CORPORATION LAW

INTRODUCTION





A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.

A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent
on its will," it is "a creature without any existence until it has received the imprimatur of the state acting
according to law." A corporation will have no rights and privileges of a higher priority than that of its
creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet
Corporation

A corporation has four (4 attributes:

(1 t is an artificial being;
(2 reated by operation of law;
(3 ith right of succession;
(4 as the powers, attributes, and properties as expressly authorized by law or incident to its
existence.


CLASSIFICATION OF PRIVATE CORPORATIONS





Stock Non-Stock

Definition

orporations which have capital
stock divided into shares and
are authorized to distribute to the
holders of shares dividends or
allotments of the surplus profits on
the basis of the shares (3


All other private corporations (3

One where no part of its income is
distributable as dividends to its
members, trustees or officers. (87

Purpose

Primarily to make profits for its
shareholders

May be formed or organized for
charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic
service, or similar purposes like
trade, industry, agricultural and like
chambers, or any combination
Definition and attributes of a corporation
Stock v. Non-Stock Corporations
thereof. (88


Distribution of Profits

Profit is distributed to shareholders

hatever incidental profit made is
not distributed among its members
but is used for furtherance of its
purpose. AO or by-laws may
provide for the distribution of its
assets among its members upon its
dissolution. Before then, no profit
may be made by members.

Composition

Stockholders

Members

Scope of right to vote

Each stockholder votes according to
the proportion of his shares in the
corporation. No shares may be
deprived of voting rights except
those classified and issued as
"preferred" or "redeemable" shares,
and as otherwise provided by the
ode. (Sec. 6

Each member, regardless of class,
is entitled to one (1 vote UNLESS
such right to vote has been limited,
broadened, or denied in the AO or
by-laws. (Sec. 89

Voting by proxy

May be denied by the AO or the by-
laws. (Sec. 89

annot be denied. (Sec. 58

Voting by maiI

May be authorized by the by-laws,
with the approval of and under the
conditions prescribed by the SE.
(Sec. 89

Not possible.

Who exercises Corporate
Powers 23

Board of Directors or Trustees

Members of the corporation

Governing Board

Board of Directors or Trustees,
consisting of 5-15 directors /
trustees.

Board of Trustees, which may
consist of more than 15 trustees
unless otherwise provided by the
AO or by-laws. ($ec, 92)

Term of directors or
trustees

Directors / trustees shall hold office
for 1 year and until their successors
are elected and qualified (Sec. 23.

Board classified in such a way that
the term of office of 1/3 of their
number shall expire every year.
Subsequent elections of trustees
comprising 1/3 of the board shall be
held annually, and trustees so
elected shall have a term of 3 years.
($ec. 92)

EIection of officers

Officers are elected by the Board of
Directors (Sec. 25, except in close
corporations where the stockholders
themselves may elect the officers.
(Sec. 97

Officers may directly elected by the
members UNLESS the AO or by-
laws provide otherwise. (Sec. 92

PIace of meetings

Any place within the Philippines, if

Generally, the meetings must be
provided for by the by-laws (Sec.
93
held at the principal office of the
corporation, if practicable. f not,
then anyplace in the city or
municipality where the principal
office of the corporation is located.
(Sec. 51

TransferabiIity of interest
or membership

Transferable.

Generally non-transferable since
membership and all rights arising
therefrom are personal. owever,
the AO or by-laws can provide
otherwise. (Sec. 90

Distribution of assets in
case of dissoIution



$ee $ec. 94.


CIR VS. CLUB FILIPINO (5 SCRA 321, 1962)

FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant,
which is incident to the operation oI the club and its gold course. The club is operated mainly
with Iunds derived Irom membership Iees and dues. The BIR seeks to tax the said restaurant as a
business.

HELD: The Club was organized to develop and cultivate sports oI all class and denomination
Ior the healthIul recreation and entertainment oI its stockholders and members. There was in
Iact, no cash dividend distribution to its stockholders and whatever was derived on retail Irom its
bar and restaurants used were to deIray its overhead expenses and to improve its golI course.

For a stock corporation to exist, 2 requisites must be complied with:

(1) a capital stock divided into shares
(2) an authority to distribute to the holders oI such shares, dividends or allotments
oI the surplus proIits on the basis oI shares held.

In the case at bar, nowhere in the AOI or by-laws oI Club Filipino could be Iound an authority
Ior the distribution oI its dividends or surplus proIits.


FORMATION AND ORGANIZATION OF CORPORATION




Who may form a corporation (See SEC. 10)

INCORPORATORS REQUIREMENTS COMMENTS

Definition

stockholders or members mentioned

O compare with orporators which
Requirements in the formation of a corporation
in the articles of incorporation as
originally forming and composing
the corporation and who are
signatories thereof stockholders
or members mentioned in the
articles of incorporation as
originally forming and composing
the corporation and who are
signatories thereof
include all stockholders or
members, whether incorporators
or joining the corporation after its
incorporation.


Characteristic

O natural persons

O excludes corporations and
partnerships

Number

O not less than 5; not more than 15

O may be more than 15 for non-
stock corp. except educational
corp.

O does not prevent the "one-man
(person corporation wherein the
other incorporators may have only
nominal ownership of only one
share of stock; not necessarily
illegal

Age

O of legal age



Residence

O majority should be residents of
the Philippines

O residence a requirement;
citizenship requirement only in
certain areas such as public
utilities, retail trade banks,
investment houses, savings and
loan associations, schools






Mutual Agreement to perform certain acts required for organizing a corporation

1- Organize and establish a corporation
2- omply with requirements of corporation code
3- ontribute capital/resources
4- Mode of use of capital/resource and control/management of capital/resource
5- distribution/disposition of capital/resource (embodied in constitutive documents


STEPS COMMENTS

a. PromotionaI Stage (See SEC. 2.
Definitions)


Promoter
O brings together persons who become
interested in the enterprise
Steps in the formation of a corporation
O aids in procuring subscriptions and sets in
motion the machinery which leads to the
formation of the corporation itself
O formulates the necessary initial business and
financial plans and, if necessary, buys the
rights and property which the business may
need, with the understanding that the
corporation when formed, shall take over the
same.


-. Drafting articIes of incorporation
(See SE. 14


(see chart beIow)

c. FiIing of articIes; payment of fees.


O AO & the treasurer's affidavit duly signed &
acknowledged
O must be filed w/ the SE & the corresponding fees
paid
O failure to file the AO will prevent due incorporation of
the proposed corporation & will not give rise to its
juridical personality. t will not even be a de facto
corp.
O Under present SE rules, the AO once filed , will be
published in the SE eekly Bulletin at the expense
of the corp. (SE ircular # 4, 1982.


d. Examination of articIes; approvaI or
rejection by SEC.


Process:
a SE shall examine them in order to determine
whether they are in conformity w/ law.
b f not, the SE must give the incorporators a
reasonable time w/in w/c to correct or modify the
objectionable portions.

Grounds for rejection or disapproval of AOI:

a AO /amendment not substantially in
accordance w/ the form prescribed

b purpose/s are patently unconstitutional, illegal,
immoral, or contrary to government rules & regulations;

c Treasurer's Affidavit is false;

d required percentage of ownership has not been
complied with (Sec. 17

e corp.'s establishment, organization or operation
will not be consistent w/ the declared national economic
policies (to be determined by the SE, after consultation
w/ BO, NEDA or any appropriate government agency --
PD 902-A as amended by PD 1758, Sec. 6 (k

O Decisions of the SE disapproving or rejecting AO
may be appealed to the A by petition for review in
accordance w/ the RO.


e. Issuance of certificate of
incorporation.


Certificate of Incorporation wiII be issued if:

a SE is satisfied that all legal requirements have
been complied with; and

b there are no reasons for rejecting or
disapproving the AO.

O t is only upon such issuance that the corporation
acquires juridical personality.
(See Sec. 19. ommencement of corporate existence

O Should it be subsequently found that the incorporators
were guilty of fraud in procuring the certificate of
incorporation, the same may be revoked by the SE,
after proper notice & hearing.





b. Drafting articles of incorporation (See SEC. 14)

CONTENTS OF AOI COMMENTS


Corporate Name

O Essential to its existence since it is through it that the
corporation can sue and be sued and perform all legal acts

O A corporate name shall be disallowed by the SE if the
proposed name is either:

(1 identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already
protected by law; or

(2 patently deceptive, confusing or contrary to existing
laws. (Sec. 18

LYCEUM OF THE PHILS. VS. CA (219 $CRA 610)

The policy underlying the prohibition against the registration of a
corporate name which is "identical or deceptively or confusingly
similar to that of any existing corporation or which is "patently
deceptive or patently confusing or "contrary to existing laws is:

1. the avoidance of fraud upon the public which would
have occasion to deal with the entity concerned;
2. the prevention of evasion of legal obligations and
duties, and
3. the reduction of difficulties of administration and
supervision over corporations.


Purpose CIause

O A corporation can only have one (1 primary purpose. owever,
it can have several secondary purposes.

O A corporation has only such powers as are expressly granted to
it by law & by its articles of incorporation, those which may be
incidental to such conferred powers , those reasonably
necessary to accomplish its purposes & those which may be
incident to its existence.

O orporation may not be formed for the purpose of practicing a
profession like law, medicine or accountancy


PrincipaI Office

O must be within the Philippines
O specify city or province
O street/number not necessary
O important in determining venue in an action by or against the
corp., or on determining the province where a chattel mortgage
of shares should be registered

Term of Existence

O cannot specify term which is longer than 50 years at a time
O may be renewed for another 50 years, but not earlier than 5
years prior to the original or subsequent expiry date UNLESS
there are justifiable reasons for an earlier extension.

Incorporators and Directors

O names, nationalities & residences of the incorporators;
O names, nationalities & residences of the directors or trustees
who will act as such until the first regular directors or trustees
are elected;
O treasurer who has been chosen by the pre-incorporation
subscribers/members to receive on behalf of the corporation, all
subscriptions /contributions paid by them.

CapitaI Stock

O amount of its authorized capital stock in lawful money of the
Philippines
O number of shares into which it is divided
O in case the shares are par value shares, the par value of each,
O 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
O for a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and the
amount contributed by each
O 25% of 25% rule to be certified by Treasurer
O paid up capital should not be less than P5,000

Other matters

O lasses of shares into w/c the shares of stock have been
divided; preferences of & restrictions on any such class;
and any denial or restriction of the pre-emptive right of
stockholders should also be expressly stated in said articles.

O f the corporation is engaged in a wholly or partially
nationalized business or activity, the AO must contain a
prohibition against a transfer of stock which would reduce
the Filipino ownership of its stock to less than the required
minimum.

Any corporation may be incorporated as a cIose corporation, except:

a mining or oil companies;
b stock exchanges;
c banks;
d insurance companies;
e public utilities;
f educational institutions; &
g corporations declared to be vested w/ public interest






User of Corporate Powers

What is a 'de facto' corporation?

A 'de facto' corporation is a defectively organized corporation, which has all the powers
and liabilities of a 'de jure' corporation and, except as to the State, has a juridical
personality distinct and separate from its shareholders, provided that the following
requisites are concurrently present:

(1 That there is an apparently valid statute under which the corporation with its
purposes may be formed;

(2 That there has been colorable compliance with the legal requirements in good
faith; and,

(3 That there has been use of corporate powers, i.e., the transaction of business
in some way as if it were a corporation.


Can a corporation transact business as a 'de facto' corporation whiIe appIication is
stiII pending with SEC?

No. n the case of all v. Piccio (6 Phil. 603; 1950), where the supposed
corporation transacted business as a corporation pending action by the SE on its
articles of incorporation, the ourt held that there was no 'de facto' corporation on the
ground that the corporation cannot claim to be in 'good faith' to be a corporation when it
has not yet obtained its certificate of incorporation.


De Facto Corporations: Requisites
Formation under apparently valid statute.

UNICIPALITY OF ALABANG V. BENITO (29 SCRA 533, 1969)

WON a corporation organized under a statute subsequently declared void acquires status
as de Iacto` corporation.

No. A corporation organized under a statute subsequently declared invalid cannot acquire
the status oI a de Iacto` corporation unless there is some other statute under which the supposed
corporation may be validly organized. Hence, in the case at bar, the mere Iact that the
municipality was organized beIore the statute had been invalidated cannot conceivably make it a
de Iacto` corporation since there is no other valid statute to give color oI authority to its
creation.






Colorable compliance with the legal requirements in good faith.

BERGERON V. HOBBS (1 N.W. 1056, 65 Am. St. Rep. 85)

The constitutive documents oI the proposed corporation were deposited with the Register
oI Deeds but not on Iile in said oIIice. One oI the requirements Ior valid incorporation is the
Iiling oI constitutive documents in the Register oI Deeds.

Was there colorable` compliance enough to give the supposed corporation at least the
status oI a de Iacto` corporation?

No. The Iiling oI the constitutive documents in the Register oI Deeds is a condition
precedent to the right to act as a corporate body. As long as an act, required as a condition
precedent, remains undone, no immunity Irom individual liability is secured.


HARRIL V. DAVIS (168 F. 18, 1909)

The constitutive documents were Iiled with the clerk oI the Court oI Appeals but not with
the clerk oI court in the judicial district where the business was located. Arkansas law requires
Iiling in both oIIices.

Was there colorable` compliance enough to give the supposed corporation at least the
status oI a de Iacto` corporation?

No. Neither the hope, the belieI, nor the statement by parties that they are incorporated,
nor the signing oI the articles oI incorporation which are not Iiled, where Iiling is requisite to
create the corporation, nor the use oI the pretended Iranchise oI the nonexistent corporation, will
constitute such a corporation de Iacto as will exempt those who actively and knowingly use s
name to incur legal obligations Irom their individual liability to pay them. There could be no
incorporation or color oI it under the law until the articles were Iiled (requisites Ior valid
incorporation).


HALL v. PICCIO (29 SCRA 533, 1969)

In the case oI Hall v. Piccio, where the supposed corporation transacted business as a
corporation pending action by the SEC on its articles oI incorporation, the Court held that there
was no de Iacto` corporation on the ground that the corporation cannot claim to be in good
Iaith` to be a corporation when it has not yet obtained its certiIicate oI incorporation.

NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry must be through a quo
warranto proceeding made by the Solicitor General. (Sec. 20


(Sec. 21)


Distinguish a de facto corporation from a corporation by estoppeI.

The 'de facto' doctrine differs from the estoppel doctrine in that where all the
requisites of a 'de facto' corporation are present, then the defectively organized
corporation will have the status of a 'de jure' corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if any of
the requisites are absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the defendant
association is estopped from defending on the ground of lack of capacity to be sued, or
the defendant third party had dealt with the plaintiff as a corporation and is deemed to
have admitted its existence.


(De facto has status of 'de jure' corpo, except separate personality against State, provided all requisites
are present

What are the effects of a Corporation by EstoppeI in suits brought:

(1 against the Corporation? onsidered a corporation in suits brought against it if
it held itself out as such and denies capacity to be sued;

(2 against third party? Third party cannot deny existence of corporation if it
dealt with it as such.


EPIRE vs. STUART (6 Mich. 82, 9 N.W. 52, 1881)

CORPORATION BY ESTOPPEL
Company was sued on a promissory note. Its deIense was that at the time oI its issuance,
it was deIectively organized and thereIore could not be sued as such.

The Corporation cannot repudiate the transaction or evade responsibility when sued
thereon by setting up its own mistake aIIecting the original organization.


LOWELL-WOODWARD vs. WOODS (10 Kan. 29, 1919)

Corporation sued a partnership on a promissory note. The latter as deIense alleged that
the plaintiII was not a corporation.

One who enters into a contract with a party described therein as a corporation is
precluded, in an action brought thereon by such party under the same designation, Irom denying
its corporate existence.




ASIA BANKING VS STANDARD PRODUCTS (6 Phil. 15, 192)

The corporation sued another corporation a promissory note. The deIense was that the
plaintiII was not able to prove the corporate existence oI both parties.

The deIendant is estopped Irom denying its own corporate existence. It is also estopped
Irom denying the other`s corporate existence. The general rule is that in the absence oI Iraud, a
person who has contracted or otherwise dealt with an association is such a way as to recognize
and in eIIect admit its legal existence as a corporate body is thereby estopped Irom denying its
corporate existence.

CRANSON VS IB (23 MD. , 200 A. 2D 33 , 196)

IBM sued Cranson in his personal capacity regarding a typewriter bought by him as
President oI a deIectively organized company whose Articles were not yet Iiled when the
obligation was contracted.

IBM, having dealt with the deIectively organized company as iI it were properly
organized and having relied on its credit instead oI Cranson`s, is estopped Irom asserting that it
was not incorporated. It cannot sue Cranson personally.

SALVATIERRA VS GARLITOS (103 Phil. 5, 1958)

Salvatierra leased his land to the corporation. He Iiled a suit Ior accounting, rescission
and damages against the corporation and its president Ior his share oI the produce. Judgment
against both was obtained. President complains Ior being held personally liable.

He is liable. An agent who acts Ior a non-existent principal is himselI the principal. In
acting on behalI oI a corporation which he knew to be unregistered, he assumed the risk arising
Irom the transaction.

ALBERT VS UNIVERSITY PUBLISHING CO., INC. (an. 30, 1965)

Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose
M. Aruego, its President, whereby University would pay plaintiII Ior the exclusive right to
publish his revised Commentaries on the Revised Penal Code. The contract stipulated that
Iailure to pay one installment would render the rest oI the payments due. When University Iailed
to pay the second installment, Albert sued Ior collection and won. However, upon execution, it
was Iound that University was not registered with the SEC. Albert petitioned Ior a writ oI
execution against Jose M. Aruego as the real deIendant. University opposed, on the ground that
Aruego was not a party to the case.

The Supreme Court Iound that Aruego represented a non-existent entity and induced not
only Albert but the court to believe in such representation. Aruego, acting as representative oI
such non-existent principal, was the real party to the contract sued upon, and thus assumed such
privileges and obligations and became personally liable Ior the contract entered into or Ior other
acts perIormed as such agent.

The Supreme Court likewise held that the doctrine oI corporation by estoppel cannot be
set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willIul
representation that University had been duly organized and was existing under the law.





When adopted:

(a) No Iater than one (1) month after receipt from SEC of
officiaI notice of issuance of Cert. of incorporation.

Requirement: Affirmative vote of stockholders representing at least
majority of outstanding capital stock (Stock orp. or members
(Non-Stock

Must be signed by stockholders or members voting for them

(b) Prior to incorporation

Requirement: Approval of all incorporators; must be signed by all of them


Where kept: (1 n the principal office of the corporation ; and
(2 Securities and Exchange ommission

When effective: Only upon the SE's issuance of a certification that the by-laws
are not inconsistent with the orporation ode.
BY-LAWS (Sec. 46 & 47)

SpeciaI corporations: By-laws and/or amendments thereto must be accompanied by
a certificate of the appropriate government agency to the
effect that such by-laws / amendments are in accordance with
law.

O banks or banking institutions
O building and loan associations
O trust companies
O insurance companies
O public utilities
O educational institutions
O other special corporations governed by special laws


Contents of By-Iaws - Subject to the provisions of the onstitution, this ode, 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 and special meetings of the
stockholders or members;

3 the required quorum in meetings of stockholders or members and the manner of voting
herein;

4 the form for proxies of stockholders and members and the manner of voting them;

5 the qualifications, duties and compensation of directors or trustees, officers and
employees;

6 the time for holding the annual election of directors or 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 certificates; and

10 such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. ( Phil. 583, 1925)

As a general rule, the by-laws oI a corporation are valid iI they are reasonable and
calculated to carry into eIIect the objective oI the corporation and are not contradictory to the
general policy oI the laws oI the land. Under a statute authorizing by-laws Ior the transIer oI
stock, a corp. can do no more than prescribe a general mode oI transIer on the corp. books and
cannot justiIy an restriction upon the right oI sale.

GOVT. OF P.I. V. EL HOGAR

8 a provi8ion in the by-law8 allowing the BOD, by vote of ab8olute mafority, to cancel 8hare8
valid?

No. It is a patent nullity, being in direct conIlict with Sec. 187 oI the Corp. Law which
prohibits Iorced surrender oI unmatured stocks except in case oI dissolution.

8 a provi8ion in the by-law8 fixing the 8alary of director8 valid?

Yes. Since the Corporation Law does not prescribe the rate oI compensation, the power
to Iix compensation lies with the corporation.

8 a provi8ion requiring per8on8 elected to the Board of Director8 to own at lea8t P 5,000 8hare8
valid?

Yes. The Corporation Law gives the corporation the power to provide qualiIications oI
its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 5)

O Where the SEC grants a license to a Ioreign corporation, it is deemed to have approved
its
Ioreign-enacted by-laws. Sec. 46 oI the Corporation Code which states that by-laws are
not valid without SEC approval applies only to domestic corporations.

O A board resolution appointing an attorney-in-Iact to represent the corporation during pre-
trial is not necessary where the by-laws authorize an oIIicer oI the corporation to make
such appointment.


LOYOLA GRAND VILLAS v. CA (26 SCRA 681)

ISSUE: Whether the Iailure oI a corporation to Iile its by-laws within one (1) month Irom the
date
oI its incorporation, as mandated by Art. 46 oI the Corporation Code, results in the
corporation's automatic dissolution.

RULING: No. Failure to Iile by-laws does not result in the automatic dissolution oI the
corporation. It only constitutes a ground Ior such dissolution. (Cf. Chung Ka Bio v. AC,
163 SCRA 53) Incorporators must be given the chance to explain their neglect or
omission and remedy the same.



THE CORPORATE ENTITY




When does the corporation's existence as a IegaI entity commence?

Upon issuance by the SE of the certificate of incorporation (Sec. 19


What rights does the corporation acquire?

The right to:

1 sue and be sued;
2 hold property in its own name;
3 enter into contracts with third persons; &
4 perform all other legal acts.

Since corporate property is owned by the corporation as a juridical person, the
stockholders have no claim on it as owners, but have merely an expectancy or inchoate
right to the same should any of it remain upon the dissolution of the corporation after all
corporate creditors have been paid. onversely, a corporation has no interest in the
individual property of its stockholders, unless transferred to the corporation. Remember
that the liability of the stockholders is limited to the amount of shares.
SAN 1UAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631)

A corporation is a juridical person separate and distinct Irom its stockholders or
members. Accordingly, the property oI the corporation is not the property oI its stockholders or
members and may not be sold by the stockholders or members without express authorization
Irom the corporation's Board oI Directors.

In this case, the sale oI a piece oI land belonging to Motorich Corporation by the
corporation treasurer (Gruenberg) was held to be invalid in the absence oI evidence that said
corporate treasurer was authorized to enter into the contract oI sale, or that the said contract was
ratiIied by Motorich. Even though Gruenberg and her husband owned 99.866 oI Motorich, her
act could not bind the corporation since she was not the sole controlling stockholder.

STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 33)

Properties registered in the name oI the corporation are owned by it as an entity separate
and distinct Irom its members. While shares oI stock constitute personal property, they do not
represent property oI the corporation. A share oI stock only typiIies an aliquot part oI the
corporation's property or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner oI any part oI the capital oI the
corporation. Nor is he entitled to the possession oI any deIinite portion oI its property or assets.

The act oI liquidation made by the stockholders oI the corp oI the latter`s assets is not and
cannot be considered a partition oI community property, but rather a transIer or conveyance oI
the title oI its assets to the individual stockholders. Since the purpose oI the liquidation, as well
as the distribution oI the assets, is to transIer their title Irom the corporation to the stockholders
in proportion to their shareholdings, that transIer cannot be eIIected without the corresponding
The Theory of Corporate Entity
deed oI conveyance Irom the corporation to the stockholders. It is, thereIore, Iair and logical to
consider the certiIicate oI liquidation as one in the nature oI a transIer or conveyance.

CARA V. CA (151 SCRA 33, 198)

The case oI the unpaid compensation Ior the preparation oI the project study.

The petitioners were not involved in the initial stages oI the organization oI the airline.
They were merely among the Iinanciers whose interest was to be invited and who were in Iact
persuaded, on the strength oI the project study, to invest in the proposed airline.

There was no showing that the Airline was a Iictitious corp and did not have a separate
juridical personality to justiIy making the petitioners, as principal stockholders thereoI,
responsible Ior its obligations. As a bona Iide corp, the Airline should alone be liable Ior its
corporate acts as duly authorized by its oIIicers and directors. Granting that the petitioners
beneIited Irom the services rendered, such is no justiIication to hold them personally liable
thereIor. Otherwise, all the other stockholders oI the corporation, including those who came in
late, and regardless oI the amount oI their shareholdings, would be equally and personally liable
also with the petitioner Ior the claims oI the private respondent.

PALAY V. CLAVE (12 SCRA 60, 1983)

The case oI the reliance on a deIault provision oI the contract granting automatic extra-judicial
rescission.

The court Iound no badges oI Iraud on the part oI the president oI the corporation. The
BOD had literally and mistakenly relied on the deIault provision oI the contract. As president
and controlling stockholder oI the corp, no suIIicient prooI exists on record that he used the corp
to deIraud private respondent. He cannot, thereIore, be made personally liable because he
appears to be the controlling stockholder. Mere ownership by a single stockholder or by another
corporation oI all or nearly all oI the capital stock oI a corporation is not oI itselI suIIicient
ground Ior disregarding the separate corporate personality.

AGSAYSAY V. LABRADOR (180 SCRA 266)

The case oI the assignment by Senator Magsaysay oI a certain portion oI his shareholdings in
SUBIC granting his sisters the right to intervene in a case Iiled by the widow against SUBIC.

The words "an interest in the subject," to allow petitioners to intervene, mean a direct
interest in the cause oI action as pleaded, and which would put the intervenor in a legal position
to litigate a Iact alleged in the complaint, without the establishment oI which plaintiII could not
recover.

Here, the interest, oI petitioners, iI it exists at all, is indirect, contingent, remote,
conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy oI a right in the management oI the corporation and to share in the proIits
thereoI and in the properties and assets thereoI on dissolution, aIter payment oI the corporate
debts and obligations.

While a share oI stock represents a proportionate or aliquot interest in the property oI the
corp, it does not vest the owner thereoI with any legal right or title to any oI the property, his
interest in the corporate property being equitable and beneIicial in nature. Shareholders are in no
legal sense the owners oI corporate property, which is owned by the corp as a distinct legal
person.





Q: What is the theory of corporate entity?

A: That a corporation has a personality distinct from its stockholders, and is not affected
by the personal rights, obligations and transactions of the latter.

Q: When Can the VeiI of Corporate Entity be Pierced?

A: The veil of corporate fiction may be pierced when it is used as a shield to further
an end subversive of justice, or for purposes that could not have been intended by law
that created it or to defeat public convenience, justify wrong, protect fraud or defend
crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or
perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit
of the stockholders.

Q: What are the effects of disregarding the corporate veiI?

(1 Stockholders would be personally liable for the acts and contracts of the corporation
whose existence at least for the purpose of the particular situation involved is ignored.

(2 ourt is not denying corporate existence for all purposes but merely refuses to allow
the corporation to use the corporate privilege for the particular purpose involved.


Contrary to law / public policy; evasion of liability to government

STATE V. STANDARD OIL (9 Ohio, St., 13, N.E. 29, 15, 1892)

Where all or a majority oI stockholders comprising a corporation do an act which is
designed to aIIect the property and business oI the company, as iI it had been a Iormal resolution
oI its Board oI Directors and the acts done is ultra vires, the act should be regarded as the act oI
the corporation, and may be challenged by the state in a quo warrranto proceeding.


LAGUNA TRANS V. SSS (10 Phil. 833, 1960)

PIERCING THE CORPORATE VEIL
Where the corporation was Iormed by and consisted oI the members oI a partnership
whose business and property was conveyed to the corporation Ior the purpose oI continuing its
business, such corporation is presumed to have assumed partnership debts.


ARVEL BLDG. CORP. V. DAVID (9 Phil. 36, 195)

The Iact that:

O certiIicates in possession oI Castro were endorsed in blank;
O Castro had enormous proIits and had motive to hide them;
O other subscribers had no incomes oI suIIicient magnitude; and
O directors never met;

shows that other shareholders may be considered dummies oI Castro. Hence, corporate veil may
be pierced.





Evasion of liability to creditors

TAN BOON BEE CO. V. 1ARENCIO (163 SCRA 205, 1988)

Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter Iails to pay. G's
printing machine levied upon to satisIy claim but PADCO, another corpo intercedes, saying it is
the owner oI the machine, having leased such to G.

Printing machine was allowed by the Court to satisIy G's liability. Both G and PADCO's
corporate entities pierced because they have: the same board oI directors, PADCO owns 50 oI
G, PADCO never engaged in the business oI printing. Obviously, the board is using PADCO to
shield G Irom IulIilling liability to T.

NAARCO v. AFCorp (19 SCRA 962, 196)

Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wiIe,
own 76 oI AFC) contracts with NAMARCO Ior an exchange oI sugar (raw v. reIined). N
delivers, AFC doesn't since it did not have sugar to supply in the Iirst place. N sues to recover
sum oI money plus damages.

Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced
because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or
conduit oI another to evade liability.

1ACINTO V. CA (198 SCRA 211)

Jacinto, president/GM and owner oI 52 oI corpo, owes MetroBank sum oI money, signs
trust receipts thereIor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank.
Corpo veil pierced because it was used as a shield to perpetuate Iraud and/or conIuse legitimate
issues. There was no clear cut delimitation between the personality oI Jacinto and the
corporation.


Evasion of liability / obligation to employees

CLAPAROLS V. CIR (65 SCRA 613, 195)

Both predecessor and successor were owned and controlled by petitioner and there was
no break in the succession and continuity oI the same business. All the assets oI the dissolved
Plant were turned over to the emerging corporation. The veil oI corporate Iiction must be pierced
as it was deliberately and maliciously designed to evade its Iinancial obligation to its employees.


INDOPHIL TEXTILE ILL WORKERS UNION V. CALICA (205 SCRA 698)

Rule: The doctrine oI piercing the veil oI corporate entity applies when corporate Iiction
is used to deIeat public convenience, justiIy wrong, protect Iraud or deIend crime, or when it is
made as a shield to conIuse the legitimate issues or where a corporation is the mere alter ego or
business conduit oI a person, or where the corporation is so organized and controlled and its
aIIairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct oI
another corporation.

Case at bar: Union sought to pierce corporate veil alleging that the creation oI Acrylic is a devise
to evade the application oI the CBA Indophil had with them (or it sought to include the other
union in its bargaining leverage).

SC: Legal corporate entity is disregarded only iI it is sought to hold the oIIicers and stockholders
directly liable Ior a corporate debt or obligation. Union does not seek to impose such claim
against Acrylic. Mere Iact that businesses were related, that some oI the employees oI Indophil
are the same persons manning and providing Ior auxiliary services to the other company, and that
physical plants, oIIicers and Iacilities are situated in the same compound - not suIIicient to apply
doctrine.


NAFLU V. OPLE (13 SCRA 125, 1986)

Libra/Dolphin Garments was but an alter ego oI Lawman Industrial, thereIore, the Iormer
must bear the consequences oI the latter's unIair acts. It cannot deny reinstatement oI petitioners
simply because oI cessation oI Lawman's operations, since it was in Iact an illegal lock-out, the
company having maintained a run-away shop and transIerred its machines and assets there.

Here, the veil oI corporate Iiction was pierced in order to saIeguard the right to selI-
organization and certain vested rights which had accrued in Iavor oI the union. Second
corporation sought the protective shield oI corporate Iiction to achieve an illegal purpose.


ASIONICS PHILS. v. NLRC (290 SCRA 16)

A corporation is invested by law with a personality separate and distinct Irom those oI the
persons composing it as well as Irom that oI any other legal entity to which it may be related.
Mere ownership by a single stockholder or by another corporation oI all or nearly all oI the
capital stock oI a corporation is not oI itselI suIIicient ground Ior disregarding the separate
corporate personality.

Where there is nothing on record to indicate the President and majority stockholder oI a
corporation had acted in bad Iaith or with malice in carrying out the retrenchment program oI the
company, he cannot be held solidarily and personally liable with the corporation.


Evasion of liability on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 89, 1968)

Jose M. Villarama, operator oI a bus company, Villa Rey Transit, which was authorized
to operate 32 units Irom Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One oI
the conditions included in the contract oI sale was that the seller (Villarama) "shall not, Ior a
period oI 10 years Irom the date oI the sale, apply Ior any TPU service identical or competing
with the buyer (Pantranco)."

Barely 3 months aIter the sale, a corporation called Villa Rey Transit, Inc. was organized,
with the wiIe oI Jose M. Villarama as one oI the incorporators and who was subsequently elected
as treasurer oI the Corporation. Barely a month aIter its registration with the SEC, the
corporation bought 5 CPCs and 49 buses Irom one Valentin Fernando, and applied with the
Public Service Commission (PSC) Ior approval oI the sale. BeIore the PSC could take Iinal
action on the said application, however, 2 oI the 5 CPCs were levied upon pursuant to a writ oI
execution issued by the CFI in Iavor oI Eusebio Ferrer, judgment creditor, against Valentin
Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and
a certiIicate oI sale was issued in his name. Shortly thereaIter, he sold the said CPCs to
Pantranco, and they jointly submitted their contract oI sale to the PSC Ior approval.

The PSC issued an order that pending resolution oI the applications, Pantranco shall have
the authority to provisionally operate the service under the 2 CPCS that were the subject oI the
contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and Iiled a
complaint Ior annulment oI the sheriII's sale oI the CPCs and prayed that all the orders oI the
PSC relative to the dispute over the CPCs in question be annulled. Pantranco Iiled a third-party
complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and
the same, and that Villarama and/or the Corporation is qualiIied Irom operating the CPCs by
virtue oI the agreement entered into between Villarama and Pantranco.

Given the evidence, the Court Iound that the Iinances oI Villa-Rey, Inc. were managed as
iI they were the private Iunds oI Villarama and in such a way and extent that Villarama appeared
to be the actual owner oI the business without regard to the rights oI the stockholders. Villarama
even admitted that he mingled the corporate Iunds with his own money. These circumstances
negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt
that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller
may not make use of a corporate entity as a means of evading the o-ligation of his
covenant. Where the Corporation is su-stantially the alter ego of one of the parties to the
covenant or the restrictive agreement, it can -e enjoined from competing with the
covenantee.


Close Corporations

CEASE V. CA (93 SCRA 83, 199)

The Cease plantation was solely composed oI the assets and properties oI the deIunct
Tiaong plantation whose license to operate already expired. The legal Iiction oI separate
corporate personality was attempted to be used to delay and deprive the respondents oI their
succession rights to the estate oI their deceased Iather.

While originally, there were other incorporators oI Tiaong, it has developed into a closed
Iamily corporation (Cease). The head oI the corporation, Cease, used the Tiaong plantation as his
instrumentality. It was his business conduit and an extension oI his personality. There is not even
a showing that his children were subscribers or purchasers oI the stocks they own.


DELPHER TRADES V. CA (15 SCRA 39, 1988)

The Delpher Trades Corp. is a business conduit oI the Pachecos. What they really did
was to invest their properties and change the nature oI their ownership Irom unincorporated to
incorporated Iorm by organizing Delpher and placing the control oI their properties under the
corporation. This saved them inheritance taxes.

This is the reverse oI Cease; however, it does not modiIy the other cases. It stands on its
own because oI the Iacts.





Q: What is the generaI ruIe governing parent-subsidiary reIationship?

Parent-Subsidiary ReIationship
A: The mere fact that a corporation owns all or substantially all of the stocks of another
corporation is not alone sufficient to justify their being treated as one entity.

Q: When may it be disregarded by the courts?

(1 if the subsidiary was formed for the payment of evading the payment of higher
taxes

(2 where it was controlled by the parent that its separate identity was hardly
discernible

(3 parent corporations may be held responsible for the contracts as well as the
torts of the subsidiary


Q: What are the criteria by which the subsidiary can be considered a mere
instrumentaIity of the parent company?


1. the parent corp. owns all or most of the capital stock of the subsidiary.
2. the parent and subsidiary have common directors and officers
3. the parent finances the subsidiary
4. the parent subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation
5. the subsidiary has grossly inadequate capital
6. the parent pays the salaries and other expenses or losses of the subsidiary
7. the subsidiary has substantially no business except with the parent corp. or no
assets except those conveyed to or by the parent corp.
8. in the papers of the parent corp. or in the statements of its officers, the
subsidiary is described as a department or division of the parent corp. or its
business or financial responsibility is referred as the parent's own
9. the parent uses the property of the subsidiary as its own
10. the directors or the executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corp. in the latter's
interest
11. the formal legal requirements of the subsidiary are not observed
(Garrett vs. Southern Railway)

ote: $ir Jack said that we must not stop after we've gone through the 11 points in order
to determine whether or not there is a subsidiary or instrumentality. We must go further
and consider other circumstances which may help determine clearly the true nature of the
relationship. --- Em)


GARRETT VS. SOUTHERN RAILWAY (13 F. Supp. 915, E.D. Tenn. 1959)

This case involved a Workers Compensation claim by a wheel moulder employed by
Lenoir Car Works. The plaintiII sought to claim Irom Southern Railway Company, which
acquired the entire capital stock oI Lenoir Car Works. PlaintiII contended that Southern so
completely dominated Lenoir that the latter was a mere adjunct or instrumentality oI Southern.

The general rule is that stock ownership alone by one corporation oI the stock oI another
does not thereby render the dominant corporation liable Ior the torts oI the subsidiary, unless the
separate corporate existence oI the subsidiary is a mere sham, or unless the control oI the
subsidiary is such that it is but an instrumentality or adjunct oI the dominant corporation.

In the case, it was Iound that there were two distinct operations. There was no evidence
that Southern dictated the management oI Lenoir. In Iact, evidence shows that Marius, the
manager oI the subsidiary, was in Iull control oI the operation. He established prices, handled
negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmen`s
Compensation Fund. There was also no evidence that Lenoir was run solely Ior the beneIit oI
Southern. In Iact, a substantial part oI its requirements in the Iield oI operation oI Lenoir was
bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions
remained in the hands oI Marius. Hence, the complaint against Southern Railway was
dismissed.


KOPPEL VS. YATCO ( Phil. 96, 196)

This case involved a complaint Ior the recovery oI merchant sales tax paid by Koppel
(Philippines), Inc. under protest to the Collector oI Internal Revenue. Although the Court oI
First Instance did not deny legal personality to Koppel (Philippines), Inc. Ior any and all
purposes, it dismissed the complaint saying that in the transactions involved in the case, the
public interest and convenience would be deIeated and would amount to a perpetration oI tax
evasion unless resort was had to the doctrine oI "disregard oI the corporate Iiction."

The Iacts show that 99.5 oI the shares oI stocks oI K-Phil were owned by K-USA. K-
Phil. acted as a representative oI K-USA and not as an agent. K-Phil. also bore alone its own
incidental expenses (e.g. Cable expenses) and also those oI its 'principal. Moreover, K-Phil`s
share in the proIits was leIt in the hands oI K-USA. Clearly, K-Phil was a mere branch or
dummy oI K-USA, and was thereIore liable Ior merchant sales tax. To allow otherwise would be
to sanction a circumvention oI our tax laws and permit a tax evasion oI no mean proportion and
the consequent commission oI a grave injustice to the Government. Moreover, it would allow
the taxpayer to do by indirection what the tax laws prohibit to be done directly.

LIDDELL & CO. VS. CIR (2 SCRA 632, 1961)

Liddel Motors Inc. was an alter ego oI Liddel & Co. At the time oI its incorporation,
98 oI the Liddel Inc.`s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied
the original capital Iunds. The bulk oI the business oI Liddel Inc. was channeled through Liddel
Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare
parts Irom Liddel Inc. and then sell them to the general public.

To allow the taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the Iormer
or that they were practically one and the same is to sanction the circumvention oI tax laws.

YUTIVO VS. CTA (1 SCRA 160, 1961)

Southern Motors was actually owned and controlled by Yutivo as to make it a mere
subsidiary or branch oI the latter created Ior the purpose oI selling vehicles at retail. Yutivo
Iinanced principally, iI not wholly, the business oI Southern Motors and actually exceeded the
credit oI the latter . At all times, Yutivo, through the oIIicers and directors common to it and the
Southern Motors exercised Iull control over the cash Iunds, policies, expenditures and
obligations oI the latter. Hence, Southern Motors, being a mere instrumentality or adjunct oI
Yutivo, the CTA correctly disregarded the technical deIense oI separate corporate identity in
order to arrive at the true tax liability oI Yutivo.

LA CAPANA VS. KAISAHAN (93 Phil. 160, 1953)

The La Campana Gaugau Packing and La Campana CoIIee Factory were operating under
one single business although with 2 trade names. It is a settled doctrine that the Iiction oI law oI
having the corporate identity separate and distinct Irom the identity oI the persons running it
cannot be invoked to Iurther the end subversive oI the purpose Ior which it was created. In the
case at bar, the attempt to make the two businesses appear as one is but a device to deIeat the
ends oI the law governing capital and labor relations and should not be permitted to prevail.


PROMOTER'S CONTRACTS PRIOR TO INCORPORATION




hile a corporation could not have been a party to a promoter's contract
since it did yet exist at the time the contract was entered into and thus could not
possibly have had an agent who could legally bind it, the corporation may make
the contracts its own and become bound thereon if, after incorporation, it:

(1 Adopts or ratifies the contract; or
(2 Accepts its benefits with knowledge of the terms thereof.

t must be noted, however, that the contract must be adopted in its entirety; the
corporation cannot adopt only the part that is beneficial to it and discard that
which is burdensome. Moreover, the contract must be one which is within the
powers of the corporation to enter, and one which the usual agents of the
company have express or implied authority to enter.


cARTHUR V. TIES PRINTING CO. (8 Minn. 319, 51 N.W. 216, 1892)

It is not a requisite that a corporation's adoption or acceptance oI a promoter's contract be
expressed, but it may be inIerred Irom acts or acquiescence on the part oI the corporation, or its
authorized agents, as any similar original contract might be shown.

The right oI agents to adopt an agreement originally made by promoters depends upon
the purposes oI the corporation and the nature oI the agreement. The agreement must be one
which the corporation itselI could make and one which the usual agents oI the company have
express or implied authority to enter into.
LiabiIity of Corporation for Promoter's Contracts

CLIFTON v. TOB (21 F. 2d 893, 1921)

Whatever may be the proper legal theory by which a corporation may be bound by the
contract (ratiIication, adoption, novation, a continuing oIIer to be accepted or rejected by the
corporation), it is necessary in all cases that the corporation should have Iull knowledge oI the
Iacts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the
knowledge oI the Iacts.

CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223, 193)

A promoter could not have acted as agent Ior a corporation that had no legal existence.
A corporation, until organized, has no liIe thereIore no Iaculties. The corporation had no
juridical personality to enter into a contract.

Al8o 8ee Caram v. CA





Should the other contracting party fail to perform its part of the bargain, the
corporation which has adopted or ratified the contract may either sue for:

(1 Specific performance; or
(2 Damages resulting from breach of contract.


The fact of bringing an action on the contract has been held to constitute
sufficient adoption or ratification to give the corporation a cause of action.


BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 1 S.W. 2d 15, 1929)

When the corporation was Iormed, the incorporators took upon themselves the whole
thing, and ratiIied all that had been done on its behalI. Though there was no Iormal assignment
oI the contract to the corporation, the acts oI the incorporators were an adoption oI the contract.
ThereIore the corporation has the right to sue Ior damages Ior the breach oI contract.

RIZAL LIGHT V. PSC (25 SCRA 285, 1968)

The incorporation oI (Morong) and its acceptance oI the Iranchise as shown by this action
in prosecuting the application Iiled with the Commission Ior approval oI said Iranchise, not only
perIected a contract between the municipality and Morong but also cured the deIiciency pointed
out by the petition. The Iact that Morong did not have a corporate existence on the day the
Iranchise was granted does not render the Iranchise invalid, as Morong later obtained its
certiIicate oI incorporation and accepted the Iranchise.

Corporate Rights under Promoter's Contracts




GENERAL RULE: Promoters are personally liable on their contracts made on behalf
of a corporation to be formed.

EXCEPTION: f there is an express or implied agreement to the contrary. t must be
noted that the fact that the corporation when formed has adopted or
ratified the contract does not release the promoter from
responsibility unless a novation was intended.


WELLS VS. FAY & EGAN CO. (13 Ga. 32, 85 S.E. 83, 1915)

Individual promoters cannot escape liability where they buy machinery, receive them in
their possession and authorize one member to issue a note, in contemplation oI organizing a
corporation which was not Iormed. (see Campos' notes p. 258-259). The agent is personally
liable Ior contracts iI there is no principal. The making oI partial payments by the corporation,
when later Iormed, does not release the promoters here Irom liability because the corporation
acted as a mere stranger paying the debt oI another, the acceptance oI which by the creditor does
not release the debtors Irom liability over the balance. Hence, there is no adoption or ratiIication.


HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936, 1963)

The rule is that iI the contract is partly to be perIormed beIore incorporation, the
promoters solely are liable. Even iI the promoter signed "on behalI oI corporation to be Iormed,
who will be obligor," there was here an intention oI the parties to have a present obligor, because
three-Iourths oI the payment are to be made at the time the drawings or plans in the architectural
contract are completed, with or without incorporation. A purported adoption by the corporation
oI the contract must be expressed in a novation or agreement to that eIIect. The promoter is liable
unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the
new corporation Ior payment; or 2) that the promoter did not have any duty toward the creditor
to Iorm the corporation and give the corporation the opportunity to assume and pay the liability.


QUAKER HILL VS. PARR (18 Colo. 5, 36 P. 2d 1056, 1961)

The promoters here are not liable because the contract imposed no obligation on them to
Iorm a corporation and they were not named there as obligors/promissors. The creditor-plaintiII
was aware oI the inexistence oI the corporation but insisted on naming it as obligor because the
planting season was Iast approaching and he needed to dispose oI the seedlings. There was no
intent here by plaintiII-creditor to look to the promoters Ior the perIormance oI the obligation.
This is an exception to the general rule that promoters are personally liable on their contracts,
though made on behalI oI a corporation to be Iormed.


PersonaI LiabiIity of Promoter on Pre-Incorporation Contracts



OLD DOINION VS. BIGELOW (203 Ma88. 159, 89 N.E. 193, 1909)

A promoter, notwithstanding his Iiduciary duties to the corporation, may still sell
properties to it, but he must pursue one oI Iour courses to make the contract binding. These are:
1) provide an independent board oI oIIicers in no respect directly or indirectly under his control,
and make Iull disclosure to the corporation through them; 2) make Iull disclosure oI all material
Iacts to each original subscriber oI shares in the corporation; 3) procure a ratiIication oI the
contract aIter disclosing its circumstances by vote oI the stockholders oI the completely
established corporation; or 4) be himselI the real subscriber oI all the shares oI the capital stock
contemplated as a part oI the promotion scheme. The promoter is liable, even iI owning all the
stock oI the corporation at the time oI the transaction, iI Iurther original subscription to capital
stock contemplated as an essential part oI the scheme oI promotion came in aIter such
transaction.


CORPORATE POWERS





O To sue and be sued in its corporate name;

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

O To adopt and use a corporate seal;

O To amend its articles of incorporation in accordance with the provisions of this ode;

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

O n case of stock corporations, to issue of sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this ode; and to admit
members to the corporation if it be a non-stock corporation;

O To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and
the onstitution;

NOTE: There are two 2) general restrictions on the power of the corp. to
acquire and hold properties:

(1) that the property must be reasonable and necessarily
Fiduciary reIationship between corporation and promoter
GeneraI Powers of Corporation (Sec. 36)
required by the transaction of its lawful business, and

(2) that the power shall be subject to the limitations prescribed
by other special laws and the Constitution.)

O To adopt any plan of merger or consolidation as provided in this ode;

O To make reasonable donations, including those for the public welfare of 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;

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

O To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.





O Extension or shortening of the corporate term (Sec. 37

O ncrease or decrease of the capital stock (Sec. 38

O ncur, create or increase bonded indebtedness (Sec. 38

O Denial of the pre-emptive right (Sec. 39

O Sale or other disposition of substantially all its assets. (Sec. 40

A sale is deemed to substantially cover all the corporate property and assets
if such sale renders the corporation incapable of continuing the business or
accomplishing the purpose for which it was incorporated.

O Acquisition of its own shares. (Sec. 41

O nvestment in another corporation or business. (Sec. 42
O Declaration of dividends. (Sec. 43

O Entering into management contracts. (Sec. 44





Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range
of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it
is ultra vires.
Specific Powers of Corporation
ImpIied Powers

A corporation is presumed to act within its powers and when a contract is not its face necessarily
beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.





Black's Law Dictionary Definition:

&ltra vires acts are those acts beyond the scope of the powers of the corporation, as defined by
its charter or laws of state of incorporation. The term has a broad application and includes not only acts
prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and
generally applied either when a corporation has no power whatever to do an act, or when the corporation
has the power but exercises it irregularly.


Q: What are the consequences of ultra vires acts?

O The corporation may be dissolved under a quo warrranto proceeding.

O The ertificate of Registration may be suspended or revoked by the SE.

O Parties to the ultra vires contract will be left as they are, if the contract has been fully
executed on both sides. Neither party can ask for specific performance, if the
contract is executory on both sides. The contract, provided that it is not illegal, will be
enforced, where one party has performed his part, and the other has not with the
latter having benefited from the former's performance.

O Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra
vires act or contract. f the act or contract has already been performed, a derivative
suit for damages against the directors maybe filed, but their liability will depend on
whether they acted in good faith and with reasonable diligence in entering into the
contracts. hen the suit against the injured party who had no knowledge that the
corporation was engaging in an act not included expressly or impliedly in its purposes
clause.

O Ultra vires acts may become binding by the ratification of all the stockholders, unless
third parties are prejudiced thereby, or unless the acts are illegal.


REPUBLIC OF THE PHILS. v. ACO1E INING ( SCRA 361, 1963)

Resolution adopted by the company to open a post oIIice branch at the mining camp and
to assume sole and direct responsibility Ior any dishonest, careless or negligent act oI its
appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns
the beneIit, convenience, and welIare oI the company`s employees and their Iamilies.

While as a rule an ultra vires act is one committed outside the object Ior which a
corporation is created as deIined by the law oI its organization and thereIore beyond the powers
conIerred upon it by law, there are however certain corporate acts that may be perIormed outside
The UItra Vires Doctrine
oI the scope oI the powers expressly conIerred iI they are necessary to promote the interest or
welIare oI the corporation.

CARLOS v. INDORO SUGAR CO. (5 SCRA 33, 1932)

The BOD oI the Phil Trust Co. adopted a resolution which authorized its president to
purchase at par and in the name oI the corp. bonds oI MSC. These bonds were later resold and
guaranteed by PTC to third persons. PTC paid plaintiII the corresponding interest payments
until July 1, 1928 when it alleged that it is not bound to pay such interest or to redeem the
obligation because the guarantee given Ior the bonds was illegal and void.

Held: The act oI guaranty by PTC was well within its corporate powers. Furthermore, having
received money or property by virtue oI the contract which is not illegal, it is estopped Irom
denying liability. Even iI the then prevailing law (Corp. Law) prohibited PTC Irom guaranteeing
bonds with a total value in excess oI its capital, with all the MSC properties transIerred to PTC
based on the deed oI trust, suIIicient assets were made available to secure the payment oI the
corresponding liabilities brought about by the bonds.

GOV`T v. EL HOGAR (50 Phil 399, 1932)

(Thi8 ca8e i8 an example of how the implied power8 concept may be u8ed to fu8tify certain act8 of
a corporation.)

A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to
deprive it oI its corp. Iranchise.

1. El Hogar held title to real property Ior a period in excess oI 5 years in good Iaith, hence this
cause will not prosper.

2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess oI its
reasonable requirements, held valid bec, it was Iound to be necessary and legally acquired and
developed.

3. El Hogar leased some oIIice space in its bldg.; it administered and managed properties
belonging to delinquent SHs; and managed properties oI its SHs even iI such were not
mortgaged to them.

Held: Iirst two valid, but the third is ultra vires bec. the administration oI property in that
manner is more beIitting oI the business oI a real estate agent or trust company and not oI a
building and loan ass'n.

4. Compensation to the promoter and organizer allegedly excessive and unconscionable.

Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and
it is the corp. or its SHs who may bring a complaint on such.

5. Issuance oI special shares did not aIIect El Hogar's character as a building and loan ass'n nor
make its loans usurious.

6. Corporate policy oI using a depreciation rate oI 10 per annum is not excessive, bec. accdg.
to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be
written down upon the expenses oI installation and the property oI the corp.

7. The Corp. Law does not expressly grant the power oI maintaining reserve Iunds but such
power is implied. All business enterprises encounter periods oI gains and losses, and its oIIicers
would usually provide Ior the creation oI a reserve to act as a buIIer Ior such circumstances.

8. That loans issued to member borrowers are being used Ior purposes other than the bldg. oI
homes not invalid bec. there is no statute which expressly declares that loans may be made by
these ass'ns solely Ior the purpose oI bldg. homes.

9. Sec. 173 oI the Corp. Law provides that "any person" may become a SH on a bldg. and loan
ass'n. The word "person" is used on a broad sense including not only natural persons but also
artiIicial persons.


BISSEL v. ICHIGAN SOUTHERN ( 22 NY 258, 1860)

Two railroad corporations contend that they transcended their own powers and violated
their own organic laws. Hence, they should not be held liable Ior the injury oI the plaintiII who
was a passenger in one oI their trains.

Held: The contract between the two corporations was an ultra vires act. However, it is not one
tainted with illegality, thereIore, the accompanying rights and obligations based on the contract
oI carriage between them and the plaintiII cannot be avoided by raising such a deIense.

PIROVANO v. DELA RAA STEASHIP (96 Phil 335 , 1954)

This case involved the issue oI whether or not the deIendant corporation perIormed an
ultra vires act by donating the liIe insurance proceeds to the minor children oI Pirovano, the
deceased president oI the deIendant company under whose management the company grew and
progressed to become a multi-million peso corporation.

Held: NO.

The AOI oI the corporation provided two relevant items:

'(1) to invest and deal with moneys oI the company not immediately required, in
such manner as Irom time to time may be determined; and

(2) to aid in any other manner any person, association or corporation oI which any
obligation or in which any interest is held by this corporation or in the aIIairs oI
prosperity oI which this corporation has a lawIul interest.

From this, it is obvious that the corporation properly exercised within its chartered
powers the act oI availing oI insurance proceeds to the heirs oI the insured and deceased oIIicer.

HARDEN v. BENGUET CONSOLIDATED (58 Phil 11)

A contract between Benguet and Balatoc provided that Benguet will bring in capital,
eqpt. and technical expertise in exchange Ior capital shares in Balatoc. Harden was a SH oI
Balatoc and he contends that this contract violated the Corp.Law which restricts the acquisition
oI interest by a
mining corp. in another mining corp.

Held: Harden has no standing bec. iI any violation has been committed, the same can be enIorced
only in a criminal prosecution by an action oI quo warranto which may be maintained only by
the Attorney-General.


CONTROL AND MANAGEMENT




Q: What are the three IeveIs of corporate controI/power?

Board of directors or trustees- responsible for corporate policies and the general
management of the business and affairs of the corporation.

Officers- execute the policies laid down by the board.

$tockholders or members- have residual power over fundamental corporate changes like
amendments of articles of incorporation.




Board of directors or trustees

Q: What are the powers of the BOD?

The BOD is responsible for corporate policies and the general management of the
business affairs of the corporation. $ee Citibank v Chua)

(a) Authority (Sec. 24)

(b) Requirements

AIIocation of Power and ControI
Who Exercises Corporate Powers
(i "ualifying share ($ec. 24)

(ii Residence ($ec. 24)

(iii Nationality

(iv Disqualifications ($ec. 27)
- conviction by final judgment of offense punishable > 6 yrs. prison
- violation of orporation code within 5 years prior to date of election or
appointment

(c) How eIected (Sec. 24)

The formula for determining the number of shares needed to elect a given number of directors is as
follows:

X = Y x N1 + 1
N + 1

X = being the number of shares needed to elect a given number of directors
Y = being the total number of shares present or represented at the meeting
N1 = being the number of directors desired to be elected
N = being the total number of directors to be elected

(d) How removed (Sec. 28)

By a vote of the Ss holding or representing at least 2/3 of the outstanding capital stock, or by
a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at
either a regular meeting of the corporation or at a special meeting called for the purpose. n both
cases, there must be previous notice to the Ss / members of the intention to propose such
removal at the meeting.

Removal may be with or without cause. owever, removal without cause may not be used to
deprive minority Ss or members of the right of representation to which they may be entitled
under Sec. 24 of the ode.

(e) How vacancy fiIIed (Sec. 29)

f vacancy due to removal Must be filled by the Ss in a regular or special meeting
or expiration of term: called for that purpose.

f "vacancy" due to increase Only by means of an election at a regular or special Ss
in number of directors meeting duly called for the purpose, or in the
same or trustees: meeting authorizing the increase of
directors or trustees
if so stated in the notice of the meeting.


All other vacancies: May be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum.

ote: Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
term of their predecessors in office.

(f) How compensated (Sec. 30)

f provided in by-laws: That compensation stated in the by-laws.

f not provided in by-laws: Directors shall not receive any compensation other than
reasonable per diems, as directors. owever, compensation
other than per diems may be granted to directors by a majority
vote of the Ss at a regular or special stockholders' meeting.

ote: n no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.

(g Matters requiring Board of Directors' action

(h) LiabiIity (See subsequent discussion under Duties of Directors and Controlling
Stockholders.)

i) n general $ec. 31)

ii) Business judgment rule

iii) Dealings with the corporation $ec. 32)

iv) Contracts between corporations with interlocking directors $ec. 33)

(v Disloyalty $ec. 34)

(vi Watered stocks $ec. 65)

(i) Executive Committee (Sec. 35)

$ee subsequent discussion under Board Committees.


RAIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 63, 1918)

In this case, the board oI directors, beIore the Iinancial inability oI the corporation to
proceed with the project was revealed, had already recognized the contracts as being in existence
and had proceed with the necessary steps to utilize the Iilms. The subsequent action by the
stockholders in not ratiIying the contract must be ignored. The Iunctions oI the stockholders are
limited oI nature. The theory oI a corporation is that the stockholders may have all the proIits but
shall return over the complete management oI the enterprise to their representatives and agents,
called directors. Accordingly, there is little Ior the stockholders to do beyond electing directors,
making by-laws, and exercising certain other special powers deIined by law. In conIormity with
this idea, it is settled that contracts between a corporation and a third person must be made by
directors and not stockholders.

LOPEZ VS. ERICTA (5 SCRA 539, 192)

In this case, the Board oI Regents oI the University oI the Philippines terminated the ad
interim appointment oI Dr. Blanco as Dean oI the College oI Education by not acting on the
matter. In the transcript oI the meeting which was latter agreed to be deleted, it was Iound out
that the BOR, consisting oI 12 members, voted 5 in Iavor oI Dr. Blanco's appointment 3 voted
against, and 4 abstained.

The core oI the issue is WON the 4 abstentions will be counted in Iavor oI Dr. Blanco's
appointment or against it. The SC held that such abstentions be counted as negative vote
considering that those who abstained, 3 oI which members oI the Screening Committee,
intended to reject Dr. Blanco's appointment.

ZACHARY VS. ILLIN (29 Mic. 622, 190)

The issue in this case is regarding the validity oI the director's meeting at the company's
laboratory on December 8, 1937 wherein Zachary was removed as president oI the company.
Zachary that he was not notiIied oI the meeting thus, the action was void. On the other hand, the
deIendants contend that the notice requirement was waived by Zachary's presence at the meeting.

The SC held that the validity oI the meeting was not aIIected by the Iailure to give notice
as required by the by-laws, provided that the parties were personally present. Since all the parties
were present at the meeting oI December 8, and understood that the meeting was to be a
directors' meeting, then the action taken is Iinal and may not be voided by any inIormality in
connection with its being called.

PNB VS. CA (83 SCRA 238, 198)

The action was brought by the mortgagor (Tapnio) against PNB Ior damages in
connection with the Iailure oI the latter's board oI directors to act expeditiously on the proposed
lease oI the Iormer's sugar quota to one Tuazon.

The Supreme Court held that while the PNB has the ultimate authority to approve or
disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot
escape liability Ior observing, Ior the protection oI the interest oI the private respondents, that
degree oI care, precaution and vigilance which the circumstances justly demand in approving or
disapproving the lease oI the said sugar quota.


Corporate officers and agents

(a) Minimum set of officers and their quaIifications (Sec. 25)

The minimum set of officers are:

(1 president (who shall be a director;
(2 secretary (who shall be a resident and Filipino citizen; and
(3 treasurer (who may or may not be a director

The by-laws, however, may provide for other officers.

Any 2 or more positions may be held concurrently by the same person, except that no
one shall act as (a president and secretary, or (b president and treasurer at the same time.

(b) DisquaIifications (Sec. 27)

- onviction by final judgment of an offense punishable by imprisonment > 6 yrs.

- Violation of orporation ode committed within 6 yrs. prior to the date of election or
appointment

(c) LiabiIity in generaI (Sec. 31)

$ee discussion under Duties of Directors and Controlling $tockholders. .

(d) DeaIings with the corporation (Sec. 32)

- Generally voidable ($ee discussion under Duties of Directors and Controlling
$tockholders)

What is the doctrine of apparent authority?

The doctrine of apparent authority provides that a corporation will be
liable to innocent third persons for the acts of its agent where the representation
was made by the agent in the course of business and acting within his/her
general scope of authority even though, in the particular case, the agent is
secretly abusing his authority and attempting to perpetrate a fraud upon his/her
principal or some other person for his/her own ultimate benefit.


FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (anuary 2, 1996)

The authority oI a corporate oIIicer in dealing with third persons may be actual or
apparent. The doctrine oI "apparent authority," with special reIerence to banks, was laid out
in Prudential Bank v. CA (223 SCRA 350) where it was held that:

A bank is liable Ior the wrongIul acts oI its oIIicers done in the
interest oI the bank or in the course oI dealings oI the oIIicers in
their representative capacity but not Ior acts outside the scope oI
their authority. A bank holding out its oIIicers and agents as
worthy oI conIidence will not be permitted to proIit by the Irauds
they may thus be enabled to perpetrate in the apparent scope oI
their employment; nor will it be permitted to shrink Irom its
responsibility Ior such Irauds, even though no beneIit may accrue
to the bank thereIrom.

Accordingly, a bank is liable to innocent third persons where the representation is made
in the course oI its business by its agent acting within the general scope oI his authority even
though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetrate a Iraud upon his principal or some other person Ior his own ultimate beneIit.
Application oI these principles is especially necessary because banks have a Iiduciary
relationship with the public and their stability depends on the conIidence oI the people in their
honesty and eIIiciency. Such Iaith will be eroded where banks do not exercise strict care in the
selection and supervision oI its employees, resulting in prejudice to their depositors.


YU CHUCK V. KONG LI PO (6 Phil. 608, 192)

The power to bind a corporation by contract lies with its board oI directors or trustees.
Such power may be expressly or impliedly be delegated to other oIIicers and agents oI the
corporation. It is also well settled that except where the authority oI employing servants or
agents is expressly vested in the board, oIIicers or agents who have general control and
management oI the corporation's business, or at least a speciIic part thereoI, may bind the
corporation by the employment oI such agents and employees as are usual and necessary in the
conduct oI such business. Those contracts oI employment should be reasonable. Case at bar:
contract oI employment in the printing business was too long and onerous to the business (3-year
employment; shall receive salary even iI corp. is insolvent).


THE BOARD OF LIQUIDATORS V. HEIRS OF AXIO KALAW (20 SCRA 98, 196)

Kalaw was a corporate oIIicer entrusted with general management and control oI
NACOCO. He had implied authority to make any contract or do any act which is necessary Ior
the conduct oI the business. He may, without authority Irom the board, perIorm acts oI ordinary
nature Ior as long as these redound to the interest oI the corporation. Particularly, he contracted
Iorward sales with business entities. Long beIore some oI these contracts were disputed, he
contracted by himselI alone, without board approval. All oI the members oI the board knew
about this practice and have entrusted Iully such decisions with Kalaw. He was never questioned
nor reprimanded nor prevented Irom this practice. In Iact, the board itselI, through its acts and
by acquiescence, have laid aside the by-law requirement oI prior board approval. Thus, it cannot
now declare that these contracts (Iailures) are not binding on NACOCO.

ZABOANGA TRANSPO V. BACHRACH OTORS (52 Phil. 2, 1928)

A chattel mortgage, although not approved by the board oI directors as stipulated in the
by-laws, shall still be valid and binding when the corporation, through the board, tacitly
approved and ratiIied it. The Iollowing acts oI the board constitute implied ratiIication:

1. Erquiaga is one oI the largest stockholder, and was the all-in-one oIIicer (he was the
President, GM, Attorney, Auditor, etc.)

2. Two other directors approved his actions and expressed satisIaction with the advantages
obtained by him in securing the chattel mortgage.

3. The corporation took advantage oI the beneIits oI the chattel mortgage. There were even
partial payments made with the knowledge oI the three directors.

ACUNA V. BATAC PRODUCERS COOPERATIVE ARKETING ASSOCIATION (20
SCRA 526, 196)

Acuna entered into an agreement with Verano, manager oI PROCOMA, in which the
Iormer would be constituted as the latter's agent in Manila. Acuna diligently went about his
business and even used personal Iunds Ior the beneIit oI the corporation. During the Iace-to-Iace
meeting with the board, Acuna was assured that there need not be any board approval Ior his
constitution as agent Ior it would only be a mere Iormality. Later on, the board disapproved the
agency and did not pay him. The SC ruled that the agreement was valid due to the ratiIication oI
the corp. proven by these acts:

1. He was assured by the board that no board approval was necessary.
2. He delivered P 20,000, perIormed his work with the knowledge oI the board.
3. Due to acquiescence, the board cannot disown or disapprove the contract.


Board Committees

The By-laws of the corporation may create an executive committee, composed of
not less than 3 members of the Board, to be appointed by the Board. The executive
committee may act, by majority vote of all its members, on such specific matters within
the competence of the board, as may be delegated to it in either (1 the By-laws, or (2 on
a majority vote of the board.

owever, the following acts may never be delegated to an executive committee:

(1 approval of any action for which shareholders' approval is also required;
(2 the filling of vacancies in the board (refer to $ec. 29);
(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.

HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289, 1910)

In this case, the Executive Committee:

a) removed the Treasurer and appointed a new one
b) Iixed the annual salary oI the members oI the Executive Committee
c) amended the by-laws by giving the President the sole authority to call a stockholder's
meeting and a board oI directors meeting
d) amended the composition oI the ExeCom by limiting it to just 2 persons.

Wa8 the8e action8 valid?

No, because the Executive Commmittee usurped the powers vested in the board and the
stockholders. II their actions was valid, it would put the corp. in a situation wherein only two
men, acting in their own pecuniary interests, would have absorbed the powers oI the entire
corporation. "Full powers" should be interpreted only in the ordinary conduct oI business and
not total abdication oI board and stockholders' powers to the ExeCom. "FULL POWERS" does
not mean unlimited or absolute power.


Stockholders or Members

n the following basic changes in the corporation, although action is usually initiated by the board
of directors or trustees, their decision is not final, and approval of the stockholders or members would be
necessary:

(1 Amendment of articles of incorporation;
(2 ncrease and decrease of capital stock;
(3 ncurring, creating or increasing bonded indebtedness;
(4 Sale, lease, mortgage or other disposition of substantially all corporate assets;
(5 nvestment of funds in another business or corporation or for a purpose other than
the primary purpose for which the corporation was organized;
(6 Adoption, amendment and repeal of by-laws;
(7 Merger and consolidation;
(8 Dissolution of corporation

n all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be
entitled to vote. ($ec. 6)


BOARD OF DIRECTORS AND ELECTION COITTEE OF SB VS. TAN (105 Phil.
26, 1959)

Meeting was invalid Ior lack oI notice. By-laws provide Ior a 5-day notice beIore
meeting. March 26 posting not enough Ior March 28 election.




1OHNSTON VS. 1OHNSTON (61 O.G. No. 39, 6160, 1965)

As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nulliIied
by a subsequent walkout.

However, the proceedings can be nulliIied iI the walkout was Ior a reasonable and
justiIiable cause. In this case, F. Logan Johnston, who owned and/or represented more than 50
oI the corporation's outstanding shares, was prohibited Irom voting the shares oI the Silos Iamily
(which he had validly purchased) and oI the minor children oI Albert S. Johnston (oI whom he
was guardian) on the ground that such shares must Iirst be registered in the names oI the wards,
thereby prompting the walkout. The Court oI Appeals held that the walkout was neither
unreasonable nor unjustiIiable. It noted however that there was no Iormal declaration oI a
quorum beIore the withdrawal Irom the meeting by F. Logan Johnston.

PONCE VS. ENCARNACION (9 Phil. 81, 1953)

Upon good cause, such as a Chairman oI the Board Iailing to call a meeting, either by his
absence or neglect, the Court may grant a stockholder the authority to call such a meeting.

DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225, 1968)

The Corporation Law says that every director must own at least one (1) share oI the
capital stock oI the corporation.

GOKONGWEI VS. SEC (89 SCRA 336, 199)

O Section 21 oI the Corporation Law provides that a corporation may prescribe in its by-
laws the qualiIications, duties, and compensation oI its directors.

O A stockholder has no vested right to be elected director Ior he impliedly contracts that the
will oI the majority shall govern.

O Amended by-laws are valid Ior the corporation has its inherent right to protect itselI.

ROXAS V. DELA ROSA (9 Phil. 609, 1926)

Under the Law, directors can only be removed Irom oIIice by a vote oI the stockholders
representing 2/3 oI subscribed capital stock, while vacancies can be Iilled by a mere majority.

A director cannot be removed by a mere majority by disguising it as Iilling a vacancy.

ANGELES V. SANTOS (6 Phil. 69, 193)

Court may appoint a receiver when corporate remedy is unavailable when board oI
directors perIorm acts harmIul to the corporation.

Generally, stockholders cannot sue on behalI oI the corporation. The exception is when
the deIendants are in complete control oI the corporation.

CAPBELL V. LEOW`S INC. (13 A. 2d 852, 195)

The stockholders have an implied power to remove a director Ior cause. Even when there
is cumulative voting, stockholders can still remove directors Ior cause.

DELA RAA V. A-AO SUGAR CENTRAL CO, INC. (2 SCRA 2, 1969)

A corporation may use its Iunds to invest in another corporation without the approval oI
the stockholders iI done in pursuance oI a corporate purpose. However, iI it is purely Ior
investment, the vote oI the stockholders is necessary.



VOTING


PIedgors, mortgagors, executors, receivers, and administrators (Sec. 55)

- Pledgors or mortgagors have the right to attend and vote at stockholders' meetings.

Exception: f the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the
appropriate corporate books.

- 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.

Joint owners of stock ($ec. 56)

- Generally, consent of all co-owners shall be necessary.

Treasury shares ($ec. 57)

- Treasury shares have no voting right for as long as such shares remain in the
Treasury.


Proxies ($ec. 5)

- Proxies must be in writing, signed by the stockholder/member, 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.

- Voting trusts may be voted by proxy unless the agreement provides otherwise.
($ec. 59)

- t must be noted however that directors or trustees cannot vote by proxy at board
meetings. ($ec. 25)

- Note that in Sec. 89, non-stock corporations are permitted to waive the right to use
proxies via their AO or by-laws.

Voting trust ($ec. 59)

- Voting trusts must be in writing, notarized, specifying the terms and conditions
thereof, certified copy filed with SE. Failure to comply with this requirement renders
the agreement ineffective and unenforceable.

- As a general rule, voting trusts are valid for a period not exceeding 5 years at any
one time, and automatically expire at the end of the agreed period unless expressly
renewed.
owever, in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may exceed 5 years but shall automatically
expire upon payment of the loan.

- Voting trusts may be voted by proxy unless the agreement provides otherwise.
($ec. 59)

PooIing agreement

- Pooling agreements refer to agreements between 2 or more Ss to vote their
shares the same way. They are different from voting trust agreements in that they do
not involve a transfer of stocks but are merely private agreements between 2 or more
Ss to vote in the same way.

- Sec. 100, par. 2 of the orporation ode provides for pooling and voting
agreements in close corporations. Although there is no equivalent provision for
widely-held corporations, Justice and Prof. ampos are of the opinion that Ss of
widely-held corporations should not be precluded from entering into voting
agreements if these are otherwise valid and are not intended to commit any wrong or
fraud on the other Ss that are not parties to the agreement.


Non-voting shares ($ec. 6)

- Preferred or redeemable shares.

ITF shares

And/or shares ($ec. 56)

- Any one of the joint owners can vote said shares or appoint a proxy thereof.






Proxy Device

Sec 58. Proxie8. Stockholders and members may vote in person or by proxy in all meetings oI
stockholders or members. Proxies shall be in writing, signed by the stockholder or member and
Iiled beIore the scheduled meeting with the corporate secretary. Unless otherwise provided in the
proxy, it shall be valid only Ior the meeting Ior which it is intended. No proxy shall be valid and
eIIective Ior a period longer than Iive (5) years at any one time.

Character. agency relationship; revocable at will (by express revocation, by attending the
meeting) and by death, except when coupled with interest or is a security.


IN RE GIANT PORTLAND CEENT CO. (21 A.2d 69, 191)

Even iI stocks are sold, the stockholder oI record remains the owner oI the stocks and has
the voting right until the by-law requiring recording oI transIer in the transIer book is complied
Devices Affecting ControI
with. Thus, a proxy given by the stockholder oI record even iI he has already sold the share/s oI
stock remains eIIective.

STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 29, 195)

The general rule is that a proxy is revocable even though by its express terms it is
irrevocable. The exceptions are: (a) when authority is coupled with interest; (b) where authority
is given as part oI a security and is necessary to eIIectuate such a security. It is coupled with
interest when there is interest in the share themselves (such as a right oI Iirst reIusal in case oI
sale) and the rights inherent in the shares (such as voting rights; capacity to obtain majority).

DUFFY V LOFT (1 Del. Ch. 36, 152 A. 89, 1930)

Where a stockholder`s meeting was validly convened, the proxies must be deemed
present even iI the proxies were not presented, provided: (a) their existence is established; (b) the
agents were so designated to attend and act in SH`s behalI; (c) the agents were present in the
meeting.

Q: Is it vaIid for the corporation to pay the expenses for proxy soIicitation?

A: n the case of Rosenfeld v. Fairchild Engine and Airplane orp. (12 .E. 2d 291;
1955), it was held that in a contest over policy (as opposed to a purely personal power
contest, corporate directors have the right to make reasonable and proper expenditures,
subject to the scrutiny of the courts when duly challenged, from the corporate treasury for
the purpose of persuading the Ss of the correctness of their position and soliciting their
support for policies which the directors believe, in all good faith, are in the best interests
of the corporation. The Ss, moreover, have the right to reimburse successful
contestants for the reasonable and bona fide expenses incurred by them in any such
policy contest, subject to like court scrutiny.
owever, where it is established that such monies have been spent for personal
power, individual gain or private advantage, and not in the belief that such expenditures
are in the best interest of the stockholders and the corporation, or where the fairness and
reasonableness of the amounts allegedly expended are duly and successfully
challenged, the courts will not hesitate to disallow them.

ROSENFELD V. FAIRCHILD (128 N.E. 2d 291, 1955)

In a contest over policy, as compared to a purely personal power contest, corporate
directors have the right to make reasonable and proper expenditures. Reason: in these days oI
giant corporations with vast numbers oI SH`s, iI directors are not allowed to authorize reasonable
expenses in soliciting proxies, corporate business may be hampered by diIIiculty in procuring
quorum; or corporations may be at the mercy oI persons seeking to wrest control Ior their
purposes iI the directors may not Ireely answer their challenge. But corp expense may be
disallowed by courts where money was shown to have been spent Ior personal power, individual
gain or private advantage, or where Iairness and reasonableness oI amount spent has been
successIully challenged.


Voting Trust

A Voting Trust Agreement (VTA is an agreement whereby the real ownership of the shares is
separated from the voting rights, the usual aim being to insure the retention of incumbent directors and
remove from the stockholders the power to change the management for the duration of the trust.

Advantages

O Accumulates power. Small shareholders are given the chance to have a representation in the
BOD or at least a spokesperson during stockholders' meetings.
O ontinuity of management.
O More effective than proxies because it is irrevocable.
O Ensures that the required number of stockholders is met thereby facilitating smooth corporate
operations.

Disadvantages

O Stockholders give up rights (voting and naked title
O Susceptible to abuse
O Not used in widely held corporations

Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of
the trustee:

O Voting rights
O Proprietary rights/naked title/legal ownership
O ncidental rights such as to attend meetings, to be elected, to receive dividends



Rights retained by the shareholder

O Beneficial or equitable ownership
O Right to revoke VTA in case of breach by trustee
O Regain full ownership after the lapse of the period
O Right to an accounting by the trustee after the period of the VTA

How is a voting trust created?

(1 A VTA is prepared in writing, notarized, and filed with the corporation and SE.

(2 The certificates of stock covered by the VTA are cancelled and new ones (voting trust
certificates are issued in the name of the trustee/s stating that they are issued pursuant to
the VTA.

(3 The transfer is noted in the books of the corporation.

(4 The trustee/s execute and deliver to transferors the voting trust certificates. (ote that these
certificates shall be transferable in the same manner and with the same effect as certificates
of stock.)

(5 At the end of the period of the VTA (or the full payment of the loan to which the VTA is made
a condition, as the case may be, in the absence of any express renewal, the voting trust
certificates as well as the certificates of stock in the name of the trustee/s shall be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors.


EVERETT V. ASIA BANKING (9 Phil. 512, 1926)

This case illustrates how VTA can give rise to eIIective control and how it can be abused.
Original stockholders can set aside the VTA when their rights are trampled upon by the trustee.

ACKIN, ET AL. V. NICOLLET HOTEL (25 F. 2d 83, 1928)

Invalidating circumstances oI a VTA are:

O Want oI consideration
O Voting power not coupled with interest
O Fraud
O Illegal or improper purpose

NIDC V. AQUINO (163 SCRA 153, 1988)

A VTA transIers only voting or other rights pertaining to the shares subject oI the
agreement, or control over the stock. Stockholders oI a corp. that lost all its assets through
Ioreclosures cannot go aIter those properties. PNB-NIDC acquired those properties not as
trustees but as creditors.


Pooling and voting agreements

What are the advantages/disadvantages of a pooIing agreement?

Advantages:

1. there is a commitment to agree to a certain manner of voting
2. minority stockholders are able to control the corpo

Disadvantages:

1. possibility of disagreement thus the need for an arbitration clause
2. there is no compelling reason for stockholders to act together


What rights does a sharehoIder give up/ retain with a pooIing agreement?

Shareholders retain their right to vote because the parties are not constituted as agents.
owever, the will of the parties may not be carried out due to non-compliance with the
pooling agreement.


RINGLING v. RINGLING (29 Del. Ch. 318, 9 A. 2d 603, 196)

Generally, agreements and combinations to vote stock or control corporate Iiction &
policy are valid iI they seek without Iraud to accomplish only what parties might do as
stockholders and do not attempt it by illegal proxies, trusts or other means in contravention oI
statutes or law.

BUCK RETAIL STORE v. HARKERT (62 N.W. 2d 288, 195)

Stockholders` control agreements are valid where it is Ior the beneIit oI corporation
where it works no Iraud upon creditors or other stockholders and where it violates no statute or
recognized public policy.

CQUADE v. STONEHA (189 N.E. 23, 193)

An agreement among stockholders to divest directors oI their power to discharge an
unIaithIul employee is illegal as against public policy. Stockholders may not by agreement
among themselves control the directors in the exercise oI the judgment vested in them by virtue
oI their oIIice to elect oIIicers and Iix salaries.

CLARK v. DODGE (199 N.E. 61, 1936)

II the enIorcement oI a particular contract damages nobody-not even the public, there is
no reason Ior holding it illegal. Test is WON it causes damage to the corporation and
stockholders.



Cumulative voting (see sec. 24)

Methods of Voting

1. Straight voting: f A has 100 shares and there are 5 directors to be elected, he shall
multiply 100 by five (equals 500 and distribute equally among the five
candidates without preference

2. CumuIative voting: f A has 100 shares and there are 5 directors to be elected, he shall
(one candidate) multiply 100 by five (equals 500 and he can vote the 500 for only one
candidate.

3. CumuIative voting: f A has 100 shares, there are 5 directors to be elected, and he only
(muItipIe candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.

How to compute votes needed to get a director eIected by cumuIative voting:

1. Frey's formuIa (minimum no. of votes to elect one director

X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected

X = _ Y__ + 1
Z + 1

2. Baker & Cary's formuIa (minimum no. of votes needed to elect multiple directors

X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D'= total # of directors to be elected

X = Y x D + 1
D' + 1

NOTES

O Levels playing field or at least ensures that the minority can elect at least one representative
to the board of directors (BOD

O annot of itself give the minority control of corporate affairs, but may affect and limit the
extent of the majority's control

O By-laws cannot provide against cumulative voting since this right is mandated by law in
Section 24.





Classification of shares (see sec. 6)

Type of shares

1. Common: share with right to vote

2. Preferred: share has preference over dividends and distribution of assets upon liquidation;
right to vote may be restricted (Sec. 6

3. RedeemabIe: share is purchased or taken up by the corporation upon the expiration of a fixed
period (Sec. 8; right to vote may be restricted (Sec. 6

NOTES

O Stock can also be both preferred and redeemable.

O Even though the right to vote of preferred and redeemable shares may be restricted, owners
of these shares can still vote on certain matter provided for in Sec. 6.

O SE requires that where no dividends are declared for three consecutive years, in spite of
available profits, preferred stocks will be given the right to vote until dividends are declared.


GOTTSCHALK V. AVALON REALTY (23 N.W. 2d 606, 196)

O Provision granting right to vote to preIerred stock previously prohibited Irom voting,
constitutes diminution oI the voting power oI common stock.
O Provision in the articles oI incorporation granting holders oI preIerred stock right to vote in
case oI deIault in payment oI dividends aIter July 1, 1951 was construed as denial by
necessary implication oI the right to vote even prior to July 1, 1951.


Restriction on transfer of shares

O Peculiar to close corporations.

O Most common restriction: granting first option to the other stockholders and/or the
corporation to acquire the shares of a stockholder who wishes to sell them.

O Restrictions on shares of stock must conform to the requirements in Sec. 98

O This gives to the corporation and/or to its current management the power to prevent the
transfer of shares to persons who they may see as having interests adverse to theirs.






Prescribing qualifications for directors; founder's shares

Directors (See Sec. 23, 27, 47)

O As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly
deprive the minority of their rightful representation in the BOD, such provisions are within the
power of the majority to provide in the by-laws.

O According to okongwei vs. $EC, aside from prescribing qualifications, by-laws can also provide
for the disqualification of anyone in direct competition with the corporation.

Founder's shares

$ee $ec. 7 for definition

O Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and
redeemable shares

O f founder's shares enjoy the right to vote, this privilege is limited to 5 years upon SE's
approval, so as to prevent the perpetual disqualification of other stockholders.

Management contracts (sec. 44)

O ontract to manage the day-to-day affairs of the corporation in accordance with the policies laid
down by the board of the managed corporation.

O BOD can and usually delegate many of its functions but it can't abdicate its responsibility to act
as a governing body by giving absolute power to officers or others, by way of a management
contract or otherwise. t must retain its control over such officers so that it may recall the
delegation of power whenever the interests of the corporation are seriously prejudiced thereby.


SHERAN & ELLIS VS. INDIANA UTUAL CASUALTY (1 F. 2d 588, 1930)

Although corporations may, Ior a limited period, delegate to a stranger certain duties
usually perIormed by the oIIicers, there are duties, the perIormance oI which may not be
indeIinitely delegated to outsiders.


UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close
corporations])

O ncreases veto power of the minority in some cases.

O n exchange for the numerical majority in the BOD, minority can ask for a stronger veto
power in major corporate decisions.



BENITENDI VS. KENTON HOTEL (60 N.E. 2d 829, 195)

O A requirement that there shall be no election oI directors at all unless every single vote be
cast Ior the same nominees, is in direct opposition to the statutory rule that the receipt oI
plurality oI the votes entitles a nominee to election. (See Sec. 24)

O Requiring unanimity beIore the BOD can take action on any corporate matter makes it
impossible Ior the directors to act on any matter at all. In all acts done by the corporation, the
major number must bind the lesser, or else diIIerences could never be determined nor settled.

O The State has decreed that every stock corporation must have a representative government,
with voting conducted conIormably to the statutes, and the power oI decision lodged in
certain Iractions, always more than halI, oI the stock. This whole concept is destroyed when
the stockholders, by agreement, by-law or certiIicates oI corporation provides Ior unanimous
action, giving the minority an absolute, permanent and all-inclusive power oI veto.

O The requirement oI unanimous vote to amend by-laws is valid. Once proper by-laws have
been adopted, the matter oI amending them is no concern oI the State.


Device FavorabIe To: Limitations

CumuIative voting

MNORTY: assures them of
representation on the board

an't give minority control of
corp. affairs

CIassification of shares

MNORTY: so long as they hold
more common stock as opposed
to the majority who holds more
preferred stock

Preferred and redeemable stock
can still vote on certain matters
as provided in Sec. 6 or as may
be provided by the corp.

Restriction on transfer of
shares
*appIicabIe onIy to cIose
corporations

MAJORTY: they can choose
whether to keep or release
shares and they can prevent
opposition from acquiring shares

$ee $ec. 9


Prescribing quaIifications
for directors; founder's
shares

MAJORTY: they're the ones who
can prescribe the qualifications in
the by-laws

"ualifications must be
reasonable and do not deprive
minority of representation on the
board

Management contracts

MAJORTY: allows them to
delegate certain functions and
duties without losing control over
the corporation

O annot exceed five years
O BOD must retain control
over corp. policies
O BOD must have power to
recall contract

UnusuaI voting and quorum
requirements

MNORTY: gives them stronger
veto power in certain corp. affairs

Subject to the limitations in Sec.
103.

MEETINGS



INDS: Meetings of the Board of Directors or Trustees may be either regular or
special. ($ec. 49)

REGULAR: eld monthly, unless otherwise provided in the by-laws.
($ec. 53)

SPECIAL: At any time upon call of the president or as provided in the by-
laws.

NOTICE: Must be sent at least 1 day prior to the scheduled meeting, unless
otherwise provided by the by-laws.

ote: otice may be waived expressly or impliedly. $ec. 53)

WHERE: Anywhere in or outside the Philippines, unless the by-laws provide
otherwise.

QUORUM: Generally, 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. ($ec. 25)

Meetings of Directors / Trustees
Exceptions:

(1 f the AO or by-laws provide for a greater majority;
(2 f the meeting is for the election of officers, which
requires the vote of a majority of all the members of the
Board

WHO PRESIDES: The president, unless the by-laws provide otherwise. ($ec. 54)





INDS: Meetings of stockholders or members may be either regular or special.
($ec. 49)

REGULAR: eld annually on a date fixed in the by-laws. f no date is fixed,
on any date in April of every year as determined by the Board of
Directors or trustees.

Notice: ritten, and sent to all stockholders or members of record at
least 2 weeks prior to the meeting, unless a different period is
required by the by-laws.

SPECIAL: At any time deemed necessary or as provided in the by-laws.

Notice: ritten, and sent to all stockholders or members of record at
least 1 week prior to the meeting, unless otherwise provided in
the by-laws.

ote: otice of any meeting may be waived expressly or
impliedly by any $ or member. $ec. 50)

WHERE: n the city of municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation. Metro
Manila is considered a city or municipality. ($ec. 51)

QUORUM: Generally, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock, or a majority of the members.

Exception: f otherwise provided for in the ode or in the
by-laws.

WHO PRESIDES: The president, unless the by-laws provide otherwise. ($ec. 54)

WHAT IS THE EFFECT IF A STOCHOLDER'S MEETING IS IMPROPERLY
HELD OR CALLED?

Generally, the proceedings had and/or any business transacted shall be
void. owever, the proceedings and/or transacted business may still be deemed
valid if:

(1 Such proceedings or business are within the powers or authority of
the corporation; and

Meetings of StockhoIders / Members
(2 All the stockholders or members of the corporation were present or
duly represented at the meeting. ($ec. 51)


DUTIES OF DIRECTORS AND CONTROLLING STOCHOLDERS





WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE CORPORATION?

(1 Diligence
(2 Loyalty
(3 Obedience

Obedience - directors must act only within corporate powers and are liable for
damages if they acted beyond their powers unless in good faith. Assuming that they
acted within their powers, liability may still arise if they have not observed due
diligence or have been disloyal to the corporation.


WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS
ARISE?

n general, liability of directors, trustees or officers arises when they either:

(1 willfully and knowingly vote for or assent to patently unlawful acts of the
corporation; or
(2 are guilty of gross negligence of bad faith in directing the affairs of the
corporation; or
(3 acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees.

n such cases, the directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members
and other persons.

hen a director, trustee or officer attempts to acquire or acquires, 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 would otherwise have accrued to the corporation. ($ec. 31)

n addition to this general liability, the orporation ode provides for specific rules
to govern the following situations:

(1 Self-dealing directors ($ec. 32)
(2 ontracts between interlocking directors ($ec. 33)
(3 Disloyalty to the corporation ($ec. 34)
(4 atered stocks ($ec. 65)


Duties and LiabiIities of Directors


WHAT IS THE BUSINESS JUDGMENT RULE?

As a general rule, directors and trustees of the corporation cannot be held liable
for mistakes or errors in the exercise of their business judgment, provided they have
acted in good faith and with due care and prudence. ontracts intra vires entered into by
the board of directors are binding upon the corporation, and the courts will not interfere
unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority.

owever, if due to the fault or negligence of the directors the assets of the
corporation are wasted or lost, each of them may be held responsible for any amount of
loss which may have been proximately caused by his wrongful acts or omissions. here
there exists gross negligence or fraud in the management of the corporation, the
directors, besides being liable for damages, may be removed by the stockholders in
accordance with Sec. 28 of the ode. (Campos & Campos)

EERAL R&LE: ontracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.

EXCEPTO: hen such contracts are so unconscionable and oppressive as
to amount to a wanton destruction of the rights of the minority.

WHAT IND OF DILIGENCE IS EXPECTED OF DIRECTORS?

Directors are expected to manage the corporation with reasonable diligence, care
and prudence, i.e. the degree of care and diligence which men prompted by self-interest
generally exercise in their own affairs. Thus, they can be held liable not only
for willful dishonesty but also for negligence.
Although they are not expected to interfere with the day-to-day administrative details
of the business of the corporation, they should keep themselves sufficiently informed
about the general condition of the business.

WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER
REASONABLE DILIGENCE HAS BEEN EXERCISED?

The nature of the business, as well as the particular circumstances of each case.
The court should look at the facts as they exist at the time of their occurrence, not aided
or enlightened by those which subsequently took place. (Litwin v. Allen


OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. (155 F. 2d 522, 196)

II in the course oI management, the directors arrive at a decision Ior which there is a
reasonable basis and they acted in good Iaith, as a result oI their independent judgment, and
uninIluenced by any consideration other than what they honestly believe to be Ior the best
interest oI the railroad, it is not the Iunction oI the court to say that it would have acted
diIIerently and to charge the directors Ior any loss or expenditures incurred.

In the present case, the bond issue was adequately deliberated and planned, properly
negotiated and executed; there was no lack oI good Iaith; no motivation oI personal gain or
Duty of DiIigence: Business Judgment RuIe.
proIit; there was no lack oI diligence, skill or care in selling the issue at the price approved by the
Commission and which resulted in a saving oI approximately $9M to the corporation.

ONTELIBANO VS. BACOLOD-URCIA ILLING CO. (5 SCRA 36, 1962)

The Bacolod-Murcia Milling Co. adopted a resolution which granted to its sugar planters
an increase in their share in the net proIits in the event that the sugar centrals oI Negros
Occidental should have a total annual production exceeding one-third oI the production oI all
sugar central mills in the province. Later, the company amended its existing milling contract
with its sugar planters, incorporating such resolution. The company, upon demand, reIused to
comply with the contract, stating that the stipulations in the resolution were made without
consideration and that such resolution was, thereIore, null and void ab initio, being in eIIect a
donation that wasultra vire8 and beyond the powers oI the corporate directors to adopt. This is
an action by the sugar planters to enIorce the contract.

The terms embodied in the resolution were supported by the same cause and
consideration underlying the main amended milling contract; i.e., the premises and obligations
undertaken thereunder by the planters, and particularly, the extension oI its operative period Ior
an additional 15 years over and beyond the thirty years stipulated in the contract.

As the resolution in question was passed in good Iaith by the board oI directors, it is valid
and binding, and whether or not it will cause losses or decrease the proIits oI the central, the
court has no authority to review them. They hold such oIIice charged with the duty to act Ior the
corporation according to their best judgment, and in so doing, they cannot be controlled in the
reasonable exercise and perIormance oI such duty. It is a well-known rule oI law that questions
oI policy or oI management are leIt solely to the honest decision oI oIIicers and directors oI a
corporation, and the court is without authority to substitute its judgment oI the board oI directors;
the board is the business manager oI the corporation, and so long as it acts in good Iaith, its
orders are not reviewable by the courts.

LITWIN (ROSEARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL.
(25 N.Y.S. 2d 66, 190)

FACTS: Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to
raise money to pay the balance oI the purchase price but could not directly borrow money due to
a borrowing limitation in its charter. Thus, it sold Missouri PaciIic bonds to J.P. Morgan and Co.
worth $IOM. J.P. Morgan, in turn, sold $3M worth oI the bonds to Guaranty Trust Company.
Under the contract, the seller was given an option to repurchase at same price within six months.

HELD: Option given to seller is invalid. It is against public policy Ior a bank to sell
securities and buy them back at the same price; similarly, it is against public policy Ior the bank
to buy securities and give the seller the option to buy them back at the same price because the
bank incurs the entire risk oI loss with no possibility oI gain other than the interest derived Irom
the securities during the period that the bank holds them. Here, iI the market price oI the
securities rise, the holder oI the repurchase option would exercise it to recover the securities at a
lower price at which he sold them. II the market price Ialls, the seller holding the option would
not exercise it and the bank would sustain the loss.

Directors are not in a position oI trustees oI an express trust who, regardless oI good
Iaith, are personally liable. In this case, the directors are liable Ior the transaction because the
entire arrangement was improvident, risky, unusual and unnecessary so as to be contrary to
Iundamental conceptions oI prudent banking practice. Yet, the advice oI counsel was not
sought. Absent a showing oI exercise oI good Iaith, the directors are thus liable.

WALKER VS. AN, ET. AL. (253 N.Y.S. 58, 1931)

FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a
promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by
any meeting oI the board oI directors and was not Ior the beneIit oI the corporation. The note
was dishonored but deIendant-directors did not protest the note Ior non-payment; thus, Lacey,
the indorser who was Iinancially capable oI meeting the obligation, was subsequently
discharged.

HELD: Directors are charged not with misIeasance, but with non-Ieasance, not only with
doing wrongIul acts and committing waste, but with acquiescing and conIirming the wrong
doing oI others, and with doing nothing to retrieve the waste. Directors have the duty to attempt
to prevent wrongdoing by their co-directors, and iI wrong is committed, to rectiIy it. II the
deIendant knew that an unauthorized loan was made and did not take steps to salvage the loan,
he is chargeable with negligence and is accountable Ior his conduct.

STEINBERG VS. VELASCO (52 Phil. 953, 1929)

FACTS: The board oI directors oI Sibuguey Trading Company authorized the purchase oI
330 shares oI stock oI the corporation and declared payment oI P3T as dividends to
stockholders. The directors Irom whom 300 oI the stocks were bought resigned beIore the board
approved the purchase and declared the dividends. At the time oI purchase oI stocks and
declaration oI dividends, the corporation had accounts payable amounting to P9,241 and
accounts receivable amounting to P12,512, but the receiver who made diligent eIIorts to collect
the amounts receivable was unable to do so.

It has been alleged that the payment oI cash dividends to the stockholders was wrongIully
done and in bad Iaith, and to the injury and Iraud oI the creditors oI the corporation. The
directors are sought to be made personally liable in their capacity as directors.

HELD: Creditors oI a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the BOD will not use the assets oI the corporation to buy its
own stock, and will not declare dividends to stockholders when the corporation is insolvent.

In this case, it was Iound that the corporation did not have an actual bona fide surplus
Irom which dividends could be paid. Moreover, the Court noted that the Board oI Directors
purchased the stock Irom the corporation and declared the dividends on the stock at the same
Board meeting, and that the directors were permitted to resign so that they could sell their stock
to the corporation. Given all oI this, it was apparent that the directors did not act in good Iaith or
were grossly ignorant oI their duties. Either way, they are liable Ior their actions which aIIected
the Iinancial condition oI the corporation and prejudiced creditors.

BARNES V. ANDREWS (298 F. 61, 192)

A complaint was Iiled against a corporate director Ior Iailing to give adequate attention
(he relied solely on the President`s updates on the status oI the corp) to the aIIairs oI a
corporation which suIIered depletion oI Iunds.

The director was not liable. The court said that despite being guilty oI misprision in his
oIIice, still the plaintiII must clearly show that the perIormance oI the director`s duties would
have avoided the losses. When a business Iails Irom general mismanagement, business
incapacity, or bad judgment, it is diIIicult to conjecture that a single director could turn the
company around, or how much dollars he could have saved had he acted properly.

FOSTER V. BOWEN (1 N.E. 2d 181, 192)

Cushing, a director and in charge oI leasing a roller skating rink oI the corp, leased the
same to himselI. Minority stockholders Iiled suit against Bowen, the corporation's President, to
recover Ior company losses arising out oI an alleged breach oI Iiduciary duty.

Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest
or Iraudulent; (2) Cushing perIormed personal work such as keeping the Iacility in repair which
redounded to the beneIit oI the company and even increased its income; (3) Bowen did not
proIit personally through Cushing's lease; and (4) the issue oI the possible illegality oI the lease
was put beIore the Board oI Directors, but the Board did not act on it but instead moved on to the
next item on the agenda. Absent any bad Iaith on Bowen's part, and a showing that it was a
reasonable exercise oI judgment to take no action on the lease agreement at the time it was
entered into, Bowen was not liable.

LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602, 193)

Lowell Hoit Iiled action against directors oI a cooperative grain company Ior an alleged
willIul conversion by the manager oI grain stored in the company Iacility. The court said that the
directors were not personally liable. There was no evidence that the directors had knowledge oI
the transaction between the manager and Lowell Hoit.

The court will treat directors with leniency with respect to a single act oI Iraud on the part
oI a subordinate oIIicer/agent. But directors could be held liable iI the act oI Iraud was habitual
and openly committed as to have been easily detected upon proper supervision. To hold directors
liable, he must have participated in the Iraudulent act; or have been guilty oI lack oI ordinary and
reasonable supervision; or guilty oI lack oI ordinary care in the selection oI the oIIicer/agent.

BATES V. DRESSER (0 S.Ct.2, 1920)

Coleman, an employee oI the bank, was able to divert bank Iinances Ior his beneIit,
resulting in huge losses to the bank. The receiver sued the president and the other directors Ior
the loss.

The court said that the directors were not answerable as they relied in good Iaith on the
cashier`s statement oI assets and liabilities Iound correct by the government examiner, and were
also encouraged by the attitude oI the president that all was well (the president had a sizable
deposit in the bank). But the president is liable. He was at the bank daily; had direct control oI
records; and had knowledge oI incidents that ordinarily would have induced scrutiny.


The self-dealing director

WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32)

A self-dealing director is one who enters into a contract with the corporation of
which he is a director.

WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING
DIRECTORS?

Voidable at the option of the corporation, whether or not it suffered damages. t
is possible that the self-dealing director may have the greatest interest in its welfare
and may be willing to deal with it upon reasonable terms.

owever, such contract may be upheld by the corporation if all of the following
conditions are present:

(1 The presence of the self-dealing director or trustee in the board meeting for
which the contract was approved was not necessary to constitute a quorum
for such meeting;

(2 The vote of such self-dealing director or trustee was not necessary for the
approval of the contract;

(3 The contract is fair and reasonable under the circumstances;

(4 n the case of an officer, the contract has been previously authorized by the
Board of Directors.

n the event that either of or both conditions (1 and (2 are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was
necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of
the OS or all of the members, in a meeting called for the purpose. Full disclosure of the
adverse interest of the directors or trustees involved must be made at such meeting.

DOCTRINE: A director of a corporation holds a position of trust and as such, he owes
a duty of loyalty to his corporation. n case his interests conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate
managers, directors are committed to seek the maximum amount of profits for the
corporation. This trust relationship "is not a matter of statutory or technical law. t springs
from the fact that directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders." Prime White Cement
Corp. v. AC, 220 $CRA 103; 1993)

PALTING V. SAN 1OSE PETROLEU (Dec. 1, 1966)

The articles oI inc. oI respondent included a provision that relieves any director oI all
responsibility Ior which he may otherwise be liable by reason oI any contract entered into with
the corp., whether it be Ior his beneIit or Ior the beneIit oI any other person, Iirm, association or
partnership in which he may be interested, except in case oI Iraud.

SC: This is in direct contravention oI the Corp Law, oI the traditional Iiduciary relationship
between directors and the SH. The implication is that they can do anything short oI Iraud, even
to their beneIit, and with immunity.

ote: This case was decided in 1966 under the Corporation Law, which had no
provisions on self-dealing directors.

EAD V. CCULLOUGH (21 Phil. 95, 1911)

Issue: validity oI sale oI corp. property and assets to the directors who approved the same.

Gen Rule: When purely private corporations remain solvent, its directors are agents or trustees
Ior the SH.

Exception: when the corp. becomes insolvent, its directors are trustees oI all the creditors,
whether they are members oI the corp. or not, and must manage its property and assets with strict
regard to their interest; and iI they are themselves creditors while the insolvent corp is under their
management, they will not be permitted to secure to themselves by purchasing the corp property
or otherwise any personal advantage over the other creditors.

Exception to Exception: A director or oIIicer may in good Iaith and or an adequate
consideration purchase Irom a majority oI the directors or SH the property even oI an
insolvent corp, and a sale thus made to him is valid and binding upon the minority.

In the case at bar, the sale was held to be valid and binding. Company was losing. 4
directors present during meeting all voted Ior the sale. They likewise constitute majority oI SH.
Contract was Iound to be Iair and reasonable.

PRIE WHITE CEENT CORP. V. IAC (220 SCRA 103, 1993)

Prime White Cement Corp. (through the President and Chairman oI the Board) and
Alejandro Te, a director and auditor oI the corporation, entered into a dealership agreement
whereby Te was obligated to act as the corporation's exclusive dealer and/or distributor oI its
cement products in the entire Mindanao area Ior 5 years. Among the conditions in the dealership
agreement were that the corporation would sell to and supply Te with 20,000 bags oI white
cement per month, and that Te would purchase the cement Irom the corporation at a price oI P
9.70 per bag.

Relying on the conditions contained in the dealership agreement, Te entered into written
agreements with several hardware stores which would enable him to sell his allocation oI 20,000
bags per month. However, the Board oI Directors subsequently imposed new conditions,
including the condition that only 8,000 bags oI cement would be delivered per month. Te made
several demands on the corporation to comply with the dealership agreement. However, when
the corporation reIused to comply with the same, Te was constrained to cancel his agreements
with the hardware stores. Notwithstanding the dealership agreement with Te, the corporation
entered into an exclusive dealership agreement with a certain Napoleon Co Ior marketing oI
corporation's products in Mindanao. The lower court held that Prime White was liable to Te Ior
actual and moral damages Ior having been in breach oI the agreement which had been validly
entered into.

On appeal, the Supreme Court held that the dealership agreement is not valid and
enIorceable, Ior not having been Iair and reasonable: the agreement protected Te Irom any
market increases in the price oI cement, to the prejudice oI the corporation. The dealership
agreement was an attempt on the part oI Te to enrich himselI at the expense oI the corporation.
Absent any showing that the stockholders had ratiIied the dealership agreement or that they were
Iully aware oI its provisions, the contract was not valid and Te could not be allowed to reap the
Iruits oI his disloyalty.



Using inside information

USE OF INSIDE INFORMATION: Do directors and officers of a company owe any
duty at aII to stockhoIders in reIation to transactions whereby the officers and
directors buy for themseIves shares of stock from the stockhoIders?

MNORTY RULE: YES. Directors and officers have an obligation to
the stockholders individually as well as collectively.

MAJORTY RULE: NO. Directors and officers owe no fiduciary duty at
all to stockholders, but may deal with them at arm's
length. No duty of disclosure of facts known to
the director or officer exists. Nondisclosure
cannot constitute constructive fraud.

SPEAL FATS DOTRNE: T DEPENDS. here special circumstances
or facts are present which make in inequitable to
withhold information from the stockholder, the duty
to disclose arises, and concealment is fraud.

n the case of Gokongwei v. SEC (89 SRA 336; 1979, the Supreme ourt,
quoting from the US case of Pepper v. Litton 308 U.S. 295-313; 1939 stated that a
director cannot, "by the intervention of a corporate entity violate the ancient precept
against serving two masters . e cannot utilize his inside information and his
strategic position for his own preferment. e cannot violate rules of fair play by doing
indirectly through the corporation what he could not do directly. e cannot use his
power for his personal advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to the exclusion or
detriment of the cestuis."


Seizing Corporate Opportunity ($ec. 34)

f a director acquires for himself, by virtue of his office, a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of the
corporation, he must account to the corporation for all such profits by refunding the
same. owever, if his act was ratified by 2/3 stockholders' vote, he need not refund said
profits. This provision applies even though the director may have risked his own funds in
the venture.

ote: This provision is to be distinguished from Sec. 32 on contracts of self-dealing
directors: contracts of self-dealing directors are voidable at the option of the
corporation even if it has not suffered any injury; on the other hand, Sec. 34
applies only if the corporation has been prejudiced by the contract.




SINGER VS. CARLISLE (2 N.Y.S. 2d 190, 191)

In this case, it was held that the general allegations in the complaint oI conspiracy oI the
directors to obtain corporate opportunity were deIicient. The complaint should state speciIic
transactions.

Directorship in 2 competing corporations does not in and oI itselI constitute a wrong. It
is only when a business opportunity arises which places the director in a position oI serving two
masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been
done.

IRVING TRUST CO. VS. DEUTSCH (9 L. Ed. 123, 1935)

Fiduciary duty applies even iI the corporation is unable to enter into transactions itselI.

LITWIN V ALLEN (25 N.Y.S. 2d 66, 190)

In this case, it was held that the common stock purchased by the deIendants wasn`t a
business opportunity Ior the corporation. Having IulIilled their duty to the corporation in
accordance with their best judgment, the deIendant directors were not precluded Irom a
transaction Ior their own account and risk.


Interlocking directors

WHAT IS AN INTERLOCING DIRECTOR?

An interlocking director is one who occupies a position in 2 companies dealing
with each other.

WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCING DIRECTORS?

Except in cases of fraud, and provided the contract is fair and reasonable under
the circumstances, a contract between 2 or more corporations having interlocking
directors shall not be invalidated on that ground alone. This practice is tolerated by the
ourts because such an arrangement oftentimes presents definite advantages to the
corporations involved.
owever, if the interest of the interlocking director in one corporation is
substantial (i.e., stockholdings exceed20% of the OC$) and his interest in the other
corporation or corporations is merely nominal, he shall be subject to the conditions stated
in Sec. 32, i.e., for the contract not to be voidable, the following conditions must be
present:

(1 The presence of the self-dealing director or trustee in the board
meeting for which the contract was approved was not necessary to
constitute a quorum for such meeting;
(2 The vote of such self-dealing director or trustee was not necessary
for the approval of the contract;
(3 The contract is fair and reasonable under the circumstances;
(4 n the case of an officer, the contract has been previously authorized
by the Board of Directors.

n the event that either of or both conditions (1 and (2 are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was
necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of
the OS or all of the members, in a meeting called for the purpose. Full disclosure of the
adverse interest of the directors or trustees involved must be made at such meeting.

ote: The nvestment ouse Law prohibits a director or officer of an investment
house to be concurrently a director or officer of a bank, except as otherwise
authorized by the Monetary Board. n no event can a person be authorized to be
concurrently an officer of an investment house and of a bank except where the
majority or all of the equity of the former is owned by the bank. (P.D. 129, Sec. 6,
as amended
The nsurance ode likewise prohibits a person from being a director
and/or officer of an insurance company and an adjustment company. (Sec. 187

GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 38, 1918)

Maynard, president and chieI stockholder oI Globe but nominal SH in Utica Gas,
obtained a cheap, 10-year contract Ior Utica to supply power. Maynard did not vote during the
meeting Ior the approval oI the contract.

Can Globe 8eek to enforce contract? The Supreme Court held that Globe could not
enIorce the contract and that said contract was voidable at the election oI Utica. It was Iound
that based on the Iacts oI the case, the contract was clearly one-sided. Maynard, although he did
not vote, exerted a dominating inIluence to obtain the contract Irom beginning to end.

The director-trustee has a constant duty not to seek harsh advantage in violation oI his
trust.


Watered stocks ($ec. 65)

Any director or officer of the corporation:

(1 consenting to the issuance of stocks for a consideration less than its par
or issued value or for a consideration in any form other than cash, valued
in excess of its fair value, or
(2 who, having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporation secretary

shall be solidarily liable with the stockholders concerned to the corporation and its
creditors for the difference between the fair value received at the time of the issuance of
the stock and the par or issued value of the same.


Fixing compensation of directors and officers

GENERAL RULE: Directors as such are not entitIed to compensation for
performing services ordinariIy attached to their office.

EXEPTONS: (1 f the articles of incorporation or the by-laws expressly
so provide;
(2 f a contract is expressly made in advance.

WHO FIXES THE COMPENSATION? The stockhoIders onIy (majority of the OCS)

EXEPTON: Per diems, which can be fixed by the directors themselves

APPLICABILITY OF COMPENSATION: OnIy to future and NOT past services.

MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors
shall not exceed 10% of the net income before income tax of the
corporation during the preceding year (Sec. 30


GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399, 192)

The compensation provided in sec. 92 oI the by-laws oI El Hogar Filipino which
stipulated that 5 oI the net proIit shown by the annual balance sheet shall be distributed to the
directors in proportion to the attendance at board meetings is valid. The Corporation Law does
not prescribe the rate oI compensation Ior the directors oI a corporation. The power to Iix it , iI
any is leIt to the corporation to be determined in its by-laws. In the case at bar, the provision in
question even resulted in extraordinarily good attendance.

BARRETO VS. LA PREVISORA FILIPINA

This action was brought by the directors oI deIendant corporation to recover 1 Irom
each oI the plaintiIIs oI the proIits oI the corporation Ior 1929 pursuant to a by-law provision
which grants the directors the right to receive a liIe gratuity or pension in such amount Ior the
corporation.

The SC held that the by-law provision is not valid. Such provision is ultra vires Ior a
mutual loan and building association to make. It is not merely a provision Ior the compensation
oI directors. The authority conIerred upon corporations reIers only to providing compensation
Ior the Iuture services oI directors, oIIicers, and employees aIter the adoption oI the by-law in
relation thereto. The by-law can't be held to authorize the giving oI continuous compensation to
particular directors aIter their employment has terminated Ior past services rendered gratuitously
by them to the corporation.

CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596, 190)

The questioned resolutions which appropriated the Iunds oI the corporation Ior diIIerent
expenses oI the directors are contrary to the by-laws oI the corporation; thus they are not within
the board's power to enact. Sec. 8 oI the by-laws explicitly reserved to the stockholders the
power to determine the compensation oI members oI the board and they did restrict such
compensation to actual transportation expenses plus an additional P30 per diems and actual
expenses while waiting. Hence, all other expenses are excluded. Even without the express
reservation, directors presumptively serve without pay and in the absence oI any agreement in
relation thereto, no claim can be asserted thereIore.

FOGELSON VS. AERICAN WOOLEN CO. (10 F. 2d. 660, 198)

A retirement plan which provides a very large pension to an oIIicer who has served to
within one year oI the retirement age without any expectation oI receiving a pension would seem
analogous to a giIt or bonus. The size oI such bonus may raise a justiIiable inquiry as to whether
it amounts to wasting oI the corporate property. The disparity also between the president's
pension plan and that oI even the nearest oI the other oIIicers and employees may also be
inquired upon by the courts.

KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652, 1952)

This is an appeal Iiled to enjoin the CaliIornia Eastern Airways Irom putting into eIIect a
stock option plan and a proIit-sharing plan. The SC held that the stock option plan was deIicient
as it was not reasonably created to insure that the corporation would receive contemplated
beneIits. A validity oI a stock option plan depends upon the existence oI consideration and the
inclusion oI circumstances which may insure that the consideration would pass to the
corporation. The options provided may be exercised in toto immediately upon their issuance
within a 6 month period aIter the termination oI employment. In short, such plan did not insure
that any optionee would remain with the corporation.

With regard to the proIit-sharing plan, it was held valid because it was reasonable and
was ratiIied by the stockholders pending the action.






Sec. 97 provides that the AO of a close corp. may specify that it shall be managed by the
stockholders rather than the BoD. So long as this provision continues in effect:

O No stockholder's meeting need be called to elect directors;

O Generally, stockholders deemed to be directors for purposes of this ode, unless the context
clearly requires otherwise;

O Stockholders shall be subject to all liabilities of directors. The AO may likewise provide that
all officers or employees or that specified officers or employees shall be elected or appointed
by the stockholders instead of by the BoD.

Further, Sec. 100 provides that for stockholders managing corp. affairs:

O They shall be personally liable for corporate torts (unlike ordinary directors liable only upon
finding of negligence

O f however there is reasonable adequate liability insurance, injured party has no right of
action v. stockholders-managers





A S/director is still entitled to vote in a stockholder's meeting even if his interest is adverse to a
corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp.
and the minority.

Persons with management control of corporation hold it in behalf of Ss and can not regard such
as their own personal property to dispose at their whim.

The ff. acts are legal:

O Transfer of managerial control through BoD resignation & seriatim election of successors if
concomitant with the sale and actual transfer of majority interest or that which constitutes
voting control;

O Disposal by controlling S of his stock at any time & at such price he chooses

The ff. are illegal:

O Selling corp. office or management control by itself, that is NOT accompanied by stocks or
stocks are insufficient to carry voting control;

CIose Corporations
Duty of ControIIing Interest
O Transferring office to persons who are known or should be known as intending to raid the
corporate treasury or otherwise improperly benefit themselves at the expense of the corp.
(nsuranshares orp. V. Northern Fiscal;

O Receiving a bonus or premium specifically in consideration of their agreement to resign &
install the nominees of the purchaser of their stock, above and beyond the price premium
normally attributable to the control stock being sold;


INSURANSHARES CORP. V. NORTHERN FISCAL CORP. (35 F. Supp. 22, 190)

The corp. is suing its Iormer directors to recover damages as a result oI the sale oI its
control to a group (corporate raiders) who proceeded to rob it oI most oI its assets mainly
marketable securities.

Are previous directors who sold corp. control liable? Yes, they are under duty not to sell
to raiders.

Owners oI corp. control are liable iI under the circumstances, the proposed transIer are
such as to awaken a suspicion or put a prudent man on his guard. As in this case, control was
bought Ior so much aside Irom being warned oI selling to parties they knew little about, and also
Irom Iair notice that such outsiders indeed intended to raid the corp.






eneral rule: orporate creditors can run after the corp. itself only, and not the directors for
mismanagement of a solvent corp.

f corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore
manage its assets with due consideration to the creditor's interest.

f directors are also creditors themselves, they are prohibited from gaining undue advantage over
other creditors.






In what instances does personaI IiabiIity of a corporate director, trustee or officer
vaIidIy attach together with corporate IiabiIity?

hen the director / trustee / officer:

. (1 assents to a patently unlawful act of the corporation;
(2 is in bad faith or gross negligence in directing the affairs of the corporation;
(3 creates a conflict of interest, resulting in damages to the corporation, its
stockholders or other persons

Duty to Creditors
PersonaI LiabiIity of Directors
. onsents to the issuance of watered stocks, or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;

. Agrees to hold himself personally and solidarily liable with the corporation;

V. s made, by a specific provision of law, to personally answer for his corporate
action.

(Tramat Mercantile v. CA, 23 $CRA 14)


UICHICO v. NLRC (G.R. No. 1213, une 2, 199)

In labor cases, particularly, corporate directors and oIIicers are solidarily liable with the
corporation Ior the termination oI employment oI corporate employees done with malice or in
bad Iaith.

In the instant case, there was a showing oI bad Iaith: the Board Resolution retrenching
the respondents on the Ieigned ground oI serious business losses had no basis apart Irom an
unsigned and unaudited ProIit and Loss Statement which had no evidentiary value whatsoever.





CORPORATE BOOS AND RECORDS
AND
THE RIGHT OF INSPECTION



WHAT BOOS AND RECORDS MUST A CORPORATION EEP? ($ec. 74)

(1 Record of all business transactions;
(2 Minutes of all meetings of stockholders or members;
(3 Minutes of all meetings of Board of Directors or Trustees;
(4 Stock and Transfer book

WHAT IS A STOC AND TRANSFER BOO? ($ec. 75)

A stock and transfer book is a record of all stocks in the names of the
stockholders alphabetically arranged. t likewise contains the following information:

O nstallments paid and unpaid on all stock for which subscription has been
made, and the date of any installment;

O A statement of every alienation, sale or transfer of stock made, the date
thereof, and by whom and to whom made;

O Such other entries as the by-laws may prescribe

Corporate Books and Records
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.

WHAT IS A STOC TRANSFER AGENT? ($ec. 75)

A stock transfer agent is one who is engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation. e or she must be
licensed by the SE; however, 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, shall be applicable.

WHO IS THE CUSTODIAN OF CORPORATE RECORDS?

n the absence of any provision to the contrary, the corporate secretary is the
custodian of corporate records. orollarily, he keeps the stock and transfer book and
makes the proper and necessary entries. (Torres, et al. vs. CA, 278 SRA 793; 1997





Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how
business affairs of the corp. are run by the directors. The law therefore gives them the right to know not
only the financial health of the corp. but also how its affairs are managed so that if they find it
unsatisfactory, they can seek the proper remedy to protect their investment.

WHAT IS THE NATURE OF THE RIGHT TO INSPECT?

PREVENTVE : deterrent to an ill-intentioned management knowing its acts
are subject to scrutiny; and

REMEDAL: A dissatisfied S may avail of this right as a preliminary
step towards seeking more direct and appropriate
remedies against mismanagement.




1. Records of ALL business transactions

This includes book of inventories and balances, journal, ledger, book for copies of letters
and telegrams, financial statements, income tax returns, vouchers, receipts, contracts,
papers pertaining to such contracts, voting trust agreements (sec. 59

2. By-Iaws

These are expressly required to be open to inspection by S/members during office
hours (Sec. 46. ote: There is no similar provision as to AO, but these are filed with
the $EC anyway.

3. Minutes of director's meetings

Basis of the Right of Inspection
What Records Covered
This is to inform stockholders of Board policies. Such right arises only upon approval of
the minutes, however.

4. Minutes of stockhoIders' meetings

5. Stock and transfer books

These are records of all stocks in the names of the stockholders alphabetically arranged.
contain all names of the stockholders of record. Useful for proxy solicitation for elections.
SE has however ruled that a S cannot demand that he be furnished such a list but he
is free to examine corp. books.

6. Most recent financiaI statement

Sec. 75 of the ode provides that within 10 days from the corporation's receipt of
a written request from any stockholder or member, the corporation must furnish the
requesting party with a copy of its most recent financial statement, which shall include a
balance sheet as of the end of the last taxable year and a profit or loss statement for said
taxable year.


Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the
corporation are NOT open to inspection, EXEPT under the following circumstances:

(1 Upon written consent of concerned depositor (presumably the
corporation);
(2 n cases of impeachment;
(3 Upon court order in cases of bribery or dereliction of duty of a public
official; and
(4 n cases where the money deposited / invested is the subject matter
of litigation
(5 Upon order of a competent court in cases of unexplained wealth
under RA 3019 or the Anti-Graft and orrupt Practices Act
(6 Upon order of the Ombudsman





1. The exercise of this right is subject to reasonable limitations similar to a citizen's exercise of the
right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered,
to the prejudice of Ss.

2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and
46.

3. A corp. may regulate time and manner of inspection but provisions in its by-law which gives
directors absolute discretion to allow or disallow inspection are prohibited.

Limitations as to time and pIace:
O Exercise of right only at REASONABLE OURS on BUSNESS DAYS.
O Such business days should be TROUGOUT TE YEAR. BoD cannot limit such
to merely a few days within the year. (Pardo v. ercules Lumber

4. By-laws cannot prescribe that authority of president must first be obtained.
Extent and Limitations on Right

5. nspection should be made in such a manner as not to impede the efficient operations

6. PIace of inspection: Principal office of the corp. S cannot demand that such records be taken
out of the principal office.

7. As to purpose:

O PRESUMPTON: that S's purpose is proper. orp. cannot refuse on the mere belief
that his motive is improper (sec 74.

O BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.

O To be legitimate, the purpose for inspection must be GERMANE to the NTEREST of the
stockholder as such, and it is not contrary to the interests of the corporation.

Legitimate: inquiry about failure to declare dividends
ot legitimate: for mere satisfaction or speculation.

O Belief in good faith that a corp. is being mismanaged may be given due course even if
later, this is proven unfounded.

O f motive can be clearly shown as inimical to corp., right may be denied.






Every director, trustee, stockhoIder, member may exercise right personally or through an
agent who can better understand and interpret records (impartial source, expert accountant, lawyer.

As to VTA: both voting trustee and transferor

SH of parent corp. over subsidiary:

f the two are operated as SEPARATE entities : O right of inspection

f they are ONE AND TE SAME with respect
to management and control, and inspection is
demanded due to mismanagement of subsidiary
by the parent's directors who are also
directors of the subsidiary : With right of inspection

f the subsidiary is wholly-owned by the parent,
and its books & records are in the possession
and control of the parent corporation : With right of inspection
okongwei v. $EC)





Who May Exercise Right
Remedies avaiIabIe if Inspection Refused
WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE
CORPORATION?

(1 rit of mandamus.

OTE: Writ shall not issue where it is shown that the petitioner's purpose is
improper and inimical to the interests of the corporation.

Writ should be directed against the corporation. The secretary and
the president may be joined as party defendants.

(2 njunction

(3 Action for damages against the officer or agent refusing inspection. Also, penal
sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144

What defenses are available to the officer or agent?

1) The person demanding has improperly used any information secured
through any prior examination; or
2) Was not acting in good faith; or
3) The demand was not for a legitimate purpose.


PARDO V. HERCULES LUBER ( Phil. 965, 192)

BOD/OIIicers may deny inspection when sought at unusual hours or under improper
conditions. But they cannot deprive the stockholders oI the right altogether. In CAB, by-law
provided that the inspection be made available only Ior a Iew days in a year, chosen by the
directors. This is void.


GONZALES V. PNB (122 SCRA 90, 1983)

G acquired 1 share oI stock purposely to be able to exercise right to inspection with
respect to transactions beIore he became a SH. G not in good Iaith. His obvious purpose was to
arm himselI with materials which he can use against the bank Ior acts done by the latter when G
was a total stranger to the same. Right not available here.


VERAGUTH V. ISABELA SUGAR CO. (5 Phil. 266, 1932)

There was nothing improper in the secretary`s reIusal since the minutes oI these prior
meetings have to be veriIied, conIirmed and signed by the directors then present. Hence,
Veraguth has to wait until aIter the next meeting.


GOKONGWEI V. SEC (April 11, 199)

The law takes Irom the SH the burden oI showing impropriety oI purpose and places
upon the corporation the burden oI showing impropriety oI purpose and motive.

Considering that the Ioreign subsidiary is wholly owned by SMC and thereIore under its
control, it would be more in accord with equity, good Iaith and Iair dealing to construe the
statutory right oI Gokongwei as petitioner as SH to inspect the books and records oI such wholly
subsidiary which are in SMC`s possession and control.


DERIVATIVE SUITS




Suits of stockhoIders/ members based on wrongfuI or frauduIent acts of directors or other
persons:

a. IndividuaI suits - wrong done to stockholder personally and not to other stockholders
ex. When right of inspection is denied to a stockholder)

b. CIass suit - wrong done to a group of stockholders
ex. Preferred stockholders' rights are violated)

c. Derivative suit - wrong done to the corporation itself

O ause of action belongs to the corp. and not the stockholder

O But since the directors who are charged with mismanagement are also the
ones who will decide ON the corp. will sue, the corp. may be left without
redress; thus, the stockholder is given the right to sue on behalf of the
corporation.

O An effective remedy of the minority against the abuses of management

O An individual stockholder is permitted to bring a derivative suit to protect or
vindicate corporate rights, whenever the officials of the corp. refuse to sue or
are the ones to be sued or hold the control of the corp.

O Suing stockholder is merely the nominal party and the corp. is actually the
party in interest.

O A S can only bring suit for an act that took place when he was a
stockholder; not before. (Bitong v. CA, 292 $CRA 503)




WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS?

1 Stockholder/ member must have exhausted all remedies within the corp.

Nature and Basis of derivative suit
Requirements ReIating to Derivative Suits
2 Stockholder/ member must be a stockholder/ member at the time of acts or
transactions complained of or in case of a stockholder, the shares must have
devolved upon him since by operation of law, unless such transaction or act
continues and is injurious to the stockholder.

3 Any benefit recovered by the stockholder as a result of bringing derivative suit
must be accounted for to the corp. who is the real party in interest.

4 f suit is successful, plaintiff entitled to reimbursement from corp. for reasonable
expenses including attorneys' fees.


EVANGELISTA VS. SANTOS (86 Phil. 38, 1950)

The injury complained oI is against the corporation and thus the action properly belongs
to the corporation rather than the stockholders. It is a derivative suit brought by the stockholder
as a nominal party plaintiII Ior the beneIit oI the corporation, which is the real party in interest.
In this case, plaintiIIs brought the suit not Ior the beneIit oI the corporation's interest, but Ior
their own. PlaintiIIs here asked that the deIendant make good the losses occasioned by his
mismanagement and to pay them the value oI their respective participation in the corporate assets
on the basis oI their respective holdings. Petition dismissed Ior venue improperly laid.


REPUBLIC BANK VS. CUADERNO (19 SCRA 61, 196)

In a derivative suit, the corporation is the real party in interest, and the stockholder
merely a nominal party. Normally, it is the corp. through the board oI directors which should
bring the suit. But as in this case, the members oI the board oI directors oI the bank were the
nominees and creatures oI respondent Roman and thus, any demand Ior an intra-corporate
remedy would be Iutile, the stockholder is permitted to bring a derivative suit.

Should the corporation be made a party? The English practice is to make the corp. a
party plaintiII while the US practice is to make it a party deIendant. What is important though is
that the corporation should be made a party in order to make the court's ruling binding upon it
and thus bar any Iuture re-litigation oI the issues. Misjoinder oI parties is not a ground to
dismiss the action.


REYES VS. TAN (3 SCRA 198, 1961)

The importation oI textiles instead oI raw materials, as well as the Iailure oI the board oI
directors to take actions against those directly responsible Ior the misuse oI the dollar allocations
constitute Iraud, or consent thereto on the part oI the directors. ThereIore, a breach oI trust was
committed which justiIied the suit by a minority stockholder oI the corporation.

The claim that plaintiII Justiniani did not take steps to remedy the illegal importation Ior
a period oI two years is also without merit. During that period oI time plaintiII had the right to
assume and expect that the directors would remedy the anomalous situation oI the corporation
brought about by their wrong-doing. Only aIter such period oI time had elapsed could plaintiII
conclude that the directors were remiss in their duty to protect the corporation property and
business.


BITONG v. CA (292 SCRA 503)

O The power to sue and be sued in any court by a corporation even as a stockholder is
lodged in the Board oI Directors that exercises its corporate powers and not in the
president or oIIicer thereoI.

It was JAKA's Board oI Directors, not Senator Enrile, which had the power to
grant Bitong authority to institute a derivative suit Ior and in its behalI.

O The basis oI a stockholder's suit is always one in equity. However, it cannot prosper
without Iirst complying with the legal requisites Ior its institution. The most
important oI these is the bona fide ownership by a stockholder oI a stock in his own
right at the time oI the transaction complained oI which invests him with standing to
institute a derivative action Ior the beneIit oI the corporation.




FINANCING THE CORPORATION




WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED?

1 ontributions (stockholders; also known as stockholder equity/equity
investment
2 Loans or advances (creditors
3 Profits (corporation itself




WHAT IS MEANT BY CAPITAL STRUCTURE?

This refers to the aggregate of the securities -- instruments which represent relatively
long-term investment -- issued by the corporation. There are basically 2 kinds of
securities: shares of stock and debt securities.




Sources of Financing
CapitaI Structure
CapitaI and CapitaI Stock Distinguished

CAPITAL STOCK CAPITAL

DEFIAI1IOA

the amount Iixed, usually by the
corporate charter, to be subscribed
and paid in or secured to be paid
in by the SHS oI a corporation,
and upon which the corporation is
to conduct its operation

actual property oI the corporation,
including cash, real, and personal
property. Includes all corporate
assets, less any loss which may
have been incurred in the
business.

COAS1AACY

CONSTANT, unless amended by
the AOI

FLUCTUATING




COMMO
N
PREFERRE
D
PAR NO PAR* TREASURY REDEEMABL
E
FOUNDER'
S

DEFINITION

Stock
which
entitles
the owner
of such
stocks to
an equal
pro rata
division of
profits

Stock which
entitles the
holder to
some
preference
either in the
dividends or
distribution of
assets upon
liquidation, or
in both

Shares that
have been
issued and
fully paid
but
subsequentl
y reacquired
by the
issuing
corporation
by lawful
means.

Shares issued
by the
corporation
that may be
taken up by
the
corporation
upon
expiration of a
fixed period.
regardless
of the
existence of
unrestricted
retained
earnings

Special
shares
whose
exclusive
rights and
privileges
are
determined
by the AO.

VALUE


Depends
if it's par
or no par

Stated par
value

Fixed in
the AO,
and
indicated
in the
stock
certificate
. May be
sold at a
value
higher,
but not
lower,
than that
fixed in
the AO.

Value not
fixed in
the AO,
and
therefore
not
indicated
in the
stock
certificate
. Price
may be
set by
BOD,
S's or
fixed in
the AO
eventually
.


VOTING
RIGHTS

Usually
vested
with the
exclusive
right to
vote

an vote
only under
certain
circumstance
s

Depends
if it's
common
or
preferred
.

Depends
if it's
common
or
preferred.

No voting
rights for as
long as
such stock
remains in
the treasury
(Sec. 57

Usually denied
voting rights.


PREFERENC
E UPON
LIQUIDATIO
N

No
advantag
e, priority,
or
preferenc
e over
any other
S in the

First crack at
dividends /
profits /
distribution of
assets

Shares of Stock: inds
same
class

OTE: Only preferred and redeemable shares may be deprived of the right to vote. $ec. 6, Corporation Code)
EXCEPTO: As otherwise provided in the Corporation Code.

* o-par value shares may not be issued by the following entities: banks, trust companies, insurance companies,
public utilities, building & loan association $ec. 6)







WHAT IS A SUBSCRIPTION CONTRACT?

t is any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed. This is notwithstanding the fact that the parties refer to it as
a purchase or some other contract. $ec. 60)


WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT?

O Subscriptions constitute a fund to which the creditors have a right to look for
satisfaction of their claims.

O The assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.

O A subscription contract is NDVSBLE $ec. 64).

O A subscription contract subsists as a liability from the time that the subscription
is made until such time that the subscription is fully paid.


GARCIA V. LI CHU SING (59 Phil. 562, 193)

A share oI stock or the certiIicate thereoI is not an indebtedness to the owner nor
evidence oI indebtedness and thereIore, it is not a credit. Stockholders as such are not creditors
oI the corporation.

The capital stock oI a corporation is a trust Iund to be used more particularly Ior the
security oI the creditors oI the corporation who presumably deal with it on the credit oI its
capital.


Pre-incorporation subscription

RULE: hen a group of persons sign a subscription contract, they are deemed not only to make a
continuing offer to the corporation, but also to have contracted with each other as well. Thus, no one may
revoke the contract even prior to incorporation without the consent of all the others.

WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?

1 For a period of at least 6 months from the date of subscription;

EXCEPTO$: (1 unless all of the other subscribers consent to the
revocation; or

Nature of Subscription Contract
(2 unless the incorporation of said corporation fails to
materialize within the said period or within a longer
period as may be stipulated in the contract of subscription

2 After the AO have been submitted to the SE (Sec. 61


UTAH HOTEL CO V. ADSEN (3 Utah 285, 13 Pac. 55, 1913)

Sec 332 in express terms conIers powers upon the stockholders 'to regulate the mode oI
making subscriptions to its capital stock and calling in the same by-laws or by express contract.

Since it may be done by express contract, this shows that it was intended that a contract to that
eIIect may be entered into even beIore the corporation is organized, and the contract agreement
is enIorced iI the corporation is in Iact organized.


WALLACE V. ECLIPSE POCAHONTAS COAL CO (98 S.E. 293, 1919)

One who has paid his subscription to the capital stock oI the corporation may compel the
issuance oI proper certiIicates thereIor.


Post-incorporation subscription

OTE: Under the orporation ode, there is no longer any distinction between a
subscription and a purchase. Thus, a subscriber is liable to pay for the shares even
if the corporation has become insolvent.





WHAT IS THE PRE-EMPTIVE RIGHT?

t is the option privilege of an existing stockholder to subscribe to a proportionate
part of shares subsequently issued by the corporation, before the same can be
disposed of in favor others.

WHY A PRE-EMPTIVE RIGHT?

To protect existing stockholder equity. f the right is not recognized, the S's
interest in the corporation will be diluted by the subsequent issuance of shares.


Basis of Right; Common Law Rule

The Preemptive Right to Shares
Under the prevailing view in common law, the preemptive right is limited to shares issued in
pursuance of an increase in the authorized capital stock and does not apply to additional issues of
originally authorized shares which form part of the existing capital stock.

This common law principle which was generally understood to be applicable in this jurisdiction
has now to give way to the express provisions of the orporation ode on the matter.



Extent and Limitations of Preemptive Right under the Code

WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT?

All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to
all issues or dispositions of shares of any class, in proportion to their respective
shareholdings.

Exception: hen such right is denied by the AO or an amendment thereto.

LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)

1 nitial Public Offerings (POs;

2 ssuance of shares in exchange for property needed for corporate purposes,
including cases wherein an absorbing corporation issues new stocks to the
S's in pursuance to the merger agreement (Sec. 39

hy? (a Because it is beneficial for the corporation to save its
cash;
(b A swap is more expedient than determining the monetary
equivalent of the property.

3 ssuance of shares in payment of a previously contracted debt (Sec. 39

hy? (a The obligation is extinguished outright;
(b orporation does not have to shell out money to fulfill its
obligations;
(c Money that would have otherwise been used for interest
payments can be channelled to more productive
corporate activities.

ote: n os. 2) and 3), such acts require approval of 2/3 of the OC$ or
2/3 of total members.


In Close Corporations

n close corporations, the preemptive rights extends to ALL stock to be issued, including re-
issuance of treasury shares, EXCEPT if provided otherwise by the AO. ($ec. 102). Note that the
limitations in Sec. 39 do not apply.


Waiver of Preemptive Right

The waiver of the preemptive right must appear in the Articles of ncorporation or an amendment
thereto in order to be binding on ALL stockholders, particularly future stockholders. (Sec. 39

f it appears merely in a waiver agreement and NOT in the AO, and was unanimously agreed to
by all existing stockholders:

O The existing stockholders cannot later complain since they are all bound to their
private agreement.

O owever, future stockholders will NOT be bound to such an agreement.

Any stockholder who has not exercised his preemptive right within a reasonable time will be
deemed to have waived it.


When the issue is in breach of trust

The issue of shares may still be objectionable if the Directors have acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out the minority
interest.


Remedies when right violated/denied

WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS UNLAWFULLY
DENIED?

(1 njunction;
(2 Mandamus;
(3 ancellation of the shares (OTE: but only if no innocent 3rd parties are
prejudiced)
(4 n certain cases, a derivative suit


STOKES V. CONTINENTAL TRUST CO. (8 N.E. 1090, 1906)

The directors were under the legal obligation to give the SH-plaintiII an opportunity to
purchase at the price Iixed beIore they could sell his property to a third party. By selling to
strangers without Iirst oIIering to sell to him, the deIendant wrongIully deprived him oI his
property and is liable Ior such damages as he actually sustained.

THO V. BALTIORE TRUST (18 Atl. 23, 1930)

Independently oI the charters, the SHs oI a corporation have a preIerential right to
purchase new issues oI shares, to the proportional extent oI their respective interests in the
capital stock then outstanding, when the privilege can be exercised consistently with the object
which the disposition oI the additional stock is legally designed to accomplish. In the present
case, every SH oI the bank, Ior each oI the shares, was to receive 1 1/2 shares oI the stock co.
(share in exchange Ior property). It would not be Ieasible to consummate a transIer based upon
such consideration iI the preemptive right were to be held enIorceable with respect to every new
issue oI stock regardless oI the object oI the disposition.

FULLER V. KROGH (113 N.W. 2d 25, 1962)

Preemptive right is not to be denied when the property is to be taken as consideration Ior
the stock except in those peculiar circumstances when the corporation has great need Ior the
particular property, and the issuance oI stock is the only practical and Ieasible method by which
the corp. can acquire it Ior the best interest oI the SHs. Ground: practical necessity. cf. Sec. 39]

DUNLAY V. . GARAGE AND REPAIR (10 N.E. 91, 1930)

II the issue oI shares is reasonably necessary to raise money to be issued in the business
oI the corporation rather than the expansion oI such business beyond original limits, the original
SHs have no right to count on obtaining and keeping their proportional part oI original stock.

But even iI preemptive right does not exist, the issue oI shares may still be objectionable
iI the directors have acted in breach oI trust and their primary purpose is to perpetuate or shiIt
control oI the corporation, or to Ireeze out` minority interest.

ROSS TRANSPORT V. CROTHERS (5 A. 2d 26, 196)

The doctrine oI preemptive right is not aIIected by the identity oI the purchasers. What it
is concerned with is who did not get it. But when oIIicers and directors sell to themselves and
thereby gain an advantage, both in value and in voting power, another situation arises. In the
case at bar, the directors were not able to prove good Iaith in the purchase and equity oI
transaction, since the corp. was a Iinancial success. There was constructive Iraud upon the other
SHs.





Borrowings

Borrowings are usually represented by promissory notes, bonds or debentures.

Oftentimes, a financial institution will be willing to lend large amounts to private
corporations only on the condition that such institution will have some representation on
the Board of Directors. The role of such representative is to see to it that his institution's
investment is protected from mismanagement or unfavorable corporate policies.

Bonds and Debentures

BONDS: secured by a mortgage or pledge of corporate property

Debt Securities
must be registered with the SE, as provided by Sec. 38 of the
orporation ode

DEBENTURES: issued on the general credit of the corporation

not secured by any collateral; TEREFORE, are not bonded
indebtedness in the true sense, and stockholder approval is NOT
required (although it would generally be a good idea to obtain it)

Convertible securities; stock options

OTE: &nder the $EC rules, stock option must first be approved by the $EC.
Also, if the stock option is granted to non-stockholders, or to directors,
officers, or managing groups, there must first be $ approval of 2/3 of
the OC$ before the matter is submitted to the $EC for approval.

Of course it goes without saying that the corporation must set aside
enough of the junior securities in case the holders of the option decide to
exercise such option.

ERRITT-CHAPAN & SCOTT CORP. VS. NEW YORK TRUST CO. (18
F. 2d 95, 1950)

II the corporation is allowed to declare stock dividends without taking account oI the
warrant holders (who have not yet exercised their warrant), the percentage oI interest in the
common stock capital oI the corporation which the warrant holders would acquire, should they
choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong in
contending that a warrant holder must Iirst exercise his warrant beIore they may be issued stock
dividend.


Hybrid securities

Because preferred shares and bonds are created by contract, it is possible to create stock which
approximates the characteristics of debt securities. ybrid securities, as the name implies, therefore
combine the features of preferred shares and bonds.

Determining the true nature of the security is crucial for tax purposes. The American courts use
the following criteria:

(1) s the corporation liable to pay back the investor at a fixed maturity date?
(2) s interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate
to them?


WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?

BONDS STOC

WHAT IS PAID?

nterest

Dividends

TO WHOM PAID?

reditor-investor

Stockholder

WHEN PAID?

hether the corporation
has profits or not

Only if there are profits

NATURE

Expense

Not an expense

TAXABILITY

an be deducted for tax
purposes

ANNOT be deducted

MATURITY DATE?

Yes

No

RANK ON
DISSOLUTION

Ranked together with
other corporate creditors


Superior to stockholders,
inferior to corporate
creditors


1OHN KELLY VS. CIR TALBOT ILLS VS. CIR (326 U.S. 521, 196)

In the Kelly case, the annual payments made were interest on indebtedness (thereIore, a
bond is held) because there were sales oI the debentures as well as exchanges oI preIerred stock
Ior debentures, a promise to pay a certain annual amount iI earned, a priority Ior the debentures
over common stock and a deIinite maturity date in the reasonable Iuture.

In the Talbot Mills case, the annual payments made were dividends and not interest
(thereIore, shares are held), because oI the presence oI Iluctuating annual payments with a 2
minimum, and the limitation oI the issue oI notes to stockholders in exchange only Ior stock.
Besides, it is the Tax Court which has Iinal determination oI all tax issues which are not clearly
delineated by law.

1ORDAN CO. VS. ALLEN (85 F. Supp. 3, 199)

The payments made, regardless oI what they are called, are in Iact dividends (on stocks)
because oI the absence oI a maturity date and the right to enIorce payment oI the principal sum
by legal action, among other Iactors.

The Iollowing criteria should be used in determining whether a payment is Ior interest or
dividends:
(1) maturity date and the right to enIorce collection;
(2) treatment by the parties;
(3) rank on dissolution;
(4) uniIorm rate oI interest payable or income payable only out oI proIits;
(5) participation in management and the right to vote.

It must be noted that these criteria are not oI equal importance and cannot be relied upon
individually. E.g. treatment accorded the issuance by the parties cannot be suIIicient as this
would allow taxpayers to avoid taxes by merely naming payments as interest.


The trust indenture

ere, the bond issue usually involves 3 parties:

(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders





ALADDIN HOTEL CO. VS. BLOO (200 F. 2d 62, 1953)

The rights oI bondholders are to be determined by their contract and courts will not make
or remake a contract merely because one oI the parties may become dissatisIied with its
provisions. II the contract is legal, the courts will interpret and enIorce it.

In the deed oI trust and bonds in this case, there are provisions empowering bondholders
oI 2/3 oI the principal amount or more, by agreement with the company, to modiIy and extend
the date oI payment oI the bonds provided such extension aIIected all bonds alike. When this
was done, the bondholders only Iollowed such provisions in good Iaith. The company beneIited
because oI such move, and the bondholders were not necessarily prejudiced, as deIendants
Joneses in this case were themselves owners oI 72 oI the bond issue.



CONSIDERATION FOR ISSUANCE OF SHARES




WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR ISSUANCE OF
SHARES?

O cash;
O property actually received by the corporation: must be necessary or
convenient for its use and lawful purposes;
O labor performed for or services actually rendered to the corporation
(OTE: Future services are OT acceptable!);
O previously incurred indebtedness by the corporation;
O amounts transferred from unrestricted retained earnings to stated capital;
O outstanding shares exchange for stocks in the event of reclassification or
conversion

WHAT FORMS ARE UNACCEPTABLE?

Form of Consideration
O future services
O promissory notes
O value less than the stated par value


HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED?

t may be fixed as follows:

(1 n the AO; or

(2 By the BOD pursuant to authority conferred upon it by the AO or the by-
laws; or

(3 n the absence of the foregoing, by the Ss representing at least a majority
of the outstanding capital stock at a meeting duly called for the purpose
($ec. 62)


IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE
VALUE THEREOF DETERMINED?

t is initially determined by the incorporators or the Board of Directors, subject to
approval by the SE. ($ec. 62)





WHAT IS WATERED STOC?

Stocks issued as fully paid up in consideration of property at an overvaluation.
Oftentimes, the consideration received is less than the par value of the share.

OTE: o-par shares CA be watered stock: when they are issued for less
than their issued value as fixed by the corp. in accordance with law.


WHAT ARE THE WAYS BY WHICH WATERED STOC CAN BE ISSUED?

(1 Gratuitously, under an agreement that nothing shall be paid to the
corporation;

(2 Upon payment of less than its par value in money or for cost at a discount;

(3 Upon payment with property, labor or services, whose value is less than
the par value of the shares; and

(4 n the guise of stock dividends representing surplus profits or an increase
in the value of property, when there are no sufficient profits or sufficient
increases in value to justify it.

WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF WATERED
STOC?
Watered Stocks

Directors and officers who consented to the issuance of watered stocks
are solidarily liable with the holder of such stocks to the corp. and its creditors for the
difference between the fair value received at the time of the issuance and the par or
issued value of the share.

The liability will be to all creditors, whether they became such prior or
subsequent to the issuance of the watered stock. Reliance by the creditors on the
alleged valuation of corporate capital is immaterial and fraud is not made an element
of liability.

OTE: n the Philippines, it is the statutory obligation theory that is controlling
cf. $ec. 65).


PRIVATE TRIPLEX SHOE V. RICE & HUTCHINSTC \L 1 "TRIPLEX
SHOE V. RICE & HUTCHINS" (2 A.L.R. 932, 1930)

In this case, the stocks issued to the Dillman Iaction were no par value shares, the
consideration Ior which were never Iixed as required by law. Hence, their issuance was void.
Moreover, the stocks were issued to the Dillmans Ior services rendered and to be rendered. Future
services are not lawIul consideration Ior the issuance oI stock.


PRIVATE CCARTY V. LANGDEAUTC \L 1 "CCARTY V.
LANGDEAU" (33 S.W. 2d 0, 1960)

McCarty agreed to purchase shares oI a corp. with a downpayment oI only $20, with the
balance due to be evidenced by a note. McCarty Iailed to pay a big portion oI the balance. The
Court aIIirmed the judgement against McCarty Ior the balance due on the contract.

McCarty contends that the contract is void. But the law only prohibits the issuance oI stock.
II it is understood that the stock will not be issued to the subscriber until the note is paid, the
contract is valid and not illegal.

II a security such as a note, which is not a valid consideration, is accepted, the law does not
say that such note, or the stock issued Ior it, shall be void. What is void by express provision oI law
is the Iictitious increase oI stock or indebtedness. The law was designed Ior the protection oI the
corporation and its creditors. It emphasizes the stockholder`s obligations to make Iull and lawIul
payment in accord with its mandate, rather than Iurnish him with a deIense when he has Iailed in
that obligation. Its purpose is to give integrity to the corporation`s capital. None oI these objects
would be promoted by declaring a note given by a subscriber Ior stock uncollectible in the hands oI
a bona Iide stockholder.


RHODE V. DOCK-HOP CO. (12 A.L.R. 3, 1920)

This case involves an action to collect unpaid balances on par value oI shares. It was held
that innocent transIerees oI watered stock cannot be held to answer Ior the deIiciency oI the stocks
even at the suit oI the creditor oI the company. The creditor`s remedy is against the original owner
oI the watered stock.


PRIVATE BING CROSBY V. EATONTC \L 1 "BING CROSBY V.
EATON" (29 P. 2d 5, 1956)

A subscriber to shares who pays only part oI what he agreed to pay is liable to creditors Ior
the balance.

Holders oI watered stock are generally held liable to the corporation`s creditors Ior the
diIIerence between the par value oI the stock and the amount paid in.

Under the misrepresentation theory, the creditors who rely on the misrepresentation oI the
corporation`s capital stock are entitled to recover the 'water Irom holders oI the watered stock.
Reliance oI creditors on the misrepresentation is material. However, under the statutory
obligation theory, reliance oI creditors on the capital stock oI the corporation is irrelevant. (t must
be noted that here in the Philippines, it is the statutory obligation theory which is prevailing.)





Certificate of stock

ONDTON FOR SSUANE: payment of full amount of subscription price plus
interest, if any is due $ec. 64)

ERTFATON TAT: person named therein is a holder or owner of a
stated number of shares in the corporation.

NDATES: 1. kind of shares
2. date of issuance
3. par value, if par value shares

BEARS: Signatures of the proper officers, usually president
or secretary, as well as the corporate seal

AMOUNT SSUED: For no more than the number of shares authorized in
articles of incorporation; excess would be void




Nature and function of a certificate of stock

Issuance of Certificate
A certificate of stock is not necessary to render one a stockholder in a
corporation. Nevertheless, a certificate of stock is the paper representation or tangible
evidence of the stock itself and of the various interests therein. The certificate is not
stock in the corporation but is merely evidence of the holder's interest and status in the
corporation, his ownership of the shares represented thereby, but is not in law the
equivalent of such ownership. t expresses the contract between the corporation and the
S, but it is not essential to the existence of a share in stock or the creation of the
relation of shareholder to the corporation. (Tan v. $EC, 206 $CRA 740)

Requisites for valid issuance of formal certificate of stock ($ec. 63)

(1) The certificates must be signed by the President / Vice-President, countersigned by
the secretary or assistant secretary, and seaIed with the seaI of the corporation.

A mere typewritten statement advising a S of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a formal
certificate of stock. (Bitong v. CA, 292 $CRA 503)

(2) DeIivery of the certificate

There is no issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person whose name is inserted
therein has no control over the books of the company. (Bitong v. CA, 292 $CRA 503)

(3 Par vaIue of par vaIue shares / FuII subscription of no par vaIue shares must be fuIIy
paid.

(4 Surrender of the originaI certificate if the person requesting the issuance of a
certificate is a transferee from a SH.


BITONG V. CA (292 SCRA 503)

Stock issued without authority and in violation oI law is void and conIers no rights on the
person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack oI
power in the corporation to issue the stock, neither the corporation nor the person to whom the
stock is issued is estopped to question its validity since an estoppel cannot operate to create stock
which under the law cannot have existence.






O Unpaid subscriptions are not due and payable until a call is made by the corporation
for payment. ($ec. 67)

O An obligation arising from non-payment of stock subscriptions to a corporation
cannot be offset against a money claim of an employee against the employer.
(Apodaca v. LRC, 172 $CRA 442)

Unpaid Subscriptions
O Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-
laws. f there is none, it shall be the legal rate. ($ec. 66)








HOW ARE UNPAID SUBSCRIPTIONS COLLECTED?

(1 all for payment as necessary, i.e. the BOD declares the unpaid subscriptions due
and payable ($ec. 67);

(2 Delinquency sale ($ec. 6; to be discussed in the next section)

(3 ourt action for collection ($ec. 70)


VELASCO VS POIZAT (3 Phil. 802, 1918)

Poizat subscribed to 20 shares but only paid Ior 5. Board made a call Ior payment
through a resolution. Poizat reIused to pay. Corporation became insolvent. Assignee in
insolvency sued Poizat whose deIense was that the call was invalid Ior lack oI publication.

It was held that the Board call became immaterial in insolvency which automatically
causes all unpaid subscriptions to become due and demandable.


LINGAYEN GULF ELECTRIC VS BALTAZAR (93 Phil. 0, 1953)

Company`s president subscribed to shares and paid partially. The Board made a call Ior
payment through a resolution. However, the president reIused to pay, prompting the corporation
to sue. The deIense was that the call was invalid Ior lack oI publication.

It was held that the call was void Ior lack oI publication required by law. Such
publication is a condition precedent Ior the Iiling oI the action. The ruling in Poizat does not
apply since the company here is solvent.


DA SILVA VS ABOITIZ ( Phil. 55, 1923)

Da Silva subscribed to 650 shares and paid Ior 200. The company notiIied him that his
shares will be declared delinquent and sold in a public auction iI he does not pay the balance. Da
Silva did not pay. The company advertised a notice oI delinquency sale. Da Silva sought an
How Payment of Shares Enforced
injunction because the by-laws allegedly provide that unpaid subscriptions will be paid Irom the
dividends allotted to stockholders.

The Court held that by-laws provide that unpaid subscriptions may be paid Irom such
dividends. Company has other remedies provided Ior by law such as a delinquency sale or
speciIic perIormance.


NATIONAL EXCHANGE VS DEXTER (51 Phil. 601, 1928)

Dexter subscribed to 300 shares. The subscription contract provided that the shares will
be paid solely Irom the dividends. Company became insolvent. Assignee in insolvency sued
Dexter Ior the balance. Dexter's deIense was that under the contract, payment would come Irom
the dividends. Without dividends, he cannot be obligated to pay.

The Court held that the subscription contract was void since it works a Iraud on creditors
who rely on the theoretical capital oI the company (subscribed shares). Under the contract, this
theoretical value will never be realized since iI there are no dividends, stockholders will not be
compelled to pay the balance oI their subscriptions.

LUANLAN VS CURA (59 Phil. 6, 193)

Lumanlan had unpaid subscriptions. Company`s receiver sued him Ior the balance and
won. While the case was on appeal, the company and Lumanlan entered into a compromise
whereby Lumanlan would directly pay a creditor oI the company. In exchange, the company
would Iorego whatever balance remained on the unpaid subscription. Lumanlan agreed since he
would be paying less than his unpaid subscription. AIterwards, the corporation still sued him Ior
the balance because the company still had unpaid creditors. Lumanlan`s deIense was the
compromise agreement.
The Court held that the agreement cannot prejudice creditors. The subscriptions
constitute a Iund to which they have a right to look to Ior satisIaction oI their claims. ThereIore,
the corporation has a right to collect all unpaid stock subscriptions and any other amounts which
may be due it, notwithstanding the compromise agreement.




WHAT ARE THE RIGHTS OF UNPAID SHARES?

olders of subscribed shares not fully paid which are not delinquent shall
have all the rights of a stockholder. ($ec. 72)

FUA CUN V. SUERS ( Phil. 0, 1923)

Chua Soco bought 500 shares oI China Banking Corp. at par value oI P100.00, paying the
sum oI P25,000.00, 50 oI the subscription price. Chua mortgaged the said shares in Iavor oI
Rights and ObIigations of HoIders of Unpaid but Non-deIinquent Stock
plaintiII Fua Cun to secure a promissory note Ior the sum oI P25,000.00. In the meantime, Chua
Soco's interest in the 500 shares were attached and levied upon to satisIy his debt with China
Banking Corp. Fua Cun brought an action to have himselI declared to hold priority over the
claim oI China Bank, to have the receipt Ior the shares delivered to him, and to be awarded
damages Ior wrongIul attachment, on the ground that he was owner oI 250 shares by virtue oI
Chua Soco's payment oI halI oI the subscription price.

The Court held that payment oI halI the subscription price does not make the holder oI
stock the owner oI halI the subscribed shares. PlaintiII's rights consist in an equity in 500 shares
and upon payment oI the unpaid portion oI the subscription price he becomes entitled to the
issuance oI certiIicate Ior the said 500 shares in his Iavor.

BALTAZAR V. LINGAYEN GULF ELECTRIC POWER (1 SCRA 522, 1965)

Baltazar, et al. subscribed to a certain number oI shares oI Lingayen GulI Electric Power.
They had made only partial payment oI the subscription but the corporation issued them
certiIicates corresponding to shares covered by the partial payments. Corporation wanted to deny
voting rights to all subscribed shares until total subscription is paid.

The Court held that shares oI stock covered by Iully paid capital stock shares certiIicates
are entitled to vote. Corporation may choose to apply payments to subscription either as: (a) Iull
payment Ior corresponding number oI stock the par value oI which is covered by such payment;
or (b) as payment pro-rata to each subscribed share. The corporation chose the Iirst option, and,
having done so, it cannot unilaterally nulliIy the certiIicates issued.

Note. The Campo8e8 are of the opinion that 6 of Corporation Code make8
the Lingayen Gulf inapplicable at pre8ent.
NAVA V. PEERS ARKETING ( SCRA 65, 196)

TeoIilo Co subscribed to 80 shares oI Peers Marketing Corp. at P100.00 a share Ior a
total oI P8,000.00. He, however, paid only P2,000.00 corresponding to 20 shares or 25 oI total
subscription. Nava bought 20 shares Irom Co and sought its transIer in the books oI the
corporation. The corporation reIused to transIer said shares in its books.

It was held that the transIer is eIIective only between Co and Nava and does not aIIect the
corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because, unlike in
Lingayen GulI, no certiIicate oI stock was issued to Co.





WHAT IS DELINQUENT STOC? ($ec. 67)

Stock that remains unpaid 30 days after the date specified in the subscription
contract or the date stated in the call made by the Board.

Effect of deIinquency
WHAT ARE THE EFFECTS OF DELINQUENCY?

1. The holder thereof loses all his rights as a stockholder except only the rights
to dividends;

2. Dividends will not be paid to the stockholder but will be applied to the unpaid
balance of his subscription plus costs and expenses. Also, stock dividends
will be withheld until full payment is made.

3. Such stockholder cannot vote at the election of directors or at any meeting
on any matter proper for stockholder action.

4. Stockholder cannot be counted as part of the required quorum.

5. Stockholder cannot be voted for as director of the corporation.

WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? ($ec. 6)

(1 Issuance of Board resoIution

The BOD issues a resolution ordering the sale of delinquent stock,
specifically stating the amount due on each subscription plus all accrued
interest, and the date, time and place of the sale.

ote: The sale shall not be less than 30 days nor more than 60 days
from the date the stocks become delinquent.

(2) Notice of saIe and pubIication

Notice of the date of delinquency sale and a copy of the resolution is sent to
every delinquent stockholder either personally or by registered mail. The
notice is likewise published once a week for 2 consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.

(3) SaIe at pubIic auction

f the delinquent stockholder fails to pay the corporation on or before the date
specified for the delinquency sale, the delinquent stock is sold at public
auction to such bidder who shall offer to pay the full amount of the balance
on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smaIIest number of shares or fraction of a
share.
(4) Transfer and issuance of certificate of stock

The stock so purchased is transferred to such purchaser in the books of the
corporation and a certificate of stock covering such shares is issued.

f there is no bidder at the public auction who offers to pay the full amount of the
balance on the subscription and its attendant costs, the corporation may bid for
the shares, and the total amount due shall be credited as paid in full in the books
of the corporation. Title to all the shares of stock covered by the subscription
shall be vested in the corporation as treasury shares and may be disposed of by
said corporation in accordance with the ode.

ote that this is subject to the restrictions imposed by the Code on
corporations as regards the acquisition of their own shares. $ee the
discussion under Dividends and Purchase by Corporation of its Own
$hares.)

CAN A DELINQUENCY SALE BE QUESTIONED? ($ec. 69)

Yes. This is done by filing a complaint within 6 months from the date of sale, and
paying or tendering to the party holding the stock the sum for which said stock was sold,
with interest at the legal rate from the date of sale. No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock unless these requirements are complied with.





WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO
REPLACE THOSE STOLEN, LOST OR DESTROYED? (Sec. 73)

(1) FiIe an affidavit in tripIicate with the corporation. The affidavit must state the
following:
(a) ircumstances as to how the certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation

(2) The corporation wiII pubIish notice after the affidavit and other information and
evidence have been verified with the books of the corporation, (ote however that
this is not mandatory. The corporation has the discretion to decide whether to
publish or not.)

The notice will contain the following information:

(a Name of the corporation
(b Name of the registered owner;
(c Serial number of the certificate;
(d Number of shares represented by the certificate;
(e Effect of expiration of 1 year period from publication and failure to
present contest within that period.

(3) SLD certificate is removed from the books if after one year from date of last
publication, no contest is presented.

OTE: One-year period will not be required if the applicant files a bond good for
1 year.

(4 The corporation wiII then issue new certificates.

owever, if a contest has been presented to the corporation, or if an action is
pending court regarding the ownership of the SLD certificate, the issuance of the
new certificate shall be suspended until the final decision by the court.
Lost or Destroyed Certificate
OTE: $hould corporation issue new certificates without the conditions being
fulfilled and a third party proves that he is the rightful owner of the shares, the
corporation may be held liable to the latter EVE F it acted in good faith.

OTE: Even if the above procedure was followed, if there was fraud, bad faith,
or negligence on the part of the corporation and its officers, the corporation may
be held liable.


TRANSFER OF SHARES


HOW ARE SHARES OF STOC TRANSFERRED?

By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. ($ec. 63)


WHAT ARE THE REQUISITES FOR A VALID TRANSFER?

(1 Delivery;

(2 ndorsement by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer

ndorsement of the certificate of stock is a mandatory requirement of
law for an effective transfer of a certificate of stock. (Razon v. CA, 207
$CRA 234)

(3 Recording of the transfer in the books of the corporation (so as to make the
transfer valid as against third parties)

Until registration is accomplished, the transfer, though valid between
the parties, cannot be effective as against the corporation. Thus, the
unrecorded transferee cannot enjoy the status of a S: he cannot vote
nor be voted for, and he will not be entitled to dividends.


RURAL BANK OF SALINAS, INC. V. CA (210 SCRA 510)

A corporation, either by its board, its by-laws or the act oI its oIIicers, cannot create
restrictions in stock transIers.


TAN V. SEC (206 SCRA 0)

A by-law which prohibits a transIer oI stock without the consent or approval oI all the
SHs or oI the President or Board oI Directors is illegal as constituting undue limitation on the
right oI ownership and in restraint oI trade (citing Flei8her v. Botica Nola8co Co., nc., Phil.
583)

While Sec. 47 (9) oI the Corporation Code grants to stock corporations the authority to
determine in the by-laws the "manner oI issuing certiIicates" oI shares oI stock, however, the
power to regulate is not the power to prohibit, or to impose unreasonable restrictions oI the right
oI SHs to transIer their shares. To uphold the cancellation oI a stock certiIication as null and
void Ior lack oI delivery oI the cancelled "mother" certiIicate whose endorsement was
deliberately withheld by petitioner, is to prescribe certain restrictions on the transIer oI stock in
violation oI the Corporation Code as the only law governing transIer oI stocks.



USON V. DIOSOITO (61 Phil. 535, 1935)

Toribia Uson Iiled a civil action Ior debt against Vicente Dioisomito. Upon institution oI
said action, an attachment was duly issued and D's property was levied upon, including 75 shares
oI the North Electric Co., which stood in his name on the books oI the company when the
attachment was levied on 18 January 1932. The sheriII sold said shares at a public auction with
Uson being the highest bidder. Jollye claims to be the owner oI said certiIicate oI sock issued to
him by the co. on 13 February 1933.

There is no dispute that Diosomito was the original owner oI said shares, which he sold
to Barcelon. However, Barcelon did not present these certiIicates to the corporation Ior
registration until 19 months aIter the delivery thereoI by Barcelon, and 9 months aIter the
attachment and levy on said shares. The transIer to Jollye was made 5 months aIter the issuance
oI a certiIicate oI stock in Barcelon's name.

8 a bona fide tran8fer of the 8hare8 of corp., not regi8tered or noted on the book8 of the corp.,
valid a8 again8t a 8ub8equent lawful attachment of 8aid 8hare8, regardle88 of whether the
attaching creditor had actual notice of 8aid tran8fer or not.

NO, it is not valid. The transIer oI the 75 shares in the North Electric Co., Inc made by
the deIendant Diosomito as to the deIendant Barcelon was not valid as to the plaintiII. Toribia
Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares oI
stock which still stood in the name oI Diosomito on the books oI the corp. Sec. 35 says that No
transIer, however, is valid, except as between the parties, until the transIer is entered and noted
upon the books oI the corporation so as to show the names oI the parties to the transaction, the
date oI the transIer, the number oI the certiIicate, and the number oI shares transIerred.

All transIers oI shares not so entered are invalid as to attaching or execution creditors oI
the assignors, as well as to the corporation and to subsequent purchasers in good Iaith, and
indeed, as to all persons interested, except the parties to such transIers.

No registration of transfer of unpaid shares

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. ($ec. 63)

Remedy if registration refused

The proper remedy is a petition for a writ of mandamus to compel the corporation
to record the transfer or issue a new certificate in favor of the transferee, as the case may
be. The writ will be granted provided it is shown that he transferee has no other plain,
speedy and adequate remedy and that there are no unpaid claims against the stocks
whose transfer is sought to be recorded. t must be noted that unless the latter fact is
alleged, mandamus will be denied due to failure to state a cause of action. (Campos &
Campos)


RURAL BANK OF SALINAS, INC. V. CA (210 SCRA 510)

The right oI a transIeree/assignee to have stocks transIerred to his name is an inherent
right Ilowing Irom his ownership oI the stocks. Thus, whenever a corporation reIuses to transIer
and register stock, mandamus will lie to compel the oIIicers oI the corporation to transIer said
stock in the books oI the corporation. This is because the corporation's obligation to register is
ministerial. (Note, however, that in 8uch ca8e8, the per8on reque8ting the regi8tration mu8t be
the prima facie owner of the 8hare8. Cf. Lim Tay v. CA, 293 SCRA 63)


TORRES V. CA (28 SCRA 93)

It is the corporate secretary's duty and obligation to register valid transIers oI stocks and
iI said corporate oIIicer reIuses to comply, the transIeror SH may rightIully bring suit to compel
perIormance.

Note. n thi8 ca8e, udge Torre8 had no right to enter the a88ignment8 (conveyance8) of
hi8 8hare8 him8elf in the corporation8 8tock and tran8fer book 8ince he wa8 not
corporate 8ecretary.

RIVERA V. FLORENDO (1 SCRA 6, 1986)

Isamu Akasako, a Japanese national who was allegedly the real owner oI the shares oI
stock in the name oI one Aquilino Rivera, a registered SH oI Fujuyama Hotel and Restaurant,
Inc., sold 2550 shares oI the same to Milagros Tsuchiya along with the assurance that Tsuchiya
would be made President oI the corporation aIter the purchase. Rivera assured her that he would
sign the stock certiIicates because Akasako was the real owner. However, aIter the sale was
consummated and the consideration paid, Rivera reIused to make the indorsement unless he is
also paid.

Tsuchiya, et al. attempted several times to have the shares registered but were reIused
compliance by the corp. They Iiled a special action Ior mandamus and damages.

The Supreme Court held that mandamus was improper in this case since the shares oI
stock were not even indorsed by the registered owner who was speciIically resisting the
registration thereoI in the books oI the corporation. The rights oI the parties would have to be
threshed out in an ordinary action.





GeneraI ruIe: Shares of stock are freely transferable, without restriction.

Exception: n close corporations, restrictions may be placed on the transfer of
shares. Such restrictions must appear in the AO and in the by-laws, as
well as in the certificate of stock. Otherwise, the restriction shall not be
binding on any purchaser thereof in good faith.

The restrictions imposed shall be no more onerous than granting the
existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein. f this option is not exercised upon
the expiration of the period, the transferring stockholder may sell his
shares to any third person. ($ec. 9)


WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOC IN BREACH OF THE
RESTRICTIONS?

The corporation may, at its option, refuse to register the transfer of stock in the
name of the transferee. ($ec. 99.4) owever, this shall not be applicable if the transfer,
though otherwise contrary to subsections (1, (2 and (3 of Sec. 99, has been consented
to by all the stockholders of the close corporation, or if the close corporation has
amended its AO in accordance with Title X of the ode.

For his part, the transferee may rescind the transfer or recover from the transferor
under any applicable warranty, whether express or implied.







Certificates indorsed in blank; when quasi-negotiable

A possessor, even without authority, may transfer good title to a bona fide
purchaser if:

O the real owner endorses the certificate in blank
O the conveyance is for purposes other than transfer
O that relying on the stock certificate, the purchaser believes the possessor to
be the owner thereof or has authority to transfer the same.

This proceeds from the theory of quasi-negotiability which provides that in endorsing a
certificate in blank, the real owner clothes the possessor with apparent authority, thus,
estopping him later from asserting his rights over the shares of stock against a bona fide
purchaser.

Restrictions on Transfer; CIose Corporations
UNAUTHORIZED TRANSFERS
"uasi-negotiability does not apply in cases where the real owner:

a. did not entrust the certificate to anyone; and
b. is not otherwise guilty of estoppel

For example, in case the transfer is made by a finder or a thief.


Forged Transfers

A corporation does not incur any misrepresentation in the issuance of a
certificate made pursuant to a forged transfer. t can always recall from the person the
certificate issued, for cancellation.

n case where the certificate so issued comes into the hands of a bona fide
purchaser for value from the original purchaser, the corporation is estopped from denying
its liability. t must recognize both the original and the new certificate. But if recognition
results to an over-issuance of shares, only the original certificate may be recognized,
without prejudice to the right of the bona fide purchaser to sue the corporation for
damages.


SANTAARIA VS. HONGKONG (89 Phil. 80, 1951)

Santamaria secured her order Ior a number oI shares with Campos Co. with her stock
certiIicate representing her shares with Batangas Minerals. The said certiIicate was originally
issued in the name oI her broker and endorsed in blank by the latter. As Campos Iailed to make
good on the order, Santamaria demanded the return oI the certiIicate. However, she was
inIormed that Hongkong Bank had acquired possession oI it inasmuch as it was covered by the
pledge made by Campos with the bank. ThereaIter, she instituted an action against Hongkong
Bank Ior the recovery oI the certiIicate. Trial court decided in her Iavor. The bank appealed.

88ue8. 1) WON Santamaria wa8 chargeable with negligence which gave ri8e to the ca8e

2) WON the Bank wa8 obligated to inquire into the owner8hip of the certificate

(1) The Iacts oI the case justiIy the conclusion that she was negligent. She delivered the
certiIicate, which was endorsed in blank, to Campos without having taken any precaution. She
did not ask the Batangas Minerals to cancel it and instead, issue another in her name. In Iailing to
do so, she clothed Campos with apparent title to the shares represented by the certiIicate. By her
misplaced conIidence in Campos, she made possible the wrong done. She was thereIore estopped
Irom asserting title thereto Ior it is well-settled that 'where one oI the innocent parties must
suIIer by reason oI a wrongIul or unauthorized act, the loss must Iall on the one who Iirst trusted
the wrongdoer.

(2) The subject certiIicate is what is known as a street certiIicate. Upon its Iace, the
holder is entitled to demand its transIer into his name Irom the issuing corporation. The bank is
not obligated to look beyond the certiIicate to ascertain the ownership oI the stock. A certiIicate
oI stock, endorsed in blank, is deemed quasi-negotiable, and as such, the transIeree thereoI is
justiIied in believing that it belongs to the transIeror.


DE LOS SANTOS VS. CGRATH (96 Phil. 5, 1955)

De los Santos Iiled a claim with the Alien Property Custodian Ior a number oI shares oI
the Lepanto corporation. He contended that said shares were bought Irom one Campos and Hess,
both oI them dead. The Philippine Alien Property Administrator rejected the claim. He instituted
the present action to establish title to the aIorementioned shares oI stock.

The US Attorney General, the successor oI the Alien Property Administrator, opposed the
action on the ground that the said shares oI stock were bought by one Madrigal, in trust Ior the
true owner, Matsui, and then delivered to the latter indorsed in blank.

88ue. Had de lo8 Santo8 in fact purcha8ed the 8hare8 of 8tock?

De los Santos` sole evidence that he purchased the said shares was his own unveriIied
testimony. The alleged vendors oI the stocks who could have veriIied the allegation, were
already dead. Further, the receipt that might have proven the sale, was said to have been lost in a
Iire. On the other hand, it was shown that the shares oI stock were registered in the records oI
Lepanto in the name oI Madrigal, the trustee oI Matsui; that Matsui was subsequently given
possession oI the corresponding stock certiIicates, though endorsed in blank; and, that Matsui
had neither sold, conveyed nor alienated these to anybody.

It is the rule that iI the owner oI the certiIicate has endorsed it in blank, and is stolen, no
title is acquired by an innocent purchaser oI value. This is so because even though a stock
certiIicate is regarded as quasi-negotiable, in the sense that it may be transIerred by endorsement,
coupled with delivery, the holder thereoI takes it without prejudice to such rights or deIenses as
the registered owner or credit may have under the law, except in so Iar as such rights or deIenses
are subject to the limitations imposed by the principles governing estoppel.




Shares of stock are personal property. Thus, they can either be pledged or mortgaged. owever,
such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books.

here a certificate is delivered to the creditor as a security, the contract is considered a pledge,
and the ivil ode will apply.

f the certificate of stock is not delivered to the creditor, it must be registered in the registry of
deeds of the province where the principal office of the corporation is located, and in case where the
domicile of the stockholder is in a different province, then registration must also be made there.

n a situation where, the chattel mortgage having been registered, the stock certificate was not
delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide
CoIIateraI Transfers
purchaser for value is bound by the registration in the chattel mortgage registry. t is said that such a rule
tends to impair the commercial value of stock certificates.


CHUA GUAN VS. SAAHANG AGSASAKA (62 Phil. 3, 1935)

To guarantee payment oI a debt, Co mortgaged his shares oI Samahang Magsasaka stock
to Chiu. The said mortgage was duly registered in the City oI Manila. Chiu later assigned his
rights in the mortgage to Guan who soon Ioreclosed the same aIter Co Iailed to pay. Guan won in
the public bidding. He requested the corporation that new certiIicates be issued in his name. The
corporation reIused because apparently prior to Guan`s demand, several attachments against the
shares covered by the certiIicates had been recorded in its books.

Did the chattel mortgage in the regi8try of deed8 of Manila gave con8tructive notice to the
attaching creditor8?

The Chattel Mortgage Law provides two ways oI executing a valid chattel mortgage: 1)
the possession oI mortgaged property is delivered and retained by the mortgagee; and, 2) without
delivery, the mortgage is recorded in the register oI deeds. But iI chattel mortgage oI shares may
be made validly, the next question then becomes: where should such mortgage be properly
registered?

It is the general rule that the situs oI shares is the domicile oI the owner. It is also
generally held that Ior the purpose oI execution, attachment, and garnishment, it is the domicile
oI the corporation that is decisive. Going by these principles, it is deemed reasonable that chattel
mortgage oI shares be registered both at the owner`s domicile and in the province where the
corporation has its principal oIIice. It should be understood that the property mortgaged is not the
certiIicate but the participation and share oI the owner in the assets oI the corporation.

It is recognized that this method oI hypothecating shares oI stock in a chattel mortgage is
rather tedious and cumbersome. But the remedy lies in the legislature.

Note. The provi8ion of the Chattel Mortgage Law (Act No. 1508)
providing for delivery of mortgaged property to the mortgagee a8 a mode
of con8tituting a chattel mortgage i8 no longer valid in view of the Civil
Code provi8ion defining 8uch a8 a pledge.






Although shares of stock are as a rule freely transferable, membership in a non-stock corporation
is personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The
court may not strip him of his membership without cause. ($ec. 90)


NON-TRANSFERABILITY
IN NON-STOC CORPORATIONS

DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES




IN WHAT FORMS CAN DIVIDENDS BE ISSUED?

Cash

Property

O scrip - certificate issued to Ss instead of cash dividends which entitles them to
a certain amount in the future

Stock dividends

O Stock dividends are distribution to the Ss of the company's own stock.
O Stock dividends cannot be declared without first increasing the capital stock
unless unissued shares are available.
O New shares are issued to the Ss in proportion to their interest.
O No new income unless sold for cash.
O ivil fruits belong to the usufructuary and not to the naked owner.
O an only be issued to Ss.
O henever fractional shares result, corp may pay in cash or issue fractional share
warrants.

DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOC DIVIDENDS.

Cash Dividend Stock Dividend

Voting requirements
for issuance

Board of Directors

Board of Directors +
2/3 OS

Effect on deIinquent
stock

Shall be applied to the
unpaid balance on the
subscription plus costs and
expenses.

Shall be withheld from the
delinquent stockholder
until his unpaid
subscription is fully paid.

Can this be issued by
Executive
Committee?

No. ($ec. 35)

No, since this requires S
approval. ($ec. 35)


NIELSON v LEPANTO (26 SCRA 50, 1968)

Stock dividends are issued only to SHs This is so because only stockholders are entitled
to dividends. A stock dividend really adds nothing to the interest oI each stockholder; the
proportional interest oI each stockholder remains the same. II a stockholder is deprived oI his
stock dividends - and this happens iI the shares oI stock Iorming part oI the stock dividends are
issued to a non-stockholder - then the proportion oI the stockholder's interest changes radically.
Form of Dividends
Stock dividends are civil Iruits oI the original investment, and to the owners oI the shares belong
the civil Iruits.

FROM WHERE CAN DIVIDENDS BE SOURCED?

Dividends can be sourced only out of the unrestricted retained earnings of the
corporation.

Unrestricted retained earnings is defined as "the undistributed earnings of the
corporation which have not been allocated for any managerial, contractual or legal
purposes and which are free for distribution to the stockholders as dividends." ($EC
Rules overning Redeemable and Treasury $hares, 192)

Retained earnings has been defined as "net accumulated earnings of the corporation
out of transactions with individuals or firms outside the corporation." ($immons, $mith,
Kimmel, ntermediate Accounting, 1977, ed. P. 635) The term implies the limitation that
no corporation can declare dividends unless its legal or stated capital is maintained. t
does not include:

O premium on par stock i.e. difference between par value and selling price
of stock by corp since this is regarded as paid-in capital; but SE
allowed declaration of stock dividends out of such premiums

O transactions involving treasury stocks which are considered expansions
and contractions of paid-in capital;

O donations as additional paid- in capital;

O increase in value of existing assets, being merely unrealized capital
element

f subscribed shares have not been fully paid, the unpaid portion of subscribed capital
stock is an asset, and as long as the net capital asset (after payment of liabilities
including this unpaid portion is at least equal to the total par value of the subscribed
shares, any excess would be surplus or earnings from which dividends may be declared.
owever, if a deficit exists, subsequent profits must first be applied to cover the deficit.

Restrictions on dividend distribution include:

O BOD's appropriation of certain earnings for certain purposes;

O Agreements with creditors, bondholders and preferred Ss
requiring retention of certain percent of corporate earnings to
protect their interest and to secure redemption of their securities
upon maturity;

O SE-imposed restrictions pursuant to law, like those imposed
on banks and insurance companies;

O Restriction on the retained earnings equivalent to the cost of
treasury shares held by the corporation, which is lifted only after
such shares are reissued or retired ($ec. 195, PD 612)


BERKS BROADCASTING v CRAUER (52 A.2d 51, 19)

Dividends can only be declared only Irom the surplus, i.e. the excess in the value oI the
assets over the liabilities and the issued capital stock. To do otherwise would be illegal The
object oI the prohibition is to protect the creditors in view oI the limited liability oI the SHs and
also to protect the SHs by preserving the capital so that the purposes oI the corp. may be
perIormed.

Surplus must be bona Iide i.e. Iounded upon actual earnings or proIits and not to be
dependent Ior its existence upon a theoretical estimate oI an appreciation in the value oI the
company`s assets.

The prohibition does not apply, however, to stock dividends because creditors and SHs
will not be aIIected by their declaration since they do not decrease the company`s assets.


LICH V UNITED STATES RUBBER (39 F. Supp. 65, 191)

Dividends on non-cumulative preIerred stock are payable only out oI net proIits and Ior
the years in which said net proIits are actually earned.

The right to dividends is conditional upon: (1) accrual oI net proIits, and (2) retention in
the business.

II the annual net earnings oI a corp. are justiIiably applied to legitimate corp. purposes,
such as payment oI debts, reduction oI deIicits and restoration oI impaired capital, the right oI
non-cumulative preIerred stockholders to the payments oI dividends is lost. II they are applied
against prior losses and thereby completely absorbed, there are no net proIits Irom which
dividends may be lawIully paid.




SOME RULES ON DIVIDEND DECLARATION:

BOD has discretion whether or not to declare dividends and in what form.

Exception: Stock dividends, in which case a 2/3 vote of OS is necessary.

owever, such discretion cannot be abused and the BOD cannot accumulate surplus
profits unreasonably on the excuse that it is needed for expansion or reserves.

BOD should declare dividends when surplus profits of the corporation exceed 100%
of the corporation's paid-in capital stock.

Exceptions:

(a hen justified by definite corporate expansion projects or programs
approved by the Board;

(b hen creditors prohibit dividend declaration without their consent as a
condition for the loan, and such consent has not yet been secured;

(c hen retention is necessary under special circumstances obtaining in the
corporation, e.g. when there is a need for special reserve for probable
contingencies. ($ec. 43)

The corporation may be subjected to additional tax when it fails to declare dividends,
thereby unreasonably accumulating profits. ($ee $ec. 25, RC)

The dividends received are based on stock held whether or not paid. owever, if the
stocks are delinquent, the amount will first be applied to the payment of the
delinquency plus costs and expenses; stock dividends will not be given to a
delinquent S.


KEOGH v ST. PAUL ILK (285 N.W. 809, 1939)

The mere Iact that a large corporate surplus exists is not enough to warrant equitable
intervention; the test is good Iaith and reasonableness oI the policy oI retaining the proIits.
However, where dividends are withheld Ior an unlawIul purpose to deprive a SH oI his right to
a just proportion oI the corporation's proIit, the court may compel the corporation to declare
dividends.


DODGE v FORD OTOR CO (10 N.W. 668, 1919)

This case involves an action against the Ford Motor Company to compel declaration oI
dividends. At the time this complaint was made, Ford had concluded its most prosperous year oI
business, and the demand Ior its cars at the price oI the previous year continued. While it had
been the practice, under similar circumstances, to declare larger dividends, the corporation
reIused to declare any special dividends. The Board justiIied its reIusal to declare larger
dividends on the expansion plans oI the company by erecting a smelting plant, but maintaining
the selling price oI its cars (instead oI reducing it as had been the practice in previous years).
The plaintiIIs contend that such a proposal would be tantamount to the business being conducted
as a semi-eleemosynary (or charitable) institution instead oI a business institution.

The court pointed out that a business corporation is organized and carried on primarily
Ior the proIit oI SHs. The discretion oI the directors is to be exercised in the choice oI means to
attain that end and does not extend to a change in the end itselI reduction oI proIits or to devote
proIits to another purpose. While the Court noted the capable management oI the aIIairs oI the
corporation and thereIore was not convinced that the motives oI the directors were prejudicial to
the company's interests, it likewise noted that the annual dividends paid were very small in
relation to the proIits that the company had been making. It thereIore aIIirmed the amount Iixed
by the lower court to be distributed to the stockholders.

Note. Prof. acinto i8 of the opinion that what happened in thi8 ca8e i8
po88ible under the pre8ent Code, even without changing the AO.





Review discussion under kinds of stock.

WABASH RAILWAY CO. V. BARCLAY (6 A.L.R. 62, 1930)

In the AOI and the certiIicate oI stock oI Stock A, it was stated that the holders oI said
stocks are entitled to receive to receive preIerential dividends oI 5 per Iiscal year, non-
cumulative, beIore dividends are paid to other stocks. From 1915 to 1926, no dividends were
declared. The net earnings were instead used Ior the improvements and additions to property and
equipment. Due to this, the corporation became prosperous and proposed to pay dividends to A
& B common stock. PlaintiIIs Iiled this case in order to collect the dividends Ior Iiscal years
1915-1926 beIore the other classes oI stock are paid.

Were the Cla88 A 8tockholder8 entitled to dividend8 for FY 1915 to 1926?

No, they were not. By the plain meaning oI the words in the AOI and the certiIicates oI
stock, the holders are not entitled to dividends unless directors declare so. It is likewise
generally understood that in cases where the company's net earnings are applied Ior
improvements and no dividend is declared, the claim Ior such year is gone in case oI non-
cumulative stock, and cannot be later asserted.


BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 85, 1912)

An action was brought by the preIerred SHs oI Ottawa against the directors oI Ottawa to
(1) require the directors to account Ior all the property and assets oI the corporation, (2) declare
such dividends Irom the net proIits oI the business oI such co. as should have been declared since
1 Jan. 1906, and (3) restrain the oIIicers and directors during the pendency oI the action Irom
paying out any oI the money or disposing oI the assets oI the company except such amounts as
should be necessary to pay the actual necessary current expenses oI conducting the business oI
the corporation.

The BOD maintained that the corporation's Iunds were exhausted by expenditures Ior the
extension oI the co`s plant, hence it was unable to declare dividends. Expenditures were said to
be necessary and Ior the betterment oI the plant.

Were the corp fund8 were wrongfully diverted, and were preferred SH8 entitled to dividend8?

The case was remanded to the trial court, with instructions to make Iurther Iindings to
protect the preIerred SHs in their rights.

Preference as to Dividends
The Iair interpretation oI the contract between Ottawa and its SHS is that iI in any year
net proIits are earned, a dividend is to be declared. To hold otherwise, meaning iI the BOD had
absolute discretion when to declare dividends and when not to, when the corporation has Iunds
Ior such dividends, would result in temptation to unIair dealing, giving one party the option to
pay the other or not. In the case at bar, the accumulated proIits would be lost Iorever since the
dividends were non-cumulative.

PreIerred SHs, however, are not generally creditors until dividends are declared. In the
case at bar, iI dividends should have been declared to such SHs, they are considered creditors
Irom that time.





WHEN DOES THE RIGHT TO DIVIDENDS VEST?

As soon as the BoD has declared dividends. From this time, it becomes a debt
owed by the corporation, and therefore can no longer be revoked (McLaran v.
rescent Planning.

EXCEPTO: f the declaration has not yet been announced or
communicated to the stockholders.

OTE: When no dividends are declared for 3 consecutive years, preferred
$s are given the right to vote for directors until dividends are declared.

OTE: The extent of the $'s share in the dividends will depend on
the capital contribution; OT the number of shares he has.


CLARAN V. CRESCENT PLANNING ILL CO. (93 S.W. 819, 1906)

CPM Corp., having a surplus oI $29,000, declared a 6 cash dividend payable in Iour
installments. The Iirst installment was paid by the Board aIter which an error was discovered in
the computation oI the assets: Irom the initial recognized surplus oI $29,000 to $6,000. Mainly
Ior this reason, the Board adopted a resolution rescinding the dividends payable on the three
other installments despite the solvency oI the corp and the existence oI ample Iunds to pay said
dividends. The original P was Humber, a SH, and was substituted by McLaran, the administrator
oI his estate when he died. The deIendant corp maintained that there was no valid declaration oI
dividends because the corporation Iailed to set aside Iunds to pay Ior the same.

A cash dividend, properly declared, cannot be revoked by the subsequent action oI the
corp. Ior by its declaration, the corp had become the debtor oI the SH and it goes without saying
that the debtor cannot revoke, recall or rescind the debt or otherwise absolve itselI Irom its
payment by a unilateral action or without the consent oI the creditor. Thus, the rescission by the
BOD oI the subsequent installments was oI no Iorce.

When Right to Dividends Vests; Rights of Transferee
Dividends are deIined as portions oI proIits/surplus Iunds oI the corp. which have been
actually set apart by a valid board resolution or by the SH at a corp. mtg. Ior distribution among
SH according to their respective interests. The mere declaration oI the dividend, without more,
by competent authority under proper circumstances, creates a debt against the corporation in
Iavor oI the stockholders the same as any other general creditor oI the corporation. By the mere
declaration, the dividend becomes immediately Iixed and absolute in the stockholder and Irom
henceIorth the right oI each individual stockholder is changed by the act oI declaration Irom that
oI partner and part owner oI the corporate property to a status absolutely, adverse to every other
stockholder and to the corporation itselI, insoIar as his pro rata proportion oI the dividend is
concerned.







WHAT ARE ILLEGAL DIVIDENDS?

llegal dividends are dividends declared in violation of law.

WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS?

(1 f the directors acted wilfully, or with negligence or in bad faith, they will be
liable to the corporation. f the corporation has become insolvent, they are liable
to the corporation's creditors for the amount of dividends based out of capital.
(Based on $ec. 31)

(2 f the directors cannot be held liable because they acted with due diligence and
in good faith, in the absence of an express provision of law,
an innocent stockholder is not liable to return the dividends received by him out
of capital, unless the corporation was insolvent at the time of payment. (Majority
view; Campos)





WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS
OWN SHARES? (Sec. 41)

1. unrestricted retained earnings to cover the shares to be acquired;
2. legitimate corporate purpose

FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES?
(Sec. 41)

1. To eliminate fractional shares arising out of stock dividends;

LiabiIity for IIIegaI Dividends
Purchase by Corporation of its own shares
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale;
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the orporation ode Appraisal Right).


Appraisal Right ($ec. 1)

WHAT IS THE APPRAISAL RIGHT?

The appraisal right refers to the right of a stockholder who dissented and voted
against a proposed fundamental corporate action to get out of the corporation by
demanding payment of the fair value of his shares.

IN WHAT INSTANCES CAN THE APPRAISAL RIGHT BE EXERCISED?

The orporation ode lists 4 instances:

(1 n case any amendment to the AO has the effect of changing or restricting
the rights of any S 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 ($ec. 1);

(2 n case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in this ode ($ec. 1; $ec. 40);

(3 n case of merger or consolidation ($ec. 1);

(4 n case the corporation invests its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized
($ec. 42)


WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT?
(Sec. 82)

(1 S must have voted against he proposed corporate action;
(2 ritten demand on the corporation for payment of the fair value of his shares;
(3 Such demand must have been made within 30 days after the date on which the
vote was taken;
(4 Surrender of the stock certificate/s representing his shares;
(5 Unrestricted retained earnings in the books of the corporation to cover such
payment.


WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE
APPRAISAL RIGHT? (Sec. 83)

All rights accruing to the shares, including voting and dividend rights, are suspended
in accordance with the orporation ode, except for the right of the S to receive
payment of the fair value thereof.

Such suspension shall be from the time of demand until either:

(1 abandonment of the corporate action involved; or
(2 the purchase of the said shares by the corporation.

owever, if said dissenting S is not paid the value of his shares within 30 days
after the award, his voting and dividend rights shall immediately be restored.


WHAT ARE THE DUTIES OF THE DISSENTING STOCHOLDER IN RELATION TO
THE EXERCISE OF THE APPRAISAL RIGHT?

The dissenting S must submit the certificates of stock representing his shares to
the corporation for notation thereon that such shares are dissenting shares within 10
days after demanding payment for his shares. Failure to do so shall, at the option of the
corporation, terminate his rights under Title X of the orporation ode. ($ec. 6)


WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE
NOTATION THAT THEY REPRESENT DISSENTING SHARES?

f the certificates are consequently cancelled, the rights of the transferor as a
dissenting S cease and the transferee has all the rights of a regular stockholder. All
dividend contributions which would have accrued on the shares will be paid to the
transferee. ($ec. 6)


AMENDMENTS OF CHARTER


The charter oI a private corporation consists oI its articles oI incorporation as well as the
Corporation Code and such other law under which it is organized.





Subject to the limitation that no accrued rights or liabilities be impaired, the
legislature has the power to make changes in existing corporations through an
amendment to the orporation ode.





One of the powers expressly granted by law to all corporations is the power to
amend its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of
the outstanding stocks to change the basic agreement between the corporation and its
stockholders, making such change binding on all the stockholders, subject only to the
right of appraisal, if proper.


WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND?

PURPOSE: must be legitimate

VOTE: 2/3 of OS / membership

(1 The appraisal right must be recognized in case the amendment has the
effect of changing rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or extending or shortening the term of corporate existence.

(2 Extension of corporate term cannot exceed 50 yrs. in any one instance

(3 A copy of the amended articles should be filed with the SE, and with the
proper governmental agencies, as appropriate (e.g., in the case of banks,
public utilities, etc.

(4 Original and amended articles should contain all matters required by law to
be set out in said articles.

(5 An amendment to increase/decrease capital stock as well as to
extend/shorten corporate term cannot be made under Sec. 16, but must be
made under Sec. 37-38, respectively, both of which require a meeting; and

(6 Amendment must be in the form prescribed by the ode
Amendment by LegisIature
Amendment by StockhoIders


ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED
AMENDMENTS?

The same grounds as for the disapproval of the original articles ($ec. 17):

O Not substantially in accordance with the form prescribed by the ode;

O Purpose(s patently unconstitutional, illegal, immoral, or contrary to government
rules and regulations;


O Treasurer's Affidavit concerning amount of capital stock subscribed/paid is false;

O Required percentage of ownership of capital stock to be owned by citizens of the
Phils. has not been complied with as required by the onstitution or existing
laws;

O Absence of a favorable recommendation from the appropriate government
agency.


Amendment changing stockholder's rights

The law expressly allows amendments which would change or restrict existing
rights of stockholders or any class of shares. ($ec. 1)


ARCUS V. RH ACY ( N.E. 2d 228, 19)

The Board oI Directors gave notice to SH that among the matters to be acted upon in its
annual meeting would be a proposal to amend certiIicate oI incorporation to add to the rights oI
preIerred stockholders, voting rights equal to those oI common stockholders. Marcus, objected
and demanded payment Ior the common stock owned by her.

The Court held that Marcus may invoke her appraisal right. The aggregate number oI
shares having voting rights equal to those oI common shares was substantially increased and
thereby the voting power oI each common share outstanding prior to the meeting was altered or
limited by the resulting pro rata diminution oI its potential worth as a Iactor in the management
oI the corporate aIIairs. Considering that she held diminished voting power; that she notiIied the
corpo oI her objection; that her shares were voted against the amendmentthese were suIIicient
to qualiIy her to invoke her statutory appraisal right.

Effectivity of amendment

Amendments take effect only from the approval by the SE. owever, such
approval or rejection must be made within six months of filing of amendment; otherwise
it shall take effect even w/o such approval (as of the date of filing, unless cause of
delay is attributable to the corporation. ($ec. 16)


Special amendments

ncrease of capital stock

After the authorized capital stock has been fully subscribed and the
corporation needs to increase its capital, it will have to amend its articles to
increase its capital stock. A corporation does not have the implied power to
increase capital stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised in
accordance with the provisions of Sec. 38 of the ode.


Reduction of capital stock

Reduction of capital stock is not allowed if it will prejudice the rights of
corporate creditors.


PHILIPPINE TRUST CO. V. RIVERA ( Phil. 69, 1923)

It is established doctrine that subscriptions to the capital oI a corporation constitute a Iund
to which creditors have a right to look Ior satisIaction oI their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
Ior the payment oI its debts.

A corporation has no power to release an original subscriber to its capital stock Irom the
obligation oI paying Ior his shares, without valuable consideration Ior such release; and as
against creditors a reduction oI the capital stock can take place only in the manner and under the
conditions prescribed by the statute or charter or the articles oI incorporation.


Change in corporate term

The Code allows a corporation not only to extend but also to
shorten its term oI existence. As in the case oI increase/decrease oI capital
stock, change must be approved at a members`/stockholders` meeting by
2/3 oI the members/outstanding capital stock.


Amendments in close corporations

To recall, the provisions required to be contained in the AO of a close
corporation:

(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on
transfer permitted by law;
(3) orporation should not be listed in the stock exchange or make any public
offering of its stock.

f any of these are deleted, then the corporation will cease to be a close
corporation and will lose the special privileges of such corporations. Thereafter, it will
be governed by the general provisions of the ode. Since such amendment involves a
change in the nature of the corporation, even non-voting stocks are given a voice in the
decision. A stockholders' meeting is required and a 2/3 vote must approve the
amendment, unless otherwise provided by the articles of incorporation.



DISSOLUTION





HOW MAY A CORPORATION BE DISSOLVED?

(1) FaiIure to organize and commence business ($ec. 22);

(2) Cessation of business for 5 years (Continuous inoperation; $ec. 22);

(3) Expiration of originaI, extended, or shortened term;





(4) VoIuntary dissoIution ($ec. 11-119);

(a Where no creditors are affected ($ec. 11)

This is effected by majority vote of the BOD and a 2/3 vote of the OS or
members. (ote the special notice requirements.) The copy of the
resolution authorizing the dissolution shall be certified by a majority of
the BOD and countersigned by the secretary of the corporation. TE
SE shall thereupon issue the certificate of dissolution.

(b Where creditors are affected ($ec. 119)

(1 FiIing of petition for dissoIution with SEC

A petition for dissolution must be filed with the SE after having
been signed by a majority of the BOD, verified by the president or
secretary or one of the directors, and resolved upon by the
affirmative vote of 2/3 of the OS or members. The petition must set
forth all claims and demands against the corporation, and the fact
Modes of DissoIution
that the dissolution was approved by the Ss with the requisite 2/3
vote.

(2 Fixing of date by SEC for fiIing of objections to petition

f the petition is sufficient in form and substance, the SE shall
fix a date on or before which objections thereto may be filed by any
person.

Date: not less than 30 days nor more than 60 days after the
entry of the order

(3 PubIication of order

Before the date fixed by the SE, the SE order shall be
published and posted accordingly.

Newspaper: Once a week for 3 weeks in a newspaper of
general circulation published in the municipality
or city where the corporation's principal office is
situated, or there be no such newspaper, in a
newspaper of general circulation in the
Philippines

Posting: For 3 consecutive weeks in 3 public places in the
city or municipality where the corporation's
principal office is situated

(4) Hearing of the petition for dissoIution

Upon 5 days notice, given after the date on which the
right to file objections to the order has expired, the SE shall
proceed to hear the petition and try any issue made by the
objections filed.

f no objection is sufficient, and the material allegations
are true, the SE shall render judgment dissolving the
corporation and directing such disposition of its assets as justice
requires.

ote: The $EC may appoint a receiver to collect such
assets and pay the debts of the corporation.




(3 InvoIuntary dissoIution ($ec. 121):

(a) Revocation of ertificate of Registration by SE ($ec. 121)

A corporation may be dissolved by the SE upon filing of a
verified complaint and after proper notice and hearing on grounds
provided by existing laws, rules and regulations.

(b) "uo arranto proceedings ($ee $ec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the $EC had exclusive jurisdiction over quo warranto
proceedings involving corporation. &nder the $ecurities Regulation
Code or RA 799, however, the jurisdiction of the $EC over all cases
enumerated under $ec. 5 of PD 902-A have been transferred to the
Regional Trial Courts.

The grounds for involuntary dissolution of a corporation under quo
warranto proceedings are:

(1 hen the corporation has offended against a
provision of an act for its creation or renewal;

(2 hen it has forfeited its privileges and franchises by
non-user;

(3 hen it has committed or omitted an act which
amounts to a surrender of its corporate rights,
privileges or franchises;

(4 hen it misused a right, privilege or franchise
conferred upon it by law, or when it has exercised a
right, privilege or franchise in contravention of law

(PB v. CF, 209 $CRA 294; 1992)


(4 Shortening of corporate term ($ec. 120)

OTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.


Dissolution of close corporations

n close corporations, any stockholder may, by written petition to the SE,
compel the dissolution of such corporation when:

(1 Any of the acts of the directors, officers, or those in control
of the corporation is:

O llegal;
O Fraudulent;
O Dishonest;
O Oppressive or unfairly prejudicial to the corporation
or any other S;

(2 orporate assets are being misapplied or wasted. ($ec. 105)









WHAT ARE THE EFFECTS OF DISSOLUTION?

O orporation ceases to be a juridical person and consequently can no longer
continue transacting its business.

O orporate existence continues for 3 years following dissolution for the ff.
purposes only:

(a) winding up of affairs; and
(b) liquidation of corporate assets.

O orporation can no longer continue its business, except for winding up.

O orporation ANNOT even be a de facto corporation.

O orporate existence may be subject to OLLATERAL attack.

NOTE that the subsequent dissolution of a corporation may not remove or impair any
right or remedy in favor of or against, nor any liability incurred by, any corporation, its
stockholders, members, directors, trustees or officers. ($ec. 145)


Loss of juridical personality

NATIONAL ABACA V. PORE (2 SCRA 989, 1961)

PlaintiII National Abaca Corporation Iiled a complaint against Pore Ior the recovery oI a
sum oI money advanced to her Ior the purchase oI hemp. She moved to dismiss the complaint
by citing the Iact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950.
PlaintiII objected to such by saying that it shall nevertheless be continued as a corporate body Ior
a period oI 3 years Irom the eIIective date oI said order Ior the purpose oI prosecuting and
deIending suits by or against it and to enable the Board oI Liquidators to close its aIIairs.

Can an action commenced within 3 year8 after the abolition of plaintiff corporation be continued
by the 8ame after the expiration of 8aid period?

The Corp. Law allows a corporation to continue as a body Ior 3 years aIter the time when
it would have been dissolved Ior the purposes oI prosecuting and deIending suits by or against
it. But at any time during the 3 years, the corporation should convey all its property to trustees so
that the latter may be the ones to continue on with such prosecution, with no time limit on its
hands. Since the case against Pore was strong, the corp.'s amended complaint was admitted and
the case was remanded to the lower court.


CLEENTE V. CA ( SCRA 717)
Effects of DissoIution

The termination oI the liIe oI a juridical entity does not by itselI cause the
extinction or diminution oI the right and liabilities oI such entity nor those oI its
owners and creditors. II the 3-year extended liIe has expired without a trustee or
receiver having been expressly designated by the corporation itselI within that period,
the board oI directors or trustees itselI may be permitted to so continue as "trustees"
by legal implication to complete the corporate liquidation. In the absence oI a board
oI directors or trustees, those having any pecuniary interest in the assets, including not
only the shareholders but likewise the creditors oI the corporation, acting Ior and in its
behalI, might make proper representations with the SEC, which has primary and
suIIiciently broad jurisdiction in matters oI this nature, Ior working out a Iinal
settlement oI the corporate concerns.

Executory contracts

The prevailing view is that executory contracts are not extinguished by
dissolution. Sec. 145 of the ode states that "No right or remedy in favor of or against
any corporation..nor any liability incurred..shall be removed or impaired either by the
subsequent dissolution of said corp. or by any subsequent amendment or repeal of this
ode or of any part thereof."





WHAT IS LIQUIDATION? ($ec. 122)

Liquidation, or winding up, refers to the collection of all assets of the corporation,
payment of all its creditors, and the distribution of the remaining assets, if any, among the
stockholders thereof in accordance with their contracts, or if there be no special contract,
on the basis of their respective interests.


WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY
UNDERTAE THE LIQUIDATION OF A CORPORATION?

1. Liquidation by the corporation itseIf through its board of directors

Although there is no express provision authorizing this method, neither is
there any provision in the ode prohibiting it.

2. Conveyance of aII corporate assets to trustees who wiII take charge of
Iiquidation.

f this method is used, the 3-year limitation will not apply provided the
designation of the trustees is made within said period. There is no time limit
within which the trustee must finish liquidation, and he may sue and be sued
as such even beyond the 3-year period unless the trusteeship is limited in its
duration by the deed of trust. ($ee at'l Abaca Corp. v. Pore, supra)

Liquidation
3. Liquidation is conducted by the receiver who may be appointed by the
SEC upon its decreeing the dissoIution of the corp.

As with the previous method, the three-year rule shall not apply.
owever, the mere appointment of a receiver, without anything more, does
not result in the dissolution of the corporation nor bar it from the exercise of
its corporation rights.


FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAEN?

Generally, a corporation may be continued as a body corporate for the purpose of
liquidation for 3 years after the time when it would have so dissolved. ($ec.
122) owever, it was held in the case of Clemente v. CA supra) that if the 3-year period
has expired without a trustee or receiver having been expressly designated by the
corporation itself within that period, the BOD itself may be permitted to so continue as
"trustees" by legal implication to complete the corporate liquidation.


WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)

(1) ollection of corporate assets and property;

(2) onveyance of all corporate property to trustees for the benefit of Ss,
members, creditors, and other persons in interest;

(3) Payment of corporation's debts and liabilities;

(4) Distribution of assets and property


Distribution of assets after payment of debts

GENERAL RULE: No corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts
and liabilities. ($ec. 122)

EXCEPTION: n cases of decrease of capital stock, and as otherwise allowed
by the orporation ode


WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON
ENTITLED TO IT?

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. ($ec. 122)


CHINA BANKING V. ICHELIN & CIE. (58 Phil. 261, 1933)

The appointment oI a receiver by the court to wind up the aIIairs oI the corporation upon
petition oI voluntary dissolution does not empower the court to hear and pass on the claims oI
the creditors oI the corporation at Iirst hand. In such cases, the receiver does not act as a receiver
oI an insolvent corporation. Since "liquidation" as applied to the settlement oI the aIIairs oI a
corporation consists oI adjusting the debts and claims, that is, oI collecting all that is due the
corporation, the settlement and adjustment oI claims against it and the payment oI its just debts,
all claims must be presented Ior allowance to the receiver or trustees or other proper persons
during the winding-up proceedings within the 3 years provided by the Corporation Law as the
term Ior the corporate existence oI the corporation, and iI a claim is disputed so that the receiver
cannot saIely allow the same, it should be transIerred to the proper court Ior trial and allowance,
and the amount so allowed then presented to the receiver or trustee Ior payment. The rulings oI
the receiver on the validity oI claims submitted are subject to review by the court appointing
such receiver though no appeal is taken to the latter ruling, and during the winding-up
proceedings aIter dissolution, no creditor will be permitted by legal process or otherwise to
acquire priority, or to enIorce his claim against the property held Ior distribution as against the
rights oI other creditors.

Note. Under the Corporation Code, it i8 the SEC which may
appoint the receiver.


RP V. ARSAN DEVELOPENT COPANY ( SCRA 18, 192)

DeIendant corp. was a timber license holder with concessions in Camarines Norte.
Investigations led to the discovery that certain taxes were due on it. BIR assessed Marsman 3
times Ior unpaid taxes. Atty. Moya, in behalI oI the corp., received the Iirst 2 assessments. He
requested Ior reinvestigations. As a result, corp. Iailed to pay within the prescribed period.
Numerous BIR warnings were given. AIter 3 years oI Iutile notiIications, BIR sued the corp.

Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however
bars an action Ior recovery oI corporate debts against the liquidators. In Iact, the 1st assessment
was given beIore dissolution, while the 2nd and 3rd assessments were given just 6 months aIter
dissolution (within the 3-year rule). Such Iacts deIinitely established that the Government was a
creditor oI the corp. Ior whom the liquidator was supposed to hold assets oI the corp.


TAN TIONG BIO V. CIR (G.R. No. L-158, April 23, 1962)

The creditor oI a dissolved corp. may Iollow its assets, as in the nature oI a trust Iund,
once they pass into the hands oI the stockholders. The dissolution oI a corp. does not extinguish
the debts due or owing to it.

An indebtedness oI a corp. to the government Ior income and excess proIit taxes is not
extinguished by the dissolution oI the corp. The hands oI government cannot, oI course, collect
taxes Irom a deIunct corporation, it loses thereby none oI its rights to assess taxes which had
been due Irom the corporation, and to collect them Irom persons, who by reason oI transactions
with the corporation hold property against which the tax can be enIorced and that the legal death
oI the corporation no more prevents such action than would the physical death oI an individual
prevent the government Irom assessing taxes against him and collecting them Irom his
administrator, who holds the property which the decedent had Iormerly possessed. Thus,
petitioners can be held personally liable Ior the corporation's taxes, being successors-in-interest
oI the deIunct corporation.


Distribution of assets of non-stock corporations

WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOC
CORPORATIONS? (Sec. 94-95)

(1 All liabilities and obligations of the corporation shall be paid, satisfied, and
discharged, or adequate provision shall be made therefor.

(2 Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution,
shall be returned, transferred or conveyed in accordance with such
requirements.

(3 Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, education or
similar purposes, but not subject to condition (2 above, shall be transferred
or conveyed to one or more corporations, societies or organization
engaged in activities in the Philippines substantially similar to those of the
dissolving corp. according to a plan of distribution adopted pursuant to Sec.
95 of the ode.

(4 Assets other than those mentioned in preceding paragraphs shall be
distributed in accordance with the AO or by-laws.

(5 n any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may
be specified in a plan of distribution adopted pursuant to Sec. 95.


* The pIan of distribution of assets may be adopted by a majority vote of the
Board of trustees and approval of 2/3 of the members having voting rights
present or represented by proxy at the meeting during which said plan is
adopted.

t must be noted that the plan of distribution of assets must not be inconsistent
with the provisions of Title X of the ode.




CORPORATE COMBINATIONS





Techniques to achieve corporate combinations
WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?

(1) Merger (A + B = A

(2) onsolidation (A + B =

(3) Sale of substantially all corporate assets and purchase thereof by another
corporation;

(4) Acquisition of all / substantially all of the stock of one corporation from its
Ss in exchange for the stock of the acquiring corporation





WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION?

(1 Board of Directors of the constituent corporations must prepare and approve
a plan of merger or consolidation.

(2 2/3 vote of OS of the constituent corporations.

(3 Execution of the Articles of Merger/onsolidation, to be signed by the
Pres/VP and certified by the secretary / assistant secretary.

(4 Submission to the SE for approval.


WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? ($ec. 0)

(1 The constituent corporation shall become a single corporation:

f merger: the surviving corporation designated in the plan of
merger

f consolidation: 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 consolidated corporation.

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

(4 The surviving or consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations;

(5) 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 belong to, or due to each constituent corporation,
Merger or ConsoIidation
shall be deemed transferred and vested in such surviving or consolidated
corporation without further act or deed.

(6 The surviving or consolidated corporation shall be responsible and liable for
all the liabilities and obligations of each of the constituent corporations in the
same manner as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent corporations may
be prosecuted by or against the surviving or consolidated corporation.
(ote: The merger or consolidation does not impair the rights of creditors or
liens upon the property of any such constituent corporations.)


LOZANO V. DE LOS SANTOS (2 SCRA 52)

Consolidation becomes eIIective not upon mere agreement oI the members but
only upon issuance oI the certiIicate oI consolidation by the SEC. There can be no
intra-corporate nor partnership relation between 2 jeepney drivers' and operators'
associations whose plans to consolidate into a single common association is still a
proposal.


WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A
FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? (Sec. 132)

O A foreign corporation authorized to transact business in the Philippines may
merge or consolidate with any domestic corporation if such is permitted
under Philippine law and by the law of its incorporation.

O The requirements on merger or consolidation as provided in the orporation
ode must be complied with.

O henever a foreign corporation authorized to transact business in the
Philippines is a party to a merger or consolidation in its home country or
state, such foreign corporation shall file a copy of the articles or merger or
consolidation with the SE and the appropriate government agencies within
60 days after such merger or consolidation becomes effective. Such copy of
the articles must be duly authenticated by the proper officials of the country
or state under the laws of which merger or consolidation was effected.

f the absorbed corporation in such a merger / consolidation happens to
be the foreign corporation doing business in the Philippines, it shall file a
petition for withdrawal of its license in accordance with Sec. 136.





WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY
ALL THE CORPORATE PROPERTY AND ASSETS?

SaIe of substantiaIIy aII corporate assets
f by the sale the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated. ($ec. 40


WHAT ARE THE REQUIREMENTS? (Sec. 40)

(1 Majority vote of BOD + 2/3 vote of OS or members at a meeting duly called
for the purpose;

(2 ompliance with the laws on illegal combinations and monopolies

ote, however, that after such approval by the Ss, the BOD may nevertheless, in
its discretion, abandon such sale or other disposition without further action or approval by
the Ss. This, of course, is subject to the rights of third parties under any contract
relating thereto.


WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?

(1) f the disposition is necessary in the usual and regular course of business; or

(2) f the proceeds of the disposition be appropriated for the conduct of its
remaining business (Sec. 40


IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCHOLDERS?

Yes. owever, it must be stressed that this right is generally available only to
dissenting stockholders of the seIIing corporation, not the purchasing corporation. (t can
be argued, though, that in instances wherein the purchase constitutes an investment in a
purpose other than its primary purpose, stockholders' approval of such investment is
necessary, and anyone who objects thereto will have the appraisal right under $ec. 42.





n this method, all or substantially all the stockholders of the "acquired"
corporation are made stockholders of the acquiring corporation. ith the exchange,
the acquired corporation becomes a subsidiary of the acquiring corporation.
Although this method does not combine the 2 businesses under a single corporation
as in merger and sale of assets, from the point of view of the acquiring (parent
corporation, there is hardly any difference between owing the acquired corporation's
business directly and operating it through a controlled subsidiary. n fact, the parent
corporation would have the power to buy all the subsidiary's assets and dissolve it,
achieving the same result as in the other methods of combination. (Campos &
Campos)



FOREIGN CORPORATIONS


Exchange of stocks
WHAT IS A FOREIGN CORPORATION? $ec. 123)

A corporation formed and organized under laws other than those of the
Philippines, regardless of the citizenship of the incorporators and stockholders. Such
corporation must have been organized and must operate in a country which allows
Filipino citizens and corporations to do business there.

n times of war: For purposes of security of the state, the citizenship of
the controlling stockholders determines the corporation's
nationality.


IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?

(1 holly-owned subsidiary; or

(2 Branch office; or

(3 Joint venture with a local partner.










100% EQUITY: Mass media, except recording
The practice of a profession (law, medicine, etc.
Operation of rural banks
ooperatives
Private security agencies
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological, chemical,
and radiological weapons;

ote: Retail trade is no longer required to be 100% Filipino-owned on account
of the Retail Trade Liberalization Act.

75%-25% EQUITY: nter-island shipping (R.A. 1937, $ec. )
Private recruitment
ontracts for construction and repair of locally-funded public
works

Except: Public works that would fall under the Build-
Operate-Transfer Law, as well as those that
are foreign-funded

70%-30% EQUITY: Advertising

60%-40% EQUITY: Other industries.
Permitted areas of investment


WHAT IS THE SO-CALLED "GRANDFATHER RULE"?

here a domestic corporation which has both Philippine and foreign
stockholders is an investor in another domestic corporation which has also both
Philippine and foreign stockholders, the so-called "grandfather rule" is used to
determine whether or not the latter corporation is qualified to engage in a partially
nationalized business, i.e. by determining the extent of Philippine equity therein.

Under present SE rules, if the percentage of Filipino ownership in the
first corporation is at least 60%, then said corporation will be considered as a
Philippine national and all of its investment in the second corporation would be
treated as Filipino equity. On the other hand, if the Philippine equity in the first
corporation is less than 60%, then only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality. ($ee $EC Rule
promulgated on 2 Feb. 1967, cited in Opinion # 1, $eries of 199, Department
of Justice, dated 19 January 199.)

NOTE: The reader would be well-advised to cross-reference this
definition of the "grandfather rule" with a trusted commentary.




Documentary Requirements ($ec. 125)

(1) BOI certificate

The BO certificate is issued upon a finding of the Board of nvestments that the
business operations of the foreign corp. will contribute to the sound and balanced
development of the national economy on a self-sustaining basis. ($ee Omnibus
nvestments Code, $ec. 4-49)

OTE: Applications, if not acted upon within 10 days from official acceptance
thereof, shall be considered automatically approved! Art. 53, Omnibus
nvestments Code)

(2) SEC Iicense to do business ($ec. 125)

O Application under oath setting forth the information specified in Sec. 125;

O Additional information as may be necessary or appropriate to enable the
SE to determine whether the corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable;

O Duly executed certificate under oath by authorized official/s of the jurisdiction
of the company's incorporation, attesting to the fact that the laws of the
country of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in good
standing;

O Statement under oath of the president or any other person authorized by the
corporation showing that the applicant is solvent and in good financial
LegaI Requirements Prior to Transaction of Business
condition, and setting forth the assets and liabilities of the corporation within
1 year immediately prior to the application.

(3) Certificate from appropriate government agency

OTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. $ec. 17)


Deposit requirement ($ec. 126)

ithin 60 days after the issuance of the license, the licensee shall deposit with the SE
securities with an actual market value of at least P 100,000.00. These securities are for the
benefit of present and future creditors, and shall consist of any of the following:

O Bonds or other evidence of indebtedness of the Government or its
instrumentalities, etc.;
O Shares of stock in "registered enterprises" as defined in R.A. 5186;
O Shares of stock in domestic corporations registered in the stock exchange;
O Shares of stock in domestic insurance companies and banks.

Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned,
upon the licensee's application and proof to the satisfaction of the SE that the licensee has no liability to
Philippine residents or the Philippine government.

ote: Foreign banking and insurance corporations are the exceptions to this requirement.


Designation of a resident agent $ec. 12)

The designation of a resident agent is a condition precedent to the issuance of the license to
transact business in the Philippines.

WHO: A resident of the Philippines.

PURPOSE: To be served any summons and other legal processes which
may be served in all actions or other legal proceedings against
such corporation. Service upon such resident shall be admitted
and held as valid as if served upon the duly authorized officers of
the foreign corporation at its home office.







Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and
regulations applicable to domestic corporations of the same class.

Exceptions: (1 As regards the creation, formation, organization or dissolution
of the corporation;
(2 As regards the fixing of relations, liabilities, responsibilities, or
Laws appIicabIe to foreign corporations
duties of stockholders, members, or officers or
corporations to each other or to the corporation ($ec.
129)






WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?

(1) The corporation will not be permitted to maintain agency in the Philippines;

(2) The corporation will be subject to penalties and fines;

(3) The corporation will not be permitted to maintain or intervene in any action before
Philippine courts or administrative agencies; it can be SUED.


Isolated transactions

ARSHALL WELLS V. ELSER (6 Phil. 1, 192)

Marshall Wells, a corporation organized under the State oI Oregon, sued a domestic corp.
Ior the unpaid balance on a bill oI goods. DeIendant demurred to the complaint on the ground
that it did not show that plaintiII had complied with the law regarding corp. desiring to do
business in the Phil., nor that the plaintiII was authorized to do business in the Phil.

The Supreme Court, in ruling Ior Marshall Wells, stated that the object oI the statute was
to subject the Ioreign corp. doing business in the Phil. to the jurisdiction oI its courts. The object
oI the statute was not to prevent it Irom perIorming single acts but to prevent it Irom acquiring a
domicile Ior the purpose without taking the steps necessary to render it amenable to suit in the
local courts. The implication oI the law is that it was never the purpose oI the Legislature to
exclude a Ioreign corp. which happens to obtain an isolated order Ior business Irom the Phil.,
Irom securing redress in Phil. Courts, and thus, in eIIect to permit persons to avoid their contract
made with such Ioreign corporation.


ATLANTIC UTUAL V. CEBU STEVEDORING (G.R. No. 18961, Aug. 31,
1966)

A Ioreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction iI it
is duly licensed. II a Ioreign corp. is not engaged in business in the Phil., it can maintain such
suit iI the transaction sued upon is singular and isolated, in which no license is required. In either
case, the Iact oI compliance with the requirement oI license, or the Iact that the suing corp. is
exempt thereIrom, as the case may be, cannot be inIerred Irom the mere Iact that the party suing
is a Ioreign corp. The qualiIying circumstance, being an essential part oI the element oI the
plaintiII`s capacity to sue, must be aIIirmatively pleaded. In short, Iacts showing Ioreign
corporation`s capacity to sue should be pleaded.


Effects of FaiIure to Secure SEC License
Curing of defect

HOE INSURANCE V. EASTERN SHIPPING (123 SCRA 2, 1983)

A contract entered into by a Ioreign insurance corp. not licensed to do business in the
Phil. is not necessarily void and the lack oI capacity to sue at the time oI execution oI the
contract is cured by its subsequent registration.


Protection of intellectual property rights

GENERAL GARENTS CORP. V. DIR. OF PATENTS (1 SCRA 50, 191)

Domestic corporation General Garments registered 'Puritan trademark Ior its men`s
wear. US corporation Puritan Sportswear petitioned the Phil. Patent OIIice Ior cancellation oI
said trademark, alleging its ownership and prior use in the Phil.

The Supreme Court held that a Ioreign corp. which does not do business in the Phil. and
is unlicensed but is widely known in the Phil. through the use oI its products here has legal right
to maintain an action to protect its reputation, corporate name and goodwill. The right to use the
corporate name is a property right which the corp. may assert and protect in any oI the courts oI
the world.


LE CHEISE LACOSTE V. FERNANDEZ (129 SCRA 3, 198)

A Ioreign corporation not doing business in the Phil. needs no license to sue in the Phil.
Ior trademark violations.

Where a violation oI our unIair trade laws which provide a penal sanction is alleged, lack
oI capacity to sue oI injured Ioreign corp. becomes immaterial (because a criminal oIIence is
essentially an act against the State).


NOTE: Sec. 160 of R.A. 8293 (ntellectual Property ode provides that any
foreign national or juridical person who meets the requirements of Sec. 3
of the Act (i.e., is a national or is domiciled in a country party to any
convention, treaty or agreement relating to intellectual property rights or
the repression of unfair competition, to which the Philippines is also a
party, or extends reciprocal rights to Philippine nationals by law) and
does not engage in business in the Philippines may bring a civil or
administrative action for opposition, cancellation, infringement, unfair
competition, or false designation of origin and false description, whether
or not it is licensed to do business in the Philippines under existing laws.



What Constitutes Transacting Business


AT S ONSDERED AS NOT DONG BUSNESS, AND TEREFORE NOT
SUBJET TO TE LENSNG RE"UREMENT?

O Mere investment as a shareholder and the exercise of the rights as such
investor;

O aving a nominee director or officer represent the foreign investors'
interests;

O Appointing a representative or distributor in the Philippines who transacts
business in his own name and for his own account

Example: Rustan's exclusive distributorship of Lacoste t-shirts

O Publication of a general advertisement;

OTE: &nder the Code of Commerce, the publication of an ad is prima
facie evidence or at least creates a presumption) of doing
business in the Philippines.

O Maintaining stock of goods for processing by another entity in the
Philippines;

O onsignment of equipment to be used in processing products for export;

O ollecting information in the Philippines;

O Performing services incidental to an isolated contract of sale
Example: nstalling machinery sold by a foreign corporation to a
Philippine buyer


WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES?

hether or not there is continuity of transactions which are in pursuance of the
normal business of the corporation. (Metholatum v. Mangaliman


ENTHOLATU V. ANGALIAN (2 Phil. 525, 191)

The true test as to whether a Ioreign corporation is doing business in the Philippines
seems to be whether the Ioreign corp. is continuing the body or substance oI the business Ior
which it was organized or whether it has substantially retired Irom it and turned it over to
another. The term implies a continuity oI dealings and arrangements and contemplates
perIormance oI acts/works or the exercise oI the Iunctions normally incident to and in
progressive prosecution oI the purpose and object oI its organization.


FACILITIES ANAGEENT CORP. V. DE LA OSA (89 SCRA 131, 199)

The Court oI Industrial Relations ordered Facilities Management Corporation (FMC) to
pay Dela Osa his overtime compensation, swing shiIt and graveyard shiIt premiums. FMC Iiled
a petition Ior review on certiorari on the issue oI whether the CIR can validly aIIirm a judgment
against persons domiciled outside and not doing business in the Phil. and over whom it did not
acquire jurisdiction.

The Supreme Court held that the petitioner may be considered as doing business in the
Philippines within the scope oI Sec. 14, Rule 14 oI the Rules oI Court:

Sec. 14. Service upon private foreign corp. - II the deIendant is a Ioreign corp.,
or a non-resident joint stock corporation or association, doing business in the
Phil., service may be made on its resident agent, on the government oIIicial
designated by law to the eIIect, or to an y oI its oIIicers or agents within the
Philippines.

FMC had appointed Jaime Catuira as its agent with authority to execute Employment
Contracts and receive, on behalI oI the corp., legal services Irom, and be bound by processes oI
the Phil. Courts, Ior as long as he remains an employee oI FMS. II a Ioreign corp. not engaged
in business in the Phil., through an Agent, is not barred Irom seeking redress Irom courts in the
Phil., that same corp. cannot claim exemption done against a person or persons in the Phil..

NOTE: Under Sec. 12, RuIe 14 of the 1997 RuIes of CiviI Procedure, the term
"doing business" has been replaced with the phrase "has transacted
business," thereby allowing suits based on isolated transactions.


ERRILL LYNCH FUTURES INC. V. CA (211 SCRA 82)

Merrill Lynch Futures, Inc. (MLF) Iiled a complaint against the spouses Lara Ior the
recovery oI a debt. MLF is a non-resident Ioreign corp. not doing business in the Phil.,
organized under the laws oI Delaware, USA. It is a Iutures commission merchant duly licensed
to act as such in the Iutures markets and exchanges in the US, essentially Iunctioning as a broker
executing orders to buy and sell Iutures contract received Irom its customers on US Iutures
exchanges. (Future8 contract i8 a contractual commitment to buy and 8ell a 8tandardi:ed
quantity of a particular item at a 8pecified future 8ettlement date and at a price agreed upon with
the purcha8e or 8ale being executed on a regulated future8 exchange.)

The spouses reIused to pay and moved to dismiss the case alleging that plaintiII had no
legal capacity to sue because (1) MLF is doing business in the country without a license; and (2)
the transactions were made with Merrill Lynch Pierce, Fenner and Smith and not with plaintiII
MLF.

88ue. Can MLF 8ue in Philippine court8 to e8tabli8h and enforce it8 right8 again8t 8pou8e8 in
light of the undeniable fact that it had tran8acted bu8ine88 without a licen8e?

Legal capacity to sue may be understood in two senses: (1) That the plaintiII is
prohibited or otherwise incapacitated by law to institute suit in the Phil. Courts, or (2) although
not otherwise incapacitated in the sense just stated, that it is not a real party in interest.

The Court Iinds that the Laras were transacting with MLF Iully aware oI its lack oI
license to do business in the Phils., and in relation to those transactions had made payments and
the spouses are estopped to impugn MLF's capacity to sue them. The rule is that a party is
estopped to challenge the personality oI a corp aIter having acknowledged the same by entering
into a contract with it. The principle is applied to prevent a person contracting with a Ioreign
corporation Irom later taking advantage oI its noncompliance with the statutes, chieIly in cases
where such person has received the beneIits oI the contract.


PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 91, April 29, 1955)

This is an action instituted by the plaintiII, a Ioreign corporation, against the deIendant to
recover a sum oI money Ior damages suIIered by the plaintiII as a consequence oI the Iailure oI
the deIendant to deliver copra which he sold and bound himselI to deliver to the plaintiII.
DeIendant Iiled a motion to dismiss on the ground that the plaintiII Iailed to obtain a license to
transact business in the Phil and, consequently, it had no personality to Iile an action.

Ha8 appellant tran8acted bu8ine88 in the Philippine8 in contemplation of law?

Contrary to the Iindings oI the trial court, the copra in question was actually sold by the
deIendant to the plaintiII in the US, the agreed price to be covered by an irrevocable letter oI
credit to be opened at the Bank oI CaliIornia, and delivery to be made at the port oI destination.
It Iollows that the appellant corporation has not transacted business in the Phil in contemplation
oI Sec. 68 and 69 which require any Ioreign corporation to obtain a license beIore it could
transact business, or beIore it could have personality to Iile a suit in the Phil.. It was never the
purpose oI the Legislature to exclude a Ioreign corporation which happens to obtain an isolated
order oI business Irom the Phil., Irom securing redress in the Phil. Courts, and thus, in eIIect, to
permit persons to avoid their contracts made with such Ioreign corp.. The lower court erred in
holding that the appellant corporation has no personality to maintain the present action.


AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA
635, 19)

Aetna as subrogee oI I. Shalom sued PaciIic Star Line (PSL), the common carrier Ior the
loss oI Linen & Cotton piece goods due to pilIerage and damage amounting to US$2,300.00.
PSL contends that Aetna has no license to transact insurance business in the Philippines as
gathered Irom the Insurance Commission and SEC . It also argues that since said company has
Iiled 13 other civil suits, they should be considered as doing business here and not merely having
entered into an isolated transaction.

Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that
Aetna is not transacting business in the Philippines Ior which it needs to have a license. The
contract was entered into in New York and payment was made to the consignee in the New York
branch. Moreover, Aetna was not engaged in the business oI insurance in the Philippines but was
merely collecting a claim assigned to it by consignee. Because it was not doing business in the
Philippines, it was not subject to Sec. 68-69 oI the Corporation Law and thereIore was not barred
Irom Iiling the instant case although it had not secured a license to transact insurance business in
the Philippines.


TOPWELD ANUEL VS. ECED (138 SCRA 120, 1985)

Topweld entered into 2 separate contracts with Ioreign entities: a license and technical
assistance agreement with IRTI, and a distributor agreement with ECED, SA. When Topweld
Iound out that the Ioreign corporations were looking into replacing Topweld as licensee and
distributor, the latter went to court to ask Ior a writ oI preliminary injunction to restrain the
Ioreign corporations Irom negotiating with 3
rd
parties as violative oI RA 5445 (4).

Although IRTI and ECED were doing business in the Philippines, since they had not
secured a license Irom BOI, the Ioreign corporations were not bound by the requirement on
termination and Topweld could not invoke the same against the Iormer. Moreover, it was
incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to
engage in such agreements. The Supreme Court held that both parties were guilty oI violating
RA 5445. Being in pari delicto, Topweld was not entitled to the relieI prayed Ior.


ANTA CONSOLIDATED VS. CA (13 SCRA 289, 1986)

Stokely Van Camp Inc. Iiled a complaint against Banahaw, Antam, Tambunting and
Unicorn Ior the collection oI a sum oI money Ior Iailure to deliver 500 tons oI crude coconut oil.
Antam et al asked Ior dismissal oI case on ground that Stokely was a Ioreign corporation not
licensed to do business in the Philippines and thereIore had no personality to maintain the suit.

The SC held that the transactions entered into by Stokely with Antam et al (3
transactions, either as buyer or seller) were not a series oI commercial dealings which signiIy an
intent on the part oI the respondent to do business in Philippines but constitute an isolated
transaction. The records show that the 2
nd
and 3
rd
transactions were entered into because Antam
wanted to recover the loss it sustained Irom the Iailure oI the petitioners to deliver the crude oil
under the Iirst transaction and in order to give the latter a chance to make good on their
obligation. There was only one agreement between the parties, and that was the delivery oI the
500 tons oI crude coconut oil.




How Courts Acquire Jurisdiction over Foreign Corporations
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons
on its resident agent.

f there is no assigned resident agent, the government official designated by law can receive the
summons on their behalf and transmit the same to them by registered mail within 10 days. This will
complete the service of the summons. Summons can also be served on any of the corporation's officers
or agents within the Philippines. $ee $ec. 12; Rule 14, $ec. 12, Rules of Court. ote that while $ec.
12 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.)

Note that if there is a designated agent, summons served upon the government official is not deemed
a valid process.

Johnlo Trading case holds that the service on the attorney of an F who was also
charged with the duty of settling claims against it is valid since no other agent was
duly appointed.

Service on Officers or Agents of an foreign corporation's domestic subsidiary will
only vest jurisdiction if there is sufficient ground to disregard the separate
personalities.


GENERAL CORPORATION OF THE PHILIPPINES VS UNION
INSURANCE (8 Phil. 313, 1950)

General Corporation and Mayon investment sued Union Insurance and
Firemen`s Fund Insurance (FFI) Ior the payment oI 12 marine insurance policies. The
summons was served on Union which was then acting as FFI`s settling agent in the
country. At that time, it was not yet registered and authorized to transact business in
the Philippines.

88ue. Did the trial court acquire valid furi8diction over FF?

Yes. The service oI summons Ior FFI on its settling agent was legal and gave the court
jurisdiction upon FFI. Section 14, Rule 7 oI ROC embraces Union in the phrase, 'or agents
within the Philippines. The law does not make distinctions as to corporations with or without
authority to do business in the Philippines. The test is whether a Ioreign corporation was
actually doing business here. Otherwise, a Ioreign corporation doing business illegally because
oI its reIusal or neglect to obtain the corresponding authority to do business may successIully
though unIairly plead such neglect or illegal act so as to avoid service and thereby impugn the
jurisdiction oI the courts.


($ec. 136)

HOW: By filing a petition for withdrawal of license

REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL:

WithdrawaI of Foreign Corporation
(1 All claims which have accrued in the Philippines have been paid,
compromised and settled;

(2 All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have
been paid; and

(3 The petition for withdrawal of license has been published once a week for 3
consecutive weeks in a newspaper of general circulation in the Philippines.

$ec. 134)

AT ARE TE GROUNDS FOR REVOATON OR SUSPENSON OF A LENSE
OF A FOREGN ORPORATON?

(1 Failure to file its annual report or pay any fees as required by the
orporation ode;

(2 Failure to appoint and maintain a resident agent in the Philippines as
required;

(3 Failure, after change of resident agent or of his address, to submit to the
SE a statement of such change;

(4 Failure to submit to the SE an authenticated copy of any amendment to
its AO or by-laws or of any articles of merger or consolidation within the
time prescribed by the ode;

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

(6 Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine government or any of its agencies or political
subdivisions;

(7 Transacting business in the Philippines outside of the purpose/s for which
such corporation is authorized under its license;

(8 Transacting business in the Philippine as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do business
in the Philippines; or

(9 Any other ground as would render it unfit to transact business in the
Philippines.


SPECIAL AND MISCELLANEOUS PROVISIONS


(Sec. 106-108)


Revocation and Suspension of License
EducationaI corporations
O Educational corporations other than government-run institutions are governed first by
special laws, second, by the special provisions of the orporation ode, and lastly,
by the general provisions of the orporation ode. ($ec. 106)

O At least 60% of the authorized capital stock of educational corporations must be
owned by Filipino citizens, and ongress may require increased Filipino equity
participation therein. (With the exception of educational institutions established by
religious groups and mission boards, which are not subject to this equity
requirement.) owever, control and administration of educational institutions must
be vested exclusively in citizens of the Philippines. (Art. XV, $ec. 4 2), 197
Constitution) This means that no alien may be elected as a member of the BOD nor
appointed as Principal or officer thereof.

O Once a school, college or university has been granted government recognition by
the DES, it must incorporate within 90 days from the date of such recognition,
unless it is expressly exempt by DES for special reasons. (Act 2706, $ec. 5) n
addition, it must file a copy of its AO and by-laws with the DES. ithout the
favorable recommendation of the DES Secretary, the SE will not accept or
approve such articles. ($ec. 107, Corporation Code)


(Sec. 109-116)

Religious corporations are governed by Title X, hapter of the orporation ode and
by the general provisions of the ode on non-stock corporations insofar as they may be
applicable. ($ec. 109)

Corporation sole ($ec. 110-115)

A corporation sole is an incorporated office, composed of a single individual who may be
a bishop, priest, minister or presiding officer of a religious sect, denomination or church. ts
purpose is to administer and manage as trustee the property and affairs of such religious sect,
denomination or church, within the territorial jurisdiction of such office. ($ec. 110; $ec. 111 3))

n case of death, resignation, transfer or removal of the person in office, his successor
replaces him and continues the corporation sole. The property is not owned but is merely
administered by the corporation sole, and ownership pertains to the church or congregation he
represents. On the other hand, he is the person authorized by law as the administrator thereof
and the court may take judicial notice of such fact and of the fact that the parish priests have no
control over such property.

n determining whether the constitutional provision requiring 60% Filipino capital for
corporation ownership of private agricultural lands, the Supreme ourt has held that it is the
nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the
office, which must be taken into consideration. Thus, where at least 60% of the constituents are
Filipinos, land may be registered in the name of the corporation sole, although the holder of the
office is an alien. This ruling is based on the fact that the corporation sole is not the owner but
merely the administrator of the property, and that he holds it in trust for the faithful of the diocese
concerned. ($ee ana v. Roman Catholic Archbishop of Manila, 43 O.. o. , 3225; 1947)


Religious societies ($ec. 116)

ReIigious corporations
n contrast to a corporation sole, religious societies are composed of more than one
person. The requirements for incorporation of such societies are set forth in Sec. 116 of the
ode.


$ec. 96-105)

WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? ($ec. 96)

A close corporation, within the meaning of the orporation ode, is one whose
articles of incorporation provide that:

(1 All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons not exceeding 20;

(2 All the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by Title X of
the ode; and

(3 The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.

otes:

O A narrow distribution of ownership does not, by itself, make a close
corporation. ($an Juan $tructural and $teel Fabricators v. CA, 296
$CRA 631)

O A corporation shall not be deemed a close corporation when at least 2/3
of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation.

CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A
STOCHOLDER IN A CLOSE CORPORATION?

YES, provided that said corporation owns less than 2/3 of voting stock or
voting rights.


WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? ($ec. 96)

O Mining
O Oil
O Stock Exchange
O Bank
O nsurance
O Public Utilities
O Educational nstitutions
O orporations declared vested with public interest


DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS.

CIose Corporations
CIose Corporation "ReguIar" Corporation

No. of stockhoIders

Not more than 20 ($ec. 96)

No limit

Management

an be managed by the
stockholders ($ec. 97)

Managed by Board of
Directors

Meetings

May be dispensed with ($ec.
101)


Actual meetings are
required.

Quorum and Voting

Greater quorum and voting
requirements allowed. ($ec. 97)



Pre-emptive right

Extends to all stock, including
treasury shares ($ec. 102)

Does not extend to treasury
shares.

Buy-back of shares

Must be > par value ($ec. 105)

May be < par value

ResoIution of
deadIocks

SE has the power to arbitrate
disputes in case of deadlocks,
upon written petition by any
stockholder. ($ec. 104) This
includes the power to appoint a
provisional director, as well as to
dissolve the corporation.



DissoIution

May be petitioned by any
stockholder whenever any of the
acts of the directors or officers or
those in control of the
corporation is illegal, fraudulent,
dishonest, oppressive or unfairly
prejudicial to the corporation or
any stockholder, or whenever
corporate assets are being
misapplied or wasted. ($ec.
105)

Generally requires a 2/3 vote
of the stockholders and a
majority vote of the BOD.

(ote however that in case
of involuntary dissolution
under $ec. 121, a
corporation may be
dissolved by the $EC upon
filing of a verified complaint
and after proper notice and
hearing.)

WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104)

A provisional director is an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose
qualifications, if any, may be determined by the SE. e is not a receiver of the
corporation and does not have the title and powers of a custodian or receiver. owever,
he has all the rights and powers of a duly-elected director of the corporation, including the
right to notice of and to vote at meetings of directors, until such time as he shall be
removed by order of the SE or by all the stockholders. ($ec. 104)


COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. (Sec. 105)

WithdrawaI Right AppraisaI Right

Type of corporation
involved

lose corporation

"Regular" corporation

hen availed of

For any reason ($ec. 105)

Only the grounds
enumerated in Sec. 81
and Sec. 42

Fair value of shares

Must be > par or issued value
($ec. 105)

May be < par or issued
value


(Sec. 13-19)

O The SE has the power to issue rules and regulations reasonably necessary to
enable it to perform its duties under the ode, particularly in the prevention of fraud
and abuses on the part of the controlling stockholders, members, directors, trustees
or officers. ($ec. 143)

O henever the SE conducts any examination of the operations, books and records
of any corporation, the results thereof must be kept strictly confidential, unless the
law requires them to be made public or where they are necessary evidence before
any court. ($ec. 142)

O All domestic and foreign corporations doing business in the Philippines must submit
an annual report to the SE of its operations, with a financial statement of its assets
and liabilities and such other requirements as the SE may impose. ($ec. 141)

O No right or remedy in favor of or against, nor any liability incurred by, any
corporation, its stockholders, members, directors, trustees or officers, may be
removed or impaired by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the ode. ($ec. 145)

O Violations of the orporation ode not otherwise specifically penalized therein are
punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by
imprisonment for not less than 30 days but not more than 5 years, or both, in the
discretion of the court. f the violation is committed by a corporation, the same may
be dissolved in appropriate proceedings before the SE. ($ec. 144)

MisceIIaneous Provisions