ATENEO DE MANILA LAW SCHOOL

2ND SEMESTER, SY 2017-2018

OUTLINE IN PHILIPPINE DEAN CESAR L. VILLANUEVA

ATTY. JOEY G. HOFILEÑA
CORPORATE LAW1 ATTY. TERESA V. TIANSAY

Coded Outline by IC San Pedro

Chapter Page
I. Historical Background 1
II. Concepts 1
III. Nature and Attributes 13
IV. Separate Personality and Piercing the Veil 21
V. Corporate Contract Law 30
VI. Articles of Incorporation 34
VII. By-Laws 42
VIII. Powers 45
IX. Directors, Trustees, and Officers 55
X. Rights of Stockholders and Members 76
XI. Capital Stock 95
XII. Acquisitions, Mergers, and Consolidations 109
XIII. Dissolution and Liquidation 116
XIV. Close Corporations 121
XV. Non-stock Corporations and Foundations 126
XVI. Foreign Corporations 135
XVII. Penalty Provisions 145
XVIII. Miscellaneous 148

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I. xHISTORICAL BACKGROUND
1. Sociedades Anónimas under the Spanish Code of Commerce
Sociedades anónimas were introduced in our jurisdiction in December 1888 with the extension to Philippine
territorial application of Articles 151 to 159 of the Spanish Code of Commerce, which constituted the juridical
entities with features of limited liability and centralized management; but they were more similar to the English
joint stock companies than the modern corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711
(1956).
A sociedad anónima was considered a commercial partnership “where upon the execution of the public
instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes
a juridical person—an artificial being, invisible, intangible, and existing only in contemplation of law—with
power to hold, buy, and sell property, and to sue and be sued—a corporation—not a general partnership nor a
limited partnership … The inscribing of its articles of agreement in the commercial register was not necessary to
make it a juridical person; such inscription only operated to show that it partook of the form of a commercial
corporation.” Mead v. McCullough, 21 Phil. 95 (1911).

2. Philippine Corporate Law:2 Sort-of-Codification of American Corporate Law

When attention was drawn to the fact that there was no entity in Spanish law corresponding to the notion of the
American “corporation”, the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the
American corporation as the standard commercial entity in the Philippines and to hasten the day when the Spanish
sociedad anónima would become obsolete. The statute is a sort-of-codification of American Corporate Law.
Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933).
The Corporation Law recognized the difference between sociedades anónimas and corporations and the Court
refused to apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe
Anonyme, 15 SCRA 301 (1965).
The Corporation Law as the first corporate statute became effective on 01 April 1906. It had piece- meal
amendments during its 74-year history, but became antiquated and un-adapted to the changing times.
3. The Corporation Code of the Philippines (Batas Pambansa Bilang 68)
The current Corporation Code, which took effect on 01 May 1980, adopted various corporate doctrines
enunciated by the Supreme Court under the old Corporation Law; clarified the obligations of corporate directors
and officers; expressed in statutory language established principles and doctrines; and provided for a chapter on
close corporations.3
4. Proper Treatment of Philippine Corporate Law
Although we have a Corporation Code that provides for statutory principles, since Philippine Corporate Law
comes from the U.S. common law system, then Philippine Corporate Law is essentially, and continues to be, a
common law system and subject to developments in commercial developments, much of which can be expected to
happen in the world of commerce, and some expressed jurisprudential rules that apply and adopt corporate
principles into the changing concepts and infrastructure of the commercial world.

II. CONCEPTS
1. Definition of “Corporation” (SEC. 2)

Section 2. Corporation defined. - 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. (2)

A corporation is an artificial being created by operation of law, invested by law upon coming into existence
with a personality separate and distinct from the persons composing it, and from any other legal entity to which it
may be related. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).4

2. FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2:

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 a. An Artificial Being: “It has juridical capacity to contract and enter into legal relationships.”
b. A Creature of the Law: “It is created by operation of law and not by mere agreement.”
c. With a Strong Juridical Personality: “It has a right of succession.”
A Creature of Limited Powers: “A corporation has no powers except for those which are expressly conferred
on it by the Corporation Code, and those found in its charter, and are implied by or are incidental to its existence.
It exercises its powers through its Board of Directors and/or its duly authorized officers and agents. Pascual and
Santos, Inc. v. The Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).

3. “TRI-LEVEL EXISTENCE” IN THE CORPORATE SETTING:

a. “ASSETS-ONLY” LEVEL: “The corporation is an aggregation of Assets and resources”

b. “BUSINESS ENTERPRISE” LEVEL: “The corporation’s primary purpose is to pursue business.”

c. “JURIDICAL ENTITY” LEVEL: “The corporation is a medium of pursuing a business enterprise.”

Business enterprise constitutes the goodwill, the customer lists and all factors that make a business profitable.
Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

4. “TRI-LEVEL RELATIONSHIPS” IN THE CORPORATE SETTING:

a. “JURIDICAL ENTITY” LEVEL, treats of the aspects of the State-corporation relationship.

b. “INTRA-CORPORATE” LEVEL, considers the four (4) “corporate contractual relationships”, thus:
• Between the corporation and its agents/representatives to act in the real world, i.e.,
directors and officers, which is governed also by the Law on Agency
• Between the corporation and its shareholders or members
• Between the shareholders and the corporate directors, trustees and officers
• Between and among the shareholders or members in common venture
c. “EXTRA-CORPORATE” LEVEL, views the relationship between the corporation and “outsiders”, thus:
• Between the corporation and its employees, governed by Labor Laws
• Between the corporation and those it contracts with, governed by Contract Laws
• Between the corporation and the public affected by its enterprise, governed essentially
by Law on Torts or Quasi-Delicts.

5. THEORIES ON THE FORMATION OF CORPORATIONS

a. Theory of Concession:
A corporation’s claim of a juridical personality of its own and to transact business as such, is not a matter of
absolute right, but a privilege which may be enjoyed only under such terms as the State may deem necessary to
impose. cf Ang Pue & Co. v. Sec. of Commerce & Industry, 5 SCRA 645 (1962).
“There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which … ‘is the reality of
the group as a social and legal entity, independent of state recognition and concession.’ A corporation as known
to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state
acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher
priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever called upon to do so. Tayag v. Benguet
Consolidated, 26 SCRA 242 (1968).
All corporations, big or small, must abide by the provisions of the Corporation Code; even a simple family
corporation cannot claim an exemption nor can it have rules and practices other than those established by law.
Torres v. Court of Appeals, 278 SCRA 793 (1997).
“It is a basic postulate that before a corporation may acquire juridical personality, the State must give its
consent either in the form of a special law or a general enabling act,” and the procedure and conditions
provided under the law for the acquisition of such juridical personality must be complied with . Although the
statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be
construed the grant of a juridical personality to such an association … nevertheless, the failure to comply with
the statutory procedure and conditions does not warrant a finding that such association acquired a juridical
personality, even when it adopts constitution and by-laws. Int’l Express Travel & Tour Services, Inc. v.
Court of Appeals, 343 SCRA 674 (2000).

b. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947)

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 A corporation is but an association of individuals, allowed to transact business under a corporate name,
with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities
and perquisites appropriate to such a body. Philippine Stock Exchange (PSE) v. Court of Appeals, 281 SCRA
232 (1997).
Corporations are composed of natural persons and their separate corporate personality is no shield for the
commission of injustice and inequity, such as to avoid the execution of the property of a sister company.
Tan Boon Bee & Co v. Jarencio, 163 SCRA 205 (1983)
6. ADVANTAGES AND DISADVANTAGES OF THE CORPORATE MEDIUM:

a. Four Advantageous Attributes of the Corporation:

(i) STRONG AND SOLEMN JURIDICAL PERSONALITY (Sec. 2; Arts. 44(3), 45, 46, and 1775, Civil Code)

Section 2. Corporation defined. - 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. (2)

Article 44. The following are juridical persons:

(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (35a)

Article 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by
the laws creating or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of this
Code concerning partnerships. (36 and 37a)

Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization. (38a)

Article 1775. Associations and societies, whose articles are kept secret among the members, and
wherein any one of the members may contract in his own name with third persons, shall have no
juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)

While not in fact a person, by fiction the law treats the corporation as though it were a person—an artificial
person distinct and separate from its stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989).
Stockholders are not co-owners of corporate assets; hence, the transfer of corporate assets to the
stockholders by way of dissolution is an act of conveyance and not a partition among co- owners. Stockholders
of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
Execution pending appeal may be allowed when “the prevailing party is already of advanced age and in
danger of extinction,” but not in this case a corporation whose “juridical entity’s existence cannot be likened to
a natural person—its precarious financial condition is not by itself a compelling circumstance warranting
immediate execution and does not outweigh the long standing general policy of enforcing only final and
executory judgment.” Manacop v. Equitable PCIBank, 468 SCRA 256 (2005).

(ii) CENTRALIZED MANAGEMENT (Sec. 23)

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 Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for
one (1) year until their successors are elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.

Under Sec. 23 of Corporation Code, save in those instances where the Corporation Code requires
stockholders’ approval for certain specific acts, it is the Board of Directors or Trustees which exercises almost
all the corporate powers in a corporation. Great Asian Sales Center Corp. v. Court of Appeals,
381 SCRA 557 (2002).6

(iii) LIMITED LIABILITY TO STOCKHOLDERS (AND NON-LIABILITY TO OFFICERS)

One of the advantages of the corporation is the limitation of an investor’s liability to the amount of
investment, which flows from the legal theory that a corporate entity is separate and distinct from its
stockholders. San Juan Structural and Steel Fabricators, Inc. v. CA, 296 SCRA 631 (1998).
By virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder. This protection from liability for shareholders is the principle of limited liability.
PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).7
It is hornbook law that corporate personality is a shield against personal liability of its officers—a corporate
officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed
the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA
671 (2001).8
Obligations incurred by the corporation acting through its directors and officers, are its sole liabilities.
Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).
Where the creditor of the corporation sues not only the company but also all stockholders to reach their
unpaid subscription which appear to be the only visible assets of the company, then the controlling doctrine is
that “a stockholder is personally liable for the financial obligations of the corporation to the extent of his
unpaid subscription.” Halley v. Printwell, Inc. 649 SCRA 116 (2011).

(iv) FREE-TRANSFERABILITY OF “UNITS OF OWNERSHIP” (SHARES) (Sec. 63)

Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (35)

It is the inherent right of the stockholder to dispose of his shares of stock (which he owns as any other
property of his) anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).9

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 Authority granted to regulate the transfer of its stock does not empower the corporation to restrict the right
of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer. Thomson v. CA, 298 SCRA 280 (1998).

b. Disadvantages of the Corporate Medium:

(1) Agency Cost: Abuse of Management; Breach of Trust
(2) Abuse of Limited Liability Feature
(3) High Cost of Maintenance of the Corporate Medium
(4) Double Taxation
• Dividends received by individuals from domestic corporations are subject to final 10% tax for
income earned on or after 01 January 1998. Sec. 24(B)(2), 1997 NIRC.
• However, inter-corporate dividends between domestic corporations are not subject to any income
tax. Sec. 27(D)(4), 1997 NIRC.
• Re-imposition of the 10% “improperly accumulated earnings tax” for holding companies. Sec.
29, 1997 NIRC.

7. COMPARED WITH OTHER BUSINESS MEDIA

a. Sole Proprietorships
A sole proprietorship, although regulated separately from its owner for purpose of taxation and
regulation, is not vested with juridical personality to file or defend an action. Excellent Quality Apparel v.
Win Multiple-Rich Builders, 578 SCRA 272 (2009).10
b. Business Trusts (Art. 1442, Civil Code)

Article 1442. The principles of the general law of trusts, insofar as they are not in conflict with
this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

c. Partnerships (Arts. 1768 and 1775, Civil Code)

Article 1768. The partnership has a juridical personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of article 1772, first
paragraph. (n)

Article 1775. Associations and societies, whose articles are kept secret among the members, and
wherein any one of the members may contract in his own name with third persons, shall have no
juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)

d. Joint Ventures
Joint venture is an association of persons or companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a community of interest in the performance of the
subject matter, a right to direct and govern the policy in connection therewith, and agreement to share both
in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
e. Joint Accounts (Cuentas en Participacion) (Arts. 239-243, Code of Commerce; Art. 1775, Civil Code)

Article 1775. Associations and societies, whose articles are kept secret among the members, and
wherein any one of the members may contract in his own name with third persons, shall have no
juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)

Cuentas en participacion is an accidental partnership constituted in a manner that its existence was only
known to those who had an interest in the same, there being no mutual agreement between the partners, and
without a corporate name indicating to the public in some way that there were other people besides the one
who ostensibly managed and conducted the business, governed under Art. 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en
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 participacion is conducted, shall have only a right of action against such person and not against the other
persons interested, and the latter, on the other hand, shall have no right of action against third person who
contracted with the manager unless such manager formally transfers his right to them. Bourns v. Carman, 7
Phil. 117 (1906).
A joint account takes place when a third person is financially interested in the business of a
merchant, but does not give rise to the creation of a juridical person. Collector of Internal Revenue
v. Cojuangco, 109 Phil. 443 (1960).
f. Cooperatives (Art. 3, R.A. No. 6938)

Section 3. General Concepts. - A cooperative is a duly registered association of persons, with a

common bond of interest, who have voluntarily joined together to achieve a lawful common social
or economic end, making equitable contributions to the capital required and accepting a fair share
of the risks and benefits of the undertaking in accordance with universally accepted cooperative
principles.

Cooperatives are aimed to provide strong social and economic organizations to ensure that the tenant-
farmers enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).

8. x CLASSIFICATION OF CORPORATIONS
a. In Relation to the State:
(1) Private Corporations (Sec. 3, Act 1459)

Section 3. Corporations may be public or private. - Public corporations are those formed or
organized for the government of a portion of the state. Private corporations are those formed for
some private purpose, benefit, aim, or end, as distinguished from public corporations, which have
for their purpose the general good and welfare. Private corporations are divided into stock
corporations and nonstock corporations. Corporations which have a capital stock divided into
shares and are authorized to distribute to the holders of such shares dividends or allotments of the
surplus profits on the basis of the shares held are stock corporations. All other private corporations
are nonstock corporations.

(2) Public Corporations or Local Government Units (LGUs) (Sec. 3, Act No. 1459)
(3) Quasi-Public Corporations
(4) GOVERNMENT-OWNED-OR-CONTROLLED CORPORATIONS (GOCCS) – SEE R.A. No. 10149; Villanueva
& Reyes, The Great Restructuring of the Public Corporate Sector, 59 ATENEO L.J. 41 (2014).
Local water districts may be created under the terms of P.D. 198 by the different local legislative bodies
by the passage of a resolution to that effect, with the primary function to sell water to residents within their
territory, under such schedules of rates and charges as may be determined by their boards. In addition to the
powers granted in, and subject to such restrictions imposed under, the Act, they may also exercise the
powers, rights and privileges given to private corporations under existing laws. The juridical entities thus
created and organized under P.D. 198 are considered quasi-public corporations, performing public
services and supplying public wants. Marilao Water Consumers Asso. v. Intermediate Appeallate Court
(IAC), 201 SCRA 437 (1991).
Local water districts can validly exist as corporate entities under P.D. 198, and thereby are GOCCs, and
their Board of Directors and other personnel are government employees subject to civil service laws and
anti-graft laws. Feliciano v. Commission on Audit (COA), 419 SCRA 363 (2004).
A private corporation is created by operation of law under the Corporation Code while a government
corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees
Union v. Calleja, 237 SCRA 271 (1994).
(i) Charterred GOCCs
Although Boy Scouts of the Philippines does not receive any government monetary or financial subsidy, and its
funds and assets are not considered government in nature and not subject to COA audit, the fact that it received a
special charter, its governing board are appointed by the Government, and that it’s purpose is for public character,
for they pertain to the educational, civic, and social development of the youth which constitute a very substantial

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 nad important part of the nation, it is not a public corporation in the same sense that local governmetns are public
corporations isnce it does not govern a portion fo the state, but it also does not have proprietary functions in the
same sense that the functions or activities of GOCCs, it may still be considered as such, or under the 1987
Administrative Code as an instrumentality of the Government, and it employees are subject to the Civil Service
Law.
Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
Although it has a special charter, the Chairman of the Philippine National Red Cross is not appointed by the
President. Although Camporendodo v. NLRC had ruled that PNRC is a GOCC because it is constituted under a
special charter, it failed to consider the definition of a GOCC as provided under Sec. 2(13) of the Administrative
Code of 1987, which requires that a GOCC to be such must be owned by the government, and in the case of a
stock corporation, at least a majority of its capital stock must be owned by the government. Liban v. Gordon, 593
SCRA 68 (2009).
When the law vests in a government instrumentality corporate powers, it does not become necessarily a
corporation. A GOCC must be organized as a stock or non-stock corporation. The MIAA is not a GOCC because it
is not constituted of capital divided into shares of stock, and neither is it a non-stock corporation because it has no
members. MIAA is a government instrumentality vested with corporate powers to perform efficiently its
government functions. MIAA v. CA, 495 SCRA 591 (2006).
Sec. 31 of Corporation Code ( Liability of Directors and Officers) is applicable to corporations which have
been organized by special charters since Sec. 4 of Corporation Code renders the provisions supplementarily
applicable to all corporations, including those with special or individual charters, such as cooperatives organized
under P.D. 269, so long as those provisions are not inconsistent with such charters. Benguet Electric Cooperative,
Inc. v. NLRC, 209 SCRA 55 (1992).
While public benefit and public welfare may be attributable to the operation of the Bases Conversion and
Development Authority (BCDA), yet it is certain that the functions it performs are basically proprietary in nature
—the promotion of economic and social development of Central Luzon, and the country’s goal for enhancement.
Therefore, the rule that prescription does not run against the State will not apply to BCDA, it being said that when
title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same
category as ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).
(ii) Noncharterred GOCCs (Organized under the Corporation Code)
Government’s majority shares does not make an entity a public corporation, for it remains a private corporation
having been organized under the Corporation Law. National Coal Co., v. Collector of Internal Revenue, 46 Phil.
583 (1924).
Being a GOCC makes a private corporation liable for laws applicable to the Government or its entities and
subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).
On the other hand, we have no doubt that over GOCCs established or organized under the Corporation Code,
SEC can exercise jurisdiction. These GOCCs are regarded as private corporations despite common
misconceptions. That the government may own the controlling shares in the corporation does not diminish the fact
that the latter owes its existence to the Corporation Code. Philippine National Construction Corp. v. Pabion, 320
SCRA 188 (1999).
Whether a corporation is GOCC or private in nature is simple: Is it created by its own charter for the exercise
of a public function, or by incorporation under the general corporation law? Those with special charters, are
government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the GSIS. Camparedondo
v. NLRC, 312 SCRA 47 (1999).
Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government, and the
intervention in a transaction of the Office of the President through the Executive Secretary does not change the
independent existence of a government entity as it deals with another government entity. PUP v. Court of Appeals,
368 SCRA 691 (2001).
(iii) Emerging Rules on Labor and Civil Service Matters in GOCCs
The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the
general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by
the 1987 Constitution. GOCCs created by special charter are subject to the Civil Service Law, while those
incorporated under the Corporation Code are governed by the Labor Code. PNOC-EDC. v. NLRC, 201 SCRA 487
(1991).11
b. As to Place of Incorporation:
(1) Domestic Corporation
(2) Foreign Corporation (Sec. 123)

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 Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own
country or state. It shall have the right to transact business in the Philippines after it shall have
obtained a license to transact business in this
country in accordance with this Code and a certificate of authority from the appropriate
government agency. (n)

c. As to Purpose of Incorporation:
(1) Religious Corporation (Secs. 109 and 116)

Section 109. Classes of religious corporations. - Religious corporations may be incorporated by

one or more persons. Such corporations may be classified into corporations sole and religious
societies.

Religious corporations shall be governed by this Chapter and by the general provisions on non-
stock corporations insofar as they may be applicable. (n)

Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect or church, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder
of such religious denomination, sect or church. (154a)

On matters purely ecclesiastical, the decisions of the proper church tribunals are conclusive upon the
Civil tribunals – a church members who is expelled or a priest or minister who is deprived of his office
by by the church authorities, si without remedy in the civil courts. Long v Basa, 366 SCRA 113 (2001).

(2) Educational Corporations (Secs. 106, 107, and 108; Sec. 25, B.P. Blg 232)

Section 106.
108. Incorporation.
Board of trustees.
– Educational
– Trusteescorporations
of educational
shall be
institutions
governedorganized
by specialaslaws
non-stock
and by
the general provisions
corporations shall not be
of less
this Code.
than five
(n) (5) nor more than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of five (5).
Section 107. Pre-requisites to incorporation. – Except upon favorable recommendation of the
Unless
Ministryotherwise provided
of Education and in the articles
Culture, of incorporation
the Securities on the by-laws,
and Exchange the board
Commission of trustees
shall not of
accept or
incorporated schools,
approve the articles of colleges, or other
incorporation institutions
and by-laws of educational
of any learning shall, as soon(168a)
institution. as organized, so
classify themselves that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.

For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations. (169a)

Section 25. Establishment of Schools - All schools shall be established in accordance with
law. The establishment of new national schools and the conversion of existing schools from
elementary to national secondary or tertiary schools shall be by law: Provided, That any private
school proposed to be established must incorporate as an non-stock educational corporation in
accordance with the provisions of the Corporation Code of the Philippines. This requirement to
incorporate may be waived in the case of family-administered pre-school institutions.

Government assistance to such schools for educational programs shall be used exclusively for that
8 purpose.
 (3) Charitable, Scientific, Vocational Corporations
(4) Business Corporation
d. As to Number of Members:
(1) Aggregate Corporation
(2) Corporation Sole (Secs. 110 to 115)

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 Section 110.113. Corporation
Acquisition and sole.alienation
– For the of purpose
property. of administering
– Any corporation
and managing,
sole may as purchase
trustee, and
the
affairs,real
hold property
estate andand temporalities
personal property of anyfor religious
its church,
denomination,
charitable,sect
benevolent
or church,ora educational
corporation
sole may be
purposes, and
formed
may by receive
the chief
bequests
archbishop,
or giftsbishop,
for suchpriest,
purposes.
minister,Such
rabbicorporation
or other presiding
may sell elder
or
of such religious
mortgage real property
denomination,
held by sect
it byorobtaining
church. (154a)
an order for that purpose from the Court of First
Instance of the province where the property is situated upon proof made to the satisfaction of the
Section
court that111.
noticeArticles
of the ofapplication
incorporation.
for leave– In to sell
orderor mortgage
to becomehasa been corporation
given bysole,
publication
the chiefor
archbishop,inbishop,
otherwise such manner
priest, and
minister,
for suchrabbitime
or presiding
as said courteldermay
of any
havereligious
directed,denomination,
and that it issect
to the
or
church must
interest of thefilecorporation
with the Securities
that leave and to sell
Exchange
or mortgageCommission
should articles
be granted.
of incorporation
The application setting
for
forth the
leave to sell
following:
or mortgage must be made by petition, duly verified, by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any
1. That heofis the
member the chief
religious
archbishop,
denomination,
bishop, priest,
sect orminister,
church rabbi
represented
or presiding
by the elder
corporation
of his religious
sole:
denomination,
Provided, Thatsectin cases
or church
whereand thethat
rules,
he desires
regulationsto become
and discipline
a corporation
of thesole;
religious denomination,
sect or church, religious society or order concerned represented by such corporation sole regulate
2. That
the methodthe rules,
of acquiring,
regulationsholding,
and discipline
selling andofmortgaging
his religiousrealdenomination,
estate and personal
sect or church
property,aresuch
not
inconsistent
rules, regulations
with his andbecoming
disciplinea corporation
shall control, soleand and the
do not
intervention
forbid it; of the courts shall not be
necessary. (159a)
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged
with the114.
Section administration
Filling of vacancies.
of the temporalities
– The successors and thein management
office of any ofchief the archbishop,
affairs, estate
bishop,
and
properties
priest, minister,
of his rabbi
religious
or presiding
denomination,
elder in a corporation
sect or church sole shall
within
becomehis the
territorial
corporation
jurisdiction,
sole on
describing
their accessionsuch to territorial
office and jurisdiction;
shall be permitted to transact business as such on the filing with the
Securities and Exchange Commission of a copy of their commission, certificate of election, or
4. The of
letters manner
appointment,
in which duly
anycertified
vacancybyoccurring
any notaryinpublic.
the office of chief archbishop, bishop, priest,
minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or
discipline
During anyofvacancy
the religious
in thedenomination,
office of chief sect
archbishop,
or church to bishop,
whichpriest,
he belongs;
minister,
andrabbi or presiding
elder of any religious denomination, sect or church incorporated as a corporation sole, the person
5. The
or persons
placeauthorized
where theand principal
empowered
office of by the
the corporation
rules, regulations
sole is to
or bediscipline
established
of the
and religious
located,
which place must
denomination, sectbeorwithin
church therepresented
Philippines.by the corporation sole to administer the temporalities
and manage the affairs, estate and properties of the corporation sole during the vacancy shall
The articles
exercise all theofpowers
incorporation
and authority
may of include
the corporation
any othersole provision
during such
not vacancy.
contrary (158a)
to law for the
regulation of the affairs of the corporation. (n)
Section 115. Dissolution. – A corporation sole may be dissolved and its affairs settled voluntarily
Section
by submitting
112. Submission
to the Securities
of theandarticles
Exchangeof incorporation.
Commission –a The verified
articles
declaration
of incorporation
of dissolution.
must be
verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister,
rabbideclaration
The or presiding of dissolution
elder, as the shall
caseset may
forth:be, and accompanied by a copy of the commission,
certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister,
rabbi
1. Theornamepresiding
of theelder,
corporation;
duly certified to be correct by any notary public.

2. Theand
From reason
after
forthe
dissolution
filing with
andthe
winding
Securities
up; and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned
in The
3. the preceding
authorization
paragraph,
for the dissolution
such chief archbishop,
of the corporation
bishop,by
priest,
the particular
minister, religious
rabbi or presiding
denomination,
elder
shallorbecome
sect church; a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed by him as such chief
archbishop,
4. The namesbishop,
and addresses
priest, minister,
of the persons
rabbi or
whopresiding
are to supervise
elder shall
thebewinding
held inuptrust
of the
by affairs
him asofa
corporation
the corporation.
sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.
(n) approval of such declaration of dissolution by the Securities and Exchange Commission, the
Upon
corporation shall cease to carry on its operations except for the purpose of winding up its affairs.
(n)

10
 A corporation sole has no nationality being an institution that existed prior to the Republic. But if any
nationality is to be accorded to a corporation sole it is to be judged from the nationality of the majority of the
faithfuls thereof. Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of
Davao City, 102 Phil. 596 (1957).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA
687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public domain, because
of the constitutional prohibition qualifying only individuals to acquire land and the provision under the Public
Land Act which applied only to Filipino citizens or natural persons, has been expressly overturned in Director
of Land v. IAC, 146 SCRA 509 (1986).12

e. As to Legal Status:
(1) De Jure Corporation
(2) De Facto Corporation (Sec. 20)

Section 20. De facto corporations. – The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding. (n)

(3) Corporation by Estoppel (Sec. 21)

Section 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist performance

thereof on the ground that there was in fact no corporation. (n)

f. As to Existence of Shares (Secs. 3 and 5):

Section 3. Classes of corporations. – Corporations formed or organized under this Code may be
stock or non-stock corporations. Corporations which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits
on the basis of the shares held are stock corporations. All other corporations are non-stock
corporations. (3a)

Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-

stock corporation are called members. (4a)

(1) Stock Corporation

(2) Non-Stock Corporation)

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Power to Create a Corporation Is Legislative in Character (Sec. 16, Article XII, 1987 Constitution)

11
 SECTION 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled corporations
may be created or established by special charters in the interest of the common good and subject to
the test of economic viability.

Since Congress cannot enact a law creating a private corporation with a special charter (except if it were a
GOCC), then it follows that Congress can create corporations with special charters only if such are GOCCs.
Feliciano v. Commission on Audit (COA), 419 SCRA 363 (2004).13
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a private
corporation by special legislative act, as it is not a GOCC, since NDC was merely required to extend a loan to the
new corporation, and the new stocks of the corporation were to be issued to the old investors and stockholders of
the insolvent Agrix upon proof of their claims against the abolished corporation. National Development
Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).
PNRC which was constituted under a special law, is not a GOCC because it is not by its charter owned by the
Government, although it is intended to do public functions, it is owned by the private sector. Consequently, the
PNRC Charter, insofar as it creates the PNRC as a private corporation and grants it corporate powers, is void for
being unconstitutional. The other provisions of the PNRC Charter remain valid as they can be considered as a
recognition by the State that the unincorporated PNRC is the local National Society of the International Red Cross
and Red Crescent Movement, and thus entitled to the benefits, exemptions and privileges set forth in the PNRC
Charter. Liban v. Gordon, 593 SCRA 68 (2009).

2. THE CORPORATION AS A “PERSON” BEFORE THE LAW

a. Entitled to Protection Under the Due Process and Equal Protection Clauses
The due process clause has universal application and covers private corporations insofar as their properties
are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920).
Corporate persons, needless to stress, are entitled to the due process protection. Palm Holding Co. v.
Sandiganbayan, 732 SCRA 156 (2014), echoed the ruling in PCGG v. Sandiganbayan, 290 SCRA 639 (1998),
that the failure to implead a corporation in a suit for recovery of ill-gotten wealth against its stockholders
cannot bind the corporation itself; otherwise, its fundamental right to due process will be violated. Philippine
Coconut Federation, Inc. (COCOFED) v. Republic, 805 SCRA 1 (2016).
b. Protected under the Unreasonable Searches and Seizure Clause
A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but
its officers have no cause of action to assail the legality of the seizures, regardless of the amount of shares of
stock of each in said corporation because the corporation has a personality distinct and separate from those of
said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name, with a distinct legal entity. In
organizing itself as a collective it waives no constitutional immunities appropriate for such body. Its property
cannot be taken without compensation; can only be proceeded against by due process of law; and is protected
against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).

c. Not Entitled to Privilege Against Self Incrimination

“It is elementary that the right against self-incrimination has no application to juridical persons..” Bataan
Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987)
A corporation is but an association of individuals under an assumed name, with a distinct legal entity. In
organizing itself as a collective it waives no constitutional immunities appropriate for such body. Its property
cannot be taken without compensation; can only be proceeded against by due process of law; and is protected
against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity
statute, a corporation, vested with special privileges and franchises by the State, may not refuse to show its hand
when charged with an abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906).14
3. Generally, Not Entitled to Practice a Profession
Corporations cannot engage in the practice of a profession since they lack the moral and technical competence
required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice
of optometry. Samahan ng Optometrists v. Acebedo Int’l Corp., 270 SCRA 298 (1997).15

12
 COUNTER-REVOLUTION: Section 37 of the Architecture Act of 2004 (R.A. 9266), allows the registration with the
SEC of “Architectural professional corporations”.
4. Corporations Not Entitled to Moral and Other Damages
Being an artificial person, a corporation cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are bases for moral damages under Art. 2217
of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for
the award of moral damages. Mambulao Lumber Co. v. PNB, 22 SCRA 359 (1968);16 San Fernando Regala
Trading v. Cargill Philippines, 707 SCRA 187 (2013).
BUT: The statements in Manero and Mambulao Lumber that a corporation may recover moral damages if it
“has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. Recovery of a
corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or
bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).
NONETHELESS: An corporation’s claim for moral damages arising from libel falls under Article 2219(7) of the
Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other form
of defamation, and does not qualify whether the plaintiff is a natural or juridical person. A juridical person can
validly complain for libel or any other form of defamation and claim for moral damages. Filipinas Broadcasting
Network v. Ago Medical and Educational Center, 448 SCRA 413 (2005).
PREVAILING RULE (?): A corporation, being an artificial person has no feelings, emotions nor senses; therefore,
it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by
an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); Employees Union of Bayer Phils.
V. Bayer Philippines, Inc., 636 SCRA 473 (2010).17

5. Corporations Can Be Held Liable for Torts/Quasi-Delicts

A corporation is civilly liable for torts in the same manner as natural persons, because the rules governing the
liability of a principal for a tort committed by an agent are the same whether the principal be a natural person or a
corporation, and whether the agent be a natural or artificial person. PNB v. Court of Appeals, 83 SCRA 237
(1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a breach of
a legal duty. The failure of the corporate employer to comply with the duty under the Labor Code to grant
separation pay to employees in case of cessation of operations constitutes tort and its stockholder who was actively
engaged in the management or operation of the business should be held personally liable. Sergio F. Naguiat v.
NLRC, 269 SCRA 564 (1997).
6. Generally, No Corporate Criminal Liability (Arts. 102 and 103, Revised Penal Code)

Article 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of

establishments. - In default of the persons criminally liable, innkeepers, tavernkeepers, and any
other persons or corporations shall be civilly liable for crimes committed in their establishments,
in all cases where a violation of municipal ordinances or some general or special police regulation
shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within
their houses from guests lodging therein, or for the payment of the value thereof, provided that
such guests shall have notified in advance the innkeeper himself, or the person representing him,
of the deposit of such goods within the inn; and shall furthermore have followed the directions
which such innkeeper or his representative may have given them with respect to the care and
vigilance over such goods. No liability shall attach in case of robbery with violence against or
intimidation of persons unless committed by the innkeeper's employees.

Article 103. Subsidiary civil liability of other persons. - The subsidiary liability established in the
next preceding article shall also apply to employers, teachers, persons, and corporations engaged
in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or
employees in the discharge of their duties.

13
 a. No Criminal Suit Can Lie Against a Corporation:
Corporations cannot be held criminally liable within Philippine jurisdiction since there is no law relating to the
practice and procedure in criminal actions whereby a corporation may be brought to court to be proceeded against
criminally. West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914).18
However, a corporation can be a real-party- in-interest for the purpose of bringing a civil action for malicious
prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer.
Cometa v. Court of Appeals, 301 SCRA 459 (1999).
b. Stockholders Per Se Cannot Be Held Liable for a Corporate Criminal Act
Stockholders, being “owners” of the corporation or being basically investors in the corporation, and with the
management of its business generally vested in the Board of Directors, cannot be held liable for the criminal
offense committed on behalf of the corporation, unless they personally took part in the same. Espiritu v. Petron
Corp., 605 SCRA 245 (2009).
c. It Is the Acting Officers Who Shall Be Criminally Liable for the Criminal Corporate Act
A criminal statute that forbids the corporation from doing an act actually extends to the Board, and to each
director separately and individually. People v. Concepcion, 44 Phil. 129 (1922)

A corporation can act only through its officers and agents, and where the business itself involves a violation of
the law, the correct rule is that all who participate in it are liable. Thus, when the manager of a corporation made a
false tax return of the total amount of sales made by said corporation in violation of law, it is such manager, as the
author of the illegal act, who must necessarily answer for the criminal penalties for its consequences. People v.
Tan Boon Kong, 54 Phil. 607 (1930).19
Although all corporate powers are vested in the Board of Directors, it does not mean that the officers other than
directors cannot be made criminally liable for their criminal acts if it can be proven that they participated therein.
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005).
Apart from its sweeping allegation petitioner failed to establish the particular role or actual participation of
directors in the criminal act; neither was it shown that they assented to its commission. Only officers shown to
have participated in the alleged anomalous acts may be held criminally liable. Cruzvale, Inc. v. Eduque, 589 SCRA
534 (2009).
The existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime. The corporation obviously can act only by and through its
human agents, and it is their conduct which the law must deter. The employee or agent of a corporation engaged in
unlawful business naturally aids and abets in the carrying on of such business and will be prosecuted as principal
if, with knowledge of the business, its purpose and effect, he consciously contributes his efforts to its conduct and
promotion, however slight his contribution may be. Where it is shown that the employee was merely acting under
the direction of his superiors and was unaware that his acts constituted a crime, he may not be held criminally
liable for an act done for and in behalf of his employer. People v. Chowdury, 325 SCRA 572 (2000).
If the crime is committed by a corporation, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the
crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may
be prosecuted and, if found guilty, may be fined. Ching v. Secretary of Justice, 481 SCRA 602 (2006).
Prior to the passage of Trust Receipts Law, a corporate officer who signs the trust receipt could not be held
criminally liable for estafa punished under the Revised Penal Code, for his criminal liability could not be proven
beyond reasonable doubt under the doctrine that “the corporation was [not] directly required by law to do an act in
a given manner, and the same law makes the person who fails to perform the act in the prescribed manner
expressly liable criminally.” Sia v. CA, 121 SCRA 655 (1983).
The Trust Receipts Law now recognizes the impossibility of imposing the penalty of imprisonment on a
corporation, hence, the law makes the officers or employees responsible for the offense liable to suffer the penalty
of imprisonment. Ong v. CA, 401 SCRA 647 (2003).20

7. CORPORATE NATIONALITY
a. Primary “Place of Incorporation Test ” (Sec. 123): The corporation is a national of the country under whose
laws it is organized or incorporated.

14
 Section 123. Definition and rights of foreign corporations. – For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own
country or state. It shall have the right to transact business in the Philippines after it shall have
obtained a license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency. (n)

b. Ancillary “Control Test ”: In cases involving properties, business or industries reserved for Filipinos, in
addition to the place of incorporation test, the nationality of a corporation is determined by the nationality of
the “controlling stockholders”.
c. Sub-Sets of the Control Test:
(1) Original DOJ-SEC Grandfather Rule: For purposes of investment holdings, shares belong to
corporations at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality; but if the percentage of Filipino ownership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality.
DOJ-SEC Rule: Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989,
XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC
QUARTERLY BULLETIN (No. 2 -June 1990).
The SEC Legal Counsel overturned the use of the formula “60%-or-more-equals-100%-Filipino-
ownership,” thus0: “Accordingly, we opine that we must look into the citizenship of the individual stockholders,
i.e., natural persons, of that investor -corporation in order to determine if the Constitutional and statutory restrictions
are complied with. If the shares of stock of the immediate investor corporation is in turn held and controlled by
another corporation, then we must look into the citizenship of the individual stockholders of the latter corporation. In
other words, if there are lawyers of intervening corporations investing in a mining joint venture, we must delve into
the citizenship of the individual stockholders of each corporation. This is the strict application of the grandfather rule,
which the Commission has been consistently applying prior to the 1990s. (SEC-OGC Opinion No. 10-31, dated 09 )
FIA Test of Philippine National: Sec. 3(a) & (b) of FIA (R.A. 7042), considers for purpose of investment a
“Philippine National” as corporation organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by Filipino citizens, or a trustee of funds for
pension or other employee retirement/separation benefits, where the trustee is a Philippine National and at
least 60% of the fund will accrue to the benefit of Philippine nationals.21
Under Sec. 3 of FIA ’91, a corporation organized under Philippine laws of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by Filipino citizens, is a Philippine National,
and can hold disposable land in the Philippines. Unchuan v. Lozada, 585 SCRA 421 (2009).
(3) New SEC Control Test: The Constitution “provides for the Filipinization of public utilities by requiring that
any form of authorization for the operation of public utilities should be granted only to ‘citizens of the
Philippines or to corporation or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens.’ The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national economy and for national security .”
The evident purpose of the citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest. … the term “capital” in Sec. 11, Art. XII of the
Constitution should (a) the control test that covers only shares of stock entitled to vote in the election of
directors, and (b) the beneficial interest test that shall apply to each and every class of shares, voting and non-
voting. Gamboa v. Teves, 652 SCRA 690 (2011), expanded in 682 SCRA 397 (2012).
As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s. 2013, was issued and
provides that: All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement in that “the required percentage of Filipino ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number
of outstanding shares of stock, whether or not entitled to vote in the election of directors.” Affirmed in Roy
III v. Herbosa, 810 SCRA 1 (2016).
The definition of “beneficial owner or beneficial ownership in the SRC-IRR, which is in consonance with
the concept of “full beneficial ownership” in the FIA-IRR, is relevant is resolving only the question of who is
the beneficial owner or has beneficial ownership of each “specific stock” of the public utility whose stocks
are under review. If the Filipino has the voting power of the “specific stock”, i.e., he can vote the stock or
direct another to vote for him, or the Filipino has the investment power over the “specific stock”, i.e., he can
dispose of that “specific stock” or direct another to vote or dispose it for him, then such Filipino is the
“beneficial owner” of that “specific stock.” Being considered Filipino, that “specific stock” is then to be

15
 counted as part of the 60% Filipino ownership requirement under the Constitution. The right to the dividends,
jus fruendi—a right emanating from ownership of that “specific stock” necessarily accrues to its Filipino
“beneficial owner.” Roy III v. Herbosa, G.R. No. 207246 (Resolution), 18 April 2017.
d. Unlawful “Corporate Layering”
The grandfather rule can only extend to such limited as to those who have actual control of the affairs of the
corporation. Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966).
Although the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of 1987 Constitution are entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines; however, when there is doubt in the minds of
the court, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the “grandfather rule.” Narra Nickel
Mining v. Redmont Consolidated Mines, 722 SCRA 382 (2014).
Application of the “grandfather rule” does not eschew the “control test”, but that in fact is supplements the
control test, as implements the intent of the Filipinization provisions of the Constitution. There should be a distinction
between the “beneficial ownership” test from the “control test”. x x x As further defined by Dean Cesar Villanueva,
the Grandfather Rule is ‘the method by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization
laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or
even subsequent tier of ownership to determine the nationality of the corporate shareholder.’ Narra Nickel Mining
and Development Corp. v. Redmont Consolidated Mines Corp., (Resolution), 748 SCRA 455 (2015), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW (2011 ed.).

e. APPLICATIONS OF THE CONTROL TEST

(1) In Times of War – Domestic corporations under the control of nationals of the enemy country are deemed
foreign enemy corporations. Haw Pia v. China Banking Corp., 80 Phil. 604 (1948).22
(2) Exploitation of Natural Resources (Sec. 2, Art. XII, 1987 Constitution)

Section 2. The State may directly undertake such activities [exploration, development, and
utilization of natural resources], or it may enter into co-production, joint venture, or production-
sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum
of whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, beneficial use may be the
measure and limit of the grant.

The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea, and
exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens,
as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in
rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions provided
by law, based on real contributions to the economic growth and general welfare of the country. In
such agreements, the State shall promote the development and use of local scientific and technical
resources.

(3) Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution) –

16
 SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain.

The donation of land to an unincorporated religious organization, whose trustees are foreigners, would
violate constitutional prohibition and the refusal would not be in violation of the freedom of religion clause. The fact
that the religious association “has no capital stock does not suffice to escape the constitutional inhibition, since it is
admitted that its members are of foreign nationality. . . and the spirit of the Constitution demands that in the absence
of capital stock, the controlling membership should be composed of Filipino citizens.” Register of Deeds of Rizal
v. Ung Sui Si Temple, 97 Phil. 58 (1955).
BUT: A corporation sole being a creature prior to the constitution, has no nationality. If a nationality is sought to be
determined, the same depends of the nationality of the majority of the lay members and not on the nationality of the
sole corporator. Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of
Davao, 102 Phil. 596 (1957).
If foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign stockholders’ ownership
of the shares which is adversely affected by the capacity of the corporation to own land—that is, the corporation
becomes disqualified to own land. The prohibition in the Constitution applies only to ownership of land; it does not
extend to immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have a
strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to the
land would be limited to Filipinos and Filipino corporations only. J.G. Summit Holdings, Inc. v. Court of Appeals,
450 SCRA 169 (2005).
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not qualified to
own land in the Philippines, and therefore also disqualified to own the rights to ownership of lands in the Philippines
—it is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or
the rights to the ownership, are to be transferred to the assignee or buyer. The assignment by PNCC of the real
properties to a nominee to be designated by Radstock is a circumvention of the constitutional prohibition against a
private foreign corporation owning lands in the Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities
Ltd., 607 SCRA 413 (2009).
The nationality of a non- stock corporation in relation to the constitutional provision on land acquisition is
computed not on membership contribution but that the 60-40 minimum Filipino requirement applies to both the
nationality of the members, and their voting powers. SEC Opinion No. 16-15, 1 June 2016.
(4) Public Utilities (Sec. 11, Art. XII, Constitution)

SECTION 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body
of any public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the
Philippines.

The nationality test for public utilities applies not at the time of the grant of the primary franchise that makes a
corporation a juridical person, but at the grant of the secondary franchise that authorizes the corporation to engage in
a nationalized industry. People v. Quasha, 93 Phil. 333 (1953).
The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the corporation
and not in the corporation itself and cannot be conveyed in the absence of a legislative authority to do so. The
secondary franchises are vested in the corporation and may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).
When the lease mandates contribution into the venture on the part of the purported lessee, and makes the lessee
participate not only in the revenues generated from the venture, and in fact absorb most of the risks involved therein,
a joint venture arrangement has really been constituted between the purported lessor and lessee, since under the Law
on Partnership, whenever there is an agreement to contribute money, property or industry to a common fund, with an
17
 agreement to share the profits and losses therein, then a partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232
SCRA 110 (1994).
The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the
public. There is a clear distinction between “operation” of a public utility and the ownership of the facilities used to
serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995).
(5) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution; P.D. 36, amended by P.D.s 191 and 197; Sec. 2, P.D. 576;
DOJ Opinion 163, s. 1973; DOJ Opinion No. 120, s. 1982; SEC Opinion, 24 March 1983; SEC Opinion, 15 July
1991, XXV SEC QUARTERLY BULLETIN, (No. 4 - December, 1991), p. 31.)

SECTION 11. (1) The ownership and management of mass media shall be limited to citizens of
the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by
such citizens.

The Congress shall regulate or prohibit monopolies in commercial mass media when the public
interest so requires. No combinations in restraint of trade or unfair competition therein shall be
allowed.

(6) Industry : “Cable TV operations shall be governed by E.O. No. 205 (s.1987). If CATV operators offer public
telecommunications services, they shall be treated just like a public telecommunications entity.” (NTC Memo
Circular
(7) No. 8-9-95)
(8) Cable TV is “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or
corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate
of the Constitution.” (DOJ Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v. Federal Communications
Commission, 435 F.2d 70).
(7) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

(2) The advertising industry is impressed with public interest, and shall be regulated by law for the
protection of consumers and the promotion of the general welfare.

Only Filipino citizens or corporations or associations at least seventy per centum of the capital of
which is owned by such citizens shall be allowed to engage in the advertising industry.

The participation of foreign investors in the governing body of entities in such industry shall be
limited to their proportionate share in the capital thereof, and all the executive and managing
officers of such entities must be citizens of the Philippines.

e.Limitations of Stock Ownership in Corporations Vested with Public Interests (Sec. 140)

18
 Section 140. Stock ownership in certain corporations. – Pursuant to the duties specified by Article
XIV of the Constitution, the National Economic and Development Authority shall, from time to
time, make a determination of whether the corporate vehicle has been used by any corporation or
by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to
the Batasang Pambansa, whenever deemed necessary, a report of its findings, including
recommendations for their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared
by it to be vested with a public interest pursuant to the provisions of this section, belonging to
individuals or groups of individuals related to each other by consanguinity or affinity or by close
business interests, or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national economic policies
declared in laws, rules and regulations designed to promote the general welfare and foster
economic development.

In recommending to the Batasang Pambansa corporations, businesses or industries to be declared

vested with a public interest and in formulating proposals for limitations on stock ownership, the
National Economic and Development Authority shall consider the type and nature of the industry,
the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the export potential, as well as other factors which
are germane to the realization and promotion of business and industry.

IV. SEPARATE JURIDICAL PERSONALITY AND THE DOCTRINE

OF PIERCING THE VEIL OF CORPORATE FICTION
A. MAIN DOCTRINE: A Corporation Has a Personality Separate and Distinct from Its Directors or Trustees, Officers,
Its Stockholders or Members (Sec. 2; Art. 44, Civil Code)
A corporation is a juridical entity with a legal personality separate and distinct from the people comprising it,
hence, assets of the stockholders may not be considered as assets of the corporation, and vice-versa. Situs Dev.
Corp. v. Asiatrust Bank, 677 SCRA 495 (2012).
A corporation, upon coming into existence, is invested by law with a personality separate and distinct from
those persons composing it as well as from any other legal entity to which it may be related, with the following
consequences:
(a) It may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which
it may be connected or vice versa. General Credit Corp. v. Alsons Dev. and Investment Corp., 513
SCRA 225 (2007).23
(b) Such fiction is, however, merely a fiction created by law for conveyance and to promote the “ends of
justice.” LBP v. Court of Appeals, 364 SCRA 375 (2001).24

1. APPLICATIONS OF THE MAIN DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

a. GENERAL RULE: Corporate Representatives Do Not Become Personally Liable for Corporate Contracts That
They Enter Into in Behalf of the Corporation
A consequence of a corporation’s separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations, incurred through official acts of its
representatives, are its own. A stockholder, director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder, director or representative. Hence, a
corporation's representatives are generally not bound by the terms of the contract executed by the corporation.
They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation. Lanuza,
Jr. v. BF Corp., 737 SCRA 275 (2014).25
b. Majority Equity Ownership and Interlocking Directorship:
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of the
corporation is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other than
mere ownership of capital stocks, circumstances showing that the corporation is being used to commit fraud or

19
 proof of existence of absolute control over the corporation have to be proven. In short, before the corporate fiction
can be disregarded, alter-ego elements must first be sufficiently established.
ü Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).26
Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors
of another corporation creates no employer-employee relationship with the latter’s employees. DBP v. NLRC, 186
SCRA 841 (1990).27
The majority stockholder cannot be held personally liable for the attorney’s fees charged by a lawyer for
representing the corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil
of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422
(2004).28
c. On Being an Acting Corporate Officer:
Being an officer or stockholder of a corporation does not by itself make one’s property also that of the
corporation, and vice-versa, for they are separate entities, and that shareholders who are officers are in no legal
sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth
Emporium, Inc. v. CA, 194 SCRA 544 (1991).29
It is hornbook law that corporate personality is a shield against personal liability of its officers—a corporate officer
and his spouse cannot be made personally (civilly) liable under a trust receipt where he entered into and signed the
contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001).
The mere fact that one is President does not render the property he owns the property of the corporation, since
the president, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987);
Booc v. Bantuas, 354 SCRA 279 (2001).
The President of the corporation which becomes liable for the accident caused by its truck driver cannot be
held solidarily liable for the judgment obligation arising from quasi-delict, since the fact alone of being President
is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation. Secosa v. Heirs of
Erwin Suarez Fancisco, 433 SCRA 273 (2004).
Since a corporation has a distinct juridical personality, when the compulsory counterclaim filed against
corporate officers for their alleged fraudulent act indicate that such corporate officers are indispensable parties in
the litigation, the original inclusion of the corporation in the suit does not thereby allow the denial of a specific
counter-claim being filed to make the corporate officers personally liable. Lafarge Cement Phils., Inc. v.
Continental Cement Corp., 443 SCRA 522 (2004).
d. On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to nor
enjoyed even by the controlling stockholders. Manila Gas Corp. v. CIR, 62 Phil. 895 (1936).
e. Obligations and Debts:
Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of
the corporation. Traders Royal Bank v. CA, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but
of the corporation they represent. Crisologo v. People, 686 SCRA 782 (2012).31
The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a
second corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v.
Court of Appeals, 272 SCRA 333 (1997).
A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members
in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan
v. Araneta, Inc., 72 SCRA 347 (1976).
Stockholders have no personality to intervene in a collection case covering the loans of the corporation since
the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-
versa. Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).
A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it has
obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for they are separate
juridical persons, and thus their separate business and proprietary interests remain. Silverio, Jr. v. Filipino
Business Consultants, Inc., 466 SCRA 584 (2005).
Stockholders are not the real parties in interest to claim and recover compensation for the damages arising from
the wrongful attachment of the assets of the corporation. Stronghold Insurance Co. v. Cuenca,
692 SCRA 473 (2013).

B. PIERCING THE VEIL OF CORPORATE FICTION

1. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
20
 The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as
identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v.
Young, 354 SCRA 207 (2001).32
The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced
when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair
objectives or to shield an otherwise blatant violation of the prohibition against forum-shopping. While it is settled
that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when
necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the
contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud,
or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be
disregarded in the interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances, there must have been
fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrong-doing
must be clearly and convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc.,
506 SCRA 256 (2006).
2. Current Attitude of the Courts to the Piercing Doctrine:
While courts have authority to wield the sword which pierces through the veil of corporate fiction, concomitant to
the exercise of this power, is the responsibility to uphold the doctrine of separate entity, when rightly so; as it has
for so long encouraged businessmen too enter into economic endeavors fraught with risks and where only a few
dared to venture. Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights.
The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application. Pacific Rehouse Corp. v. Court of Appeals, 719
SCRA 665 (2014).33
3. Objectives and Effects of the Application of the Piercing Doctrine
The main effect of disregarding the corporate fiction is that stockholders will be held personally liable for the
acts and contracts of the corporation, whose existence, at least for the purpose of the particular situation involved,
is ignored. Thus, considering that We find it justified to pierce the corporate veil in the case before Us, MPEI must,
perforce, be treated as a mere association of persons whose assets are unshielded by corporate fiction. Such
persons’ individual liability shall now be determined with respect to the matter at hand. Republic v. Mega Pacific
eSolutions, Inc., 794 SCRA 414 (2016).
Under the doctrine of “piercing the veil of corporate fiction,” the courts look at the corporation as a mere
collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group. Traders Royal Bank v. Court of Appeals, 269 SCRA
15 (1997).34
Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same.
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).35
a. Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not allowed unless the remedy
sought is to make the officer or another corporation pecuniarily liable for corporate debts.
(?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
BUT SEE: La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been
reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation.” (?) Francisco Motors Corp. v Court of
Appeals, 309 SCRA 72 (1999).
b. Applicable to “Third-Parties”: That respondents are not stockholders of record does not make them non-
parties, since it is alleged that the sister corporations are mere alter egos of the directors-petitioners, and that the
sister corporations acquired the properties sought to be reconveyed to FGSRC in violation of directors-
petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals
composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or

21
 illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit
of the stockholders. Gochan v. Young, 354 SCRA 207 (2001).

4. Piercing Doctrine Is Soley an “Equitable Remedy”: Piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).36 CONSEQUENTLY:
a. It Is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when
other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529 (1990).
b. Can Be Availed-of Only to Prevent Fraud or to Achieve an Equitable End:
Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to
perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them.
Villanueva v. Adre, 172 SCRA 876 (1989).
The creation by DBP as the mother company of the three mining corporations to manage and operate the
assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value, does not indicate
fraud or wrongdoing and will not constitute application of the piercing doctrine. DBP v. Court of Appeals, 363
SCRA 307 (2001).
c. Not Applicable to Theorize or to Advance/Create New Rights or Interest: Piercing of the veil of corporate
fiction cannot be resorted under a theory of co-ownership to justify continued use and possession by
stockholders of corporate properties. Boyer-Roxas v. CA, 211 SCRA 470 (1992).

Piercing cannot be availed of in order to dislodge from SEC’s jurisdiction a petition for suspension of payments
filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to
the exclusion of the petitioning corporate debtor: “doctrine only applies when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court of Appeals, 290
SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company cannot be
allowed to support a theory of set-off or compensation, there being no allegation much less any proof of fraud.
Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
An employee who officially retired and availed of her retirement benefits, but who continued to be
employed as a consultant with affiliate companies, cannot employ piercing in order to treat her stint with the
affiliate companies as part of her employment with the main company she retired from—there is no fraud or
employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009).
BUT SEE: Where clear evidence support the fact that a corporation’s affiliates have received large amounts
which became the consideration for the company’s execution of a real estate mortgage over its properties, then
the piercing doctrine shall be applied to support the fact that the real estate mortgage was valid and supported
by proper consideration. Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
d. Piercing Must Therefore Be Based on Clear Evidence:
To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot
be presumed and must be clearly and convincingly established. Application of the doctrine of piercing should
be done with caution. The wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never intended may result from an erroneous application. PNB v. Andrada
Electric & Engineering Co., 381 SCRA 244 (2002).37 CONSEQUENTLY:
• Organization of the corporation when the relationship between the landowner and the developer were still cordial
cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the
developer under the mere allegation that the corporation is being used to evade the performance of obligation by
its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).
• In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the
piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001).38
• Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even assuming that the businesses
of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate
personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third
persons of their rights. Francisco v. Mejia, 362 SCRA 738 (2001).39
• The mere assertion by a Filipino litigant against the existence of a “tandem” between two Japanese corporations
cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing
evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

22
 The question of whether a corporation is a mere alter ego is purely one of fact, and the party seeking to
pierce has the burden of presenting clear and convincing evidence to justify the setting aside of the separate
corporate personality rule. Concept Builder, Inc. v. NLRC, 257 SCRA 149 (1996).40
e. Piercing Is a Power Belonging to the Courts and Cannot Be Assumed Improvidently by a Sheriff. Cruz v.
Dalisay, 152 SCRA 482 (1987); D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
f. Piercing Has Only Res Judicata Effect: Application of the doctrine to a particular case does not deny the
corporation of legal personality for any and all purposes, but only for the particular transaction or instance, or
the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).41

5. CLASSIFICATION OF PIERCING CASES:

• FRAUD PIERCING: When corporate entity used to commit a crime, to undertake fraud or do a wrong, or that
the corporate veil is used as a means to evade the consequences of one’s criminal or fraudulent acts
• ALTER-EGO PIERCING: When corporate entity merely a farce since the corporation is merely the alter ego,
business conduit, or instrumentality of a person or another entity
• DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate corporate
personality would be inconsistent with the business purpose of the legal fiction or would merely confuse
legitimate issues, or when piercing the corporate fiction is necessary to achieve justice or equity for those
who deal in good faith with the corporation.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and
isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of
public convenience, as when the corporation is used as vehicle for the evasion of existing
Obligation; 2) 2) fraud cases or when the corporate entity is used to justify wrong, protect fraud, or defend a crime;
or 3) alter ego cases, where the corporation is merely a farce since it is a 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.
ü General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007),42 citing VILLANUEVA,
COMMERCIAL LAW REVIEW (2004 ed.), at p. 576.
a. Rundown on Piercing Application: This Court has pierced the corporate veil to ward off a judgment credit, to
avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or
to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up
an otherwise blatant violation of the prohibition against forum shopping. Only in these and similar instances
may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
b. Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).43 The absence of
these elements prevents piercing the corporate veil. Lim v. CA, 323 SCRA 102 (2000).44

6. FRAUD PIERCING CASES:

When the separate corporate personality is abused, such as when it is used for fraudulent or wrongful ends, the
courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil
of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and
personally liable for his or her actions. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522
(2004). However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot warrant
the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307
(2001).
The general rule is that obligations incurred by a corporation, acting through its directors, officers or
employees, are its sole liabilities; however, there would be piercing of the veil when the corporation is used by any
of them as a cloak or cover for fraud or illegality or injustice. Here, the fraud was committed by petitioners to the
prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
The attempt to make the security agencies appear as two separate entities, when in reality they were but one,
was a devise to defeat the law [i.e. , in this case to avoid liabilities under labor laws] and should not be permitted.
Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006).
Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used for fraudulent
or wrongful ends. For reasons discussed below, We see red flags of fraudulent schemes in public procurement, all
of which were established in the 2004 Decision, the totality of which strongly indicate that MPEI was a sham
corporation formed merely for the purpose of perpetrating a fraudulent scheme. Republic v. Mega Pacific
eSolutions, Inc., 794 SCRA 414 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW, p. 105 (2013 Ed.)
a. Acts by Controlling Stockholders:
The fact alone that a corporation owns all of the stocks of another corporation does not justify their being
treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected,
23
 and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in their
respective business. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).45
Where a stockholder, who has absolute control over the affairs of the corporation, entered into a contract with
another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-
defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v.
Associated Finance Co., 19 SCRA 962 (1967).
Where the corporation is used as a means to appropriate a property by fraud which property was later resold to
the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr.
v. Uy, 344 SCRA 238 (2000).
Piercing will be applied in the present case when there is an indubitable link between CBB’s closure and
Binswanger’s incorporation: CBB ceased to exist only in name; it re-emerged in the person of Binswanger to
avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well as its other
financial liabilities. Livesey v. Binswanger Philippines, 719 SCRA 433 (2014).
b. Tax Evasion or Fraud:
In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is
merely an adjunct, business conduit or alter ego of another corporation or when they practice fraud on internal
revenue laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both entities
treated as one taxable person, subject to assessment for the same taxable transaction. Commissioner of Internal
Revenue v. Menguito, 565 SCRA 461 (2008).

c. Shell or Fictitious Company

“Fictitious” companies are by definition fraudulent and may also serve as fronts for government officials. The
typical scheme involves corrupt government officials creating a fictitious company that will serve as a ‘vehicle’ to
secure contract awards. Often, the fictitious—or ghost—company will subcontract work to lower cost and
sometimes unqualified firms. The fictitious company may also utilize designated losers as subcontractors to deliver
the work, thus indicating collusion.” They have no significant assets, staff or operational capacity. They pose a
serious red flag as a bidder on public contracts, because they often hide the interests of project or government
officials, concealing a conflict of interest and opportunities for money laundering. Republic v. Mega Pacific
eSolutions, Inc., 794 SCRA 414 (2016).
d. Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
• There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the
corporation by itself would not authorize piercing;
• Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof; and
• The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against
corporate officers or stockholders.
Two corporations may engage in the same business, share the same address, or have interlocking incorporators,
directors or officers, but in the absence of fraud or other public policy consideration, does not warrant piercing the
veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222 (2007).46
Mere substantial identity of incorporators does not necessarily imply fraud, nor warrant the piercing of the
corporate veil. In the absence of clear and convincing evidence to show that the corporate personalities were used
to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from
each other. Laguio v. NLRC, 262 SCRA 715 (1996).47

7. ALTER EGO PIERCING CASES:

a. Distinguishing Alter Ego Piercing from Fraud Piercing: Unlike in fraud piercing, alter ego piercing does not
require that evidence of fraud or wrongdoing be established, but only that the corporate personality has been used
as an instrumentality for the personal agenda of its controlling stockholder.
Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
b. Using Corporation as Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit of such individual owner,
the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634
(1923).
When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of
separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205
(1988).48
A corporation has a personality separate and distinct from the persons composing it, as well as from any other
legal entity to which it may be related. Equally well-settled is the principle that the corporate mask may be

24
 removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another
corporation. Sarona v. NLRC, 663 SCRA 394 (2012).
c. Mixing-up Operations; Disrespect to the Corporate Entity
Mixing of personal accounts with corporate bank accounts would authorize piercing to protect the judgment
creditors. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot
be used as the basis to pierce: “It is understandable that a shareholder would want to help his corporation and in
the process, assure that his stakes in the said corporation are secured.”
ü LBP v. Court of Appeals, 364 SCRA 375 (2001).
Where two business enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third persons, disregard their separate legal fictions and treat them as
identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
Employment of same workers; single place of business, etc., may indicate alter ego situation. éLa Campana
Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); Shoemart v. NLRC, 225 SCRA 311 (1993).
The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose shares are wholly
if not almost wholly owned by its parent company. The structural and systems overlap inherent in parent and
subsidiary relations often render the subsidiary as a mere local branch, agency or adjunct of the foreign parent.
Thus, when the foreign parent company leased a large parcel of land purposely for the benefit of its subsidiary,
which took over possession of the leased premises, the Subsidiary was a mere alter ego of ESSO Eastern. Mariano
v. Petron Corp., 610 SCRA 487 (2010).
d. Guiding Principles in Alter-Ego Cases:
• Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law
principle of separating ownership from management;
• Doctrine in such cases is based on estoppel: if stockholders do not respect the separate entity, others cannot also be
expected to be bound by the separate juridical entity;
• Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the
stockholders or officers of the corporation.
HOWEVER: The mere existence of a parent-subsidiary relationship between two corporation, or that one
corporation is affiliated with another company does not by itself allow the application of the alter-ego piercing
doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946).49
Just because two foreign companies came from the same country and closely worked together on certain
projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction.
Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce, since by that
practice alone does it mean that the said corporation is merely a dummy of the individual stockholder, provided
such act is lawful. LBP v. Court of Appeals, 364 SCRA 375 (2001).
If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liabilities
of the parent corporation and the subsidiary will be confined to those arising in their respective businesses. Even
when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary,
does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA
617 (2002).50
A subsidiary corporation has an independent and separate juridical personality, distinct from that of its parent
company, hence, any claim or suit against the latter does not bind the former and vice-versa. Jardine Davies, Inc.
v. JRB Realty, Inc., 463 SCRA 555 (2005).51

8. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): Juridical Personality Cannot Be Employed To:
a. Confuse Legitimate Issues: Telephone Eng’ring and Service Co. v. WCC, 104 SCRA 354 (1981).
b. Raise Legal Technicalities: Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co.,
5 SCRA 1011 (1962).52
Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to
live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse
the legitimate issues (as in this case where the actions of management of the two corporations created confusion as
to the proper employer of claimants), the two corporations would be merged as one. Azcor Manufacturing, Inc. v.
NLRC, 303 SCRA 26 (1999).

25
 The corporate veil cannot be used to blatantly violate the prohibition against forum-shopping. Where the
corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and
applying remedies available to it, then shareholders, whether suing as the majority in direct actions or as the
minority in a derivative suit, cannot be allowed to pursue the same claims. First Philippine International Bank v.
Court of Appeals, 252 SCRA 259 (1996).
c. The Case for Thinly-Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961).
The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means perpetrated upon
the investing public who were made to believe that ASBHI had the financial capacity to repay the loans it enticed
petitioners to extend, despite the fact that the deficient capitalization evidenced by its articles of incorporation, the
treasurer’s affidavit, the audited financial statements. “Moreover, respondent’s argument assumes that there is legal
obligation on the part of petitioners to undertake an investigation of ASBHI before agreeing to provide the loans.
There is no such obligation. It is unfair to expect a person to procure every available public record concerning an
applicant for credit to satisfy himself of the latter’s financial standing. At least, that is not the way an average
person takes care of his concerns.” Gabionza v. Court of Appeals, 565 SCRA 38 (2008).
Where the corporation was under the control of its stockholders who ran-up quite a high obligation with the
printing company knowing fully well that their corporation was not in a position to pay for the accounts, and where
in fact they personally benefited from the operations of the company to which they never paid their subscription in
full, would constitute piercing of the veil to allow the creditor to be able to collect what otherwise were debts owed
by the company which has no visible assets and has ceased all operations. Halley v. Printwell, Inc. 649 SCRA
116 (2011).
d. Avoidance or Minimization of Taxes:  Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961);
Liddel & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).

Use of nominees to constitute the corporation for the benefit of the controlling stockholder who sought to avoid
payment of taxes. Marvel Building v. David, 9 Phil. 376 (1951).
The plea to pierce the veil of corporate fiction on the allegation that the corporations’ true purpose is to avoid
payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: “With
regard to their claim that [the companies] Ellice and Margo were meant to be used as mere tools for the avoidance
of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be
his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).
HOWEVER: The mere existence of parent-subsidiary relations, or the fact that one corporation is affiliated with
another corporation does not justify piercing based on serving public convenience. Comm. of Internal Revenue v.
Norton and Harrison, 11 SCRA 704 (1954).53
e. Promotion of Social Justice
We have applied the piercing doctrine in cases where the employees are put in a disadvantageous position as a
result of the separate juridical personalities of the employers involved. These rulings were made pursuant to the
fundamental doctrine that corporate fiction should not be used as a subterfuge to commit injustice and circumvent
labor laws. While there is no prohibition on the mere act of engaging in a work-pooling scheme as sister
companies, that act will not be tolerated, and the sister companies’ separate juridical personalities will be
disregarded, if they use that scheme to defeat the workers right to collective bargaining. The employees’ right to
collectively bargain with their employees is necessary to promote harmonious labor-management relations in the
interest of sound and stable industrial peace. Lee v. Samahang Manggagawa ng Super Lamination, 809 SCRA 313
(2016).

9. Piercing Doctrine and the Due Process Clause

a. Suit Against Individual Shareholders Is Not a Suit Against the Corporation That Would Allow the Piercing
Doctrine to Be Applied: Failure to implead the corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of due process for it would in effect be disregarding their distinct and
separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both trial and appellate courts found sufficient basis for the conclusion that PKA and Phoenix Omega
were one and the same, and the former is merely a conduit of the other the Supreme Court held void the
application of a writ of execution on a judgment held only against PKA, since the RTC obtained no jurisdiction
over the person of Phoenix Omega which was never summoned as a formal party to the case. The general principle
is that no person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not
bound by the judgment rendered by the court.
ü Padilla v. Court of Appeals, 370 SCRA 208 (2001).
Piercing the veil of corporate fiction is applied only to determine established liability; it is not available to
confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in the case. The
doctrine comes into play only during the trial of the case after the court has already acquired jurisdiction over the

26
 corporation; hence, before this doctrine can be even applied based on the evidence presented, it is imperative that
the court must first have jurisdiction over the corporation. Mayor v. Tiu, 810 SCRA 256 (2016).
b. When Corporate Officers Are Sued in Their Official Capacity, the Corporation Which Was Not Made a Party,
Is Not Denied Due Process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
c. To Make Acting Officers Personally Liable under the Piercing Doctrine, Is There a Need to Bring a New Case
Against the Officer? McConnel v. Court of Appeals, 1 SCRA 723 (1961).
There is no denial of due process to hold officers liable under the piercing doctrine, provided that evidential
basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211
(1991).
We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), where we found lawful the CA’s
act of applying the piercing doctrine of the corporation and holding its president, Arcilla, liable for the obligations
incurred in the name of the corporation although it was not a party to the collection suit before the trial court.
Violago v. BA Finance Corp., 559 SCRA 69 (2008).
The elements of “control” laid down in Concept Builders to allow the application of piercing must be properly
pleaded and proved during the hearing on the merits, and cannot be merely raised for the first time in the motion
for the issuance of an alias writ of execution. Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665
(2014).

V. CORPORATE CONTRACT LAW

1. Pre-Incorporation/Promoter’s Contracts
a. Who Is a Promoter?
“Promoter ” is a person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor. Sec. 3.10, Securities Regulation Code (R.A.
8799)
b. Pre-incorporation Subscription Agreements (Secs. 60 and 61)

Section 60. Subscription contract. – Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some
other contract. (n)

Section 61. Pre-incorporation subscription. – A subscription for shares of stock of a corporation

still to be formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period or within a longer period
as may be stipulated in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of incorporation to the Securities
and Exchange Commission. (n)

c.Liability Rules for Promoter’s Contracts:

A corporation, until organized, has no being, franchises or faculties, nor do those engaged in bringing it into
being have any power to bind it by contract—it is, as it were, a child in ventre sa mere. The acts of promoters of a
corporation may be ratified by the corporation if and when subsequently organized, but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which would result in the
commission of injustice or fraud to the candid and unwary. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko,
65 Phil. 223 (1937).
A franchise granted to a corporation at the time when it was still in the process of incorporation would
nevertheless constitute a valid contractual commitment, with the acceptance thereof subsequent to the completion
of incorporation. Rizal Light & Ice Co., Inc. v. Public Service Commission, 25 SCRA 285 (1968).
Promoter’s contracts can be pursued against the investors who were the “moving spirit” behind the organization
of the corporation, but not against investors who were merely convinced to invest in the proposed corporate
venture on the basis of the feasibility study undertaken by the promoters. Caram, Jr. v. Court of Appeals, 151
SCRA 372 (1987).

2. De Facto Corporation (Sec. 20)

27
 Section 20. De facto corporations. – The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo warranto proceeding. (n)

a. Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).

By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose right
to exercise corporate powers may not be inquired into collaterally in any private suit to which such
corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).

3. Corporation by Estoppel Doctrine (Sec. 21)

Section 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist performance

thereof on the ground that there was in fact no corporation. (n)

a. Jurisprudential Background
In the absence of fraud, a person who has contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate
existence in any action leading out of or involving such contract. Asia Banking Corp.
v. Standard Products, 46 Phil. 145 (1924).54
The corporation by estoppel doctrine cannot be applied against the claims of an innocent third- party who seeks
to enforce the contract against the person who entered into a contract in behalf of a non-existent corporation on the
ground of separate juridical personality. The doctrine that is applied is one found in the Law on Agency, i.e., a
purported agent who enters into a contract in the name of the non-existing principal shall be personally liable for
contract so entered into. Vda. De Salvatierra v. Garlitos, 103 Phil. 757 (1958).
We reiterate Salvatiera in that one who has induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle
of corporation by estoppel. For even when there is an existing corporate entity, we have applied the doctrine of
piercing of the veil of corporate fiction to make the actors behind the corporation personally liable for the contract
entered into in the name of the corporation. Albert v. University Publishing Co., 13 SCRA 84 (1965).
b. Nature of Doctrine
Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when
persons assume to form a corporation and exercise corporate functions and enter into business relations with third
persons. Where no third person is involved in the conflict, there is no corporation by estoppel. A failed consolidation
therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized corporation after having
acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its
merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).55
A person who accepts employment in an unincorporated charitable association is estopped from
Alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989).
One who deals with an unincorporated association is not estopped to deny its corporate existence when his
purpose is not to avoid liability, but precisely to enforce the contract against the action for the purported
corporation. Int’l Express Travel v. Court of Appeals, 343 SCRA 674 (2000).
Section 21 explicitly provides that one who assumes an obligation to an ostensible corporation, as such, cannot
resist performance thereof on the ground that there was in fact no corporation. Clearly, petitioner is bound by his
obligation under the MOA not only on estoppel but by express provision of law. Paz v. New Int’l
Environmental Universality, Inc., 756 SCRA 284 (2015).

28
b. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
When the incorporators represent themselves to be officers of the corporation which was never duly registered
with SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from
claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code which provides that all
persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general
partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Garcia, 271
SCRA 621 (1997).
We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence. The
doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application
of the doctrine applies to a third party only when he tries to escape liabilities on a contract from which he has
benefited on the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to
escape liability from the contract but rather is the one claiming from the contract. Int’l Express Travel & Tour
Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).
c.Can a Defective Attempt to Form a Corporation Result at Least in a Partnership?
While it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy the position of partners inter se , however, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist, and it should be implied only when necessary to do justice between the
parties. Thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. A
partnership relation between certain stockholders and other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an ostensible corporation and
those benefited by it, knowing it to be without valid existence, are held liable as general partners. Lim Tong Lim
v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

4. TRUST FUND DOCTRINE

a. Common Law Premise: Creditors Preferred Over Equityholders to the Assets of the Business Enterprise (Art.
2236, Civil Code)

Article 2236. The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exemptions provided by law. (1911a)

The subscriptions to the capital stock of a corporation constitute a fund to which the 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. Phil. Trust Co. v. Rivera,
44 Phil. 469 (1923); Lumanlan v. Cura, 59 Phil. 746 (1934).
A share of stock is not an indebtedness of the company to the owner, and therefore, it is not a credit.
Stockholders are not as to their shares creditors of the company, which can be off-setted against their
liabilities to the company. The capital stock of a corporation is a trust fund to be used more particularly for
the security of its creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which provides that the capital stock, property and other assets of a corporation are regarded as equity in trust
for the payment of corporate creditors. Reason: creditors of a corporation are preferred over the stockholders
in the distribution of corporate assets. There can be no distribution of assets among the stockholders without
first paying corporate creditors; any disposition of corporate funds to the prejudice of creditors is null and
void. Boman Environmental Dev. Corp. v. Court of Appeals, 167 SCRA 540 (1988).56
Even when foreclosure on corporate assets was wrongful done, stockholders have no standing to recover
for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to,
such stockholders of part of the corporation’s assets before the dissolution and the
Liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).
The Trust Fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. Unitl the liquidation of the corporation, no
part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption
of redeemable shares) without violating this principle. Thus, dividents must never impair the subscribed capital

29
 stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares
using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
We clarify that the trust fund doctrine is not limited to reaching the stockholders’ unpaid subscriptions. The
scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other
property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets
and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the
possession of the stockholders, regardless of full payment of their subscriptions may be reached by the
creditors in satisfaction of its claim. Halley v. Printwell, Inc. 649 SCRA 116 (2011), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW (2001), p. 558.

b. Power to Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph)

Section 43.
8. Redeemable
Power to declare shares.dividends.
– Redeemable- Theshares
board mayof directors
be issued of by
a stock
the corporation
corporationwhenmay
expresslydividends
declare so provided out inofthe
thearticles
unrestricted
of incorporation.
retained earnings
They may whichbe purchased
shall be payable
or takeninupcash,
by the
in
corporation
property, or in
uponstock thetoexpiration
all stockholders
of a fixed
on theperiod,
basis ofregardless
outstanding of stock
the existence
held by them:
of unrestricted
Provided,
retained
That any earnings
cash dividends
in the due
bookson of
delinquent
the corporation,
stock shallandfirst
uponbe applied
such other to the
terms
unpaid
andbalance
conditions
on the
as
may be statedplus
subscription in the
costsarticles
and expenses,
of incorporation,
while stock which
dividends
terms andshallconditions
be withheld must
from
also
thebedelinquent
stated in
the certificateuntil
stockholder of stock
his unpaid
representing
subscription
said shares.
is fully
(n)paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
Section 41. Power to acquire own shares. – A stock corporation shall have the power to purchase
Stock corporations
or acquire are prohibited
its own shares from retaining
for a legitimate corporate surplus
purpose profits in excessincluding
or purposes, of one hundred
but not (100%)
limited
percent of their paid-in
to the following cases: capital
Provided,stock,
Thatexcept: (1) when justified
the corporation by definite
has unrestricted corporate
retained expansion
earnings in its
projects
books toor programs
cover approved
the shares by the board
to be purchased or of directors; or (2) when the corporation is prohibited
acquired:
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends
1. To eliminate without
fractional its/his
shares consent,
arising out ofand such
stock consent has not yet been secured; or (3)
dividends;
when it can be clearly shown that such retention is necessary under special circumstances
obtaining
2. To collectin orthe corporation,
compromise such as when
an indebtedness there
to the is need for
corporation, special
arising out ofreserve
unpaid for probable
subscription,
contingencies.
in a delinquency (n)sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (a)

Section 122. Corporate liquidation. –

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities. (77a, 89a, 16a)

30
 Under common law, there were originally conflicting views on whether a corporation had the power to purchase
its own stocks. Only a few American jurisdictions adopted the strict English rule forbidding a corporation from
purchasing its own shares. In some American states where the English rule used to be adopted, statutes granting
authority to purchase out of surplus funds were enacted, while in others, shares might be purchased even out of
capital provided the rights of creditors were not prejudiced. The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets and against the
impairment of its capital needed for the protection of creditors. Turner v. Lorenzo Shipping Corp., 636 SCRA 13
(2010).
c.Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal commitments, do not constitute
legal ground to rescind the such agreement: “In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a subscription agreement is not
one of the instances when distribution of capital assets and property of the corporation is allowed.” Distribution of
corporate assets among the stockholders cannot even be resorted to achieve “corporate peace.” Ong Yong v. Tiu,
401 SCRA 1 (2003).

VI. ARTICLES OF INCORPORATION

1. Nature of Charter: The charter is in the nature of a contract between the corporation and the State. Government
of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
The articles of incorporation defines the charter of the corporation and the contractual relationships between
the State and the corporation, the stockholders and the State, and between the corporation and its stockholders.
Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
a. Commencement of Corporate Existence (Sec. 19).

31
 Section 19. Commencement of corporate existence. – A private corporation formed or organized
under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (n)

2. Procedure and Documentary Requirements (Sec. 14 and 15)

Section 19. Commencement of corporate existence. – A private corporation formed or organized

under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (n)

Section 14. Contents of the articles of incorporation. – All corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;

3. The place where the principal office of the corporation is to be located, which must be within
the Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen
(15);

7. The names, nationalities and residences of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the share are par value
shares, the par value of each, the names, nationalities and residences of the original subscribers,
and the amount subscribed and paid by each on his subscription, and if some or all of the shares
are without par value, such fact must be stated;

32
 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of incorporation of any
stock corporation unless accompanied by a sworn statement of the Treasurer elected by the
subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the
corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been
fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five
thousand (P5,000.00) pesos.

a. As to Number and Residency of Incorporators (Sec. 10)

Section 10. Number and qualifications of incorporators. – Any number of natural persons not less
than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents
of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the
incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation. (6a)

It is possible for a business to be wholly owned by one individual, and the validity of its incorporation is not
affected when he gives nominal ownership of only one share of stock to each of the other four incorporators. This
arrangement is not necessarily illegal, but it valid only between and among the incorporators privy to the agreement. It
does not bind the corporation that will consider all stockholders of record as the lawful owners of their registered
shares. As between the corporation on the one hand, and its stockholders and third persons on the other, the
corporation looks only to its books to determine who its shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA
415 (2005).
b. Corporate Name (Secs. 18, 14[1] and 36)

Section 18. Corporate name. – No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name. (n)

Section 14. Contents of the articles of incorporation. – All corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:

1. The name of the corporation;

33
 Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or 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;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. (13a)

The name of a corporation is essential not only for its existence as a juridical person, but also in the manner of
dealing with it, and in the exercise of its juridical capacities; it cannot be changed except in the manner provided for
by law. Red Line Trans. v. Rural Transit, 60 Phil. 549 (1934).
A corporation has no right to intervene in a suit using a name, not even its acronym, other than its registered name,
as the law requires and not another name which it had not registered. Laureano Investment and Dev. Corp. v. Court of
Appeals, 272 SCRA 253 (1997).
HOWEVER: There is no denial of due process when a corporation is sued and judgment is rendered against it under
its unregistered trade name: “A corporation may be sued under the name by which it makes itself known to its
workers.” Pison-Arceo Agri. Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
(i) Deceptively Similar Corporate Names: See SEC Memo Circular No. 21, s. 2013.
Similarity in corporate names between two corporations would cause confusion to the public. To fall within
the prohibition of the law Revised Guidelines in the Approval of Corporate and Partnership Names, two requisites
must be proven, to wit: (a) That the complainant corporation acquired a prior right over the use of such corporate
name; and (b) the proposed name is either: (i) identical, or (ii) deceptively similar to that of any existing corporation
or to any other name already protected by law; or (iii) patently deceptive, confusing or contrary to existing laws.
Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992).

34
 Incorporators must choose a name at their peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonprofit organization, if misleading or likely to injure the exercise of its
corporate functions, regardless of intent, may be prevented by the corporation having a prior right. Ang Mga Kaanib
sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Kristo Jesus, 372 SCRA 171 (2001).
The policy behind Sec. 18 which expressly prohibits the use of a corporate name which is “ identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing laws,” is to avoid fraud upon the public that will occasion to
deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252
(2002).57
Enforcement of protection accorded by Sec. 18 to corporate names is lodged exclusively in the SEC which has
absolute jurisdiction, supervision and control over all corporations. It is the SEC’s duty to prevent confusion in the use
of corporate names not only for the protection of the corporations involved, but more so for the protection of the
public. It has authority to de -register at all times, and under all circumstances corporate names which in its estimation
are likely to generate confusion.” GSIS Family Bank v. BPI Family Bank, 771 SCRA 284 (2015).
(ii) Effect of Change of Corporate Name
A corporation may change its name by the amendment of its articles of incorporation, but the same is not
effective until approved by the SEC. Phil. First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no effect on the identity of the
corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals, 216 SCRA 738
(1992).58
(iiii) Use of Corporate Names of Dissolved Corporations – In accordance with SEC Memo Circular No. 6, s.
2015, a dissolved corporation’s name shall not be allowed to be used within 3-years after approval of
dissolution by the SEC, unless allowed by the last stockholders representing at least majority of the
outstanding capital stock. Indian Chamber of Commerce Phils. Inc. v. Filipino Indian Chamber of Commerce
in the Phils., 799 SCRA 27 (2016).
c. Purpose Clauses (Secs. 14[2] and 42)

Section 14. Contents of the articles of incorporation. – All corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;

Section 42. Power to invest corporate funds in another corporation or business or for any other
purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any
other corporation or business or for any purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder’s or
member’s meeting duly called for the purpose. Written notice of the proposed investment and the
time and place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided, however, That where the investment by
the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a)

35
 The statement of the primary purpose in the articles of incorporation is means to protect shareholders so they
will know the main business of the corporation and file derivative suits if the corporation deviates from the
primary purpose. Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 (1919).
“The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of
incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the
administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the
accomplishment of said purpose.” Therefore, the allegation that the corporations were organized to illegally avoid
the provisions on land reform and to avoid the payment of estate taxes, constitute prohibited collateral attack.
Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
d. Corporate Term (Sec. 11)

Section 11. Corporate term. – A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said period is extended. The
corporate term as originally stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation,
in accordance with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission. (6)

No extension of term can be effected once dissolution stage has been reached, as it constitutes new business.
Alhambra Cigar v. SEC, 24 SCRA 269 (1968).
Article 605 of Civil Code “clearly limits any usufruct constituted in favor of a corporation or association to 50
years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a corporation’s lifetime may be
extended indefinitely. The usufruct would then be perpetual. This is especially insidious in cases where the
usufruct given to a corporation covers public land.” National Housing Authority v. Court of Appeals, 456 SCRA
17 (2005).
e. Principal Place of Business (Sec. 51)

Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s
meetings, whether regular or special, shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members, if
within the powers or authority of the corporation, shall be valid even if the meeting be improperly
held or called, provided all the stockholders or members of the corporation are present or duly
represented at the meeting. (24 and 25)

Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon, 19
SCRA 379 (1967)
The residence of its president is not the residence of the corporation because a corporation has a personality
separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
Although the Rules of Court do not provide that the complaint should be filed in the location of its principal
office as indicated in its articles of incorporation, jurisprudence has, however, settled that the place where the
principal office of a corporation is located, as stated in the articles, indeed establishes its residence. This ruling is
important in determining the venue of an action by or against a corporation, as in the presnt case. Hyatt Elevators and
Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW (1998), p. 162.
Place of residence of the corporation is the place of its principal office. Clavecilla Radioa System v. Antillon,
19 SCRA 379 (1967)
The residence of its president is NOT the residence of the corporation beause the corporation ahs a personality
separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
f. Minimum Capitalization (Sec. 12): Why Is Maximum Capitalization Required to Be Indicated?

36
 Section 12. Minimum capital stock required of stock corporations. – Stock corporations
incorporated under this Code shall not be required to have any minimum authorized capital stock
except as otherwise specifically provided for by special law, and subject to the provisions of the
following section.

g. Subscription and Paid-Up Requirements (Sec. 13)

Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. –
At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per
cent of the total subscription must be paid upon subscription, the balance to be payable on a date
or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date
or dates, upon call for payment by the board of directors: Provided, however, That in no case shall
the paid-up capital be less than five Thousand (P5,000.00) pesos. (n)

The entries in the articles of incorporation of the original issuances of shares of stock has a stronger weight that the
stock and transfer book (STB) in determining the validity and issuance of such shares. Lanuza v. Court of Appeals,
454 SCRA 54 (2005).
h. Steps and Documents Required By the SEC
3. Grounds for Disapproval (Sec. 17)

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved.
– The Securities and Exchange Commission may reject the articles of incorporation or disapprove
any amendment thereto if the same is not in compliance with the requirements of this Code:
Provided, That the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The following are
grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in accordance
with the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations;

3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is
false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and

quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by the Commission unless
accompanied by a favorable recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law. (n)

When the proposed articles show that the object is to organize a barrio into a separate corporation for the
purpose of taking possession and having control of all municipal property within the incorporated barrio and
administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied
registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).
4. Amendments to the Articles of Incorporation (Sec. 16)

37
 Section 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and the vote
or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with
the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members
if it be a non-stock corporation.

The original and amended articles together shall contain all provisions required by law to be set
out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring
the change or changes made, and a copy thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.

VII. BY-LAWS
1. Nature, Function and Contents (Sec. 47)

Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may provide in its by-laws for:

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 or special meetings of the stockholders
or members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of
giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors
or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs. (21a)

The power to adopt by-laws is an inherent power on the part of those forming a corporation or any other form of
association. Gokongwei v. SEC, 89 SCRA 337 (1979).
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own
actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it,” by- laws are indispensable to corporations. These may not be essential to
corporate birth but certainly, these are required for an orderly governance and management of corporations. Loyola
Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
38
 By-laws are traditionally defined as regulations, ordinances, rules or laws adopted by a corporation for its internal
governance, including rules for routine matters such as calling meetings and the like. If those key by-law provisions
on matters such as quorum requirements, meetings, or on the internal governance of the local/chapter are themselves
already provided for in the constitution, then it would be feasible to overlook the requirements for by-laws. Indeed in
such an event, to insist on the submission of a separate document denominated as “By-Laws” would be an undue
technicality, as well as a redundancy. San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW, 467 SCRA
107 (2005).
The by-laws are the self-imposed rules resulting from the agreement between the country club and its members to
conduct the corporate business in a particular way. In that sense, the by -laws are the private “statutes” by which the
country club is regulated, and will function. Until repealed, the by-laws are the continuing rules for the government of
the country club and its officers, the proper function being to regulate the transaction of the incidental business of the
country club. The by-laws constitute a binding contract as between the country club and its members, and as among
the members themselves. The by-laws are self-imposed private laws binding on all members, directors, and officers of
the country club. The prevailing rule is that the provisions of the articles of incorporation and the by -laws must be
strictly complied with and applied to the letter. Ching v. Quezon City Sports Club, Inc., 807 SCRA 46 (2016).
a. Adoption Procedure for By-Law (Sec. 46)

Section 46. Adoption of by-laws. – Every corporation formed under this Code must, within one
(1) month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent
with this Code. For the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall
be signed by the stockholders or members voting for them and shall be kept in the principal office
of the corporation, subject to the inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange Commission which
shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange Commission, together with the articles
of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust company,
insurance company, public utility, educational institution or other special corporations governed
by special laws, unless accompanied by a certificate of the appropriate government agency to the
effect that such by-laws or amendments are in accordance with law. (20a)

There can be no automatic dissolution simply because the incorporators failed to file the required by-laws under
Sec. 46 of Corporation Code. Proper notice and hearing are cardinal components of due process in any democratic
institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same. Loyola Grand Villas Homeowners v. Court of Appeals, 276 SCRA 681 (1997).
A corporation which has failed to file its by -laws within the prescribed period does not ipso facto lose its powers
as such, and may be considered a de facto corporation whose right to exercise corporate powers may not be inquired
into collaterally in any private suit to which such corporations may be a party. (?) Sawadjaan v. Court of Appeals,
459 SCRA 516 (2005).
b. Amendments and Revisions of By-Laws (Sec. 48)

39
 Section 48. Amendments to by-laws. – The board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority
of the members of a non-stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3)
of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt
new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or
repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority of the members in
non-stock corporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be
attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with
the Securities and Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code. (22a
and 23a)

2. Common Law Intramural Limitations on By-Laws

a. By-Laws Cannot Be Contrary to Law, Public Policy or the Charter
A by- law provision that empowers the Board of Directors to cancel the shares of any member and return to the
owner thereof the value thereof is void for being in violation of the Corporation Law that provided that capital can
only be returned after dissolution. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
A by-law provision granting t oa stockholder permanent seat in the Board of Directors is void, even when
formally adopted by the members of the association, because it is contrary to the provision in the Corporation Code
requiring all members of the Board to be elected by the stockholders. Grace Christian High School v. Court of
Appeals, 281 SCRA 133 (1997).
The by-law provisions cannot be such or be amended to be able to go around the security of tenure clause of
employees nor impair the obligation of existing contracts or rights; otherwise, it would enable an employer to
remove any employee from his employment by the simple expediency of amending its by-laws and providing that
his/her position shall cease to exist upon occurrence of a specified event.” Salafranca v. Philamlife (Pamplona)
Village Homeowners, 300 SCRA 469 (1998).
Board of directors should act in the manner and within the formalities, if any, prescribed in its charter or by law. Thus,
directors must act as a body in a meeting called pursuant to the law or the corporation’s by-laws; otherwise, any action
taken therein may be questioned by the objecting director or shareholder. Certainly, the rules set in the by-laws are
mandatory for every member of the corporation to respect. They are the fundamental law of the corporation with which the
corporation and its officers and members must comply. It is on this score that we cannot sustain the Bernas Group’s stance
that the subsequent annual stockholders’ meetings were valid. Bernas v. Cinco, 761 SCRA 104 (2015).
b. By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws
By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions on
property rights of stockholders; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc.
v. Court of Appeals, 210 SCRA 510 (1992).
Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to
restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
c. By-Law Provisions Cannot Discriminate Among Its Stockholders or Members

3. Binding Effects of By-laws on the Dealing Public

By-law provisions on the required quorum for special meetings of the Board have the force of law and are
binding even on third-parties who deal with the properties of the corporation. Peña v. Court of Appeals, 193
SCRA 717 (1991).

40
 The nature of by- laws being intramural instruments would mean that they are not binding on third-parties,
except those who have actual knowledge of their contents. China Banking Corp. v. Court of Appeals, 270
SCRA 503 (1997).
Contracts entered into on behalf of the corporation not signed by the Chairman of the Board in violation of the
specific by- law provision are not void, since by-laws operate merely as internal rules among the stockholders,
they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the
same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997).

VIII. CORPORATE POWERS AND AUTHORITY

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45)

Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization. (38a)

Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or 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;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. (13a)

Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred. (n)

a. Classification of Corporate Powers: Express, Implied, and Incidental

A corporation has only such powers as are expressly granted by law and its articles of incorporation
(express powers), those which may be incidental to such conferred powers, those reasonably necessary to
accomplish its purposes (implied powers) and those which may be incident to its existence as a juridical entity
(incidental powers). Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).59
b. Where Corporate Power Lodged: Board of Directors/Trustees

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 A corporation has no power except those expressly conferred by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation exercises said powers through its Board of
Directors and/or its duly authorized officers. In turn, physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or
by a specific act of the Board. Shipside Inc. v. CA, 352 SCRA 334 (2001).60

2. EXPRESS POWERS
a. Enumerated Powers (Sec. 36)

Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or 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;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. (13a)

b. Extend or Shorten Corporate Term (Secs. 37 and 81[1])

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 Section 37. Power to extend or shorten corporate term. – A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in
case of non-stock corporations. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
(n)

Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the 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 of extending or shortening the term of
corporate existence;

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 the Code; and

3. In case of merger or consolidation. (n

c. Increase or Decrease Capital Stock (Sec. 38)

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. – No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of directors
and, at a stockholder’s meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution
of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder’s meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth: (see
codal)

Despite the board resolution approving the increase in capital stock and the receipt of payment on the future
issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the
corporation until approval of the increase by SEC. Central Textile Mills v. NWPC, 260 SCRA 368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast
profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice.
Madrigal & Co. V. Zamora, 151 SCRA 355 (1987).
d. Incur, Create, or Increase Bonded Indebtedness (Sec. 38)

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 e. Sell or Dispose of Assets (Sec. 40)

Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on
illegal combinations and monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon such terms and conditions
and for such consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors or trustees may
deem expedient, when authorized by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to
two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the
purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge
or other disposition of property and assets, subject to the rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into
any transaction authorized by this section.

Corporate property is not the property of the stockholders or members, and as such, may not be sold without
express authority from the Board of Directors. Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 requiring ratification
of members representing at least two-thirds of the membership, would make the sale null and void. Islamic
Directorate v. CA, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).
The Corporation Code defines a sale or disposition of substantially all assets and property of a corporation as one
by which the corporation “would be rendered incapable of continuing the business or accomplishing the purpose for
which it was incorporated” – any sale or disposition short of this will not need stockholder ratification, and may be
pursued by the majority vote of the Board of Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.,
607 SCRA 413 (2009).
f. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42)

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 Section 42. Power to invest corporate funds in another corporation or business or for any other
purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any
other corporation or business or for any purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder’s or
member’s meeting duly called for the purpose. Written notice of the proposed investment and the
time and place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided, however, That where the investment by
the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a)

Investment by a sugar central in the equity of a jute-bag manufacturing company used in packing sugar, falls
within the implied powers of the sugar central as part of its primary purpose and does not need ratification by the
stockholders. De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 (1969).
g. Declare Dividends (Sec. 43)

Section 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies. (n)

Dividends from retained earnings can only be declared to those who are stockholders of the corporation;
dividends cannot be declared to creditors as part of the settlement of debts. Nielson & Co. v. Lepanto
Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the “trust fund” of the corporation. NTC v. Court
of Appeals, 311 SCRA 508 (1999).
h. Enter into Management Contracts (Sec. 44)

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 Section 44. Power to enter into management contract. – No corporation shall conclude a
management contract with another corporation unless such contract shall have been approved by
the board of directors and by stockholders owning at least the majority of the outstanding capital
stock, or by at least a majority of the members in the case of a non-stock corporation, of both the
managing and the managed corporation, at a meeting duly called for the purpose: Provided, That
(1) where a stockholder or stockholders representing the same interest of both the managing and
the managed corporations own or control more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case
of a non-stock corporation. No management contract shall be entered into for a period longer than
five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or otherwise: Provided,
however, That such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into for such periods
as may be provided by the pertinent laws or regulations. (n)

A management contract is not an agency contract, and therefore is not revocable at will. Nielson & Co. v.
Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195 SCRA 247 (1991).

3. IMPLIED POWERS
When the articles expressly provide that the purpose was to “engage in the transportation of person by water,”
such corporation cannot engage in the business of land transportation, which is an entirely different line of
business. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to undertake stevedoring
services to unload coal into its pier since it is not reasonably necessary for the operation of its power plant.
National Power Corp. v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker. Philipinas Loan Co. v.
SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael v. Court of
Appeals, 372 SCRA 587 (2001).

4. INCIDENTAL POWERS
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a loan to finance the
activities of the corporation, hence, not an ultra vires act. Atrium Management Corp. v. Court of Appeals, 353
SCRA 23 (2001).

5. Other Powers (Sec. 36)

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 Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same
in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or 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;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. (13a)

a. Sell Land and Other Properties

When the corporation’s primary purpose is to market, distribute, export and import merchandise, the sale of
land is not within the actual or apparent authority of the corporation acting through its officers, much less when
acting through the treasurer. Articles 1874 and 1878 of Civil Code requires that when land is sold through an
agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan Structural v. Court of
Appeals, 296 SCRA 631 (1998).61
b. Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is required under
Art. 1878 of the Civil Code. There is invariably a need of an enabling act of the corporation to be approved by
its Board of Directors. The argument that the obtaining of the loan was in accordance with the ordinary course
of business usages and practices of the corporation is devoid of merit because the prevailing practice in the
corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking
Corp. v. Court of Appeals, 270 SCRA 503 (1997).
c. Power to Sue and Be Sued
As a creature of the law, the powers nad attributes of a corporation are those set out, expressly or implied, in the
law. Among the general powers granted by law ot a corporation is the power to sue in its own name. This power is
granted to a duly -organized corporation, unless specifically revoked by another law. Umale v. ASB Realty Corp.,
652 SCRA 215 (2011).
Under Sec. 36 in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its
Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on
the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).62
(i) Power to Sue on Behalf of the Corporation
When the power to sue is delegated by the by- laws to a particular officer, such officer may appoint counsel
to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v.
Chua, 220 SCRA 75 (1993).
(ii) xCertificate of Non-Forum Shopping

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 Where the petitioner is a corporation, a board resolution authorizing a corporate officer to execute
the certification against forum shopping is necessary—a certification not signed by a duly authorized
person renders the petition subject to dismissal. Gonzales v. Climax Mining Ltd., 452 SCRA 607
(2005);63 such as the administrator or project manager, Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230
(2001); or the General Manager, Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of
Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003).64 Nonetheless, such lack of authority may be cured:
even if the counsel executed the verification and certificate of non-forum shopping before the board authorized
him, the passing of the board resolution of authorization before the actual filing of the complaint. Median
Container Corp. v. Metropolitan Bank and Trust Co. , 561 SCRA 622 (2008); the submission in the motion for
reconsideration of the authority to sign the verification and certification constitutes substantial compliance with
the procedural requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).
When a corporate officers has been granted express power by the Board of Directors to institute a suit, the
same is considered broad enough to include the power of said corporate officer to execute the verification and
certification against forum shopping required in initiatory pleadings under the Rules of Court. Cunanan v.
Jumping Jap Trading Corp., 586 SCRA 620 (2009).
A President, among other enumerated corporate officers and employees, can sign the verification and
certification against non-forum shopping in behalf of the corporation without the benefit of a board resolution.
South Cotabato Communications Corp. v. Sto. Tomas, 638 SCRA 566 (2011).
However, the following officials or employees of the company can sign a verification and certification
against forum-shopping without need of a board resolution: (1) the Chairperson of the Board of Directors, (2)
the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and
(5) an Employment Specialist in a labor case. While the above cases do not provide a complete listing of
authorized signatories to the verification and certification required by the rules, the determination of the
sufficiency of the authority was done on a case to case basis. Pasos v. PNCC, 700 SCRA 608 (2013).
(iii) xService of Summons on Corporations
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the
old provision in the Rules of Court, it does not include the term “agent”. Consequently, the enumeration of
persons to whom summons may be served is “restricted, limited and exclusive” following the rule on statutory
construction expressio unios est exclusio alterius. Therefore, the earlier cases that uphold service of summons
upon a construction project manager; 65 a corporation’s assistant manager;66 ordinary clerk of a corporation;67
private secretary of corporate executives; 68 retained counsel;69 officials who had charge or control of the
operations of the corporation, like the assistant general manager; 70 or the corporation’s Chief Finance and
Administrative Officer;71 no longer apply since they were decided under the old rule that allows service of
summons upon an “agent”72 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65
(1999).
For service of summons upon a private domestic corporation to be effective and valid, it should be made on
the person enumerated in the Rule. Conversely, service of summons on anyone other than the president,
manager, secretary, cashier, agent or director, is not valid on the corporation. Ellice Agro-Industrial Corp. v.
Young, 686 SCRA 51 (2012).

d. Hire Employees and Appoint Agents

Except where the authority of employing servants and agents is expressly vested in the board of directors or
trustees, an officer or agent who has general control and management of the corporation’s business, or 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. But the contracts of employment must be reasonable. Yu Chuck
v. “Kong Li Po,” 46 Phil. 608 (1924).
e. Provide Gratuity Pay for Employees (Sec. 36[10])

Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and
cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting
such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
f. To Make Donations (Sec. 36[9])

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 Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has
the power and capacity:

9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan political
activity;

g. To Enter Into a Partnership or Joint Venture: SEC Opinion, 29 Feb. 1980;

ü SEC Opinion No. 16-22. 04 Oct. 2016
While a corporation has no inherent power to enter into a partnership, it may enter into a joint venture
arrangements. Tuason & Co. v. Bolaños, 95 Phil. 106 (1954).

6. ULTRA VIRES DOCTRINE

a. Ultra Vires of the First Type: Classic Ultra Vires Acts (Secs. 2 and 45)

Section 2. Corporation defined. – 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. (2)

Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers so
conferred. (n)

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 power conferred upon it by law. The term “ultra vires“ is
“distinguished from an illegal act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.” Atrium Management Corp. v. Court of
Appeals, 353 SCRA 23 (2001).
A corporation has no power except those expressly conferred on it by the Corporation Code, its charter, and
those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its Board
of Directors and/or its duly authorized officers and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort
III, 434 SCRA 27 (2004).
(i) General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of “ultra vires” will not be allowed to
prevail, whether interposed for or against a corporation, when it will not advance justice but, on the contrary, will
accomplish a legal wrong to the prejudice of another who acted in good faith. Zomer Dev. Corp. v. Int’l Exchange
Bank, 581 SCRA 115 (2009).
(ii) Ratification of Ultra Vires Acts – Acts done by the Board of Directors which are ultra vires cannot be set-aside if
the acts have been ratified by the stockholders. Pirovano v. De la Rama Steamship Co., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the corporation,
nevertheless it will not be set aside when, not being malum prohibitum, the corporation, through its senior officers
or its Board of Directors, are estopped from questioning the legality of such act, contract or transaction. Carlos v.
Mindoro Sugar Co., 57 Phil. 343 (1932).73
b. Ultra Vires of the Second Type: Doctrine of Centralized Management (Sec. 23)

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 Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.

Where the President enters into speculative contracts without prior nor subsequent board approvals, nor were
the transactions included in the reports of the corporation, such contracts do not bind the corporation. It must be
pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., 355 SCRA 559 (2001).
Acts done in excess of corporate officers’ scope of authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf of the corporation being represented by its President acting
pursuant to a Board of Directors’ resolution, such constituted as a confirmatory act signifying ratification of all
prior acts of its officers. NPC v. Alonzo-Legasto, 443 SCRA 342 (2004).
Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent duly
authorized by the Board—absent such valid delegation/authorization, the rule is that the declaration of an
individual director relating to the affairs of the corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not binding on the corporation. Manila Metal
Container Corp. v. PNB, 511 SCRA 444 (2006).
Application of the First and Second Types of Ultra Vires – Corporations are artificial entities granted legal
personalities upon their creation by their incorporators in accordance with law. Unlike natural persons, they have
no inherent powers. Third persons dealing with corporations cannot assume that corporations have powers. It is up
to those persons dealing with corporations to determine their competence as expressly defined by the law and their
articles of incorporation.

Corporations are artificial entities granted legal personalities upon their creation by their incorporators in
accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with
corporations cannot assume that corporations have powers. It is up to those persons dealing with corporations to
determine their competence as expressly defined by the law and their articles of incorporation.[75]

A corporation may exercise its powers only within those definitions. Corporate acts that are outside those
express definitions under the law or articles of incorporation or those "committed outside the object for which a
corporation is created"[76] are ultra vires.

The only exception to this, rule is when acts are necessary and incidental to carry out a corporation's purposes, and
to the exercise of powers conferred by the Corporation Code and under a corporation's articles of incorporation.
[77] This exception is specifically included in the general powers of a corporation under Section 36 of the
Corporation Code. University of Mindanao v. Bangko Sentral ng Pilipinas, 778 SCRA 458 (2016).

c. Ultra Vires of the Third Type: Although arrangements between the two mining companies was prohibited under
the terms of the Corporation Law, the Supreme Court did not declare the nullity of the agreements on the ground
that only private rights and interests, not public interests, were involved in the case.Harden v. Benguet
Consolidated Mining Co., 58 Phil. 140 (1933).

IX. BOARD OF DIRECTORS/TRUSTEES AND OFFICERS (MANAGEMENT)

“Board of Directors” is the body which (1) exercises all powers provided for under the Corporation Code;
(2) conducts all business of the corporation; and (3) controls and holds all property of the corporation. Its members
have been characterized as clothed with a fiduciary character. It is clearly separate and distinct from the corporate
entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).
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 This stands to reason for the board of directors of a corporation is generally a policy making body. Even if the
corporate powers of a corporation are reposed in the board of directors under the first paragraph of Sec. 23 of the
Corporation Code, it is of common knowledge and practice that the board of directors is not directly engaged or
charged with the running of the recurring business affairs of the corporation. Depending on the powers granted to
them by the articles of incorporation, the members of the board generally do not concern themselves with the day-
to-day affairs of the corporation, except those corporate officers who are charged with running the business of the
corporation and are concomitantly members of the board, like the President. Section 25 of the Corporation Code
requires the president of a corporation to be also a member of the board of directors. Federated Dealers Assn. v.
Del Rosario, 808 SCRA 272 (2016).

1. DOCTRINE OF CENTRALIZED MANAGEMENT: Powers of Board of Directors (Sec. 23)

Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.

The consent of the corporation as a juridical person is manifested through a board resolution since powers are
exercised through its Board of Directors. The mandate of Section 23 of the Corporation Code is clear that unless
otherwise provided in the Code, “the corporate powers of all corporations shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or trustees ...”
Further, as a juridical entity, a corporation may act through its Board, which exercises almost all corporate powers,
lays down all corporate business policies and is responsible for the efficiency of management. As a general rule, in
the absence of authority from the Board, no person, not even its officers, can validly bind a corporation. PSE v.
Litonjua, G.R. No. 204014, 5 Dec. 2016.
The well-entrenched rule that a corporation exercises its powers through its Board of Directors and/or its duly
authorized officers and agents, except in instances where the Corporation Code requires stockholders’ approval for
certain specific acts. Thus, courts are without power, and would commit a grave abuse of discretion amounting to
lack of jurisdiction, in placing the management and control of the corporation to a mere interveno, on the basis of a
MOA between the latter and the controlling stockholder. Tom v. Rodriguez, 761 SCRA 679 (2015).
Section 23 expressly provides that the corporate powers of all corporations shall be exercised by the Board of
Directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the Board of
Directors validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or
acts of a corporation must be made either by the Board of Directors or by a corporate agent duly authorized by the
Board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating
to the affairs of the corporation, but not in the course of, or connected with the performance of authorized duties of
such director, are held not binding on the corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444
(2006).74
A verbal promise given by the Chairman and President of the company to the general manager and chief
operating officer to give the latter unlimited sick leave and vacation leave benefits and its cash conversion upon his
retirement or resignation, when not an integral part of the company’s rules and policies, is not binding on the
company when it is without the approval of the Board of Directors. Kwok v. Philippine Carpet Manufacturing
Corp., 457 SCRA 465 (2005).
A corporation is an artificial being and can only exercise its powers and transact its business through the
instrumentalities of its Board of Directors, and through its officers and agents, when authorized by resolution or by
its by-laws. Consequently, when legal counsel was clothed with authority through formal board resolution, his acts
bind the corporation. De Liano v. Court of Appeals, 370 SCRA 349 (2001).75
a. Rationale for “Centralized Management” Doctrine:

51
 The raison d’etre behind conferment of corporate powers on the Board of Directors is not lost on the Court
– indeed, the concentration in the Board of the powers of control of corporate business and appointment of
corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct
Its business directly. And so the plan of corporatie organization si for the stockholders to choose the
directors who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518
SCRA 453 (2007).
A corporation is an artificial being and can only exercise its powers and transact its business through
the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by Resolution or
by its by-laws. Consequently, hwen legal counsel was clothed with authority through formal board resolution, his acts
bind the corporation which must be held bound the actuations of its counsel of record. De Liano v. Court of Appeals,
370 SCRA 349 (2001).
“The physical acts of the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board of directors.”
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).

b. Theories on Source of Board Power

(i) Doctrine of Directly-Vested Power – Sect. 23, Corporation Code

Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.

The powers granted to the Board of Directors are directly vested to them by law, thus: Under Section 23 “it
cannot be doubted that the management and control of GDITI, being a stock corporation, are vested in its duly
elected Board of Directors, the body that: (1) exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all property of the corporation. Its members
have been characterized as trustees or directors clothed with a fiduciary character.” Consequently, the MOA
executed among the feuding stockholders that arranges that the affairs of the corporation shall be in the hands of
one set of stockholders would be void and cannot serve to oust the duly elected Board of Directors from the
exercise of corporate powers. Toms v. Rodriguez, 761 SCRA 679 (2015); 797 SCRA 60 (2016).
(ii) Delegated Powers Coming from the Stockholders: The Board of Directors is a creation of the stockholders and
controls and directs the affairs of the corporation by delegation of the stockholders. By drawing themselves the
powers of the corporation, they occupy positions of trusteeship in relation to the stockholders. Angeles v. Santos,
64 Phil. 697 (1937).
One of the most important rights of a qualified shareholder or member is the right to vote for the directors or
trustees who are to manage the corporate affairs. The right to choose the persons who will direct, manage and
operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a non-stock corporation can have a say on how the
purposes and goals of the corporation may be achieved. Once the directors or trustees are elected, the stockholders
or members relinquish corporate powers to the board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006).
The theory of delegated power of the board of directors similarly explains why, under Section 29 of the
Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not only by the
expiration of a member’s term, the successor “so elected to fill in a vacancy shall be elected only for the unexpired
term of his predecessors in office. The law has authorized the remaining members of the board to fill in a vacancy
only in specified instances, so as not to retard or impair corporate operations; yet, in recognition of the
stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve

52
 only to the “unexpired term of his predecessor in office.” Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202
(2009).
c. Must the Board Act As a Body to Bind the Corporation and Its Affairs (Sec. 25)

Section 25. Corporate officers, quorum. – Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that no one shall act as president
and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide
for a greater majority, a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting at which there is a
quorum shall be valid as a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

Exercise of powers by the Board of Directors may either be express and formal through the adoption of a board
resolution in a meeting called for the purpose, or it may be implied where the Board collectively and knowingly
allows the President to enter into important contracts in the pursuit of the corporate business. Board of
Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 (1967).
A Director-Treasurer has no power to bind the company even in transactions that are pursuant to the primary
purpose its corporation, especially when the by-laws specifically provided that the acts entered into can only be
done by the Board of Directors. Ramirez v. Orientalist Co., 38 Phil. 634 (1918).
Between the act of the Board as a body affirming informally the perfection of a contract entered into in behalf
of the corporation by a senior officer, and the subsequent formal board resolution rejecting the same contract, the
former must prevail under the doctrine of estoppel. Acuña v. Batac Producers Cooperative Marketing Assn., 20
SCRA 526 (1967).
A corporation, through its Board of Directors, should act in the manner and within the formalities prescribed by
its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any
action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence
tells us that an action of the Board of Directors during a meeting, which was illegal for lack of notice, may be
ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the
corporation’s subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995).
d. Effects of Acts by a “Bogus” Board: The acts or contracts effected by a bogus board would be void pursuant to
Art. 1318 of Civil Code because of the lack of “consent”. Islamic Directorate of the Philippines v. Court of
Appeals, 272 SCRA 454 (1997).
e. Executive Committee (Sec. 35)

Section 35. Executive committee. – The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board, to be appointed by the board.
Said 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 the by-laws or on a majority vote of the
board, except with respect to: (1) approval of any action for which shareholders’ approval is also
required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the
adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.

53
 It is within the power of the Board of Directors to authorize any person or committee to undertake corporate
acts. The board has power to constitute even an executive committee, even when no such committee is provided
for in the articles and by-laws of the corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).

2. BUSINESS JUDGMENT RULE:

b. BJR First Branch: On the Transactions Etnered Into

When a resolution is passed in good faith by the board of directors, it is valid and binding , and weather or niot
it will cause losses or decrease the profits of the corporation, the court has no authority to review them. It is a
well-known rule of law that questions of policy or management are left soelley to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its judgment for that 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. Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36
(1962).76
While SEC is the agency with the primary say as to whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange, it does not mean that PSE’s management prerogatives
are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved business. One of the PSE’s main concerns, as such, is
still the generation of profit for its stockholders.
ü Philippine Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997).
No court can, in resolving the issues between squabbling stockholders, order the corporation to undertake
certain corporate acts, since it would be in violation of the business judgment rule. Ong
Yong v. Tiu, 401 SCRA 1 (2003), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.
b. BJR Second Branch: On the Personal Liability of the Members of the Board & Officers
Directors and officers who purport to act for the corporation, keep within the lawful scope of their authority
and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts,
which are properly attributed to the corporation alone. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA
55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence,
directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting
losses must be proven to have resulted from bad faith and with malice in doing the assailed acts. Bad faith does
not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of
the nature of fraud. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).

3. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS

a. Theories of Estoppel and Ratification
Estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction
entered into by its officer with a third party who in good faith, relied on the authority of the former as manager
to act on behalf of the corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
In order to ratify the unauthorized act of an agent and thereby bind the corporation, it must be shown that the
governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected
with the transaction to which it relates. Ratification can never be made by the same person who wrongfully assume
the power to make the contract, but the ratification must be by the officer or governing body having authority to
make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973).
“Ratification means that the principal voluntarily adopts, confirms and gives sanction to some unauthorized
act of its agent on its behalf. The substance of the doctrine is confirmation after conduct, amounting to a
substitute for a prior authority. Ratification can be made either expressly or impliedly. Implied ratification may
take various forms — like silence or acquiescence, acts showing approval or adoption of the act, or acceptance
and retention of benefits flowing therefrom.” Lopez Realty, Inc. v. Spouses Tanjangco, 739 SCRA 644 (2014).
The admission by counsel on behalf of the corporation of the latter’s culpability for personal loans obtained
by its corporate officers cannot be given legal effect when the admission was “without any enabling act or
attendant ratification of corporate act,” as would authorize or even ratify such admission. In the absence of such
ratification or authority, such admission does not bind the corporation. Aguenza v. Metropolitan Bank and
Trust Co., 271 SCRA 1 (1997).
When an officer in a banking corporation arrange a credit line agreement and forwards the same to the legal
department at its head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev.
Bank v. Court of Appeals, 427 SCRA 686 (2004).

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 Under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority
cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying
them. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against
the corporation unless ratified by the corporation. Woodchild Holdings, Inc. v. Roxas Electric Constructions
Co., Inc., 436 SCRA 235 (2004).
Acts done in excess of officers’ scope of authority cannot bind the corporation; however, when
subsequently a compromise agreement was on behalf of the corporation being represented by its President
acting pursuant to a Board of Directors’ resolution, such constituted as ratification of all prior acts of its
officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
The acceptance of the offer to purchase by the clerk of the branch, and the representation that the manager
had already approved the sale (in fact not true), cannot bind the bank to the contract of sale, it being obvious
that such a clerk is not among the bank officers upon whom putative authority may be reposed by a third party.
There is, thus, no legal basis to bind the bank into any valid contract of sale with the buyers, given the absolute
absence of any approval or consent by any responsible officer of the bank. DBP v. Ong, 460 SCRA 170 (2005).

b. Doctrine of Laches or “Stale Demands”

The principle of laches or “stale demands” provides that the failure or neglect, for an unreasonable and
unexplained length of time, to do that which by exercising due diligence could or should have been done earlier, or
the negligence or omission to assert a right within a reasonable time, warrants a presumption that the party entitled
to assert it either has abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176
(2002).
c. Doctrine of Apparent Authority: Art. 1883, Civil Code.
If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agent’s authority. Francisco v. GSIS, 7
SCRA 577 (1963).77
Rationale: “Naturally, the third person has little or no information as to what occurs in corporate meeting; and
he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner
may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Soluta’s
authority. Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts.”
Associated Bank v. Pronstroller, 558 SCRA 113 (2008).
A corporation cannot disown its President’s act of applying to the bank for credit accommodation, on the
ground that it never authorized the President by the lack of any formal board resolution. The following placed the
corporation and its Board of Directors in estoppel in pais: (a) by-laws provides for the powers of the President,
which includes, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks;
(b) there were already previous transaction of discounting the checks involving the same personalities wherein any
enabling resolution from the Board was dispensed with and yet the bank was able to collect from the corporation.
Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal is
liable for the obligations contracted by the agent. The agent’s apparent representation yields to the principal's true
representation and the contract is considered as entered into between the principal and the third person. First
Philippine Int’l Bank v. Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of
corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of Appeals, 269 SCRA 601
(1997).
Apparent authority may be ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act, or, in other words the apparent authority to act in general with which is
clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment Industries v. Court of Appeals,
403 SCRA 452 (2003).
Per its Secretary’s Certificate, the foundation had given its President ostensible and apparent authority to inter
alia deal with the respondent Bank, and therefore the foundation is estopped from questioning the President’s
authority to obtain the subject loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals,
421 SCRA 328 (2004).
The general rule remains that, in the absence of authority from the Board of Directors, no person, not even its
officers, can validly bind a corporation. If a corporation, however, consciously lets one of its officers, or any other
agent, to act within the scope of an apparent authority, it will be estopped from denying such officer’s authority. …
Unmistakably, the Court’s directive in Yao Ka Sin Trading is that a corporation should first prove by clear

55
 evidence that its corporate officer is not in fact authorized to act on its behalf before the burden of evidence shifts
to the other party to prove, by previous specific acts, that an officer was clothes by the corporation with apparent
authority. Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).
The doctrine of apparent authority provides that a corporation will be estopped from denying the agent’s
authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to do those acts. The doctrine of apparent
authority does not apply if the principal did not commit any acts or conduct which a third party knew and relied
upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts or conduct must
have produced a change of position to the third party’s detriment. Advance Paper Corp. v. Arma Traders Corp.,
712 SCRA 313 (2013).
The existence of apparent authority may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act
in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. Georg v. Holy
Trinity College, Inc., 797 SCRA 550 (2016).

Qualifications of Directors/Trustees (Secs. 23 and 27)

Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.

Section 27. Disqualification of directors, trustees or officers. – No person convicted by final

judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of any corporation. (n)

The qualifications provided for in the law are only minimum qualifications; additional qualifications and
disqualifications can be provided for but only by proper provisions in the by-laws of the corporation.
ü Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
A director must own at least one share of stock. Peña v. Court of Appeals, 193 SCRA 717 (1991).78 The law
does not require that a Vice-President be a stockholder. Baguio v. CA, 226 SCRA 366 (1993).
Beneficial ownership under VTA no longer qualifies as a director owning at least one share of stock in his
name. Lee v. Court of Appeals, 205 SCRA 752 (1992).
5. Election of Directors and Trustees
a. Directors (Secs. 24 and 26)

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 Section 24. Election of directors or trustees. – At all elections of directors or trustees, there must
be present, either in person or by representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority of the members
entitled to vote. The election must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on
the stock books of the corporation, or where the by-laws are silent, at the time of the election; and
said stockholder may vote such number of shares for as many persons as there are directors to be
elected or he may cumulate said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal, or he may distribute
them on the same principle among as many candidates as he shall see fit: Provided, That the total
number of votes cast by him shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of
incorporation or in the by-laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared elected. Any
meeting of the stockholders or members called for an election may adjourn from day to day or
from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there
are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. (31a)

Section 26. Report of election of directors, trustees and officers. – Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death,
the secretary, or any other officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange Commission. (n)

A by-law provision or company practice of giving a stockholder a permanent seat in the Board would be
against the provisions of Corporation Code which requires member of the board of corporations to be elected.
Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be
governed by a Board of Directors whose members have stood for election, and who have actually been elected
by the stockholders, on an annual basis. Only in that way can the directors’ continued accountability to the
shareholders, and the legitimacy of their decisions that bind the corporation’s stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over
properties that they do not own. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
Since under Sec. 26 all corporations are mandated to submit a formal report to the SEC on the changes in
their directors and officers, then only those directors and officers appearing in such report (General Information
Sheet) to the SEC are deemed legally constituted to bind the corporation, especially in the bringing of suits in
behalf of the corporation. Premium Marble Resources v. CA, 264 SCRA 11 (1996); Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
The proper remedy to question the legality and proper qualification of persons elected to the board is a quo
warranto proceeding. Ponce v. Encarnacion, 94 Phil. 81 (1953). – Now an election contest under the Interim
Rule of Procedure for Intra-Corporate Controversies
b. CUMULATIVE VOTING (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the
Equation, 35 SOUTH CAROLINA L. REV. 295)

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 Section 24. Election of directors or trustees. – At all elections of directors or trustees, there must
be present, either in person or by representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority of the members
entitled to vote. The election must be by ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on
the stock books of the corporation, or where the by-laws are silent, at the time of the election; and
said stockholder may vote such number of shares for as many persons as there are directors to be
elected or he may cumulate said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal, or he may distribute
them on the same principle among as many candidates as he shall see fit: Provided, That the total
number of votes cast by him shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of
incorporation or in the by-laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared elected. Any
meeting of the stockholders or members called for an election may adjourn from day to day or
from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there
are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. (31a)

c. Election of Trustees (Secs. 92 and 138)

Section 92. Election and term of trustees. – Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more
than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as
soon as organized, so classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members. (n)

Section 138. Designation of governing boards. – The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or special corporations may, through their articles
of incorporation or their by-laws, designate their governing boards by any name other than as
board of trustees. (n)

d. xElection Contests: Rule 6, Interim Rules of Procedure for Intra-Corporate Controversies

All election contests over directors and trustees now fall within the original and exclusive jurisdiction of the RTC
Special Commercial Courts and no longer with the SEC. GSIS v. CA, 585 SCRA 679 (2009).
SEC retains its regulatory power over proxy issues on matters other than election of directors or trustees, but
not on matters relating to elections of directors or trustees. The test is whether the controversy relates to such
election. All matters affecting the manner and conduct of the election of directors are properly cognizable by the
regular courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory

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 powers it exercises over corporations, partnerships and associations. SEC v. Court of Appeals, 739 SCRA 99
(2014).
Under Section 1 to 3 of Rule 6 of the Interim Rules, an election contest should be dismissed when filed beyond
the 15- day prescriptive period allowed for an election protect. In substance, the main issues herein are on all fours
with Yujuico v. Quiambao, 513 SCRA 243 (2007), where we expressly ruled that where one of the reliefs sought in
the complaint is to nullify the election of the Board of directors as the ASM (annual stockholders’ meeting), the
complaint involves an election contest. Ricafort v. Dicdican, 787 SCRA 163 (2016).
6. Term of Office, Vacancy and Holdover Principle (Sec. 29)

Section 29. Vacancies in the office of director or trustee. – Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only or the unexpired term of his predecessor in office.

Any directorship or trusteeship to be filled by reason of an increase in the number of directors or

trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of directors
or trustees if so stated in the notice of the meeting. (n)

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors,
hold-over until qualification of their successors. Gov’t v. El Hogar Filipino, 50 Phil. 399 (1927).
Remaining members of the Board of Directors cannot elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The hold-over period is not part of the term of office of a member of the board
of directors. Consequently, when during the holdover period, a director resigns from the board, the vacancy can
only be filled- up by the stockholders, since there is no term left to fill-up pursuant to the provisions of Section 29
which mandates that a vacancy occurring in the board of directors caused by the expiration of a member’s term
shall be filled by the corporation’s stockholders. That a director continues to serve after one year from his election
(i.e., on a holdover capacity), cannot be considered as extending his term. This hold-over period, however, is not to
be considered as part of his term, which as declared,had already expired. Valle Verda Country Club, Inc. v.
Africa, 205 SCRA 752 (1992).
6. Removal of Directors or Trustees (Sec. 28)

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 Section 28. Removal of directors or trustees. – Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3)
of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting called for the purpose,
and in either case, after previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock
corporation, on the written demand of a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the
notice, or if there is no secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member of the corporation signing the demand.
Notice of the time and place of such meeting, as well as of the intention to propose such removal,
must be given by publication or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under
Section 24 of this Code. (n)

A stockholders’ meeting called for the removal of a director is valid only when called by at least two-thirds of
the outstanding capital stock. Roxas v. De la Rosa, 49 PHIL. 609 (1926).
Only stockholders or members have the power to remove the directors or trustees elected by them, as laid down
in Sec. 28 of Corporation Code. Raniel v. Jochico, 517 SCRA 221 (2007).

8. Directors’ or Trustees’ Meetings (Secs. 49, 53, 54 and 92)

Section 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)

Section 53. Regular and special meetings of directors or trustees. – Regular meetings of the board
of directors or trustees of every corporation shall be held monthly, unless the by-laws provide
otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the call of the
president or as provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or outside of the

Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee
may waive this requirement, either expressly or impliedly. (n)

Section 54. Who shall preside at meetings. – The president shall preside at all meetings of the
directors or trustee as well as of the stockholders or members, unless the by-laws provide
otherwise. (n)

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 Section 92. Election and term of trustees. – Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more
than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as
soon as organized, so classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the
board of trustees shall be held annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members. (n)

a. Quorum
For stock corporations, the “quorum” referred to in Section 52 is based on the number of outstanding voting
stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be
counted in determining the existence of a quorum during members’ meetings. Dead members shall not be
counted. Tan v. Sycip, 499 SCRA 216 (2006).
When the principle for determining quorum for stock corporations is applied by analogy to non-stock
corporations, only those who are actual members with voting rights should be counted. Tan v. Sycip,
499 SCRA 216 (2006).
b. Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it
may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption,
being merely prima facie would not hold in the face of clear evidence to the contrary. Lopez v. Ericta, 45
SCRA 539 (1972).
c. Teleconferencing Allowed under Specified Terms: See SEC Memo Circular No. 15, s. 2001.
d. Minutes of Meetings
There is no provision in the Corporation Code that requires that the minutes of the meeting should be signed
by all the members of the board—the signature of the corporate secretary gives the minutes of the meting
probative value and credibility. The entries contained in the minutes are prima facie evidence of what actually
took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence. People v.
Dumlao, 580 SCRA 409 (2009).
Resolution versus Minutes: A resolution is distinct and different from the minutes of the meeting—a board
resolution is a formal action by a corporate board of directors or other corporate body authorizing a particular
act, transaction, or appointment, while, on the other hand, minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/members or directors/trustees, but also at a meeting of an
executive committee. People v. Dumlao, 580 SCRA 409 (2009).
When there is evidence to show that other directors and the corporate secretary refused to sign the minutes,
then the presumption in Dumlao does not prevail. Lopez Realty, Inc. v. Spouses Tanjangco,
739 SCRA 644 (2014).

10. COMPENSATION OF DIRECTORS (Sec. 30)

Section 30. Compensation of directors. – In the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such compensation other than per diems may
be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year. (n)

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 Directors and trustees are not entitled to salary or other compensation when they perform nothing more than
the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service
gratuitously, and that the return upon their shares adequately furnishes the motives for service, without
compensation. But they can receive remunerations for executive officer position.
ü Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).79
It is well settled that directors presumptively serve without compensation. Hence, even though director
assigning themselves additional duties which still fall within their power much less do they amount to
extraordinary or unusual services to the company, they would then be acting in excess of their authority by voting
for themselves compensation for such additional duties. In addition, such transfer of properties of the corporation
by way of payment of compensation amounts to self-dealing covered by Section 32 of the Corporation Code.
Agdao Landless Residents Assn. v. Maramion, 806 SCRA 74 (2016).

11. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS

a. Directors as Fiduciaries
Pre-Corporation Code Fiduciary Rule for Corporate Officers: Palting v. San Jose Petroleum, 18
SCRA 924.
In Philippine jurisdiction, the members of the Board of Directors have a three- fold duty: duty of obedience,
duty of diligence, and the duty of loyalty. Accordingly, the members of the board of directors
(1) shall direct the affairs of the corporation only in accordance with the purpose for which it was organized;
(2) shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in
bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees. Strategic Alliance Dev.
Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.
b. Duty of Obedience (Sec. 25)

Section 25. Corporate officers, quorum. – Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that no one shall act as president
and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide
for a greater majority, a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting at which there is a
quorum shall be valid as a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

The board of directors should act in the manner and within the formalities, if any, prescribed by its charter or by
the general law. Lopez Realty Inc. v. Fontecha, 2247 SCRA 183 (1995).

c. Duty of Diligence (Sec. 31)

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 Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such 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.

When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)

The directors shall be personally liable to reimburse the corporation for the amounts of dividends wrongfully
declared and paid to stockholders, when they failed to consider that therecoreded retained earnings in the books of
the corporation was illusory considering the various accounts receivables that had to be written off as
uncollectible. Steinberg v. Velasco, 52 Phil. 953 (1929).
To make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by
the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on
company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are
those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a
law declaring the act unlawful and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy-Dumalasa v.
Fernandez, 593 SCRA 656 (2009).
Holding a corporate officer personally liable for directing the corporate affairs with gross negligence or in bad
faith does not amount to an application of the doctrine of piercing the veil of corporate fiction, for such personal
liability is imposed directly under Section 31 to directors and officers of corporation who are guilty of violating
their duty of diligence. Sanchez v. Republic, 603 SCRA 229 (2009).
d. Duty of Loyalty (Secs. 31 to 34)

Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such 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.

When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)

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 Section 32. Dealings of directors, trustees or officers with the corporation. – A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of
a contract with a director or trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances. (n)

Section 33. Contracts between corporations with interlocking directors. – Except in cases of fraud,
and provided the contract is fair and reasonable under the circumstances, a contract between two
or more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors. (n)

Section 34. Disloyalty of a director. – Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, he must account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the venture. (n)

(i) Doctrine of Corporate Opportunity

It is well established that corporate officers are not permitted to use their position of trust and confidence to
further their private interests. The doctrine of “corporate opportunity” s precisely a recognition by the courts that
the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interest.
The doctrine rest fundamentally on the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his personal profit when the interest of the corporation justly calls for protection.
Gokongwei v. SEC, 89 SCRA 336 (1979).
(ii) Using Inside Information
When a director-majority stockholder, who is the administrator of corporate affairs directly negotiating the sale
of corporate landholdings to the Government at great prices, purchases the stocks of a shareholder without
informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the
shareholdings by way of deceit practiced by means of concealing his knowledge of important corporate affairs.
Strong v. Repide, 41 Phil. 947 (1909).

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 Doctrine of corporate opportunity applies to confidential employees of the corporation. cf. Sing Juco
v. Llorente, 43 Phil. 589 (1922).
(iii) Self-Dealings of Directors and Officers (Sec. 32)

Section 32. Dealings of directors, trustees or officers with the corporation. – A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of
a contract with a director or trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances. (n)

Section 32 on self- dealings by directors/trustees and officers merely incorporate well- established principles in
Corporate Law. A director who enters into a distributorship agreement with the corporation would make the
contract voidable at the option of the corporation especially when the terms are disadvantageous to the
corporation. The director cannot claim the same doctrine as an outsider dealing in good faith with the corporation.
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).
e. Contracts Between Corporations with Interlocking Directors (Sec. 33)

Section 33. Contracts between corporations with interlocking directors. – Except in cases of fraud,
and provided the contract is fair and reasonable under the circumstances, a contract between two
or more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors. (n)

The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with
interlocking directors resulting in the prejudice to one of the corporation, has no application to cases where fraud
is alleged to have been committed to third parties. DBP v. Court of Appeals, 363 SCRA 307 (2001).
f. Duty to Creditors and Outsiders (Sec. 31)

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 Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such 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.

When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)

Under the trust fund doctrine, it would be a violation of the right of creditors to allow the return to the
stockholders of any portion of their capital or declare dividends outside of the unrestricted retained earnings, and
that upon the corporation’s insolvency, the Board of Directors are duty bound to hold its assets primarily for the
payment of the creditors. Mead v. McCullough, 21 Phil. 95 (1911).
g. Stakeholder Theory versus Maximization of Shareholders’ Value Doctrine:
• REVISED CODE OF CORPORATE GOVERNANCE [FOR PUBLIC COMPANIES] (SEC Memo Circular No. 6, s.
2009, as revised by SEC Memo Circular No. 9, s. 2014).
• CODE OF CORPORATE GOVERNANCE FOR PUBLICLY-LISTED COMPANIES (SEC Memorandum. Circular
No. 19, s. 2016)
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons
and medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that
reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises;
(2) between the hospital and the patient being treated or
Examined within its premises; and (3) between the patient and the doctor. Regardless of its relationship with
the doctor, the hospital may be held directly liable to the patient for its own negligence or failure to follow
established standard of conduct to which it should conform as a corporation. Professional Services, Inc. v. Court
of Appeals, 611 SCRA 282 (2010).

12. CORPORATE OFFICERS

The general principles of agency govern the relation between the corporation and its officers or agents, subject
to the articles of incorporation, by -laws, or relevant provisions of law—when authorized, their acts bind the
corporation, otherwise, their acts cannot bind it. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006);
Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
a. Rules on Corporate Officer’s Power to Bind the Corporation
Insofar as the public is concerned, a corporation may not distance itself from the acts of a senior officer:
“the dual roles of Romulo F. Sugay should not be allowed to confuse the facts.” R.F. Sugay v. Reyes, 12 SCRA
700 (1961).
An officer who is authorized to purchase the stock of another corporation has implied power to perform all
other obligations arising therefrom such as payment of the shares of stock. Inter-Asia Investments Industries v.
Court of Appeals, 403 SCRA 452 (2003).
Even though a judgment or order is addressed to the corporation only, the officers as well as the corporation
itself, may be punished for contempt for disobedience to its terms, at least if they knowingly disobey the court’s
mandate, since a lawful judicial command to a corporation is in effect a command to the officers. Heirs of
Trinidad de Leon Vda. De Roxas v. Court of Appeals, 422 SCRA 101 (2004).
Doctrine of Apparent Authority: Corporate policies need not be in writing. Contracts entered into by a
corporate officer or obligations or prestations assumed by such officer for and in behalf of such corporation are
binding on the said corporation only if such officer acted within the scope of his authority or if such officer
exceeded the limits of his authority, the corporation has ratified such contracts or obligations. Kwok v.
Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
While those who belong to the upper corporate echelons would have more privileges, it cannot be presume
the existence of such privileges or benefits—he who claims the same is burdened to prove not only the
existence of such benefits but also that he is entitled to the same. Kwok v. Philippine Carpet Manufacturing
Corp., 457 SCRA 465 (2005).

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 As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation, but when these officers exceeded their authority, their actions cannot bind the corporation, unless
it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI Employees Credit Union, Inc., 499
SCRA 319 (2006).
While it is a general rule that, in the absence of authority from the Board, no person, not even its officers,
can validly bind a corporation, the Board may validly delegate some of its functions and powers to its officers,
committee and agents. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).80
Just as a natural person may authorize another to do certain acts for and on his behalf, the Board of
Directors may validly delegate some of its functions and powers to officers, committees or agents—the
authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or
authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general
course of business. Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).81
(i) President
In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the
authority to act within the domain of the general objectives of the corporation’s business and within the scope
of his or her usual duties. Hence, it has been ruled in other jurisdiction that the president of the corporation
possesses the power to enter into a contract for the corporation, when the “conduct on the part of both the
president and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized, approved and ratified his
former and similar actions.” People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998).82
It is the Board of Directors, not the President, that exercises corporate powers. It must be emphasized that
the basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559
(2001).
The President is considered as the corporation’s agent, and as such, his knowledge of the repeal of a resolution in
another juridical person in which his corporation has an interest, is ascribed to his principal under the theory of
imputed knowledge. Rovels Enterprises v. Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck driver cannot be
held solidarily liable for the judgment obligation arising from quasi-delict, since the fact alone of being
President is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation and its
employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
(ii) Corporate Secretary
In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records –
he keeps the stock and transfer book and makes proper and necessary entries therein. It is his duty and obligation to
register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty,
the transferor-stockholder may rightfully bring suit t compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA
793 (1997).
A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the buyer relies upon
a Secretary’s Certificate confirming authority. A secretary’s certificate which is regular on its face can be relied
upon by a third party who does not have to investigate the truths of the facts contained in such certification;
otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered.
Esguerra v. Court of Appeals, 267 SCRA 380 (1997).
Although the corporate secretary’s duty to record transfers of stock is ministerial, he cannot be compelled to do
so when the transferee’s title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor,
prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the
corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge.
Mandamus will not issue to establish a right, but only to enforce one that is already established. Lim Tay v. Court
of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
A Corporate Secretary’s obligation under Section 74 of the Corporation Code to record in the stock and transfer
book any and all alienations involving the shares of stock of the corporation, does not cover any obligation to
record the attachment of banks against the shares of a debtor, since attachments are not transfer of shares, but
merely a burden on the title of the owner. Only absolute transfers of shares of stock are required to be recorded in
the stock and transfer book in order to have “force and effect as against third persons.” Ferro Chemicals, Inc. v.
Garcia, 804 SCRA 528 (2016).

(iii) Corporate Treasurer

A corporate treasurer’s function have generally been described as “to receive and keeps funds of the
corporation, and to disburse them in accordance with the authority given him by the board or the properly
authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a
sale of its assets, which obviously is foreign to a corporate treasurer’s function. San Juan Structural v. Court of
Appeals, 296 SCRA 631, 645 (1998).
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 A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of crossed checks,
knowing fully well that the checks were strictly endorsed for deposit only to the payee’s account and not to be
further negotiated, may be personally liable for the damaged caused the corporation. Atrium Management Corp. v.
Court of Appeals, 353 SCRA 23 (2001).

(iv) Manager
Although a branch manager of a bank, within his field and as to third persons, is the general agent and is in
general charge of the corporation, with apparent authority commensurate with the ordinary business entrusted him
and the usual course and conduct thereof, yet the power to modify contracts of the bank remains generally with the
board of directors. Being a branch manager alone is insufficient to support the conclusion that he has been clothed
with “apparent authority” to verbally alter terms of the bank’s written contract, such a the mortgage contract.
Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).

b. BOARD POWER TO APPOINT AND TERMINATE CORPORATE OFFICERS

(i) Nature of Exercise of Power to Terminate Officers
An officer’s removal is a corporate act, its nature is not altered by the reason or wisdom, or lack thereof, with
which the Board of Directors might have in taking such action. Perforce, the matter would come within the area of
corporate affairs and management, and such a corporate controversy would call for SEC adjudicative expertise
[now RTC Special Commercial Courts], not that of NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999); Okol v.
Slimmers World Int’l, 608 SCRA 97 (2009).
The president, vice -president, secretary and treasurer are commonly regarded as the principal or executive
officers of a corporation, and they are usually designated as the officers of the corporation. However, other officers
are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered
under the by-laws of a corporation to create additional offices as may be necessary. This Court expounded that an
“office” is created by the charter of the corporation and the officer is elected by the directors or stockholders, while
an “employee” usually occupies no office and generally is employed not by action of the directors or stockholders
but by the managing officer of the corporation who also determines the compensation to be paid to such employee.
The creation of the position is under the corporation’s charter or by-laws, and that the election of the officer is by
the directors or stockholders must concur in order for an individual to be considered a corporate officer, as against
an ordinary employee or officer. It is only when the officer claiming to have been illegally dismissed is classified
as such corporate officer that the issue is deemed an intra-corporate dispute which falls within the jurisdiction of
the trial courts. Wesleyan University-Philippines v. Maglaya, Sr., G.R. No. 212774, 23 Jan. 2017.
The position of Executive Secretary, which is provided for in the Society’s by -laws, is an “officer”
position. Since the appointment of the incumbent did not contain a fixed term, the implication was that the
appointee held the appointent at the pleasure of the Board of Directors, such that when the Board opted to
replace the incumbent, technically there was no removal but only an expiration of the term and there was no
need of prior notice, due hearing or sufficient grounds before the incumbent could be separated from office.
Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).84
When the by-laws provide for the position of “Superintendent/ Administrator,” it is clearly a corporate
officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC.
Ongkingco v. NLRC, 270 SCRA 613 (1997).
A mere manager not so named in the by-laws does is not an officer of the corporation. Pamplona
Plantation Company v. Acosta, 510 SCRA 249 (2006).
One who is included in the by-laws of a corporation in its roster of corporate officers is an officer of said
corporation and not a mere employee—being a corporate officer, his removal is deemed to be an intra-
corporate dispute cognizable by the SEC and not by the Labor Arbiter. Garcia v. Eastern Telecommunications
Philippines, 585 SCRA 450 (2009).
Ordinary company employees are generally employed not by action of the directors and stockholders but by
that of the Management of the corporation who also determines the compensation to be paid such employees.
Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those
who are given that character either by the Corporation Code or by the corporation’s by-laws. Gomez v. PNOC
Dev. and Management Corp., 606 SCRA 187 (2009).85
Although the by-laws provide expressly that the Board of Directors “shall have full power to create new
offices and to appoint the officers thereto,” any office created, and any officer appointed pursuant to such
clause does not become a “corporate officer”, but is an employee and the determination of the rights and
liabilities relating to his removal are within the jurisdiction of the NLRC; they do not constitute intra-corporate
controversies. “A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the
By-Laws of an enabling clause on the creation of just any corporate officer position.” The rulings in Tabang v.
NLRC, 266 SCRA 462 (1997), and Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002), “should
no longer be controlling.” Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12 (2010).86
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13. LIABILITIES OF DIRECTORS, TRUSTEES AND OFFICERS (Sec. 31)

Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such 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.

When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)

a. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts

Corporate officers who entered into and signed contracts on behalf of the corporation in their official
capacities cannot be made personally liable thereunder in the absence of stipulation to that effect, due to the
personality of the corporation being separate and distinct from the persons composing it. Western Agro
Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990).87
Mere ownership by an officer (President) of majority of the equity of the corporation do not warrant a
piercing of the veil of corporate fiction to make such officer personally liable for the debts of the corporation.
Palay, Inc. v. Clave, 124 SCRA 638 (1993).88
To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction,
the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never
presumed. Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
faith means [a] breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of
fraud. Carag v. NLRC, 520 SCRA 28 (2007).89
Unless they have exceeded their authority, corporate officers are not personally liable for their official acts,
because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders
and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).90
A corporation has a personality separate and distinct from the persons composing or representing it; hence,
personal liability attaches only in exceptional cases, such as when the director, trustee, or officer is guilty of
bad faith or gross negligence in directing the affairs of the corporation. Continental Cement Corp. v. Asea
Brown Boveri, Inc., 659 SCRA 137 (2011).91
Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their personal
liability but the direct responsibility of the corporation they represent. Polymer Rubber Corp. v. Salamuding,
702 SCRA 153 (2013).
b. Rundown on Corporate Liability: Tramat Mercantile, Inc. v. CA, 238 SCRA 14 (1994).92
Before a director or officer of a corporation can be held personally liable for corporate obligations, the
following requisites must concur: (a) the complaint must allege that the director or officer assented to patently
unlawful acts of the corporation, or the officers or directors were guilty of gross negligence or bad faith; and (b)
the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. Heirs of Fe
Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013).93
An officer-stockholder who signs in behalf of the corporation to a fraudulent contract cannot claim the
benefit of separate juridical entity: “Thus, being a party to a simulated contract of management, petitioner Uy
cannot be permitted to escape liability under the said contract by using the corporate entity theory. This is one
instance when the veil of corporate entity has to be pierced to avoid injustice and inequity.” Paradise Sauna
Massage Corporation v. Ng, 181 SCRA 719 (1990).
Finding of solidary liability among the corporation, its officers and directors would patently be baseless when
the decision contains no allegation or finding regarding particular acts committed by said officers and director
that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal
dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their
official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation.
NPC. v. Court of Appeals, 273 SCRA 419 (1997).94
While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal
liability for the corporate debts, a corporate officer may nevertheless divest himself of this protection by

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 voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544
(2003).
Officers signing as a solidary guarantee as corporate representative did not undertake to guarantee personally
the payment of the corporation’s debt embodied in the trust receipts. Debts incurred by directors, officers and
employees acting as corporate agents are not theirs but the direct liability of the corporation. As an exception,
directors or officers are personally liable for the corporation’s debt if they so contractually agree or stipulate.
Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).
Officers of a corporation may become liable for its loans when they have breached their duty of diligence
under Sec. 31 of the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007).95
“Bad faith ” does not arise just because a corporation fails to pay its obligation, because the inability to pay
one’s obligation is not synonymous with fraudulent intent not to honor the obligations. In order to piece the veil
of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions
of the corporation, such negligence must be “gross”. Magaling v. Ong, 562 SCRA 152 (2008).
Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the
corporation or acquire any pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation. EDSA Shangri-La
Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
Where the Chairman & President has made himself accountable in the promissory note “in his personal
capacity and as authorized by the Board Resolution,” and in the absence of any representation on the part of
corporation that the obligation is all its own because of its separate corporate identity, we see no occasion to
consider piercing the corporate veil as material to the case.” Prisma Construction & Dev. Corp. v. Menchavez,
614 SCRA 590 (2010).

c. xSPECIAL PROVISIONS IN LABOR LAWS:

Since a corporate employer is an artificial person, it must have an officer who can be presumed to be the
employer, being the “person acting in the interest of (the) employer” as defined in Art. 283 of the Labor Code.
A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).
(i) Overturning the A.C. Ransom Ruling:
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of
the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of
officers for the debts of the corporation. David v. National Federation of Labor Unions, 586 SCRA 100 (2009).
Corporate officers cannot be held personally liable for damages on account of employees dismissal because
the employer corporation has a personality separate and distinct from its officers who merely acted as its agents.
Malayang Samahan … sa M. Greenfields v. Ramos, 357 SCRA 77 (2001).96
Corporate officers are not personally liable for money claims of discharged employees unless they acted with
evident malice and bad faith in terminating their employment. AHS/Philippines v. Court of Appeals, 257 SCRA
319 (1996).97
Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be
held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC, 189 SCRA 767
(1990);98 and for the separate juridical personality of a corporation to be disregarded as to make the highest
corporate officer personally liable on labor claims, the wrongdoing must be clearly and convincingly
established. Del Rosario v. NLRC, 187 SCRA 777 (1990).
A corporation, being a juridical entity, may act only through its directors, officers and employees and
obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the
corporation they represent. In labor cases, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of employees done with malice or bad faith. Brent Hospital,
Inc. v. NLRC, 292 SCRA 304 (1998).99
In labor cases, 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 this case, it is undisputed that the
corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-
ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the
feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and
Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997).
(ii) Limiting the A.C. Ransom Ruling to Insolvent Corporation
A.C. Ransom is not in point because there the corporation actually ceased operations after the decision of
the Court was promulgated against it, making it necessary to enforce it against its former president. When the
corporation is still existing and able to satisfy the judgment in favor of the private respondent, corporate
officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).

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 A.C. Ransom will apply only where the persons who are made personally liable for the employees’ claims
are stockholders-officers of employer-corporation. In the case at bar, a mere general manager while admittedly
the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a
member of the Board of Directors nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723 (1992).
(iii) A.C. Ransom Reiterated Again in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).100
(iv) Definitive Overturning of A.C. Ransom Ruling:
It is settled that in the absence of malice, bad faith, or specific provisions of law, a stockholder or an officer
of a corporation cannot be made personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222
(2007).101
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of
backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case. [What applies therefore is the ruling [i]n Santos v. NLRC, [254
SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).102
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA 22 (2007), that
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of
the corporation—the governing law on personal liability of directors or officers for debts of the corporation is
still Section 31 of the Corporation Code. Pantranco Employees Assn. (PEA-PTGWO)
v. NLRC, 581 SCRA 598 (2009).103
d. Personal Liability of Trustees and Officers of Non-Stock Corporations
The non-stock corporation acted in clear bad faith when it sent the final notice to a member under the
pretense they believed him to be still alive, when in fact it had very well known that he had already died. Non-
stock corporations and their officers are not exempt from the obligation imposed by Articles 19, 20 and 21
under the Chapter on Human Relations of the Civil Code, which provisions enunciate a general obligation
under law for every person to act fairly and in good faith towards one another. Valley Golf and Country Club,
Inc. v. Vda. De Caram, 585 SCRA 218 (2009)

X. RIGHTS OF STOCKHOLDERS AND MEMBERS

1. What Does a “Share” Represent?
While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they
are properties of the stockholders who own them]. 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 the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to
the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate property.
Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
The registration of shares in a stockholder’s name, the issuance of stock certificates, and the right to receive
dividends are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales
Corp. v. Court of Appeals, 349 SCRA 35 (2001).
“As early as the case of Fisher v. Trinidad, the Court already declared that “[t]he distinction between the title
of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and
well-settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The
interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are
declared by the corporation, during its existence, under its charter, and to a like proportion of the property
remaining, upon the termination or dissolution of the corporation, after payment of its debts.” Mobilia Products,
Inc. v. Umezawa, 452 SCRA 736 (2005).
A person who desires to be recognized as stockholder to exercise stockholders’ right must secure standing by
having his ownership of share recorded on the stock and transfer book. Thus, only those whose ownership of
shares are duly registered in the stock and transfer book are considered stockholders of record and are entitled to
all rights of a stockholder. Guy v. Guy, 790 SCRA 288 (2016).
2. Preemptive Rights (Sec. 39)

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 Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued
in compliance with laws requiring stock offerings or minimum stock ownership by the public; or
to shares to be issued in good faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.

Pre-emptive right under Section 39 refers to the right of a stockholder of a stock corporation to subscribe to all
issues or disposition of shares of any class, in proportion to their respective shareholdings. Although it can validly
be withdrawn, it cannot be done in breach of fiduciary duties such as to perpetuate control over the corporation.
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
The early pronouncement in Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983) that pre-emptive right
only covers increases in authorized capital stock, the new wordings under Section 39 as to cover all issuances of
shares has been corrected in Dee v. SEC, 199 SCRA 238 (1991).
3. Right to Transfer or Dispose of Shareholdings (Sec. 63)

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (35)

Shares of stock of a corporation are not owned or are the assets of the corporation—they are owned by the
stockholders of record. The corporation whose shares of stock are the subject of transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a part to transaction to be valid; however, to
bind the corporation as well as third parties, it is necessary that the transfer is recorded in the books of the
corporation. Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).
When the subscriber under a Subscription Agreement assigns the shares to another party, the same partakes of
the nature of a novation through the substitution of the person of the debtor, which is effective only with the
consent of the creditor; but that in the case of the corporation issuing the shares, such assignment would be valid
and binding upon notice by the transferee of the transfer of the shares coupled with a tender of the balance of the
unpaid subscription pursuant to the call made by the corporation. The provisions of Section 63 of the Corporation
Code to the effect that a transfer of shares does not bind the corporation unless it is registered in the corporate
books cannot apply in this case since formal notice of the transfer was given to the corporation. Interport
Resources Corp. v. SSI, 792 SCRA 155 (2016).
a. Restriction on Transfers—In General
Restraint of Trade : An agreement by which a person obliges himself not to engage in competitive trade for
five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the
parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918).
A contractual undertaking on restriction of transfer of shares that has a reasonable business purpose and
limited in coverage is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).
b. RIGHT OF FIRST REFUSAL

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 Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not suggest that
any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of
shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he
pleases, without limitation in this respect, than the general provisions of law.
The indication of the face of the stock certificate that it is “nontransferable” alone does not compel the
corporation to buy back the shares from the stockholder, and held that “in the absence of a similar contractual
obligation and of a legal provision applicable thereto, it is logical to include that it would be unjust and
unreasonable to compel the corporation to comply with a non-existent or imaginary obligation.”
Padget v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
The “right of first refusal” is primarily an attribute of ownership. Conversely, a waiver thereof is an act of
ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning its
exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988 (unrep.)
A corporation cannot by its board, its by -laws, or the act of its officers, create restrictions in stock transfers,
because “Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation
itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and
prescribe relation, not restriction; they are always subject to the charter of the corporation.” The only limitation
imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares intended to be
transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, and where
there exists a right of first refusal agreement between the co-shareholders, the fact that the corporations owns
land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. J.G. Summit Holdings, Inc.
v. Court of Appeals, 450 SCRA 169 (2005).
c. Remedy If Registration Refused:
Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the corporate
books when the petitioner is not the registered stockholder nor does he hold a power of attorney from the latter.
This is under the general rule that as between the corporation and its shareholders, the corporation looks only to
its books for the purpose of determining who its share-holders are, so that a mere indorsee of a certificate of
stock, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers,
in absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of
attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911).104
Since the law does not prescribe a period within which the registration of purchase of shares should be
effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning
the transfer.” Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).105
A stipulation on the stock certificate that any assignment would not be binding on the corporation unless
registered in the corporate books as required under the by-laws and without providing when registration should
be made, would mean that the cause of action and the determination of prescription period would begin only
when demand for registration is made and not at the time of the assignment of the certificate. Won v. Wack
Wack Golf & Country Club, 104 Phil. 466 (1958).
BUT SEE: It is already settled jurisprudence that the registration of a transfer of shares of stock is a
ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of mandamus
to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new certificates
of stock. This remedy is available even upon the instance of a bona fide transferee who is able to establish a
clear legal right to the registration of the transfer. Andaya v. Rural Bank of Cabadbaran, 799 SCRA 325
(2016).
The claim for damages of what the shares could have sold had the demand for their registration in the name
of the buyer been complied with is deemed to be speculative damage and non-recoverable. Batong Buhay
Gold Mines v. Court of Appeals, 147 SCRA 4 (1987).
4. Rights to Dividends (Sec. 43)

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 Section 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies. (n)

The term “dividend” in its technical sense and ordinary acceptation is that part of portion of the profits of the
enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of it
capital stock—it is a payment, and the right thereto is an incident of ownership of stock. Hence, when the Court
directed that a total of 111,415 shares of PLDT be reconveyed to the Republic as the rightful owner of said shares,
that necessarily included the reconveyance to the Republic of the dividends and interest accruing thereto.
Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009).
5. Right to Attend and Vote at Stockholders’/Members’ Meetings (Secs. 6 and 89)

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 Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to issue no-par value shares of
stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated
par value. The board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms
and conditions shall be effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value
of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights. (5a)

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 Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any
meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on
account of such participation, even if it be shown later on that the shares had been previously sold (but not
recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).
One of the rights of a stockholder is the right to participate in the control and management of the corporation
that is exercised through his vote—a right inherent in and incidental to the ownership of corporate stock, and as
such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004).
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued
stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or
whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock
actually issued and outstanding may be voted. Under Section 6, each share of stock is entitled to vote, unless
otherwise provided in the articles of incorporation or declared delinquent under Section 67. Neither the
stockholders nor the corporation can vote or represent shares that have never passed to the ownership of
stockholders, or, having so passed, have again been purchased by the corporation. These shares are not to be taken
into consideration in determining majorities. When the alw speaks of a given proportion of the stock, it must be
construed to mean shares that have been passed from the corporation, and thatm ay be voted. Tan v. Sycip, 499
SCRA 216 (2006).
Sequestration of shares does not entitle the government to exercise acts of ownership, since even sequestered
shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). However,
inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which
are public in character, then the right to vote them shall be exercised by the PCGG. Republic v. COCOFED, 372
SCRA 462 (2001); Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006).
a. Instances When Stockholders Entitled to Vote:
- Amendment of articles of incorporation (Sec. 16)
- Election of directors and trustees (Sec. 24)
- Investment in another business or corporation (Secs. 36 and 42)
- Increase and Decrease of capital stock (Sec. 38)
- Incurring, or increasing bonded indebtedness (Sec. 38)
- Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec. 40)
- Declaration of stock dividends (Sec. 43).
- Management contracts (Sec. 44)
- Adoption, amendment and repeal of by-laws (Sec. 48).
- Fixing of consideration of no par value shares (Sec. 62)
- Merger and consolidation (Sec. 72)

b. Joint Ownership (Sec. 56)

Section 56. Voting in case of joint ownership of stock. – In case of shares of stock owned jointly
by two or more persons, in order to vote the same, the consent of all the co-owners shall be
necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares: Provided, That when the shares are owned
in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or
appoint a proxy therefor. (n)

c. Pledgor, Mortgagors and Administrators (Sec. 55)

Section 55. Right to vote of pledgors, mortgagors, and administrators. – In case of pledged or
mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and
vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the
pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books.
(n)

Executors, administrators, receivers, and other legal representatives duly appointed by the court
may attend and vote in behalf of the stockholders or members without need of any written proxy.
(27a)

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 When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a
loan, the pledgee does not become the owner thereof simply by the failure of the registered stockholder to pay
his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in
his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to bring suits on
behalf of the deceased, do no prohibit the heirs from representing the deceased. When no administrator has
been appointed, there is all the more reason to recognize the heirs as the proper representatives of the deceased.
Gochan v. Young, 354 SCRA 207 (2001).
d. Treasury Share No Voting Rights (Sec. 57) Tan v. Sycip, 499 SCRA 216

Section 57. Voting right for treasury shares. – Treasury shares shall have no voting right as long as
such shares remain in the Treasury. (n)

e. (2006). e. Conduct of Stockholders’ Meetings:

Section 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)

Section 50. Regular and special meetings of stockholders or members. - Regular meetings of
stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed,
on any date in April of every year as determined by the board of directors or trustees: Provided,
That written notice of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.

Special meetings of stockholders or members shall be held at any time deemed necessary or as
provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent
to all stockholders or members, unless otherwise provided in the by-laws.

Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

Whenever, for any cause, there is no person authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning stockholder or member directing him to call a
meeting of the corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority of the stockholders
or members present have chosen one of their number as presiding officer. (24, 26)

Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s
meetings, whether regular or special, shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members, if
within the powers or authority of the corporation, shall be valid even if the meeting be improperly
held or called, provided all the stockholders or members of the corporation are present or duly
represented at the meeting. (24 and 25)

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 Section 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or
a majority of the members in the case of non-stock corporations. (n)

Section 93. Place of meetings. – The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even outside the place where
the principal office of the corporation is located: Provided, That proper notice is sent to all
members indicating the date, time and place of the meeting: and Provided, further, That the place
of meeting shall be within the Philippines. (n)

• Kinds and Requirements of Meetings (Secs. 49 and 50);

• Place and Time of Meeting (Secs. 51 and 93);
• Quorum (Sec. 52)
Section 50 of the Corporation Code expressly allows a shorter period of notice of stockholders’ meetings
that those provided under its default two (2) week period, provided the same is provided for in the By-Laws.
Ricafort v. Dicdican, 787 SCRA 163 (2016); Guy v. Guy, 790 SCRA 288 (2016).
Quorum is based on the totality of the shares which have been subscribed and issued whether it be
founders’ shares or common shares. To base the computation of quorum solely on the obviously deficient, if
not inaccurate STB, and completely disregarding the issued and outstanding shares indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the said shares. The stock and
transfer book cannot be used as the sole basis for determining the quorum as it does not reflect the totality of
shares which have been subscribed, more so when the articles of incorporation show a significantly larger
amount of shares issued and outstanding as compared to that listed in the stock and transfer book. Lanuza v.
CA, 454 SCRA 54 (2005).

6. Contracts and Agreement Affecting Shareholdings

a. Proxy (Sec. 58)

Section 58. Proxies. – Stockholders and members may vote in person or by proxy in all meetings
of stockholders or members. Proxies shall 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. (n)

Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the
validation of such secured and submitted proxies. It is possible that an intra-corporate controversy may animate
a disgruntled shareholder to complain to the SEC, corporation’s violations of SEC rules and regulations, but
that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers,
especially so since such powers are exercisable on a motu proprio basis. GSIS v. Court of Appeals, 585 SCRA
679 (2009).
The SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively
been withdrawn, tied as it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular
courts under Section 5(c) is confined to the voting on election of officers, and not on all matters which may be
voted upon by stockholders, elucidates that the power of the Securities and Exchange Commission (SEC) to
regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than
the election of directors. GSIS v. Court of Appeals, 585 SCRA 679 (2009).
b. Voting Trust Agreements (Sec. 59)

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 Section 59. Voting trusts. – One or more stockholders of a stock corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the
case of a voting trust specifically required as a condition in a loan agreement, said voting trust
may be for a period exceeding five (5) years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed with the corporation and
with the Securities and Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall
be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which
shall be transferable in the same manner and with the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder of the corporation in the same manner as any other corporate book or record:
Provided, That both the transferor and the trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the provisions of this Code.

Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions
of said agreement.

No voting trust agreement shall be entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire
at the end of the agreed period, and the voting trust certificates as well as the certificates of stock
in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the transferors.

The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a)

A VTA separates the voting rights and other rights covered of the stock from other attributes of ownership,
intended to be irrevocable for a definite period of time and the purpose of which is to give to the trustee to
acquire voting control of the corporation. Lee v. CA, 205 SCRA 752 [1992]).
The trustor has a right to terminate the VTA for breach thereof. Everett v. Asia Banking Corporation,
49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
c. Pooling Agreements or Shareholders’ Agreements (Sec. 100)

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 Section 100. Agreements by stockholders. -

1. Agreements by and among stockholders executed before the formation and organization of a
close corporation, signed by all stockholders, shall survive the incorporation of such corporation
and shall continue to be valid and binding between and among such stockholders, if such be their
intent, to the extent that such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except those required by
this Title to be embodied in said articles of incorporation.

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
them.

3. No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make
them partners among themselves.

4. A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability insurance.

7. RIGHTS TO INSPECT AND COPY CORPORATE RECORDS

a. Basis of Right
The stockholder’s right of inspection of corporate books and records arises as an incident of ownership of
the assets and property of the corporation. It is therefore an incident of ownership of the corporate property,
whether such interest be termed an equitable ownership, a beneficial ownership or a quasi- ownership. The
right of inspection is predicated upon the necessity of self-protection on the part of the stockholder.
Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).106
The grant of legal personality to a corporation is conditioned on its compliance with certain obligations.
Among these are its fiduciary responsibilities to its stockholders. Providing stockholders with access to
information is a fundamental basis for their intelligent participation in the governance of the corporation as a
business organization that they partially own. The law is agnostic with respect to the amount of shares
required. Generally, each individual stockholder should be given reasonable access so that he or she can
assess or share his or her assessment of the management of the corporation with other stockholders. The
separate legal personality of a corporation is not so absolutely separate that it divorces itself from its
responsibility to its constituent owners. Philippine Associated Smelting and Refining Corp. v. Lim, 804
SCRA 600 (2016).
The right to inspect remains valid and enforceable during the 3-year liquidation period provided under
Sections 122 and 145 of the Corporation Code. êChua v. People, 801 SCRA 436 (2016).
b. Specified Records Covered (Secs. 74, 75 and 141)

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 Section 74. Books to be kept; stock transfer agent. – Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act done
or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member,
the time when any director, trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder
or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate purpose in making
his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. 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.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks
in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock corporation is not
precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein provided,
shall be applicable. (51a and 32a; P.B. No. 268.)

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 Section 75. Right to financial statements. – Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall furnish to him 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, showing in reasonable detail its assets and liabilities and the
result of its operations.

At the regular meeting of stockholders or members, the board of directors or trustees shall present
to such stockholders or members a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly signed and certified by an
independent certified public accountant.

However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements
may be certified under oath by the treasurer or any responsible officer of the corporation. (n)

c. Limitations and Conditions on Right of Inspection (Sec. 74)

As contrasted from the old Corporation Law, the law now provides for (a) express limitations on the right
to inspect, and (b) now requires as a condition for such examination that one requesting it must not have been
guilty of using improperly any information secured through a prior examination, and (c) that the person asking
for such examination must be acting in good faith and for a legitimate purpose in making his demand. The
exercising stockholder must set forth the reasons and the purposes for which he desires such inspection.
Gonzales v. PNB, 122 SCRA 489 (1983).
The only express limitations on the right of inspection under Sec. 74 are: (a) it should be exercised at
reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the
corporate records and minutes has not improperly used any information secured through any previous
examination of records; and (c) the demand is made in good faith or for a legitimate purpose. Africa v. PCGG,
205 SCRA 39 (1992).
Section 74 places the burden of showing unlawful intention on the part of corporate officers who
refuse a registered stockholder from exercise his right to inspect. Republic v. Sandiganbayan, 199 SCRA
39 (1999); Terelay Investment and Dev. Corp. v. Yulo, 765 SCRA 1 (2015).
Summary of Rulings: The right to inspect corporate books and records:
• Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not
know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919).
• Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose
records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
• Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate
premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
• Does not include the right of access to minutes until such minutes have been written up and approved by the directors.
Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
• Cannot be limited to a period of ten days shortly prior to the annual stockholders’ meeting, as such would be an
unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.”
Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).

d. Remedies If Right Denied: Mandamus

Refusal to allow stockholders or members to examine company books is not a ground for appointing a
receiver (or creating a management committee) since there are other adequate remedies, such as write of
mandamus. Misconduct of corporate directors or other officers is not a ground for the appointment of a
receiver where thera re one or more adequate legal action against the officers, where they are solvent, or
other remedies. Ao-as v. CA, 491 SCRA 339 (2006).

As contrasted from the old Corporation law, the law now provides for express limitation on the right to
tinspect and now requires asa condition for such examination that one requesting must not have been guilty
of using improperly any information secured through a prior examination, and that the person asking for
such examination must be acting in good faith and for a legitimate purpose in making his demand. The
stockholder seeking to exercise the right of inspection must set forth the reasons and the purposes for which
he desires such inspection. Gonzales v. PNB, 122 SCRA 489 (1983).

Burden of proof to show that examination is for improper purpose is on the part of the corporation.
Republic v. Sandiganbayan, 199 SCRA 39 (1999).

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 The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that an action
for injunction and, consequently, a writ of preliminary injunction filed by a corporation is generally
unavailable to prevent stockholders from exercising their right to inspection. Specifically, stockholders cannot
be prevented from gaining access to the (a) records of all business transactions of the corporation; and (b)
minutes of any meeting of stockholders or the board of directors, including their various committees and
subcommittees. PASAR v. Lim, 804 SCRA 600 (2016).
e. Criminal Sanction under Section 144

Section 144. Violations of the Code. – Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one
thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If
the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director, trustee or officer
of the corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code. (190 1/2 a)

ü Ang-Abaya v. Ang, 573 SCRA 129 (2008), enumerated the requisites before the penal provision under
Sect. 144 of the Corporation Code may be applied in a case of violation of a stockholder or member’s right to
inspect the corporate books/records as provided for under Sec. 74. In a criminal complaint for violation of
Section 74, the defense of improper use or motive is in the nature of a justifying circumstance that would
exonerate those who raise and are able to prove the same, Where inspection is denied on the ground of
improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation.
Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009).
Officer’s refusal to allow a stockholder to review any corporate record, including the stock and transfer
book, provided for in Sec. 74 would constitute a criminal offense under Section 144 which anyway punishes all
violations of the Corporation Code. Yujuico v. Quimbao, 724 SCRA 262 (2014).
While a cloud of doubt is cast upon the existence of criminal intent on the part of the corporate officers, it is
jurisprudentially settled that proof of malice or deliberate intent (men rea ) is not essential in offenses
punishable by special laws, which are mala prohibita. Section 74, in relation to Sec. 144, of the Corporation
Code, a special law, provides for penalties relative to the commission of offenses, which cannot be trivialized,
lest the public purpose for which they are crafter be defeated and put to naught.
Chua v. People, 801 SCRA 436, 451 (2016).
f. Confidential Nature of SEC Examinations (Sec. 142)

Section 142. Confidential nature of examination results. – All interrogatories propounded by the
Securities and Exchange Commission and the answers thereto, as well as the results of any
examination made by the Commission or by any other official authorized by law to make an
examination of the operations, books and records of any corporation, shall be kept strictly
confidential, except insofar as the law may require the same to be made public or where such
interrogatories, answers or results are necessary to be presented as evidence before any court. (n)

8. Appraisal Right (Secs. 81 to 86 and 105)

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 Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the
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 of extending or shortening the term of corporate existence;

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 the Code; and

3. In case of merger or consolidation. (n)

Section 82. How right is exercised. – The appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment of the fair value of his
shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the
appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate or certificates of stock representing his shares,
the fair value thereof as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third by the two thus chosen. The
findings of the majority of the appraisers shall be final, and their award shall be paid by the
corporation within thirty (30) days after such award is made: Provided, That no payment shall be made
to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to
cover such payment: and Provided, further, That upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n)

Section 83. Effect of demand and termination of right. – From the time of demand for payment of the
fair value of a stockholder’s shares until either the abandonment of the corporate action involved or
the purchase of the said shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended in accordance with the provisions of this Code, except the
right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored. (n)

Section 84. When right to payment ceases. – No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If, however, such demand for payment is
withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the Securities and Exchange Commission where such
approval is necessary, or if the Securities and Exchange Commission determines that such stockholder
is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his
shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him. (n)

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 Section 85. Who bears costs of appraisal. – The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed
against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)

Section 86. Notation on certificates; rights of transferee. – Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his
shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do
so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by
the certificates bearing such notation are transferred, and the certificates consequently cancelled, the
rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and all dividend distributions which would have accrued
on such shares shall be paid to the transferee. (n)

A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of
his shares, which right of appraisal is expressly recognized in Section 81. Clearly, the right of appraisal may be
exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing
the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose
of enabling the dissenting stockholder to have his interest purchased and to retire from the corporation. Turner v.
Lorenzo Shipping Corp., 636 SCRA 13 (2010).

9. RIGHT TO FILE DERIVATIVE SUITS

Derivative suits are governed by the “Interim Rules of Procedure Governing Intra-Corporate
Controversies under Republic Act No. 8799” (A.M. No. 01-2-04- SC; effective 01 April 2001). Section 1, Rule
1 thereof expressly lists derivative suits among the cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals,
590 SCRA 548, 556 (2009).
A “family” corporation is not exempt from complying with the clear requirements and formalities of the rules
for filing a derivative suit. There is nothing in the pertinent laws or rules which state that there is a distinction
between family corporations and other types of corporations in the institution by a stockholder of a derivative suit.
Ang v. Spouses Ang, 699 SCRA 272 (2013).

a. Nature of the Power to File Derivative Suit

A derivative suit is an action brought by minority shareholders in the name of the corporation to redress
wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by
equity and has been the principal defense of the minority shareholders against abuses by the majority. Western
Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).107
The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce
rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action. R.N. Symaco
Trading Corp v. Santos, 467 SCRA 312 (2005).108
b. Condition Precedent: Derivative Suit Can Be Effectively Only When Board Cannot Properly Exercise Its
Business Judgment
GENERAL RULE: In the absence of a special authority from the Board of Directors to institute a derivative
suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her
own name or for the corporation. The power to sue and be sued is lodged in the Board that exercises its
corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
Under Sec. 36, in relation to Sec. 23, a corporation’s power to sue is lodged with its Board. An individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in
order to protect or vindicate corporate rights, henever the officials of the corporation refuse to sue, or are the
ones being sued, or hold control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.
ü Chua v. Court of Appeals, 443 SCRA 259 (2004).109
While questions of policy and management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for the judgment of the Board of
Directors; yet where the corporate directors are guilty of breach of trust—not of mere error of judgment or abuse

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 of discretion—and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself
and other stockholders and for the benefit of the corporation. However, the corporation is the real party in interest
in a derivative suit and the suing
stockholder is only a nominal party. A derivative suit must be differentiated from a class suit. Cua, Jr. v. Tan, 607
SCRA 645 (2009).110
In Cua, v. Tan, We held that by virtue of ratification, the acts of the Board of Directors become the acts of the
stockholders themselves, even if those acts were, at the outset, unauthorized . . . By ratification, even an
unauthorized act of an agent becomes the authorized act of the principal. To declare the Board resolution null and
void will serve no practical use or value, or affect any of the rights of the parties, because the subsequent
stockholders’ resolution approving and ratifying said acquisition and the manner in which PRCI shall constitute
the JTH Board of Directors, will still remain valid and binding. Lopez Realty, Inc. v. Spouses Tanjangco, 739
SCRA 644 (2014).
Minority stockholders do not have any statutory right to override the business judgments of the officers and
Boards of Directors. It is settled that a stockholder's right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569
(2014).111
c. REQUISITES OF DERIVATIVE SUIT
In the case of, we enumerated the foregoing requisites before a stockholder can file a derivative suit:
(a) the party bringing suit should be a shareholder during the time of the act or transaction complained of, the
number of shares not being material; (b) the party has tried to exhaust intra-corporate remedies, relief, but the latter
has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation; the
wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing
the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).112
Section 1, Rule 8 of the Interim Rules lays down the following requirements which a stockholder must comply
with in filing a derivative suit: A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable
efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3)
No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment
suit. Yu v. Yukayguan, 589 SCRA 588 (2009).113
(i) Who May Bring a Derivative Suit?
The relators must be stockholders both at time of occurrence of the events constituting the cause of action and
at the time of the filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911); Gochan v. Young, 354
SCRA 207 (2001).
A minority stockholder can file a derivative suit against the president for diverting corporate income to his
personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s board of
directors in a derivative suit brought against them. To do so would be tantamount to representing conflicting
interests, which is prohibited by the Code of Professional Responsibility.” Hornilla v. Salunat, 405 SCRA 220
(2003).
Since a derivative action is a suit by a shareholder to enforce a corporate cause of action, the corporation is a
necessary party to the suit, and the relief which is granted is a judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder
may intervene and defend on behalf of the corporation. Chua v. Court of Appeals, 443 SCRA 259 (2004).114
Since the ones to be sued are the directors/officers themselves, a stockholder, like Cruz, may validly institute a
derivative suit to vindicate the alleged corporate injury; in which case Cruz is only a nominal party while Filport is
the real party-in-interest. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A minority stockholder-director has no power or authority to sue on the corporation’s behalf. Nor can we uphold
this as a derivative suit, since it is required that the minority stockholder suing for and on behalf of the corporation
must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all
other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has
complied with the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Hi-Yield Realty, Inc. v.
Court of Appeals, 590 SCRA 548 (2009).
The status of heirs as co-owners of shares of stocks prior to the partition of the decedent’s estate does not
immediately and necessarily make them stockholders of the corporation–-unless and until there is compliance with
the Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered

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 stockholders of the corporation. Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno
Enterprises, Inc., 599 SCRA 585 (2009).
A derivative action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation
Code, where a corporation is an injured party, its power to sue is lodged with its Board of. But an individual
stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder,
on behalf of the corporation, is only a nominal party. BSP
v. Campa, Jr., 787 SCRA 476 (2016).
(ii) Exhaustion of Intra-Corporate Remedies:
A condition precedent to the filing of a derivative suit is that the party has tried to exhaust inta-corporate
remedies, i.e., has made a demand on the Board of Directors for the appropriate relief, but the latter has failed to or
refused to heed his plea. Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697
(1937).
A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed
without prior demand upon the Board of Directors where the legality of the constitution of the Board lies at the
center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
While it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to
redress his grievances within the corporation, except when such remedy is complete control of the person against
whom the suit is being filed. The reason is obvious: a demand upon the board to institute an action and prosecute
the same effectively would have been useless and an exercise in futility. Hi-Yield Realty, Inc. v. Court of Appeals,
590 SCRA 548, 557 (2009).
The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert all reasonable
efforts to exhaust all remedies available under the articles of incorporation, by laws, laws or rules governing the
corporation or partnership to obtain relief he desires is to make the derivative suit the final recourse of the
stockholders, after all other remedies to obtain the relief sought had failed. Yu
v. Yukayguan, 589 SCRA 588 (2009).115
(iii) Relief/Remedies Prayed For Are for the Benefit of the Corporation
The complaint cannot demand for the defendants to pay the suing stockholders the value of their respective
participation in the assets that have been damaged, for a derivative suit must have cause of action for the benefit of
the corporation. Evangelista v. Santos, 86 Phil. 387 (1950).116
Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be
for the benefit or interest of the corporation. When the relief prayed for do not pertain to the corporation, then it is
an improper derivative suit. Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453 (2012),117 citing VILLANUEVA, PHILIPPINE
CORPORATE LAW, 1998 ed., p. 375.
Allegations of injury to the relators can co-exist with those pertaining to the corporation, merely gives an
additional cause of action for damages against the erring directors and does not disqualify them from filing a
derivative suit on behalf of the corporation. Gochan v. Young, 354 SCRA 207 (2001).
A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary
restraining order enjoining a person from representing the corporation will not bar such action, because it is
instituted on behalf and for the benefit of the shareholder, not the corporation. Lim v. Lim-Yu, 352 SCRA 216
(2001).
Where directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself
and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to
the corporation and indirectly to the stockholders. In such derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporation’s behalf is only nominal party. Hornilla v. Salunat, 405 SCRA
220 (2003).
The rule on derivative suits presupposes that the corporation is the injured party and the individual stockholder
may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials
of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In this case, the
damage in this case does not really devolve on the corporation. The harm or injury that Aliño sought to be
prevented pertains to properties registered under Aliño and other third-party mortgagors. x x x Furthermore, the
prayer in the complaint seeks for recovery of the properties.

Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA
602 (1966).
(iv) Lack of Appraisal Right

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 An allegation that appraisal rights were not available for the acts complained of is another requisite for
filing derivative suits under Rule 8, Section 1(3) of the Interim Rules. Also a distinction must be made between
an individual stockholder’s suit, a class suit for stockholders from derivative suits. Villamor, Jr.
v. Umale, 736 SCRA 325 (2014).118
(v) Must Not Be a Nuisance or Harrassment Suit
Nuisance and harassment suits are prohibited, and in determining whether a suit is a nuisance or harassment
suit, the court shall consider, among others, the follow: (a) The extent of the shareholding or interest of the
initiating stockholder or member; (b) subject matter of the suit; (c) legal and factual basis of the complaint; (d)
availability of appraisal rights for the act or acts complained of; and (e) prejudice or damage to the corporation.
In case of nuisance or harassments suits, the court may motu proprio or upon motion dismiss the case. Ang v.
Ang, 699 SCRA 272 (2013).
c. Venue for Derivative Suit – Under Section 5, Rule 1 of the Interim Rules, the proper venue for derivative suit
would be in the RTC which has jurisdiction over the principal office of the corporation. Hi-Yield Realty, Inc. v.
Court of Appeals, 590 SCRA 548 (2009).
10. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 122)

Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon the winding up of the corporate affairs, 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.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)

In the liquidation of a corporation, after the payment of all corporate debts and liabilities, the remaining
assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share
of each stockholder in the assets upon liquidation is what is known as liquidating dividend. President of PDIC v.
Reyes, 460 SCRA 473 (2005).

XI. CAPITAL STOCK; SHARES OF STOCK

Generally, a corporation may obtain funds for capital expenditures by floating either shares of stock (equity) or
bonds (debt) in the capital market. Shares of stock (or equity securities) represent ownership interest or
participation in the issuer-corporation; bonds (or debts securities) are evidences of indebtedness of the issuer-
corporation. Banco de Oro v. Republic, 800 SCRA 392 (2016).
The power to issue shares of stock in a corporation is lodged in the Board of Directors and no stockholders’
meeting is required to consider it because additional issuances of shares of stock does not need approval of the
stockholders—what is only required is the board resolution approving the additional issuance of shares. Majority
Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).

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 But once issued, shares are not owned nor are they assets of the corporation—they are owned by the
stockholders of record. The corporation whose shares of stock are the subject of transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a part to transaction for it to be valid.
However, to bind the corporation, it is necessary that the transfer is recorded in its books. Forest Hills Golf &
Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).
1. Concept of “Capital Stock” (Sec. 137)

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this
Code, means the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares. (n)

By express provision of Sec. 137, “Paid -up Capital” is that portion of the “Authorized Capital Stock” which
has been both subscribed and paid. Not all funds or assets received by the corporation can be considered paid-up
capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized
capital stock of the corporation, subscribed and then actually paid up. Advances given by stockholders as payment
of future subscriptions to the capital stock do not constituted part of the Outstanding Capital Stock of the
company. MSCI-NACUSIP v. NWPC, 269 SCRA 173 (1997).119
The term “capital” and other terms used to describe the capital structure of a corporation are of universal
acceptance, and their usages have long been established in jurisprudence. The capital subscribed is the total
amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not
necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premium if any, in consideration of the original issuance of the shares. NTC v. Court of
Appeals, 311 SCRA 508 (1999).
Section 137 defines “capital stocks “the total shares of stock issued to subscribers or stockholders whether or
not fully or partially paid (as long as there is binding subscription agreement) except treasury shares.” Thus,
quorum is based on the totality of the shares that have been subscribed and issued, whether it be founders’ shares
or common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
An “investment”, being in the nature of equity, is an expenditure to acquire property or other assets in order to
produce revenue. It is the placing of capital or laying out of money in a way intended to secure income or profit
from its employment. Unlike a deposit of money or a loan that earns interest, cannot be
Assured of a dividend or an interest on the amount invested, for dividends on investments are granted only
after profits or gains are generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
“Advances for Future Subscription” is a receivable account and does not form part of the capital stock of the
corporation since it does not correspondto any particular issuance of shares of stock. Cetnral Textile Mills v. National
Waze and Productivity Comm., 260 SCRA 368 (1996). Consequently, there is no liability for the payment of the
documentary stampt tax on such deposit for future subscription for the reason that there is yet no subscription that
creates rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue v. First
Express Pawnshiop Co., Inc., 589 SCRA 253 (2009).

Classification of Shares (Sec. 6)

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 Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may
be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code: Provided, further, That there shall always be a class or series
of shares which have complete voting rights. Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The
board of directors, where authorized in the articles of incorporation, may fix the terms and conditions
of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:

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 1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)

a. Common Shares
“A common stock represents the residual ownership interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits.” Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
b. Preferred Shares: (1) Participating or Non-participating
(2) Cumulative or Non-cumulative
(3) Par Value or No Par Value
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution.
CIR v. Court of Appeals, 301 SCRA 152 (1999).
Even for preferred shares issued with a 1% dividend rate, the stockholders are not entitled to the payment
thereof as a matter of right without the necessity of a prior declaration of dividends which can only come from
existing retained earnings. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
It is not correct to say that holders of the non-voting preferred shares lose all their voting rights, since
Section 6 provides for the situations where non-voting shares like preferred shares are granted voting rights.
COCOFED. v. Republic, 600 SCRA 102 (2009).
In the absence of provisions in the articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on other matters,
on the theory that the preferred shareholders are merely investors in the corporation for income in the same
manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting,
and any provision in the articles of incorporation restricting the right of common shareholders to vote is
invalid. Gamboa v. Teves, 652 SCRA 690 (2011).
c. Redeemable Shares (Sec. 8)

Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly
so provided in the articles of incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in
the books of the corporation, and upon such other terms and conditions as may be stated in the articles
of incorporation, which terms and conditions must also be stated in the certificate of stock representing
said shares. (n)

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 When the certificates of stock recognize redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as “optional” and rest entirely with the corporation, and
that the stockholder is without right ot either compel or refuse the redemption of his shares of stock. Republic
Planters Bank v. Agana, 269 SCRA 1 (1997).
“Redemption” is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the
corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the
stock, and continues in business as before. The redemption of stock dividends previously issued is used as a
veil for the constructive distribution of cash dividends. Commissioner of Internal Revenue v. Court of Appeals,
301 SCRA 152 (1999).
d. Founder Shares (Sec. 7)120

Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation when expressly
so provided in the articles of incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in
the books of the corporation, and upon such other terms and conditions as may be stated in the articles
of incorporation, which terms and conditions must also be stated in the certificate of stock representing
said shares. (n)

e. Treasury Shares (Sec. 9)

Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a reasonable price fixed
by the board of directors. (n)

Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase,
donation, forfeiture or other means, and do not have the status of being outstanding shares and are not entitled
to be voted upon nor participate in dividend declarations. Commissioner v. Manning, 66 SCRA 14 (1975).
A treasury share, either common or preferred, may be used for a variety of corporate purposes, such as for a
stock bonus plan for management and employees, or for acquiring another company. It may be held
indefinitely, resold or retired. While held in the company’s treasury, the stock earns no dividends and has no
vote in company affairs. COCOFED v. Republic, 600 SCRA 102 (2009).
f. Stock Warrants and Stock Options
g. Re-Classification and Exchange of Shares
“Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional
interest. But the exchange is different—there would be a shifting of the balance of stock features like priority
in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se yields
income for tax purposes. … In this case, the exchange of shares, without more, produces no realized income to
the subscriber. There is only a modification of the subscriber’s rights and privileges—which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire
interests and not when there is still maintenance of proprietary interest.” Commissioner of Internal Revenue v.
Court of Appeals, 301 SCRA 152 (1999).
Conversion of common shares into preferred shares through amendment of SMC’s articles of
incorporation, is a legitimate exercise of corporate powers under the Corporation Code. The conversion
does not amount to SMC using its funds to effect conversion, but would amount merely to a reconfiguration
of said (common) shares into preferred shares. Philippine Cocnut Producers Federation, Inc. v. Republic,
600 SCRA 102 (2009).

4. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15 (1918).

5. Quasi-Reorganization
a. Reduction of Capital Stock (Sec. 38) – Reduction of capital stock cannot be employed to avoid the
corporation’s obligations under the Labor Code. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).

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 Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness.
– No corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholder’s
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholder’s meeting at which the proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.

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 Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall
be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and
the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing
may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of
the corporation lawfully holding office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property the valuation of which is equal to twenty-
five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission,
which shall have the authority to determine the sufficiency of the terms thereof. (17a)

b. Stock Splits versus Stock Consolidations

6. Subscription Agreements (Secs. 60 and 72)

Section 60. Subscription contract. – Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)

Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. (n)

a. No “Sale of Unissued Shares”: Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942).
b. Assignment of Subscription Agreements
When properties were assigned pursuant to a pre -incorporation subscription agreement, but the corporation
fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission
and does not amount to corporate distribution of assets prior to dissolution. Ong Yong v. Tiu, 375 SCRA 614
(2002).
The assignment of the subscription agreement is a form of novation by substitution of a new debtor, which
requires the consent of the creditor. In this case, the change of debtor took place when R.C. Lee assigned the
Oceanic shares under Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter became
obliged to settle the 75% unpaid balance on the subscription. Interport Resources Corp. v. Securities Specialist,
Inc., 792 SCRA 155 (2016).

7. CONSIDERATION (Sec. 62): (a) Cash (c) Service (d) Shares

(b) Property(d) Retained Earnings

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 Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration less than the par
or issued price thereof. Consideration for the issuance of stock may be any or a combination of any
two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future service.

The same considerations provided for in this section, insofar as they may be applicable, may be used
for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of
directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (5 and 16)

Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted
retained earnings converted into equity in the corporation’s books. Lincoln Phil. Life v. Court of Appeals, 293
SCRA 92 (1998).121
Sec. 43 prohibits the issuance of any stock dividend without the approval of stockholders, representing not less
than two-thirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a
stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”, on which the
corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only
when construed as requiring payment of interest as dividends from net earnings or surplus only. Republic
Planters Bank v. Agana, 269 SCRA 1 (1997).
a. Watered Stocks (Sec. 65)

Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation
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 who, having knowledge
thereof, does not forthwith express his objection in writing and file the same with the corporate
secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors
for the difference between the fair value received at the time of issuance of the stock and the par or
issued value of the same. (n)

b. Unpaid Subscription (Secs. 66 and 67)

Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of
interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to
be the legal rate. (37)

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 Section 67. Payment of balance of subscription. – Subject to the provisions of the contract of
subscription, the board of directors of any stock corporation may at any time declare due and payable
to the corporation unpaid subscriptions to the capital stock and may collect the same or such
percentage thereof, in either case with accrued interest, if any, as it may deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if
any, shall be made on the date specified in the contract of subscription or on the date stated in the call
made by the board. Failure to pay on such date shall render the entire balance due and payable and
shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full payment. If within thirty (30)
days from the said date no payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors
orders otherwise. (38)

Under the trust fund doctrine, a board resolution releasing the stockholders from payment of the balance of
their subscription is wholly ineffectual; and the trustee of the insolvent corporation has still recover the
amounts waived. Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923).
A valid and binding subscription for shares cannot be cancelled so as to release the subscriber from liability
thereon without the consent of all the stockholders.  Lingayen Gulf Elect Power v. Baltazar, 93 Phil. 404
(1953); Tan v. Sycip, 499 SCRA 216 (2006).122
A stockholder who is employed with the company, cannot offset his unpaid subscription against his
awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v.
NLRC, 172 SCRA 442 (1989).
c. Delinquency on Subscription (Secs. 68, 69, 70 and 71)

Section 68. Delinquency sale. – The board of directors may, by resolution, order the sale of delinquent
stock and shall specifically state the amount due on each subscription plus all accrued interest, and the
date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60)
days from the date the stocks become delinquent.

Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either
personally or by registered mail. The same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the province or city where the principal
office of the corporation is located.

Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale
of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent
stock shall be 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. The stock so purchased shall be transferred to
such purchaser in the books of the corporation and a certificate for such stock shall be issued in his
favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock covering such shares.

Should there be no bidder at the public auction who offers 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, the corporation may, subject to the provisions of this
Code, bid for the same, 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
provisions of this Code. (39a-46a)

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 Section 69. When sale may be questioned. – 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 the party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest from the date of sale at the legal
rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within
six (6) months from the date of sale. (47a)

Section 70. Court action to recover unpaid subscription. – Nothing in this Code shall prevent the
corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and expenses. (49a)

Section 71. Effect of delinquency. – No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights
of a stockholder except the right to dividends in accordance with the provisions of this Code, until and
unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of
advertisement, if any. (50a)

In spite of a specific provision in the by-laws providing for the manner of collection of unpaid
subscriptions, the Board still has the business judgment prerogative to determine the best manner of collecting
unpaid subscriptions, which may include the filing of a collection suit. De Silva v. Aboitiz & Co., 44 Phil. 755
(1923).
The power of the Board of Directors to make a call on unpaid subscription cannot be limited by the
provisions of the subscription contract. Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 (1932).
A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as
much bound to pay the amount of share subscribed as he would be to pay any other debt, and the right of the
company to demand payment is non less incontestable. Velasco v. Poizat, 37 Phil. 802 (1918); Lumanlan v.
Cura, 59 Phil. 746 (1934).
The prescriptive period to recover on unpaid subscription commences not from the time of subscription but
from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil.
441 (1939).
8. CERTIFICATE OF STOCK (Sec. 63)

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (35)

a. Nature of Certificate
A certificate of stock is an instrument signed by the proper corporate officer acknowledging that the person
named in the document is the owner of a designated number of shares of stock. It is prima facie evidence that
the holder is a shareholder of a corporation. Lao v. Lao, 567 SCRA 558 (2008).123

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 A stock certificate is not necessary to render one a stockholder in a corporation; nevertheless, it is the paper
representative or tangible evidence of the stock itself and the various interests therein. The stock certificate
expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a
share i or the creation of the relationship with the shareholder. Tan v. SEC, 206 SCRA 740 (1992).124
A certificate of stock could not be considered issued in contemplation of law unless signed by the president
or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292
SCRA 503 (1998).
The fact that the stock certificates registered in the name of one person are found in the possession of
another stockholder does not prove that the possessor is the owner of the covered shares. A stock certificate is
merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of
the registered owner to dispose of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi,
475 SCRA 20 (2005).
A stock certificate is not the stock itself—it merely is a tangible evidence of ownership of shares of stock.
Even without the covering certificate of stock having been issued, yet, the registered subscriber to the shares
may validly and legally transact with the shares, and sell and dispose of them to ay interest buyer thereof
provided he complies with the right of first refusal provided for in the by-laws.
Makati Sports Club, Inc. v. Cheng, 621 SCRA 103 (2010).
b. Quasi-Negotiable Character of Certificate of Stock
A certificate of stock is merely a quasi-negotiable instrument in the sense that it may be transferred by
endorsement, coupled with delivery; but it is not negotiable because the holder thereof takes it without
prejudice to such rights or defenses as the registered owners or transferor’s creditors may have under the law,
except only insofar as such rights or defenses are subject to the limitations imposed by the principles
governing estoppel. De los Santos v. Republic, 96 Phil. 577 (1955).
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other
person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same
is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the new transferee. But to be valid against third parties, the transfer
must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998).125
Since physical delivery of the certificates of stock is one of the essential requisites for the transfer of
ownership of the stocks purchased, then the failure of the seller-registered owner to delivery the stock
certificates would constitute a material breach that warrants the rescission of the sale of the shares upon the
option of the buyer. Fil-Estate Golf v. Vertex Sales and Trading, 698 SCRA 272 (2013).
c. Right to Certificate of Stock for Fully Paid Shares (Sec. 64)

Section 64. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent shares), if
any is due, has been paid. (37)

Board resolution which prohibited not- fully shares from voting shares (although certificates have been issued for
them is unlawful) since not fully paid shares which are not delinquent may not be denied their voting rights. Unless
prohibited by by-laws, stock certificates may be issued for less than the number of the shares subscribed for provided
the par value of ach of the stocks represented by each of the certificates has been paid. Baltazar v. Lingayen Gulf
Elect. Power Co., 14 SCRA 522 (1965).
d. Lost or Destroyed Certificates (Sec. 63 and 73)

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 Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (35)

Section 73. Lost or destroyed certificates. – The following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation or his legal representative shall file
with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial
number of the certificate and the name of the corporation which issued the same. He shall also submit
such other information and evidence which he may deem necessary;

2. After verifying the affidavit and other information and evidence with the books of the corporation,
said corporation shall publish a notice in a newspaper of general circulation published in the place
where the corporation has its principal office, once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The
notice shall state the name of said corporation, the name of the registered owner and the serial number
of said certificate, and the number of shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication, if no contest has been presented to said
corporation regarding said certificate of stock, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and
in such form and with such sureties as may be satisfactory to the board of directors, in which case a
new certificate may be issued even before the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the
court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no
action may be brought against any corporation which shall have issued certificate of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)

While Sec. 73 appears to be mandatory, the same admits exceptions, such that a corporation may
voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without
complying with the requirements under said section. It would be an internal matter for the corporation to find
measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that

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 unless proven otherwise, the “stock and transfer book” is the best evidence to establish stock ownership. SEC
Opinion 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos
e. Forged and Unauthorized Transfers
A bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the
limitations laced on said certificates by the real owner, or of any secret agreement relating to the use which
might be made of the stock by the holder. When a stock certificate has been endorsed in blank by the owner
thereof, it becomes a “street certificate” so that upon its face the holder is entitled to demand its transfer into his
name from the issuing corporation. As such the certificate if quasi-negotable and the transferee thereof is
justified in believing that it belongs to the older and transferor. J. Santamaria v. Hongkong and Shanghai
Banking Corp., 89 SCRA 780 (1951).
Since certificates of stock are only quasi-negotiable instruments, a transferee in good faith under a forged
assignment acquires no title which can be asserted against the true owner, unless the true owner’s own
negligence has been such as to create an estoppel against him. Delos Santos v. Republic, 96 Phil. 577
(1955).
When the stock certificates have been endorsed in blank for purposes of showing the nominee relations, the
eventual delivery and registration of the shares in violation of the trust relationship and after their having been
stolen, would be void, even when such transfers have been registered in the stock and transfer book.
Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).
Indeed, even if Gilbert’s parents were not the beneficial owners, an endorsement in blank of the stock
certificate coupled with its delivery, entitles the holder thereof to demand the transfer of said stock certificate in
his name from the issuing corporation. Guy v. Guy, 680 SCRA 214 (2012).

9. TRANSFERS, ENCUMBRANCES AND OTHER DEALINGS WITH SHARES

a. Share Dispositions and the Stock and Transfer Book (STB) (Secs. 63, 72 and 74):

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (35)

Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. (n)

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 Section 74. Books to be kept; stock transfer agent. – Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act done or ordered done at
the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and
on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of excerpts from said records or
minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed upon the directors
or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action
under this section that the person demanding to examine and copy excerpts from the corporation’s
records and minutes has improperly used any information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or was not acting in good faith
or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must
be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and such other entries as the by-laws may prescribe. 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.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission,
which shall be renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and regulations imposed
on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a
and 32a; P.B. No. 268.)

Under Section 63, certain minimum requisites must be complied with for there to be a valid transfer of
stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate must have been endorsed by
the owner or his attorney- in-fact or other persons legally authorized to make the transfer; and (c) to be valid
aainst third parties, the transfer must be recorded in the books of the corporation. Rural Bank of Lipa City v.
Court of Appeals, 366 SCRA 188 (2001).
Section 63 of the Corporation Code prescribes the manner by which a share of stock may be transferred.
Said provision is essentially the same as Section 35 of the old Corporation Law, which, as held in Fleisher v.
Botica Nolasco Co., defines the nature, character and transferability of shares of stock. Fleisher also stated that
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 the provision on the transfer of shares of stocks contemplates no restriction as to whom they may be transferred
or sold. As owner of personal property, a shareholder is at liberty to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the general provisions of law. Teng v. SEC, 784
SCRA 216 (2016).
(i) Nature of the STB
The stock and transfer book records the names and addresses of all stockholders arranged alphabetically,
the installments paid and unpaid on all stock for which subscription has been made, and the date of payment
thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and to whom
made, and such other entries as may be prescribed by law. A stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and
things which ordinarily are or should be written therein. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
As between the General Information Sheet and the corporate books, it is the latter that is controlling as to
the number of shares held by shareholders. Lao v. Lao, 567 SCRA 558 (2008).
Who May Make Entries in the STB. – Entries made on the stock and transfer book by any person other than
the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect.
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
Absence of a deed of sale evidencing sale of shares of stock does not necessarily show irregularity since
Sec. 63 itself does not require any deed for the validity of the transfer of shares stock, it being sufficient that
such transfer be effected by delivery of the stock certificates duly endorsed. It has been held in Rural Bank of
Lipa City, Inc. v. Court of Appeals, 366 SCRA 188 (2001), that the execution of a deed of sale does not
necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
Sales and other dispositions of shares of stock must under Sec.63 be registered in the stock and transfer
book: (a) to enable the corporation to know at all times who are the actual stockholders, and who have standing
to exercise the rights pertaining to the shares; (b) to afford the corporation an opportunity to object or refuse its
consent to such transfer when it has claims against such shares; and
(c) to avoid fictitious or fraudulent transfers. Escaño v. Filipinas Mining Corporation, 74 Phil. 71 (1944);
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).

(ii) Effects of Registration/Non-Registration of Transfers in the STB

The failure to register a sale or disposition of shares of stock in the books of the corporation would render
the same invalid to all persons, including the attaching creditors of the seller. Uson v. Diosomito, 61 Phil.
535 (1935).
Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting;
his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the
claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be
recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer
recorded on the corporate books. Unitl the transfer is registered, the transferee is not a stockholder but an
outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
A transfer of shares which his not recorded in the books of the corporation is valid only as between the parties.
Hence, the transferor has the right to dividends as against the corporation without notice of transfer but it
serves as trustee of the real owner of the dividends, subject to the contract between the transferor and transferee
as to who is entitled to receive the dividends. Cojuangco v. Sandiganbayn,
586 SCRA 790 (2009).

b. Pledge, Mortgage and Other Encumbrances on Shares

The “unpaid claims” under Sec. 63 refers to any unpaid subscription, and not to any indebtedness which a
stockholder may owe the corporation arising from any other transactions, like unpaid monthly dues. Fua
Cun v. Summers, 44 Phil. 704 (1923).127
Shares for which no certificate of stock has been issued may validly be mortgaged in whole (an not just
with respect to the portion paid-up) and the corporation receiving notice thereof is bound to respect the security
arrangement. Fua Cun v. Summers, 44 Phil. 704 (1923).
When the shares are covered by a stock certificate issued in the name of the usufructuary by the original
owner with the agreement between them that they should not be disposed or sold, but the registered owner had
pledged the shares by endorsement and delivery of the certificate to one who took them in good faith and for
value, the latter shall be preferred since registration of a security arrangement covering shares of stock does not
require, for its validity and binding effect on the world, to be registered in the stock and transfer book.
Monserrat v. Ceran, 58 Phil. 469 (1933).
In order for the chattel mortgage on shares of stock be valid and binding on third parties, registration
thereof in the stock and transfer book is not required and not legally effective. What is necessary is that the
chattel mortgage over the shares be registered in the Registry of Deeds of the principal place of business of the

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 corporation, as well as in the Registry of Deeds of the stockholders’ domicile. Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 (1935).
The pledge of shares of stock covered by a certificate is valid and binding on third parties, when the
certificate of stock has been endorsed and delivered to the creditor, notwithstanding the fact that the contract
does not appear in a public instrument (chattel mortgage). “Certificates of stock . . . are quasi-negotiable
instruments in the sense that they may be given in pledge or mortgage to secure an obligation.” Bachrach
Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937).
Only fully paid shares for which certificates of stock have been issued are subject to the registration
requirement in the stock and transfer book in cases dealing with their sales and absolute disposition.
ü Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
The process of registering lis pendens is inapplicable to shares of stock which are personal properties;
however, however, formal notice given to the Corporate Secretary of claims to the shares of stock shall be
deemed equivalent of registration of an encumbrance or assignment of the shares on the corporate books; and
that by virtue of such registration through notice to the corporation, pending litigation, third parties, or potential
transferees pendente lite, may therefore be charged with constructive notice of claimants line/title over the
subject shares and the pending litigation involving the same. MR Holdings, Ltd. V. Bajar, 683 SCRA 336
(2012).
c. Attachments, Execution and Other Involuntary Dealings on Shares
Attachments of shares of stock are not included in the term “transfer” as provided in Sec. 63 of Corporation
Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporation’s
STB for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export
& Import Corp. v. Court of Appeals, 251 SCRA 257 (1995).
A Corporate Secretary is under no obligation to record the attachment of the bank consortium, not being a
transfer of ownership but merely a burden on the title of the owner. Ferro Chemicals, Inc. v. Garcia, 804
SCRA 528 (2016).
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer
or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are
without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia v. Jomouad,
323 SCRA 424 (2000).
d. Equitable Mortgage Assignment
The assignment of voting shares as security for a loan operates to give the assignee not only the right to
vote on the shares, but would also treat the assignee as the owner of the shares (not just an equitable mortgage):
“It is true that the assignment was predicated on the intention that it would serve as security vis-à-vis DBP’s
financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a
resolutory condition, which was the settlement of PJI’s loan obligation with DBP.” APT v. Sandiganbayan, 341
SCRA 551, 560 (2000).
10. Situs of Shares of Stocks (Sec. 55)
Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo Bank and
Union v. Collector, 70 Phil. 325 (1940).
ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS
1. Types of Acquisitions\Transfers
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets, Except when
any of the following circumstances is present: (1) where the purchasers expressly or impliedly agrees to assume
the debts; (2) where the selling corporation fraudulently enters into the transactions to escape liability for those
debts (3) where the purchasing corporation is merely a continuation of the selling corporation , and (4) where the
transaction amounts to a consolidation or merger of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA
415 (1965).129
The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property
and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purposes for which it was incorporated. Such a sale or disposition must be understood as valid only if it does not
prejudice the creditors of the assignor, which necessarily implies that the assignee assumes the debts of the
assignor. Even under the provisions of the Civil Code, a creditor has a real interest to go after any person to whom
the debtor fraudulently transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498
SCRA 400 (2006).

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 PSALM took ownership over most of NPC’s assets by operation of law—these properties may be used to
satisfy the Court’s judgment, and such being the case, the employees may go after such properties. NPC Drivers
and Mechanics Association (NPC DAMA) v. NPC, 606 SCRA 409 (2009).
2. Business Enterprise Transfers:
A business enterprise operated under a partnership and later incorporated, or where a corporation assumed all
the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of the obligations
imposed under the SSS Law, as having come into being only from its incorpor-ation but from the date the
partnership commenced. Laguna Trans. Co. v. SSS, 107 Phil. 833 (1960).130
The judgment in a suit for workmen’s compensation can be pursued against the corporation organized by the
controlling stockholder who as the sole proprietor organized the corporation to insulate properties transferred
thereto against the judgment debt. A.D. Santos v. Vasquez, 22 SCRA 1156 (1968).
When the bus operations belonging to the estate of the deceased spouses is duly incorporated by the
administratrix with the intention to make the corporation liable for past and pending obligations of the estate as the
transportation business itself, then that liability on the part of the corporation, vis -à-vis the estate, should continue
to remain with it even after the percentage of the estate’s shares of stock in the corporation should have been
diluted. Buan v. Alcantara, 127 SCRA 845 (1984).
Where a corporation transferred all its assets to another corporation “to settle its obligations”, that would not
amount to a fraudulent transfer, and does not authorized application of the piercing doctrine to make the transferee
liable for labor claims against the transferor. McLeod v. NLRC, 512 SCRA 222 (2007).
Settled now is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity under Article 1311
to 34 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are valid and binding
only between the contracting parties and their successors- in-interest. Thus, despite the sale of all corporate assets,
the transferee corporation cannot be prejudiced as it is not in privity with the contracts between the transferor
corporation and its creditors. x x x Jurisprudence has held that in a business-enterprise transfer, the transferee is
liable for the debts and liabilities of his transferor arising from the business enterprise conveyed. Many of the
application of the business- enterprise transfer have been related by the Court to the application of the piercing
doctrine. Y-I Leisure Phils., Inc. v. Yu, 770 SCRA
56 (2015), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2010 ed., pp. 686, 687-689.

3. Equity Transfers
The disposition by the controlling shareholder of all of its equity in the corporation warrants the application of
the alter ego piercing doctrine since it shows that the transferor had complete control of the corporation (?).
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).
PROPER DOCTRINE: The mere fact that a stockholder sells his equity in the corporation during the pendency of a
collection case against the corporation, does not make such stockholder personally liable for the corporate debt,
since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the
stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).131
B. MERGER AND CONSOLIDATIONS
1. Concepts
A consolidation is the union of two or more existing entities to form a new entity called the consolidated
corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by
another corporation that survives and continues the combined business. Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).132
Merger is a re-organization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving.
To put it another way, merger is the absorption of one or more corporations by another existing corporation, which
retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of
the absorbed corporation(s) . The absorbing corporation continues its existence while the life or lives of the other
corporation(s) is or are terminated. Bank of Commerce v. Radio Philippines Network, Inc., 722 SCRA 529 (2014).
2. Procedure:
a. Plan of Merger or Consolidation (Sec. 76)

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 Section 76. Plan or merger of consolidation. – Two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:

1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;

2. The terms of the merger or consolidation and the mode of carrying the same into effect;

3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in
case of merger; and, with respect to the consolidated corporation in case of consolidation, all the
statements required to be set forth in the articles of incorporation for corporations organized under this
Code; and

4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary
or desirable. (n)

b. Stockholders’ or Members’ Approvals (Sec. 77)

Section 77. Stockholder’s or member’s approval. – Upon approval by majority vote of each of the
board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members of each of such corporations at
separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation
in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock
corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors decides to abandon the plan, the
appraisal right shall be extinguished.

Any amendment to the plan of merger or consolidation may be made, provided such amendment is
approved by majority vote of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be considered as the agreement of merger
or consolidation. (n)

c. Articles of Merger or Consolidation (Sec. 78)

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 Section 78. Articles of merger or consolidation. – After the approval by the stockholders or members
as required by the preceding section, articles of merger or articles of consolidation shall be executed
by each of the constituent corporations, to be signed by the president or vice-president and certified by
the secretary or assistant secretary of each corporation setting forth:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations,
the number of members; and

3. As to each corporation, the number of shares or members voting for and against such plan,
respectively. (n)

d. Submission of Financial Statements Requirements: For applications of merger, the audited financial
statements of the constituent corporations (surviving and absorbed) as of the date not earlier than 120 days
prior to the date of filing of the application and the long-form audit report for absorbed corporation(s) are
always required. Long form audit report for the surviving corporation is required if it is insolvent. (SEC
Opinion 14, s. of 2002, 15 Nov. 2002).
e. Approval by SEC (Sec. 79)

Section 78. Articles of merger or consolidation. – After the approval by the stockholders or members
as required by the preceding section, articles of merger or articles of consolidation shall be executed
by each of the constituent corporations, to be signed by the president or vice-president and certified by
the secretary or assistant secretary of each corporation setting forth:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations,
the number of members; and

3. As to each corporation, the number of shares or members voting for and against such plan,
respectively. (n)

When the procedure for merger/consolidation prescribed under the Corporation Code are not followed,
there can be no merger or consolidation, corporate separateness between the constituent corporations remains,
and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
The issuance by the SEC of the certificate of merger is crucial because not only does it bear out SEC’s
approval but also marks the moment whereupon the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights, and properties as well
as liabilities shall be taken and deemed transferred to and vested in the surviving corporation. Poliand
Industrial Ltd. V. NDC, 467 SCRA 500 (2005).133
f. Approval by PCC for Mergers Exceeding P1.0 Billion in Value (Secs. 16 and 17, R.A. 10667)

Section 16. Review of Mergers and Acquisitions. — The Commission shall have the power to review
mergers and acquisitions based on factors deemed relevant by the Commission.

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 Section 17. Compulsory Notification. – Parties to the merger or acquisition agreement referred to in
the preceding section wherein the value of the transaction exceeds one billion pesos
(P1,000,000,000.00) are prohibited from consummating their agreement until thirty (30) days after
providing notification to the Commission in the form and containing the information specified in the
regulations issued by the Commission: Provided, That the Commission shall promulgate other criteria,
such as increased market share in the relevant market in excess of minimum thresholds, that may be
applied specifically to a sector, or across some or all sectors, in determining whether parties to a
merger or acquisition shall notify the Commission under this Chapter.

An agreement consummated in violation of this requirement to notify the Commission shall be

considered void and subject the parties to an administrative fine of one percent (1%) to five percent
(5%) of the value of the transaction.

Should the Commission deem it necessary, it may request further information that are reasonably
necessary and directly relevant to the prohibition under Section 20 hereof from the parties to the
agreement before the expiration of the thirty (30)-day period referred. The issuance of such a request
has the effect of extending the period within which the agreement may not be consummated for an
additional sixty (60) days, beginning on the day after the request for information is received by the
parties: Provided, That, in no case shall the total period for review by the Commission of the subject
agreement exceed ninety (90) days from initial notification by the parties.

When the above periods have expired and no decision has been promulgated for whatever reason, the
merger or acquisition shall be deemed approved and the parties may proceed to implement or
consummate it. All notices, documents and information provided to or emanating from the
Commission under this section shall be subject to confidentiality rule under Section 34 of this Act
except when the release of information contained therein is with the consent of the notifying entity or
is mandatorily required to be disclosed by law or by a valid order of a court of competent jurisdiction,
or of a government or regulatory agency, including an exchange.

In the case of the merger or acquisition of banks, banking institutions, building and loan associations,
trust companies, insurance companies, public utilities, educational institutions and other special
corporations governed by special laws, a favorable or no-objection ruling by the Commission shall not
be construed as dispensing of the requirement for a favorable recommendation by the appropriate
government agency under Section 79 of the Corporation Code of the Philippines.

A favorable recommendation by a governmental agency with a competition mandate shall give rise to
a disputable presumption that the proposed merger or acquisition is not violative of this Act.

3. EFFECTS OF MERGER OR CONSOLIDATION (Sec. 80)

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 Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following
effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall be
the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and

5. 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. The rights of creditors or liens upon the property
of any of such constituent corporations shall not be impaired by such merger or consolidation. (n)

It is settled that in the merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one
of the constituent corporations. Babst v. CA, 350 SCRA 341 (2001).
Global is bound by the terms of the contract entered into by its predecessor-in- interest, Asian Bank. Due to
Global’s merger with Asian Bank and because it is the surviving corporation, it is as if it was the one which
entered into contract with Surecomp. In the same way, Global also has the right to exercise all defenses, rights,
privileges, and counter-claims of every kind and nature which Asian Bank may have or invoke under the law.
Global Business Holdings Inc. v. Surecompsoftware, B.V., 633 SCRA 94 (2010).

4. De Facto Mergers
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the Corporation Code, “a
de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up
with the business enterprise of the target corporation; whereas, the target corporation would end up with basically
its only remaining assets being the shares of stock of the acquiring corporation.” No de facto merger took place in
the present case simply because the TRB owners did not get in exchange for the bank’s assets and liabilities an
equivalent value in Bancommerce shares of stock. Bancommerce and TRB agreed with BSP approval to exclude
from the sale the TRB's contingent judicial liabilities, including those owing to RPN. Bank of Commerce v.
RPN 9, 722 SCRA 520 (2014).

C. EFFECTS ON EMPLOYEES OF THE CORPORATION

1. Assets Only Transfers:

There is no law requiring that the purchaser of MDII’s assets should absorb its employees … the most that the
NLRC could do, for reasons of public policy and social justice, was to direct the buyer to give preference to the
qualified separated employees of MDII in the filling up of vacancies in the facilities. MDII Supervisors &
Confidential Employees Asso. V. Pres. Assitance on Legal Affairs, 79 SCRA 40 (1977).
Unless expressly assumed, employment contracts and CBAs are not enforceable against a transferee of an
enterprise, labor contracts being in personam, thus binding only between the parties. A labor contract merely
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 creates an action in personam and does not create any real right which should be respected by third parties.
Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).

2. Business-Enterprise Transfers:
There is no law requiring that the purchaser should absorb the employees of the selling company. Well-
established is the principle “that it is within the employer’s legitimate sphere of management control of the
business to adopt economic policies to make some changes or adjustments in their organization or operations that
would insure profit to itself or protect the investments of its stockholders. As in the exercise of such management
prerogative, the employer may merge or consolidate its business with another, or sell or dispose all or substantially
all of its assets and properties which may bring about the dismissal or termination of its employees in the process
Central Azucarera del Danao v. CA, 137 SCRA 295 (1985).
Where a corporation is closed for alleged losses and its equipment are transferred to another company which
engaged in the same operations, the separate juridical personality of the latter can be pierced to make it liable for
the labor claims of the employees of the closed company. National Federation of Labor Union v. Ople, 143 SCRA
124 (1986).
Although a corporation may have ceased business operations and an entirely new company has been organized
to take over the same type of operations, it does not necessarily follow that no one may now be held liable for
illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992).134
Under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of
the seller or transferor is not obliged to absorb the latter’s employees. The most that the purchasing company may
do, for reasons of public policy and social justice, is to give preference of reemployment to the selling company’s
qualified separated employees, who in its judgment are necessary to the continued operation of the business
establishment. In the case of a transfer of all or substantially all of the assets of a corporation (i.e., business
enterprise transfers), the liabilities of the previous owners to its employees are not enforceable against the buyer or
transferee, unless (a) the latter unequivocally assumes them; or (b) the sale or transfer was made in bad faith.
Barayoga v. APT, 473 SCRA 690 (2005). 135
3. Equity Transfers:
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the successor-
employer is deemed to have absorbed the employees and is held liable for the transgressions of his or her
predecessor. Peñafrancia Tours and Travel Transport v. Sarmiento, 634 SCRA 279 (2010).
Where transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor’s
employees as there is no law compelling such absorption. For reasons of public policy and social justice,
transferee may give preference to the qualified separated employees in the filling of vacancies in the facilities of
the purchaser. Manlimos v. NLRC, 242 SCRA 145 (1995).136
4. Mergers and Consolidations
In the case of merger or consolidation, the employees have a right to their retirement benefits computed from
the time worked with the predecessor-constituent corporations, saying there was no break in the employer-
employee relationship. Filipinas Port Services v. NLRC, 200 SCRA 773 (1991) .137 CONTRA: Employees of a
predecessor-constituent corporation cannot avail of their previous tenure when determining their termination
benefits with the surviving corporation in the merger. Filipinas Port Services, Inc. v. NLRC, 177 SCRA 203
(1989).
It is more in keeping with the dictates of social justice of according full protection to labor to deem
employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence of
an express stipulation in the articles of merger or the merger plan. This ruling strengthens judicial protection of the
right to security of tenure of employees affected by a merger and avoids confusion regarding the status of their
various benefits. BPI. v. BPI Employees Union, 658 SCRA 828 (2011).138
5. Spin-Offs:
Where a spin-off by the corporation of a division into another corporation is done for a valid business reason
and in good faith, the employees in the spun-off unit no longer belong to the bargaining unit of the mother
company, and that the employees in the new corporations constitute new bargaining unit. SMC Employees Union-
PTGWO v. Confessor, 262 SCRA 81 (1996).

CORPORATE DISSOLUTION AND LIQUIDATION

1. No Vested Rights to Corporate Fiction: No person who has any constitutional right to the perpetual existence of such
entity.
2. Voluntary Dissolution (Sec. 117)

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 Section 117. Methods of dissolution. – A corporation formed or organized under the provisions of this
Code may be dissolved voluntarily or involuntarily. (n)

a. When There Are No Creditors Affected (Sec. 118)

Section 118. Voluntary dissolution where no creditors are affected. – If dissolution of a corporation
does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected
by majority vote of the board of directors or trustees, and by a resolution duly adopted by the
affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees
after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks
in a newspaper published in the place where the principal office of said corporation is located; and if
no newspaper is published in such place, then in a newspaper of general circulation in the Philippines,
after sending such notice to each stockholder or member either by registered mail or by personal
delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the
dissolution shall be certified by a majority of the board of directors or trustees and countersigned by
the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the
certificate of dissolution. (62a)

b. When There Are Creditors Affected (Secs. 119 and 122).

Section 119. Voluntary dissolution where creditors are affected. – Where the dissolution of a
corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the
Securities and Exchange Commission. The petition shall be signed by a majority of its board of
directors or trustees or other officers having the management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and
that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a
meeting of its stockholders or members called for that purpose.

If the petition is sufficient in form and substance, the Commission shall, by an order reciting the
purpose of the petition, fix a date on or before which objections thereto may be filed by any person,
which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the
order. Before such date, a copy of the order shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation published in the municipality or city where
the principal office of the corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such municipality or city.

Upon five (5) day’s notice, given after the date on which the right to file objections as fixed in the
order has expired, the Commission shall proceed to hear the petition and try any issue made by the
objections filed; and if no such objection is sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.
(Rule 104, RCa)

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 Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon the winding up of the corporate affairs, 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.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)

c. Shortening of Corporate Term (Sec. 120)

Section 120. Dissolution by shortening corporate term. – A voluntary dissolution may be effected by
amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code. Upon approval of the amended articles of
incorporation of the expiration of the shortened term, as the case may be, the corporation shall be
deemed dissolved without any further proceedings, subject to the provisions of this Code on
liquidation. (n)

A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity, since to
be effective “[t]he requirements mandated by the Corporation Code should have been strictly complied with.”
Vesagas v. Court of Appeals, 371 SCRA 509 (2002).
When a corporation is contemplating dissolution, it must submit tax return on the income earned by it from
the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of
Appeals, 363 SCRA 840 (2001).

3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A)

Section 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and regulations. (n)

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 Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:

(i) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:chanroblesvirtuallawlibrary

[1] Fraud in procuring its certificate of registration;

[2] Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;

[3] Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise;

[4] Continuous inoperation for a period of at least five (5) years;

[5] Failure to file by-laws within the required period;

[6] Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period;

a. Quo Warranto
Dissolution is a serious remedy granted by the courts only in extreme cases and only to ensure that there is
an avoidance of prejudice to the public. Even when the prejudice were public in nature, the remedy is to enjoin
or correct the mistake; and only when it cannot be remedied that dissolution is imposed. Government v. El
Hogar Filipino, 50 Phil. 399 (1927); Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967);
Republic v. Bisaya Land Trans., 81 SCRA 9 (1978).
Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially
when the situation can be remedied such as giving minority stockholders a veto power to any decision. Chase
v. Buencamino, 136 SCRA 365 (1985).
b. Non-User of Charter and Continuous In-Operation (Sec. 22)

Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. – If a
corporation does not formally organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation. (19a)

This provision shall not apply if the failure to organize, commence the transaction of its businesses or
the construction of its works, or to continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange Commission.

To “organize” involves the election of officers, providing for the subscription and payment of the capital
stock, the adoption of by -laws, and such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which the corporation was created. “Organization” relates
merely to the systematization and orderly arrangement of the internal and managerial affairs of the corporation.
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The failure to file the by- laws does not automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
c. Expiration of Term

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 Where the corporate life of a corporation as stated in its articles of incorporation expired, without a valid
extension having been effected, it was deemed dissolved by such expiration without need of further action on
the part of the corporation. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011),
citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p. 841.

4. Legal Effects of Dissolution

A corporation that has reached the stage of dissolution is no longer qualified to receive a secondary franchise.
Buenaflor v. Camarines Industry, 108 Phil. 472 (1960).
A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-
year statutory period for liquidation when its original term of existence had already expired, as the same would
constitute new business. Alhambra Cigar & Cigarette Mfg. Co. v. SEC, 24 SCRA 269 (1968).
When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of
continuing the business for which it was organized. PNB v. CFI of Rizal, 209 SCRA 294 (1992).
The dissolution of a juridical entity does not by itself cause the extinction or diminution of the rights and
liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its
property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002).
A corporation’s Board is not rendered functus officio by its dissolution, since Sec. 122 prohibits a dissolved
corporation from continuing its business, but allows it to continue with a limited personality in order to settle and
close it affairs, including its complete liquidation. Necessarily there must be a Board that will continue acting for
that purpose. Aguirre II v. FQB+7, Inc., 688 SCRA 242 (2013).
The executed releases, waivers and quitclaims involving labor claims are valid and binding notwithstanding
that they were executed 6 years after the revocation of the corporation’s certificate of incorporation – the
revocation does not result in the termination of its liabilities. Section 122 and 145 provide for a three-year winding
up period of r a corporation whose charter is annulled by forfeiture or otherwise to continue as a body corporate
for the purpose, among others, of settling and closing its affairs. Vigilla v. Philippine College of Criminology,
Inc., 210 SCRA 277 (1992).134
Meaning of “Liquidation”
Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding
up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing
assets to cash, discharging liabilities and dividing surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360
SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation proceeding s—they are neither
part of each other nor the necessary consequence of the other. There is therefore no basis from one action to result
in the other. Following the dissolution of a corporation, liquidation or the settlement of its affairs consists of
adjusting the debts and claims, i.e., collecting all that is due to the corporation, the settlement and adjustment of
claims against it and the payment of its just debts. Yu v. Yukayguan, 589 SCRA 588 (2009).139
6. Methods of Liquidation (Sec. 122)

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 Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon the winding up of the corporate affairs, 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.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)

a. The Board of Directors/Trustees Pursuing Liquidation; Subject to the 3-Year Period

Since the old Corporation Law did not contain any provision that allowed any action after the 3-year period
for liquidation, then all actions for or against the corporation as abated after the expiration thereof. National
Abaca Corp. v. Pore, 2 SCRA 989 (1961).
After the expiration of the 3-year period, corporate creditors can still pursue their claims against corporate
assets against the officers or stockholders who have taken over the properties of the corporation. Tan Tiong Bio
v. Commissioner, 100 Phil. 86 (1956).140
Although a corporate officer is not liable for corporate obligations, such as claims for wages, when,
however, such corporate officer takes corporate property to apply to his own claims against the corporation, he
shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had
similarly valid claims, he took advantage of his position as general manager and applied the assets exclusively
to his own claims. De Guzman v. NLRC, 211 SCRA 723 (1992).
It immaterial that the present action was filed after the expiration of the three years, for at the very least,
and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that
actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation,
obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three
years, definitely established the Government as a creditor for whom the liquidator is supposed to hold assets of
the corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).141
b. Liquidation Pursued Thru a Court-Appointed Receiver
Under the Corporation Law, Legislature intended to let the shareholders have control of the assets of the
corporation upon dissolution, by having the directors and executive officers have charge of the winding up
operations, though there is the alternative method of assigning the property of the corporation to the trustees
for the benefit of its creditors and shareholders. “While the appointment of a receiver rests within the sound
judicial discretion of the court, such discretion must, however, always be exercised with caution and governed
by legal and equitable principles, the violation of which will amount to its abuse, and in making such
appointment the court should take into consideration all the facts and weigh the relative advantages and
disadvantages of appointing a receiver to wind up the corporate business.” China Banking Corp. v. M.
Michelin & Cie, 58 Phil. 261 (1933).
When the liquidation of a dissolved corporation has been placed in the hands of a receiver or assignee, the
3-year period prescribed by law for liquidation cannot be made to apply, and that the receiver or trustee may
institute all actions leading to the liquidation of the assets of the corporation even after the expiration of said
period. Sumera v. Valencia, 67 Phil. 721 (1939).

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 c. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of Liquidators, they were duly
constituted as trustees for the liquidation of the corporate affairs, and there being no term placed on the Board,
their power to pursue liquidation did not terminate upon the expiration of the 3-year period. Board of
Liquidators v. Kalaw, 20 SCRA 987 (1967).
For purposes of dissolution and liquidation of a corporation, the term “trustee” should include counsel of
record who may be deem to have authority to pursue pending litigation after the expiration of the 3-year
liquidation period. Gelano v. Court of Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of
Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as “trustees”
to complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including
the shareholders and the creditors of the corporation, acting for and in its behalf, might make proper
representations with the appropriate body for working out a final settlement of the corporate concerns.
Clemente v. Court of Appeals, 242 SCRA 717 (1995).142
A trustee appointed for purposes of liquidation does not become personally liable for the outstanding
obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
There is no time limit within which the trustees must complete a liquidation placed in their hands. What is
provided in Sec. 122 is that the conveyance to the trustees must be made within the 3 -year period. But it may
be found impossible to complete the work of liquidation within the 3-year period or to reduce disputed claims
to judgment. Furthermore, Sec. 145 clearly provides that “no right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation.” Vigilla v.
Philippine College of Criminology, Inc., 698 SCRA 247 (2013).
The trustee may continue to prosecute a case commenced by the corporation within 3 years from its
dissolution until rendition of the final judgment, even if such judgment is rendered beyond the 3-year period
allowed by Sec. 122. However, there is nothing in the said cases that allows an already defunct corporation to
initiate a suit after the lapse of the said 3-year period. To allow petitioner to initiate the subject complaint and
pursue it until final judgment, on the ground that such complaint was filed for the sole purpose of liquidating its
assets, would be to circumvent the provisions of Sec. 122 of the Corporation Code. Alabang Dev. Corp. v.
Alabang Hills Village Assn., 724 SCRA 321 (2014).

7. REINCORPORATION: The procedures on the sale of all or substantially all of the assets of the corporation, allows
stockholders to transfer the assets and business enterprise of the dissolved corporation to a newly registered entity
bearing the same corporate name. Chung Ka Bio v. IAC, 163 SCRA 534 (1988)

XIV. CLOSE CORPORATIONS

1. Definition (Sec. 96)

Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this
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 twenty (20); (2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of
other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

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 The concept of a close corporation organized for the purpose of running a family business or managing family
property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families
have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and
their families with a modicum of material comfort and financial security as a reward for years of hard work. A
family corporation should serve as a reward for years of hard work— as a rallying point for family unity and
prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of
mutual aid and security that are the original driving forces behind the formation of family corporations and use
these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v.
Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
a. De Jure Close Corporations: Articles of Incorporation Requirements (Sec. 97)

Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may
provide:

1. For a classification of shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each of whom may be voted for and
elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code.

The articles of incorporation of a close corporation may provide that the business of the corporation
shall be managed by the stockholders of the corporation rather than by a board of directors. So long as
this provision continues in effect:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to
be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation 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 board of
directors.

(i) Restriction on Transfer of Shares (Secs. 98 and 99)

Section 98. Validity of restrictions on transfer of shares. – Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall
not be 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 upon the expiration of said period, the existing stockholders or the corporation fails to
exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

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 Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. -

1. If stock of a close corporation is issued or transferred to any person who is not entitled under any
provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for
such stock conspicuously shows the qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.

2. If the articles of incorporation of a close corporation states the number of persons, not exceeding
twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of stock to any person would cause
the stock to be held by more than such number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.

3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock
of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that
he has acquired stock in violation of the restriction, if such acquisition violates the restriction.

4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is
conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be
a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer
of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee.

5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to
subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if
the close corporation has amended its articles of incorporation in accordance with this Title.

6. The term "transfer", as used in this section, is not limited to a transfer for value.

7. The provisions of this section shall not impair any right which the transferee may have to rescind
the transfer or to recover under any applicable warranty, express or implied.

(ii) Pre-Emptive Rights (Sec. 102)

Section 102. Pre-emptive right in close corporations. – The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.

(iii) Amendment (Sec. 103)

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 Section 103. Amendment of articles of incorporation. – Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title to be contained in
the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of
incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater
proportion of shares as may be specifically provided in the articles of incorporation for amending,
deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.

b. De Facto Close Corporation:

The Court cannot lose sight of the fact that the enterprise is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute control of the corporation. The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual
members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, three (3) children and their father whose name identifies their
corporation. Hence, the contract is valid and binding on the corporation even without formal Board resolution.
Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 (1993).
The petitioners conceded tha both CFTI and Naguiat Enterprises were “close family corporations” owned
by the Naguiat family. Section 100(5) of the Corporation Code state: “(5) To the extent that the stockholders
are actively engaged(d) in the management or operation of the business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall
be personally liable for corporate tors unless the corporation has obtained adequate liability insurance.
Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
BUT SEE: The articles of incorporation of Motorich Sales Corp. does not contain any provision required
under Sec. 96, and therefore from its very articles of incorporation, it is not a close corporation. It does not
become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The “[m]ere 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
personalities.”San Juan Structural v. CA, 296 SCRA 631 (1998).
The application of Sec. 98 (validity of restrictions on transfer of shares) applies only to close corporations.
Before courts can allow the operation of Sec. 98 to a case, there must first be a factual determination that the
corporation is indeed a close corporation. There needs to be a presentation of evidence on the relevant
restricitons in the articles of incorporation and bylaws of the corporation. In this case, there is apparently no
such determination or even allegation based on the records or the RTC decision that would assist this Court in
ruling on these two major factual matters. .”Andaya v. Rural Bank, G.R. No. 188769, 03 Aug. 2016.
4. Binding Agreements by Stockholders (Sec. 100)

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 Section 100. Agreements by stockholders. -

1. Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the articles of incorporation, irrespective of
where the provisions of such agreements are contained, except those required by this Title to be
embodied in said articles of incorporation.

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.

3. No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make
them partners among themselves.

4. A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation
as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts
imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance.

5. No Necessity of Board (Sec. 101)

Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be
deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the directors; or

2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing; or

3. The directors are accustomed to take informal action with the express or implied acquiescence of all
the stockholders; or

4. All the directors have express or implied knowledge of the action in question and none of them
makes prompt objection thereto in writing.

If a director’s meeting is held without proper call or notice, an action taken therein within the
corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his
written objection with the secretary of the corporation after having knowledge thereof.

6. Deadlocks (Sec. 104). Missed opportunity: Ong Yong v. Tiu, 401 SCRA 1 (2003).

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 Section 104. Deadlocks. – Notwithstanding any contrary provision in the articles of incorporation or
by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so
divided respecting the management of the corporation’s business and affairs that the votes required for
any corporate action cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders generally, the Securities
and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate
the dispute. In the exercise of such power, the Commission shall have authority to make such order as
it deems appropriate, including an order: (1) cancelling or altering any provision contained in the
articles of incorporation, by-laws, or any stockholder’s agreement; (2) cancelling, altering or enjoining
any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing
or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other
persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder,
either by the corporation regardless of the availability of unrestricted retained earnings in its books, or
by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7)
granting such other relief as the circumstances may warrant.

A provisional director shall be 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 further qualifications, if any,
may be determined by the Commission. A provisional director is not a receiver of the corporation and
does not have the title and powers of a custodian or receiver. A provisional director shall have 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 Commission or by
all the stockholders. His compensation shall be determined by agreement between him and the
corporation subject to approval of the Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the corporation.

7. Withdrawal and Dissolution (Sec. 105)

Section 105. Withdrawal of stockholder or dissolution of corporation. – In addition and without

prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel the said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued value, when the corporation has sufficient assets
in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder
of a close corporation may, by written petition to the Securities and Exchange Commission, compel
the dissolution of such corporation whenever any of acts of the directors, officers or those in control of
the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.

Even prior to the passage of Corporation Code formally recognizing close corporations, the Supreme Court had
on limited instances recognized the common law rights of minority stockholders to seek dissolution of the
corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
NON-STOCK CORPORATIONS AND FOUNDATIONS
1. Theory on Non-Stock Corporation (Secs. 14[2], 43, 87, 88 and 94[5])

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 Section 14. Contents of the articles of incorporation. – All corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special law:

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;

Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at
a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies. (n)

Section 87. Definition. – For the purposes of this Code, a non-stock corporation is one where no part
of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions
of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized, subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. (n)

It is not inconsistent with the nature of a non -stock corporation to incidentally earn profits in pursuing its
eleemosynary purpose. What is prohibited is to operate the company for profit and/or distribute any profits so
earned to its officers and members. CIR v. University of Visayas, 1 SCRA 669 (1961).143
The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the
courts will consider whether dividends have been declared or its members or that is property, effects or profit was
ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise.
Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
A non-stock corporation may only be formed or organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings
such as the investment business where profit is the main or underlying purpose. Although it may obtain profits as
an incident to its operation, such profits are not to be distributed among its members but must be used for the
furtherance of its purposes. People v. Menil, 340 SCRA 125 (2000).
In a mutual life insurance company organized as a non-stock non-profit corporation, the so -called “dividends”
received by members-policyholders are not a portion of profits set aside for distribution to the stockholders. One, a

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 mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but
only members. Two, the amount they receive does not partake of the nature of a profit or income, such distribution
represents overpayment, a benefit to which the member-policyholder is equitably entitled. Republic v. Sunlife
Assurance Co., 473 SCRA 129 (2005).

2. Non-Applicability of the Nationalization Laws to Non-Stock Corporations

A foreigner may become a member or an officer of a non-stock corporation. Save for the position of the
Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens
becoming officers in corporations engaged in business does not apply to the activities of a non-stock corporation
which do not fall within the coverage of a nationalized industry or area of business reserved by law exclusively to
Filipino citizens. SEC Opinion No. 12, 21 Nov. 2002.

3. Voting Rights of Members

Under the by-Laws, membership in the corporation shall, among others, be terminated by the death of the
member. Further, applying Section 91 that provides that termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of the incorporation or the by-laws, we hold that dead
members who are dropped from the membership roster in the manner for the cause provided for in the by -Law are
not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual
members’ meeting. With 11 remaining members, the quorum in the present case should be 6; therefore, there
being a quorum, the annual members’ meeting, conducted with six members present, was valid. Tan v. Sycip, 499
SCRA 216 (2006).
When an individual’s membership has not been terminated in accordance with the provisions provided for in
the articles of incorporation and/or by-laws, then such termination is void, and such individual remains a member
of the corporation with concomitant rights inspect corporate books and to demand accounting of the corporate
funds. Agdao Landless Residents Assn. v. Maramion, 806 SCRA 74 (2016).
4. Delinquency of Membership Dues
Section 69 refers specifically to unpaid subscriptions to capital stock, the sale of which is governed by Sec. 68,
and utterly inapplicable to non-stock corporations. In such recovery claims, Article 1140 of the Civil Code governs
and provides that an action to recover movables shall prescribe in 8 years. Calatagan Golf Club, Inc. v. Clemente,
Jr., 585 SCRA 300 (2009).
A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of his
unpaid monthly dues, when such corporation is authorized to do so under the by-laws, even when no provision on the
matter appears in the articles of incorporation, and in spite of the fact that Sec. 67 on delinquency sale pertains to
payment of shares subscription. Section 91 provides that membership shall be terminated in the manner and for causes
provided in the articles of incorporation or the by-laws of a non-stock corporation, then the right of a non-stock
corporation to expel a member through the forfeiture of such member’s share may be established in the by-laws alone,
and need not be embodied in the articles of incorporation. Valle Golf & Country Club v. Vda. De Caram, 585
SCRA 218(2009).
4. Board of Trustees and Corporate Officers
Section 108, although setting the term of the members of the Board of Trustees at 5 years, has a proviso
subjecting the duration to what is otherwise provided in the articles of incorporation or by-laws of th educational
corporation – that contrary provision control on the term of office. A trustee occupying his office in a hold-over
capacity could be removed at any time, without cause, upon the election or appointment of his successor.
Barayuga v. Advestist University of the Philippines, 655 SCRA 640 (2011).
By-Laws provisions [which allows the election of members of the Board of Trustees distributed to two per
district] is not contrary to the Corporation Code [which under Section 24 requires that in the election of trustees of
a non- stock corporation it is necessary that at least “a majority of the members entitled to vote” must be present].
Section 89 pertaining to non-stock corporations provides that “(t)he right of the members of any class or classes
(of a non-stock corporation) to vote may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws.” This is an exception to Section 6 where it is provided that “no share may be
deprived of voting rights except those classified and issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise
provided in this Code.” Ao-as v. CA, 491 SCRA 339 (2006).

6. Conversion of Non-Stock Corporation to Stock Corporation

The conversion of a non-stock educational institution into a stock corporation is not legally feasible, as it
violates Sec. 87 of Corporation Code that no part of the income of a non-stock corporation may be distributable as
dividends to its members, trustees or officers. “Thus, the Commission has previously ruled that a non -stock
corporation cannot be converted into a stock corporation by a mere amendment of the Articles of Incorporation.
For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the
methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock
corporation directed to bring profits or pecuniary gains to themselves.” SEC Opinion dated 10 December 1992;
SEC Opinion dated 24 February 2003.

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7. Conversion of Corporation Sole to Aggregate Religious Corporation
By virtue of the provision under Sec. 109 that allows the application to religious corporations of the general
provisions governing non-stock corporations, a corporation sole may convert itself into a religious aggregate
corporation, by formally amending its articles of incorporation, by approval of its sole corporator and ratified by at
least two-thirds of its general membership, and without needlessly going through the process of dissolution.
Inglesia Evangelica Metodista en las Islas Filipino (IEMELIF) (Corporation Sole), Inc. v. Lazaro, 624 SCRA 224
(2010).
8. Tax Considerations for Non-Stock Corporations
a. What Is a “Foundation”? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Rev. Reg. No. 2; BIR-NEDA
Regulations No. 1-81, as amended)

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:

(A)  Labor, agricultural or horticultural organization not organized principally for profit;

(B)  Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;

(C)  A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees providing for the payment of
life, sickness, accident, or other benefits exclusively to the members of such society, order,
or association, or nonstock corporation or their dependents;

(D)  Cemetery company owned and operated exclusively for the benefit of its members;

(E)  Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;

(F)  Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G)  Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(H)  A nonstock and nonprofit educational institution;

(I)  Government educational institution;

(J)  Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and

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 (K)  Farmers', fruit growers', or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the quantity of produce finished
by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code

SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship where no deductions shall
be allowed under this Section other than under subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall
be allowed the following deductions from gross income;

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(H) Charitable and Other Contributions. -

(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use
of the Government of the Philippines or any of its agencies or any political subdivision thereof
exclusively for public purposes, or to accredited domestic corporation or associations organized and
operated exclusively for religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-
government organizations, in accordance with rules and regulations promulgated by the Secretary of
finance, upon recommendation of the Commissioner, no part of the net  [30] income of which inures to
the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in
the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable
income derived from trade, business or profession as computed without the benefit of this and the
following subparagraphs.

(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph,

donations to the following institutions or entities shall be deductible in full:

(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its
agencies or political subdivisions, including fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking priority activities in education, health, youth and
sports development, human settlements, science and culture, and in economic development according
to a National Priority Plan determined by the National Economic and Development Authority
(NEDA), In consultation with appropriate government agencies, including its regional development
councils and private philanthropic persons and institutions: Provided, That any donation which is
made to the Government or to any of its agencies or political subdivisions not in accordance with the
said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this
Subsection;

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 (b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign
institutions or international organizations which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special laws;

(c) Donations to Accredited Nongovernment Organizations. -The term 'nongovernment organization'

means a non-profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and
youth and sports development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net [31] income of which inures to the benefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the accredited
nongovernment organizations taxable year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the purpose or function for which it is
organized and operated, unless an extended period is granted by the Secretary of Finance in
accordance with the rules and regulations to be promulgated, upon recommendation of the
Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
but in no case to exceed thirty percent (30%) of the total expenses; and

(4) The assets of which, in the event of dissolution, would be distributed to another non-profit
domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or
would be distributed by a court to another organization to be used in such manner as in the judgment
of said court shall best accomplish the general purpose for which the dissolved organization was
organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term
'utilization' means:

(i)  Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited nongovernment organization was created or organized.

(ii)  Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more
purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a period to be prescribed in
rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of funds.

(3) Valuation. - The amount of any charitable contribution of property other than money shall be based
on the acquisition cost of said property.

(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under
the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

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 REV REG 2 – Annex A

BIR-NEDA Regulations No. 1-81, as amended – Annex B

Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of
compliance with such requirements, still show that it falls under the provisions of NIRC as a tax-exempt
corporation. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
b. xIncome-Tax Exemption of Certain Non-Stock Corporations (Sec. 30, NIRC)

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:

(A)  Labor, agricultural or horticultural organization not organized principally for profit;

(B)  Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;

(C)  A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees providing for the payment of
life, sickness, accident, or other benefits exclusively to the members of such society, order,
or association, or nonstock corporation or their dependents;

(D)  Cemetery company owned and operated exclusively for the benefit of its members;

(E)  Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;

(F)  Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G)  Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(H)  A nonstock and nonprofit educational institution;

(I)  Government educational institution;

(J)  Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and

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 (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code

“ Non-profit ” does not necessarily mean “charitable.” Collector of Internal Revenue v. Club Filipino Inc.
de Cebu considered a sports club organized for recreation and entertainment of its stockholders and members
and primarily funded by membership fees and due, as being non-profit because of its purpose and there was no
evidence that it was engaged in a profit -making enterprise. But that did not make it “charitable”, which term
has been defined in Lung Center of the Philippines v. Quezon City, 433 SCRA 119 (2004), as “a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish themselves in
life or [by] otherwise lessening the burden of government.” As organization may be considered as non- profit if
it does not distribute any part of its income to stockholders or members; however, despite its being a tax
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in Section 30 of the NIRC. CIR v. St. Luke’s Medical Center, 682 SCRA 66 (2012).
9. Right of Members to Proportionate Share of Remaining Assets Upon Dissolution (Secs. 94
and 95; Sec. 34(H)(2)(c), 1997 NIRC)

SEC. 94. Payment before Delivery by Executor or Administrator. - No judge shall authorize
the executor or judicial administrator to deliver a distributive share to any party interested in
the estate unless a certification from the Commissioner that the estate tax has been paid is
shown.

SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the
Registry of Property any document transferring real property or real rights therein or any
chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a
certification from the Commissioner that the tax fixed in this Title and actually due thereon
had been paid is show, and they shall immediately notify the Commissioner, Regional
Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or
municipality where their offices are located, of the nonpayment of the tax discovered by
them. Any lawyer, notary public, or any government officer who, by reason of his official
duties, intervenes in the preparation or acknowledgment of documents regarding partition or
disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of
furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue
Collection Officer of the place where he may have his principal office, with copies of such
documents and any information whatsoever which may facilitate the collection of the
aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs,
legatee, executor or administrator of his creditor, unless the certification of the Commissioner
that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or
judicial administrator without said certification if the credit is included in the inventory of the
estate of the deceased.

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 (H) Charitable and Other Contributions. –

xx

(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph,
donations to the following institutions or entities shall be deductible in full:

xx

(c) Donations to Accredited Nongovernment Organizations. -The term 'nongovernment organization'

means a non-profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and
youth and sports development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net [31] income of which inures to the benefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the accredited
nongovernment organizations taxable year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the purpose or function for which it is
organized and operated, unless an extended period is granted by the Secretary of Finance in
accordance with the rules and regulations to be promulgated, upon recommendation of the
Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
but in no case to exceed thirty percent (30%) of the total expenses; and

(4) The assets of which, in the event of dissolution, would be distributed to another non-profit
domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or
would be distributed by a court to another organization to be used in such manner as in the judgment
of said court shall best accomplish the general purpose for which the dissolved organization was
organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term
'utilization' means:

(i)  Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited nongovernment organization was created or organized.

(ii)  Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more
purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a period to be prescribed in
rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of funds.

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 As provided for under Secs. 94 and 95 of Corporation Code, in the event of dissolution of a non-stock
corporation, its assets shall be distributed in accordance with the rules. Unless, it is so provided in the articles of
incorporation or by-laws, the members are not entitled to any beneficial or vested interest over the assets of the
non-stock corporation. In other words, non-stock, non -profit corporations hold their funds in trust for the carrying
out of the objectives and purposes expressed in its charter. SEC Opinion dated 24 February 2003; SEC Opinion
dated 13 May 1992.

FOREIGN CORPORATIONS
1. Definition (Sec. 123)

Section 123. Definition and rights of foreign corporations. – For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall
have the right to transact business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a certificate of authority from the
appropriate government agency. (n)

A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal
existence within the State in which it is foreign. A foreign corporation illegally doing business here because of its
refusal or neglect to obtain the required license may not unfairly plead such lack to avoid service and thereby
impugn the jurisdiction of the local courts. Such danger does not exist among foreign corporations that are
indubitably not doing business in the Philippines: there would be no reason for it to be subject to the State’s
regulation; for in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to
subject such foreign corporation to the local courts’ jurisdiction would violate the essence of sovereignty of the
creating state. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
2. License to Do Business in the Philippines
a. Application for License (Secs. 124 and 125)

Section 124. Application to existing foreign corporations. – Every foreign corporation which on the
date of the effectivity of this Code is authorized to do business in the Philippines under a license
therefore issued to it, shall continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws. (n)

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 Section 125. Application for a license. – A foreign corporation applying for a license to transact
business in the Philippines shall submit to the Securities and Exchange Commission a copy of its
articles of incorporation and by-laws, certified in accordance with law, and their translation to an
official language of the Philippines, if necessary. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically set forth the following:

1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the corporation in the country or
state of incorporation;

3. The name and address of its resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all notices affecting the corporation;

4. The place in the Philippines where the corporation intends to operate;

5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the
certificate of authority issued by the appropriate government agency;

6. The names and addresses of the present directors and officers of the corporation;

7. A statement of its authorized capital stock and the aggregate number of shares which the
corporation has authority to issue, itemized by classes, par value of shares, shares without par value,
and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of shares which the
corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if
any;

9. A statement of the amount actually paid in; and

10. Such additional information as may be necessary or appropriate in order to enable the Securities
and Exchange Commission to determine whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable.

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 Attached to the application for license shall be a duly executed certificate under oath by the authorized
official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens and corporations to do business therein, and
that the applicant is an existing corporation in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall likewise be accompanied by a
statement under oath of the president or any other person authorized by the corporation, showing to the
satisfaction of the Securities and Exchange Commission and other governmental agency in the proper
cases that the applicant is solvent and in sound financial condition, and setting forth the assets and
liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of
the application.

Foreign banking, financial and insurance corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous authority from the appropriate government
agency, whenever required by law. (68a)

b. Rationale for Requiring License:

Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in the
Philippines to the jurisdiction of our courts, not to prevent the foreign corporation from performing single acts,
but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to
render it amenable to suit in the local courts. Marshall-Wells v. Elser, 46 Phil. 71 (1924).
c. Appointment of a Resident Agent (Sec. 127 and 128)

Section 127. Who may be a resident agent. – A resident agent may be either an individual residing in
the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character and of sound financial standing.
(n)

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 Section 128. Resident agent; service of process. – The Securities and Exchange Commission shall
require as a condition precedent to the issuance of the license to transact business in the Philippines by
any foreign corporation that such corporation file with the Securities and Exchange Commission a
written power of attorney designating some person who must be a resident of the Philippines, on
whom any summons and other legal processes may be served in all actions or other legal proceedings
against such corporation, and consenting that service upon such resident agent shall be admitted and
held as valid as if served upon the duly authorized officers of the foreign corporation at its home
office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange
Commission an agreement or stipulation, executed by the proper authorities of said corporation, in
form and substance as follows:

"The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being
granted by the Securities and Exchange Commission a license to transact business in the Philippines,
that if at any time said corporation shall cease to transact business in the Philippines, or shall be
without any resident agent in the Philippines on whom any summons or other legal processes may be
served, then in any action or proceeding arising out of any business or transaction which occurred in
the Philippines, service of any summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and effect as if made upon the
duly-authorized officers of the corporation at its home office."

Whenever such service of summons or other process shall be made upon the Securities and Exchange
Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance by the party at whose instance
the service is made.

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in
writing the Securities and Exchange Commission of the new address. (72a; and n)

d. Issuance of License (Sec. 126)

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 Section 126. Issuance of a license. – If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the Philippines and continue to do so for as
long as it retains its authority to act as a corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance
with this Code or other special laws.

Within sixty (60) days after the issuance of the license to transact business in the Philippines, the
license, except foreign banking or insurance corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines,
securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other
evidence of indebtedness of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in
"registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic
corporations registered in the stock exchange, or shares of stock in domestic insurance companies and
banks, or any combination of these kinds of securities, with an actual market value of at least one
hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal
year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit
additional securities equivalent in actual market value to two (2%) percent of the amount by which the
licensee’s gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities
and Exchange Commission shall also require deposit of additional securities if the actual market value
of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at
the time they were deposited. The Securities and Exchange Commission may at its discretion release
part of the additional securities deposited with it if the gross income of the licensee has decreased, or if
the actual market value of the total securities on deposit has increased, by more than ten (10%) percent
of the actual market value of the securities at the time they were deposited. The Securities and
Exchange Commission may, from time to time, allow the licensee to substitute other securities for
those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the
interest or dividends on the securities deposited. In the event the licensee ceases to do business in the
Philippines, the securities deposited as aforesaid shall be returned, upon the licensee’s application
therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the
licensee has no liability to Philippine residents, including the Government of the Republic of the
Philippines. (n)

A licensed foreign corporation should be subjected to no harsher rules that is required of domestic
corporations—it should not be subject to attachment on the pretense that such foreign corporation is not
residing in the Philippines. Claude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932).
e. Effects of Failure to Obtain License (Secs. 133 and 144)

Section 133. Doing business without a license. – No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws. (69a)

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 Section 134. Revocation of license. – Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines may be revoked or suspended by
the Securities and Exchange Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as required by this Code;

2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;

3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange
Commission a statement of such change as required by this Title;

4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any
amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation
within the time prescribed by this Title;

5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title;

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 or purposes for which such
corporation is authorized under its license;

8. Transacting business in the Philippines 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. (n)

Under Sec. 123, a foreign corporation must first obtain a license to do business before it can transact
business in the Philippines. Without the proper license, it cannot maintain any action or proceeding before
Philippine courts as provided in Section 133 of the Corporation Code. Cargill, Inc. v. Intra Strata Assurance
Corp., 615 SCRA 304 (2010).
The contract itself is valid, but it is the standing to sue of the foreign corporation that is missing, which can
be remedied with the subsequent obtaining of the license to do business. Home Insurance Co. v. Eastern
Shipping Lines, 123 SCRA 424 (1983).
Summary of Rulings on Doing Business: (1) if a foreign corporation does business in the Philippines
without a license, it cannot sue before Philippine courts; (2) if a foreign corporation is not doing business in
the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of
action entirely independent of any business transaction; (3) if a foreign corporation does business in the
Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation’s corporate personality in a suit brought before the
Philippine courts; and (4) if a foreign corporation does business in the Philippines with the required license, it
can sue before Philippine courts on any transaction. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).145
f. Amendment of License (Sec. 131)

Section 131. Amended license. – A foreign corporation authorized to transact business in the
Philippines shall obtain an amended license in the event it changes its corporate name, or desires to
pursue in the Philippines other or additional purposes, by submitting an application therefor to the
Securities and Exchange Commission, favorably endorsed by the appropriate government agency in
the proper cases. (n)

g. Revocation of License (Secs. 134 and 135)

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 Section 135. Issuance of certificate of revocation. – Upon the revocation of any such license to
transact business in the Philippines, the Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing a copy thereof to the appropriate government
agency in the proper cases.

The Securities and Exchange Commission shall also mail to the corporation at its registered office in
the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (n)

3. CONCEPTS OF “DOING BUSINESS IN THE PHILIPPINES”

a. Statutory Definition of Doing Business (R.A. 7042, Foreign Investment Act of 1991)

Section 3. Definitions. – As used in this Act

d) The praise "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization: Provided,
however, That the phrase "doing business: shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to represent its interests in
such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account;

FIA ’91 repealed Arts. 44-56 of Book II of the Omnibus Investments Code, and enumerates in Sec. 3(d)
not only the acts or activities which constitute “doing business” but also those activities which are not deemed
“doing business”. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
Under Sec. 3(d) of FIA ‘91, also Rule I, Sec. 1(f) of its IRR, the appointment of a distributor is not
sufficient to constitute “doing business” unless it is under the full control of the foreign corporation. If the
distributor is an independent entity which buys and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter cannot be considered to be doing business in the
Philippines. Steelcase, Inc. v. Design Int’l Selections, Inc., 670 SCRA 64 (2012).
Section 3(d) provides that “The phrase ‘doing business’ shall include … opening offices, whether called
‘liaison’ offices or branches,” leads to no other conclusion than that Saudia is a foreign corporation doing
business in the Philippines, and it may be sued in the Philippines and is subject to the jurisdiction of Philippine
tribunals. Saudi Arabian Airlines v. Rebesencio, 746 SCRA 140 (2015).

b. Jurisprudential Concepts of “Doing Business”: it implies a continuity of commercial dealings and

arrangements and the performance of acts or works or the exercise of some of the functions normally incident
to the purpose or object of a foreign corporation’s organization. Mentholatum v. Mangaliman, 72 Phil. 515
(1941).

(i) “Territoriality Rule” – Doing business in the Philippines requires that the contract must be perfected or ed. of
business contracts constitutes doing business in the Philippines. Marubeni Nederland B.V. v. Tensuan, 190
SCRA 105 (1990).
(ii) “Profit-Seeking Transactions Rule” – Although each case must be judged in light of attendant circumstances,
jurisprudence has evolved several guiding principles for the application of these tests. “By and large, to constitute

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 ‘doing business,’ the activity to be undertaken in the Philippines is one that is for profit-making.” Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon
Technology Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq.
(1998 ed.); Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW 801-802 (2001).
Examples:
• Insurance Business – A foreign corporation with a Philippine settling agent which issues twelve marine
policies covering different shipments to the Philippines is doing business here. General Corp. of the Phil.
v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is doing business in
the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).
Foreign insurance companies who undertake the filing of collection suits with Philippine courts arising
from insurance contracts entered into and premiums paid abroad are not doing business in the Philippines.
Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).146
• Air Carriers – Off-line air carriers having general sales agents in the Philippines are engaged in business in
the Philippines and that their income from sales of passage here (i.e., uplifts of passengers and cargo occur
to or from the Philippines) is income from within the Philippines. South African Airways v. Commissioner
of Internal Revenue, 612 SCRA 665 (2010).
(iii) Transactions with Agents and Brokers – When it is shown that the foreign corporation exercised control
over the business of its brokers, then it is deemed doing business in the country. Granger Associates v.
Microwave Systems, Inc., 189 SCRA 631 (1990).147
c. Special Cases on Infringement of Business Names and Trademarks
The right to corporate name and trade name of a foreign corporation is a property right in rem, which it may
assert and protect in any of the courts of the world even in countries where it does not personally transact any
business. Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 (1927).
Infringement of trade name may be pursued in local courts separate from the issue of whether there is the
proper license to do business in the Philippines. General Garments Corp. v. Director of Patens, 41 SCRA 50
(1971); Universal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 (1988).
d. Doctrine on Unrelated or Isolated Transactions
Isolated acts, contracts, or transactions of foreign corporations are not regarded as carrying on of business.
Typical examples of these are the making of a single contract, sale with the taking of a note and mortgage in the
state to secure payment thereof, purchase, or note, or the mere commission of a tort. MR. Holdings, Ltd. V. Bajar,
380 SCRA 617 (2002).
A foreign corporation needs no license to sue before Philippine courts on an isolated transaction. Even a series
of transactions which are occasional, incidental and casual—not of a character to indicate a purpose to engage in
business—do not constitute the doing or engaging in business as contemplated by law. Lorenzo Shipping v.
Chubb and Sons, Inc., 431 SCRA 266 (2004).
The performance of services auxiliary to an existing isolated contract of sale which are not on a continuing
basis do not constitute “doing business in the Philippines.” Antam Consolidated v. Court of Appeals, 143
SCRA 288 (1986).148
(i) Examples of Isolated Transactions:
• Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v. La Campañia
Transatlantica, 8 Phil. 766 (1907).
• Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East Asia Co., Ltd. v. Manila
Port Service, 25 SCRA 633 (1968).
• Recovery of damages on cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA 1 (1986).
• Sale of construction equipment to the Government with no intent of continuity of transaction. Gonzales v. Raquiza,
180 SCRA 254 (1989).
• Recovering a Hongkong judgment from a Manila resident. Hang Lung Bank v. Saulog, 201 SCRA 137 (1991).
• Appointment of local lawyer by foreign movie companies who have registered intellectual property rights over their
movies in the Philippines, to protect such rights for piracy: “We fail to see how exercising one's legal and property
rights and taking steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can
be deemed by and of themselves to be doing business here.” Columbia Pictures Inc. v. Court of Appeals, 261 SCRA
144 (1996).
(ii) Examples of When Single Transactions Constitute Doing Business:
• Recovery Where a single act or transaction is not merely incidental or casual but indicates the foreign corporation’s
intention to do other business in the Philippines, said single act or transaction constitutes doing business. Far East
Int'l v. Nankai Kogyo, 6 SCRA 725 (1962).

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 • When a foreign corporation engaged in the manufacture of uniforms purchases through a local agent 7,770 dozens
of soccer jerseys from a local company, it was engaged in business here for the single act was not merely incidental
or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other
business in the state. Litton Mills, Inc. v. CA, 256 SCRA 696 (1996).
• Participating in a bidding process constitutes “doing business” because it shows the foreign corporation’s intention
to engage in business in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for
which it was created, regardless of volume of business, that determines whether a foreign corporation needs a
license or not. European Resources and Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte, 435 SCRA 246
(2004).

4. Local Suits BROUGHT BY Foreign Corporations

a. Need to Allege Capacity to Sue: The fact that a foreign corporation is not doing business in the Philippines
must be alleged if a foreign corporation desires to sue in Philippines courts under the “isolated transactions
rule.” Atlantic Mutual Inc. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966).149
The filing of an action by a foreign corporation before Philippine courts would mean that by voluntary
appearance, the local courts have actually obtained jurisdiction over the “person” of the foreign corporation.
Communication Materials v. Court of Appeals, 260 SCRA 673 (1996).
b. Need to Allege Resident Agent: A complaint filed by a foreign corporation is fatally defective for failing to
allege its duly authorized representative or resident agent in Philippine jurisdiction. New York Marine
Managers, Inc. Court of Appeals, 249 SCRA 416 (1995).
c. Certificate of Non-Forum Shopping: A resident agent of a foreign corporation is not per se authorized to
execute the requisite certification against forum shopping—while a resident agent may be aware of actions
filed against his principal, he may not be aware of actions initiated by its principal, whether in the Philippines
or abroad. Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005).
d. Discredited Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business
in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign
corporation cannot maintain suit, under the principle of pari delicto. Top-Weld Mfg. v. ECED, 119 SCRA 118
(1985).
e. ESTOPPEL DOCTRINE: Under the principle of estoppel, a foreign corporation doing business in the Philippines
may sue in Philippine courts even without license to do business against a Philippine citizen who had
contracted with and been benefited by said corporation and knew it to be without the necessary license to do
business. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992).150
PROPER DOCTRINE: Foreign corporations which conduct regular business should be denied any access to courts
until they secure a license so as to ensure that they will abide by the decisions of our courts, even if adverse to
it. Dismissal of the petition would be without prejudice to the foreign corporation subsequently re-filing the
case when it has obtained the requisite license. Eriks Ltd. v. Court of Appeals, 267 SCRA 567 (1997).
f. On Isolated Transactions: A foreign corporation not licensed to do business in the Philippines is not
absolutely incapacitated from filing a suit in local court. Aboitiz Shipping Corp. v. Insurance Co. of North
America, 561 SCRA 262 (2008).
5. Local Suits AGAINST Foreign Corporations: A fundamental international law principle is that no state can by
its laws, and no court as a creature thereof, can by its judgments and decrees directly bind or affect property or
persons beyond state limits. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 12, Rule 14, Rules of Court)

Section 12. Service upon foreign private juridical entities. — When the defendant is a foreign
private juridical entity which has transacted business in the Philippines, service may be made on its
resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the
government official designated by law to that effect, or on any of its officers or agents within the
Philippines. (14a)

For purposes of venue, a foreign corporation, its “residence” includes the country where it exercises
corporate functions or the place where its business is done. State Investment House v. Citibank, 203 SCRA 9
(1991); Northwest Orient Airlines v. Court of Appeals, 241 SCRA 192 (1995).
For service of summons under Sec. 14, Rule 14, it is sufficient that it be alleged in the complaint that the
foreign corporation is doing business in the Philippines. Hahn v. CA, 266 SCRA 537 (1997).

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 When a foreign corporation has designated a person to receive service of summon, the designation is
exclusive and service of summons on any other person is inefficacious. H.B. Zachry Company Int’l v. Court of
Appeals, 232 SCRA 329 (1994).
When a foreign corporation is doing business in the Philippines, summons may be served on (a) its designated
resident agent; (b) if there is no resident agent, the government official designated by law to that effect; or (c)
any of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is
the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent; it is
necessary that there must be specific allegations that establishes the connection between the foreign corporation
and its alleged agent with respect to the transaction in question. French Oil Mills Machinery Co.v. CA, 295
SCRA 462 (1998).
b. Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the tribunal’s
jurisdiction over its person is not equivalent to service of summons, nor does it constitute acquiescence to the
court’s jurisdiction. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
Participation of a foreign corporation’s counsel in the trial process, e.g., cross- examination of witnesses,
agreement and objection to documentary evidence, and the introduction of witnesses and documentary
evidence, vacates the plea of lack of jurisdiction over such foreign corporation. General Corp. of the Phil. v.
Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).151
c. ODD DOCTRINE: “Indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from
seeking redress from the courts in the Philippines, a fortiori, that same corporation cannot claim exemption
from being sued in Philippine courts for acts done against a person or persons in the Philippines.” Facilities
Management Corp. v. De la Osa, 89 SCRA 131 (1979).152
CONTRA: Sine qua non requirement for service of summons and other legal processes or any such agent or
representative is that the foreign corporation is doing business in the Philippines. Signetics Corp. v. Court of
Appeals, 225 SCRA 737 (1993).153
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations not doing
business here; insofar as the State is concerned, such foreign corporations have no legal existence, and to
subject foreign corporations not doing business to the courts’ jurisdiction would violate the essence of
sovereignty. The Court is not persuaded by the position taken invoking the ruling in Facilities Management.
Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the Philippines, it is deemed a
confirmation by the foreign corporation, even though not doing business in the Philippines, to be sued in local courts.
Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
6. Laws Applicable to Foreign Corporations (Sec. 129)

Section 129. Law applicable. – Any foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class,
except such only as provide for the creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or
officers of corporations to each other or to the corporation. (73a)

The provision in the New York law which allowed only stockholders with a minimum number of shareholdings
(3%) to be entitled to exercise the right of inspection is valid in the case of a foreign corporation licensed to do
business in the Philippines which in its internal relationship was bound by the New York law. Grey v. Insular
Lumber Co., 67 Phil. 139 (1938).
7. Amendment of Articles of Incorporation (Sec. 130)

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 Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. – Whenever
the articles of incorporation or by-laws of a foreign corporation authorized to transact business in the
Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the
appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws,
as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly
certified by the authorized official or officials of the country or state of incorporation. The filing
thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is
authorized to transact business in the Philippines. (n)

8. Merger and Consolidation (Sec. 132)

Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. –
One or more foreign corporations authorized to transact business in the Philippines may merge or
consolidate with any domestic corporation or corporations if such is permitted under Philippine laws
and by the law of its incorporation: Provided, That the requirements on merger or consolidation as
provided in this Code are followed.

Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a
merger or consolidation in its home country or state as permitted by the law of its incorporation, such
foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective,
file with the Securities and Exchange Commission, and in proper cases with the appropriate
government agency, a copy of the articles of merger or consolidation duly authenticated by the proper
official or officials of the country or state under the laws of which merger or consolidation was
effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business
in the Philippines, the latter shall at the same time file a petition for withdrawal of its license in
accordance with this Title. (n)

9. Withdrawal of Foreign Corporation (Sec. 136)

Section 136. Withdrawal of foreign corporations. – Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued
by the Securities and Exchange Commission unless all the following requirements are met;

1. All claims which have accrued in the Philippines have been paid, compromised or 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 three (3) consecutive
weeks in a newspaper of general circulation in the Philippines.

XVII. PENALTY PROVISIONS OF THE CODE

1. Penalty Clause for Violations of the Corporation Code (Sec. 144)

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 Section 144. Violations of the Code. – Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less than
one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may, after notice and
hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission:
Provided, That such dissolution shall not preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for dissolution of a corporation
provided in this Code. (190 1/2 a)

2. Cross-reference (Sec. 27)

Section 27. Disqualification of directors, trustees or officers. – No person convicted by final judgment
of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)

3. Specific Application: Denial of the Right of Inspection (Sec. 74)

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 Section 74. Books to be kept; stock transfer agent. – Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act done or ordered done at
the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and
on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of excerpts from said records or
minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed upon the directors
or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action
under this section that the person demanding to examine and copy excerpts from the corporation’s
records and minutes has improperly used any information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or was not acting in good faith
or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must
be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and such other entries as the by-laws may prescribe. 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.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission,
which shall be renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and regulations imposed
on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a
and 32a; P.B. No. 268.)

4. Criminal Law: “No person shall be penalized for a crime not defined as such by the statutes.”
a. Historical Background of Sec. 144 (Sec. 190 of the old Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground
for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in such
matters. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
Penalties imposed in Sec. 190(A) for the violation of the prohibition in question are of such nature that they
can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be
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 maintained only by the Solicitor General in representation of the Government. Harden v. Benguet
Consolidated Mining Co., 58 Phil. 141 (1933).
b. Current Doctrine on the Coverage of Sec. 144
Section 133, unlike its counterpart Sec. 69 in the old Corporation Law which specifically provided for penal
sanctions for foreign corporations engaging in business in the Philippines without obtaining the requisite
license, should be deemed to have a penal sanction by virtue of Sec. 144 of the Corporation Code. Home
Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
The lack of specific language imposing criminal liability in Secs. 31 and 34 shows legislative intent intent
to limit the consequences of their violation to the civil liabilities mentioned therein. Had it been the
intention of the drafters of the law to define Sec. 31 and 34 as offenses, they could have easily included
similar language as that found in Section 74. Ient v. Tullett Prebon (Phils.), Inc., G.R. No. 189158 &
189530, 11 January 2017.

XVII. MISCELLANEOUS
1. SEC Power and Supervision (P.D. 902-A)

PRESIDENTIAL DECREE NO. 902-A

SEC REORGANIZATION ACT
March 11, 1976

REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH

ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT.

WHEREAS, in line with the government's policy of encouraging investments, both domestic and
foreign, and more active public participation in the affairs of private corporations and enterprises
through which desirable activities may be pursued for the promotion of economic development; and to
promote a wider and more meaningful equitable distribution of wealth, there is a need for an agency of
the government to be invested with ample powers to protect such investment and the public;
WHEREAS, to achieve these national objectives, it is necessary to reorganize and restructure the
Securities and Exchange Commission to make it a more potent, responsive and effective arm of the
government to help in the implementation of these programs and to play a more active role in national-
building;

WHEREAS, it is necessary and desirable to professionalize such agency by investing it with

adequate powers so that it could avail itself of the services of highly technical and qualified men in the
government service;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Republic of the Philippines,

by virtue of the powers vested in me by the Constitution, do hereby order and decree that:

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 Section 1. The administrative supervision of the Securities and Exchange Commission is hereby
transferred from the Department of Trade and shall hereafter be under the direct general supervision of
the President.

Sec. 2. That the Commission shall be a collegial body composed of a Chairman and two (2) Associate
Commissioners who shall be appointed by the President and the tenure of the office of each member
shall be seven (7) years: Provided, however, That the Chairman and the Members of the Commission
first appointed by the President shall serve for a period of seven (7) years, five (5) years and three (3)
years, as fixed in their respective appointments: Provided, further, That upon the expiration of his
term, a Member shall serve as such until his successor shall have been appointed and qualified: and
Provided, Finally, that no vacancy shall be filled except for the unexpired portion of the term. The
Chairman shall receive an annual salary of Fifty Thousand (P50,000.00) Pesos and a monthly
allowance of Two Thousand (P2,000.00) Pesos and each Member shall receive an annual salary of
Forty-Two Thousand Five Hundred (P42,500.00) Pesos and a monthly commutable allowance of One
Thousand Five Hundred (P1,500.00) Pesos.

The Commission shall meet as often as may be necessary on such day or days as the Chairman may
fix. The notice of the meeting shall be given to all members of the Commission and the presence of at
least two (2) shall constitute a quorum. In the absence of the Chairman, the more senior associate
commissioner shall act as presiding officer of the meeting.

The Chairman shall have the general executive control, direction and supervision of the work and
operation of the Commission and of its members, bodies, boards, personnel and all of its
administrative business.

There shall be a Secretary of the Commission, under the control and direction of the Chairman, who
shall be in charge of all the administrative business of the Commission and shall perform such other
duties and functions as may be assigned to him. He shall be the recorder and official reporter of the
proceedings of the Commission and shall have authority to administer oath in all matters coming under
the jurisdiction of the Commission. He shall be the custodian of all records, profiles, reports, minutes
and other documents and papers filed with the Commission or entrusted to his care and shall be
responsible therefor to the Commission.

There shall be an Executive Director of the Commission who shall be responsible for the effective
implementation of the policies, rules and standards promulgated by the Commission, to coordinate and
supervise the activities of the different operating units; to report to the Chairman the operations of
such units; to report to the Chairman the operations of such units; and to perform such functions as
may be assigned to him by the Chairman and/or by Commission. The position of the Executive
Director is hereby declared primarily confidential in nature.

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchise and/or a license or permit
issued by the government to operate in the Philippines; and in the exercise of its authority, it shall have
the power to enlist the aid and support of any and all enforcement agencies of the government, civil or
military.

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 Sec. 4. The Commission shall reorganize and restructure the present staff and personnel of the agency.
The proposed staffing pattern of the Commission with the corresponding salary scale, attached as
Annex "A" is hereby approved: Provided, That except as to the technical staff and such other positions
as the Commission, with the approval of the President, may declare to be highly technical, policy-
determining or primarily confidential, all positions in the Commission are subject to the Civil Service
Law and Rules.

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving.

(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of associations or organizations
registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity; and

(c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:

(a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in
which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply;

(b) To punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of, and penalties prescribed by, the Rules of Court;

(c) To compel the officers of any corporation or association registered by it to call meetings of
stockholders or members thereof under its supervision;

(d) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members;

(e) To issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases order search and seizure or cause the search and seizure of all
documents, papers, files and records as well as books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases before it;

(f) To impose fines and/or penalties for violation of this Decree or any other laws being implemented
by the Commission, the pertinent rules and regulations, its orders, decisions and/or rulings;

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 (g) To authorize the establishment and operation of stock exchanges, commodity exchanges and such
other similar organization and to supervise and regulate the same; including the authority to determine
their number, size and location, in the light of national or regional requirements for such activities with
the view to promote, conserve or rationalize investment;

(h) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of
Industry, National Economic and Development Authority or any other appropriate government
agency, the application for registration of any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establishment, organization or operation will not be
consistent with the declared national economic policies.

(i) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:chanroblesvirtuallawlibrary

[1] Fraud in procuring its certificate of registration;

[2] Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;

[3] Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise;

[4] Continuous inoperation for a period of at least five (5) years;

[5] Failure to file by-laws within the required period;

[6] Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period;

(j) To exercise such other powers as implied, necessary or incidental to the carrying out the express
powers granted to the Commission or to achieve the objectives and purposes of this Decree.

In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be
conducted by the Commission or by a Commissioner or by such other bodies, boards, committees
and/or any officer as may be created or designated by the Commission for the purpose. The decision,
ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed
to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of
such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling within its jurisdiction.

The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the
Supreme Court by petition for petition for review in accordance with the pertinent provisions of the
Rules of Court.

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 Sec. 7. The Commission is authorized to recommend to the President the revision, alteration,
amendment or adjustment of the charges and fees, which by law, it is authorized to collect.

Sec. 8. With the approval of the President, the Commission is further authorized to create additional
positions as it may deem necessary to carry out the provisions and intents of this Decree.

Sec. 9. So much amount as may be needed to implement the provisions of this Decree taken from the
income of the Commission not to exceed twenty-five per cent (25%) thereof and any unexpended
balance in the current appropriation is hereby authorized to be appropriated.

Sec. 10. When the exigency of the service so requires and with the approval of the President, funds
may be set aside from the appropriation provided for the Commission and/or from the fees collected
under existing laws, decrees, rules and regulations to defray expenses to be incurred by the
Commission.

Sec. 11. The Commission shall submit an annual report to the President of the Philippines not later
than January 31 of each year with such recommendations as may be necessary.

Sec. 12. All laws, executive orders, decrees, rules and regulations or parts thereof, contrary to or
inconsistent with the provision of this Decree are hereby repealed, amended or modified accordingly.

This decree shall take effect immediately.

Done in the City of Manila, March 11, 1976.

a. Annual Report and Submission of Financial Statements to the SEC (Art. 141)

Section 141. Annual report or corporations. – Every corporation, domestic or foreign, lawfully doing
business in the Philippines shall submit to the Securities and Exchange Commission an annual report
of its operations, together with a financial statement of its assets and liabilities, certified by any
independent certified public accountant in appropriate cases, covering the preceding fiscal year and
such other requirements as the Securities and Exchange Commission may require. Such report shall be
submitted within such period as may be prescribed by the Securities and Exchange Commission. (n)

b. SEC Endowed with Quasi-Legislative Power to Implement Code (Sec. 143)

Section 143. Rule-making power of the Securities and Exchange Commission. – The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this Code,
and to promulgate rules and regulations reasonably necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (n)

c. Issue IRR to Enable It to Perform Its Duties, Including the Prevention of Fraud and Abuses on the Part of
the Controlling Stockholders, Members, Directors, Trustees or Officers. (Art. 143)

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 Section 143. Rule-making power of the Securities and Exchange Commission. – The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this Code,
and to promulgate rules and regulations reasonably necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (n)

2. Corporations Created by Special Laws or Charters: Code Has Suppletory Application (Sec. 4)

Section 4. Corporations created by special laws or charters. – Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n)

3. Existing Corporation at Adoption of the Code: Deemed to Have Been Authorized, Licensed or Registered
under the Code (Sec. 148).

Section 148. Applicability to existing corporations. – All corporations lawfully existing and doing
business in the Philippines on the date of the effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange Commission, shall be deemed to have been
authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions
of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is
affected by the new requirements of this Code, said corporation shall, unless otherwise herein
provided, be given a period of not more than two (2) years from the effectivity of this Code within
which to comply with the same. (n)

4. Applicability of Other Provisions of the old Corporation Law (Secs. 145 and 146)

Section 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof. (n)

Section 146. Repealing clause. – Except as expressly provided by this Code, all laws or parts thereof
inconsistent with any provision of this Code shall be deemed repealed. (n)

—oOo—

18 JANUARY 2018\ SCRA 811

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