CLAUSES in BL / AOI: Other matters that may be included in BL: (a) designatio n of time when voting rights may

be exercised by SH of record (24) (b) providing for additional officers (25) (c) provisions for compensation of directors (30) (d) creation of an executive committee (35) (e) date of annual meeting or provisions for a special meeting of SHs/members (50 & 53) (f) quorum on meetings of SHs/members (52) (g) providing for presiding officer at meetings of directors/trustees and of SHs/members (54) (h) procedure for issuance of stock certificates (63) (i) providing for interest on unpaid subscriptions (66) (j) entries to be made in stock and transfer book (74) (k) providing for meetings of members outside the principal office (93) Other matters that may be included in either the AOI or the BL: (a) cumulative voting in non-stock corporations (24) (b) higher quorum for valid board meeting (25)

(c) limiting, broadening or denial of right to vote and voting by proxy, for non-stock corporations (89) (d) transferabi lity of membership in nonstock corps (90) (e) terminatio n of membership in non-stock corps (91) (f) manner of election and term of office of trustees and officers in nonstock corps (92) (g) manner of distribution of assets in nonstock corps upon dissolution (94) (h) staggered board in educational institutions (108) Matters that must appear in BOTH AOI & BL: (a) restriction s on right to transfer shares in close corporations (98) Matters that CANNOT be in the BL: (a) classification of shares and preferences to preferred shares (6) (b) founders shares (7) (c) redeemable shares (8) (d) purposes of the corporation (e) corporate term of existence (f) capitalization of stock corporations (g) corporate name (h) denial of pre-emptive rights (39) (i) classification of shares of directors, providing for greater quorum for close corporations (96)(97)

(j) provisions (11)

on

corp

sole

NOTES: Chapter VII CONTROL / MANAGEMENT Who Exercises Corporate Powers (1) BOD or Trustees (S23, 25, 53, 97) *Qualifications for directors may be made for protection (Gokongwei) or as added security (El Hogar); *A corp may be owned and controlled by 1 person, provide for nominal shares for other SH; *Corp SH may achieve BOD representatn by making their delegates trustees of the shares or membership. By virtue of VTA, the individual reps becomes SH of record, & thereby qualified to the BOD, but at the same time maintaining legal responsibility of trustees to other corp SH. (2) Corp Off / Agents (S25) (3) Board Committees (S35) (4) SH / Members Devices affecting control (1) Proxy device (2) VTA (3) Pooling & trust agreements (4) Management contracts May be used as a device for tax avoidance, resulting in splitting of income. Conditions in S44 must be complied with so that there shall be no legal

basis to pierce the veil of corporate entity. (5) Voting & Quorum Reqmts may increase veto power of minority SH. (6) Classification of shares (7) Restriction on transfer Chapter VIII DUTIES OF DIRECTORS AND CONTROLLING SH - Where the directors have been grossly negligent or have fraudulently mismanaged the corporation, besides being held liable for damages, they may be removed by the SH under S28. - The line of demarcation between the fiduciary relnship and a directors personal right is not easy to define. Prohibition against self-dealing not absolute. - Abuses may arise where the executives paid compensation are at the same time directors of the corp, or have a dominating influence over them. In such cases, S32 on self-dealing directors would be applicable, & the court would have to scrutinize the reasonableness or fairness of the compensation to executives. - Interlocking directors not always detrimental to the corp. If the business opportunity is one wch does not properly belong to the corporation, then the latter has suffered no prejudice if the director takes advantage of the transaction is therefore not accountable for his profits.

It is possible under S34 (ratificatn by 2/3 of SH) for a maj SH to actually compete with the corporation to the detriment of the 1/3 minority and despite their objection. S34 covers only directors, not officers. Officers may become liable under S31. - If a director is liable for seizing corporate opportunity, there are even stronger reasons for making the officer similarly liable: an officer is usually a full-time corporate agent and is paid a salary for his services. Under S33 (interlocking directors), the burden of proving the fairness of the transaction on the corporation which seeks to uphold the contract & who have knowledge of salient facts related to the transaction. An interlocking director may in effect be a self-dealing director where his interest in one corp is merely nominal, and his interest in the other copr is greater than 20% of its outstanding capital stock. - In Close corp: (1) SH who choose to manage corp in lieu of BOD have the powers & liabilities of directors (S97). (2) SH personally liable for corporate torts, unlike the director of other corp who is liable for such torts only if he has been negligent. - Duty of controlling interest: a majority SH is subject to the duty of GF when he acts by voting at a SH mtg

wrt a matter in wch he has a personal interest. GR: directors not personally liable to corp creditors for general inefficient management of a solvent corp. Except: (1) Corp insolvent (Mead v. McCullough); (2) S31, S65 liable even to creditors Securities Regulation Code (1) S23.2. Transactions of Directors, Officers & Principal SH (Under Protection of SH Interest): a. Coverage specifically only salepurchase of equity secu of corp in w/c he is connected if BOTH transactns take place w/in 6mos. b. Liability to corp only, thus SH may initiate suit only as derivative suit c. No presumption of disloyalty; acts complained of must be proven by complainant (2) S27. Insiders Duty to Disclose when Trading (Under Prohibitions on Fraud, Manipulation & Insider Tradiing): a. Coverage all acts of unfair use of inside info considered unlawful *Inside info not generally available to others & is acquired bec. of close relationship of dir/off to the corp *Unfair use info w/held is of such matlity that a reasonable person would consider it a factor in

det. WON he should sell his stocks or buy more stocks. b. Liability effect not mentioned, except to say it is unlawful c. No presumption of unfair use of inside info; burden to rebut on dir/officer d. Broader, gives way to S23.2 (3) S71. Validity of Contracts All contracts made in violation of SRC void, but only as regards the rights of guilty director/officer; innocent parties can enforce contract as to him, but if prejudiced, may recover what has been pd or delivered. Sir: Trust imposed by SH collectively; fiduciary obligation owed to corporation, not SH (majority view), except special facts doctrine (Taylor v. Wright) S31: repository of duties & liabilities BOD may be liable collectively as a board or a director may be individually liable Chapter IX RIGHT OF INSPECTION - Reasonable restrictions on: (1) Time

(2)

Place (3) purpose - Presumption: SHs purpose of inspection is presumed to be a proper one.

Improper motives a matter of defense by the corp. - Germane to interests of SH as such: e.g. Stock & transfer book would yield the names of all SH and may be helpful where a SH wants to communicate w/ SH about the co.s failure to pay dividends, to enlist their oppositn to a proposed merger, or to solicit proxies for a forthcoming election, even if the ultimate objective is to gain control of the corp. - Test: Whether SH was driven by honest belief and whether he seeks to protect his substantial investment in the corp. Corps burden to prove BF or improper motives under S74. No distinction b/w right of inspection, extension and limitations, of a director & SH. However, a directors right of inspection may be grounded on a different basis as that of a SH because of his duties to the corp. Thus, it will require stronger evidence to rebut the presumption of propriety of purpose in case of a director than in case of a SH. - Remedy when refused: (1) Mandamus (2) Injunction (3) Damages (erring directors & officers) S74 - Violation of right of inspection generally in the nature of an individual suit, but may also be the basis for derivative suits. Chapter X - DERIVATIVE SUITS

Compare w/ individual and class suits Consider the effect of strike suits GR: An individual SH has no more right to challenge by a derivative suit a decision of the board not to sue a 3P than to so challenge any other decision of the board under the business judgment rule. However, where the complaint alleges and it is proved that the directors acted in BF, dishonestly, or in breach of trust, or were under the control of the wrongdoers, then a derivative suit against a 3P may be given due course. - See cases on requisites of derivative suits. Derivate suit is founded on equity and does not apply to overcome business judgment rule; and therefore is available only in instances when the BOD is incapable of exercising business on behalf of the corp, such as when the majority of the BOd are the culprit, when the BOD acts in violation of duty of diligencel or duty of loyalty. Chapter XI- FINANCING THE CORPORATION - Sources of Funds/ Capital: (1) SHE (Investor) ROI: No guarantee Sale of shares Dividends (Inclusive of liquidating dividends) Nature of Equity Interest: Mgt / Control Participation

Economic Rights (2) FinancialAccommodations (Creditor) ROI: Term = P + Interest Lien / preference of prop/assets may be converted to Equity Interest, but loses lien (e.g . NDC v. Phil. Veterans Bank; EK Buck Retail Store v. Harket; Union Glass v. SEC) Can never create preferences where SHs would have attributes of creditors over SHs. Equity = Shares of Stock = ACS (1) Founders shares (2) Common shares (3) Preferred shares (4) Treasury shares (5) Part / non-participating* Cumulative* / noncumulative (7) Conversion (8) Redemption *Default (unless otherwise provided) - Promotion (vs. financing of going concern) involves only equity interests because of the high risk involved when the business venture still has to prove its worth. Or, the organizers may resort to debt financing when they want control but have no resources of their own. Profits may only be made as a going concern, and not upon liquidation; Dividends declared only out of profits and not out of assets (Hay dissent)

(6)

Variations of equity securities: (1) right to an early claim on the income before other security holders (2) right to residual income, however large, after other have been paid (3) right to vote on personnel and policy and hence the power to control - Factors affecting variations: (1) nature of the business (e.g. public utility companies) (2) probable profitability (3) control of management (4) attraction to different types of investors (5) tax advantages Shares may be classified to exercise control (founders shares), to manage corporate capital structure (redeemable & treasury shares). - Since only 25% of the ACS need be subscribed initially, the promoters are not bound to limit the starting capital needed by the business to the contributions. - Debt-to-Equity Ratio: High ratio must be justified by stable earnings, or a closely held structure where risk of default is less. Not all corporate debt is bad or to be avoided. Rights of PS and Bondholders are contractual in nature. CS may be in a better position than PS if the residual profits after paying PS is larger than the fixed percentage for PS.

No-par value shares advantage over par value shares in attracting investors where the market value of shares is less than par - Stock split may be done by corp by amending AOI to double no. of par value shares and splitting par in half, and then sell issues at market value. - Treasury shares may be sold even at less than par, and the purchaser will not be liable to creditors - Redemption permits adjustment of capital structure to meet varying conditions, such as enabling the corp to pay off the securities; e.g. avoid the restrictions usually attached thereto at a time when economic and financial conditions are favorable to such a move. - Unpaid subscription SH personally liable for financial obligatns of the corp to the extent of unpd portion It is desirable for the corp to have an authorized capital stock and subscriptions much higher than the actual starting capital it needs for the business. - Code reqt that at least 25% must be subscribed and 25% paid in before corp may be legally formed is consistent with the view which deems SH to have made a continuing offer to the corp and contracted with each other as well s.t. they may not revoke the contract w/o unanimous consent.

PR based on right to invest capital, not merely on right to maintain proportionate voting interest. PR not available where shares issued in exchange for property needed or for debt previously contracted, because corp might badly need the property or has no other way of settling its previous debt. - PR does not provide for equal rights of preemption across all classes because it may have the effect of diluting the interest of one class (e.g. non-voting PS v. voting CS), and the rationale behind PR will be subverted. A SH cannot demand to buy the shares pursuant to an exercise of PR at par where the board has fixed a higher price in its exercise of business judgment. Failure of SH to purchase at such fixed price constitutes waiver of his PR. There are times when a limitation of the PR would not only be convenient but necessary to be able to effect corporate acts later such as stock option plans as an incentive. - PR very important in close corp because (1) control is main factor for SH; and (2) Prosperity of corp largely due to personal efforts of SH. - Waiver of PR must appear in AOI to bind present and all SH, not merely in an ordinary waiver agreement.

PR objectionable even if not w/in exceptions in S39 where it is done in bad faith or to freeze out minority interest. - Remedies when violated: Violation of PR generally in the nature of an individual suit, but may also be the basis for derivative suits, as when the violation resulted in waste and management of corporate assets or in giving fraudulent directors control of the corp - When a corp. becomes insolvent & unable to meet its obligations, a compromise agreement is usually worked out whereby all classes of security holders, whether of equity or debt, make some sacrifice, scaling down their interests in order to keep the corporation in operation because it is worth more as a going concern. However, denial of PR may also benefit SH: might enhance value of subscription; merger; bigger business, more clients - Conversion usually from a senior security (bonds/PS) to common stocks xxxxxxx WHY? - Stock purchase warrants options to purchase stocks in the corp at a specified price not lower than par, exercisable by the grantee at any time within a specified period. Chapter XII - CONSIDERATION FOR SHARES Consideration recipient is corporation

(1) Cash a.

b.

Partial pro-rate over total no. of shares subscribed; indivisible; unconditional Full

(2) Property Rights valuation by corp and by SEC; must be need by corp to pursue its business; ownership/title transferred to corp; fully payment to investor before such conveyance (3) Services valuation + complete performance; must be needed by corp to pursue its business - Original subscription SH & Corp; inures to benefit of corp as well as subsequent transferees of SH - Subsequent Conveyance SH & SH - Watered stocks affects: (1) Corporation deprived of needed capital & of opportunity to sell securities at more advantagous prices (2) other SH existing and future, because it dilutes proportional interest in the corp (3) creditors present and future, because it reduces the value of corp assets wch stand as a substitute for the SH personal liability to them - Basis of liability to creditors: (1) The capital stock stands as a substitute for the

personal liability of SH to the creditors (trust fund) (2) False representation to creditors that par value has been paid or agreed to be paid in full (fraud theory) this considers only future creditors and not prior creditors (3) Statute itself S65 does not distinguish b/w present and future creditors; fraud immaterial Right of corp to sell delinquent stocks applies only to sale of stocks for unpaid subscriptions & cannot be used to satisfy other indebtedness of the SH to the corp. Interest on unpaid subscription not due unless BL provides. In delinquency sale, the highest bidder is the one who is willing to pay the amount of the balance of subscription for the least number of shares. - Sir: In delinquency sale, what is sold is what is due or unpaid, corp may not make profit (no incentive for corp; no bidder, shares go to corp); purchasers appears to have bought at a discount; and delinquent stands to lose everything - Contract of subscription indivisible; pro-rata application of partial payment to all subscribed shares (pursuant to Fua Cun, Nava and S64; Lingayen doctrine on application of partial payment to fully paid shares an exceptional case!)

Bayla distinctions b/w purchase agreement and subscription agreement removed in order to remove subscription agreements from the operations of ordinary contract principles such as rescission; condonatio; effect of happening or nonhappening of conditions; to ensure protection of creditors under the trust fund doctrine. Partially paid subscriber cannot piecemeal assign his rights to the shares, but he may sell his entire subscription to another who assumes his entire unpaid balance. - COS not a condition precedent to the acquisition of rights & status as a SH, but is best evidence thereof & is convenient for purposes of transfer, either by way of collateral or absolute sale. - Conditions set forth in S73 for the issuance of corp of new certificate in lieu of lost, stolen or destroyed certificates in S73 for the protection of the corp against liability for any claimant of the shares (to be able to claim good faith/absence of negligence). see also Transfer of Shares on forged transfers. Sir: S73 is obscure because it applies rules on negotiable instruments; benefits stem from issuance of COS & holder can assert ownership rights; holding period.

Chapter XIII - DIVIDENDS & PURCHASE BY CORPORATIONS OF ITS OWN SHARES - Dividends not a matter of right demandable at all times, but is discretionary on the BOD. Reason: it is the corp who owns the unrestricted earnings; business judgment. In cash dividend, BOD approval sufficient; in stock dividend, 2/3 approval OCS. Reason: no actual distribution of profit, but capitalization of profit; higher risk stock prices usually drop when SD declared. A stock corp is prohibited from retaining surplus profit in excess of 100% of paid-in capital, not subscribed capital. Stock dividends are in the nature of civil fruits belonging to the usufructuary and not to the naked owner of the stocks on wch they are declared. - C-D relation is created b/w SH and corporation upon lawful declaration of dividends by the BOD. Thus: (1) From that moment, dividends may not be rescinded or revoked (McLaran). Note however, that this rule is n/a to stock dividends because these are not distributions but merely represent changes in the share structures. (2) Whoever owns the stocks at the time of declaration owns the dividends. Registered owner rule applies. Directors not personally liable for unintentionally

declaring dividends in violatn of law, unless BF or negligence. - Creditors may not follow the illegal dividends into the hands of innocent SH unless corp was insolvent at the time of its payment. If solvent, then no SH protected. - Purchase of own shares a power of the corp which may be exercised if made out of URE & for a legitimate corporate purpose (S41). - Purposes of purchase of own stock: (1) may be a substitute for dividend declaration (2) in close corp prevent stocks from going to strangers (3) redeem PS of bonds to facilitate future financing - Illegitimate purposes: (1) Manipulative device: simulate a market for its shares to create appearance of active trading in its shares - In relatn to SRC (2) Create preference to some SH to the prejudice of other SH Remedies in case of improper purchase is in S31 and to those affected by improper purchase: (1) SH it may reduce what is due them as dividends / dilution; shift in voting control; remaining assets may not be sufficient to cover debts as well as the par or issued value of their shares

(2) creditors have the right to assume that as long as there are outstanding debts & liabilities, BOD will not use corp assets to purchase own stock (Steinberg) - Shares reacquired become treasury shares wch may be declared as property dividends to be issued out of URE previously used to support their acquisition, provided that the amt of such RE has not been subsequently impaired by losses. SH may not get his invested capital until dissolution & liquidation except: (1) by decrease of capital stock where a reduction surplus occurs, provided no creditors are prejudiced; and (2) other cases allowed by law such as A/R under S81 & 42; in close corp S104 &S105; repurchase of stocks for legit purpose under S41; and distribution of dividends under S43 - Purchase of own shares in close corp: (1) regardless of availability of URE (S104) (2) SH has right to compel corp to purchase his own shares for any reason (S105) Chapter XIV - AMENDMENTS OF CHARTER - Corp charter consists of its AOI as well as Corp Code &

other laws under wch it is organized. The state has the power to amend the statute under wch corp organized, subject to the limitatn that no accrued rights or liable shall be impaired in S145. - The corp has the power to amend its charter under S36 and the procedure is provided for in S16. No meeting is necessary under S16, because written assent is allowed. Treasurers Trust and Incorporators may not be amended. - Amendments changing or restricting SH rights subject to abuse. For instance, PS may be frozen out by the majority or the CS holders. Thus, safeguards are created: (1) must be for legitimate purposes (S16) although burden of proving BF on dissenting SH (2) appraisal right (S81) - Amendment by 2/3 of the majority not an impairment of vested rights because on who becomes a SH is presumed to have accepted his contract with the corp subject to the power of selfamendmt by S36. Only remedy is appraisal right. However, A/R is granted where there is a radical change in contractual relationship presumably agreed upon bet SH & corp (S81, 42, 37, 105) A/R in the ff cases- are SH rights affected? (1) Primary purpose - Y

(2) Increase no. of directors Y, control & management (3) Decrease no. of directors Y, affects cumulative voting (4) Changing classificatn of shares Y, economic rights (5) Increase / decrease CS - Y - Special amendments requires meeting unlike general amendments in S16 wch allows for written assent only (1) increase CS (S38)

create a new class of shares under S16) - Reduction of CS must not prejudice rights of corporate creditors, such as releasing SH from the payment of the balance of their subscription (Phil. Trust Co. v. Rivera) Exception: consent of creditors or no creditors.

(2) (3) (4) -

decrease CS (S38) extend corp term (S37) shorten corp term (S37)

Increase CS the 25% requirement does not merely refer to the capital stock as increased, but to the increment itself. - Except in case of capitalization of income in case of stock dividends (as a means of increasing capital without actual transfer of property to the corp), there can be no increase of CS in pursuance of a mere revaluation of corp assets because there is no transfer of cash or property to the corp as consideration, which is required. Increase of capital stock may be effect by increasing par value, no. of shares, or both. - No appraisal right for increase of CS unless creates preferences of restrictions (which involves 2 kinds of amendments: one to increase CS under S38 and the other to

Purposes of reduction of CS: (1) Wipe out capital deficit (or create a reduction surplus?), so that future earnings can be made available for dividends (2) Reduce capital thats unneeded from ACS to amt subscribed (3) Retire or eliminate treasury shares instead of reissuing them - Reduction surplus arising from the decrease in legal capital may be distributed as dividends to SH under the last paragraph of S122. However, this presupposes that the decrease has been approved by the SEC as one wch does not prejudice the rights of corporate creditors. - Reduction of unneeded capital from ACS to amt subscribed does not prejudice creditors since it does not release any unpaid subscription. Effect is merely to remove corps power to issue the unissued shares wch have disappeared due to the reduction.

No appraisal right for decrease of CS unless creates preferences or restrictions, or alters rights of SH. For example, material reduction of capital wch safeguards the preferential rights of PS. Appraisal right exists for both extension & shortening (S81) although S37 grants it only in case of extension. - Amendments in close corp amendments to those enumerated in S103 which constitutes the essence of close corps = fundamental change. Thus, even non-voting stocks have voice. Chapter VIII - TRANSFER OF SHARES There is only 1 SH of record, WON there have been conveyances. - Effect of lack of registration transfer valid b/w parties, not against corp. - Purpose of registration to enable the transferee to exercise rights of SH and to inform corp of any change in share ownership s.t. it can ascertain the persons entitled to the rights & subj to the liable of SH - Delivery + Indorsement if duly indorsed, possessor has right to transfer / record, but right of possessor is prima facie only - Manner of indorsement determines subsequent transfer. (1) if blank quasi-negotiable (2) if transferee identified 2 indorsement??

Quasi-negotiability: a possessor though acting wrongfully can give a bona fide purchases a better title than he has but only where the owner is guilty of estoppel, not where it is held merely by a finder or a thief! - Forged transfers: The corp may be placed in a situation where it has to recognize two owners where a COS pursuant to a forged transfer was issued by a corp and subsequently transferred to bona fide purchaser for value: (1) original because true owner cannot be deprived of his title by a forged transfer (COS quasinegotiable only), & corp may demand the COS from the purchaser who has the duty to determine that the indorsement of the original owner is genuine. (2) new because by issuing a new COS, corp represnts that the person named therein is the owner If no overissue: corp will recognize both; if overissue: corp must recognize true & original owner, w/o prejudice to its liability for damages ifo of the new owner and recourse against the person who made false representations. - Collateral transfers: not covered by registration reqt in S63, which contemplates only absolute transfer. Thus, registration of collateral transfers in corp books have

no legal effect, and registrant reqts are governed by provisions of the Civil Code (not CM Law). See Chua Guan. - Where a COS already mortgaged and registered in CM registry but not in corp books (collateral transfer) is subsequently transferred to a bona fide purchaser for value (absolute transfer), the transferee must respect the mortgage. should amend the law to protect commercial value of COS - Razon, Yumul, Salinas, De Los Santos, Santamaria one party asserting right over shares; one party possesses COS No registration of transfer of unpaid shares! If there is any unpaid balance on SH subscription, there can be no COS on wch indorsement can be made, thus not transferable on corp books, although SH may transfer. SH may transfer via deed of assignment, but corp may refuse OTG that it has an unpaid claim vs. the SH (S63). Except: transferee assumes obligatn to paid unpaid balance. - Remedy if registration refused Mandamus. - Ownership divorced from management. Thus, dissatisfied SH may freely sell his shares and get out. - Exception to free transferability of shares: close corporatn. Thus, in close corp, there are restrictions on transfer in the nature of a right of first

refusal. Reason: To preserve delectus personae in close corporations. Contractual in nature. - Other corps may place restrictions on transfer, provided they appear in AOI, BL & COS and are reasonable. Test of reasonableness: not more onerous than the option restriction allowed by the Corp Code (granting the existing SH of the corp the option to purchase the shares of the transferring SH w/ such reasonable terms, conditions or period stated therein.) - Conclusive presumption that transferee knows restriction: COS conspicuously shows the restriction (S99) The option, to be effective, must be in favor of the corp & the SH. - An option in favor of corp cannot be enforced if no URE out of which it can pay the price (purchase of own stock). - Option price not book value (cannot determine); not market value (none in close corp); not necessarily fixed or agreed value (still raises question of reasonablness). Test: balances desire of corp to attract investors & interest of future purchasers in not paying more than a fair price. Qualificatns for owing or holding shares in S97(1) not subject to the reasonableness test in S98. - Non-transferability of members in non-stock corporations. Chapter VIII - DISSOLUTION

In dissolution, the corporation is not always in a bad state and may even be profitable, although the condition & circumstances of the corp is a factor considered in dissolution. For example, dissolution may be initiated/ urged by creditors so that they at least get something than nothing later. Parties Initiating: (1) SH a. Dissolutn w/ consent of SH / Creditors b. Shortening of corp term c. Surrender of COR Financing Corp v. Teodoro (minority SH); RP v. Bisaya Land (motion for judgment on consent); PCPI; China Bank (2) 3P / Creditors a. Rehab / suspension of payments b. Dissolution - NDC v. Phil. Veterans Bank (Agrix) (3) State / Govt a. Quo warranto Govt. of Phils. V. El Hogar b. Revocation of COR due to: - non-use / dormancy or failure to commence business operations and - violation of charter c. Legislature Gonzales v. SRA; Natl Abaca v. Pore

SEC - deadlocks in close corps - Implementation of Corp Acts: (1) Collation (Financing Corp v. Teodoro: seeking directors liability part of collation process; Natl Abaca v. Pore) (2) Settlement of liabilities (e.g. sale of assets) (3) Determination of remaining assets (4) Distribution of remaining assets via liquidating dividends (e.g. SH of T Guanzon v. RD) Corp is dead the moment corporate purposes can no longer be pursued and cannot even be considered a DFC certificate of dissolution by SEC for voluntary dissolution; expiration of term automatic dissolution; it cannot even be considered a DFC and its existence may be subject to collateral attack. No publication reqd in voluntary dissolutn where there are no creditors affected. - Dissolution does not: (a) relieve fr. liability; (b) automatically dispose of assets; (c) ipso facto end corp personality! 3y period to wind up, may be extended through constitution of trustees - Methods of liquidation: (1) by corp itself through BOD w/in 3y (2) by conveyance of assets to trustees may be beyond 3y

d.

(3) by SEC appointment of receiver may be beyond 3y (4) by lawyer who represented the corp in the suit Constitution of trustees extends winding up, but not the life of the corp; purpose is to regulate claims, make those responsible for fraud liable Corp not relieved from executory contracts which are passed on to liquidating trustee or receivers, except purely personal services (intransmissible) - SH may not get his invested capital until dissolution & liquidation except: (3) by decrease of capital stock where a reduction surplus occurs, provided no creditors are prejudiced; and (4) other cases allowed by law such as A/R under S81 & 42; in close corp S104 &S105; repurchase of stocks for legit purpose under S41; and distribution of dividends under S43 SH may not unanimously decide to dissolve & distribute remaining assets among themselves w/o filing any papers with SEC, even after paying creditors. There would be no dissolution & in violation of S122 for which the guilty directors or SH may be held criminally liable. S122: Duty of corp to look for creditors w/ reasonable diligence, thus cannot be found.

Even a single act is sufficient for the purpose of commencing business and preventing non-use of charter under S22. - No automatic dissolution under S22 because corp given right to prove that cessation of business not due to causes beyond its control. Assuming however that corp is automatically dissolved s.t. there can neither be de factor or de jure corp, still innocent 3P cannot be prejudiced by such dissolution, and corp by estoppel applies. - Dissolution in close corp: may be ordered by SEC under S105 - Distribution of assets in non-stock corp: S94 & 95 Chapter VIII CORPORATE COMBINATIONS Purposes of Corporate Combinations: (1) Reorganize due to burden of fixed expenses (2) Continue business under different corp set-up (3) Selling out to larger party (4) Expansion (5) Prevent cut-throat competition (6) Improve marketing facilities (7) Economies of scale Illegal combinations not allowed: monopolies & combinations in restraint of trade - Factors affecting corporate combinations (M/C): (1) Tax (2) SH approval

(3) (4) (5) (6)

A/R P/R Dilution of SH interest Control - Effects of corporate combinations (M/C): (1) Transfer of corp property / assets * (may be achieved in de facto M/C) (2) Combination of SH * (may be achieved in de facto M/C) (3) Assumption of existing liabilities, regardless of WON creditors consented (not achieved in w/o following M/C provisions in Corp Code, unless requisites in Edward J. Nell) (4) Mandatory dissolution coupled w/ organization of new corp *Important features Approval reqd: 2/3 SH and SEC - M/C involves fundamental changes in corp, as well as rights of SH & creditors. Thus, there must be express provision of law authorizing them, otherwise UV. - M/C under S76-80: (1) Creditors consent not necessary; cannot prevent M/C. Remedy is to follow assets. (2) Dissenting SH cannot prevent SH. Remedies: a. A/R b. If fraudulent/BF or if not pursuant to statute: injunction, damages (no rescission)

c. No P/R if absorbing corp issues new stocks in pursuance to merger (Thom) (3) Exempt from registration & fees under SRC (4) Parties to an M/C are the corporations, not the SH What corp acts will result in the transfer of corp power / assets & collective ownership of both SH even w/o express provisions of M/C? De Facto M/C or Exchange of Stocks (P/S) - De facto M/C (Reyes v. Blouse): (1) sale of all the assets of the absorbed corp to the absorbing corp (S40) in exchange for stocks of the absorbing corp Only way by wch SH of the absorbing become SH of the absorbed (2) dissolutn of the absorbed corp - amend AOI to shorten existence distribute liquidating dividends (3) amendment, if necessary, of the AOI of the absorbing corp: - increase capital stocks if needed to effectuate issuance of shares; - name - increase no. of directors so that majority SH of previous corps will have seats; - corp purposes, if needed (4) Consent of absorbed corps creditors necessary. Absorbed corp should reserve sufficient assets to pay creditor claims because

there is no automatic assumption of liability. (5) SH approval: Absorbed corp: May not require SH approval even if corp should sell a sizable portion of its assets resulting in abandonment of one of its business ventures, if the proceeds are to be used for the operations of remaining business. Remedy: a. A/R b. If fraudulent/BF: injunction; damages; no rescission Absorbing corp: No A/R unless the absorbed corps business is outside the primary purposes of absorbing corp (S42); No P/R because issuance of new stocks not for cash - To pay off liabilities of absorbed corp: (1) influx of investors; (2) sale of shares of absorbing corporatn; (3) reserve funds by absorbed corp If no intent to combine, selling corp may continue in the same or in a new business or remain in a state of suspended animation. - Disadvantages of de facto M/C vs. M/C under S76-80: (1) no automatic assumption by the absorbing corp of the liabilities of the absorbed corp, s.t. creditors consent is indispensable (See Edward J. Nell) & funds may have to be reserved to pay off liabilities;

(2)

not exempt from registratn & fees under SRC - Advantages of de factor M/C over M/C under S7680: (1) Problems in securing SH approval (2) A/R of dissenters Why is there no automatic assumption by the absorbing corp of the liabilities? It would be too onerous for the absorbing corporation liabilities were automatically assumed (see also assets only transfer) - Exchange of Stocks (Edward J. Nell / Thom v. Baltimore Trust) acquisition of all or substantially all of the stocks of one corp from its SH (acquired corp / subsidiary), in exchange for the stock of the acquiring corp (parent) From the point of view of the parent, no difference b/w operating the acquired corp as a subsidiary or owing it as a business. Parent may: (1) Control the acquired as a subsidiary (sub retains personality) non-selling SH affected by shift in control, but he has no A/R (2) Merge with subsidiary, or (3) Buy all the assets of the subsidiary - Note that the controlling interest has a duty of loyalty to the corp & to the minority (Insuranshares v. Northern Fiscal) - Villanueva:

(1)

(2)

(3)

Assets Tee not liable for liab (e.g. Gonzales v. SRA; Reyes v. Blouse; Yu v. NLRC), except where there is express/implied assumption of liability or fraud; Ratio: (a) no privity of contract; (b) modification of an obligation w/ substitution of new debtor requires consent of creditor & new debtor Business-Enterprise Tee liable for the liabilities; Ratio: Tee steps into the shoes & enjoys the business of Tor; creditors extended credit to corp on basis of business earning capacity; protect business creditors by giving them remedy against the new owner; otherwise, creditors would be left without recourse because Tor has disappeared with the liability, and the Tee may claim that he is a purchase in good faith & for value; Equity Tee not liable for liable unless there is express/implied assumption of liability; Ratio: separate juridical personality & limited liability, mere ownership of shares of stock insufficient for liability to attach (Edward J. Nell); no continuity of the same business by same owners FOREIGN

Chapter XVIII CORPORATIONS

On doing business w/o license: GR: may not sue (Mentholatum) Except: estoppel (Merril Lynch; Agilent) GR: may be sued (S133) Except: in pari delicto (TopWeld) - On isolated transactions: May sue, even if w/o license, because not doing business. License reqd only when doing business (Marshall-Wells; Antam Auxiliary Rule) Except: Single transaction in pursuance of business (Litton Mills) needs license - On other instances wherein FC may sue even if not doing business: (1) Isolated transactions (Marshall; Antam) (2) IPR a. Admin (Gen Garments) b. Penal law (Le Chemise) c. Enforcement (Columbia) (3) Other Valid COA (Agilent) - On object of S133: (1) to subject FC doing business in Phils to jurisdiction of courts; prevent it fr acquiring domicile w/o taking steps to make it amenable to suits reasonable interpretation (Marshall Wells) (2) Doctrine of lack of capacity to sue based on failure to acquire a local license is based on consideratns of sound

public policy. Never intended to favor domestic corp who enter in solitary obligatns simply because latter not licensed (Antam) - On WON FC not doing business in Phils may bring action for TM infringement: (1) Mentholatum: doing business w/o license, may not sue (2) Gen Garments: not doing business thus no license; TM law applied purposed to counteract Mentholatum effects; may sue WON licensed to do business (3) Le Chemise: not doing business thus no license; IPR right in rem; criminal law in name of People; effects of Paris Convention; may sue (4) Columbia: mere ownership/ enforcement of IPR not doing business; may sue - On sale of FC through local distributor: (1) Metholatum: principle of agency doing business (2) Top-Weld: highly restrictive terms to make LC mere conduit doing business (3) Le Chemise: thru a middleman acting for own acct & own name not doing business (BOI) (4) Columbia: sales made to customers in the Phils by an independent dealer who has purchased &

(5)

(1)

obtained title from the corp of the products sold not doing business Agilent: maintaining stocks for mere processing & consigning machinery not doing business (FIA) On contract theory:

Columbia: entering into contracts w/ residents, consummated outside the Phils not doing business (2) Top-Weld: restrictive terms of contract doing business - Foreign Investment Act Doing Business: (1) Soliciting orders (2) Service contracts (3) Opening offices, whether called liaison offices or branches (4) Apponting representatives or distributors domiciled in the Phils. or who in any calendar year stay in the country for a pd or pds totaling 180 days or more (5) Participating in the mgt, supervision or control of any domestic business, firm, entity or corp in the Phils (6) Any other act or acts that imply a continuity of commercial dealings or arrangements, & contemplate to that extent, performance normally incident to, & in progressive prosecution of, commercial gain or of the purpose & object of the business org (Mentholatum)

(7) Publication of general advertisement through any print or broadcast media; (8) Maintaining stock of goods in Phils for purpose of processing for export; (9) Collecting info in the Phils; (10) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis - Not Doing Business: Mere investmt as SH by a foreign entity in domestic corps duly registered to do business &/or the exercise of rights as such investor Having a nominee director or officer to represent its interest in such corp (1) Appointing a representative or distributor domiciled in the Phls., wch transacts business in its own name & for its own account. - Grandfather Rule: Shares belonging to 1 corp/part @ 60% of the capital of wch is owned by Filipino citizens shall be considered Phil nationality. But If the % of Filipino ownership is <60%, only the no. of shares corresponding to such % shall be counted as of Phil nationality (DOJ Opinion No. 18, S1989)

MAY SUE DOING BUSINESS W/ License W/ o License Yes No. Yes Yes

MAY BE SUED

Mentholatum v. Mangaliman -Twin Characterizatn Test - Sale thru local distributor agency

S133

Except: Merril Lynch Futures v. CA - estoppel to deny corporate existence Single transaction, but in pursuance of business

Except: Top-Weld Mfg. Inc. v. ECED - in pari delicto - highly restrictive terms; sale thru local distributor = doing business Yes Litton Mills v. CA - fact of doing business must be alleged to make summons & to acquire jurisdiction; court need not go beyond allegatns - how done: (1) agent designated; (2) govt official designated by law; (3) any officer/agent of the corp Yes.

NOT DOING BUSINESS Isolated Transaction

Yes.

Marshall-Wells v. Elser - Nature of corp - Object of statute - When license reqd

IPR:

Admin Proceeding

Antam v. CA - Auxiliary rule - Sound public policy Yes. Gen. Garments v. Dir. of Patentsl - Nature of corp - Admin proceeding - vs. Mentholatum here: WON llicensed, may enforce TM rights Le Chemise Lacoste v. Fernandez - Failure to allege xxxxx not fatal - Crim complaint - vs. Mentholatum here: not doing business but middleman (under BOI) Columbia Pictures v. CA - Mere ownership of copyright / distribution rights + enforcement + entering into contracts with residents not = doing business Yes. Agilent Tech. Singapore v. Integrated Silicon Tech. Phils. - Summary of when corp may sue

Penal Law

Enforcement of IPR

Other Valid COA

- When license necessary, Except: estoppel - Reviewed Mentholatum - FIA not doing business: maintaining stock; consignment of machinery - PROFIT as element of doing business

CHAPTER I & II
1. Union Glass v. SEC

>Premiere in a state of suspension of payments, receiver already appointed

4. CIR v. Club Filipino

>Debt-equity conversion allowing corp creditor to obtain BOD seats & control and acquire the glass plant which it later sold to another corp (Union Glass); >Beyond SEC jurisdiction no intra-corp reln: (1) CPA and public; (2) CPA and the SH, partners, members or officers; (3) CPA and the State; and (4) among the SH, partners members or officers themselves. >Union Glass 3P as to Pioneer & latters SH. >Undervaluation, self-dealing claimed by SH; sale of all / substantially all assets
2. Abejo v. De La Cruz

>Non-stock, non-profit corp.; Even if there is a statement of capital stock, the corp is still not a stock corp if nowhere in a corps AOI or BL could be found an authority for distribution of profits. (c.f S3)
5. Manuel R. Dulay Ent. V. CA

>Agrix should have been dissolved; but if dissolved, only preferred creditors would benefit by virtue of their respective liens; & ordinary creditors will be helpless (prejudicial to public) >Scaling down of interests of creditors, whether secured or unsecured, to keep the corporation in operation because it is worth more as a going concern.
7. Pioneer Insurance v. CA

(2) proposed name is identical or deceptively or confusingly similar to that o any existing corp or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws (c.f. S18) as determined by ff test. >Test of Confusing Similarity: Ordinary care and discernment; proof not reqd >Dominant: 2 words
9. Lyceum of the Phils. v. CA

>The assertion that Abejo is not a SH of record s.t. the dispute is not intra-corporate begs the question, for an action to compel a corporation to register a sale and issue new certificates of stock is itself an intra-corporate matter. >Pre-emptive right claimed by a SH as against another SH not upheld as there is no restriction in AOI, BL or stock certificates. (v. Fleischer) >Right of Abejo to transfer to Telectronics upheld and recording deemed purely ministerial >SEC jurisdiction intracorp matter
3. Magalad

>In close corp., a board meeting may be dispensed w/: (1) directors written consent, actual/implied knowledge + no objection; (2) SH accustomed to informal action of direc. (3) actual/implied acquiescence of all SH, and (4) press acts may bind the corporation. (c.f. S96) >Pierced corporate veil to bind the corp for the acts of its President, w/o applying S96 of the Corp Code or any indicatn as to how SC arrived at conclusion that corp was a close corp; expanded coverage of close corp >GR is no piercing veil of close corp since close corp precisely designed as alterego; piercing applies to de facto close corp. SC here applied piercing even if corp actually a de facto close corp.
6. NDC v. Phil. Veterans Bank

>Where a person convinces other parties to invest money for the formation of a corp, but wch was never duly incorporated, there can be no resulting partnership among them, and the mere passive investors cannot be held liable to share in the losses suffered by the business enterprise. (v. Lim Tong Lim) >When parties come together to form a corporatn, but no corp is formed: (1) parties who intended to participate or actually participated (Lim) would be liable as partners (2) parties who took no part except to subscribe for stock in a proposed corp not liable as partners CHAPTER III ORGANIZATN FORMATN /

>Doctrine of Secondary Meaning v. Generic Word >Proof of actual confusion reqd

10. PC Javier & Sons v. CA

>A change in corp name does not make a new corp. No effect on identiy, on its property, rights or liabilities. Thus, change in name of bank does not grant the debtor the right to refuse to pay their loans OTG that they have not been informed formally. DE FACTO CORPORATION (c.f. S20)
11.

v. Premiere Financing Corp. >Issue relates to protecting the public from fraud and therefore intracorp >SEC jurisdiction; Magalads award in RTC set aside w/o prejudice

>Legislature (Special Law) may not provide for formation, organization, and regulation of a private corporation unless GOCC; should be governed by Corp. Law (Gen Law). (c.f. S4) >State of rehabilitation; extinguished security for loans no liens in favor of actual corp property

CORPORATE NAME (c.f. S18)

8. Philips Export BV v. CA

Malabang v. Benito >Not DFC; No valid law under which the municipality of Balabagan was created, since the law creating it was declared unconstitutional and no other valid law exists; however operative fact. Harril v. Davis >Not DFC; failure to file AOI as reqd by statute = no GF >GR: Persons who associate themselves for profit liable personally EXCEPT when there is colorable compliance or GF attempt to incorporate.

12.

>SPC rider in Philips good will; similar line of business >Right to use corp. & trade name a property right / right in rem. >Requisites: (1) prior right determined by priority of adoption; and

13. Hall v. Piccio (all parties knew

no corp) >Not DFC; no COI; no GF the incorporators must have been aware of the issuance of the COI for GF to exist (constructive notice) >To be a DFC there must be color of authority, wch contemplates only errors & irregularities, not total/substantial disregard for the mandatory reqts >Would-be incorporators may validly petition for its dissolution due to fraud and financial losses; need not be in a quo warranto proceeding since not DFC >Where DFC doctrine n/a due to fact fact that there was no corp (no COI), not necessary that estoppel doctrine automatically applies. ESTOPPEL (c.f. S21)

14. ABC v. Standard Products

>2nd type of Corp by Estoppel: Alleged corp (Standard Products) estopped from denying own existence to evade suit, having dealt with ABC in a manner recognizing its corp. existence >1st type of Corp by Estoppel: Alleged corp (Standard Products) estopped from denying 3P (ABC) existence to evade suit.

fraud; It does not apply where both parties to the contract acted in the honest belief that a contracting corp entity did exist, such as in Cranson >Wrt to any unpaid portion of his subscriptin, a SH is personally liable for the financial obligatns of the corp to the extent of unpd subscriptn.
18.

20. Lozano v. De Los Santos (all

parties knew no corp) >No corporation by estoppel, whether of the 1st or 2nd kind arises where there is no 3P involved and the conflict arises among those assuming to form a corporation, who therefore know that it has not been registered..
21.

Chiang Kai Shek Sch. v. CA >2nd type of Corp by Estoppel: Alleged corp (school) estopped from denying own existence to evade suit due to own noncompliance with legal mandate to incorporate and having dealt with respondent for 32 years
15. 16.

Apparent Authority All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. Corporation by estoppel 1st type: When any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. 2nd type: One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.

Cranson v. IBM >2nd type of Corp by Estoppel: 3P (IBM) estopped from denying alleged corp existence to enforce Cransons personally liability having dealt with it in a manner recognizing its corp. existence; Cranson NOT liable personally Salvatierra v. Garlitos >Apparent Authority: 3P (Salvatierra) NOT estopped from denying alleged corp existence to enforce personally liability because transaction attended by fraud / active misrepresentation = doctrine of apparent authority; President liable personally >SC did not apply 2nd type of Corp by Estoppel (as to Salvatierra) like in Cranson but applied apparent authority as to the associates. >1st type of Corp by Estoppel applies where where there is

Intl Express Travel v. CA >3P (Intl Express Travel) NOT estopped from denying alleged corp existence to enforce personally liability of because 2nd type of Corp by Estoppel applies only when 3P escapes liability on a contract, not when the 3P is the one claiming on it (modifying Cranson). >Before a corp may acquire juridical personality, State must give its consent either in the form of a special law or a general enabling act. Association failed to comply with the laws providing for the manner by which sports federatns may be constituted as distinct bodies. Khan / managing director liable personally

LBC Express v. CA >No moral damages to corp; artificial person; Separate juridical personality of corporation and officers. BY-LAWS (c.f. S46)

22.

LGVHAI v. CA >BL not essential to corp existence, only for orderly admin & mgt of corp, thus, non-filing of BL does not lead to automatic dissolution; but a ground for suspension / revocation of COI by SEC (also c.f. S22) >BL subordinate to AOI, Corpo Law and related statutes v. Botica Nolasco (BL contrary to law) >BL operate merely as internal rules among SHs, they cannot affect or prejudice 3P who deal wih the corp, unless they have knowledge, actual or constructive. >BL should not be contrary to laws; should not be the source to limit the rights of SH to transfer shares of stock wch are personal property wch the Corp law recognizes the SH can transfer (c.f. S63). >Restrictions on transfer can be provided only in the law or the charter of the corp, and would be invalid if provided for in the BL.

23. Fleischer

17.

Lim Tong Lim v. Phil. Fishing Gear Industries >Apparent Authority: 3P (Phil Fishing Gear) denies alleged corp existence to enforce personally liability; A business associate who did not participate in the fraudulent misrepresentation of his associates but nevertheless reaped the benefits of the contract entered into with 3P is deemed to be part of said association and is covered by the doctrine of corporation by estoppel; Lim liable personally (v. Pioneer Surety)
19.

Purpose of BL to regulate not restrict. >Pre-emptive right is claimed by corp as against any SH, thereby affecting the corp, SH and 3P. There is a restriction in the bylaws, but the certificates of stock provides for indorsement in blank at the back, and noz provision in AOI. (v. Abejo) (c.f. S6)
24. Govt. of PI v. El Hogar (BL

owned by it as sep entity (c.f. S36(7), S122) >SH shares are personal prop, not corps; represents aliquot share in corp prop or right to share in proceeds; not owner of any definite part, not co-owner
26. Magsaysay-Labrador

>Mere ownership of both NOT = piercing (v. La Campania, same as Jardine)

29. JG Summit Holdings v. CA (as

32. Jacinto v. CA MetroBank trust

contrary to charter) >Although power to adopt BL is an inherent right, BL cannot contravene the charter. >Provision granting the BOD power for forceful surrender / withdrawal of shares as it stands is patently null and void. Remedy is to render offending provision invalid, not forfeiture of charter. (c.f. S47(5)) >Power to fix compensation of directors left to corp, determined by BL. Fixing qualification of directors and impose security from them for the proper discharge of the duties of their office, a good practice. (c.f. S30) >Where the offense of the corp is not serious enough to cause great prejudice to the public, such a severe penalty as revocation should be avoided (also El Hogar). CHAPTER IV THE CORPORATE ENTITY SEPARATE PERSONALITY
25. SH of F. Guanzon v. RD (as to

v. CA (as to property) >A SH right / interest in corp property is purely inchoate not amounting to legal interest and thus will not entitle him to intervene in a litigant involving corp property (c.f. S36(7))

to acts of corp v. acts of SH) >RFR over shares in a landholding corp pertains to SH whereas capacity to own land pertains to corp, since corp and SH are separate juridical personalities. Consti prohibition applies to owning land, not owning shares in a landholding corp. (c.f. S36(7))
30. Tramat

receipts (Due process in piercing cases) >Piercing may be applied even when complaint does not seek its enforcement, prov. evidence is adduced during trial as the basis for its application.
33. Concept

27. Caram v. CA (as to promoters

contracts) >Pre-inc expenses generally for the acct of the corp. Unless corp is fictitious, the incorporators/SH not personally liable therefor. >Promoters contracts - majority of investing incorporators who were merely convinced to invest were not promoters, thus not liable to pay for feasib services
28. Palay Inc. v. Clave rescission

property) >Distributn of corp assets to SH = conveyance / disposition by corp to SH, not partition among coowners because property registered in the name of corp

clause in subdivision lot sale (as to acts of SH) >Corp not liable for acts & liab of SH or those of the legal entities to wch it may be connected & vice versa unless sufficient proof exists on record of BADGES of FRAUD: (none exists in this case) - shield to further an end subversive of justice; purposes not intended by the law that created it; defeat public convenience; justify wrong; protect fraud; defend crime; perpetuate fraud of confuse legitimate issues; circumvent the law; used as an alter-ego, adjunct or conduit

Mercantile v. CA reconditioned machinery as brand new (as to acts of director or officers) >Personal liability of corp director, trustee or officer attaches only when (none of these exist in case): (1) assents to (a) patently unlawful act of the corp; (b) bad faith; (c) conflict of interest (S31 p.1) (2) consents to issuance of watered stocks (S65) (3) agrees to bind himself personally (4) made by specific provision of law to personally answer (S144)

VEIL PIERCED:
31. Marvel Bldg. v. David

(alterego to evade war profit tax; not fraud; use of nominees as badge of alterego case) >Maria Castro owner of all shares of stock of corp and other SH mere dummies; MBC a mere dummy corporation as shown by circumstances >No compulsory heirs

Builders, Inc. v. NLRC (fraud to evade civil liab) >Petitioner ceased its operations in order to evade payment of backwages and bar reinstatement; filing of cessation of business operations same day as filing of info sheet same address, same officers >No hard and fast rule, but there are probative factors: (1) stock ownership by 1 or common ownership of both corporations; (2) identity of directors and officers; (3) manner of keeping corporate books and records; and (4) methods of conducting the business. >TEST (compare with Garnett for P-S): (1) control, not mere majority or complete stock control, but complete domination not only of finances but of policy and business practice (2) such control must have been used to commit fraud or wrong, etc. (3) the aforesaid control and breach of duty must proximate cause the injury or unjust loss complained of. v. CIR (fraud to evade civil liab; avoiding the liability scheme)

34. Claparols

>Claparols Corp wch succeeded Claparols Steel and Nail is the continuation and successor of the first entity skillfully (deliberately and maliciously designed) timed to avoid the financial liability that already attached to predecessor; both corp were owned and controlled by same person and no break in succession or cessation in operations. (Compare with La Campana and Yu on labor law)
35. Villa

>Control of stock + other factors (not mere ownership) = piercing (vs. Koppel)
38. La Campana Coffee Factory

Rey Transit v. Ferrer (fraud to evade contractual liab) >Restrictive clause in contract of slae of CPCs also binding on Villa Rey as it is on Jose; No actual payment by orig subscribers, mingling of corporate and personal funds >Business Enterprise transfer property among heirs; mixing of funds as badge of alterego) >Tiaong Millling is only the business conduit and alterego of Forrest Cease. Corp developed into a close family corp. >Accounts of corp and of family indistringuishable; should be divided among heirs

36. Cease v. CA (alterego to divide

v. Kaisahan 1953 case (alterego; pierced to resolve issue of jurisdictn) >Mere ownership of both = piercing >Piercing allowed to treat the starch and coffee factory as one for purpose of establishing jurisdiction of the Court of Industrial Relns over labor issues, upon proof that there was one office, one management, single payroll for both businesses, interchangeable employees. (v. Jardine) >In alterego cases, no pecuniary claims need be involved (v. Indophil) >Labor law (compare w/ Claparols & Yu)
39.

legal conclusions control of CSselection of BOD-board action >Koppel ruling that mere ownership = piercing didnt constitute precedents in alterego cases, Koppel actually involved a fraud case (CSV). VEIL NOT PIERCED:
40. Indophil

37. Liddell

v. CIR (alterego to evade payment of higher sales taxes; parent-subsidiary) >A taxpayer has the legal right to decrease, by means which the law permits, the amount of what otherwise would be his taxes or altogether aboid them; but a dummy corporation serving no business purpose other than as a blind, or a shield for tax evasion will be disregarded

Koppel v. Yatco (alterego to evade tax/parentsubsidiary relnship) >The subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alterego of the P and was used to evade taxes. >Effect of piercing: not a contravention of principle that corp personality cannot be collaterally attacked. When piercing is applied in a particular case, the court does not deny legal personality for any an all purposes, only for the transactn or instance for wch doctrine was applied. >control of stock (mere ownership) by itself = piercing (vs. Lidell); control leads to certain

Textile Mills v. Calica (alterego?) >Creation of Indophil Acrylic not a devise to evade application of CBA b/w the union and Indophil Textile. That two corps business are related, some EEs are interchanged, and physical facilities in same compound not sufficient bases to pierce veil. >Pecuniary claims made an element in alterego case; Legal corp entity disregarded only if sought to hold officers and SH directly liable for corp debt or obligation. (vs. La Campana where issue is only jurisdiction) Secosa v. Heirs of Erwin Suarez Francisco >The president of a corp wch becomes liable for the accident caused by its truck driver cannot be held solidarily liable for the judgmt obligatn arising from the QD, the fact alone of being president is not sufficient. >There must be clear and convincing proof of the wrongdoing. It cannot be just alleged nor be presumed. >Corp entity may be pierced in such cases as fraud that may work inequities among members of the corp internally, involving no rights of the public or 3P.

>Tanduay Distillers not the same as Tanduay Distillery, Inc. Tanduay Distillers is the corporate name assumed by Twin Ace Holdings, Inc., who purchased TDIs assets and took over the business. Use of similar name merely to capitalize on goodwill which Tanduay built over the years. No commonality of ownership and management. TDI itself not absorbed by Twin Ace. >In Labor Law, the doctrine of enterprise transfer as to make the transferee liable for the bus obligatns of transferor is really a species of piercing doctrine and would require a certain degree of continuity of the same business by the same owners using the corporate fiction as a sile, and that the transferor has ceased to exist and operate on its own (compare with La Campana & Claparols as to Labor Law)
43. Delpher Trade v. CA (alterego;

41.

estate planning) >Piercing can only be invoked if there is clear and convincing evidence that the corp was organized for an illegal and unlawful purpose. >An estate planning has been considered as a valid mode of tax avoidance.
44. Garnett v. Southern Railway

42. Yu v. NLRC (equity transfer)

(parent-subsidiary relnship; workmens compensation) >11 indices of instrumentality: (See Concept) -P owns all or most of capital stock // -P & S have common directors/officers -P finances S -P subscribes to all CS of S or causes its incorporatn //

-S has grossly inadequate capital -P pays salaries & other expenses of S -S has substantially no business except w/ P or no assets except those conveyed to P -S is listed as department in books of P -P uses property of S -S directors take orders from P and dont act independently -Formal legal reqts of S not met >Only 2 of 11 indices met; thus there exists 2 distinct operations. While entire capital stock owned by P, no evidence that P dictated management of S, that S was solely for benefit of P.
45. Jardine Davies v. JRB Realty,

Inc. 2005 case (parentsubsidiary relnship) >Mere ownership of both NOT = piercing (v. La Campania); >Applying Concept Builders Test: Mere existence of interlocking directors, corp officers & SH and ownership of majority of CS not enough justificatn to pierce the veil of corp fiction in the absence of fraud or other public policy consideratn. >Even when there is dominance over the affairs of the subsidiary, piercing will only apply when such fiction is the very tool used to commit fraud or to do wrong, or the very means to avoid the consequences of ones wrongdoing or to evade ones liabilities. Wrongdoing must be clearly established, it cannot just be presumed. CHAPTER V CONTRACTS PROMOTERS

McArthur v. Times Printing (Corp sued by EE for promoters act) >Times (newly formed corp) liable for acts of promoter; While a corp is not bound by engagemts made on its behalf by its promoters before its organizn, it may, after such organizn, make such engagemts its own contracts by a formal action of BOD or it may be inferred from its acts of acquiescence. All of the SH, dir & officers of corp knew of the contract at the time of the organizatn or were informed soon afterwards & none of them objected or repudiated it. >Right to adopt promoters agreemt depends on corp powers & nature of agreemt >Adoption effective on date of corps act of adoption, no retroactivity Ratificatn relates back to date of agents act
46.

not have the capacity to convey them to Sandiko.

48. Builders Duntile v. Dunn Mfg.

Co. (Corp suing to enforce promoters contract) >Builders Duntile (newly formed corp) has the right to sue to enforce contract; to deny it would be to deny it of any remedy for breach of contract. >Dunn Mfg Co. liable on contract executed by promoter because (1) it was clearly understood that the contract was made in behalf of Builders Duntile; (2) incorporators took over the whole thing and ratified; (3) it was the corporation who suffered. >Filing of suit is the act of adoption Rizal Light v. PSC and Morong Electric (Corp sued by competitor) >Curable; Public interest; The fact that Morong Electric (newly formed corp) had no corp existence on the day the franchise was granted by PSc does not render the franchise invalid because later, Morong obtained its COI and accepted the franchise in accordance w/ the conditions thereof. >Suspensive condition >Expanded Cagayan
49.

party agreed to look to the corp and not the promoters for payment. Plaintiff was well aware the corp was not formed & nevertheless urged that the contract be made in the name fo the proposed corp, contemplating the corp as the contracting party.
51.

Old Dominion Copper Mining v. Bigelow (Corp sues own promoter) >Bigelow is an exception; from prior to pos, promoters benefited >Promoter liable for breach of trust. No liability while stock remains unissued. Wrong done when stocks sold to market without revealing secret profits from overstating value of property when it sold stocks. CHAPTER POWERS VI CORPORATE

52. RP v. Acoje Mining (within corp

Cagayan Fishing v. Sandiko (Corp sues to enforce contract) >Contracts by the promoter for and in behalf of a proposed corp gen bind only him unless ratified by the BOD. Ratification not applied here as it would result in injustice. Although corp is enforcing a contract w/ Sandiko, in effect it is the one evading liability from its obligatn to PNB. >The newly formed corp was nonexistent (under process of incorporatn) at the time Tabora sold disputed property to it. The corp was really the promoter Tabora + his wife and others. Since the corp could & did not acquire the 4 parcels of land, it did
47.

Quaker Hill v. Parr (Promoter sued in personal capacity) >Promoter not personally liable; Promoters are personally liable on their contracts though made in behalf of the corp to be formed EXCEPT if the contract is made in behalf of the corp & the other
50.

powers as stipulated in AOI; estoppel by benefits) >NOT UV, the resolutn reg. post office: (1) reasonably necessary reasonable and proper adjunct to the conduct of business (c.f. S45); (2) concerns benefit, convenience and welfare of its employees; receipt of benefits by Acoje = estoppel >Assuming UV, not void as it not contra LCPP. UV different from illegal act. UV is voidable which may be validated by ratification and estoppel, while illegal is void and cannot be validated >Defense of UV rests on violatn of trust towards SH, n/a where it will do greater injust to innocent 3P .

53. Napocor v. Vera (within corp

powers as stipulated in charter) >TEST: WON a logical & necessary reln exists b/w act questioned and corp purpose in charter yes (c.f. S45) >If act is lawful, not prohibited & for purpose of serving corp ends, & reasonably contributes to promotn of those ends in a substantial sense, it is deemed w/in charters powers.
54. Madrigal

P- partnerships as SH: any person includes artificial person O-outstanding loans to non-SH: consequence of business operatns, technicality of bookkeeping
56. Pirovano

58. Ramirez v. Orientalist Co. &

& Co. v. Zamora (abuse of corp power granted by S38) >Reduction of CS to hide the fact that it was making profits and deprive employees of wage increase (c.f. S38) >Dividends for compensation for its management services in favor of companies it managed = profits, corp earnings arising from corp investment attended to by the employees (c.f. S44) Govt. of PI v. El Hogar T- title to RP >5yrs: GF dispositn L- lot: reasonably necessary (c.f. S36(7)) F- foreign activities: admin bldgs: same as in lot admin prop of delinqt SH: security mgt of prop of SH: UV C- compensatn: extraordinary devt (c.f. S30) S- special share: implied authority D- deprecn rate: legislature R- reserve funds: implied power, good bus practice, contingency (c.f. S43) L- loans for other purpose: bldg & loan assocn not limited to bldg homes

55.

v. De La Rama (within corp powers as stipulated in charter, consistent with S36) >Donation to family of deceased former mgr. valid; w/in purpose clause of corp; not UV ((c.f. S36 (9)) >Valid ratification of UV act:\ (1) consummated; (2) no creditors prejudiced; (3) rights of public/state not involved; (4) all SH present >>UV different from illegal act; Effects of UV: (1) wholly executory unenforceable; damages unrecoverable (2) wholly executed / consummated * not interefered w/ as bw parties whose rights get deprived therefrom; State may question (3) partial recovery may be had from party who received benefits upheld) >Diversion of corp. funds into mining claim of Balatoc a form of control & devt of competitor; management contract (c.f. S44) >Contract b/w Balatoc & Harden illegal; action should be quo warranto; no civil wrong; Parties left as they are. CHAPTER VII CONTROL / MGT ACTS OF DIRECTORS (c.f.S23)

57. Harden v. Benguet (illegal but

Fernandez (Ratificatn; Agency by Estoppel; Burden of Discovery; Original power of BOD) >Exception to the GR that BOD must act w/in manner and formalities required ratiificatn >Agency by Estoppel Doctrine; Direc-Treas had no authority to bind the corp because corp powers is exercised by the BOD, as stated in BL. However, corp knowingly permitted one of its officer to do acts within the scope of an apparent authority, thus the corp, as against 3P, estopped from denying the officers authority. BOD here had knowledge and gave its consent to offier. SH meeting was even called. >Burden of discovery; Remedial law reqt: Lack of authority to bind is a defense wch must be specially pleaded because public not supposed nor required to know the transactions wch happen inside corp; ratio integrity of comm transactns, due process >Original power of the BOD (SH vs BOD): SH resolutions not legally effective nor binding on BOD, merely advisory; BOD approval of contract prevails over subsequent SH resolution repudiating the contract (Compare with Angeles v. Santos)
59. Lopez

60. Expert Travel& Tours v. CA

(Personal Acts) > Physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corp BL or by specific act of BOD. The allegation that there was a BR via teleconference is incredible. Certificate of non-forum shopping is a peculiar and personal responsibility of the party, wch must be accomplished by party himself because only he had actual knowledge of WON he has instituted similar actions in other courts.
61. Citibank

NA v. Chua BP22 (Delegation) >3 levels of control: (1) BOD; (2) officers; (3) SH. >BR not necessary; BOD may validly delegate some of its functions to officers or agents appointed by it. Since Citibanks BL allows Executive Officer to delegate his authority in whole or in part, BR not necessary to grant him authority to delegate his power to represent corp in court to banks counsel. (Self-Dealing) >Dealership agreement is voidable at the option of corp if not approved by BOD and entered into only the corp president, or assuming such approval, that it was approved under the ff conditions: (1)presence of self-dealing director in meeting at wch agreemt was approved not necessary to constitute quorum

62. Prime White Cement v. IAC

v. Ericta (Vote of Absention) >GR: vote of abstention is counted in favor of the issue that won the majority vote, since by their abstaining, the directors are deemed to abide by the rule of the majority; however, such presumption rebuttable by contrary evidence.

(2)vote of self-dealing director not necessary for the approval of agreemt (3)agreemt is fair and reasonable under the circumstances (c.f. S32) >Contract here is not fair and reasonable, thus contract invalid and unenforceable, even if it may have been in the ordinary course of business.
63. Boyer-Roxas v. CA (Property)

65. Benguet

>Piercing cannot be used or resorted to merely establish a right of interest; purpose is to prevent fraud or wrong and not any other purpose; denied piercing when it was employed to justify under the theory of coownership the continued use and possession by SHs of corporate properties. >Stock ownership does not entitle SH to possession of any specific property of the corp or a definite portion thereof. Neither is he a coowner of corp prop. Prop registered in the name of corp are owned by it as an entity separate and distrinct from SH.
64. EPG Construction v. CA UP

Electric Coop v. NLRC Whistleblower GM ousted (Malice/BF/GN) >GR: GM of corp not personally liable for his official acts in behalf of corp EXCEPT if he acted maliciously or in BF. Here, there are strong indicatns that BOD members acted with indecent haste in removing the GM from his positn. BOD guilty of gross negligence and BF in directing the affairs of the corp in enacting assailed resolutns, and in so doing, acted beyond the scope of their authority. Thus, they are personally liable. (c.f. S31) Electric & Constn Co. (UV of 2nd type beyond scope of authority) >GR: Acts of corp officers w/in scope of authority are binding on corp. Acts done by such officers beyond the scope of authority are not binding on corp, unless ratified expressly or tacitly, or is estopped from denying them. BR relied upon by buyer did not contain an express authority to sell or encumber adjacent corp property. >Corp did not (1) knowingly permit Roxas to hold himself out as having such authority, nor (2) clothe the agent with the indicia of authority to lead a reasonably prudent person to believe he had such authority. No ratificatn, no estoppel by apparent authority = corp not bound. >Property of corp not property of SH, and may not be sold by the SH w/o express authorizatn from BOD.

ACTS OF OFFICERS / AGENTS (c.f.S25)

67. YuChuk v. KongLiPo Chinese

69. Board of Liquidators v. Heirs

66. Woodchild Holdings v. Roxas

newspaper (UV of 2nd type beyond scope of authority) >GM had no power to bind the corp; GM may have had general control & mgt of corp and may bind the corp by employment of such agents & EEs as are usual & necessary in the conduct of such business. However, GM can only perform such acts and enter into such contracts as are reasonable usual in the ordinary course of business of the corp. Contract here is too onerous, since it required payment of EE for 3yrs even if newspaper goes bankrupt. BOD could have ratified, but didnt. Contract wasnt even presented to them. >GR: power to bind corp rests in BOD, but the power may be delegated, expressly or impliedly, to other officers / agents of the corp. CA (Applicatn of apparent authority) >If a corp knowingly permits one of its officers, or any other agent, to act w/I the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corp will, as against anyone who has in GF dealt w/ it thru such agent, be estopped from denying the agents authority. >President here presented a notarized Secretarys certificate from the corp as proof of his authority.

68. Lapulapu Foundation, Inc. v.

of Kalaw Destroyed crops (Long Acquiescnce; Business Judgment Rule; Retroactivity of Ratificatn) >Contract entered into original power of the BOD may, due to long acquiescence and usage, be binding on corp which may be deemed to have waived such compliance and ratified the act. >Business Judgmt: Directors not liable for business losses incurred because of honest bad judgmt not amounting to BF or GN. >Ratificatn retroacts to time of act and is equivalent to original authority. >2 methods of validating: empowerment and ratification >Mere ownership of majority of shares or mere holding of officership positn does not make one personally liable >Unless the trusteeship is limited in its duration by the deed of trust, there is no time limit w/I which the trustee must finish liquidatn, & he may sue and be sued as such beyond the 3year period of liquidation. (Also: Natl Abaca v. Pore)
70. Zamboanga Transportation v.

Law lib (Malice/BF = Personal liability) >GM/President of corp not personally liable for his official acts in behalf of corp for mere breach of contract done by the corp because the corp has a distinct juridical personality. GM/President liable only if he acted maliciously or in BF. No proof here that GM acted in BF. (c.f. S31)

Bachrach Motor chattel mortgages (Direc=Sole SH = Implied Ratificatn) >A contract entered in by the directors w/o BR is binding upon the corp where the directors happened to be the sole SH. >Corp bound by the CM executed by the president despite the fact that CMs were disapproved by the BOD due to implied ratification. The president of the corp, who is one of the principal SH & at the same time the GM, auditor, legal counsel, is empowered by the BL

to enter into CM contracts subject to board approval, and took advantage of the benefits of the contract. MEETINGS / ELECTIONS / SH APPROVAL
71. Board of SMB Workers v. Tan

74. Detective

& Protective Bureau v. Cloribel (Holdover) >BL of corp provides that directors shall serve until election and qualification of successor (holdover); if successor not qualified due to non-ownership of stock, Alberto may not be compelled to vacate his office. (c.f. S23) BL; SH right to be elected) >Board membership not available for SH w/ controlling interest in competing co. If there is presented to a corp officer/dir a business opportunity wch the corp is (1) financially able to undertake; (2) from its nature in line w/ corps business & is of practical advantage to it, (4) one in wch the corp has an interest or a reasonable expectancy, and (5) by embracing the opportunity, the self-interest of the officer/dir will be brought intro conflict w/ that of his corp, the law will not permit him to seize the opportunity for himself, and if he does, the corp may elect to claim all the benefits of the transactns for itself. >Power to adopt/amend BL inherent power of corp. Thus, corp may prescribe qualification, duties and compensation of directors, officers and employees (c.f. S47(5)) and may place noncompete provisions in BL (c.f. S32,34) >SH has no vested right to be elected to the board. Majority Rule: SH is considered to have parted with his personal right or privilege to regulate the disposition of his property which he invested in the capital stock of the corporation.

>Validity or reasonableness of BL a question of law REMOVAL

76. Roxas v. De La Rosa (Election

(Notice) >Failure to give notice as required by law or by the corp BL (may expand or shorten) would, as a rule render any resolution made therein voidable at the instance of an absent SH who was not notified of the meeting. (c.f. S50)
72. Johnston

75. Gokongwei v. SEC (Competitor;

v. Johnston (Walkout/Quorum) >GR: a majority of SH present at a meeting cannot break the quorum by withdrawing as to defeat the elections (BL); except when for justifiable reason, as when SH is trying to protect & enforce his rights as SH. Here, the SHs withdrawal was justified. (c.f. S52) Ponce v. Encarnacion (SH call meeting) >SH can call meeting upon showing of good cause (c.f. S50) >upon showing of good cause does not mean that petition must be set for hearing with notice served upon BOD. Court satisfied that there was good cause since Chairman of BOD failed, neglected or refused to perform his duty to call SH mtg & elect new set of directors, in accordance with BL.
73.

as mode of removal of director) >Invalid: (1) no vacancy; (2) no notice; (3) for failure of a majority voting trust who called the meeting to meet 2/3 requirement for removal of a director. (c.f. S28) >CSV: erroneous even if majority is needed to call a mtg, it doesnt mean that only the majority will attend. The majority may, in that meeting, gather the reqd 2/3 vote in order to successfully oust a director.
77. Angeles

>(Delegate Power of BOD): BOD is a a creation of the SH and controls and directs the affairs of the corp by delegation of the SH. But the BOD occupies a position of trusteeship in relation to the minority of the SH. Right of SH to bring derivative suit on behalf of corp based on recognition that BOD powers delegated tot hem by SH (Compare with Ramirez v. Orientalist) >Exceptin to GR that corp should be made party defendant in derivate suit. (also: Everett v. Asia Banking; controlling doctrine is RP v. Cuaderno)
78. Campbell

QUALIFICATIONS DISQUALIFICATIONS

v. Santos (Court appointmt of receiver as mode of removal) >Valid: GR is SH cannot ordinarily sue to redress wrong done to the corp, must be brought by the BOD. Except: Corp is under complete control of the wrongdoers, or where demand or suit is futile. Thus, where director is guilty of breach of trust and an intracorporate remedy is futile, SH may institute a suit in behalf of himself and other SH and for the benefit of the corp. >Law does not expressly confer upon courts the power to remove a dir. But since court has jurisdictn to appoint receiver due to mismanagmt of board members, these may be removed and others appointed. Here, removal of directors unnecessary and unwarranted since corp assets are amply protected by appointed receiver. (c.f. S28)

v. Leow, Inc. (Outright removal of director for cause then elect new directors) >President had authority to call a special meeting for the purpose of removing a a director for cause and electing new directors, as it is expressly provided in BL. Wording of BL gives president power to state broad purposes in his call for a meeting. >SH has power to remove director for cause even if elected by cumulative voting system. FUNDAMENTAL CHANGES (Investmt) >If corp invested in another corp pursuant to its primary purpose there is no need for SH approval. Where corp invests in another corp solely for control or participation in management and not to accomplish the purpose of its primary purpose, BOD approval & 2/3 vote of OCS in a meeting called for the purpose is required. (c.f. S42)

79. De La Rama v. Ma-ao Sugar

PROXY DEVICE (c.f. S58)

80. In Re: Giant Portland Cement

82. Alejandrino v. De Leon (Proxy

(SH of record = right to vote; P/SH as to voting rights) >Right of SH to vote transferred to unrecorded transferee/purchaser (who voted for management) properly rejected. As far as corp is concerned, that who is recorded is the real owner of the stock and has the right to vote in person or otherwise. >Preferred stocks are by contract usually denied the right to vote. But unless such right is clearly withheld, the P/SH would have the right to vote, since it is incident to stock ownership.
81. State ex. Rel Everett Trust v.

coupled with an interest) >Proxy coupled w/ an interest; scheme whereby controlling SH loan money to SH on the security of their stocks for purpose of perpetuating monopoly of directorship and maintaining value of shares is legitimate (c.f. S55,58) >Proxy issued for a consideration therefore irrevocable >Pledgor-pledgee: interest of pledge in ensuring that the value of stock used as security may not be impaired, and may be sold at a premium to 3P at public auction in case obligor defautls
83. Campbell v. Leow, Inc. (Solicit

in books / no copy to corp) its illegal.

85. Everett

Pacific Wax (Proxy coupled w/ an interest) >Agreement to offer shares to partner first before sale secured by the proxy agreemt >A proxy in favor of the pledgee of the shares subject of the proxy is sufficient interest to render the proxy irrevocable. >GR: A proxy is revocable even though by its terms it is irrevocable, except: (1) where authority or power is coupled w/ an interest which is not limited to the thing itself (certificate of stock) upon wch the power is to be exercised, but also includes the subject matter upon wch the power is to be exercised (voting right and control of corp) (2) where authority is given as part of a security or is necessary to effectuate a security more than interest in being permitted to exercise power, less tan estate

proxies) >Management entitled to expend reasonable sums of corp funds in the solicitation of proxies; proxy votes valid VOTING TRUST AGREEMENT (c.f. S59)
84. Abercrombie v. Davis (Agency

agreement = VTA; not in compliance with statute) >Agency agreement is a secret voting trust: Voting rights divorced from beneficial ownership which is reclaimed by the SHs through stock receipts to acknowledge their holding of the stock certificates. Voting rights transferred to fiduciaries named agents, for irrevocable period of 10yrs. All voting rights were pooled in the agents as a group. It is a control device whose purpose is to achieve effective control of the board and control its policies. >Since it was not in compliance with the statutory reqt (no transfer

v. Asia Banking (Abuse of VTA) >Abuse of VTA; breach of trust as basis of termination of V.TA >Bank acquires control of co. via VTA; similar to rehabilitn; VTA used by bank as trustees to defraud the real owners of the business; VTA set aside >Effect: SC recognized right of transferring SH even under the old Corp Law to set aside VTA when their rights are trampled upon by the trustee >Derivative Suit/Exhaustion of intra-corp remedies: Demand not necessary where it would be futile to make it, as where the majority of the board are the very ones guilty of the wrong complained of. >Exceptin to GR that corp should be made party defendant in derivate suit. (also: Angeles v. Santos; controlling doctrine is RP v. Cuaderno) >Right of inspection: Both the voting trustee as well as the transferor have the right of inspection. The transferor, although no longer a SH of record, is the beneficial owner of the shares and should have as much right to seek information to protect his investment as any other SH. v. Nicollet Hotel (Consideration for voting device= investmt via PS / loan via bonds wch is conditn for State Securities Commission approval) >Voting trusts not illegal per se and will be upheld absent any invalidating circumstance such as

want of consideration, voting power not coupled with an interest, fraud, illegal purpose, etc. Here, the voting power of the trustees was coupled w/ an interest & all are w/ legit purpose of conserving property for benefit of purchasers of PS and bonds. >transferees of VTC acquire no better right than transferor; no voting rights during VTA (enuh)
87. NIDC v. Aquino (VTA as part of

86. Mackin

corporate loan agreement) > Corp should have annulled foreclosures because properties acquired by NIDC (trustee) not out of VTA but out C-D relationship in a foreclosure. Thus upon expiration of the VTA, NIDC (trustee) must return only the certificate of shares and not the properties itself. >SC failed to appreciate that VTA part of loan arrangement, means by wch the bank obtains control over the management of operation of the borrowing corp, not merely a transfer of voting or other rights pertaining to the shares. >SC not ready to import into Phil jurisprudence the concept of lenders liability by wch a lender becomes liable as trustee for the operatns & mgt of co. to which it had extended loans by reason of its having itself to be involved in the mgt & operatns of the borrowing corp. VOTING/POOLING AGREEMTc.f. S100(2) Ringling Bros. (Consideration device=RFR)
88.

v. for

Ringling voting

>Valid: 10yr agreemt b/w 2 SH for RFR of stocks or VTCs and to vote together a certain slate of directors or to follow arbitrators decision is valid and enforceable, not a mere agreement to agree. >NOT VTA but a variation of a stock pooling agreement, since SH vote for their own stock at all times. Direction by arbitrator only in limited cases, SH retains continuous voting control. Thus compliance with Delaware Statute as to the form and registration of VTA n/a. >Arbitrator implied agency coupled with an interest, thus irrevocable EK Buck Retail Store v. Harket (Consideration for voting device= loan/investment) >Valid: Voting agreemt (whereby 2 out of 4 board seats will be held by Buck group; other 2 will be nominated from each group Buck & Harkert) is consistent w/ statutory law that corp is to be managed by BOD as elected by SH. SH elect BOD and vote policy decisions by the terms of the private contract, and the control agreemt is for benefit of the corp, doesnt defraud creditors or other SH not parties to the contract, and doesnt violate no statute or recognized PP. >Note: GR is agreement should not limit actions of directors after they have been elected otherwise, void. Except: for the benefit of the corp as in this case.
89.

>Valid: While GR is that corp business is to be managed by board, SH may do as they please and enter into contract provided no party is damaged. The test is damage to any party (corp, SH, creditors 3P, public). No such damage here. >Note: GR is pooling or voting agreemt cannot limit discretion of directors. Except: Close corp as in this case. See S100 (2) >See declaration on dividends in case. OTHER CONTROL DEVICES Gottschalk v. Avalon Realty (Classification of shares; Consideration for voting device=PS with economic rights) >Valid: Restriction of voting power in preferred stock need not be expressed in the stock certificate. It may exist by necessary implication. The provision in the certificate authorizing holders of PS to vote whenever default should exist in the payment of dividends after July 1951 constitutes a denial of the right to vote prior to the happening of that contingency (voting rights subject to a suspensive condition). (c.f. S6)
91. 92. Sherman & Ellis v. Indiana

managing co (Sherman) conducted a casualty business. (c.f. S44)

93. Benitendi

v. Kenton Hotel (Unanimous vote reqt) >Void: The unanimous vote reqt gives minority interest an absolute, permanent, all inclusive power of veto. Device is unlawful because it contravenes an essential part of the State policy. Every stock corporation must have a representative govt, w/ voting conducted conformably to the statues, and power of decision lodged in certain fractions, always more than half. (c.f. S6)

Clark v. Dodge (Consideration for device=IPR, services, formula)

90.

voting secret

Mutual underwriting corp (Management contract) >Void: 20yr Management Contract void because what has been delegated was not only the managerial powers but the principal business of writing casualty insurance. managed company (Indiana) became a mere instrumentality by which

CHAPTER VIII DUTIES OF DIRECTORS / CONTROLLING SH DUTY OF DILIGENCE

94. Otis & Co. v. Pennsylvania &

Co. competitive bidding v. bond refinancing negotiations (BJ Rule) >Business Judgment Rule: courts will not interfere in matters of business judgment / court will not overturn and directors will not be held personally liable reasonable basis, good faith, uninfluenced by another consideration other than the bes interest of the corp. > No charge of BF.
95. Montelibano

> In determining whether reasonable diligence has been exercised, the particular circumstances of each case must be considered. The nature of the business is an important factor. Thus, a director of a bank is held to a higher degree of diligence than an ordinary commercial transaction. 97. Walker v. Man failure/negligence in collecting loans () >Nonfeasance (c.f. S31) or gross negligence bordering on fraud!
98. Steinberg v. Velasco buy own

but after he has laid the foundatn for the successful completn of the same, he can still be held liable to acct for the profits he ma have reaped. (c.f. S35) Note, however, that what controls in making such director liable is his intention and actual use of influence with codirectors.
99. Barnes v. Andrews 2 BMtgs: 1

100. Bates

v. Dresser embezzlemt mssgr, bkkeeper, teller () >(Enuh): Negligence (c.f. S31) >Directors not liable, but president liable DUTY OF LOYALTY Self-Dealing

v. Bacolod Murcia milling contracts w/ sugar planters (Test to determine UV; BJ Rule) >Attitude of courts towards corp acts & contracts wch are not per se illegal or prohibited is liberal due to 2 public policies: (1) Contract Law (2) Corporate Law >Business Judgment Rule: BOD of a milling co. has the authority to modify the proposed terms of the milling contract for the purpose of making the terms more acceptable tot the other contracting parties. As long as the resolutn was passed upon in GF by the BOD, it is valid & binding, & WON it will cause losses or decrease corp profits, court has no authority to review thm.
96. Litwin

v. Allen bank repurchase bonds after 6mos. (Degree of care & Dilidgence) >Director of a bank is held to a higher degree of diligence than an ordinary commercial transaction. >Negligence at the time of transaction & causation.

shares / dividend declaratn (Trust Fund Doctrine; Remedy for Illegal Distribution; Selfdealing) >Trust Fund Doctrine: Corp creditors have right to assume that so long as there are debts & liab, BOD will not use its assets to purchase its own stock or declare dividends to its SH, when the corp is insolvent. (c.f. 41) >As applied to S43, Steinberg is a clear indicatn that only dividends declared from a bona fide URE is legally permissible. Thus, although a corps B/S provides for URE, if the figure does not register the true value of the assets (such as when worthless assets have not been written-off), dividends declared on that basis would be illegal. (c.f. 43) >Remedy for Illegal Distributn: Directors who are in BF or are grossly ignorant of their duties shall be held solidarily liable for the reimbursement of the amt declared as dividends to the corp, or if it has become insolvent, to its creditors. >Even when the director resigns in order to consummate the contract,

absent; productn problems (Duty of diligence; BJ Rule) >Inattentiveness of director: Although directors are not expected, nor is it desirable for them to interefere with the da-today administrative details of the business of the corp, they should keep themselves sufficiently informed about the general condition of the business, and to some extent, of the manner in which it is being conducted, so that they may become aware of the difficulties and the problems that must be met and solved. If due tot their F/N, the assets of the corp are wasted or lost, each of them may be held responsible for any amt of loss which may have been proximately caused by his wrongful acts or omissions. They cannot however be held liable for mistakes or errors in the exercise of their business judgmt, provided the act in GF & w/ due care & prudence. (c.f. S31) >Burden of proof on plaintiff (receiver) where business fails from general mismanagement, business incapacity or bad judgment: show that directors performance of his duties would have avoided loss & what loss it could have avoided.

101. Palting

v. San Jose Petroleum (BL: no liab for self-dealing under old Corp law where there were no provisions on self-dealing) >Grandfather Rule xxxx (p. 46) >AOI provision allowing dir. & officers immunity fr. Any claims against corp even in cases of selfdealings against Phil corp policy. Affects dir-SH fiduciary relnship obvious to those who protect investors interest. Provisn allows dir & officers to do anything short of actual fraud, w/ corp affairs even to benefit themselves directly or toher persons or entities to which they are interested, & w/ immunity because of the advance condonatn or relief from resp by reason of such acts. (p. 159) (c.f. 32) >BL provision seeking to have its securities registered & distributed in Phils.xxx (p. 260) >Other provisions wch allow election of non-SH as directors completely disassociate SH from the govt & management of the business in wch they have invested (p. 260)
102. Mead v. McCullough sale of

wrecking contract to 1 of dir., bad operatns (Self-Dealing; Duty to Creditors: Effect of insolvency on duties & obligatns of directors &

officers; Presumption of abandonment) >Duty to Creditors: When the corp is insolvent, the directors will be deemed trustees of the creditors & should manage its assets w/ strict regard to the creditors interest. And if they themselves are creditors, they will not be permitted to secure to themselves a personal advantage over other creditors. >Effect of insolvency: No reason why a dir or off, by the authority of a majority of the SH or BOD may not deal with the corp, loan it money or buy property from it, in like manner as a stranger. So long as a purely private corp remains solvent, its directors are agents or trustees for the SH. They own no duties to others. But the moment the corp becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corp or not, & must manage the prop & assets w/ strict regard to their interest; and if they themselves are creditors while the insolvent corp is under their mgt, they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in GF & for adequate consideratn purchase fr a majority of the dir or SH the prop even of an insolvent corp, & a sale thus made to him is valid & binding upon the minority. (c.f. 32) >Under S32: Presence of plaintiff (minority SH) was not necessary to constitute quorum; his vote not necessary for the approval of the cotract; the contract is not only fair

& reasonable under the circumstances but also necessary >Abandonment: Where a director accepts a positn in wch his duties are incompatible w/ those as such director, it is presumed that he has abandoned his office as director of the corp. - ok Fixing Compensation Directors / Officers of

>Profit sharing plan reasonable & ratified.

valid,

108. Singer

Using Inside Information (SRC, Sec 23.2, 27, 71)

106. Strong v. Repide friar land;

103. Govt. v. El Hogar 5% profit

shared based on attendance of BMtgs () >(Enuh): incentive for attendance valid (c.f. S30) as to compensation of directors!
104. Barretto v. La Previsora 1%

profit = pension; past service () >A SH resolution to grant such compensatn for directors / officers can only refer to future & not to past services. (c.f. S30) >BL provision UV, cant authorize con compensatn for past services rendered. >During the early history of Phil Corp Law, it was the accepted notion that any contract made or BL provision adopted by a corp in contraventn of law is UV & void. (p132-ok) (c.f. 45 )
105. Kerbs v. California Eastern

administrator = majority SH (special facts doctrine) >Violation of fiduciary trust: Director may be held accountable directly to the SH where the special facts surrounding the transaction give rise to the obligation to disclose his identity or the inside info he possesses (vs. the traditional view that the director holds fiduciary relnship to the copr but not to the individual SH) >Duty of disclosure of director (3/4 maj SH) to disclose the circumstance that would affect value of stocks, failure of which amounts to fraud
107. Taylor

etal v. Carlisle underwriting for pub utility co. (Corporate opportunity) >Controlling interest has fiduciary relation towards minority SH >Mere directorship in two competing corporations does not in and of itself constitute a wrong. But where a fiduciary is engaged in a business in competition w/ his corporation, he cannot actively use his position & power over his corporation so as to prevent the crop from seeking certain business in competition with himself. Here, not only failed and refused to attempt, but affirmatively prevented corp from competing with them for business. >No need to allege that corp is well-equipped to handle the opportunity or that business would go the corp; but must allege the specific transactions
109. Irving Trust v. Deutsch etal

losing business became very profitable; stock option + profit sharing plan () >Stock option plan: no condition in the plan insuring benefit to the corp; Valitdity of stock option plan depends directly upon the existence of consideration to the corp; reasonable relationship b/w the value of the services rendered & the value of the options granted.

v. Wright autofinancing turned investmt co.; w/ jewel asset (special facts doctrine) >Court applied special facts doctrine (not majority nor minority) >Special facts by reason of position as directors, had full knowledge of actual value of stock, concealed identity to effectuate purchase of stock >Majority/Legalistic view duty to corp, not SH collectively under principle of separate personality >Minority/Realistic view duty to SH by virtue of the strategic inside information obtained Seizing Corporate Opportunity

stock purchase by dir. claiminig corp has insufficient funds (Corp insufficient funds) >Directors forbidden from taking over for their own profit a corporate contract on the plea of corps inability to perform. Reason is temptation to refrain from exerting strongest efforts for the interest of the corp. >If directors are unsure as to WON corp can perform, they need not embark on the venture themselves. And if they do, no profit will accrue to them even if they risk own funds.
110. Litwin v. Allen (supra) stock

purchase by dir. (Not business opportunity of corp) >When not business opportunity: not offered to the corp; no

expectancy; corps interest arelayd fixed & limited by wholly independent arrangement; different interest involved; purchase & resale by directors in no way competed with corp. >Not business opportunity having fulfilled the duty to corp according to their best capacity, the directors are not precluded to transact at their own risk.

SHs applied to situation where there is a clear-cut majority. CHAPTER IX - INSPECTION

113. Pardo v. Hercules Lumber

Interlocking Directors
111. Globe Woolen v. Utica Gas

10d before annual SH mtg (restrictions on right) >BL cannot unreasonably restrict the right to inspection to merely a few days during a year chosen by the directors. The law means at reasonable hours on business days throughout the year.
114. Gonzales v. PNB nominal SH

chief SH in milling co.; nominal SH in elec. co. (interlocking director; refusal to vote does not nullify influence / dominance) >Although a director may not have voted in the corp in which he is a nominal SH, if the other members of the board are under his dominating influence, he will still be considered a self-dealing director covered by the provision. (c.f. S35) >S33: interlocking directors Duty of Controlling Interest
112. Insuranshares v. Northern

Fiscal Corp. sale of control to looters () >Duty of controlling interest: GR is controlling SH may dispose of his stock at any time & at any price, but they cannot abuse by transferring office to persons who are known as intending to raid the corp treasury or improperly benefit or enrich themselves. >Sir: A systematic, orchestrated move to transfer mgt/ctrl to an irresponsible group; duty to inform

1 share; adversarial SH (nature) >Nature of right to inspect under Corp Code v. Corp Law: While the present provision seemingly enlarges the right of insepctn, the new Code has prescribed limitatns to the same. It is now expressly reqd as a conditn for such examination that the one requesting it must (1) not have been guilty of using improperly any info secured through a prior examinatn, & (2) that the person asking for such examinatn must be acting in GF & for a legitimate purpose in making his demand. >Where a person acquired 1 share of a corp just so he can exercise his right to inspect a transactn entered into before he became a SH, his purpose is not germane to his interest as such & is thus not legitimate. Right is denied. >Covers prior acts before became SH
115. Veraguth

>Records are voluminous & may be difficult to interpres, thus SH may make copies, extracts, & memoranda of such records. >No absolute right to secure certified copies of the minutes of a corp until these minutes have been officially written & approved by the directors >Place of inspection: SH cannot demand that he be allowed to take the corp books out of the corps principal office for the purpose of inspecting them (c.f. S73) >BL may not provide for inspection only upon authority of the president of the corp previously obtained in each case. >A wrongful denial of the right to inspect corp books & records may be enforced by mandamus.
116. Gokongwei

v. SEC (subsidiary books; germane to purpose as SH) >SH has power to inspect corp books of a controlled subsidiary of the mother corp of wch he is a SH, since it was a wholly-owned subsidiary, and therefore under the control of the parent. >What is a legitimate purpose? One which is germane to the interests of the SH as such & not contrary to the interests of the corp. >Remedy if inspectn refused: Mandamus (1) directed to corp; (2) secretary may be joined as partydefendant. See also Banking. Everett v. Asia

v. Isabela Lumber Co. notice to mtgs & copies of minutes (copies; place; pretexts)

CHAPTER SUITS

DERIVATIVE

117. Evangelista etal v. Santos

misuse/mismanagement by F/N leading to lapse of lumber franchise (Standing) >Standing: Action must be brought for the benefit & in behalf of the corp.
118. Republic Bank v. Cuaderno

protect chair for crim prosecutn = waste of assets; derivative suit (Standing; Exception to exhaustion of intra-corp remedies; Corp as plaintiff) >Standing to institute derivative suit: Number of shares immaterial since the SH is not suing in his own behalf. Suing SH is merely nominal party, but real party in interest is the corp. >Whether in a derivative suit filed by a SH, the corp should be joined as a plaintiff or a defendant is not important; what is important is that the corp should be made a party in order to make the courts judgment binding upon it & thus bar future relitigatn of the issues (Compare w/ Everett and Angeles cases; controlling doctrine is RP v. Cuaderno) >Exception to the GR that intracorp remedies must be exhausted: where it is a futile formality; corp refuses to sue or are the ones to be sued (also Everett)
119. SMC

(2) he has exhausted intra-corp remedies (i.e. demand on BOD for approp relief, but the latter failed or refused to heed his plead) (3) COA actually devolves on the corp, the wrongdoing or harm having been caused to the corp & not to the particular SH bringing the suit. >Standing to institute derivative suit as a SH: bona fide ownership by a SH in his own right suffices to invest him w/ standing to bring a derivative suit for the benefit of corp. >Although a director may have been voted into office by a block of SHs, it is the directors duty to vote according to his own judgmt & his own conscience as to what is in the best interest of the corp. See also Everett v. Asia Banking and Angeles v. Santos. CHAPTER XI FINANCING THE CORPORATION Kinds of Shares of Stock Common Stock Preferred Stock
120. Ellingwood v. Wolfs Head

end (v. Burk v. Ottawa mandatory dividend; also compare with Lich v. US non-cumulative, right to net profit, not annual net earnings) (c.f. S6) >Difference in treatment of ongoing concern & liquidation
122. Augusta Trust v. Augusta

etal. Holder of bond convertible to P/S (Fr. creditor to P/SH) >Preferred SH not a creditor >After conversion, P/S not entitled to share in proceeds of mortgage, which rightfully belongs only to bondholders who are the secured creditors with lien over the mortage. (c.f. S6)
123. Garcia v. Lim Chu Sing SH

(Post-incorporation subscription; Purchase v. Subsription) >As to nature: P: agreemt b/w individual & corp; S: mutual agreemt among SH >As to when SH: P: upon payment; S: even before payment > As to effect of insolvency of corp: P: failure of consideratn rescissible; S: immediately due & demandable >As to C-D reln: P: not debtor; S: debotr >As to corps capacity to release: P: corp may release; S: corp may not release Pre-emptive Right
126. Benito

10T, Trust Receipt 9T offset (SH not creditor; Nature of subscription contract) >SH not creditor, thus compensatn not proper absent 2 persons in their own right are C/D as to each other. Nature of Subscription Contract

v. SEC Corp Law, before S39 (only new issues covered by PR) >SH approval not needed in issuance of stock >Old corp law: PR covers only new issuance of stock; Corp Code: covers all issuances & dispositions!
127. Stokes v. Continental Trust

124. Wallace

Oil Refining (P/S as to contingent voting rights) >Contingent voting power remains in P/S until payment of full years dividends; right of election remains so long as 2 years in default (c.f. S6)
121. Hay

v. Khan sequestered SMC shares, PCGG rep & concurrent SH (Requisites) >Requisites for filing a derivative suit: (1) the party bringing suit should be SH as of the time of the act or transactn complained of;

v. Hay (P/S as to liquidatn; ongoing concern v. liquidatn on distributn of assets) >P/S entitled to accrued unpd div. (=distributn of assets) upon liquidatn even if no profit ever existed or no surplus profits in the

v. Eclipse Pocahontas Coal Co. pre-inc: SH leasehold = 250 shares (Pre-incorporation subscription) >Subscriber right to compel issuance of proper COS for his leasehold (property) corresponding to 1/5 interest in the business, not money judgmt (c.f. S62(2)) >Pre-incorporation subscription (c.f. S61)
125. Bayla etal v. Silang Traffic

influential bank bought shares at premium (nature of PR) >PR an inherent right to proportionate share of new stock issued for money only & not property; a waivable right, but SH cant be deprived of this right w/o his consent >SH who had no PR dilution of interest; however, because 3P paid a premium, SH gets to share in a bigger pool (expectancy)
128. Thom

Co. Inc. Corp Law, before S60

v. Baltimore Trust new issues for purpose of bank merger (no PR in exchange for property) >No PR where purpose of new issue is to effect merger, otherwise

it wouldnt be feasible to consummate acquisition of property by corporatn in exchange for their stocks, provided not in bad faith (c.f. S39) >Acquisition of all or substantially all of the stocks of one corp from its SH (acquired corp / subsidiary), in exchange for the stock of the acquiring corp (parent)
129. Ross Transport v. Crothers

corp at a specified price not lower than par, exercisable by the grantee at any time within a specified period. >Consideration for warrant diff. from consideratn for underlying shares >What was pd for warrants formed part of corp assets.
131. Jordan Co. v. Allen (hybrid

>Consideration for issuance of CS invalid because to be rendered future services >Invalid no par value CS because (1) no. of no par value shares not state in AOI (c.f. S14(8)) and (2) consideratn fixed by BOD , but BOD had no authority under AOI
134. McCarty

sale of unissued ACS by directors to themselves (issue in breach of trust / bad faith; constructive fraud) >Where dir/officer sell stocks to themselves, burden is upon them to prove good faith & equity of their transactions (voidable); here, no financial need therefore bad faith! >Even if the PR does not exist either because the issues comes within the exceptions in S39 or because it is denied or limited in the AOI, an issue of shares may still be objectionable if the directors have acted in breach of trust & their primary purpose is to perpetuate or shift control of the corp, or to freeze out the minority interest. Debt Securities
130. Merritt

security; interest v. dividend) >In determining whether interest or dividend: (1) treatment of parties (2) maturity date & right to enforce collection* (3) rank on dissolution (4) uniform / prescribed rate of interest or income payable out of profits (5) participatn in mgt and right to vote *Key Factor
132. Aladdin Hotel v. Bloom maj.

v. Landeau PN consideratn for stocks issued to president (PN as consideratn) >The prohibitn against PN as consideratn for stocks intended to protect corp, not shield unpaid SH.
135. Rhode

>Rule on Call: valid call not reqd where corp is insolvent all unpd subscriptions become due & demandable, recoverable by assignee in insolvency (corollary to Lingayen; same as Phil. Trust Co. v. Rivera) >Contract Theory & Rule on Release: Subscriber is a debtor from the moment he subscribes to his shares (corollary to Lingayen & Fua Cun); Corp cant release w/o unanimous consent & valuable consideratn (same as Lingayen; Phil trust)
137. Lingayen Gulf v. Baltazar

SH extended bond maturity w/o minority consent (Trust Indenture) >Strict compliance by corp & trustee w/ deed of trust provisions; no equitable right, if any grantors have it not Bloom; ratified by acceptance of interest; trustee alone has standing CHAPTER XII CONSIDERATION FOR SHARES Liability on Watered Stocks (c.f S65)
133. Triplex Shoe Co. v. Rice &

Chapman v. New York Trust (convertible securities / stock purchase warrants) >Effect of stock dividends on holders of stock option warrant: Corp reqd to deposit addnal 40% more w/ trustee resultinf from its declaratn of SD pursuant to trust deed >Stock purchase warrants options to purchase stocks in the

v. Dock-hop Co. stocks fully pd. but not equal in value - property (watered stock) >2 contracts involved: corporation transferor (watered); transferor transferee >An innocent purchaser for value / transferee of watered stock not reqd to pay anything more even @ suit of corp. The essence of creditors right to compel balance is that watered stocks are fraudulent as to him. >Innocent purchase for value of watered stock like the holder in GF of negotiable instrument, based on policy of encouraging free transferability of shares. Remedy of defrauded creditor against original owner / transferor of watered stocks (first contract). How Payment of Shares Enforced (c.f. S13, 67-70)
136. Velasco v. Poizat insolvent

solvent corp; w/ notice, but call not published (Subscription Contract - Contract Theory & Rule on Release; Rule on Call; Rule on Fixing Compensatn) >Rule on Call: provisions on call, notice & publication mandatory especially if solvent corporation (corollary to Velasco); publicatn reqd when calling except when insolvent; once call is made, it must operate uniformly on all SH. >Contract Theory and Rule on Release: Once the subscription contract has been perfected, each subscriber must comply with his contract and pay his subscription. Not even the corporatn, once formed, can release him from his obligation, except: (1) unanimous consent of all SH ; (2) only upon valid consideration (3) without prejudice to creditors (same as Phil. Trust co. v. Rivera; Velasco)
138. De Silva v. Aboitiz BL: net

Hatchins Inc. No par value CS v. PS in elections; consideratn: services for CS (services as consideratn)

corp; released Infante; court action v. Poizat (Subscription Contract - Contract Theory; Insolvent corp; Rule on Call)

profit applied to unpd subscriptn; no dividend declaratn (alternative actions of corp)

>BL providing for application of net profit to unpd subscription not sole & exclusive method; BOD has absolute discretn to select among the ff: (1) BL (2) Delinquency sale (3) Court action >Where court action is the remedy chosen, a valid call is a prerequisite to liability. Natl Exchange v. Dexter (dividends to be declared as consideratn for stocks in subscription contract) >Illegal for subscriber to pay nothing for the shares except as dividends may accrue because it is discriminatory ifo of subscriber to the detriment of creditors & other subscribers. >Compared with Da Silva v. Aboitiz wherein application of dividends on unpd subscription appears in BL still invalid because apart from ensuring equality among SH, the law seeks to protect corp creditors. >Also, in Aboitiz, subscription came from a fund. Lumanlan v. Cura unpaid subscriber assumes corp debt in exchange for remission of 50% of his unpd subscription ( >Since there are other corp creditors, corp has right to collect all unpaid stock subscription notwithstanding the agreement. Rights & Obligatns of Holders of Unpaid but Non-delinquent Stock (c.f. S72, 66, 63, 64)
139. Fua

>Indivisibility: Right in an equity of 500 shares from moment of subscription even if not paid. Subscriber acquire rights of SH fr. moment of subscription (corollary to Velasco; v. Baltazar); thus he may sell / mortgage them. >Upon payment of unpaid portion, entitled to issuance of COS for 500 shares; >CM valid b/w Fua Cun & Chua Soco as well as Bank because there was due notice (v. Uson v. Diosomito where notice is immaterial, only record is immaterial. Note that Uson is absolute transfer not collateral transfer like Fua Cun) >No lien in favor of corp upon shares of SH for indebtedness other than subscription (c.f. S63 last p., compare with Nava)
140. Baltazar v. Lingayen Gulf

>S63 contemplates alienatn, sale or transfer of stock covered by COS >In the stocks & transfer books of the corp, only transfer of COS can be recorded. The sale of subscription agreements cannot be recorded in the stock & transfer book. CHAPTER XIII DIVIDENDS / PURCHASE BY CORPORATIONS OF SHARES See also Steinberg. Form of Dividends
142. Nielson & Co. v. Lepanto

>Unrealized appreciation of fixed assets not surplus from which dividends may be declared
144. Lich

w/ COS; BR depriving unpd SH of right to vote; before S64 () >W/ COS representing par value paid so far; may vote said shares even if balance of subscription is delinquent; says Fua Cun is obsolete because Corp Law allows 2 ways of applying partial payment : (1) fully payment for corresponding no. of stock par value covered; and (2) pro-rata applicant to entire no. of stocks subscribed (v. Fua Cun)
141. Nava

Cun v. Summers mortgage of stocks no COS (Indivisibility of Subscription; Effect of notice on validity of CM of stocks not covered by COS)

v. Peers no COS; importance of COS to make transfer effective against 3P () >COS needed to make transfer effective against 3P; transfer may not be recorded because (1) not covered by COS; (2) corp has claim on 20 unpaid shares (c.f. S63, compare with Fua Cun)

Consolidated services under MC by Lepanto to Nielson (Stock Dividends) >A corporation under a management contract may be issued shares in payment for the reasonable value of its services. (c.f. S62(3)) >But since it is not a SH of the managed corp, such shares must come from unissued shares of the latters original ACS or of a subsequent increase thereof, & not in the form of stock dividends, to which only SH are entitled. >Also: because stock dividends are in the nature of civil fruits belonging to the usufructuary and not to the naked owner of the stocks on wch they are declared. Source of Dividends
143. Berks

v. US Rubber RE (deficit) = A (L+LC); cap restructure to remove deficit by increasing LC (Annual Income v. RE) >Non-cumulative P/S inchoate right attaches to net profit (retained earnings), not annual net earnings (annual income); this is essential distinction from cumulative >non-cumulative dividends in yrs w/ enough net earnings; cumulative dividend / arrearages WON net earnings are sufficient >compare with Hay v. Hay (preference in liquidation even if there was never profit nor surplus profit upon liquidation) Dividend Discretionary? Declaration:

145. Keough v. St. Paul Milk Co.

SD declared instead of CD (CD reqd in substantial accumulatn of surplus profits) >Exception to the general rule that management has absolute discretion to declare cash dividends: here BOD abused their discretion & accumulated surplus profits unreasonably by capitalizing profits (via SD), on the excuse that it is needed for expansion or reserves, but motivated by personal purposes or BF.
146. Dodge v. Ford Motor Co.

Craumer assets)

Broadcasting v. (write-ups of fixed

Ford wants to decrease SP, improve qlty & productivity expand () >Corp exists for profit of SH, not the benefit of the public; should declare cash dividends

>No guarantee that business will be more profitable Preference as to Dividends

147. Burk

condition of the SHs exercise of their appraisal right (c.f. S81) >No minimum value for the exercise of appraisal right. Special Amendments -Increase in Capital Stock (c.f. S38) -Reduction of Capital Stock (c.f. S122)
150. Philippine

v. Ottawa Gas & Electric Co. Non Cum P/SH contract provides (Mandatory Dividend Type) >The terms of the P/SH contract may impose a positive duty on the directors to declare preferred dividends every year that profits are earned. In such case, failure of the directors to do so would not deprive the holder of this kind of stock of his dividend rights for the particular year. (v. Hay v. Hay) >Only means by which P/SH of this type may earn profit from his investment. Duty of Controlling Interest When Right to Dividends Vests
148. McLaran

the judgment it is void against the judgment C; notice is immaterial (v. Fua Cun) >Strict adherence to the letter of the law: an unregistered transfer, not being effective against persons other than the parties thereto, cannot prevail over the rights of a subsequent attaching creditor.
152. Nautica

155. Santamaria

v. Crescent Planning Dividend declared but not set aside () >Creation of C-D relation b/w SH and corporation upon lawful declaration of dividends by the BOD. Thus, may not be rescinded or revoked after declaration. >Note: N/A to stock dividends CHAPTER XIV AMENDMENTS TO CHARTER Amendments Changing Rights (c.f. S81)
149. Marcus

Trust Co. v. Rivera BR decreased CS by 50% % released subscribers (Reduction of CS, cf. S122) >Reduction of CS must not prejudice rights of corporate creditors, such as releasing SH from the payment of the balance of their subscription >Assignee in insolvent has right to collect upon unpaid subscription (same as Velasco) >Corp has no power to release subscriber w/o valuable consideration (same as Lingayen) >Non-compliance w/ statutory reqt of 2/3 SH approval -Change in Corporate Term (c.f. S37, 11) Amendments Corporations in Close

Canning Corp. v. Yumul dir- nominal SH; Dee beneficial owner (pd) (SH of record) >Transfer of shares not recorded; granting there was an agreement, such is binding only b/w the parties; allegation is self-serving; no proof of transfer
153. Razon v. IAC nominal owner

w/ option to buy (Importance of Indorsement plus delivery of duly indorsed) >In order for a transfer of COS to be effective, there must be proper indorsement plus delivery of duly indorsed COS. Restrictions on Transfer
154. Rural Bank of Salinas v. CA

v. HKSB brokerage > SM > brokerage > HSBC (Estoppel) >Negligence in depositing the COS w/o precaution >Street certificate indorsed in blank >If the SH so indorses his COS in blank & places it in the hands of another for purposes other than transfer, such possessor, although acting w/o authority, may transfer good title to a bona fide purchaser who, relying on the indorsed certificate, believed him to the be owner thereof or to have authority to effect a transfer. The real owner is estopped from claiming the shares as against such bona fide purchaser since he has clothed the possessor w/ apparent authority to deal with the shares as his own.
156. De Los Santos v. Atty Gen.

CHAPTER XV TRANSFER OF SHARES Effect of Lack of Registratn on Effectivity of Transfer (c.f. S63)
151. Uson v. Diosomito judgmt C

SH

v. RH Macy CSH appraisal right bec. PSH given same voting rights as CSH () >Corp amendment diluted voting power to a proportional extent, power to amend burdened with the

transfer > SHs death; bank refuses to record (Restrictions on transfer) >Restrictions on transfer must not merely appear in the BL, BR, acts of BOD/officers; must appear in AOI, BL and COS (same as Fleishcer) >Recording of transfer a ministerial act Certificates indorsed in blank, when quasi-negotiable

Madrigals name for benefit of Japanese (Quasi-negotiable character; Not negotiable) >Quasi-negotiable: COS transferred by indorsement + delivery; not negotiable because holder takes it subject to rights of the registered owner (S63 provides: not valid except b/w parties until entered & noted upon corp books, til then absolutely void) >Stolen COS; no title acquired by innocent purchaser for value as against true owner, except only where true owners negligence has been such as to create an estoppel against him. Collateral Transfers
157. Chua

(won) v. transferee where sale > judgmt > record of sale (SH of record) >Record of sale came after judgmt, thus even if sale took place before

Guan v. Samahang Magsasaka creditor-mortgagor v. levying creditor where

mortgage > assignmt > foreclosure > attachment (Double registration) >If the COS is not delivered to the C, the transactn must be registered in the CM registry domicile of mortgagor + corp place of business to make encumbrance valid on 3P >Registration on the stock & transfer book of the corp would be of no effect. >Attaching creditor supersedes rights of the mortgagor because it is defectively registered. CHAPTER XVI DISSOLUTION Dissolution by Minority
158. Financing Corp. v. Teodoro

where SH rights may be protected in some other way. >Where the controversy is essentially private in character and does not affect public interest, SolGen may move for dismissal of the quo warranto. (vs. Financing Corp v. Teodoro where private interest & lack of available remedy is reason why court allowed minority SH to sue) Effects of Dissolution; Winding Up and Liquidation (c.f. S122)
160. Gonzales v. SRA Philsucom

there is no time limit w/I which the trustee must finish liquidatn, & he may sue and be sued as such beyond the 3year period of liquidation. (Also: Board of Liquidators v. Kalaw) Distribution of assets payment of debts after

163. China Banking v. Michelin

minority SH suit for dissolutn; exceptn (Private interest) >GR: Minority SH has no right to petition for dissolution, only the state in quo warranto Except: Private Interest doctrine strictly a matter b/w SH >Court may appoint receiver in exceptional cases as when SH cant obtain redress / no available remedy because fraud & mismanagement perpetrated by majority SH / BOD. (vs. RP v. Bisaya Land where the fact that it is private made court realize that quo warranto does not lie) >Making directors personally liable is part of collation process. >(c.f. S104-105) Dissolution by Quo Warranto
159. RP v. Bisaya Land Transpo

SRA asset transfer (Asset Trail in Assets only transfer) >In assets only transfer, the assets must respond for payment of the lawful obligations of the dissolved corporation; successor liable to the extent of the fair value of the assets acquired.
161. Pepsi Cola Prod. Phils v. CA

PCPI acquisition of PDCP (BOD as trustees) >W/in 3y liquidatn pd, the corp may appoint a trustee / receiver; >Failure to appoint trustees w/I 3y pd: BOD as trustees by legal implication
162. Natl

Receiver; Preferred or Ordinary Claim? () >Cannot make a claim preferred from ordinary after dissolution of the corp >Appointmt of receiver is not mandatory in voluntary dissolution. SH may, as a GR, take control of dissolutn. >Appointment of receiver is not the same as the power to decide creditor claims. Procedure: (1) Present claim to receiver (2) If in dispute, present to court for allowance (3) Present court-allowed claims to receiver
164. RP v. Marsman Devt. Corp.

liquidatn (Asset Trail; Trust Fund Doctrine) >The beneficiaries of the corporate properties are liable to the extent of their shares in liquidation. Petitioners here themselves caused their substitution as successors-ininterest of the corporation. >Although the 3yr pd has expired, it does not follow that a creditor who was unable to collect his claim before 3yrs would lose his rights. It is still possible for him to sue the trustee, if there be one, or the court may allow him, if the circumstances so warrant, to follow the corporate assets in the hands of the SH who may have received the same as liquidating dividends. CHAPTER XVII CORPORATE COMBINATIONS
166. Reyes v. Blouse (De facto

land/water transpo quo warranto (intra-corp) >Dissolution is a serious remedy, to be awarded only where no other adequate remedy is available, not

Abaca v. Pore (Abatement of actions upon 3yr expiratn; Old Corp Law) >GR: No provision authorizing corp to continue in its corp name actions instituted by it beyond the 3y pd from the expiration of life, but the law authorizes corps to convey to corp properties to trustees to prosecute and defend actions for the benefit of SH and creditors. (old Corp Law) >Unless the trusteeship is limited in its duration by the deed of trust,

Extra-J dissolution > Tax assessmt after 2 yrs, but w/in 3 yr pd of liquidatn (trust fund doctrine) >No bar to action for recovery of debts of corp against corp, since the liquidator continues in his capacity as such during the 3y pd of liquidation (c.f. S122) >Where the offense of the corp is not serious enough to cause great prejudice to the public, such a severe penalty as revocation should be avoided (also El Hogar).
165. Tan Tiong Bio v. CIR Tax

merger under S28 (now S40)) >De facto merger consolidation of assets, not corporate personality >Otherwise dispose of under S28 >Transfer of assets, not dissolution; not merger / consolidation in the true sense because separate corporate personality continues, absorbed corp not dissolved and no assumption of liabilities
167. Edward

assessment beyond 3yr pd of

J. Nell v. Pacific Farms Equity transfer; judgment C of transferor v. transferee (Exchange of stocks P/S; Equity transfer) >GR: In equity transfer, the purchasing corporation (transferee) not liable for the debts of the selling corp (transferor) if it has acted in GF & has paid adequate consideratn, except:

(1) express / implied assumption of liability (2) transactn amounts to consolidatn/merger (3) transferee merely a continuation of the tranferors (4) fraudulently entered into to escape liability fo such debts >Liabilities not assumed by Pacific under the principles of separate juridical personality (equity shares) >Parent-Subsidiary Relationship: acquisition of all or substantially all of the stocks of one corp from its SH (acquired corp / subsidiary), in exchange for the stock of the acquiring corp (parent) >No M/C but there is a consolidation of control in SH; exercise of control main factor for the purchase of shares w/o M/C, Pacific can maximize property/assets of Insular w/o incurring liability; however, consent of creditor may be required >No amendenment of AOI needed

steps necessary to render it amenable to suit in the local courts (v. Antam) >When license reqd only when ding business in Phils.
169. Columbia Pictures v. CA FC

>the existence of such treaty need not be alleged in the complaint brought by the FC
172. Litton Mills v. CA LC > FC:

reg. IPR, appointed lawyer; Complaint w/ NBI (Not doing business, IPR) >Does not constitute doing business: (1) Mere ownership/enforcement of IPR (2) Mere entering into a contract if consummated outside the Philippines (Contract Theory)
170. Gen. Garments v. Dir. of

uniform delivery; jurisdictional issues (Single transaction but Doing business) >Single transaction in pursuance of business purposes constitutes doing business; intent essential >Fact of doing business must be alleged >How summons done: (1) agent designated (2) govt. official designated (3) any officer/agent of the corp
173. Mentholatum

even distributor does not have an independent staning in court. >Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for wch the corporation was formed.
174. Agilent

CHAPTER XVIII CORPORATIONS

FOREIGN

168. Marshall Wells v. Elser FC

> LC: unpd balance on bill of sale; demurred (Not doing business, isolated transaction) >May sue, isolated transaction >Nature of corp no legal status beyond bounds of sovereignty; thus, it may be excluded by any other state from doing business w/I ints limits, or conditions may be imposed on the exercise of such privileges (v. Gen. Garments) >Object of statute not to prevent FC from performing single acts, but to prevent it from acquiring a domicile for the purpose of business w/o taking

Patents FC seeks cancellatn of Puritan; admin action (Not doing business, IPR) >May sue because only admin proceeding >Registratn of TM not necessary if not suing under IPC, but is one for admin cancellatn of the TM of the corp who is alleged to have infringed the FCs TM, under another section of the IPC. >Nature of corp fact that FC has no license & may not do businesss in Phils doesnt make it less of a juridical person >v. Mentholatum on enforcement of IPR WON licensed, may enforce IPR
171. Le

Chemise Lacoste v. Fernandez FC sues under RPC (Not doing business, IPR) >May sue, because under criminal law the party aggrieved is the state >v. Mentholatum on transactns via distributor: Rustans own name and account

v. Mangaliman FC > LC: Mentholiman (Doing business w/o license) >May NOT sue, because doing business w/o license >Test of doing business: twin characterization test (substance/continuity) whether there is a continuity of transactions which are in pursuance of the normal business of the corporation whether there is a continuity of transactions which are in pursuance of the normal business for it was organized or whether it has substantially retire from it & turned it over to another. The term implies a continuity of commercial dealings & arrangements, & contemplates, to that extend, the performance of acts or works or the exercise of the functions normally incident to, & in progressive prosecution of, the purpose & object of its organization. >v. Le Chemise on transactns via distributor: distributor is the agent of the foreign representative from which it derives authority; thus

Technologies Singapore (Pte) Ltd. v. Integrated Silicon Technology Philippines Corp. FC > LC and LC > FC (Not doing business, w/ valid COA) >Summary of when FC may sue: (1) Doing business: w/ license yes w/o license no except: estoppel (2) Not doing business Isolated / yes COA entirely independent of any business transaction >When license necessary only if FC doing business in the country, if not, license is not required and corp may sue in Philippine courts. Except estoppel : an FC doing business in Phils even w/o license may sue if said Phil citizen or entity received benefits (estopped) such Phil citizen or entity may be estopped from challenging FCs corp personalty >Mentholatum doing business test reiterated. >Foreign Investmts Act maintaining stocks for mere processing & consigning machinery Not doing business >Profit as an additional element in doing business

175. Merril Lynch Futures v. CA

FC > local investors: commodity futures (Doing business w/o license) >Even if doing business w/o license, may still sue because LC estopped to deny corporate existence
176. Top-Weld Mfg. Inc. v. ECED

LC > FC: licensee / distribution agent (Doing business w/o license) >Even if doing business w/o license, relief still not granted to LC because in pari delicto
177. Antam v. CA FC > LC : 3 or 1

contract (Not doing business, isolated transaction) >Auxiliary Rule does not consider as doing business the performance of services auxiliary to an existing isolated contract of sale which are not on a continuing basis >Sound Public Policy - Doctrine of lack of capacity to sue based on failure to acquire a local license is based on consideratns of sound public policy. Never intended to favor domestic corp who enter in solitary obligatns simply because latter not licensed (v. Marshall Wells)