form.
Exception: Stock dividends, in which case a 2/3 vote of OCS is necessary.
However, such discretion cannot be abused and the BOD cannot accumulate surplus
profits unreasonably on the excuse that it is needed for expansion or reserves.
2. BOD should declare dividends when surplus profits of the corporation exceed 100% of
the corporation's paid-in capital stock.
Exceptions:
(b) When creditors prohibit dividend declaration without their consent as a condition
for the loan, and such consent has not yet been secured;
4. The corporation may be subjected to additional tax when it fails to declare dividends,
thereby unreasonably accumulating profits. (See Sec. 25, NIRC)
5. The dividends received are based on stock held whether or not paid. However, if the
stocks are delinquent, the amount will first be applied to the payment of the delinquency
plus costs and expenses; stock dividends will not be given to a delinquent SH.
The mere fact that a large corporate surplus exists is not enough to warrant equitable intervention;
the test is good faith and reasonableness of the policy of retaining the profits. However, where dividends
are withheld for an unlawful purpose – to deprive a SH of his right to a just proportion of the corporation's
profit, the court may compel the corporation to declare dividends.
This case involves an action against the Ford Motor Company to compel declaration of dividends.
At the time this complaint was made, Ford had concluded its most prosperous year of business, and the
demand for its cars at the price of the previous year continued. While it had been the practice, under
similar circumstances, to declare larger dividends, the corporation refused to declare any special
dividends. The Board justified its refusal to declare larger dividends on the expansion plans of the
company by erecting a smelting plant, but maintaining the selling price of its cars (instead of reducing it as
had been the practice in previous years). The plaintiffs contend that such a proposal would be tantamount
to the business being conducted as a semi-eleemosynary (or charitable) institution instead of a business
institution.
The court pointed out that a business corporation is organized and carried on primarily for the profit
of SHs. The discretion of the directors is to be exercised in the choice of means to attain that end and
does not extend to a change in the end itself – reduction of profits or to devote profits to another purpose.
While the Court noted the capable management of the affairs of the corporation and therefore was not
convinced that the motives of the directors were prejudicial to the company's interests, it likewise noted
that the annual dividends paid were very small in relation to the profits that the company had been
making. It therefore affirmed the amount fixed by the lower court to be distributed to the stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this case is
possible under the present Code, even without changing the AOI.
Preference as to
Dividends
In the AOI and the certificate of stock of Stock A, it was stated that the holders of said stocks are
entitled to receive to receive preferential dividends of 5% per fiscal year, non-cumulative, before dividends
are paid to other stocks. From 1915 to 1926, no dividends were declared. The net earnings were instead
used for the improvements and additions to property and equipment. Due to this, the corporation became
prosperous and proposed to pay dividends to A & B common stock. Plaintiffs filed this case in order to
collect the dividends for fiscal years 1915-1926 before the other classes of stock are paid.
No, they were not. By the plain meaning of the words in the AOI and the certificates of stock, the
holders are not entitled to dividends unless directors declare so. It is likewise generally understood that in
cases where the company's net earnings are applied for improvements and no dividend is declared, the
claim for such year is gone in case of non-cumulative stock, and cannot be later asserted.
Burk v. Ottawa Gas & Electric Co. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to (1) require
the directors to account for all the property and assets of the corporation, (2) declare such dividends from
the net profits of the business of such co. as should have been declared since 1 Jan. 1906, and (3) restrain
the officers and directors during the pendency of the action from paying out any of the money or disposing
of the assets of the company except such amounts as should be necessary to pay the actual necessary
current expenses of conducting the business of the corporation.
The BOD maintained that the corporation's funds were exhausted by expenditures for the extension
of the co’s plant, hence it was unable to declare dividends. Expenditures were said to be necessary and
for the betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?
The case was remanded to the trial court, with instructions to make further findings to protect the
preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS is that if in any year net profits
are earned, a dividend is to be declared. To hold otherwise, meaning if the BOD had absolute discretion
when to declare dividends and when not to, when the corporation has funds for such dividends, would
result in temptation to unfair dealing, giving one party the option to pay the other or not. In the case at
bar, the accumulated profits would be lost forever since the dividends were non-cumulative.
Preferred SHs, however, are not generally creditors until dividends are declared. In the case at bar,
if dividends should have been declared to such SHs, they are considered creditors from that time.
As soon as the BoD has declared dividends. From this time, it becomes a debt owed by the
corporation, and therefore can no longer be revoked (McLaran v. Crescent Planning).
EXCEPTION: If the declaration has not yet been announced or communicated to the
stockholders.
NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given the
right to vote for directors until dividends are declared.
NOTE: The extent of the SH’s share in the dividends will depend on the capital contribution;
NOT the number of shares he has.
CPM Corp., having a surplus of $29,000, declared a 6% cash dividend payable in four installments.
The first installment was paid by the Board after which an error was discovered in the computation of the
assets: from the initial recognized surplus of $29,000 to $6,000. Mainly for this reason, the Board adopted
a resolution rescinding the dividends payable on the three other installments despite the solvency of the
corp and the existence of ample funds to pay said dividends. The original P was Humber, a SH, and was
substituted by McLaran, the administrator of his estate when he died. The defendant corp maintained that
there was no valid declaration of dividends because the corporation failed to set aside funds to pay for the
same.
A cash dividend, properly declared, cannot be revoked by the subsequent action of the corp. for by
its declaration, the corp had become the debtor of the SH and it goes without saying that the debtor
cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by a unilateral action
or without the consent of the creditor. Thus, the rescission by the BOD of the subsequent installments was
of no force.
Dividends are defined as portions of profits/surplus funds of the corp. which have been actually set
apart by a valid board resolution or by the SH at a corp. mtg. for distribution among SH according to their
respective interests. The mere declaration of the dividend, without more, by competent authority under
proper circumstances, creates a debt against the corporation in favor of the stockholders the same as any
other general creditor of the corporation. By the mere declaration, the dividend becomes immediately
fixed and absolute in the stockholder and from henceforth the right of each individual stockholder is
changed by the act of declaration from that of partner and part owner of the corporate property to a status
absolutely, adverse to every other stockholder and to the corporation itself, insofar as his pro rata
proportion of the dividend is concerned.
Liability for Illegal
Dividends
(1) If the directors acted wilfully, or with negligence or in bad faith, they will be liable to the
corporation. If the corporation has become insolvent, they are liable to the corporation's
creditors for the amount of dividends based out of capital. (Based on Sec. 31)
(2) If the directors cannot be held liable because they acted with due diligence and in good
faith, in the absence of an express provision of law, an innocent stockholder is not liable to
return the dividends received by him out of capital, unless the corporation was insolvent at
the time of payment. (Majority view; Campos)
WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES? (Sec. 41)
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41)
The appraisal right refers to the right of a stockholder who dissented and voted against a proposed
fundamental corporate action to get out of the corporation by demanding payment of the fair value of his
shares.
(1) In case any amendment to the AOI has the effect of changing or restricting the rights
of any SH or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of
corporate existence (Sec. 81);
(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in this Code (Sec.
81; Sec. 40);
(4) In case the corporation invests its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized (Sec. 42)
WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. 82)
(1) SH must have voted against he proposed corporate action;
(2) Written demand on the corporation for payment of the fair value of his shares;
(3) Such demand must have been made within 30 days after the date on which the vote was
taken;
(5) Unrestricted retained earnings in the books of the corporation to cover such payment.
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the shares, including voting and dividend rights, are suspended in accordance
with the Corporation Code, except for the right of the SH to receive payment of the fair value thereof.
However, if said dissenting SH is not paid the value of his shares within 30 days after
the award, his voting and dividend rights shall immediately be restored.
The dissenting SH must submit the certificates of stock representing his shares to
the corporation for notation thereon that such shares are dissenting shares within 10 days
after demanding payment for his shares. Failure to do so shall, at the option of the
corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86)
The charter of a private corporation consists of its articles of incorporation as well as the Corporation
Code and such other law under which it is organized.
Amendment by
Legislature
Amendment by
Stockholders
One of the powers expressly granted by law to all corporations is the power to amend
its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of the
outstanding stocks to change the basic agreement between the corporation and its
stockholders, making such change binding on all the stockholders, subject only to the right
of appraisal, if proper.
(1) The appraisal right must be recognized in case the amendment has the
effect of changing rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or
extending or shortening the term of corporate existence.
(2) Extension of corporate term cannot exceed 50 yrs. in any one instance
(3) A copy of the amended articles should be filed with the SEC, and with the
proper governmental agencies, as appropriate (e.g., in the case of banks, public
utilities, etc.)
(4) Original and amended articles should contain all matters required by law to
be set out in said articles.
The same grounds as for the disapproval of the original articles (Sec. 17):
The law expressly allows amendments which would change or restrict existing rights
of stockholders or any class of shares. (Sec. 81)
MARCUS v. RH MACY (74 N.E. 2d 228; 1947)
The Board of Directors gave notice to SH that among the matters to be acted upon in its annual
meeting would be a proposal to amend certificate of incorporation to add to the rights of preferred
stockholders, voting rights equal to those of common stockholders. Marcus, objected and demanded
payment for the common stock owned by her.
The Court held that Marcus may invoke her appraisal right. The aggregate number of shares having
voting rights equal to those of common shares was substantially increased and thereby the voting power
of each common share outstanding prior to the meeting was altered or limited by the resulting pro rata
diminution of its potential worth as a factor in the management of the corporate affairs. Considering that
she held diminished voting power; that she notified the corpo of her objection; that her shares were voted
against the amendment—these were sufficient to qualify her to invoke her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval
or rejection must be made within six months of filing of amendment; otherwise it shall take
effect even w/o such approval (as of the date of filing), unless cause of delay is attributable
to the corporation. (Sec. 16)
Special amendments
After the authorized capital stock has been fully subscribed and the
corporation needs to increase its capital, it will have to amend its articles to increase
its capital stock. A corporation does not have the implied power to increase capital
stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised in
accordance with the provisions of Sec. 38 of the Code.
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts.
A corporation has no power to release an original subscriber to its capital stock from the obligation
of paying for his shares, without valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the conditions prescribed by
the statute or charter or the articles of incorporation.
The Code allows a corporation not only to extend but also to shorten its term
of existence. As in the case of increase/decrease of capital stock, change must be
approved at a members’/stockholders’ meeting by 2/3 of the members/outstanding
capital stock.
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on transfer
permitted by law;
(3) Corporation should not be listed in the stock exchange or make any public
offering of its stock.
If any of these are deleted, then the corporation will cease to be a close corporation
and will lose the special privileges of such corporations. Thereafter, it will be governed by
the general provisions of the Code. Since such amendment involves a change in the
nature of the corporation, even non-voting stocks are given a voice in the decision. A
stockholders’ meeting is required and a 2/3 vote must approve the amendment, unless
otherwise provided by the articles of incorporation.
DISSOLUTION
Modes of
Dissolution
This is effected by majority vote of the BOD and a 2/3 vote of the OCS or
members. (Note the special notice requirements.) The copy of the resolution
authorizing the dissolution shall be certified by a majority of the BOD and
countersigned by the secretary of the corporation. THE SEC shall thereupon
issue the certificate of dissolution.
(b) Where creditors are affected (Sec. 119)
A petition for dissolution must be filed with the SEC after having been
signed by a majority of the BOD, verified by the president or secretary or
one of the directors, and resolved upon by the affirmative vote of 2/3 of
the OCS or members. The petition must set forth all claims and demands
against the corporation, and the fact that the dissolution was approved by
the SHs with the requisite 2/3 vote.
If the petition is sufficient in form and substance, the SEC shall fix a
date on or before which objections thereto may be filed by any person.
Date: not less than 30 days nor more than 60 days after the
entry of the order
Before the date fixed by the SEC, the SEC order shall be published and
posted accordingly.
Upon 5 days notice, given after the date on which the right to
file objections to the order has expired, the SEC shall proceed to hear
the petition and try any issue made by the objections filed.
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto
proceedings involving corporation. Under the Securities Regulation Code or
RA 8799, however, the jurisdiction of the SEC over all cases enumerated
under Sec. 5 of PD 902-A have been transferred to the Regional Trial Courts.
to expire.
In close corporations, any stockholder may, by written petition to the SEC, compel
the dissolution of such corporation when:
(1) Any of the acts of the directors, officers, or those in control
of the corporation is:
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
Effects of
Dissolution
Corporate existence continues for 3 years following dissolution for the ff.
purposes only:
Corporation can no longer continue its business, except for winding up.
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of
money advanced to her for the purchase of hemp. She moved to dismiss the complaint by citing the fact
that National Abaca had been abolished by EO 372 dated Nov. 24, 1950. Plaintiff objected to such by
saying that it shall nevertheless be continued as a corporate body for a period of 3 years from the effective
date of said order for the purpose of prosecuting and defending suits by or against it and to enable the
Board of Liquidators to close its affairs.
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the
same after the expiration of said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would
have been dissolved for the purposes of prosecuting and defending suits by or against it. But at any time
during the 3 years, the corporation should convey all its property to trustees so that the latter may be the
ones to continue on with such prosecution, with no time limit on its hands. Since the case against Pore
was strong, the corp.'s amended complaint was admitted and the case was remanded to the lower court.
The termination of the life of a juridical entity does not by itself cause the extinction or diminution
of the right and liabilities of such entity nor those of its owners and creditors. If the 3-year extended life
has expired without a trustee or receiver having been expressly designated by the corporation itself within
that period, the board of directors or trustees itself may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation. In the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors
of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has
primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of
the corporate concerns.
Executory contracts
The prevailing view is that executory contracts are not extinguished by dissolution.
Sec. 145 of the Code states that "No right or remedy in favor of or against any
corporation….nor any liability incurred……shall be removed or impaired either by the
subsequent dissolution of said corp. or by any subsequent amendment or repeal of this Code
or of any part thereof."
Liquidati
on
Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its
creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in
accordance with their contracts, or if there be no special contract, on the basis of their respective
interests.
WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE
LIQUIDATION OF A CORPORATION?
If this method is used, the 3-year limitation will not apply provided the
designation of the trustees is made within said period. There is no time limit
within which the trustee must finish liquidation, and he may sue and be sued as
such even beyond the 3-year period unless the trusteeship is limited in its
duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)
As with the previous method, the three-year rule shall not apply. However,
the mere appointment of a receiver, without anything more, does not result in the
dissolution of the corporation nor bar it from the exercise of its corporation rights.
FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?
Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3
years after the time when it would have so dissolved. (Sec. 122) However, it was held in the case of
Clemente v. CA (supra) that if the 3-year period has expired without a trustee or receiver having been
expressly designated by the corporation itself within that period, the BOD itself may be permitted to so
continue as "trustees" by legal implication to complete the corporate liquidation.
(Sec. 122)
(2) Conveyance of all corporate property to trustees for the benefit of SHs, members,
creditors, and other persons in interest;
GENERAL RULE: No corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities. (Sec. 122)
Any asset distributable to any creditor or stockholder or member who is unknown or cannot be found
shall be escheated to the city or municipality where such assets are located. (Sec. 122)
The appointment of a receiver by the court to wind up the affairs of the corporation upon petition
of voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the
corporation at first hand. In such cases, the receiver does not act as a receiver of an insolvent
corporation. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of
adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts, all claims must be presented for
allowance to the receiver or trustees or other proper persons during the winding-up proceedings within the
3 years provided by the Corporation Law as the term for the corporate existence of the corporation, and if
a claim is disputed so that the receiver cannot safely allow the same, it should be transferred to the proper
court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for
payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court
appointing such receiver though no appeal is taken to the latter ruling, and during the winding-up
proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire
priority, or to enforce his claim against the property held for distribution as against the rights of other
creditors.
Defendant corp. was a timber license holder with concessions in Camarines Norte. Investigations
led to the discovery that certain taxes were due on it. BIR assessed Marsman 3 times for unpaid taxes.
Atty. Moya, in behalf of the corp., received the first 2 assessments. He requested for reinvestigations. As
a result, corp. failed to pay within the prescribed period. Numerous BIR warnings were given. After 3
years of futile notifications, BIR sued the corp.
Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however bars an
action for recovery of corporate debts against the liquidators. In fact, the 1st assessment was given
before dissolution, while the 2nd and 3rd assessments were given just 6 months after dissolution (within
the 3-year rule). Such facts definitely established that the Government was a creditor of the corp. for
whom the liquidator was supposed to hold assets of the corp.
Tan Tiong Bio v. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they
pass into the hands of the stockholders. The dissolution of a corp. does not extinguish the debts due or
owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not
extinguished by the dissolution of the corp. The hands of government cannot, of course, collect taxes from
a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the
corporation, and to collect them from persons, who by reason of transactions with the corporation hold
property against which the tax can be enforced and that the legal death of the corporation no more
prevents such action than would the physical death of an individual prevent the government from
assessing taxes against him and collecting them from his administrator, who holds the property which the
decedent had formerly possessed. Thus, petitioners can be held personally liable for the corporation's
taxes, being successors-in-interest of the defunct corporation.
(1) All liabilities and obligations of the corporation shall be paid, satisfied, and
discharged, or adequate provision shall be made therefor.
(2) Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with such requirements.
(3) Assets received and held by the corporation subject to limitations permitting
their use only for charitable, religious, benevolent, education or similar
purposes, but not subject to condition (2) above, shall be transferred or
conveyed to one or more corporations, societies or organization engaged in
activities in the Philippines substantially similar to those of the dissolving corp.
according to a plan of distribution adopted pursuant to Sec. 95 of the Code.
It must be noted that the plan of distribution of assets must not be inconsistent with
the provisions of Title XI of the Code.
CORPORATE COMBINATIONS
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another
corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its SHs in
exchange for the stock of the acquiring corporation
Merger or
Consolidation
(1) Board of Directors of the constituent corporations must prepare and approve a
plan of merger or consolidation.
(2) The separate existence of the constituent corporations shall cease, except that
of the surviving or consolidated corporation.
(3) The surviving or consolidated corporation shall possess all rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under the Corporation Code.
(6) The surviving or consolidated corporation shall be responsible and liable for all
the liabilities and obligations of each of the constituent corporations in the same
manner as if such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action or proceeding brought by
or against any of such constituent corporations may be prosecuted by or against
the surviving or consolidated corporation. (Note: The merger or consolidation
does not impair the rights of creditors or liens upon the property of any such
constituent corporations.)
Consolidation becomes effective not upon mere agreement of the members but only upon issuance
of the certificate of consolidation by the SEC. There can be no intra-corporate nor partnership relation
between 2 jeepney drivers' and operators' associations whose plans to consolidate into a single common
association is still a proposal.
WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE CORPORATE
PROPERTY AND ASSETS?
If by the sale the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated. (Sec. 40)
(1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the
purpose;
Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion,
abandon such sale or other disposition without further action or approval by the SHs. This, of course, is
subject to the rights of third parties under any contract relating thereto.
(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its remaining
business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to
dissenting stockholders of the selling corporation, not the purchasing corporation. (It can
be argued, though, that in instances wherein the purchase constitutes an investment in a
purpose other than its primary purpose, stockholders' approval of such investment is
necessary, and anyone who objects thereto will have the appraisal right under Sec. 42.)
Exchange of
stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made
stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a
subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses under a
single corporation as in merger and sale of assets, from the point of view of the acquiring (parent)
corporation, there is hardly any difference between owing the acquired corporation's business directly and
operating it through a controlled subsidiary. In fact, the parent corporation would have the power to buy
all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of
combination. (Campos & Campos)
FOREIGN CORPORATIONS
A corporation formed and organized under laws other than those of the Philippines, regardless of the
citizenship of the incorporators and stockholders. Such corporation must have been organized and must
operate in a country which allows Filipino citizens and corporations to do business there.
In times of war: For purposes of security of the state, the citizenship of the
controlling stockholders determines the corporation’s
nationality.
IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?
Permitted areas of
investment
Cooperatives
Small-scale mining
Private recruitment
Contracts for construction and repair of locally-funded public
works
Under present SEC rules, if the percentage of Filipino ownership in the first
corporation is at least 60%, then said corporation will be considered as a Philippine
national and all of its investment in the second corporation would be treated as
Filipino equity. On the other hand, if the Philippine equity in the first corporation is
less than 60%, then only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. (See SEC Rule promulgated on 28 Feb.
1967, cited in Opinion # 18, Series of 1989, Department of Justice, dated 19 January
1989.)
The BOI certificate is issued upon a finding of the Board of Investments that the
business operations of the foreign corp. will contribute to the sound and balanced
development of the national economy on a self-sustaining basis. (See Omnibus
Investments Code, Sec. 48-49)
NOTE: Applications, if not acted upon within 10 days from official acceptance
thereof, shall be considered automatically approved! (Art. 53, Omnibus Investments
Code)
Application under oath setting forth the information specified in Sec. 125;
Statement under oath of the president or any other person authorized by the
corporation showing that the applicant is solvent and in good financial condition,
and setting forth the assets and liabilities of the corporation within 1 year
immediately prior to the application.
NOTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. (Sec. 17)
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned,
upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to
Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
The designation of a resident agent is a condition precedent to the issuance of the license to
transact business in the Philippines.
PURPOSE: To be served any summons and other legal processes which may be
served in all actions or other legal proceedings against such
corporation. Service upon such resident shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign
corporation at its home office.
(1) The corporation will not be permitted to maintain agency in the Philippines;
(3) The corporation will not be permitted to maintain or intervene in any action before
Philippine courts or administrative agencies; it can be SUED.
Isolated transactions
Marshall Wells, a corporation organized under the State of Oregon, sued a domestic corp. for the
unpaid balance on a bill of goods. Defendant demurred to the complaint on the ground that it did not show
that plaintiff had complied with the law regarding corp. desiring to do business in the Phil., nor that the
plaintiff was authorized to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was to subject
the foreign corp. doing business in the Phil. to the jurisdiction of its courts. The object of the statute was
not to prevent it from performing single acts but to prevent it from acquiring a domicile for the purpose
without taking the steps necessary to render it amenable to suit in the local courts. The implication of the
law is that it was never the purpose of the Legislature to exclude a foreign corp. which happens to obtain
an isolated order for business from the Phil., from securing redress in Phil. Courts, and thus, in effect to
permit persons to avoid their contract made with such foreign corporation.
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly
licensed. If a foreign corp. is not engaged in business in the Phil., it can maintain such suit if the
transaction sued upon is singular and isolated, in which no license is required. In either case, the fact of
compliance with the requirement of license, or the fact that the suing corp. is exempt therefrom, as the
case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The qualifying
circumstance, being an essential part of the element of the plaintiff’s capacity to sue, must be
affirmatively pleaded. In short, facts showing foreign corporation’s capacity to sue should be pleaded.
Curing of defect
A contract entered into by a foreign insurance corp. not licensed to do business in the Phil. is not
necessarily void and the lack of capacity to sue at the time of execution of the contract is cured by its
subsequent registration.
Domestic corporation General Garments registered “Puritan” trademark for its men’s wear. US
corporation Puritan Sportswear petitioned the Phil. Patent Office for cancellation of said trademark,
alleging its ownership and prior use in the Phil.
The Supreme Court held that a foreign corp. which does not do business in the Phil. and is
unlicensed but is widely known in the Phil. through the use of its products here has legal right to maintain
an action to protect its reputation, corporate name and goodwill. The right to use the corporate name is a
property right which the corp. may assert and protect in any of the courts of the world.
A foreign corporation not doing business in the Phil. needs no license to sue in the Phil. for
trademark violations.
Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack of capacity
to sue of injured foreign corp. becomes immaterial (because a criminal offence is essentially an act against
the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any
foreign national or juridical person who meets the requirements of Sec. 3 of
the Act (i.e., is a national or is domiciled in a country party to any convention,
treaty or agreement relating to intellectual property rights or the repression of
unfair competition, to which the Philippines is also a party, or extends
reciprocal rights to Philippine nationals by law) and does not engage in
business in the Philippines may bring a civil or administrative action for
opposition, cancellation, infringement, unfair competition, or false designation
of origin and false description, whether or not it is licensed to do business in
the Philippines under existing laws.
WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE LICENSING
REQUIREMENT?
Whether or not there is continuity of transactions which are in pursuance of the normal business of the
corporation. (Metholatum v. Mangaliman)
The true test as to whether a foreign corporation is doing business in the Philippines seems to be
whether the foreign corp. is continuing the body or substance of the business for which it was organized or
whether it has substantially retired from it and turned it over to another. The term implies a continuity of
dealings and arrangements and contemplates performance of acts/works or the exercise of the functions
normally incident to and in progressive prosecution of the purpose and object of its organization.
The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa
his overtime compensation, swing shift and graveyard shift premiums. FMC filed a petition for review on
certiorari on the issue of whether the CIR can validly affirm a judgment against persons domiciled outside
and not doing business in the Phil. and over whom it did not acquire jurisdiction.
The Supreme Court held that the petitioner may be considered as doing business in the Philippines
within the scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp., or a
non-resident joint stock corporation or association, doing business in the Phil., service
may be made on its resident agent, on the government official designated by law to
the effect, or to an y of its officers or agents within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and
receive, on behalf of the corp., legal services from, and be bound by processes of the Phil. Courts, for as
long as he remains an employee of FMS. If a foreign corp. not engaged in business in the Phil., through an
Agent, is not barred from seeking redress from courts in the Phil., that same corp. cannot claim exemption
done against a person or persons in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business"
has been replaced with the phrase "has transacted business," thereby allowing suits
based on isolated transactions.
Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the recovery of a
debt. MLF is a non-resident foreign corp. not doing business in the Phil., organized under the laws of
Delaware, USA. It is a futures commission merchant duly licensed to act as such in the futures markets
and exchanges in the US, essentially functioning as a broker executing orders to buy and sell futures
contract received from its customers on US futures exchanges. (Futures contract is a contractual
commitment to buy and sell a standardized quantity of a particular item at a specified future settlement
date and at a price agreed upon with the purchase or sale being executed on a regulated futures
exchange.)
The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no legal
capacity to sue because (1) MLF is doing business in the country without a license; and (2) the transactions
were made with Merrill Lynch Pierce, Fenner and Smith and not with plaintiff MLF.
Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses in light of the
undeniable fact that it had transacted business without a license?
Legal capacity to sue may be understood in two senses: (1) That the plaintiff is prohibited or
otherwise incapacitated by law to institute suit in the Phil. Courts, or (2) although not otherwise
incapacitated in the sense just stated, that it is not a real party in interest.
The Court finds that the Laras were transacting with MLF fully aware of its lack of license to do
business in the Phils., and in relation to those transactions had made payments and the spouses are
estopped to impugn MLF's capacity to sue them. The rule is that a party is estopped to challenge the
personality of a corp after having acknowledged the same by entering into a contract with it. The principle
is applied to prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits of the
contract.
Pacific Vegetable Oil v. Singson (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a
sum of money for damages suffered by the plaintiff as a consequence of the failure of the defendant to
deliver copra which he sold and bound himself to deliver to the plaintiff. Defendant filed a motion to
dismiss on the ground that the plaintiff failed to obtain a license to transact business in the Phil and,
consequently, it had no personality to file an action.
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant
to the plaintiff in the US, the agreed price to be covered by an irrevocable letter of credit to be opened at
the Bank of California, and delivery to be made at the port of destination. It follows that the appellant
corporation has not transacted business in the Phil in contemplation of Sec. 68 and 69 which require any
foreign corporation to obtain a license before it could transact business, or before it could have personality
to file a suit in the Phil.. It was never the purpose of the Legislature to exclude a foreign corporation which
happens to obtain an isolated order of business from the Phil., from securing redress in the Phil. Courts,
and thus, in effect, to permit persons to avoid their contracts made with such foreign corp.. The lower
court erred in holding that the appellant corporation has no personality to maintain the present action.
Aetna Casualty & Surety Co. vs. Pacific Star Line (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen
& Cotton piece goods due to pilferage and damage amounting to US$2,300.00. PSL contends that Aetna
has no license to transact insurance business in the Philippines as gathered from the Insurance
Commission and SEC . It also argues that since said company has filed 13 other civil suits, they should be
considered as doing business here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is
not transacting business in the Philippines for which it needs to have a license. The contract was entered
into in New York and payment was made to the consignee in the New York branch. Moreover, Aetna was
not engaged in the business of insurance in the Philippines but was merely collecting a claim assigned to it
by consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of the
Corporation Law and therefore was not barred from filing the instant case although it had not secured a
license to transact insurance business in the Philippines.
Although IRTI and ECED were doing business in the Philippines, since they had not secured a license
from BOI, the foreign corporations were not bound by the requirement on termination and Topweld could
not invoke the same against the former. Moreover, it was incumbent upon Topweld to know whether or not
IRTI and ECED were properly authorized to engage in such agreements. The Supreme Court held that both
parties were guilty of violating RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed
for.
Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and Unicorn for the
collection of a sum of money for failure to deliver 500 tons of crude coconut oil. Antam et al asked for
dismissal of case on ground that Stokely was a foreign corporation not licensed to do business in the
Philippines and therefore had no personality to maintain the suit.
The SC held that the transactions entered into by Stokely with Antam et al (3 transactions, either as
buyer or seller) were not a series of commercial dealings which signify an intent on the part of the
respondent to do business in Philippines but constitute an isolated transaction. The records show that the
2nd and 3rd transactions were entered into because Antam wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude oil under the first transaction and in order to give the latter a
chance to make good on their obligation. There was only one agreement between the parties, and that
was the delivery of the 500 tons of crude coconut oil.
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons
on its resident agent.
If there is no assigned resident agent, the government official designated by law can receive the
summons on their behalf and transmit the same to them by registered mail within 10 days. This will
complete the service of the summons. Summons can also be served on any of the corporation's officers or
agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec. 128
presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed
a valid process.
Johnlo Trading case holds that the service on the attorney of an FC who was also
charged with the duty of settling claims against it is valid since no other agent was duly
appointed.
General Corporation of the Philippines vs Union Insurance (87 Phil. 313; 1950)
General Corporation and Mayon investment sued Union Insurance and Firemen’s Fund Insurance
(FFI) for the payment of 12 marine insurance policies. The summons was served on Union which was then
acting as FFI’s settling agent in the country. At that time, it was not yet registered and authorized to
transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over FFI?
Yes. The service of summons for FFI on its settling agent was legal and gave the court jurisdiction
upon FFI. Section 14, Rule 7 of ROC embraces Union in the phrase, “or agents within the Philippines”. The
law does not make distinctions as to corporations with or without authority to do business in the
Philippines. The test is whether a foreign corporation was actually doing business here. Otherwise, a
foreign corporation doing business illegally because of its refusal or neglect to obtain the corresponding
authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid
service and thereby impugn the jurisdiction of the courts.
(1) All claims which have accrued in the Philippines have been paid, compromised
and settled;
(2) All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been
paid; and
(3) The petition for withdrawal of license has been published once a week for 3
consecutive weeks in a newspaper of general circulation in the Philippines.
(1) Failure to file its annual report or pay any fees as required by the
Corporation Code;
(3) Failure, after change of resident agent or of his address, to submit to the
SEC a statement of such change;
(4) Failure to submit to the SEC an authenticated copy of any amendment to its
AOI or by-laws or of any articles of merger or consolidation within the time
prescribed by the Code;
(6) Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine government or any of its agencies or political
subdivisions;
(7) Transacting business in the Philippines outside of the purpose/s for which
such corporation is authorized under its license;
(8) Transacting business in the Philippine as agent of or acting for and in behalf
of any foreign corporation or entity not duly licensed to do business in the
Philippines; or
(9) Any other ground as would render it unfit to transact business in the
Philippines.
Once a school, college or university has been granted government recognition by the
DECS, it must incorporate within 90 days from the date of such recognition, unless it is
expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it must
file a copy of its AOI and by-laws with the DECS. Without the favorable recommendation
of the DECS Secretary, the SEC will not accept or approve such articles. (Sec. 107,
Corporation Code)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by
the general provisions of the Code on non-stock corporations insofar as they may be applicable.
(Sec. 109)
In case of death, resignation, transfer or removal of the person in office, his successor
replaces him and continues the corporation sole. The property is not owned but is merely
administered by the corporation sole, and ownership pertains to the church or congregation he
represents. On the other hand, he is the person authorized by law as the administrator thereof and
the court may take judicial notice of such fact and of the fact that the parish priests have no control
over such property.
In determining whether the constitutional provision requiring 60% Filipino capital for
corporation ownership of private agricultural lands, the Supreme Court has held that it is the
nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the
office, which must be taken into consideration. Thus, where at least 60% of the constituents are
Filipinos, land may be registered in the name of the corporation sole, although the holder of the
office is an alien. This ruling is based on the fact that the corporation sole is not the owner but
merely the administrator of the property, and that he holds it in trust for the faithful of the diocese
concerned. (See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
In contrast to a corporation sole, religious societies are composed of more than one person.
The requirements for incorporation of such societies are set forth in Sec. 116 of the Code.
A close corporation, within the meaning of the Corporation Code, is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a specified number of
persons not exceeding 20;
(2) All the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by Title XII of the Code; and
(3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notes:
YES, provided that said corporation owns less than 2/3 of voting stock or
voting rights.
Buy-back of shares Must be > par value (Sec. 105) May be < par value
A provisional director is an impartial person who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the corporation, and whose qualifications, if any, may
be determined by the SEC. He is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected
director of the corporation, including the right to notice of and to vote at meetings of directors, until
such time as he shall be removed by order of the SEC or by all the stockholders. (Sec. 104)
COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. (Sec. 105)
When availed of For any reason (Sec. 105) Only the grounds
enumerated in Sec. 81
and Sec. 42
Fair value of shares Must be > par or issued May be < par or issued
value (Sec. 105) value
Whenever the SEC conducts any examination of the operations, books and records
of any corporation, the results thereof must be kept strictly confidential, unless the law
requires them to be made public or where they are necessary evidence before any
court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit
an annual report to the SEC of its operations, with a financial statement of its assets and
liabilities and such other requirements as the SEC may impose. (Sec. 141)
No right or remedy in favor of or against, nor any liability incurred by, any
corporation, its stockholders, members, directors, trustees or officers, may be removed
or impaired by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of the Code. (Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are
punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by
imprisonment for not less than 30 days but not more than 5 years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may be
dissolved in appropriate proceedings before the SEC. (Sec. 144)