1
CORPORATION LAW
 Corporation is one of the types of business
organizations. It is also the most important in
economic development.
INTRODUCTION
 Sole proprietorship
- One man form of business entity, personally answers
all liabilities, but enjoys all the profits with the
exclusion of others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether they be natural
or juridical
- does not entail continuity because after
undertaking is completed it is already the end
- particular partnership and joint venture would be
similar, but there is already a decision of the Supreme
Court declaring them as different
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a
domestic corporation, it must be registered. Generally
they do not need to be registered.
 Corporations
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions must
go hand in hand
1. The articles of incorporation expressly authorized
the corporation to enter into contracts of
partnership;
2. The agreement or articles of partnership must
provide that all the partners will manage the
partnership; and
3. The articles of partnership must stipulate that all
the partners are and shall be jointly and severally
liable for all obligations of the partnership.
DEFINITION AND ATTRIBUTES
 4 attributes of a corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly authorized
by law or incident to its existence.
 Doctrine of limited capacity
- Only such powers as are expressly granted to it by law
and by its articles of incorporation including others
which are incidental to such conferred powers, those
reasonably necessary to accomplish its purpose and
those which may be incidental to its existence
- Can do things as the law asks or allows it to do
- If it does anything beyond, it shall be considered as
ULTRA VIRES
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 General rule: Moral damages cannot be granted to
corporations
 Exception: Filipinas Broadcasting Network Inc. vs. Ago
Med
- In cases of slander, libel and other forms of
defamation (should not qualify because the code does
not qualify whether natural or juridical) Art. 2219 of
the civil code:
Art. 2219. Moral damages may be recovered
in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious
acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
the (6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped,
or abused, referred to in No. 3 of this article, may also
recover moral damages.
The spouse, descendants, ascendants, and brothers
and sisters may bring the action mentioned in No. 9 of
this article, in the order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore protected by the
due process clause and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining what provisions of
the code or the law may be applicable
Section 3. Classes of corporations. -
Corporations formed or organized under this Code may
be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are
authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the
basis of the shares held are stock corporations. All
other corporations are non-stock corporations. (3a)
 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
creating them
Section 4. Corporations created by special
laws or charters. - Corporations created by special
 2

laws or charters shall be governed primarily by the - If incorporated under the laws of the Philippines it is a
provisions of the special law or charter creating them domestic corporation
or applicable to them, supplemented by the provisions
of this Code, insofar as they are applicable. (n)
• ME Gray vs. CA

 Section 3 - Parent or Holding/ subsidiaries and affiliates

- The two requisites must always concur - Affiliates- no majority vote

1. That they have a capital stock divided into shares; SMC 12%
and,

2. That they are authorized to distribute dividends or

HERSHEY CBPl 12%
allotments as surplus profits to its stockholders on the
CBP
basis of the shares held by each of them.
12%

 Section 4 Affiliate is subject to common control by the 12 % owners

 De jure
- Created by a special law, they have their own
character - cannot be attached by the state even in a quo
warranto proceeding
- They are not immune from suit unless provided by the
law of their creation  De facto

- Primarily governed by the law creating them - exists by virtue of colorable compliance

- Their subsidiaries are entirely different or independent - Attached directly only by the state in a quo warranto
from that of the other proceeding

 Close corporation  Corporation by estoppel

- There is no exemption it is absolute - So defectively formed, but still considered corporation,

but only in relation to those who cannot deny their
existence section 20 and 21
 Public corporation
FORMATION AND ORGANIZATION
- Political or governmental purposes

 3 stages
- Those formed or organized for the government or a
portion of the State or any of its political subdivision
1. Creation
and which have for their purpose the general good and
welfare
2. Re-organization or quasi-reorganization

 Private Corporation
3. Dissolution/winding-up

- Immediate benefit, aim or advantage of private

 Purpose clause
individuals

- Defining the scope of authority of the corporate

- Those formed for some private purpose, benefit, aim
enterprise pr undertaking. Both confirmed and limited
or end

- Distinction: public for governmental purpose  4 limitations of purpose clause

1. Lawful
 Corporation Sole

2. Specific or stated concisely

- Exemption to the rule because it is composed only of
one person 3. More than one, the primary and secondary must
be specified
- An incorporator may also be a juridical person
4. Lawfully combined

 Close corporation
- Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued
- There is exclusivity of shares of stock
less than par

- Section 96-105
 A corporation commences only upon issuance of the
- Restrictions to transfer shares certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a
- Only those indicated can own shares projected corporation

- Article must provide that there will be no public

 Metro Manila- paid up capital requirement is 10 M
offering

 Non- stock- mere mention of the operating capital

 Open corporation

 Mention the authorized capital

- openly admit investors

- example: stock exchange  Restrictions

 Domestic/ Foreign - Mandatory in close

 Test - Not mandatory in ordinary

- Incorporation test
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 3

 Non-stock - venue of actions for or against the corporations

- If value is not more than 100,000 - venue of meetings

- section 51 meetings may only be within the

 A corporation cannot use any other name unless it has
boundaries of the city where the principal office
been amended
- non-stock may be held anywhere in the Philippines, if
 Section 19 provided in its by-laws

- If confusingly similar it will not be allowed to be - where summons may be served

registered
- registration of chattel mortgage must be registered in
the register of deeds where the principal office is
- Verification slip from the records officer located

Section 19. Commencement of corporate • Clavecilla Radio System vs. Antillon

existence. - A private corporation formed or organized
under this Code commences to have corporate - action not upon a written contract
existence and juridical personality and is deemed
incorporated from the date the Securities and
- city where the defendant resides
Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their  term of existence
successors shall constitute a body politic and
corporate under the name stated in the articles of - corporate term required
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is
sooner dissolved in accordance with law. (n) - determining what point in time the juridical personality
will cease to exist

- Words corporation or inc. either in full or abbreviated

- enter into contract only when it has juridical
form must be included
personality

Section 18. Corporate name. - No - once it ceases to exist, it no longer has personality
corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of - exist for another 3 years only for purposes of
any existing corporation or to any other name already liquidation
protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the
- Dissolution- it is automatic
corporate name is approved, the Commission shall
issue an amended certificate of incorporation under
the amended name. (n)  When should extension be made?

 Doctrine of secondary meaning - General rule: Not earlier than 5 years

- Exception: unless there are justifiable reasons

- A word or phrase originally incapable of exclusive  May it be extended after expiration?

appropriation [usually generic] with reference to an
article in the market, because of geographically or - Alhambra cigar vs. SEC once it ceases to exist it has
otherwise descriptive, might nevertheless have been no vested politic, exist only for a period of 3 years only
used so long and so exclusively by one producer with for liquidation and for that purpose only
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase
 Article 5 How many incorporators should there be?
has become to mean that the article was his product.

- 5-15
 Section 18

 May a corporation be an incorporator?

- Lyceum of the Philippines case, the additional
geographical name does not make it confusingly - General rule: only natural persons
similar
- Exception: cooperatives and corporation primarily
- actual confusion is not necessary- Philips case “it is organized to hold equities in rural banks
enough that there is probable confusion”
 How about minors?
 2 requisites must be proven
- NO, because they must be of legal age
- that the complainant corporation acquired a prior right
over the use of such corporate name  May a corporation organized by incorporators
consisting solely of foreigners
- identical, deceptively or confusingly, patently
deceptive - Yes, there is no nationality requirement only
residence, as long as majority are residents of the Phil
 principal office
 Define incorporators <sec.5>
- statement of principal office is required
- Those person mentioned in the articles as originally
- city and municipality not only province must be forming the corporation and who are signatories of the
specified articles of incorporation.

- principal office NOT operations office - Must be signatories to be incorporators

- necessary because it will establish the residence of

Section 5. Corporators and incorporators,
corporations
stockholders and members. - Corporators are those
who compose a corporation, whether as stockholders
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

or as members. Incorporators are those stockholders
or members mentioned in the articles of incorporation
as originally forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
 Define corporators <sec.5>
- All persons who compose the corporation at any given
time and need not be among those who execute the
articles of incorporation at the start of its formation
and organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a corporation from
being a stockholder
 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to
Filipinos
 An incorporator maybe a corporator as long as he is a
stockholder
 section 6
Section 6. Classification of shares. - The
shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may
be deprived of voting rights except those classified
and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or
have no par value as may be provided for in the
articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not
be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of
incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board
of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with
the Securities and Exchange Commission.
Shares of capital stock issued without par
value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be
issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its
no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance with
constitutional or legal requirements.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
4
Except as otherwise provided in the articles
of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other
share.
Where the articles of incorporation provide
for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
(5a)
 How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non stock
corporation whose number of trustees, though not less
than five and not more than [15] should be divisible by
five [5], meaning they must have either five, ten, or
fifteen trustees and no other;
2. In close corporations where all the stockholders are
considered as members of the board of directors
thereby effectively allowing twenty members in the
board.
3. The by-laws of a corporation may provide for
additional qualifications and disqualifications of its
members of the board of directors or trustees.
However it may not do away with the minimum
disqualifications lay down by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all
property of such corporations controlled and held by
the board of directors or trustees to be elected from
among the holders of stocks, or where there is no
stock, from among the members of the corporation,
who shall hold office for one (1) year until their
successors are elected and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name on
the books of the corporation. Any director who ceases
to be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director shall
thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of

the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
 May a domestic corporation have a governing board
consisting solely of foreigners?
- YES, section 23 majority of them must be residents of
the Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number
shall only be in proportion to their equity or
participation in the capital stock of the corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is absolute and may
not be done away with. Corporate by-laws may,
however, provide for additional qualifications and
disqualifications.
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
 Section 27 and 23 minimum disqualifications and
qualifications
• Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares
par value 1.00
Amount of shares subscribed
50 K A depending on the net worth of the company since they
50 K B
C 250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum 25% total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
5
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by the
code?
- If there is minimum paid-up logically there should also
be a minimum capital =5000
 Minimum paid-up capital for a financing company
metro manila 10 M if located in MM
 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges of the
stockholders;
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers
and stockholders.
- As a management control device.
- To comply with statutory requirements particularly
those which provide for certain limitations on foreign
ownership and shares like overseas employment
agencies requiring to own at least 75% of the shares of
stock thereof.
- To better insure return on investment which can be
affected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof,
preference as to dividends and/or distribution of assets
in case of liquidation; and,
- For flexibility in price, particularly, no par shares may
be issued or sold from time to time at different price
do not purport to represent an actual of fixed value.
 Section 6
- Each shall be equal in all respects to every other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding
stocks?
- Section 137
Section 137. Outstanding capital stock
defined. - The term "outstanding capital stock", as
used in this Code, means the total shares of stock
issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (n)
- Voting and dividend rights, it refers to the outstanding
capital stocks
- Only outstanding stocks are allowed to vote and
receive dividends

- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and
dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets
upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT
THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent
with the Code. This is so because Section 6 of the said
law allows a stock corporation to issue preferred
shares subject only to the limitations imposed therein
which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise,
each share shall be, in all respect, equal to every other
share.
 Participating
- Must be stated because the presumption is that it is
participating
 Cumulative
- Irrespective of whether or not they where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends rights
for the previous years? May they be denied dividend
rights because they are non holders of non-
cumulative? NOTE: YOU CANNOT COMPEL THE
CORPORATION TO DECLARE DIVIDENDS UNLESS IT
EXCEEDS 100 % PAID UP CAPITAL SEC. 43
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or
in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from
the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
6
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
 Compare cumulative share from non-cumulative,
earned cumulative or dividend credit type
- Cumulative share –whether or not earned
- Non-cumulative earned cumulative or dividend credit
type- only if earned
 Par
- stated par value; shall not be issued less than par
 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
 Voting
- entitled to vote at any motion brought up in writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of the right to
vote?
- Preferred and redeemable shares
 Is it correct to state that common shares can never be
denied the right to vote?
- Only preferred and redeemable shares are denied
unless provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI
YUNG FOUNDER’S SHARES MERON SILANG EXCLUSIVE
RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG
BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA
SAKOP NG COMMON SHARE RIGHTS
- Example: founders shares- may be given certain rights
and privileges
- Even common shares may be denied the right to vote
of founders’ shares issued <sec.7>
Section 7. Founders' shares. - Founders'
shares classified as such in the articles of
incorporation may be given certain rights and
privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange
Commission. The five-year period shall commence
from the date of the aforesaid approval by the
Securities and Exchange Commission. (n)

 Do you include non-voting shares in passing a valid
corporate act?
- Even non-voting shares are entitled to vote under
section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its own shares if
it has unrestricted retained earnings
 Exception: redeemable shares may be reacquired
irrespective of retained earnings
Treasury shares

- They are treasury while in the treasury account of the
corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the right to
vote?
- Once reissued they shall become outstanding stocks
again and purchasers shall be entitled to all the rights
and privileges as the other holders have
 Section 57 treasury shares have no voting and
dividend rights. Why not?
Section 57. Voting right for treasury
shares. - Treasury shares shall have no voting right as
long as such shares remain in the Treasury. (n)
- Answer: commissioner vs. manning page 62 first par.
“Although authorities may differ on the
exact legal and accounting status of so-called treasury
shares, they are more or less in agreement that
treasury shares are stocks issued and fully paid for
and reacquired by the corporation either by purchase,
donation, forfeiture or other means. Treasury shares
are therefore issued shares but being in the treasury
they do not have the status of outstanding shares.
Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be
re-issued or sold again, such shares, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor in
meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors
will be able to perpetrate their control of the
corporation, though it still represents a paid for
interest in the property of the corporation. The
foregoing essential features of a treasury stocks are
lacking in the questioned shares.
In this case, and under the terms of the trust
agreement, the shares of stock of Reese
participated in dividends which the trustee received
and the said shares were voted upon by the trustee in
all corporation meetings. They were not, therefore,
treasury shares.”
 When the law speaks of outstanding rights it does not
include treasury shares
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks again
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
7
- The corporation may cancel them; in effect there will
be a reduction in the outstanding capital stocks
- The code does not require ordinary corporations to
provide for restrictions, but it does not likewise
prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of
incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily required
in close corporations
- If it does not provide restrictions it is not a close
corporation
- Specified persons- close corporations
- If not one of those specified you are not included
because there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles of
incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of incorporation
 Section 23-27 minimum qualifications, but there may
be additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not
in compliance with the requirements of this Code:
Provided, That the Commission shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
articles or amendment. The following are grounds for
such rejection or disapproval:
1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the
form prescribed herein;
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
3. That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or paid is false;
4. That the percentage of ownership of the capital
stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws or
the Constitution.
No articles of incorporation or amendment
to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan
associations, trust companies and other financial
intermediaries, insurance companies, public utilities,
educational institutions, and other corporations
governed by special laws shall be accepted or
approved by the Commission unless accompanied by a
 8

favorable recommendation of the appropriate - Strict or substantial compliance

government agency to the effect that such articles or
amendment is in accordance with law. (n)
 De facto

- But the grounds in section 17 are not exclusive - 4 requisites must go hand in hand take out anyone of
them there can be no de facto corporation

 When will the corporation commence to exist?

- Section 19
Section 19. Commencement of corporate
existence. - A private corporation formed or organized
under this Code commences to have corporate
existence and juridical personality and is deemed
incorporated from the date the Securities and
Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is
sooner dissolved in accordance with law. (n)
1. There is a valid statute under which the corporation
could have been created as a de jure corporation.
2. An attempt, in good faith, to form a corporation
according to the requirements of law, which goes far
enough to amount to a “colorable compliance” with
the law;
3. A user of corporate powers, the transaction of business
in some way as if it were a corporation; and,
4. Good faith in claiming to be and doing business as a
corporation.
 Are the rights and obligations between officers and
directors of a de jure and de facto the same?

 A corporation de jure can come into existence only

- YES. Governed by the same law, rules and regulations
upon the issuance of the certificate of registration by
the SEC? TRUE OR FALSE?
 Only important in determining, is for the purpose of
applying the rules with regards to the direct and
- TRUE
collateral attack

- EXCEPTION: CORPORATION SOLE <sec. 112>  The existence of a de jure cannot be questioned even
by the State, either directly or indirectly

Section 112. Submission of the articles of

incorporation. - The articles of incorporation must be  Existence of a de facto can be questioned only by the
verified, before filing, by affidavit or affirmation of the State directly in a quo warranto proceeding only
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied • Municipality of Malabang vs. Benito
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly certified - What is the missing link so as to consider it a de facto?
to be correct by any notary public.
A law, because the executive order is unconditional

From and after the filing with the Securities - An unconditional act affords no rights, creates no
and Exchange Commission of the said articles of office
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, - Legal contemplation it was never passed at all
priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or - It can therefore be questioned by any person
church theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister, rabbi  If the certificate of registration has not been issued,
or presiding elder shall be held in trust by him as a may a corporation de facto exist?
corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, - NO!
parsonages and cemeteries thereof. (n)
- Number 4 requirement, good faith in claiming to be
and doing business as a corporation
- CORPORATION SOLE- upon filing of the verified articles
of incorporation, once filed it is vested with a judicial
capacity • Hall vs. Piccio

 General rule section 19 - Missing link is good faith

- Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to atty.
Ladia because there are those that can issue
for example cooperatives- BUREAU OF
COOPERATIVES which register, home
insurance guaranty corporation- HOME
OWNERS
- The certificate was not yet issued by the SEC, the
members knew and therefore they were not acting in
good faith, therefore anybody can question its
existence
 Corporation by estoppel
- So defectively formed so that they are not to be
considered a de jure or de facto

• Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by the CONCERNED
government corporation or agency
- General partners- liable even beyond his promise even
his personal properties are prone to attachment
• Lozano vs. Delos Santos
- Founded on principle of equity

- Prior there to it has no being - Exercise corporate powers

- The transfer of the property was not valid, it likewise - Enters with business with 3rd parties
did not have the right to transfer

 De jure
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 9

- When there is no 3rd persons involved and the problem

o office, it is in legal contemplation, as inoperative as
though it had never been passes
arises between there members, therefore they
themselves know that there is no corporation by
estoppel  Hall vs. Piccio

- No good faith
• Albert vs. University

- 1965 case, no section 21 yet  Corporation by estoppel

- Applied where the rules governing agency - Admission, conduct or agreement

- A person purporting in behalf of a non existing - Will not apply among members themselves there must
corporation be a 3rd party

- Section 21, you arrive at the same decision - Cannot escape when benefited

• Chiang Kai Siek vs. CA - General rule: you deal with a corporation, as to estop it

- SC based its decision from the provision of the

education act
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those members,
2. 3rd party will not be estopped if he is not trying to
- It cannot immune itself by virtue of its non compliance
escape liability
with the law

 2 possible remedies
 Assuming there was no law?

- Chiang kai siek case

- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
- Albert case
juridical personality

 What would be the effect if the corporation failed to

 General rule: a 3rd party transacting with a non commence transaction?
existent corporation shall be estopped to deny
- Automatic
• Asia banking vs. standard products
 Operated but becomes subsequently inoperative for 5
- General rule: absence of fraud a person who has dealt years only a ground for suspension, proper notice and
with a non incorporated corporation shall be stopped hearing
to deny from actions in which it had benefited
 Commencement
- Exemptions: when there is fraud the general rule shall
not apply - Example realty company

• Salvatierra vs. Garlitos CORPORATE CHARTER AND ITS AMENDMENTS

- As a general rule a person who has contracted it a  What do you understand by the word charter? Is it the
corporation lacking personality same as articles of incorporation?

- Doctrine is not applicable where fraud takes part in the - Corporate charter is broader
transaction
 Franchise
 Another exemption
- Primary power granted by the state to be and act as a
• International express travel and tours vs. CA corporation

- No fraud in this case - Secondary franchise is the right or privilege that the
corporation may exercise
- How come Kahn was made liable?
 You cannot issue investment contracts without a
- Doctrine of incorporation secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not
- Applies only if that person is trying to escape from a exist until issued with a certificate of registration or
contract where he is benefited incorporation

- In this case petitioner is not trying to escape liability,  Corporate entity

but rather the one claiming from the contract
- Corporation exist separately and independently from
 Would this apply to foreign corporation? the stockholders

- YES, it may apply - Stockholders cannot bring an action, to bring back the
properties of a corporation
- Georg Grotjahn vs. Isnami
- Corporation has no interest in the individual properties
 A foreign corporation cannot gain access to our courts of its members
unless they attain a license to engage in business in
the Philippines but applying corporation by estoppels, • Sulo ng Bayan vs. Araneta
the court allowed
- Corporation cannot bring an action for the recovery of
the properties of its members
 Municipality of Malabang case

• Caram vs. CA
- No law, hence may be questioned by any person

- An unconstitutional act is not a law, t confers no rights,

it imposes no duties, it affords no protections, it crates
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

- Stockholders cannot be held liable for the legitimate
obligations of the corporation, they exist separately
and independently from one another
• Cruz vs. Dalisay
- Final judgment against a corporation cannot be
enforced against stockholders
• Rustan Pulp vs. CA
- Corporation exist separately and independently
- Corporation are juridical entities, they exist only in
legal contemplation, can act only through its
authorized representatives
• Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the corporation
• Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be
enforced against stockholders, etc., even if
stockholders, etc. happens to own a substantial
interest in the corporation, mere ownership does not
disregard the corporate entity theory
 Corporate entity for legal or legitimate purposes only
 Two or more corporations, one of them will be treated
as a mere alter-ego
 You cannot pierce the veil of corporate fiction when
there are no facts attendant in the case
 Corporate Entity Theory
- The corporation is possessed with a personality
separate and distinct from the individual stockholders
or members and is not affected by the personal rights,
obligations or transactions of the latter
 Instrumentality rule
- Where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the
fiction of the corporate entity of the “instrumentality”
may be disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the shares
of stock of a corporation is not, in itself, insufficient
ground for disregarding the separate corporate
personality. And for the separate personality of the
corporation to be disregarded, the wrong doing must
be clearly and convincingly established
- Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
cannot be justified by speculation and can never be
presumed. And only if it sought to hold the
stockholders liable directly for corporate debt
• Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is one and the
same
• Marvel bldg. vs. David
- There must be facts before the court will be justified in
piercing the veil of corporate fiction
- Corporation was a mere extension of the personality of
the person
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
10
• Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by the
court here?
- Subscribed capital where all advanced by Yutivo, the
board where the same as Yutivo
• Commissioner of Internal Revenue vs. Norton and
Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that it
has a same corporate entity
• La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family,
workers were made interchangeably
• Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their official
capacity)
• Tesco vs. WCC
- The two corporations where located in the same office
• Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
• Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality rule?
“where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the
fiction of the corporate entity of the “instrumentality”
may be disregarded.”
- Has no separate mind of its own. What is the degree of
control?
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own.
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of
a statutory or other positive legal duty or dishonest
and unjust act in contravention of plaintiff’s legal
rights; and,
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
- The absence of one of the elements prevents “piercing
the corporate veil.” In applying the “instrumentality”
or “alter ego” doctrine, the courts are concerned with
reality and not form, with how the corporation
operated and the individual defendant’s relationship to
that operation.
 There must facts and circumstances before warrant
piercing the veil of corporate fiction
 The control necessary does not mean stock ownership
• MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all of the
capital stock of a corporation does not necessary

mean that it is a mere business conduit of the
stockholder, that conclusion is amply justified where it
is shown, as in the case before us, that the operations
of the corporation were so merged with the
stockholders as to be practically indistinguishable from
them. To hold the latter liable for the corporation’s
obligations is not to ignore the corporation’s separate
entity, but merely to apple the established principle
that such entity cannot be invoked or used for
purposes that could not have been intended by the
law that created that separate personality.”
• Tan boon bee vs. Jarencio
- Why would a drug company need a printing machine
- The property must be in pursuance of a company
business
• Cease vs. CA
- Alter-ego or the extension of the person of forest ware
does the court pierced the veil of corporate fiction
- As to not deprive the holders of their successional
rights
- Mere ownership of all or substantially all is not a
justification of piercing the veil of corporate fiction
 Fraud must be proven by clear and convincing
evidence cannot presume or speculate, there must be
facts and circumstances
 Fraud must be clear and convincing evidence more
than preponderance
• Remo Jr. vs. IAC
- The resolution was not entered to defraud anyone
• Del Rosario vs. National Labor Commission
- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
• Indophil Textile Mill vs. CALICA
- How do you distinguish this ruling to La Campana,
having the same issues:
- La campana, one payroll, employees were made
interchangeable. Acrylic had its own standards
• PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested party
- Assets and machineries
 Amendment of the articles of incorporation
- Express power granted to a corporation
 Section 16
- Appraisal right
- Section 81 to object on certain acts and transactions
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
11
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
Are non-voting shares included in amending the articles of
incorporation
1 100/s XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would
be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the SEC
Section 37. Power to extend or shorten
corporate term. - A private corporation may extend or
shorten its term as stated in the articles of
incorporation when approved by a majority vote of the
board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least
two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action
and of the time and place of the meeting shall be
addressed to each stockholder or member at his place
of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose, two-
thirds (2/3) of the outstanding capital stock shall favor
 12

the increase or diminution of the capital stock, or the Commission, which shall have the authority to
incurring, creating or increasing of any bonded determine the sufficiency of the terms thereof. (17a)
indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness  The vote must be cast at the meeting called for that
and of the time and place of the stockholder's meeting purpose
at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any  Written assent would not suffice
bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of
residence as shown on the books of the corporation  When do amendments become valid and effective?
and deposited to the addressee in the post office with
postage prepaid, or served personally. - Only upon the approval of the SEC TRUE OR FALSE?

A certificate in duplicate must be signed by

a majority of the directors of the corporation and
- FALSE because it can be valid upon the date of filing if
countersigned by the chairman and the secretary of not acted upon within 6 months without fault
the stockholders' meeting, setting forth: attributable to the corporation

 Why is it retroactive?
(1) That the requirements of this section have been
complied with;
 What provision may be amended, altered or repealed

(2) The amount of the increase or diminution of the

capital stock;  Can you change name, address for example she
married or changed address?

(3) If an increase of the capital stock, the amount of

- NO. you cannot change that
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount
of capital stock or number of no-par stock subscribed
 Fait accompli, are beyond the powers or authority of
by each, and the amount paid by each on his the corporation to change, alter or modify. These
subscription in cash or property, or the amount of would include the following:
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the - Names of the incorporators and
purpose of making effective stock dividend therefor
authorized;
- The incorporating directors or trustees,

(4) Any bonded indebtedness to be incurred, created
or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
- The name of the treasurer originally or first elected by
the subscribers or members to act as such until his
successor has been duly elected and qualified,
- The number of shares and amount originally
subscribed and paid out of the original authorized
capital stock of the corporation,
- The date and place of execution of the articles of
incorporation,
- The signatories and acknowledgment thereof.

Any increase or decrease in the capital stock - All other provisions or matters stated or contained in
or the incurring, creating or increasing of any bonded the articles are subject to amendment.
indebtedness shall require prior approval of the
Securities and Exchange Commission.  Founder’s or signatories hindi pwede palitan

One of the duplicate certificates shall be  Names, nationalities- you cannot

kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange
 Capital- right granted by law to all corporation
Commission and attached to the original articles of
incorporation. From and after approval by the
Securities and Exchange Commission and the issuance  Paid up capital- NO
by the Commission of its certificate of filing, the capital
stock shall stand increased or decreased and the
 Restriction and transfer of shares in ordinary stock
incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing corporations
may declare: Provided, That the Securities and
Exchange Commission shall not accept for filing any - You can, but close corporation cannot
certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer - Section 96, otherwise it will not be a close corporation
of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital Section 96. Definition and applicability of
stock has been subscribed and that at least twenty- Title. - A close corporation, within the meaning of this
five (25%) percent of the amount subscribed has been Code, is one whose articles of incorporation provide
paid either in actual cash to the corporation or that that: (1) All the corporation's issued stock of all
there has been transferred to the corporation property classes, exclusive of treasury shares, shall be held of
the valuation of which is equal to twenty-five (25%) record by not more than a specified number of
percent of the subscription: Provided, further, That no persons, not exceeding twenty (20); (2) all the issued
decrease of the capital stock shall be approved by the stock of all classes shall be subject to one or more
Commission if its effect shall prejudice the rights of specified restrictions on transfer permitted by this
corporate creditors. Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its
stock of any class. Notwithstanding the foregoing, a
Non-stock corporations may incur or create
corporation shall not be deemed a close corporation
bonded indebtedness, or increase the same, with the
when at least two-thirds (2/3) of its voting stock or
approval by a majority vote of the board of trustees
voting rights is owned or controlled by another
and of at least two-thirds (2/3) of the members in a
corporation which is not a close corporation within the
meeting duly called for the purpose.
meaning of this Code.

Bonds issued by a corporation shall be

Any corporation may be incorporated as a
registered with the Securities and Exchange
close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

utilities, educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise
provides.
 Transfer clause, executor clause, acknowledgment,
treasury affidavit-NO
• Philippine First Insurance case
- Mere change in the name of a corporation or by
merely complying with the law is general amendment
- It does not change its personality. It is the same
person in a different name. the charter is the same
 Amendment of a corporate term
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for
earlier extension as may be determined by the SEC
 Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is
dissolved automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension whose term
has already expired
- All of them involved are institutions of learning, it was
the case in order to avoid confusion that would arise
later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all
property of such corporations controlled and held by
the board of directors or trustees to be elected from
among the holders of stocks, or where there is no
stock, from among the members of the corporation,
who shall hold office for one (1) year until their
successors are elected and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name on
the books of the corporation. Any director who ceases
to be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director shall
thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of
the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn over
the management to the governing board
- But unless the law provides the power may be
delegated
 General rule
- Corporations must sit and act as a body
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
13
- Will be bound by corporate officers if they acted within
the 5 classification page 150
• Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
- Why did the court rule that actions of Fernandez
bound the corporation when he is not even a board of
director?
“if a man is found acting for a corporation
with the external indicia of authority, any person not
having notice of want of authority, may usually rely
upon those appearances; and if it be found that the
directors had permitted the agent to exercise that
authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced
in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may
never have been granted.”
- Contracts must be made by the director and not the
stockholders
- Actions of the stockholders in such matters is only
advisory and not in any way binding in the corporation
• Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their
approval or vote is necessary to prove a valid
corporate act
 Qualifications:
- No citizenship requirement, at least majority must be
residents
- Can have a governing board consisting solely of
foreigners
- But we have to take into consideration partly
nationalized industries and other laws which prohibits
or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources 60% must
be owned by Filipino citizens, therefore they only own
40%---10 members they can only have 4 seats, but not
entirely correct because the law may provide
otherwise; educational institutions restricted to
Filipinos, but there are exceptions when created by
religious and charitable institutions.
- By-laws may provide additional qualifications and
disqualifications
- To qualify as a director he must own at least 1 share
 Should the stockholder be the equitable or beneficial
owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in the
books as owner of one share
• Lee vs. CA
- As long as you are listed in the books as owner of one
share
- Under the old law he must be the beneficial owner and
legal owner thereof but in the new law it is not
required as long as it stands in his name he is qualifies
1 A-100t/S B (own in the trust of X) is B qualified to be a
director?
2
 14

3-10  Who wins? Or who gets elected?

2– transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the voting rights
voting rights must be recorder in the books of the corporation
that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will
be able to be nominated
 Gen. Rule:
- No vote requirement, the one who gets the most
number of votes gets elected, section24.
 What is cumulative voting?
- Process of multiplying the number of shares to the
number of director to be elected
- Matter of right granted to stockholders in a stock
corporation
1 to 5 has 200k/s and members of the same family- majority
800k they have 4M votes they are guaranteed 4 seats

- Term of one year who will serve as such until there 6 to 10 are not related- 1 seat 1M votes
successors are elected and qualified
 Cumulative to allow the minority to have a rightful
 Exception: representation in the board

- Non-stock corporation can serve for a term of 3 years  Is it allowed in a non-stock corporation?

- Educational non-stock- term of the governing board - Not generally available

can be 5 years
- Section 89 unless the articles or by-laws allow
 May this term exceed one year? cumulative voting

- Yes, they may serve in a hold over capacity until their

successors have been duly elected and qualified
• Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected
from among themselves
- Must be duly elected and qualified
How are the directors elected?
Section 89. Right to vote. - The right of the
members of any class or classes to vote may be
limited, broadened or denied to the extent specified in
the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code.
(n)

1-100T/S Voting by mail or other similar means by

members of non-stock corporations may be authorized
by the by-laws of non-stock corporations with the
2-100T/S approval of, and under such conditions which may be
prescribed by, the Securities and Exchange
3-100T/S Commission.

to 10=1M/S

 Do you include the vote of 1 & 2 to have a quorum to  Other corporate officers other than the governing
have a valid meeting? board section 25

- NO, quorum requirements is 401,000

Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
Quorum requirement is 501k corporation must formally organize by the election of a
president, who shall be a director, a treasurer who
Holders of non-voting shares are only entitled to vote in last par. may or may not be a director, a secretary who shall be
Of section 6 a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held
1-200k
concurrently by the same person, except that no one
shall act as president and secretary or as president
2-200k and treasurer at the same time.

3-200k
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by
4-100k law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
5-100k greater majority, a majority of the number of directors
or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate
6-100k business, and every decision of at least a majority of
the directors or trustees present at a meeting at which
7-50k there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require
8-40k the vote of a majority of all the members of the board.

9-5k Directors or trustees cannot attend or vote

by proxy at board meetings. (33a)
10-5k
 Is the president required to be a stockholder. YES
=1MS
 The chairman may be another person
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all their  The president may also be another person
shares on themselves

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

 Prohibited is president to be secretary or treasurer at
the same time
 Board of director must sit and act as a body to arrive
at a corporate act
 What would constitute a quorum if 5 then 3 must be
present
 May the vote of 2 members past a 5 man governing
board pass a valid corporate act?
- YES. Voting requirement is majority of directors
present at which there where a quorum
1 1 and 2 present=valid
requirement
2 1 and 2 voted yes
3 3 voted no
4 established, by proof of the course of business, the
5 knowledge which the board of directors has, or must
 Is it absolute?
- NO, except in the election because it requires the
majority of all the members of the board
- If by-laws or articles provide a higher
requirement
 Artificial beings must act through its members and act
as a body to have a valid corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed with actual or
apparent authority
- Otherwise it will not bind the corporation
 Yao ka sin trading case “already asked in the bar”
- Only bind the corporation to the extent of authority
confined to him or virtue of customs, usage and policy
- Must pass first the controller and counsel
 What if the notice requirement is not complied with?
• Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it
should have been with force and effect, but according
to the SC, it may be ratified expressly if there is a
subsequent meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation
- There was implied ratification or she was estopped
• Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- Neumark as president and also stockholder
• Yu chuck vs. Kong Li Po
- General manager usually has the power to hire but the
SC said the contract must be reasonable
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
15
- The contract here is so onerous that it would throw the
corporation into insolvency
• Francisco vs. GSIS
- GSIS cannot evade the binding effect of the telegram
- Only 15 months later that the corporation said there
was a mistake
- The silence coupled with the unconditional acceptance
of the other subsequent remittances is binding to the
corporation
• Board of liquidators vs. Kalaw
voting
“Settled jurisprudence has it that where
similar acts have been approved by the directors as a
matter of general practice, custom and policy, the
general manager may bind the company without
formal authorization of the board of directors. In
varying language, existence of such authority is
usages and practices of the company and by the
be presumed to have, of acts and doings of its
subordinates in and about the affairs of the
corporation. So also, “xx authority to act for and bind a
corporation may be presumed from acts of recognition
in other instances where the power was in fact
exercised.” “xx Thus, when, in the usual course of
business of a corporation, an officer has been allowed
voting in his official capacity to manage its affairs, his
authority to represent the corporation may be implied
from the manner in which he has been permitted by
the directors to manage its business.”
In the case at bar, the practice of the
corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading
activities for and in NACOCO’s behalf without prior
board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior
approval on all corporate contracts. But that Board
itself, by its acts and through acquiescence, practically
laid aside the by-law requirement of prior approval.
- Kalaw signed alone and said contracts were submitted
to the board of directors after its consummation and
not before
• Buenaseda vs. Bowen
- Express ratification is made through a formal board
action
- Implied ratification is through: silence or acquiescence,
acceptance benefits and lastly recognition or adoption
 An unauthorized act may nevertheless be binding
either by express or implied by estoppels
 By virtue of silence the board had impliedly accepted
the act
 By recognition or adoption
 By virtue of payment of obligations arising therefore-
Lopez realty
 May directors or trustees be disqualified to act as
such?
- YES, crime, etc. disqualifications in book
- Possess or dispossess any of the qualifications or
disqualifications , cease to hold at least one share
 May directors be ousted from office?
- At least 2/3 of members representing outstanding
capital stock. Again notice requirement must be
complied with
 16

1-200 1-5 same compensation of directors, as such directors, exceed

family ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
2-200
- Generally not entitled to receive compensation
3-200 because they render it gratuitously

4-100 - Unless the by-laws allows

5-100 electing - Stockholders may also grant pursuant to a majority

vote
6-100 6 to 10 not
related - Must not exceed net income of 10% tax of the
preceding year
7-50
- Acting in special capacity
8-40
- In, sum directors may receive compensation when
9-5
1. there is a provision in the by-laws to that effect
10-5 outstanding
director 2. When the stockholders, by a majority vote of the
outstanding capital stock grant the same; and,
 Meetings called by the president or the secretary
ordered by the president 3. If the director renders extra-ordinary or unsual service

 It depends if the removal is without cause they cannot
do so because removal without cause shall not deprive
the minority stockholders or members of the right of
representative
 If with cause they can even if it will prejudice the
rights of the minority, provided of course additional
requirements by-laws and articles of incorporation
• Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may also allow such
 What do you understand by the phrase “as such
directors”
• Western institute vs. Salas

 Who will fill up the vacancy created due to the ouster - Compensation was granted without by-laws authority
of a member of the board of directors <section 29>

- Prohibition is not a sweeping rule

Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
- Members of the board may receive when they receive
board of directors or trustees other than by removal by
the stockholders or members or by expiration of term, in a special capacity
may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a - Mere act of the board will suffice
quorum; otherwise, said vacancies must be filled by
the stockholders in a regular or special meeting called
 Is the 10% ceiling applicable to other officers?
for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term
of his predecessor in office. - NO. the phrase “as such director” was used twice
<Section 30>

Any directorship or trusteeship to be filled

by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
- The SC ruled that the 10% ceiling will not likewise
apply if they acted in a capacity other than “as such
directors”
• Government vs. El Hogar

- Judicial intervention is not proper

 Other than by removal or expiration of term they do
not have the power
 When will the vacancies be filled up?
 Is notice required, to fill up vacancies due to removal?
 What if the vacancy is due to an increase, can it be
filled up in the same meeting where in the number is
increased?
- The appropriates remedy is to those who can make or
unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and in behalf
of the corporations are not there’s BUT there are
exceptions even if they are acting for and in behalf of
the corporation

 Election due to removal-in the same meeting notice is • Tramat vs. CA

not required
- General rule was applied in the case
 Election due to increase in number- it must be so
stated in the meeting - Ong acted as officers and acted within the scope of his
authority
 Section 30
- Court laid down 4 instances when even if acting within
Section 30. Compensation of directors. - In the scope of his authority he is held solidarily liable
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any 1. He assents (a) to a patently unlawful act of the
compensation, as such directors, except for corporation, or (b) for bad faith, or gross negligence in
reasonable per diems: Provided, however, That any
directing its affairs, or (c) for conflict of interest,
such compensation other than per diems may be
granted to directors by the vote of the stockholders resulting in damages to the corporation, its
representing at least a majority of the outstanding stockholders or other persons;
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation;
4. He is made, by a specific provision of law, to
personally answer for his corporate action.
- Watered stocks- issued, fully paid up when in fact they
have not been fully paid or promised as such
• Llamado vs. CA
- The corporate entity theory cannot be used as a
defense to escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the
persons who signed the check shall be liable.
• Uichico vs. NLRC
- Labor case corporate directors and officers are
solidarily liable with the corporation for the
termination of employment of corporate employee
done with malice and bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left solely to
the honest decision of the board of directors and the
courts are without authority to substitute its judgment
as against the former. The directors are the business
managers of the corporation and as long as they act in
good faith, its actuations are not subject to judicial
review. Montelibano vs. Bacolod Murcia Milling
- questions of policy and management are left solely to
the board of directors
- BOD, business manager of the corporation and as long
as they act in good faith, its actuations are not subject
to judicial review
- They are not insurer of the property of the company,
they were guarantors that the enterprise undertaken
by the corporation shall be successful
• Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest
error of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when corporate officers
may violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the position of a
fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and
with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in
fairness should belong to the corporation.
 Last paragraph of section 31 and the provision of
section 34 make reference to recovery of “forbidden
profits”
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
17
 Distinction between section 31 and 34 relative to the
ratification by the stockholders
- The second paragraph of section 31 which makes a
director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability
upon him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section 34
if a director acquires for himself a business opportunity
which should belong to the corporation, he is bound to
account for such profits unless his act is ratified by the
stockholders owning ore representing at least 2/3 of
the outstanding capital stock.
- If reposed in him in confidence, not subject to
ratification
- If the acquisition is merely that of a business
opportunity which has not been reposed in him in
confidence, the same may be subject to ratification by
the stockholders.
Director x co.
A-REALTY
B
C Z owns property and is going abroad never to Return,
he wants to sell for 25M the fair
market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and later he
sells it for 30M making 4M profit, one of the stockholders learned
and complains that he should submit the profits. E said that he
will move for ratification of his actuation. Can it be ratified?
- It can be ratified he merely acquired a business
owning to the corporation
- It would be different if it was entrusted in his
confidence
Another scenario:
Had A not attended the meeting he would not have known of
the sale it is then a matter reposed in him in confidence
 A corporation cannot reaquire its share if it has no
restricted unretained earnings
• Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not
invalidated
 Self-dealing director and interlocking director
 What is a self-dealing director?
- Director of a corporation dealing or transacting
business with his corporation
 Are the contracts and dealing of a self0dealing director
valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid
per se.
- YES. If all the 4 conditions are present they will be
valid per se
 18

1. That the presence of such director or trustee in the  May corporate directors purchase the corporate
board meeting in which the contract was approved property?
was not necessary to constitute a quorum for such
meeting; • Mead vs. Mccullogh

2. That the vote of such director or trustee was not - interlocking director- a director of one corporation who
necessary for the approval of the contract; deals and transacts business with another corporation
who is himself a director
3. That the contract is fair and reasonable under the
circumstances; and A- director of X company also a director of Y corporation

4. That in case of an officer, the contract has been B-

previously authorized by the board of directors.
C-
 When do they become voidable?
D-
- When any of the two requisites are absent it is
voidable, but subject to ratification by 2/3 of the E-
outstanding capital stock or 2/3 of the member
 Both companies enter into a contract and A sits, is the
 Requisites for ratification (subject to ratification by the contract valid?
stockholders holding or representing at least 2/3 of the
outstanding capital stock or 2/3 of the members.) - Yes on the ground of fraud or if it is unfair

- it must be at a meeting called for the purpose - May be subject to the provision of section 32

- full disclosure of the adverse interest of the director - Section 32 contract may become voidable, hence it
concerned must be made may also be ratified

- the contract is fair and reasonable under the X Co.

circumstances Y Co.

 Problem if self-dealing director involved owns all or A owe 20%

substantially all of the shares of stock of the A owe 20%
corporation thereby making it easily possible to have
the contract ratified Is it generally valid or voidable? VALID

- last sentence of section 32 should be made to apply 25%

by determining the reasonableness and fairness of the 25% VALID
contract
15%
Section 32. Dealings of directors, trustees 25% VOIDABLE SUBJECT TO section 32
or officers with the corporation. - A contract of the
corporation with one or more of its directors or More than 20 substantial
trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are
present:  BOD mismanages corporate officers. Who may file a
suit?

1. That the presence of such director or trustee in the

- General rule: BOD which can institute a case because
board meeting in which the contract was approved
was not necessary to constitute a quorum for such it has all the powers. To allow stockholders to file
meeting; would violate the doctrine of corporate entity and may
result to multiplicity of suits

2. That the vote of such director or trustee was not

necessary for the approval of the contract; - Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
3. That the contract is fair and reasonable under the
circumstances; and  Derivative suit

4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such contract
may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3)
of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair
and reasonable under the circumstances. (n)
• Prime white cement vs. IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage
- An action based on injury to the corporation-to enforce
a corporate right- wherein the corporation itself is
joined as a necessary party, and recovery is in favor of
and for the corporation.
- Remedy granted by law to stockholders to institute a
case to remedy a wrong done directly to the
corporation and indirectly to the stockholders, if the
board refuses to do so. Otherwise if not they would be
left without any recourse
 Available suits
• individual or personal
- Wrong done against his person as a stockholder
• Class suit
- Filed by a stockholder in representation of other
stockholders

- as a director he should have acted in a manner as not - A wrong or redress done, a derivative suit in nature
to unduly prejudice the corporation
 Intra-corporate remedies
- he cannot be allowed to enrich himself
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

- Demand to the BOD to institute such action
- Negated by the BOD
- The one who instituted must be a stockholder at the
date when the act was done, must have been a
stockholder by that time
 Demand will not be required if the majority of the BOD
are the one’s guilty of the wrong charged
 The corporation must be made a party in the case
whatever side will not matter because under Philippine
law misjoinder is not a ground for dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to the corporation
 Stockholder bringing the action is entitled to
reimbursement such as attorney’s fee ONLY IF the
case is SUCCESSFUL to avoid harassment suit to their
management
• Pascual vs. Orozco
- By virtue of the fact that he is a stockholder, may
maintain a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be a
stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902
 Derivative suit
- By a stockholder to address a wrong done against the
corporation and the stockholder indirectly
- Essential requisite must have been a stockholder from
the time the act complained of took place
- Cannot institute an action from the years he was still
not a stockholder
• Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in
equity and such is in the hands of its BOD however
there are exceptions when the BOD will not sue since
they are themselves principals to the fraud.
• Republic vs. Cuaderno
- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from
criminal prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
• Western institute vs. Salas
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must
be stated in the complaint that it is being instituted as
a derivative suit and for and in behalf of the
corporation
- Granting arguendo, that this is a derivative suit, the
same is still outrightly dismissible for having been
wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case should
have been filed with the SEC which exercises original
and exclusive jurisdiction over derivative suits, they
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
19
being intra-corporate disputes, per Section 5 (b) of
P.D. 902-A
• San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was
useless
• Chase vs. Buencamino
- Argument that he should be in estoppels since he filed
in the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to
step in it must be a case by the corporation
• Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a
wrong done
- Fraud in the conduct of corporate affairs
• Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating damage
against him
- Violation of their rights as individuals, hence derivative
suit is not the remedy
• Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation, but
rather his individual benefit
 From the cases above cited, these are the
requirements and the procedures that must be
followed in order that a derivative suit may prosper
1. That the party bringing the suit should be a
stockholder as of the time the act or transaction
complained of took place, or whose shares have
evolved upon him since by operation of law. This rule,
however, does not apply if such act or transaction
continues and is injurious to the stockholder or affect
him specifically in some other way.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or
vindication of his own right, or the redress of a wrong
done against him, individually, but in behalf and for
the benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he
has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
heed his plea. Demand, however, is not required if the
company is under the complete control of the directors
who are the very ones to be sued (or where it
becomes obvious that a demand upon them would
have been futile and useless) since the law does not
require a litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action
actually devolves on the corporation and not to a
particular stockholder.
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the

court’s judgment binding upon it, and thus, bar future
litigation of the same issues. On what side the
corporation appears loses importance when it is
considered that it lay within the power of the court to
direct the making of amendment of the pleading, by
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground
to dismiss action; and,
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or vindication of
a right or rights of a particular stockholder, otherwise,
the aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or
individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are
similarly situated, injured or violated, personally or
individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and
constituted?
- Section 35
Section 35. Executive committee. - The by-
laws of a corporation may create an executive
committee, composed of not less than three members
of the board, to be appointed by the board. Said
committee may act, by majority vote of all its
members, on such specific matters within the
competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except
with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or repeal
of by-laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable; and (5) a distribution of cash dividends to
the shareholders.
- Said committee may act and bind the corporation by
the majority vote of all its members except with
respect to those matters provided for in sec. 35 these
are:
1. Approval of any action for which shareholders’
approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of
new by-laws;
4. Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to
have a valid transaction
 May a non-member of the board of directors be a
member of the executive committee?
- NO, all of them must be members of the board of
directors
- BOD cannot act by proxy it would be abdication of
powers
 Purpose clauses necessary because it confers and also
limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
20
 Corporate authority may be classified into three
classes namely:
1. Those expressly granted or authorized by law inclusive
of the corporate charter or articles of incorporation;
2. Those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW
Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the corporation
if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
stated in the articles of incorporation. (13a)
Section 37. Power to extend or shorten corporate
term. - A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at
a meeting by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
code. (n)
Section 38. Power to increase or decrease capital
stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution
of the capital stock, or the incurring, creating or increasing of

any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the
time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount
of capital stock or number of no-par stock subscribed
by each, and the amount paid by each on his
subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor
authorized;
(4) Any bonded indebtedness to be incurred, created
or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office
of the corporation and the other shall be filed with the Securities
and Exchange Commission and attached to the original articles
of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been
subscribed and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease
of the capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof. (17a)
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-emptive right
to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is
denied by the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares
to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock, in
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
21
exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
Section 40. Sale or other disposition of assets. -
Subject to the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money or
other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock corporation, by
the vote of at least to two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless,
in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is
necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of
such property and assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
Section 41. Power to acquire own shares. - A stock
corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code. (a)
Section 42. Power to invest corporate funds in
another corporation or business or for any other purpose. -
Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors
or trustees and ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall
not be necessary. (17 1/2a)
Section 43. Power to declare dividends. - The board
of directors of a stock corporation may declare dividends out of

the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be clearly
shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies. (n)
Section 44. Power to enter into management
contract. - No corporation shall conclude a management contract
with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or by at
least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation,
at a meeting duly called for the purpose: Provided, That (1)
where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations
own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2)
where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members
of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the
total outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to
any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may
be provided by the pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations. - No
corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
Section 36
 Where should the corporation be sued?
- principal office is important because it establishes the
residence of the corporation and determining service
of summons, venue of action
- it can be sued in the city or municipality where its
principal office is found
 Principal office is also important for venue of meetings
 Non-stock corporation may provide in its by-laws that
the venue of meeting be anywhere in the Philippines
 Upon whom service of summons be made?
- Section 11. Service upon domestic private juridical
entity- when the defendant is a corporation,
partnership or association organized under the laws of
the Philippines with a juridical personality, service may
be made upon the president, managing partner,
general manager, corporate secretary, treasurer, or in
house counsel.
• Delta motor vs. Mangosing
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
22
- strict compliance is necessary
- should be served to those named in the statute
- secretary of a dep’t are not those included in the
statute
• E.B. Villarosa vs. Benito
- decision En Banc repeals all other pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and at all time
illogical
 the particular revision under Section 11 of Rule 14 was
explained by retired Supreme Court Justice Florenz
Regalado, thus:
“xxx the then section 13 of this Rule allowed
service upon a defendant corporation to “be
made on the president, manager, secretary,
cashier, agent or any of its directors.” The
aforesaid terms were obviously ambiguous
and susceptible of broad and sometimes
illogical interpretations, especially the word
“agent” of the corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared to
challenge the validity of service of summons
but whose very appearance for that purpose
was seized upon to validate the defective
service, is an illustration of the need for this
revised section with limited scope and
specific terminology. Thus the absurd result
in the Filoil case necessitated the
amendment permitting service only on the
in-house counsel of the corporation who is in
effect an employee of the corporation, as
distinguished from an independent
practitioner.”
o notes: additional knowledge
- special appearance enter for that particular
appearance you are not the counsel in the case
- would apply only if it does not involve an intra-
corporate controversy (controversy between and
among the stockholders)
- upon any of the statutory officers or officers fixed in
the by-laws any secretary, any of the directors; any
managers in the by-laws
 Seal
- merely ministerial or permissive
 Power to amend
- section 16
- special 37,38,120
 Power to adopt by-laws
- section 46-48
 Power to issue or sell stocks and to admit members
- stock of stockholders and provision governing non-
stock
 Power to acquire or alienate real or personal property
- is there any limitation? YES
- Two specific limitation
1. Section 36, as lawful transactions of business of the
corporation may reasonably and necessarily require
2. Constitution and law

• Luneta vs. A.D. Santos
- Importance of the purpose clause
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
• Gov’t vs. El Hogar
- As the lawful transaction of its business may
reasonably represent
• Director of Lands vs. CA
- Exception to the rule in the constitution
- Alienable public land
- Converts the property to a private land automatically
once converted it can now be registered
 Power to make donation
- Limitation section 36 par.9
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a
means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36 expressly
authorizes a corporation to make donations. The only
limitations imposed are the following:
1. The donation must be “reasonable”;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and,
3. It shall not be in aid of political party or candidate, or
for purposes of partisan political activity.
 Power to establish pension
- Include any act to promote and improve the
convenience, welfare and benefit of the employees or
offices
• Republic vs. Acoje
- While as a rule an ultra-vires act is one committed
outside the object for which a corporation is created
as defined by law, there are however certain
corporate acts that may be performed outside of the
scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the
corporation. Thus, it has been held that “although not
expressly authorized to do so a corporation may
become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its
business,” and here it is undisputed that the
establishment local post office is a reasonable and
proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital
improvement in the living condition of its employees
and laborers who came to settle in its mining camp
which is far removed from the postal facilities or
means of communication accorded to people living in
a city or municipality.
 Power to exercise such other powers essential or
necessary to carry out its purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid employees; and,
5. Acts to increase business
• Teresa Electric and Power Co. vs. P.S.C.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
23
- Examined the articles of incorporation to arrive at its
decision
• National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical and
necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC
charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Power to extend its terms
- Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital stock?
1. Increasing the par value of the existing number of
shares without increasing the number of shares;
2. Increasing the number of existing shares without
increasing the par value thereof; and,
3. Increasing the number of existing shares and at the
same time increasing the par value of the shares.
 Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
acquiring other business, expansion, other valid
reasons)
 How do you decrease capital stock and why a
corporation decreases?
- Reduce or wipeout existing deficit where no creditors
would thereby be effected
- When capital is more than necessary to procreate the
business or reduction of capital surplus
- To write down the value of its fixed assets to reflect
those present and actual
o NOTE: any increase or decrease of capital stock
requires approval of government agency like SEC it
can never take place unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where no
creditors would thereby be affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus;
or,
3. To write down the value of its fixed assets to reflect
there present actual value in case where there is a
decline in the value of the fixed assets of the
corporation.
- Examples: Php 10M capital for grocery business,
mayor didn’t want to issue license/permit because
mayor has 3 other grocery stores, only allowed sari-
sari store permit, reduce capital for sari-sari so that
the money will not sleep in bank
 24

- Example: car rental agencies-Php 10M capital for 20  May it be denied? How?
taxi’s, after some time each taxi is only 250K,
nagmura ang taxi, to reduce capital is to show actual
assets
- Yes, if provided by articles of incorporation or by an
amendment
 Limitation imposed by law
- However, pre-emptive rights is unavailable to shares in
trading in stock exchange otherwise stockholders must
- Decrease shall not in any way affect the rights of the
waive first their right before they may sell such.
creditors

 Exceptions
 Philippine Trust Company vs. Rivera

1. When the shares to be issued is in compliance

- Without the appraisal of SEC, a decrease in capital
with laws requiring stock offerings or minimum
stocks has no effect
stock ownership by the public

 TRUST FUND DOCTRINE:

2. Shares to be issued in good faith with the
approval of the stockholders representing 2/3 of
- Subscription to capital stock of a corporation the outstanding capital stock either
constitute a fund to which the creditors have a right to
look upon for satisfaction of their claims and that the
a. In exchange for property needed for
assignee in insolvency can maintain an action upon
corporate purpose or,
any unpaid stock subscription in order to realize assets
for the payment of its debts.
b. In payment of a previously contracted debt

• Madrigal vs. Zamora

- Decrease in capital has a subterfuge to evade
payment
- Thus not valid and effective
- Must not prejudice creditors which includes
employees
 Bond
- Commonly understood as an obligation of a state, its
subdivision or a private corporation, represented by a
certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges
himself to pay a certain sum of money to another at a
day named.
- There are different kinds of bond but before they may
be issued or floated by the corporation, the same must
be registered and approved by the SEC subject to the
rules and regulations that may be adopted by that
agency. The procedure and requirements set forth in
section 38 is the same as in increasing or decreasing
the capital stock except that the certificate does not
have to state the matters required in sub-section 2 & 3
thereof.
- The exceptions, however will not apply to stockholders
of a close corporation by virtue of a subsequent and
specific provision of the Code which provides that the
“pre-emptive right of a stockholder in a close
corporation shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services or in payment of
the a corporate debt, unless the articles of incorporation
provide otherwise, if not entirely absolute, in that it
extends to all issuance and disposition of shares
- Such right of pre-emption may be lost by waiver of the
stockholder, expressly or impliedly by his inability or
failure to exercise it after having been notified of the
proposed issuance or disposition of shares
 When is it unavailable?
- In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must provide it first
on its articles of incorporation, that its articles does
not really deny such pre-emptive rights.
 Section 102, will not apply to close corporations

 Pre-emptive rights
 The right of pre-emptive rights is absolute in close
corporations
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or “All issues or depositing shares of any class” form part of ACS
disposition of shares of any class, in proportion to their
respective stockholdings, subject only to the  Certain instances when a stockholder may
limitations imposed under section 39 of the Code. nevertheless be unable to exercise this right:

- Internationally granted - Issued for public ownership

 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain
their proportionate right as not to dilute their right
- Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in exchange for
property needed or b) for payment of a previously
contracted debt

 Pre- emptive rights of stockholders in ordinary stock

 Power to deny pre-emptive rights
corporations may be denied

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

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 25

without exceptions unless, of course, denied or limited  May 1-5 subscribe to the unsubscribed capital stock to
by the articles of incorporations. Section 102 provides: the exclusion of 6-10?

Section 102. Pre-emptive right in close - If a corporation makes 2M unrestricted retained

corporations. - The pre-emptive right of stockholders in
close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services, or
in payment of corporate debts, unless the articles of
incorporation provide otherwise.
 Denial will not apply to a close corporation, ABSOLUTE
earnings, it is the shares and not the number of
persons that matters
 May 6-10 complain for a dilution of their interest?
- YES, it’s an internationally recognized right because it
includes “all issues and disposition of shares of any
class” and all kinds of shares new or old

- section 96 - If the remaining unsubscribed shares are issued, it’s

 May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?
- Yes, section 102
 What type or shares are covered by pre-emptive
rights?
 Does it include those originally unsubscribed?
- NO. Benito vs. SEC
an issuance of any class
 May a corporation sell/dispose all or substantially all of
its corporate assets and liabilities?
- YES
- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION
4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT

 If a corporation sells substantially all of it assets and

 Will the stockholders be able to exercise their pre- properties, will the buyer assume liability?
emptive right with respect to the old unissued shares?
- NO, EXCEPT
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it is
1) Express or implied agreement to the purchase
presumed that the original subscribers is deemed to
have taken his shares knowing that they form a
2) Where the transaction amounts to consolidation or
definite proportionate part of the whole number of
merger of the corporations
authorized shares

3) When purchasing corporation is merely a continuation

- When the shares, left unsubscribed are re-offered, he
of the selling corporation
cannot therefore claim. DILUTION OF INTEREST

4) Where the transaction is entered into fraudulently in

 Will the acquiring purchaser be liable for debts of the order to escape liability for such debt
former corporation?

 Legitimate purpose: for a corporation to reacquire its

- Generally no, corporate entity theory because there
own shares
may be instances when purchasing corporation may
be held liable
- Limitation: it must have surplus/unrestricted retained
earnings
 May a corporation acquire its own shares?
- Exception: may redeem irrespective of unrestricted
- Yes retained earnings

 Is there any restriction provided for by law in 1) Exercise of stockholders’ right to compel “close
reacquiring its own shares? corporation” to purchase his shares

- Yes, it must have been unrestricted retained earnings 2) Where corporation has sufficient assets in its books to
appearing in the books of corporation cover its debts and liabilities exclusive of capital stock

 A corporation can never acquire its own shares if it has ACS 1M

no unrestricted retained earnings
SUBSRIBED 1M
- False, exception close corporation and redeemable
shares PAID-UP 1M

EXAMPLE: ASSETS 500K

ACS 2M 1M PROFITS

SUBSCRIBED 1M - 500K LIABILITIES

PAID UP 1M ____________________

1 100K 500K RESERVES IN A CLOSE

CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS
2 100K
X – REALTY CORPORATION
TO
• THE ONLY PROPERTY OF
10 100K THE CORPORATION

 If 1-5 became 200K each, may 6-10 demand the • BOARD OF DIRECTORS
exercise their pre-emptive right? DECIDED TO SELL IT

- YES Will it need the approval of the stockholders?

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

- NO, if the same is necessary in the usual and regular
course of business of said corporation or if the
proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of
its remaining business
 If X is a manufacturing company, then it can sell its
only property upon approval of the stockholders
because it will render itself capable of continuing its
business, BUT if the proceeds will be used to purchase
a better one for the continuance of its business, then it
does not need the approval of the stockholders
 Conditions for the valid exercise of this power are the
following
1. Resolution by the majority vote of the board of
directors/trustees
2. Authorization from the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the
members;
3. The ratification of the stockholders or members must
be made at a meeting duly called for that purpose
4. Prior written notice of the proposed action and of the
time and place of meeting must be made addressed to
all stockholders of record, either by mail or personal
service;
5. The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and
monopolies
6. Any dissenting stockholder shall have the option to
exercise his appraisal right
• IDP vs. CA
- Consent of the members was not secured
• Edward Nell Co. vs. Pacific Farms
- Generally where one corporation sells or otherwise
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
transferor, except:
1. Where the purchaser expressly or impliedly
agrees to assume such debts;
2. Where the transaction amounts to a consolidation
or merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation;
4. Where the transaction is entered into fraudulently
in order to escape liability for such debts.
 Power to acquire own shares
Section 41. Power to acquire own shares. -
A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (a)
 The corporation must at all times have “unrestricted
retained earnings” to exercise this corporate power
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
26
• Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the right to assume
that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets
of the corporation to purchase its own stock, and that
it will not declare dividends to stockholders when the
corporation is insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest corporate
funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other
corporation or business or for any purpose other than
the primary purpose for which it was organized when
approved by a majority of the board of directors or
trustees and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's
or member's meeting duly called for the purpose.
Written notice of the proposed investment and the
time and place of the meeting shall be addressed to
each stockholder or member at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
any dissenting stockholder shall have appraisal right
as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17
1/2a)
- For any other purpose other than the primary purpose,
stockholder’s consent or approval is necessary
- Thus, if it’s for the secondary purpose, it is necessary
- If it’s in connection with the primary purpose, only
board resolution is necessary
 Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Resolution by the majority of the board of directors or
trustees;
2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
3. The ratification must be made at a meeting duly called
for that purpose;
4. Prior written notice of the proposed investment and
the time and place of the meeting shall be made,
addressed to each stockholder or member by mail or
by personal service, and;
5. Any dissenting stockholder shall have the option to
exercise his appraisal right
• Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote connection
between the sugar bags and the sugar manufacture,
thus stockholder’s approval is not necessary for
validity
- A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge, or dispose of shares
bonds, securities and other evidences of indebtedness
of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not
need the approval of the stockholders; but when the
purchase of shares of another corporation is done
solely for investment and not to accomplish the

purpose of its incorporation, the vote of approval of
the stockholders is necessary.
• Gokongwei vs. SEC
- Investments made by SMC is necessarily connected
with its primary purpose and this was ratified in a
meeting
- Submission of previous action is a sound corporate
practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of shares
“withdrawal shares” provided corporation has
sufficient funds to cover its debts and liabilities
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities
and Exchange Commission, compel the dissolution of
such corporation whenever any of acts of the
directors, officers or those in control of the corporation
is illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are being
misapplied or wasted.
 If shares are reacquired, what happens?
- It becomes treasury shares
 Stockholder’s consent/ approval is not necessary and
mere board action is sufficient if in accordance with
primary purpose
 The logical relation of act done and primary purpose of
corporation and between the board of directors to
undertake submission of acts is a sound corporate
practice
 Dividends
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or
in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from
the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared and ordered by
the Board of Directors to be paid to the stockholders.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
27
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and chairs make
surplus profits?
- No, they do not make surplus, bonds, etc.
 Where should dividends come from?
- Stock dividends are declared as stocks coming from
corporation
 Who declares dividends to be declared? Do
stockholders have any say?
- Board of Directors, if stock approval of 2/3 outstanding
capital stock
ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus
profits of the corporation)
1-100k
2-100k
To
10-100k
1M
 Board decides to declare 1M, how much will each
receive? May the board declare stock dividend
- NO. that would be over issuance of shares, violation of
securities regulation code
- It must have a free portion
- The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
- No, because in property 2/3 is not required
 What is the effect of declaration of dividends with
regards to the assets of a company?
- As compared to stock dividends, the declaration of
cash or property dividends have the effect of reducing
corporate assets to the extent of dividends declared.
- Neither would stock dividends increase the
proportionate interest of the stockholders of the
corporation although it will have the effect of
increasing the subscribed and paid-up capital of the
corporation. It gives the stockholders nothing in the
way of distribution of assets but merely divides his
existing shares into smaller units.
 Earnings belong to the corporation until declared or
given
 Revocation
- No revocation of dividend may be has unless it has not
been officially communicated to the stockholders or is
in the form of stock dividends which is revocable at
any time prior to distribution.
 Stock dividends- no reduction, you capitalize your
restricted retained earnings, what is issued is a piece
of paper. The restricted earnings remain in the
corporation
 Cash and property- reduces corporate assets
 Stock dividends increase corporate assets? No, it will
only have the effect of increasing the subscribed and
paid-up capital of the corporation
 28

 Will there be a corresponding increase in their  How did the court decide dividends in the case of
proportionate interest? Neilsen

- REMAINS THE SAME - Stock dividends cannot be issued to a person who is

not a stockholder in payment of services rendered.
- Exception: when stock dividends will result in a
- Whether cash, property or stock, only stockholders
fractional share
may receive dividends. Dividends are fruits of
investments. They come from the U.R.E. or surplus
ACS-2M 1-100K 200 (10%) *VOTING AND
profits of the corporation.
DIVIDEND RIGHTS STILL THE SAME

ACS 2M 1M U.R.E.
SUB-1M TO
10%
SUB 1M JULY 24 DECLARATION
JULY 31
PU-1M 10-100K

PU 1M
ACS 2M

1 100K 100T JULY 26-Y(NEW ONE WAS DECLARED

SUB 1M
TO Y) JULY 30- 100K

PU 1M
2

1M RE
TO TO HAVE THE TRANSFER
RECORDED
1 100K
10 100K
2 100K
1M
TO

 Insofar as 1 and Y who has a better right? Already

10 100K
declared, but not yet paid?

1M
- Right to receive vest upon declaration. Who ever owns
at the time of declaration owns the dividends
 May they be compelled?
- Unless there is a stipulation to the contrary
- NO. You cannot declare if it does not come from
unrestricted retained earnings.  TRUST FUND DOCTRINE

1. 1M-U.R.E. (is it true there is no way to compel?) - The power to declare it if paid-up capital is not
maintained or is impaired
2. 2M-U.R.E.
- Trust fund must be kept intact for the protection of
 May they be compelled to declare dividends creditors who have the right to rely on such
subscription and the paid-up capital for the satisfaction
- Mandatory if earned, the board may be compelled to of their claims
declare dividends
 Cannot accumulate surplus unreasonably

- if exceeds 100% of the paid-up capital the boards may

 Basis is the paid-up capital
be compelled

 Entitled to dividends
ACS 2M 1M U.R.E.

 Irrespective of whether the subscription is full

SUB 1M

PU 800K  Illegally declared

1-100K 50K PU - Declare dividend with the belief that it formed part of
the U.R.E., but yun pala sa capital
2-100K 50K
 Directors are not liable, unless sec31 acted in bad faith
TO or gross negligence in the conduct of corporate affairs

10-100K  Directors even if acting in behalf of the corporation,

1M
 Power to enter into management contract
 Will 1 and 2 receive full amount of dividends?
- New provision
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be applied
to his delinquency plus expenses.
 Delinquency occurs, you are called to pay, but you
failed to pay. In case of stock dividend, the delinquent
stock holder will not be entitled thereto until he has
paid his subscription in full.
 Are non-stockholders entitled to receive dividends?
- No, tock dividends are civil fruits of the original
investment, and to the owners of the shares belong
the civil fruits.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
may still be held solidarily liable
Section 44. Power to enter into
management contract. - No corporation shall conclude
a management contract with another corporation
unless such contract shall have been approved by the
board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at
least a majority of the members in the case of a non-
stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the
purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both
the managing and the managed corporations own or
control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the

members of the board of directors of the managing
corporation also constitute a majority of the members
of the board of directors of the managed corporation,
then the management contract must be approved by
the stockholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation.
No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another corporation,
whether such contracts are called service contracts,
operating agreements or otherwise: Provided,
however, That such service contracts or operating
agreements which relate to the exploration,
development, exploitation or utilization of natural
resources may be entered into for such periods as may
be provided by the pertinent laws or regulations. (n)
 The requirement for a valid management contract are
as follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of
the members in case of non-stock corporation of both
the managing and the managed corporation
3. The approval of the stockholders or members must be
made at the meeting called for that purpose
4. The contract shall not be for a period longer than 5
years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such periods
as may be provided by pertinent laws and regulations
 Every corporate act emanates from the BOARD
 Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock corporation
would be required for the approval of a management
contract in the following instances:
1. Where the stockholders representing the same
interest of both the managing and managed
corporation own or control more than 1/3 of the total
outstanding capital stock of the managing corporation;
and
2. Where a majority of the members of the board of
directors of the managing corporation also constitute a
majority of the directors of the managed corporation
3. Where the contract would constitute the management
or operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the business
of another corporation the first paragraph of section
44 will apply and not that of the second, that is, only
the vote of the stockholders holding or representing at
least a majority of the outstanding capital stock or
majority of the members in the case of non-stock
corporation will be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or utilization of
natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do such
acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a collateral
attack
- If not illegal per se merely voidable. Can be ratified
expressly or impliedly or even stopped as equitable
grounds
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
29
- Ultra-vires acts which are not illegal per se may
become binding and enforceable either by satisfaction,
estoppels or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the provisions of
PD 902-A, as amended and R.A. No. 8799 may
suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of the
corporation for serious misrepresentation as to what
the corporation can do or is doing to the great damage
or prejudice of the general public
2. On the rights of the stockholders
- A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been
performed, a derivative suit for damages against the
directors may be filed, but their liability will depend on
whether they acted in good faith and with reasonable
diligence in entering into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal effect of a
corporate contract outside of its authorized business
but Ballatine gives the following summary of the
doctrines evolved:
a. If the contract is fully executed on both sides, the
contract is effective and the courts will no
interfere to deprive either party of what has been
acquired under it
b. If the contract is executory on both sides, as a
rule, neither party can maintain an action for its
non-performance
c. Where the contract is executor on one side only,
and has been fully performed on the other, the
courts differ as to whether an action will lie on
the contract against the party who has received
benefits of performance under it. Majority of the
courts, however, hold that the party who has
received benefits from the performance is
estopped to set up that the contract is ultra-vires
to defeat an action on the contract. This is more
in conformity with the doctrine that no person
shall be allowed to enrich himself at the expense
of another
• Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal with any of
its money
- “deal” broad enough to cover the donation it is not
then ultra-vires
- Not illegal per se hence (law of agency) excess powers
are subject to ratification
- Ratified by passing the resolution in question
• Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied powers
as to make them more attractable
- Not ultra-vires in pursuance of its legitimate business
• Japanese war notes vs. SEC
- Non-stock corporations cannot make profits and
distribute profits to its shareholders

- Ultra-vires because Japanese war notes is a non-stock
corporation
• Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN
SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
holder for value, although such holder at the time of
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. This is
because the issue or indorsement of negotiable paper
by a corporation without consideration and for the
accommodation of another is ultra-vires
- Corporate officers may guarantee or endorse an
accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the
stockholders rather than any director
- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to the
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS CASE
- Purpose clause may be stretched to cover PLDT
internet. It may be within its business.
- May it sell computers? NO! other line of business. Its
trading!
BY-LAWS
 By-Laws
- Rule adopted by the corporation for its internal
governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or filed? Can it
not be adopted earlier?
- After incorporation- within 1 month (emanates from
the BOARD)
- Prior-more convenient (signed by the incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or members attested to by
the corporate secretary
 What happens if the corporation fails to adopt the by-
laws from the tie provided by the law? Would there be
an automatic revocation or suspension?
- Proper notice and hearing, must first be complied with
• Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must – not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper notice and
hearing
- Not affect the status of the corporation as a juridical
person
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
30
- Subject the corporation to a fine, as may be issued by
the SEC
 When do by-laws become effective?
- Until and unless the SEC gives it stamped of approval
- Suspension of any government agency. The
permission must first be secured- section 46
 Elements of a valid by-law
1. It must not be contrary to law, public policy or morals;
2. It must not be inconsistent with the articles of
incorporation;
3. It must be general and uniform in its effect or
applicable to all alike or those similarly situated;
4. It must not impair obligations and contracts or vested
rights; and’
5. It must be reasonable.
- Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
 By-laws
- None filing would not affect the status of the
corporation, Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
 How about 3rd persons?
- NO. unless there is actual knowledge of the same they
are not presumed to know of the provisions of the by-
laws
• Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom ever he wishes
- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among the parties
and corporation
• Gov’t vs. El Hogar
- Did the court categorically ruled here that the
provision in the 5th cause of action is valid?
- Rules governing equity, considering the fact that there
was always lack of quorum
- Section 29 BOD if still constituting a quorum may fill
up a vacancy other than by removal, etc.
• Gokongwei vs. SEC
- Section 48 allows a corporation to amend it by-laws
- Section 47 of the code, the by-laws may provide for
the qualification and disqualification
- It cannot be said Gokongwei has a vested rights
 31

- Prevent directors from taking advantage of position to - Upon issuance of the SEC that they are not
promote his individual interest to the damage of inconsistent
others
 What if the SEC failed to act within 10 months without
- The validity or reasonableness of a by-laws is a fault attributable to the corporation?
question of law
 T or F any amendment of the by-laws will never
- Subject to the limitations that reasonableness of a by- become valid until it gives its stamp of approval even
law is a mere matter of judgment after 1 year

- Rule of the majority and not the tyranny of the - TRUE. Articles of incorporation and by-laws are
minority different

 May the by-laws be amended altered or appealed? MEETINGS

- YES. HOW? Two modes  Meetings

1. By a majority vote of the directors or trustees and the - Meetings of stockholders 1. Date fixed
majority vote of the outstanding capital stock or in the by-laws or by-law
members in a non-stock corporation, at a regular or
special meeting called for that purpose; - Meetings of director or trustees

2. By the board of directors alone when delegated by 2/3  Meetings are regular and special
of the outstanding capital stock or 2/3 of the members
in a non-stock corporation.
 Meetings of stockholders

- This delegated power, however, is considered revoked

 What is regular and what is special?
whenever a majority of the outstanding capital stock
or members shall so vote at a regular or special
meeting.  When are regular meetings of the stockholders held?

- Fixed date provided by the by-laws

 If it is to be amended what is the proceeding?

 What if there is no date?

- Section 48 2nd paragraph provides:
- April
Section 48. Amendments to by-laws. - The
board of directors or trustees, by a majority vote  Why april?
thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the - Point in time the audited financial statement have
members of a non-stock corporation, at a regular or
been prepared
special meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the outstanding  What if in the date specified in the by-laws or by the
capital stock or two-thirds (2/3) of the members in a law itself the meeting was not convened, for instance
non-stock corporation may delegate to the board of lack of quorum or force majeure?
directors or trustees the power to amend or repeal any
by-laws or adopt new by-laws: Provided, That any
power delegated to the board of directors or trustees - It may be postponed on a reasonable date
to amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders  Notice requirement?
owning or representing a majority of the outstanding
capital stock or a majority of the members in non-
- Regular- 2 weeks prior notice
stock corporations, shall so vote at a regular or special
meeting.
- Special- 1 week

Whenever any amendment or new by-laws

are adopted, such amendment or new by-laws shall be  May the notice requirement be lessened?
attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under - By-laws may provide a longer or a shorter duration
oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities
 What if the notice requirement is not complied with?
and Exchange Commission the same to be attached to
the original articles of incorporation and original by-
laws.  What happened to any act passed in a meeting when
notice requirement was not required with?
The amended or new by-laws shall only be
effective upon the issuance by the Securities and - Voidable, subject to ratification
Exchange Commission of a certification that the same
are not inconsistent with this Code. (22a and 23a) • Board of directors vs. Tan

• Baretto vs. La Previsora - Notice requirement is the by-laws is a mandatory

requirement
- Any corporate act emanates from the board
- Improperly served, any action will be invalidated at the
- Directors themselves cannot amend the by-laws if they objection of any stockholder or member
were not granted the same
 Must be held in the proper place
 Section 48
 Where should it be held?
 The power granted is not subject to revocation T or F?
- Apparent from the foregoing provision is that meetings
- FALSE of stockholders must, at all times, be held in the city or
municipality where the principal office of the
corporation is located and, as far as practicable, in the
 If the by-laws are amended when will they become
principal office of the corporation.
valid?

 May the by-laws of a corporation provide that

meetings be held anywhere in the Philippines?
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 32

- While there is no provision authorizing a stock  Mandamus would be appropriate remedy if there is a
corporation to hold stockholders’ meetings outside of person authorized but refuses
the City of Municipality where the principal office is
located, the law allows a non-stock corporation to  Quorum and voting requirement
provide in its by-laws any place of members’ meeting
provided that proper notice is sent to all members - Majority stockholders or members constitute a quorum
indicating the date, time and place of the meeting
which shall be within the Philippines.
 Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a
 T or F the by-laws of a stock corporation may validly quorum?
provide that meetings shall be held anywhere in the
Philippines? - NO. when the code requires a higher quorum it must
also be equivalent to the vote required
- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is
 Do you include non-voting shares in arriving at the
given
voting requirement to have a valid corporate act?

 Corporation can do only such things as the law allows - It depends.

it to do, DOCTRINE OF LIMITED CAPACITY
- Section 6 last par. If it falls within the penultimate par.
 San Miguel office located in Ortigas Center. May Of section 6
stockholders meeting be held in PICC center?
 Five requisites of a valid meeting
- YES. Metro Manila, one single city
1. It must be held on the date fixed in the by-laws or in
 Must be called by the proper party accordance with law

 Who calls? 2. Prior notice must be given

- President until and unless there is a provision ,
secretary on order of the president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder
petition to authorize a meeting?
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied
with and the person who called not authorized, what
happens to any resolution called?

- Ponce case only applies when there is NO person

- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
authorized to call the meeting. If there is a person, but
provided it is within the power of the corporation. 3RD
neglects his duty. Ponce will not apply.
paragraph of 324

 Writ of injunction may never be issued ex parte

- If the voting requirement is met, any resolution passed
in the meeting, even if improperly held or called will be
 Is there any exception?
valid if all the stockholders or members are present or
duly represented thereat. The last paragraph of
- Section 28 only instance section 51 is clear on the matter when it provides:

Section 28. Removal of directors or “all proceedings had and any business
trustees. - Any director or trustee of a corporation may transacted at any meeting of the
be removed from office by a vote of the stockholders stockholders or members, if within the
holding or representing at least two-thirds (2/3) of the powers or authority of the corporation, shall
outstanding capital stock, or if the corporation be a
be valid even if the meeting be improperly
non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That held or called, provided all the stockholders
such removal shall take place either at a regular or members of the corporation are present
meeting of the corporation or at a special meeting or duly represented at the meeting.”
called for the purpose, and in either case, after
previous notice to stockholders or members of the  Directors/trustees meeting
corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders
or members of a corporation for the purpose of  Regular (monthly) and special (anytime)
removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or  May that be restricted (within or outside the Phil)
on the written demand of the stockholders
representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock - YES. unless the by-laws provide otherwise.
corporation, on the written demand of a majority of
the members entitled to vote. Should the secretary fail  Is there any notice requirement?
or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there
- YES. 1 day unless otherwise provided by the by-laws
is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing  What happens if notice is not complied with?
the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such - If the notice requirement is not complied with the
removal, must be given by publication or by written
meeting is illegal and will not bind the corporation
notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without except when subsequently ratified or in the case of a
cause may not be used to deprive minority close corporation where the act of any one director
stockholders or members of the right of representation may bind the corporation even without a meeting
to which they may be entitled under Section 24 of this under the special provision of Section 101 of the Code.
Code. (n)
 Can notice be waived? <sec.53>
 Cases of removal or ouster of a director
Section 53. Regular and special meetings
of directors or trustees. - Regular meetings of the
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 33

board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call of the
president or as provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every
director or trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (n)
- YES. Expressly and impliedly
- However this right is not always inherent, because it
may be denied:
1. Redeemable and preferred shares, however if
founders shares are issued others may be denied
the right to vote.
2. May be denied by the articles of incorporation or
contracts
- When not denied they may do so in person or by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy voting is
not allowed?

- SEC ruling - NO

A special meeting is valid without notice  Only non-stock may be denied proxy voting (may be
where the directors are all present or where broaden, limited or denied)
they consent to the meeting. Presence at
the meeting waives the want of notice.  Proxy voting is a matter of right granted by law
Moreover, it has been ruled that the meeting
of the directors without a formal call first
 Requirements of a valid proxy?
being had, and notice thereof given to the
members, did not operate to invalidate it or
- Section 58
to render the proceedings which were taken
at it void, for every member of the board
Section 58. Proxies. - Stockholders and
were present, and their joint action had
members may vote in person or by proxy in all
completely bound the corporation as if the
meetings of stockholders or members. Proxies shall in
meeting has been called with due formality,
writing, signed by the stockholder or member and filed
and everyone of the directors had received
before the scheduled meeting with the corporate
proper notice.
secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
 What is the quorum and voting requirement in the
intended. No proxy shall be valid and effective for a
directors meeting?
period longer than five (5) years at any one time. (n)

- Majority of the members of the board of directors

 How long may a proxy exist?
(entire membership)

- Maximum of 5 years
 Vote required to pass a valid corporate act?

- Valid for the meeting in which it is intended

- Majority of those present at which there is a quorum (3
present, vote of 2 sufficient)
 Is proxy revocable?
- Exception, majority of all the members of the board in
case of election of corporate officers, unless the - Generally revocable, unless coupled with interest
articles provide for a greater quorum or voting
requirement  Revocation

 Should the director or trustees be physically present?
- General rule, must sit and act as a body to have a
valid corporate act
 Five man member board, a meeting was called today,
should the physical presence or warm bodies requires
to constitute a quorum?
- A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may be
expressed to the proxy holder, to the election
committee, by a subsequent proxy to another or by
sale of the shares. Thus it may be revoke orally by
conduct such that appearing and asserting the right to
vote at a meeting by the registered owner of the
shares revokes a proxy previously given.

- NO. it is not required. Teleconference or video

 Must be submitted to a validation committee
conference is allowed, E- commerce law

 By-laws of non-stock corporations may deny proxy

 Membership subject to laws
voting

 Stockholder not yet

 What is voting trust agreement?

 May director vote by proxy?

- One created by an agreement between a group of
- NO
 If A is a director and a meeting is called for the
purpose of electing a new set of BOD can A vote by
proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
stockholders of a corporation and a trustee, or a group
of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term o years or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock owned
by such stockholders, shall be lodged in the trustee,
either with or without reservation to the owners or
persons designated by them the power to direct how
such control shall be issued.

- It is a devise of binding stockholders to vote as a unit

 Stockholder’s right to vote
and thus assuring a desirable stability and continuity
in management in situations where it is needed.
- Inherent in stock ownership
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 34

 What is the effect of a voting trust agreement relative  Being still the beneficial owner they may transfer
to the rights? these rights

- Lee vs. CA must pass these criteria  Is the right granted to a voting trust agreement
absolute? (to inspect)

1. That the voting rights of the stock are separated from

- NO.
the other attributes of ownership;

- The voting trust agreement filed with the corporation

2. That the voting rights granted are intended to be
shall be subject to examination by any stockholder of
irrevocable for a definite period of time; and,
the corporation in the same manner as any other
corporate book or record. Provided, that both the
3. That the principal purpose of the grant of voting rights
transfer and the trustee or trustees may exercise the
is to acquire voting control of the corporation.
right of inspection of all corporate books and records
in accordance with the provisions of this Code.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Legal title is transferred to the voting trustee

 Requisites
 May the voting trustee vote by proxy?

- Section 59
- Yes, legal owner may vote by proxy

Section 59. Voting trusts. - One or more  May the proxy holder vote by proxy?
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
- NO, (AGENT) an agent can have no other agent unless
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding five specifically allowed by the principal
(5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a  Stockholder executing as a proxy, is he qualified to be
loan agreement, said voting trust may be for a period voted as a director?
exceeding five (5) years but shall automatically expire
upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall  Why is he qualified to act as a director if the
specify the terms and conditions thereof. A certified stockholder executes as a director?
copy of such agreement shall be filed with the
corporation and with the Securities and Exchange - The beneficial owner of the shares in a voting trust is
Commission; otherwise, said agreement is ineffective disqualified to be a director in a voting trust whereas
and unenforceable. The certificate or certificates of
in a proxy, the owner of the shares may be elected as
stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of such since legal title thereof remains with him
the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
- YES he remains to be the owner
name of the trustee or trustees is made pursuant to
said voting trust agreement.  Is the stockholder executing in a voting trust
agreement, is he qualified to act as a director?
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates, - NO. ceases to be stockholder of record, no longer the
which shall be transferable in the same manner and legal owner of shares
with the same effect as certificates of stock.
 May the corporation enforce the voting trust
The voting trust agreement filed with the agreements executed by its stockholders?
corporation shall be subject to examination by any
stockholder of the corporation in the same manner as - NO. NIDC vs. AQUINO
any other corporate book or record: Provided, That
both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books - Not a privy to the contract
and records in accordance with the provisions of this
Code. - Rights liabilities of a stockholder are there in their
individual capacity- corporate entity theory
Any other stockholder may transfer his
shares to the same trustee or trustees upon the terms  Voting trust agreements
and conditions stated in the voting trust agreement,
and thereupon shall be bound by all the provisions of - Normally executed in favor of banking and financial
said agreement.
institutions

No voting trust agreement shall be entered - So that they can vote a certain set of directors
into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of
- They will be more secured
trade or used for purposes of fraud.

 Voting pull agreement

Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically expire
at the end of the agreed period, and the voting trust - Enters into an agreement
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be - Pull all their shares to cast one vote
deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
- Covered by rules governing contracts

The voting trustee or trustees may vote by - By pulling their votes they can decline the resolution
proxy unless the agreement provides otherwise. (36a) passed by the board

 Does it need to be notarized?  END OF MIDTERMS

- Yes, otherwise it is ineffective and unenforceable

 Only legal ownership is transferred STOCKS AND STOCKHOLDERS

 3 modes
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 35

1. By a contract of subscription with the corporation;

- 2nd example galling sa treasury shares hindi sa
unissued share
2. By purchase of treasury shares from the corporation;
and,
 NO such thing as purchase of unissued stocks
3. By purchase or acquisition of shares from existing
stockholders.
 A subscription contract can be conditional provided
there is nothing in the charter or statute prohibiting it
 Section 60 subscription
and not against public order, law, etc.
- Any contract
 Must it be in writing?
- Whether existing or still to be formed
- NO, it may be oral
Section 60. Subscription contract. - Any contract for
the acquisition of unissued stock in an existing corporation  5M should it be in writing to be valid and binding as a
or a corporation still to be formed shall be deemed a subscription?
subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n) - NO, statutes of frauds only applies to SALES

• Trillana vs. Quezon College

 Under the old law the 4th mode is PURCHASE

- Counter proposal, therefore there was a need for an

 Purchase acceptance

- Reciprocal in nature - Facultative because it is in his own free will, it is void

- Purchaser can neither require the issuance  What may be used as a consideration and how much
should be the consideration?
Xco. Inc.
- Section 62 provides:

P Section 62. Consideration for stocks. -

Stocks shall not be issued for a consideration less than
the par or issued price thereof. Consideration for the
Authorized capital 1M issuance of stock may be any or a combination of any
two or more of the following:
500 SUBSCRIBED
1. Actual cash paid to the corporation;
500 UNISSUED STOCKS (AS LONG AS GALING DITO)

2. Property, tangible or intangible, actually received by

Z wants to acquire 100K
the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to the
Entered in June 50% shall be down payment remainder par or issued value of the stock issued;
December 08

3. Labor performed for or services actually rendered to

o he will not be considered a stockholder unless he has the corporation;
paid in full

4. Previously incurred indebtedness of the corporation;

August 08 property is ravaged by fire all are turned into shares

 Is Z liable to pay the balance of his acquisitions?
- YES, no matter how the party refer to it, it is
considered subscription
- Once you subscribe, you become a stockholder which
is entitled to all the liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Where the consideration is other than actual
cash, or consists of intangible property such as patents
of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to approval by the Securities and
Exchange Commission.

Z did not pay on the date called and was declared a delinquent
Shares of stock shall not be issued in
share
exchange for promissory notes or future service.

 Corporation paid 100T/S therefore the corporation

reacquired the shares again, what are they called? The same considerations provided for in this
section, insofar as they may be applicable, may be
used for the issuance of bonds by the corporation.
- Treasury shares

Y- 80T/S DECEMBER 08 The issued price of no-par value shares may

40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO
PAY THE UNPAID PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
be fixed in the articles of incorporation or by the board
of directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders representing at
least a majority of the outstanding capital stock at a
meeting duly called for the purpose. (5 and 16)
 “Amounts transferred from unrestricted retained
earnings to stated capital” what does it mean?
- Stock dividends will in effect capitalize the unrestricted
retained earnings

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

 After 5 years the founders shares may be converted
into common shares or other kinds of shares
 May shares of stocks be issued without consideration?
Why?
- NO, two reasons by the SC, discriminatory against
other stockholders and second unlawful, it prejudices
the right of the creditors “Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as watered stocks
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a
consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time
of issuance of the stock and the par or issued value of
the same. (n)
- Subscribers may be compelled to pay the value
 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid
certificate of stock?
1. It must be signed by the president or vice-president
and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal; and the
entire value thereof (together with interest or
expenses, if any) should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription together
with interest and expenses (in case of delinquent
shares) if any is due, has been paid, a subscriber to
shares of stock, even if not yet fully paid, is entitled to
exercise all the rights of a stockholder and the
corresponding liability that attach thereunder. Thus,
the Code provides:
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without a
certificate of stock
 Instances when he may not be able to exercise his
rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable when it may
be transferred through endorsement and delivery?
100t/s 001
10/s
Notes on Corporation Law
“Notes come in handy only when you have studied…”
Abc co.
©GTan; ASoguilon; VVillanueva
36
B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as negotiable in
the same sense that a bill or note is negotiable, even if it is
endorsed in blank. Thus, while it may be transferred by
endorsement coupled with delivery thereof, and therefore
merely quasi-negotiable, it is nonetheless non-negotiable in that
the transferees takes it without prejudice to all the rights and
defenses which the true and lawful owner may have except in so
far as the principles governing estoppels may apply.
He acquired it by virtue of a forged instrument; no matter how
innocent the purchaser is because it is subject to all the rights
and defenses
 What if A endorsed it?
- He is estopped, unless there are other available
defenses
 Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be
valid between the parties. Non-registration will not
however, affect the validity thereof at least in so far as
the contracting parties are concerned.
Section 63. Certificate of stock and
transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which
certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to
the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares
transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
 “Until registration is accomplished, the transfer,
though valid between the parties, cannot be effective
as against the corporation. Thus the, unrecorded
transfer cannot enjoy the status of a stockholder; he
cannot vote nor be voted for, and he will not be
entitled to dividends. The corporation will be protected
when it pays dividend to the registered owner despite
a previous transfer of which it had no knowledge. The
purpose of registration therefore is twofold: to enable
the transferee to exercise all the rights of a
stockholder and to inform the corporation of any
change in shares ownership so that it can ascertain
the persons entitled to the rights and subject to the
liabilities of a stockholder.”
Thus, it was also ruled by the High Court in
Nautica Canning Corp. vs. Yumul that “A
transfer of shares not recorded in the stock
and transfer book of the corporation is non-
existent in so far as the corporation is
concerned.” This is so because “the
corporation looks only through its books for

the purpose of determining who its
stockholders are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its
stockholders are;
2. To enable the transferee to exercise his rights a s
stockholders;
3. To afford the corporation an opportunity to object or
refuse registration of the transfer in case allowed by
law;
4. To avoid fictitious and fraudulent transfers; and,
5. To protect creditors who have the right to look upon
stockholders, in case of no-payment or watered
shares, for the satisfaction of their claims.
 Duty of the secretary is ministerial, hence mandamus
will lie if the secretary refuses to record the transfer,
but he cannot be compelled when the transferee’s title
to the said shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional transfer to
warrant registration in the books of the corporation in
order to bind the latter and other third persons.
 Other restrictions on the right to transfer shares would
include:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Shares of stock against which the corporation holds
any unpaid claim shall not be transferable in the books
of the corporation; unpaid claims, refer to claims
arising from unpaid subscription and not to any
indebtedness which a stockholder may owe the
corporation such as monthly dues;
3. Restrictions required to be indicated in the articles of
incorporation, by-laws and stock certificates of a close
corporation;
4. Restrictions imposed by special law, such as the Public
Service Act requiring the approval of the government
agency concerned if it will vest unto the transferee
40% of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the
parties.
• Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
noted upon the books of the corporation in order that
such transfer may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion and
ownership thereof, its entry and notation upon the
books of the corporation is not necessary requisite to
its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as against
subsequent third parties
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
37
- Register of deeds where the corporation resides and if
different in the register of deeds of owner’s domicile
 Unson vs. Dinamito
- All transferred not register will not have a valid force
and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central Bank
• Lambert vs. Fox
- Valid , may be reasonably regulated, restricted by
agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
• Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its shares
- Valid restrictions shares are applicable
- Any restriction on a stockholder’s right to dispose of
his shares must be construed strictly; and any attempt
to restrain a transfer of shares is regarded as being in
restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid
restrictive regulations and agreements exist and are
applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from
exercising his right to transfer by the corporation or its
officers or by other stockholders, even though the sale
is to a competitor of the company, or to an insolvent
person, or even though a controlling interest is sold to
one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock certificate to
the transferee
 In order to be valid, must be registered in the books. If
not, will only be binding among parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner or attorney-
in-fact with delivery
• Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-fact coupled
with delivery
- Endorsed not delivered
- Proper mode and manner must be complied with
• Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor delivery
without endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring stock?
- Notarized deed
- Deed of assignment

• Rural bank of Salinas vs. CA
- If denied or refused without good cause, mandamus
will lie
• Tay vs. CA
- Mandamus may issue if petition has a clear legal right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right and
alleged ownership is without merit
- Did not acquire ownership by virtue of the contract of
pledge
- In a contract of pledge there must be foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
• Nava vs. Peers Marketing
- A stock subscription is a subsisting liability from the
time the subscription is made
- The subscriber is as much bound to pay
subscription as he would be to pay any other debt
- No stock certificate was issued. Without stock
certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction
 Exception to the general rule
• Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be coupled
with delivery, exception (TAN vs. SEC)
 Stock certificate has already been issued it must be
coupled with the delivery
 After certificate of stock is issued, may it be effectively
transferred even without endorsement or delivery of
the stock certificate?
- Person sought to be a stockholder is an officer and has
custody
 Endorsement and delivery is not necessary (TAN vs.
SEC)
• Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
- Persons sought to be stockholder is officer and has
custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by owner or
attorney-in-fact coupled with delivery
 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other modes
transferring shares
 Is there a time frame or fixed period as when transfer
can be made?
- NO, (WON vs. WACK WACK)
• Won vs. Wack Wack
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
38
- Valid between contracting parties even if not recorded
in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in registration of
shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the rights
and defenses as the true and lawful owner may have
under the law except insofar as such rights and
defenses are subject to the limitations imposed by the
principles governing estoppels
• De los Santos vs. Republic
- Why is he, not considered as the owner of shares?
When it has been said that when endorsed by the
owner it is considered as strict certificate? Because
certificate of stocks are non-negotiable
- Although a stock-certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it
his
is well settled that the instrument is non-negotiable,
because the holder thereof takes it without prejudice
to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations
imposes by the principles governing estoppels.
 Unauthorized issuance of stock certificates
100/s
100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form certificate, sold to
D (innocent purchaser for value), will D acquire title?
- NO, subject to such rights and defenses as the true and
lawful owner may have
 What if C now goes to the corporation and presents the
form?
- Then the corporation shall cancel the old certificate and
issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?
- A, A cannot be deprived of his right by virtue of an
of unauthorized transfer
 Corporation can compel C to deliver the new stock
certificate because he made a representation that the
certificate where good.
Armed with the new certificate issued to C, C delivers

to D a purchaser in good faith and for value will D
acquire title?

- D will acquire title took the shares not by virtue of a
forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew of
what happened and went to the corporation and
complains. Who will have a better title?
- the corporation may be compelled to recognize both, A
as stockholder (non-negotiable) D, reliance that the
stock certificate is valid and existing and owned by C
 Forged transfers
- If the corporation should issue a new certificate in
pursuance of a forged transfer, the corporation incurs
no liability to the person in whose favor it is issued and
it may demand its return for cancellation. The
corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty of
the purchaser to determine that the indorsement of
the owner is genuine. However, if the new certificate
issued to the purchaser comes into the hands of a
bona fide purchaser for value, the corporation will be
stopped from denying validity thereof, since by issuing
such new certificate it represents that the person
named therein is a stockholder of the corporation. The
corporation is thus forced to recognize both the
original certificate and new certificate-the original,
because the true owner could not be deprived of his
title by a forged transfer, and the new, because of its
representation that the person named therein is the
owner of shares in the corporation. But if the
recognition of both stockholders would result in an
over issue of shares, then only the original and true
owner can be recognized as a stockholder. The bona
fide purchaser of the new certificate will however have
a right of damages against the corporation. The
corporation, in turn, would have a right of action
against the person who made false representations
and in whose favor it issued a new certificate. The true
owner of the shares which were wrongfully transferred
would of course have a right to compel the corporation
to issue him a certificate in lieu of the original one
which was wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation recognize as
rightful owner A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an
over issue of shares, then only the original and true
owner can be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of
certificate of stocks
 The true and lawful owner will never be deprived of his
rights
 What happens to D?
- D will have a cause of action against the corporation for
the value of his acquisition cost inclusive of damages,
attorney’s fees and cost of suit
 D sues the corporation for the value of his acquisition
cost, inclusive of damages, attorney’s fees and cost of
suit. What may the corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the certificate of
stocks is valid, subsisting, etc.
 2nd situation, what cause of action may the corporation
have? Remedy?
- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
39
- Section 64 provides:
Section 64. Issuance of stock certificates. -
No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if
any is due, has been paid. (37)
 A certificate of stock cannot be issued unless he fully
paid the amount subscribed
 Subscription to the capital stocks of the corporation
are indivisible
 Clear mandate of section 148 of the code is that the
ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true
Section 148. Applicability to existing
corporations. - All corporations lawfully existing and
doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been
authorized, licensed or registered under the provisions
of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions
hereof: Provided, That if any such corporation is
affected by the new requirements of this Code, said
corporation shall, unless otherwise herein provided, be
given a period of not more than two (2) years from the
effectivity of this Code within which to comply with the
same. (n)
 Subscription to shares of stocks are indivisible
 Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be issued a
stock certificate and in the event that the corporation
refuses to do so, the stockholder my institute a case
for mandamus with damages. Thus, it has been said
that the duty of the corporate officers to issue stock
certificates to those entitled thereto is a ministerial
duty enforceable by mandamus.
• Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner of
250 shares of stock; “the plaintiff’s rights consist in
equity in 500 shares and upon payment of the unpaid
portion of the subscription price he becomes entitled
to the issuance of certificate for said 500 shares in his
favor.”
- No certificate of stock until the full amount has been
paid.
 Watered stock
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value
thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a
consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-up
capital be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or
issued value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall
be paid at all; or
4. In the guise of stock dividends when there are no
surplus profits of the corporation.

 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby
hurting its business prospects, financial capability and
responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced
by the reduction of their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of the
corporate assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their
claims
 What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of
ultra-vires or illegal acts which constitute an injury to
or fraud upon the public, or which will tend to injure or
defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the
subscriber is liable to pay the full par or issued value
thereof, to render it valid and effective.
3. As to the consenting stockholders - They are stopped
from raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution
of their proportionate interest in the corporation, they
may compel the payment of the “water” in the stock
solidarily against the responsible and consenting
directors and officers inclusive of the holder of the
watered stocks;
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
solidarily against the responsible directors/officers and
the stockholders concerned; and’
6. As against transferees of the watered stock – His right
is the same as that of his transferor. If, however, a
certificate of stock has been issued and duly indorsed
to a bona fide purchaser, without knowledge, actual or
constructive, the latter cannot be held liable, at least
as against the corporation, since he took the shares on
reliance of the misrepresentation made by the
corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited
from issuing certificates of stock until the full value of
the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it
issued as against a purchaser in good faith. Thus,
Ballentine states that whether there is any liability on
the part of the transferee of watered stock is made to
depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had
knowledge thereof, he is subject to the same liability
as his transferor.
 What is the nature of the liability of the corporate
directors consenting to the issuance of watered stocks
and the extent of their liabilities?
- Solidarily liable with the holder of the watered stocks
to the extent of the water from said shares of stocks
 Will all the directors be liable? What if you objected
will you also be liable?
- If you do not issue a written objection, you are still
liable
- Even passive directors may be liable
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
40
- Those having knowledge thereof, but did not interpose
their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a
consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time
of issuance of the stock and the par or issued value of
the same. (n)
 ACS-100M 100M/S PAR VALUE-
1.00
SUBSCRIBED-50M FAIR MARKET VALUE-
12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is
12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par value
indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
 Can you question there actuations? What would be the
cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such directors
- They cannot advance their own motives to the
damage prejudice of the corporation which they
represents and stockholders as a whole instead of it
being sold outside
- 500M would have gone to the coffers of the
corporation, 500M should be there for the protection of
creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung corporation,
opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. -
Subject to the provisions of the contract of
subscription, the board of directors of any stock
corporation may at any time declare due and payable
to the corporation unpaid subscriptions to the capital
stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as
it may deem necessary.
 41

Payment of any unpaid subscription or any percentage of this Code, bid for the same, and the total amount
thereof, together with the interest accrued, if any, due shall be credited as paid in full in the books of the
shall be made on the date specified in the contract of corporation. Title to all the shares of stock covered by
subscription or on the date stated in the call made by the subscription shall be vested in the corporation as
the board. Failure to pay on such date shall render the treasury shares and may be disposed of by said
entire balance due and payable and shall make the corporation in accordance with the provisions of this
stockholder liable for interest at the legal rate on such Code. (39a-46a)
balance, unless a different rate of interest is provided
in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date  Who is the winning bidder in a delinquency sale?
no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and
- Bidder who shall “offer to pay the full amount of the
shall be subject to sale as hereinafter provided, unless
balance on the subscription together with accrued
the board of directors orders otherwise. (38)
interest, cost of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
 Remedies of the corporation to enforce payment of share.”
unpaid subscription
X Co. has 1M authorized capital stock
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code 500 thousand is already subscribed
2. By a collection case in court as provided for in section
70
A subscribed to 100 thousand shares, 50 thousand is
already paid leaving 50 thousand unpaid
 Are subscribers of shares of stocks not fully paid, liable
to pay interest?
The corporation is at a loss of 250 thousand, the board
decides to make a call for the payment of the unpaid
- General rule is they are not liable to pay interest subscriptions, however A could not paid, hence
because the code says unless requires in the by-laws declared delinquent and decides to sell his share at a
- Aside from the mandate of the law that subscribers to public auction
shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in the 55 thousand is to be paid, remaining balance plus cost
contract or in the corporate by-laws at such rate as and expenses
may be indicated thereat or the legal rate if not so
fixed. Unless so required or provided, however,
subscribers to shares of stock, not fully paid, are not BIDDERS:
liable to pay interest on their unpaid subscriptions. The
code thus provides:
X-55K FOR 99,900 shares

Section 66. Interest on unpaid

Y-55K FOR 99,500 shares
subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from
the date of subscription, if so required by, and at the Z-55K FOR 99,000 shares (winning bidder)
rate of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)  Assume there is no bidder, may the corporation bid?

 Until a call is made, they are not due and payable, but - NO. It cannot bid because the law says, subject to the
still subject to the provisions of the contracts provisions of this CODE. Section 68 and 41 should be
 Procedures in case of sale of delinquent stocks reconciled. Section 68 states that:

- Section 68. Delinquency sale. - The board of directors Should there be no bidder at the public
auction who offers to pay the full amount of the
may, by resolution, order the sale of delinquent stock
balance on the subscription together with accrued
and shall specifically state the amount due on each
interest, costs of advertisement and expenses of sale,
subscription plus all accrued interest, and the date,
for the smallest number of shares or fraction of a
time and place of the sale which shall not be less than
share, the corporation may, subject to the
thirty (30) days nor more than sixty (60) days from the
provisions of this Code, bid for the same, and the
date the stocks become delinquent.
total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock
Notice of said sale, with a copy of the covered by the subscription shall be vested in the
resolution, shall be sent to every delinquent corporation as treasury shares and may be disposed of
stockholder either personally or by registered mail. by said corporation in accordance with the provisions
The same shall furthermore be published once a week of this Code. (39a-46a)
for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the
principal office of the corporation is located.

- There was no unrestricted retained earnings in the

Unless the delinquent stockholder pays to
the corporation, on or before the date specified for the
sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent
stock shall be sold at public auction to such bidder
who shall offer to pay the full amount of the balance
on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The
stock so purchased shall be transferred to such
purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor.
The remaining shares, if any, shall be credited in favor
of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
share, the corporation may, subject to the provisions
example given therefore the corporation cannot bid ,
section 41, it states that:
Section 41. Power to acquire own shares. -
A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (a)

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

 What if the shares of A were sold without compliance
of the requirements? May A question the sale?
- The law prescribes two conditions before an action to
recover delinquent stocks irregularly sold may be
allowed. These are:
1. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for
which the same was sold, with interest from the date
of the sale at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the sale.
- The reason for such is the stability of transactions of
the shares of stock
 Suppose in the example, since there are no
unrestricted retained earnings, hence the corporation
cannot bid, is the corporation left without any
recourse?
- Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall prevent the
corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and
expenses. (49a)
• Velasco vs. Poizat
- The subscriber is as much bound to pay the amount of
the share subscribed by him as he would be to pay any
other debt, and the right of the company to demand
payment is no less incontestable.
- Two available remedies: the first and most special
remedy given by the statute consist in permitting the
corporation to put up the unpaid stock and dispose of
it for the account of the delinquent subscriber. The
other remedy is by action in court.
• De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors to
do whatever is provided in the said article relative to
the application of the part of the 70 percent of the
profit distributable in equal parts on the payment of
the shares subscribed to and fully paid
• Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide compromise or to
set off a debt due from the corporation, a release
supported by consideration, will be effectual as against
dissenting stockholders and subsequent and existing
creditors. A release which might originally have been
held invalid may be sustained after a considerable
lapse of time
• Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable
only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will not
be demandable or payable at all
• Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize
assets for the payment of its debts.
• PNB vs. Bitulak
- Where it not for the promise, the defendants would
have not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute
a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
42
stock subscription in order to realize assets for the
payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction
of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or
the charter or the articles of incorporation.
• Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled that
a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscriptions
 Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
• Garcia vs. Suarez
- Never became due and payable until there is a call
made
- Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
demand has been made and not from the time of
subscription
 If declared delinquent, what would be the effect as to
the owner of said shares?
- Section 71. Effect of delinquency. - No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor shall
the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code, until and
unless he pays the amount due on his subscription
with accrued interest, and the costs and expenses of
advertisement, if any. (50a)
- However if the shares are not delinquent, subscribers
to the capital of a corporation, though not fully paid,
are entitled to all the rights of a stockholder, according
to section 72
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
 May the rules governing delinquency sale apply to a
non-stock corporation? Are there unpaid shares in a
non-stock corporation?
- Rules governing stock corporations, when applicable,
also applies to a non-stock corporation
- There are delinquent shareholders also in a non-stock
corporation. Example is membership dues
 A corporation paid 50% of subscription and was later
on declared delinquent when he could not pay upon
call; A is also a director of the corporation. Will A, upon
declaration of delinquency , still be able to exercise his
right as a director?
- Yes, he loses all his right as a stockholder except his
right to receive dividends
- He remains to be a director, only qualification to be a
director is he must own at least 1 share and since it
still stands in his name pending the sale, he remains to
be and act as a director
- Even if there is sale, he may still be director because
the winning bidder may not bid or pay for all the
shares or there might be remaining shares, which
would be credited in favor of the delinquent
stockholder
- Section 43 provides:
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or

in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from
the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
 When a certificate of stock is loss or destroyed, what
must be done by the owner thereof?
- Section 73. Lost or destroyed certificates. - The
following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of
those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal representative shall
file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of
shares represented by such certificate, the serial
number of the certificate and the name of the
corporation which issued the same. He shall also
submit such other information and evidence which he
may deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the
place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of
stock which has been lost, stolen or destroyed. The
notice shall state the name of said corporation, the
name of the registered owner and the serial number of
said certificate, and the number of shares represented
by such certificate, and that after the expiration of one
(1) year from the date of the last publication, if no
contest has been presented to said corporation
regarding said certificate of stock, the right to make
such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has
been lost, stolen or destroyed and issue in lieu thereof
new certificate of stock, unless the registered owner
files a bond or other security in lieu thereof as may be
required, effective for a period of one (1) year, for such
amount and in such form and with such sureties as
may be satisfactory to the board of directors, in which
case a new certificate may be issued even before the
expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance
of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of stock
in lieu of those lost, stolen or destroyed pursuant to
the procedure above-described. (R.A. 201a)
- The rationale of the above-quoted law is to avoid
duplication of certificates of stock and the avoidance
of fictitious and fraudulent transfers.
 When will the replacement certificate be issued?
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
43
- The code provides that:
after the expiration of one (1) year from
the date of the last publication, if no contest has
been presented to said corporation regarding said
certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new
certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files a bond or
other security in lieu thereof as may be required,
effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be
satisfactory to the board of directors, in which case a
new certificate may be issued even before the
expiration of the one (1) year period provided
herein: Provided, That if a contest has been
presented to said corporation or if an action is pending
in court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu thereof
shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed.
 May corporate officers be held liable for the
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of stock
in lieu of those lost, stolen or destroyed pursuant to
the procedure above-described. (R.A. 201a)
 Assuming the last paragraph is not there; would it be
not the same, that they should be held liable due to
fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors, trustees
or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all
damages resulting there from suffered by the
corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence,
as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee
for the corporation and must account for the profits
which otherwise would have accrued to the
corporation. (n)
 Certificate of stock was lost, the owner transfers his
shares by way of a notarized deed will it be valid?
- He cannot do so, if a certificate of stock is issued by a
corporation, a mere notarized deed will not suffice
- Deed of assignment was not sufficient since there was
no endorsement (Rural Bank of Lipa vs. CA)
 Rights and liabilities of stockholders
- RIGHTS
1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted
upon either personally or by proxy as provided for
under sections 50 and 58 of the code;
 44

2. To enter into a voting trust agreement subject to the

procedure, requirements and limitations imposed
under section 50;
3. To receive dividends and to compel their declaration if
warranted under section 43;
4. To transfer shares of stock subject only to reasonable
restrictions such as options and preferences as may be
allowed by law inclusive of the right of the transferee
to compel the registration of the transfer in the books
of the corporation as provided for in section 63;
5. To be issued a certificate of stock for fully paid-up
shares in accordance with 64;
6. To exercise pre-emptive rights as provided for in
section 39;
7. To exercise their appraisal right in accordance with the
provision of section 81 and in those instance allowed
by law such as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under section 69;
10. To inspect the books of the corporation subject only to
the limitations imposed by section 73;
11. To be furnished by the most recent financial statement
of the corporation as by section 75;
12. To be issued a new stock certificate in lieu of the lost
or destroyed one subject to the procedure laid down in
section 73;
13. To have the corporation dissolved under section 118 to
121, and section 105 in a close corporation;
14. To participate in the distribution of the assets of the
corporation upon dissolution under section 122;
15. In the case of a close corporation, to petition the SEC
to arbitrate in the event of a deadlock as allowed
under section 104; and,
16. Also in the case of a close corporation, to withdraw
therefrom, for my reason, and compel the corporation
to purchase his shares as provided for under section
105.

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

- LIABILITIES
1. To pay to the corporation the balance of his unpaid
subscriptions subject to the provision of section 67 to
70;
2. To pay interest on his unpaid subscription if required
by the by-laws or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the unpaid portion of his
subscription under the TRUST FUND DOCTRINE;
4. To answer the “water” in his stocks as provided for in
section 65;
5. To be liable, as general partners, for all debts,
liabilities and damages of a determinable corporation
as envisioned under section 21 (corporation by
estoppel); and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates
in the management of the corporate affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are required to
be kept?
- Section 74. Books to be kept; stock transfer agent. -
Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all
meetings of stockholders or members, or of the
board of directors or trustees, in which shall be
set forth in detail the time and place of holding
the meeting, how authorized, the notice given,
whether the meeting was regular or special, if
special its object, those present and absent, and
every act done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when any
director, trustee, stockholder or member
entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and
nays must be taken on any motion or
proposition, and a record thereof carefully
made. The protest of any director, trustee,
stockholder or member on any action or
proposed action must be recorded in full on his
demand.
The records of all business transactions of
the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who
shall refuse to allow any director, trustees, stockholder
or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such
director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which
shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or
trustees, the liability under this section for such action
shall be imposed upon the directors or trustees who
voted for such refusal: and Provided, further, That it
shall be a defense to any action under this section that
the person demanding to examine and copy excerpts
from the corporation's records and minutes has
improperly used any information secured through any
prior examination of the records or minutes of such
corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in
making his demand.
Stock corporations must also keep a book to
be known as the "stock and transfer book", in which
must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has
been made, and the date of payment of any
installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the
office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business days.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
45
No stock transfer agent or one engaged
principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed
to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission
and pays a fee as may be fixed by the Commission,
which shall be renewable annually: Provided, That a
stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the
rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein
provided, shall be applicable. (51a and 32a; P.B. No.
268.)
 To summarize:
1. Records of all business transactions which include,
among others, journals, ledger, contracts, vouchers
and receipts, financial statements and other books of
accounts, income tax returns, and voting trust
agreements which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders or members
and of the directors or trustees setting forth in detail
the date, time, and place of meeting, how authorized,
the notice given whether the same be regular or
special, and if special, the purpose thereof shall be
specified, those present and absent, and every act
done or ordered done there at which ,must likewise be
kept at the principal office of the corporation; and,
3. Stock and transfer book showing the names of the
stockholders, the amount paid or unpaid on all stocks
for which subscription has been made, a statement of
every alienation, sale or transfer of stock made, if any
the date thereof, and by whom and to whom made
which must also be kept at the principal office of the
corporation or in the office of its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are
subject to inspection by any of the directors, trustees,
stockholders or members of the corporation at
reasonable hours on business days and a copy of
excerpts of said records may be demanded. In fact, in
so far as financial statement is concerned, the Code
clearly provides:
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall
furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of
the last taxable year and a profit or loss statement for
said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to such
stockholders or members a financial report of the
operations of the corporation for the preceding year,
which shall include financial statements, duly signed
and certified by an independent certified public
accountant.
However, if the paid-up capital of the corporation is
less than P50,000.00, the financial statements may be
certified under oath by the treasurer or any
responsible officer of the corporation. (n)
 May books and records be examined? Who may
examine? Can they copy them? In whose expense?
- Yes, according to the code:
“The records of all business
transactions of the corporation and the minutes
of any meetings shall be open to inspection by
any director, trustee, stockholder or member of
the corporation at reasonable hours on business
days and he may demand, in writing, for a copy
of excerpts from said records or minutes, at his
expense. “
 Is there any defense available that could be raised? By
the corporate officers to justify the refusal?
- Yes, the code provides that:
“and Provided, further, That it shall be a
defense to any action under this section that the
person demanding to examine and copy

excerpts from the corporation's records and
minutes has improperly used any information
secured through any prior examination of the
records or minutes of such corporation or of any
other corporation, or was not acting in good
faith or for a legitimate purpose in making his
demand.”
 What is the stock and transfer? Where should stock
and transfer be kept? Can it be kept elsewhere?
“Stock corporations must also keep a book
to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the
names of the stockholders alphabetically
arranged; the installments paid and unpaid on
all stock for which subscription has been made,
and the date of payment of any installment; a
statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to
whom made; and such other entries as the by-
laws may prescribe. The stock and transfer book
shall be kept in the principal office of the
corporation or in the office of its stock transfer
agent and shall be open for inspection by any director
or stockholder of the corporation at reasonable
hours on business days. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the minutes or by
the hours
- Non-stock corporation- stock and transfer books
- Club share- membership
 Are stockholders entitled to financial statements?
- Yes, they are entitled to a copy, the code provides
that:
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall
furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of
the last taxable year and a profit or loss statement for
said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees shall
present to such stockholders or members a financial
report of the operations of the corporation for the
preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the financial
statements may be certified under oath by the
treasurer or any responsible officer of the corporation.
(n)
- Audited financial statement filed in the SEC, 120 days
from the end of the final year, or must be filed on or
before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with
increasing and decreasing
- If not “kulong” violation of securities and regulation
act
 Why is this right of inspection granted to
stockholder?
- The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper
purpose is to protect his interest as a stockholder.
Thus, it has been said that:
“The right of the shareholders to ascertain
how the affairs of his company are being
conducted by its directors and officers is
founded by his beneficial interest through
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
46
ownership of shares and the necessity of
self-protection. Managers of some
corporations deliberately keep the
shareholders in ignorance or under
misapprehension as to the true condition of
its affairs. Business prudence demands that
the investor keep a watchful eye on the
management and the condition of the
business. Those in charge of the company
may be guilty of gross incompetence or
dishonesty for years and escape liability if
the shareholders cannot inspect the records
and obtain information.”
 Is there any distinction of the right of inspection of a
stockholder and that of a director?
- Yes, as compared to a stockholder or member, the
right of a director or trustee to inspect and examine
corporate books and records is considered absolute
and unqualified and without regard to motive. This is
because a director supervises, directs and manages
corporate business and it is necessary that he be
equipped with all the information and data with regard
to the affairs of the company in order that he may
manage and direct its operations intelligently and
according to his best judgment in the interest of all the
stockholders he represents. Thus, while stockholders
and members are entitled to inspect and examine the
books and records as provided in sections 74 and 75
they may not gain access to highly sensitive and
confidential information. In the case of directors. “it is
not denied” that they have such access. This would
include, among others,
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms
 May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock ownership thus
personal in nature it may be made by the
stockholder’s agent or representative since it may be
unavailing in many instances
 What if the right of the stockholder to inspect is
denied? What is his remedy?
1. Mandamus
2. Damages either against the corporation or responsible
officer who refused the inspection
3. Criminal complaint for violation of his right to inspect
and copy excerpts of all business transactions and
minutes of meeting. Section 74 provides that Any
officer or agent of the corporation who shall refuse to
allow any director, trustees, stockholder or member of
the corporation to examine and copy excerpts from its
records or minutes, in accordance with the provisions
of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable
under Section 144 of this Code. The latter provision
imposes a penalty of a fine of not less than P1,000 but
not more than P10,000 or an imprisonment for not less
than 30 days but not more than 5 years, or both, at
the discretion of the court. If the refusal is pursuant to
a resolution or order of the board, the liability shall be
imposed upon the directors or trustees who voted for
such refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly used any
information secured through any prior examination of
the records or minutes of such corporation or of any
a other corporation;
2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
3. The right is limited or restricted by special law or the
law of it creation.
• W.G. Philpotts vs. Philippine Manufacturing Co.
- The right of inspection given to a stockholder can be
exercised either by himself or by any proper
representative or attorney-in-fact, and either with or
without the attendance of the stockholder

- The right may be regarded as personal, in the sense
that only a stockholder may enjoy it; but the
inspection and examination may be made by another.
Otherwise it would be unavailing in many instances.
o Note: Usually hires an auditor or accountant to
safeguard his interest
• Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised during reasonable
hours on any business days, the by-laws cannot deny
this right all together
- The general right given by the statute may not be
lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive officers nor the
board of directors have the power to deprive a
stockholder of the right altogether.
- The corporation, or its responsible directors and
officers cannot unduly restrict this right of inspection
and may not arbitrarily set a few days of the year
within which the stockholder may make the inspection.
- A by-law unduly restricting the right of inspection is
undoubtedly invalid
• Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the unqualified right to
inspect the books and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these
minutes have been written up and approved by the
directors.
 May a stockholder of a holding company inspect the
books and records of a subsidiary?
- It depends
- The right of the stockholders to examine corporate
books extends to wholly-owned subsidiary which is
completely under the control and management of the
parent company where he is such a stockholder. But if
the two entities (subsidiary and parent) are legally
being operated as separate and distinct entities, there
is no such right of inspection on the part of the
stockholder of the parent company.
AYALA- HOLDING COMPANY/PARENT COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-
owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to be a
PARENT COMPANY
 A, is a stockholder of Ayala, does he have a right to
inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
• Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of stock
of San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such
wholly-owned subsidiary which are in respondent
corporation’s possession and control
 If being operated as separate and distinct
corporations, there is no such right
 Telecommunications- special franchise, it is a
legislative grant
• Gonzales vs. PNB
- Provisions of the old law was unqualified, when it
granted stockholders the right to inspect
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
47
- However, whole seemingly enlarging the right of
inspection, the new code has prescribed limitations to
the same. It is now expressly required as a condition
for such examination that the one requesting it must
not have been guilty of using improperly any
information secured through a prior examination and
that the person asking for such examination must be
acting in good faith and for a legitimate purpose in
making his demand
- Admittedly, he sought to be a stockholder in order to
pry into transactions entered into by the respondent
bank even before he became a stockholder. His
obvious purpose was to arm himself with materials he
can use against the respondent bank for acts done by
the latter when the petitioner was a total stranger to
the same.
- Bank was created by a special law, it has its own
charter and primarily governed by the law creating
them
- The bank is only subject to the inspection of the
Central Bank and any information pertaining to the
bank is confidential and shall not be revealed to any
person other than the President of the Philippines, the
Secretary of Finance and the Board of Directors, nor
shall any information relative to the funds in its
custody, its current accounts or deposits belonging to
private individuals, corporations or other entities
except by order of a Court of Competent Jurisdiction,
hence inspection sought to by the petitioner is
violative of the provisions of its charter and is even
subject to penal sanctions
 Assuming you are a stockholder of PNB, and then it
was privatized, may you already have the right to
inspect?
- No, unless its charter has been altered or repealed it is
still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
MERGER AND CONSOLIDATION
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company
- Corporations are granted by the code to merge or
consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial
capability
- also a method of recapitalization
o purchase and sale of corporate assets is another
form of corporate reorganization
 How do you value the assets of the merging
corporation, do you consider goodwill?
 First secure favorably recommendation of government
agency
- Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities,
educational institutions and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained. If the
Commission is satisfied that the merger or
consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or
consolidation shall be effective.

If, upon investigation, the Securities and
Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice
of the date, time and place of hearing shall be given to
each constituent corporation at least two (2) weeks
before said hearing. The Commission shall thereafter
proceed as provided in this Code. (n)
 Merger
- A union effected by absorbing one or more existing
corporations by another which survives and continues
the combined business
- It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and
merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent
corporation
 Consolidation
- The uniting or amalgamation of two or more existing
corporations to form a new corporation
- In merger there is a surviving corporation, the others
are dissolved, while in consolidation, all constituent
are dissolved and a new one organized
A B
C the rights, privileges, immunities and franchises of
 Like all other corporate acts, it emanates from the
board
1. The board of directors or trustees of each constituent
corporations shall approve a plan of merger or
consolidation setting forth the matters required in
section 76;
2. Approval of the plan by the stockholders
representing 2/3 of the outstanding capital
stock or 2/3 of the member in non-stock
corporations of each of such corporations at separate
corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or
summary of the plan of merger or consolidation
shall be given to all stockholders or members at least
two (2) weeks prior to the scheduled meeting, either
personally or registered mail stating the purpose
thereof;
4. Execution of the articles of merger or consolidation by
each constituent corporations to be signed by the
president or vice-president and certified by the
corporate secretary or assistant secretary
setting forth the matters required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the SEC subject
to the requirement of section 79 that if it involve
corporations under the direct supervision of any other
government agency or governed by special laws the
favorable recommendation of the government agency
concerned shall first be secured and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the merger
or consolidation shall be effective. If the plan,
however, is believed to be contrary to law, the SEC
shall set a hearing to give the corporations concerned
an opportunity to be heard upon proper notice and
thereafter, the Commission shall proceed as provided
in the Code.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
48
 Although merger and consolidation is an express
power granted to corporation, it is subject to
limitations, as maybe proscribed by law
 What would be the effect of merger or consolidation?
<sec. 80>
1. There will only be a single corporation. In case of
merger, the surviving corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under
the Code;
4. The surviving or consolidated corporation shall possess
all the rights, privileges, immunities and franchises of
the constituent corporations, and all property and all
receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or
belonging to or due to the constituent corporations
shall be deemed transferred to and vested in such
surviving or consolidated corporation without further
act and deed; and,
5. The rights of creditors or any lien on the property of
the constituent corporations shall not be impaired by
the merger or consolidation.
 Is there a liquidation process in case of merger or
consolidation?
- None, there is nothing to distribute
• Associated Bank vs. CA
- By virtue of a specific provision in the merger
agreement
- Although the subject promissory note names CBTC as
the payee, the reference to CBTC in the note shall be
construed, under the very provision of the merger
agreement, as a reference to petitioner bank, “as if
such reference (was a) direct reference to the latter
for all intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated
corporation shall thereupon and thereafter possess all
each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever
account, including subscriptions to shares and other
choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such
surviving or consolidated corporation without further
act or deed; and
- Without further acts, meaning it is automatic
 When do merger and consolidation become effective?
What if the SEC fails to act on it without fault
attributable to the corporation involved?
- It will never become valid until and unless the SEC
gives its stamp of approval
- It will be up to the constituent corporation to follow it
up
- It will never take effect until the SEC gives its approval
and issues the articles of merger
o Granted 3 years to wing up unless there is a
trustee to wing up its affairs
 Could there be liquidators and winding up with respect
to the corporation in consolidation and merger?
- No, there is none
- No assets properties or rights to collect, they are
transferred
- No debts and liabilities to pay because they become
the liabilities of the surviving corporations
- No properties transferred because they will be the
properties of the surviving corporations
o Hardest part is the financial act, regarding how
many shares would be issued, probability of
collection and the like

o In merger and consolidation, there is due
diligence and an economist is usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation and demand
payment of the fair value of his shares after dissenting
from certain corporate acts involving fundamental
changes in corporate structure <sec. 81>
 What property? When may this right be exercises?
- Section 81 provides:
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation. (n)
 May it be exercised by a stockholder who dissents to
the act of a business other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque
A objects and makes a written demand. May he
exercise his right of appraisal?
- It is not available in all amendments of the corporation
- It must be changing or restricting the rights of any
stockholder
 What if the principal office is changed from QC to
TAWI-TAWI, will it change or affect the rights of A?
- To some it may change or restrict the rights to others
it may not
 How is the right exercised?
- According to section 82 of the code:
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate
action, by making a written demand on the
corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value
of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action
is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate
or certificates of stock representing his shares, the fair
value thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen. The findings of the
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
49
majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained
earnings in its books to cover such payment: and
Provided, further, That upon payment by the
corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the
corporation. (n)
X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for payment of
fair value of shares. Can he make a demand of
payment of shares?
 True or False, no stockholder in a stock corporation
can ever demand if the principal office is amended,
changing it from QC to Manila
- False, a stockholder in a close corporation may for any
reason compel the close corporation that he be paid
the fair value of his shares
Can he exercise his appraisal rights in the first place?
He hasn’t even paid his subscription in full.
 May a stockholder who hasn’t paid his subscription in
full exercise his appraisal rights?
- Yes, he can exercise his appraisal rights, by reconciling
the provisions of section 72, section 82 and section 86
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate
action, by making a written demand on the
corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value
of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action
is implemented or affected, the corporation shall
pay to such stockholder, upon surrender of the
certificate or certificates of stock representing
his shares, the fair value thereof as of the day prior
to the date on which the vote was taken, excluding
any appreciation or depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained
earnings in its books to cover such payment: and
Provided, further, That upon payment by the
corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the
corporation. (n)
Section 86. Notation on certificates; rights
of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares
to the corporation for notation thereon that such
shares are dissenting shares. His failure to do so shall,
at the option of the corporation, terminate his
rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and
the certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under this
Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend

distributions which would have accrued on such shares
shall be paid to the transferee. (n)
- Notation is not mandatory, it is even discretionary
because the code provides “at the option of the
corporation” because it never issued one for that
matter since the subscriptions are not yet fully paid
 May the corporation be compelled to pay the interest
of A
300 T, 150T, 150T and 0 unrestricted retained
earnings
 No stockholder may be able to compel the corporation
to pay the value of his shares if the corporation has no
unrestricted retained earnings
- False, a stockholder of a close corporation may for any
reason, provided only that the corporation has
sufficient assets to cover its debts and liabilities
o General rule: there should be unrestricted
retained earnings
o Exception: section 105 “close corporation”
 The procedure and requirements for the valid exercise
of this rights are:
1. The stockholder must have voted against the proposed
corporate action in any of the instances allowed by law
for the exercise of the right of appraisal;
2. The written demand for payment must be made by the
dissenting stockholder within thirty (30) days after the
date on which the vote was taken thereon. Failure to
make the demand within the said period shall be
deemed a waiver on the part of the stockholder
concerned to exercise his appraisal right;
3. Surrender of the certificate of stock by the dissenting
stockholder for notation in the corporate books and
the payment by the corporation of the fair market
value of the said shares as of the day prior to the date
on which the vote was taken. If the stockholder and
the corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance
with the provision of paragraph 2 of section 82;
4. The fair value of the shares of the dissenting
stockholder must be paid by the corporation only if it
has “unrestricted retained earnings” in its books to
cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting
stockholder may not, therefore, be able to effectively
exercise his appraisal rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
 What would be the effect if the stockholder exercises
his appraisal rights? What happens to his voting and
dividend rights if he exercises his appraisal rights?
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
Section 83. Effect of demand and
termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares
until either the abandonment of the corporate action
involved or the purchase of the said shares by the
corporation, all rights accruing to such shares,
including voting and dividend rights, shall be
suspended in accordance with the provisions of
this Code, except the right of such stockholder
to receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is
not paid the value of his shares within 30 days
after the award, his voting and dividend rights
shall immediately be restored. (n)
 How do you compare the rights of a stockholder,
declared delinquent compared to a dissenting
stockholder exercising his appraisal rights
 What if a stockholder exercising his appraisal rights is
also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is
paid, unless there is a stipulation in the by-laws
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
50
 When may the right to be paid the value of his shares
cease? Can he withdraw his right of appraisal?
- Yes, he may withdraw, but there must be consent by
the corporation as provided for by section 83 of the
code:
Section 84. When right to payment ceases.
- No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and
Exchange Commission where such approval is
necessary, or if the Securities and Exchange
Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall
cease, his status as a stockholder shall thereupon be
restored, and all dividend distributions which would
have accrued on his shares shall be paid to him. (n)
 Instances when the right of a dissenting stockholder to
be paid the fair value of his shares ceases.
1. When he withdraws his demand for payment and the
corporation consents thereto;
2. When the proposed action is abandoned or rescinded
by the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certificate within ten
(10) days from demand to the corporation for notation
that such shares are dissenting shares; and,
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is lower than
the fair value of the shares of the dissenting
stockholder as determined by the appraisers;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
- Dissenting stockholder will be liable for the cost and
expenses of appraisal when
a. When the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified.
 The dissenting stockholder may also sell, transfer or
assign his shares
Section 86. Notation on certificates; rights
of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares
to the corporation for notation thereon that such
shares are dissenting shares. His failure to do so shall,
at the option of the corporation, terminate his rights
under this Title. If shares represented by the
certificates bearing such notation are
transferred, and the certificates consequently
cancelled, the rights of the transferor as a
dissenting stockholder under this Title shall
cease and the transferee shall have all the
rights of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee. (n)
NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where no part of its
income is distributable as dividends to its members,

trustees, or officers, subject to the provisions of this
code on dissolution
 What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific
provisions of this Title. (n)
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
 May it be granted or allowed by the by-laws?
- Yes
 May the right to cumulative voting be denied in a
stock corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation vote by
proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code.
(n) “
 May the right to vote by proxy be validly denied in a
stock corporation?
- No, it is a matter of right in a stock corporation
 May member of a non-stock corporation cast their vote
by text?
- Yes, subject to the approval and terms and conditions
of the SEC <sec. 89>
“Voting by mail or other similar means by
members of non-stock corporations may be authorized
by the by-laws of non-stock corporations with the
approval of, and under such conditions which may be
prescribed by, the Securities and Exchange
Commission. “
 How about in stock?
- Voting by mail or other similar means may also be
authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the vote
must be cast at a duly constituted meeting. The only
exception, in case of the latter, is in the matter of
general amendment of the articles of incorporation
where the written assent of the stockholder may be
sufficient.
 How is the governing board constituted in a non-stock
corporation? How many members?
- It may exceed 15 in a non-stock corporation unless the
AOI or by-laws provide otherwise, as provided for by
section 92 of the code:
Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of
non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
51
office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the expiration
of a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless
he is a member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines;
and,
3. Other qualifications as may be provided for in the by-
laws.
 Governing board in a non-stock
- Board of Trustees, however section 138 provides that:
Section 138. Designation of governing
boards. - The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or
special corporations may, through their articles
of incorporation or their by-laws, designate their
governing boards by any name other than as
board of trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock corporation,
same holds true to the manner of removal <sec. 29 ad
30>
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by
the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by
the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term
of his predecessor in office.
Any directorship or trusteeship to be filled
by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
 Who elects the other officers?
- Directly by the general members unless the by-laws or
articles provide otherwise. <sec.92>

“Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n) “
 In stock corporations who elect officers?
- Directors
 The provision that stock corporations cannot validly
provide that members cannot be voted by
stockholders is only a general rule because there is an
exception section 97 of the code states that:
The articles of incorporation of a close
corporation may provide that the business of the
corporation shall be managed by the stockholders
of the corporation rather than by a board of
directors. So long as this provision continues in
effect:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of
this Code; and
3. The stockholders of the corporation shall be subject
to all liabilities of directors.
The articles of incorporation may
likewise provide that all officers or employees or
that specified officers or employees shall be
elected or appointed by the stockholders, instead
of by the board of directors.
 Nature of membership is non-transferrable and
personal in nature unless the articles of incorporation
or by-laws provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock corporation
and all rights arising there from are personal and non-
transferable, unless the articles of incorporation or the
by-laws otherwise provide. (n)
 How is a membership requirement in a non-stock
corporation
A holds a membership certificate
B goes to the corporation and compels the corporation
to record the transfer in his name
- Membership in non-stock corporations may be
acquired by complying with the provisions of its rules
prescribed in the by-laws. This is in consonance with
the express power granted by law under section 36,
paragraph 6 of the code, authorizing them to admit
members thereof and that authority carries with it the
power to prescribe rules on membership. It has thus
been stated that in the absence of charter or statutory
restrictions, non-stock corporations may determine
who shall be admitted to membership and how they
shall be admitted.
Section 36. Corporate powers and
capacity. - Every corporation incorporated under this
Code has the power and capacity:
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the corporation
if it be a non-stock corporation;
- They can provide the manner in which to admit
depending on their own rules
 The power or authority to terminate members in non-
stock corporations is said to be inherent but strict
compliance with the manner and procedure laid down
in the by-laws must be observed, otherwise it may
render the expulsion ineffective and invalid.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
52
Section 91. Termination of membership. -
Membership shall be terminated in the manner and for
the causes provided in the articles of incorporation or
the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws.
(n)
 Power is inherent and may be exercised in certain
situations:
1. When an offense is committed which, although it
has no immediate relation to a member’s duty as
such, it is so infamous as to render him unfit for
society of honest men, which is indictable at
common law;
2. When the offense is a violation of his duty as
member of the corporation; and,
3. When the offense is of a mixed nature, being
both against his duty as a member of the
corporation, and also indictable at common law.
If the conduct of the member comes within any of this
cases, it is a ground for valid expulsion although it
may not be expressly made so by the by-laws
• Chinese YMCA vs. Ching
- Right of the corporation to choose who the members
are, cannot be inquired or intervened by the court
- The appealed decision thus contravened the establish
principle that the courts cannot strip a member of a
non-stock corporation of his membership therein
without cause.
• Lions Club International vs. CA
- Courts will not generally interfere on matters involving
the internal affairs of an unincorporated association
such as election contest unless the acts complained of
are arbitrary, oppressive, fraudulent, violative of civil
rights and the like
- General rule is that the courts will not interfere with
the internal affairs of an unincorporated association so
as to settle disputes between the members, or
questions of policy, discipline, or internal government,
so long as the government of the society is fairly and
honestly administered in conformity with its by-laws
and the law of the land, and no property or civil rights
are involved.
- Exceptions are the following:
a. Where law and justice so require, and the
proceedings of the association are subject to
judicial review where there is fraud, oppression,
or bad faith, or where the action complained of is
capricious, arbitrary, or unjustly discriminatory
b. To grant relief in case property or civil rights are
invaded, although it has also been held that the
involvement of property rights does not
necessarily authorize judicial intervention, in the
absence of arbitrariness, fraud or collusion.
c. Are violative of the laws of the society, or the law
of the land, as by depriving the person of due
process of law
d. There is lack of jurisdiction on the part of the
tribunal conducting the proceedings, where the
organization exceeds its powers, or where the
proceedings are otherwise illegal
 Corporations, stock and non-stock, may be dissolved in
accordance and pursuant to the provisions of Sections
118 to 121 of the Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If such be the
case, the assets of the corporation are to be
distributed in accordance with law and established
jurisprudence.
 If a non-stock corporation is dissolved how will its
properties be distributed?
Section 94. Rules of distribution. - In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code, its
assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
adequate provision shall be made therefore;

2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such
requirements;
3. Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
requiring return, transfer or conveyance by
reason of the dissolution, shall be transferred or
conveyed to one or more corporations, societies
or organizations engaged in activities in the
Philippines substantially similar to those of the
dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be distributed
in accordance with the provisions of the articles
of incorporation or the by-laws, to the extent that
the articles of incorporation or the by-laws,
determine the distributive rights of members, or
any class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for profit,
as may be specified in a plan of distribution
adopted pursuant to this Chapter. (n)
 Non-stock corporations with 4Billion funds, may it be
distributed for and among its members?
- Section 94 number 3 provides:
3. Assets received and held by the
corporation subject to limitations permitting their use
only for charitable, religious, benevolent, educational
or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of
the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations
engaged in activities in the Philippines substantially
similar to those of the dissolving corporation according
to a plan of distribution adopted pursuant to this
Chapter;
- If there is no distributive agreement then they may do
so through a plan of distribution under section 95
Section 95. Plan of distribution of assets. -
A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by majority vote,
adopt a resolution recommending a plan of distribution
and directing the submission thereof to a vote at a
regular or special meeting of members having voting
rights. Written notice setting forth the proposed plan
of distribution or a summary thereof and the date,
time and place of such meeting shall be given to each
member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice
of meetings to members. Such plan of distribution
shall be adopted upon approval of at least two-thirds
(2/3) of the members having voting rights present or
represented by proxy at such meeting. (n)
CLOSE CORPORATIONS
 Section 96. Definition and applicability of Title. - A
close corporation, within the meaning of this Code, is
one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to one
or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
53
be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a
close corporation within the meaning of this Code.
- Between and among themselves, they feel and act
alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you cannot
be a stockholder
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not publicly
offered
- 3 qualifying conditions must be contained in the
articles of incorporation, to be considered as a close
corporation, if not, it will not be considered as such
and will be governed by the general provisions of the
code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3 qualifying
provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in
management
- Combination of the corporation and partnership type
of business
 May any type of corporation, be organized as such
close corporation?
- No, the 3 qualifying conditions must be present
 What if 2/3 of the outstanding capital stock is owned
by another corporation which is also a close
corporation, will it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the
voting stocks of a close corporation is also owned by a
close corporation. It must be “voting” stocks
- Even if another corporation owns or controls 2/3 of the
voting stocks of a close corporation, the latter may still
be considered as such close corporation if the
corporation owning or controlling the shares is also a
close corporation.
“Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation within the
meaning of this Code.”
 What kind of corporations cannot be a close
corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated
therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more
classes, each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements in
meetings of stockholders or directors than those
provided in this Code.

 After classification what then?
- After classification, qualification and then restriction as
provided for under the 3 qualifying conditions in
section 96
 Cumulative voting is restricted in close corporations if
will be elected solely by a particular class
 In a close corporation, the articles of incorporation
may provide for a greater quorum and voting
requirement in meetings of both stockholders or
directors to increase the veto power of minority
stockholders, unlike in a stock corporation wherein
only directors meetings may provide for greater
quorum requirement and in stockholders meeting
which may not be altered or increased, as provide for
in section 25, following the doctrine of limited capacity
 The articles of a close corporation may likewise
provide that the business of the corporation shall be
managed by the stockholders rather than by the board
of directors. However the same must contain the
continuing provisions required in paragraph 2 of
section 97, that is:
1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed
to be directors; and;
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
 Liability of stockholders acting as directors in a close
corporation are more extensive since they are
personally liable for corporate torts unless the
corporation has obtained a reasonable adequate
liability insurance, unlike a ordinary stock corporation,
wherein directors thereof are only liable for corporate
torts only if they have been negligent or acted
fraudulently in the performance of their functions.
 Restrictions
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear in
the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not be
binding on any purchaser thereof in good faith
 What if the stockholders do not want to exercise their
right or option to purchase may it be sold to any
person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on
transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option
to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period
stated therein. If upon the expiration of said
period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may sell
his shares to any third person.
o ordinary stock corporations are liable only if
acted in Bad faith, fraud or negligence in
performance of duty
 What if there are already 20 stockholders and they
want to add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to admit
because it breaches the qualifying conditions
 Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or
instead of consenting they decide to amend their
articles of incorporation
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
54
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
becomes in excess of 20
o Unless all the stockholders consent they
“may”
 What if the other stockholders object to register? What
will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is
mutual restitution
 How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his
shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover
the debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing
stockholder, unlike in an ordinary stockholder where
there is none, they may only do so in the exercise of
appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel
the said corporation to purchase his shares at
their fair value, which shall not be less than
their par or issued value, when the corporation
has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation
may, by written petition to the Securities and
Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal,
or fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation or any stockholder, or
whenever corporate assets are being misapplied or
wasted.
 Agreements may also be entered in a close
corporation <sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall
be managed
 Board resolution
- Ordinary stock corporations- sit and act as a body at a
duly constituted meeting, they may do so by virtue of
the E-Commerce Act through teleconference or video
conference
 Exception to the rule: other officers may be directly
appointed and hired by the stockholders
 Close corporations may validly act even without a
meeting provided the conditions are obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the by-laws
provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless
be deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors; or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiescence of all
the stockholders; or
4. All the directors have express or implied knowledge
of the action in question and none of them makes
prompt objection thereto in writing.
 Pre-emptive rights in a close corporation is absolute
 55

Section 102. Pre-emptive right in close A provisional director shall be an impartial

corporations. - The pre-emptive right of stockholders in
close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services, or
in payment of corporate debts, unless the articles of
incorporation provide otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a close
corporation, otherwise it will not be considered as
close
 In a close corporation the pre-emptive rights is
broadened to include all issues without exception
unless denied or limited by the articles of
incorporation
 Section 39 is the governing provision concerning rights
of the stockholder in an ordinary stock corporation and
it may be denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues of shares
whether money, property or previously incurred
indebtedness.
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied
by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall
not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in
good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.
 Are treasury shares covered in the exercise of pre-
emptive rights in ordinary stock corporations?
 As regards amendments
person who is neither a stockholder nor a creditor of
the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional
director is not a receiver of the corporation and does
not have the title and powers of a custodian or
receiver. A provisional director shall have all the rights
and powers of a duly elected director of the
corporation, including the right to notice of and to vote
at meetings of directors, until such time as he shall be
removed by order of the Commission or by all the
stockholders. His compensation shall be determined
by agreement between him and the corporation
subject to approval of the Commission, which may fix
his compensation in the absence of agreement or in
the event of disagreement between the provisional
director and the corporation.
- Powers of the SEC in intra-corporate concerns has
been transferred to the proper commercial courts
- Prohibit, even if acting in good faith
- Provisional director appointed by the court
- Requiring the purchase, irrespective of unrestricted
retained earnings
- The provision of the law above-quoted gives the SEC a
very wide discretion in respect to management of a
close corporation in the event of a deadlock. It may:
1. Cancel or alter any provision in the articles of
incorporation, by-laws or any stockholders
agreement
2. Cancel, alter or enjoin any resolution or other act
of the corporation or its board of directors,
stockholders or officers
3. Prohibit any act of the corporation or its board of
directors, stockholders or officers or other
persons party to the action;
4. Requiring the purchase of the par value of the
shares of any stockholders, either by the
corporation regardless of availability of
unrestricted earnings, or by the other
shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.

 Section 105
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any - Dishonesty is a ground for dissolution of a close
provision required by this Title to be contained in the corporation
articles of incorporation or to reduce a quorum or - Even one stockholder may petition for dissolution
voting requirement stated in said articles of
incorporation shall not be valid or effective unless
approved by the affirmative vote of at least two-thirds o when there is a relief available, dissolution
(2/3) of the outstanding capital stock, whether with or would not be available in an ordinary
without voting rights, or of such greater proportion of corporation
shares as may be specifically provided in the articles
of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly CLOSE CORPORATION ORDINARY STOCK
called for the purpose. CORPORATION
1. The number of stockholders No limitation as to number of
cannot exceed 20 shareholder
 What happens if there is a deadlock? 2. To the extent that all Maximum number of directors
stockholders can be is 15
deemed directors, the
- Section 104 provides for a remedy number of directors can
effectively be more than 15
Section 104. Deadlocks. - Notwithstanding 3. Shares of stock are subject Generally no restriction on
any contrary provision in the articles of incorporation to specified restrictions transfer of shares
or by-laws or agreement of stockholders of a close 4. Shares of stock are No prohibition
corporation, if the directors or stockholders are so prohibited from being listed
divided respecting the management of the in the stock exchange or
corporation's business and affairs that the votes offered for sale to the public
required for any corporate action cannot be obtained, 5. Stockholders may take an Management is lodged in the
with the consequence that the business and affairs of active part in corporate Board of Directors
the corporation can no longer be conducted to the management by vesting
advantage of the stockholders generally, the Securities management to them rather
and Exchange Commission, upon written petition by than a Board of Director
any stockholder, shall have the power to arbitrate the 6. Those active in Directors are liable for torts
dispute. In the exercise of such power, the management are personally only if they have acted
Commission shall have authority to make such order liable for corporate torts negligently or fraudulently
as it deems appropriate, including an order: (1) unless the corporation has
cancelling or altering any provision contained in the obtained an adequate
articles of incorporation, by-laws, or any stockholder's liability insurance
agreement; (2) cancelling, altering or enjoining any 7. Directors can validly act Directors must, as a rule, act
resolution or act of the corporation or its board of even without a meeting as a body at a duly constituted
directors, stockholders, or officers; (3) directing or meeting
prohibiting any act of the corporation or its board of 8. Agreements between Not valid and binding since
directors, stockholders, officers, or other persons party stockholders regarding the stockholders’ agreement
to the action; (4) requiring the purchase at their fair operations of the business cannot limit the discretion of
value of shares of any stockholder, either by the can validly be made the Board to manage
corporation regardless of the availability of corporate affairs
unrestricted retained earnings in its books, or by the 9. To the extent that directors Ordinarily, no such
other stockholders; (5) appointing a provisional may be classified into one classification and no
director; (6) dissolving the corporation; or (7) granting or more classes and to be restrictions on cumulative
such other relief as the circumstances may warrant. voted solely by a particular voting
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
 56

class of stock, cumulative  What provision governs educational corporations?

voting may, in effect, be
restricted
10. The articles of Officers are elected by the Section 106. Incorporation. - Educational
incorporation may provide Board of Directors corporations shall be governed by special laws and by
that all officers shall be the general provisions of this Code. (n)
elected or appointed by the
stockholders - Special laws like they Education Act of the Philippines
11. It may provide for greater Although the articles of
quorum and voting incorporation or by-laws may
- These institutions of learning, once recognized by the
requirements in meetings of provide for greater quorum government as such are mandated by law to be
stockholders and directors and voting requirements in incorporated within ninety (90) days under the
directors’ meeting under provisions of the Corporation Code and must, perforce,
section 25, those for comply with the requirements and procedure laid
stockholders’ meeting cannot down there under. Their failure to so will not immune
generally be altered the educational institution from suit as a corporation.
(Chiang Kai Siek Case)
12. Restriction on transfer of Valid and binding if indicated
- Favorable recommendation of government agency
shares should be indicated in the articles of incorporation
involved
in the articles of and stock certificates
incorporation, by-laws and
stock certificates  Two types of educational corporations
13. Pre-emptive rights of Pre-emptive rights may be
stockholders is broader as it denied as provided for in
include all issues without section 39 - Certificate of completion in the academic field
exception - Vocational and technical one’s
14. A stockholder may Unless he sells his shares, a
withdraw and compel the stockholder cannot get back
corporation to purchase his his investment nor compel the o Recommendation of DECS if certificate of
shares for any reason with corporation to buy his shares completion in the academic field
the limitation only that the except in the exercise of his
corporation has sufficient appraisal right
 How is the governing board of an educational
assets to cover its liabilities
institution instituted?
exclusive of capital stock
15. The proper forum may Courts cannot interfere I the
interfere in the business judgment of the - Non-stock- multiples of 5 only (example: 5,10,15)
management of a close directors/stockholders - Stock- can be anywhere between 5 to 15
corporation in case of “BUSINESS JUDGMENT RULE”
deadlocks under Section
104, even of the  Can they consist of 7 or 9 members?
directors/stockholders are
acting in good faith
16. Any stockholder may Dissolution may be had only - Yes, if stock
petition the SEC for on the grounds provided by
corporate dissolution on the provisions of the Code on
 Can they be incorporated also as non-stock?
grounds among others, dissolution and P.D. 902-A, as
provides for in section 105 amended
• Manuel Dulay Enterprises vs. CA - Yes
- B.P. 232 allows the organization of an educational
institution that is stock corporation, only if they do not
- What was the position of Manuel Dulay here? issue a certificate of completion in the academic field
President, General Manager and Treasurer
- Cannot act both as president and treasurer at the
same time  Qualifications and disqualifications of the membership
- Since it is a close corporation owned by the family of in the board of an educational corporation
Manuel Dulay, save and except the secretary, it should
be governed by Title XII
- Petitioner is classified as a close corporation and - Educational corporations are governed by special laws
consequently a board resolution authorizing the sale or and general provisions, hence if there is no provision
mortgage of the subject property is not necessary to in the special law, you go back to section 25 and 27 of
bind the corporation for the action of its president. At the general provisions
any rate, a corporate action taken at a board meeting - Stock- must be a stockholder
without proper call or notice in a close corporation is - Non-stock- must be a member
deemed ratified by the absent director unless the - By-laws may provide for additional qualifications and
latter promptly files his written objection with the disqualifications
secretary of the corporation after having knowledge of
the meeting which, in this case, petitioner Virgilio
Section 25. Corporate officers, quorum. -
Dulay failed to do.
Immediately after their election, the directors of a
- Virgilio Dulay is a signatory witness, he knows very
corporation must formally organize by the election of a
well about the deed of absolute sale, he is estopped
president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall be
• Naguiat vs. NLRC a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held
- Section 100 par. 5. To the extent that the concurrently by the same person, except that no one
stockholders are actively engaged in the management shall act as president and secretary or as president
or operation of the business and affairs of a close and treasurer at the same time.
corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for The directors or trustees and officers to be
corporate torts unless the corporation has obtained elected shall perform the duties enjoined on them by
reasonably adequate liability insurance. law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors
 Family corporations is not automatically a close or trustees as fixed in the articles of incorporation shall
corporation the 3 qualifying conditions must be constitute a quorum for the transaction of corporate
present. business, and every decision of at least a majority of
the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act,
SPECIAL CORPORATIONS except for the election of officers which shall require
the vote of a majority of all the members of the board.
 2 types of special corporations
Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole Section 27. Disqualification of directors, trustees or
2.2 Religious Societies officers. - No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years,
or a violation of this Code committed within five (5) years prior to
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
 Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards,
shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum
of the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino
equity participation in all educational institutions. The
control and administration of educational institutions
shall be vested in citizens of the Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not
apply to schools established for foreign diplomatic
personnel and their dependents and, unless otherwise
provided by law, for other foreign temporary residents.
- Management is left solely to citizens of the Philippines
- Board of Directors manages the corporate affairs,
foreigners cannot therefore be elected in the board
- Exceptions are, mission boards and religious orders,
which may have a governing board consisting of
foreigners
 Term of office of governing board in an educational
institutions
- Can serve a term of 5 years. If that be the case, 1/5 of
their number shall expire every year
 Non-stock or stock, can they serve for a 1 year term
only?
- Yes, the articles of incorporation may provide that it be
1 year only
 What are these religious corporations spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor in some
particular station, who are incorporated by law in order
to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural
persons they could not have had
 May a corporation be organized by less than 5 natural
persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily organized to
hold equities in rural banks and may rightfully become
incorporators thereof)
- Exception, corporation sole, consist of only one person
 May any person form or organize a corporation sole?
- No, not any person can form a corporation sole,
section 110 provides:
Section 110. Corporation sole. - For the
purpose of administering and managing, as trustee,
the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may
be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
 Is it required to file the articles of incorporation in the
SEC?
- Yes
 What should be contained in the articles
incorporation?
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
57
- Section 111 and section 112 provides for the contents
and procedures
Section 111. Articles of incorporation. - In
order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church
must file with the Securities and Exchange
Commission articles of incorporation setting forth the
following:
1. That he is the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and
do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged with
the administration of the temporalities and the
management of the affairs, estate and properties of
his religious denomination, sect or church within his
territorial jurisdiction, describing such territorial
jurisdiction;
4. The manner in which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the
religious denomination, sect or church to which he
belongs; and
5. The place where the principal office of the
corporation sole is to be established and located,
which place must be within the Philippines.
The articles of incorporation may include
any other provision not contrary to law for the
regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, duly certified
to be correct by any notary public.
From and after the filing with the Securities
and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or
church theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister, rabbi
or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)
 Is it required to indicate its terms of execution? Why
not?
- Not required because they are supposed to exist in
perpetuity
- However, it does not mean that it shall continue to
exist forever, it merely means that it has the capacity
of continuous existence during a particular period until
dissolved in accordance with law
 When will it acquire judicial personality? How do you
compare this to other types of corporation?
- After the filing the verified articles of incorporation
along with the documents required in Section 112 with
the SEC, immediately becomes endowed with
corporate personality, this serves as an exception to
of
the rule that a corporation acquires juridical
personality only upon the issuance of a certificate of
incorporation by the said government agency.

- Upon filing of verified articles of incorporation with the
SEC, will not require the approval of SEC
 A corporation sole is possessed with the same power,
rights and privileges, to own, acquire and hold or
convey properties like any other corporation? True or
False
- False, they have the same power rights and privileges,
but when it comes to alienation and acquisition, it
must possess a court order, however when there is a
regulated method, a court order may be dispensed
with <sec. 113>
Section 113. Acquisition and alienation of
property. - Any corporation sole may purchase and
hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes. Such
corporation may sell or mortgage real property held by
it by obtaining an order for that purpose from the
Court of First Instance of the province where the
property is situated upon proof made to the
satisfaction of the court that notice of the application
for leave to sell or mortgage has been given by
publication or otherwise in such manner and for such
time as said court may have directed, and that it is to
the interest of the corporation that leave to sell or
mortgage should be granted. The application for leave
to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation
sole, and may be opposed by any member of the
religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the
rules, regulations and discipline of the religious
denomination, sect or church, religious society or
order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such
rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary.
(159a)
 Since a corporation sole is consists only of one person,
will the registration of the property in the name of the
corporation sole vest unto the head thereof the
ownership of the property?
- No, it will not vest unto the head, the head is acting
merely as a guardian
• Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land
Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the congregation or religious
denomination
- A corporation consists of one person only and his
successors (who will always be one at a time, in some
particular station), who are incorporated by law in
order to give them some legal capacities and
advantages, particularly that of perpetuity, which in
their natural persons they could not have had
- Roman Catholic Church has no nationality and that the
framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60 percent
of the capital thereof be owned by Filipino citizens.
• Director of Lands vs. CA
- Alienable public land is converted into private land
when the same has been openly, continuously and
exclusively in possession of the property as concept of
an owner for 30 years, automatically that is
• Republic of the Philippines vs. IAC
- Determination of the character of the land should be in
mind
- If they still form part of public domain they cannot be
owned, but if they are converted into private land, the
constitutional prohibition will not apply
 If there is vacancy who will fill up the same? What if
there is none, what must the successor do?
- According to section 114:
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
58
Section 114. Filling of vacancies. - The
successors in office of any chief archbishop, bishop,
priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on
their accession to office and shall be permitted to
transact business as such on the filing with the
Securities and Exchange Commission of a copy of their
commission, certificate of election, or letters of
appointment, duly certified by any notary public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or
persons authorized and empowered by the rules,
regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to
administer the temporalities and manage the affairs,
estate and properties of the corporation sole during
the vacancy shall exercise all the powers and authority
of the corporation sole during such vacancy. (158a)
 If a corporation exists in equity may it not be
dissolved?
Section 115. Dissolution. - A corporation
sole may be dissolved and its affairs settled voluntarily
by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its
affairs. (n)
- While section 115 of the code provides for the process
and procedure for the dissolution of a corporate sole,
there is nothing in the law itself which would prohibit it
from amending its articles of incorporation
- It is believed that authorization for the dissolution by
the particular religious denomination, sect or church,
as required in sub-paragraph 3 of section 115 would
still be necessary in the case of amending the articles
of incorporation to affect dissolution.
o Expiration of a corporate term will not apply
to a religious corporation
 May a corporation sole be dissolved by judicial decree?
- General rule: No, because a corporation sole, is by its
very nature ecclesiastical and religious (doctrine of
separation of church and state)
- Exception: police power of the state, if its purpose is
being carried out and is instead being used for illegal
purpose, it may be so dissolved
 What are religious societies?
- Under common law, a religious society is a body of
persons associated together for the purpose of
maintaining religious worship.
 Is it also required to file its articles of incorporation to
the SEC?
- No <sec. 116> “may”
 What should be contained in the articles of
incorporation?

- Section 116 provides:
Section 116. Religious societies. - Any
religious society or religious order, or any diocese,
synod, or district organization of any religious
denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a
part, or by competent authority, may, upon written
consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration of its
temporalities or for the management of its affairs,
properties and estate by filing with the Securities and
Exchange Commission, articles of incorporation
verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district
organization of the religious denomination, sect or
church, setting forth the following:
1. That the religious society or religious order, or
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership
have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules,
regulations or discipline of the religious denomination,
sect, or church of which it forms a part;
4. That the religious society or religious order, or
diocese, synod, or district organization desires to
incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the
corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the
trustees elected by the religious society or religious
order, or the diocese, synod, or district organization to
serve for the first year or such other period as may be
prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than
five (5) nor more than fifteen (15). (160a)
 Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not
require to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into existence
without SEC approval, section 19 will thus govern,
Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to atty.
Ladia because there are those that can issue
for example cooperatives- BUREAU OF
COOPERATIVES which register, home
insurance guaranty corporation- HOME
OWNERS
 How may religious societies be dissolved?
- Go to the general rules governing dissolution, because
the rules under special corporations do not provide for
such rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate franchise and the
termination of corporate existence
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
59
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution);
3. By revocation of its corporate franchise (involuntary
dissolution)
• Philippine National Bank vs. CFI
- When the period of corporate life expires, the
corporation ceases to be a body corporate for
purposes of continuing the business for which it is
organized. But it shall nevertheless be continued as a
body corporate for three years after the time when it
would have be dissolved, for the purpose of
prosecuting and defending suits by or against it and
for enabling it gradually to settle and close its affairs
to dispose of and convey its property and to divide its
assets. There is no need for the institution of a
proceeding for quo warranto to determine the time
and date of the dissolution of a corporation because
the period of corporate existence is provided in the
articles of incorporation. When such period expires
and without any extension having been made
pursuant to law, the corporation is dissolved
automatically insofar as the continuation of its
business is concerned.
- The rights of the lessor and the lessee over the
improvements which the latter constructed on the
leased premises are governed by Article 1678 of the
Civil Code. The provision gives the lessee the right to
remove the improvements if the lessor chooses not to
pay one half of the value thereof. However, in the case
at bar the law will not apply because the parties herein
have stipulated in the contract their own terms and
conditions concerning the improvements before the
termination of the lease. Petitioner PNB as assignee of
PBM succeeded to the obligation of the latter under
the contract of lease. It could not possess rights more
than what PBM had as lessee under the contract.
Hence, petitioner was duly bound to remove the
improvements before the expiration of the period of
lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its rights
and interest over the improvements on the leased
premise.
o 3 modes of dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up- FREQUENTLY
ASKED IN THE FINALS
 What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are affected;
<sec.118>
2. Voluntary dissolution where creditors are affected;
<sec. 119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are affected
<sec.118>
- The formal and procedural requirements necessary are
the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member
either by registered mail or personal delivery at least
thirty (30) days prior to the meeting (scheduled by the
board for the purpose of submitting the board action
to dissolve the corporation for approval of the
stockholder or members.);
3. Publication of the notice of time, place and subject of
the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal
office of said corporation is located or in a newspaper
of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting
duly called for the purpose;
5. A copy of the resolution authorizing the dissolution
must be certified by a majority of the board of
directors or trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
 Should this be strictly complied with?

- Yes, compliance with the requirements and formalities
prescribed above is mandatory such that failure to
comply therewith will have no effect on the legal
existence of the corporation.
 Will dissolution be effective and valid by a mere
resolution of the BOD and stockholders?
- No, a mere resolution by the stockholders or the BOD
of a corporation to dissolve the same does not affect
the dissolution but that some other steps,
administrative or judicial is necessary. (Daguhoy
Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it is
only through the State which can allow the termination
of its existence; without consent of the State, it will not
be dissolved.
 Voluntary dissolution where creditors are affected
<sec.119>
- By virtue of a petition, when there are creditors
affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at
least 2/3 of the outstanding capital stock or at least
2/3 of the members at a meeting duly called for that
purpose;
2. Petition for dissolution shall be filed with the SEC
signed by a majority of its board of directors or
trustees or other officers having the management of
its affairs, verified by the president or secretary or one
of its directors or trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC reciting the purpose of
the petition and fixing the date on or before which
objections thereto may be filed by any person, which
date shall not be less than thirty days nor more than
sixty days after entry of the order.
4. Before such date, a copy of the order must be
published once a week for three (3) consecutive weeks
in a newspaper of general circulation published in the
city or municipality where the principal office is
situated or in a newspaper of general circulation in the
Philippines.
5. Posting of the same order for three (3) consecutive
weeks in three (3) public places in such city or
municipality.
6. Upon five (5) days’ notice, given after the date on
which the right to file objections has expired, the SEC
shall hear the petition and try any issue made by the
objections filed.
7. Judgment dissolving the corporation and directing of
its assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such
assets and pay the debts of the corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on the part
of the court. The code uses the word “may”; the law
intended to let the shareholders have the control of
the assets of the corporation upon dissolution and
winding up.
- The directors may also undertake liquidation and
winding up of its corporate affairs, and sound business
judgment, on how they will wind up
 Dissolution by shortening of corporate term
<sec.120>
- Will be valid upon approval of the SEC, unlike general
amendments, which will be deemed approved if not
acted upon by the SEC within 6 months from the date
of filing for a cause not attributable to the corporation.
- Shortening of the corporate term partakes the nature
of an amendment of the articles of incorporation.
Section 16 under general amendments allows “written
assent” section 37 mandates that the vote must be
cast at a duly constituted meeting.
Section 120. Dissolution by shortening
corporate term. - A voluntary dissolution may be
effected by amending the articles of incorporation to
shorten the corporate term pursuant to the provisions
of this Code. A copy of the amended articles of
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
60
incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code.
Upon approval of the amended articles of
incorporation of the expiration of the shortened term,
as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to
the provisions of this Code on liquidation. (n)
o Intra-corporate- special commercial courts
 Another way of dissolving a corporation is through
involuntary dissolution
Section 121. Involuntary dissolution. - A
corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations. (n)
- Dissolution is tantamount to the imposition of death
penalty
- Instead of dissolving the corporation, courts normally
enjoin the further commission of the questioned act
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
protected in some other way (Republic vs. Bisaya Land
Trans. Co. Inc.)
 What are the grounds for involuntary dissolution?
- It is commenced through a verified complaint or motu
proprio by the proper courts
- Section 6 of PD 902-A provides for the grounds for
involuntary dissolution as follows:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage
to the general public;
3. Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which
would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5)
years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period.
- Other grounds are provided for in the corporation code
itself: among them are:
1. Violation of any provision of the Code under section
144;
2. In case of deadlock in a close corporation as provided
for in section 105;
3. In a close corporation, any acts of directors, officers or
those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly
prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or
wasted under section 105.
- Mere dishonesty is also a ground in a close corporation
- Other grounds can be found in other special laws like
the Securities Regulation Code and the General
Banking Act as well as the Insurance Code.
• Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial foreclosure of
respondent’s charter to show a mis-user of its
franchise justifying such a forfeiture
- Object is to protect the public, and not to redress
private grievances, the mis-user must be such as to
work or threaten a substantial injury to the public, or
such as to amount to a violation of the fundamental
condition of the contract by which the franchise was
granted and thus defeat the purpose of the grant
- Courts proceed with extreme caution which has for
their object the forfeiture of corporate franchise, and
forfeiture will not be allowed, except under express
limitation, or for plain abuse of power by which the
corporation fails to fulfill the design and purpose of its
organization. But when the abuse or violation
constitutes or threatens a substantial injury to the
public or such as to amount to a violation of the
fundamental conditions of its charter, or its conduct is

characterized by obduracy or pertinacity in contempt
of law, dissolution will be granted
- Did the court dissolve the corporation? No, it did not, it
granted the corporation 6 months to cease and desist
the performance of the questioned act otherwise it will
be dissolved
• Government vs. El Hogar
- 3 causes of action, the first is that the corporation
violated the law by holding on the property beyond
that provide for by law, the second is that the
corporation undertook the management f petitioners
belonging to delinquent shareholders of the
association, and lastly that the by-law provision, which
empowers the BD to cancel shares and to return to the
owners thereof the balance returning from the
liquidation
 Compare to Philippine Sugar Estate, wherein the court
ruled conditional dissolution. Why decree conditional
dissolution in one and not in the other case?
- Because in El Hogar the government was at fault, the
government wasn’t able to issue the certificate of title
on time
- When the case was instituted, El Hogar was already
able to dispose the properties in question, in
Philippine Sugar Estate it was still the holding the
properties in order to enrich itself at the expense of
the taxpayers
• Republic vs. Security Credit and Acceptance Corp. et
al.
- The corporation here is a lending institution and not a
banking institution
- Defendant corporation violated the law because before
a corporation may engage into a banking activity it
must first obtain a secondary franchise from the
Central Bank
- Defendant corporation threatens substantial injury to
the general public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
• Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
protected in some other way
- Misuse and misapplication of the funds and assets of
the respondent were committed particularly by the
corporate officers, where they can instead be held
personally liable
- Since there is another remedy available dissolution is
not warranted
 Assuming the above stated corporation is a close
corporation, would the court decree otherwise?
- Yes, because in a close corporation, mere dishonesty
is a ground for the dissolution
- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code < sec.
105>
• Financing Corporation of the Philippines vs. Teodoro
- Minority stockholders may not ask for the dissolution
of a corporation in private suits and that such actions
should be brought by the Government through its legal
officers, except in cases where the intervention
of the State, for one reason or another, cannot
be obtained, as when the State is not interested
because the complaint is strictly a matter
between the stockholders and does not involve,
in the opinion of the legal officer of the
Government, any of the acts or omissions
warranting quo warranto proceeding , in which
minority stockholders are entitled to have such
dissolution. It should be exercised if necessary in
order not to entirely ignore and disregard the rights of
said minority stockholders, especially when said
minority stockholders are unable to obtain redress and
protection of their rights within the corporation itself.
Stockholders should not be left without recourse
 Present set up
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
61
- Any stockholder or member of a corporation can
institute a dissolution proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear and decide
intra-corporate disputes
 May a corporation ask for dissolution of the
corporation when there is no prejudice to the general
public?
- Yes, in a close corporation, a petition for the
dissolution of the corporation may be instituted by any
one individual shareholder on the ground, even by
mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only terminates its
primary franchise to be a corporation, but generally
prevents it from further exercising other or secondary
franchises which have been conferred to its. It
terminates its power to enter into contracts or t o
continue the business as a going concern.
- Based on this general rule, the Supreme Court held
that a corporation, whose corporate life expired,
cannot lawfully pursue the business for which it was
organized. It cannot apply for a new certificate or a
secondary franchise for it is incapable of receiving a
grant. Neither can it enforce a contract executed prior
its dissolution for the purpose of continuing the
business of its organization.
- In general the rights and liabilities of the corporation
are not extinguished by its dissolution.
Section 145. Amendment or repeal. - No
right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such
corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said
corporation or by any subsequent amendment or
repeal of this Code or of any part thereof. (n)
• Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an
activity that was illegal
- A corporation where the corporate life has expired it
cannot lawfully pursue the business for which it was
organized.
- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply for
a new certificate or a secondary franchise for it is
incapable of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a medal
for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It was
not even a corporation de facto. And then, there is no
application subscribed by the new corporation
- And yet as stated, the new corporation has not filed
any application for certificate of public convenience in
Sabang, and has not published such application.
• Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would convey
the idea clearly manifested in the limitation “but not
for the purpose of continuing the business for which it
was established,” that the 3-year period allowed by
the law is only for the purpose of winding up its affairs.
• Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court
applied the constitutional provision
- Cannot be read as permitting to destroy the
substantive rights
- Such would collide with the non-impairment of
contracts clause of the constitution
- Complainants will have the right to follow the assets of
the corporation in the hands of SRA or any other
agency for that matter
 After dissolution what next?
- Liquidation and winding up should follow

 What is the definition of liquidation and winding up?
- Collection of all corporate assets, the payments of all
its debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if any of
it remains, to all stockholders in accordance with their
proportionate stockholdings in the corporation or in
accordance with their respective contracts of
subscription.
 Preference upon liquidation
- If there are preferred shares, the preference granted
to such should be complied with
- Preferred shares may give the holder thereof,
preference only in the dividends but also in the
distribution of corporate assets upon liquidation or
termination of the corporate existence. If such is the
intent, the contract of subscription must so indicate
lest they are placed on equal footing with common
shareholders
- Preference may be participating or non-participating
 Dissolved corporations are granted a period of 3 years
to liquidate
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated
in any other manner, shall nevertheless be continued
as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose
of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of
and convey its property and to distribute its assets,
but not for the purpose of continuing the business for
which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey all
of its property to trustees for the benefit of
stockholders, members, creditors, and other persons
in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall
be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the 3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a corporation
and although there is no law authorizing it, neither is
there anything that prohibits the BOD from
undertaking the same
- If this method is resorted to, the board will only have a
period of 3 years to finish its task of liquidation
- Claims for or against the corporate entity not filed
within the period will become unenforceable as there
exist no corporate entity against which they can be
enforced
- Actions pending for or against the corporation when
the 3 year period expires, are abated since after the
period, the corporation ceases for all intents and
purposes and is no longer capable of suing or being
sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate
assets to a trustees who will take charge of liquidation
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
62
- If this method is used, the three year period limitation
imposed by section 122 will not apply provided the
designation of the trustee is made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum on
petition or motu proprio upon the dissolution of the
corporation
- The appointment of a receiver is, however, permissive
rather than mandatory and the law tends to recognize
that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except
under special circumstances and upon proper showing
- If a receiver is appointed, the 3 year period fixed by
law within which to complete the task of liquidation
will not likewise apply because the dissolved
corporation is substituted by the receiver who may sue
or be sued even after that period
o Mere appointment of a receiver without
anything more does imply in the dissolution
of a corporation
• National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation when
the 3 year period expires, are abated since after that
period, the corporation ceases for all intents and
purposes and is no longer capable of suing or being
sued
- May be continued by the trustee provided done within
the 3 year period
- Should the corporation, therefore, finds it difficult to
finish its liquidation, it may, at any time during the
three year period, convey all its assets and receivables
to a trustee to prosecute and defend suits by or
against the corporation begun before the expiration of
said period
- The effect of the conveyance is to make the trustees
the legal owners of the property conveyed, subject to
the beneficial interest therein of creditors and
stockholders
• Sumera vs. Valencia
- Thus it was held that when a corporation is dissolved
and the liquidation of the assets is placed in the hands
of receiver or assignee, the period of 3 years
prescribed by law is not applicable and the assignee
may institute all actions leading to the liquidation of
the corporation even after the expiration of 3 years.
- If the corporation carries out the liquidation of its
assets through its own officers and continues and
defends the actions brought by or against it, its
existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or
assignee is appointed, with or without a transfer of its
properties within 3 years, the legal interest passes to
the assignee, the beneficial interest remaining in the
members, stockholders, creditors and other interested
persons and said assignee may bring an action,
prosecute that which has already been commenced for
the benefit of the corporation, or defend the latter
against any other action already instituted or which
may be instituted even outside of the period of three
years fixed for the offices of the corporation.
• Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can
continue prosecuting suit even beyond the 3 year
period fixed by law because he becomes the legal
owner of the rights, assets and properties conveyed to
him
• Gelano vs. CA
- “Trustee” as used in the corporation statute must be
understood in its general concept which could include
the counsel to whom was entrusted in the instant
case, the prosecution of the suit filed by the
corporation. The purpose in the transfer of the assets
of the corporation to a trustee upon its dissolution is
more for the protection of its creditors and
stockholders. Debtors like the petitioners herein may
not take advantage of the failure of the corporation to
transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show, in the first
place. To sustain petitioners’ contention would be to
allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.

- The counsel who prosecuted and defended the interest
of the corporation may be considered as a “trustee” at
least with respect to the matter in litigation only
 May a corporation that is already dissolved, transfer
and assign its assets and properties to a new
corporation which will continue the business of the
dissolved one?
- Yes, provided all the stockholders gave their consent
(Chung Ka Bio vs. IAC)
• Republic vs. Marsman Development Company
Chung Ka Bio vs. IAC
- During the three year period granted to a corporation
to liquidate or wind up its affairs, the BOD is not
normally permitted to undertake any activity outside
the usual liquidation of the corporation. There is,
however, nothing to prevent the stockholders from
conveying their respective shareholdings toward the
creation of a new corporation to continue the business
of the old. This is because winding up is the sole
activity of the dissolved corporation that does not
intend to incorporate a new. If it does, however, it is
not unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation to
the new corporation intended to be created as long as
the stockholders have given their consent (Republic
vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate anew.
If it does, however, it is not unlawful for the old board
of directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended
to be created as long as the stockholders have given
their consent (Chung Ka Bio vs. IAC)
 What happens to the remaining assets and properties
of the dissolved corporation if liquidation and winding
up as provided in section 122 is not complied with, as
a result of which the 3 year period has elapsed
- If the three year extended life has expired without a
trustee or receiver having been expressly designated
by the corporation within that period, the board of
directors o trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA may be
permitted to do so continue as” trustees” by legal
implication to complete the liquidation. Still in the
absence of a BOD or BOT, those having any pecuniary
interest in the assets, including not only the
shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make
proper representations with the SEC, which has
primary and sufficiently broad jurisdiction in matters of
this nature, for working out a final settlement of the
corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of the
Supreme Court in the case of Clemente vs.
CA is wrong, opinion is further discussed
after the Clemente Case
• Clemente vs. CA
- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does not
by itself cause the extinction or diminution of the
rights and liabilities of such entity or those of its
owners and creditors. If the three year extended life
has expired without a trustee or receiver having been
expressly designated by the corporation within that
period, the board of directors o trustees itself,
following the rationale of the Supreme Court’s decision
in Gelano vs. CA may be permitted to do so continue
as” trustees” by legal implication to complete the
liquidation. Still in the absence of a BOD or BOT, those
having any pecuniary interest in the assets, including
not only the shareholders but likewise the creditors of
the corporation, acting for and in its behalf, might
make proper representations with the SEC, which has
primary and sufficiently broad jurisdiction in matters of
this nature, for working out a final settlement of the
corporate concerns
o the ruling is wrong according to atty.
Ladia
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
63
 According to atty Ladia: What happens to a
corporation that is already dissolved, that has not
been able to appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to exercise its
rights granted in section 122 after the 3 year period
has elapsed, ceases to exist for all intents and
purposes, it can no longer sue or be sued
- according to 122 of the code, the property should be
escheated, accordingly:
Section 122. Corporate liquidation. - Every
& corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated
in any other manner, shall nevertheless be continued
as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose
of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of
and convey its property and to distribute its assets,
but not for the purpose of continuing the business for
which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey all
of its property to trustees for the benefit of
stockholders, members, creditors, and other persons
in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
- Section 123. Definition and rights of foreign
corporations. - For the purposes of this Code, a foreign
corporation is one formed, organized or existing under
any laws other than those of the Philippines and whose
laws allow Filipino citizens and corporations to do
business in its own country or state. It shall have the
right to transact business in the Philippines after it
shall have obtained a license to transact business in
this country in accordance with this Code and a
certificate of authority from the appropriate
government agency. (n)
 What if the law of the state of the foreign corporation
does not allow Filipino citizens to do business in their
country?
- The phrase “and whose laws allow Filipino citizens and
corporations to do business in its own country or
state” is not, however, an accurate inclusion in the
definition as ay corporation registered or organized
under the laws of another state is necessarily a foreign
corporation whether or not the state of its
incorporation allow Filipino citizens or corporations to
do business in that forum.
- The said phrase was inserted by the framers of the law
only as a condition precedent to the grant of a license
of a foreign corporation to do business in the
Philippines.
 Composed of 100% Americans; organized under the
laws other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation irrespective
of the nationality
- Exception: control test would apply in determining the
corporate nationality, i.e., the citizenship of the

controlling stockholders determines the nationality of
the corporation
 If a foreign corporation wants to transact business in
the Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a license. - A
foreign corporation applying for a license to transact
business in the Philippines shall submit to the
Securities and Exchange Commission a copy of its
articles of incorporation and by-laws, certified in
accordance with law, and their translation to an official
language of the Philippines, if necessary. The
application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically
set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors
and officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of
shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares,
shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary
or appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the
fees payable.
Attached to the application for license shall
be a duly executed certificate under oath by the
authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens
and corporations to do business therein, and that the
applicant is an existing corporation in good standing. If
such certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be
attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of the
president or any other person authorized by the
corporation, showing to the satisfaction of the
Securities and Exchange Commission and other
governmental agency in the proper cases that the
applicant is solvent and in sound financial condition,
and setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
64
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of existing
laws applicable to them. In the case of all other foreign
corporations, no application for license to transact
business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous
authority from the appropriate government agency,
whenever required by law. (68a)
 Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the license, a
foreign corporation, except those engaged in foreign
banking or insurance, shall deposit with the SEC, for
the benefit of creditors, securities consisting of bonds
or other evidence of indebtedness of the Philippine
government or its political subdivision, or of
government owned or controlled corporation, shares of
stock in “registered enterprises” as this term is
defined in R.A. 5186, shares of stock in domestic
insurance companies and banks or any combination
thereof with an actual market value of 100,000
- Additional securities may be required by the SEC if the
actual market value of the securities on deposit has
decreased by at least 10%. Section 126 of the code
provides:
Section 126. Issuance of a license. - If the
Securities and Exchange Commission is satisfied that
the applicant has complied with all the requirements
of this Code and other special laws, rules and
regulations, the Commission shall issue a license to
the applicant to transact business in the Philippines for
the purpose or purposes specified in such license.
Upon issuance of the license, such foreign corporation
may commence to transact business in the Philippines
and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the
country or state of its incorporation, unless such
license is sooner surrendered, revoked, suspended or
annulled in accordance with this Code or other special
laws.
Within sixty (60) days after the issuance of
the license to transact business in the Philippines, the
license, except foreign banking or insurance
corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present and
future creditors of the licensee in the Philippines,
securities satisfactory to the Securities and Exchange
Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of
government-owned or controlled corporations and
entities, shares of stock in "registered enterprises" as
this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock
exchange, or shares of stock in domestic insurance
companies and banks, or any combination of these
kinds of securities, with an actual market value of at
least one hundred thousand (P100,000.) pesos;
Provided, however, That within six (6) months after
each fiscal year of the licensee, the Securities and
Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also require
deposit of additional securities if the actual market
value of the securities on deposit has decreased by at
least ten (10%) percent of their actual market value at
the time they were deposited. The Securities and
Exchange Commission may at its discretion release
part of the additional securities deposited with it if the
gross income of the licensee has decreased, or if the
actual market value of the total securities on deposit
has increased, by more than ten (10%) percent of the
actual market value of the securities at the time they
were deposited. The Securities and Exchange
Commission may, from time to time, allow the licensee
to substitute other securities for those already on
deposit as long as the licensee is solvent. Such
licensee shall be entitled to collect the interest or
dividends on the securities deposited. In the event the
licensee ceases to do business in the Philippines, the
securities deposited as aforesaid shall be returned,
upon the licensee's application therefor and upon
proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability
to Philippine residents, including the Government of
the Republic of the Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law before a
 65

foreign corporation may transact business in the
Philippines
- Yes. A Resident agent is required. As a condition
precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation is
required to designate its resident agent on whom
summons and other legal processes may be served in
all actions or legal proceedings against such
corporation
- Section 128 provides:
Section 128. Resident agent; service of
process. - The Securities and Exchange Commission
shall require as a condition precedent to the issuance
of the license to transact business in the Philippines by
any foreign corporation that such corporation file with
the Securities and Exchange Commission a written
power of attorney designating some person who must
be a resident of the Philippines, on whom any
summons and other legal processes may be served in
all actions or other legal proceedings against such
corporation, and consenting that service upon such
resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign
corporation at its home office. Any such foreign
corporation shall likewise execute and file with the
Securities and Exchange Commission an agreement or
stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
"The (name of foreign corporation) does
hereby stipulate and agree, in consideration of its
being granted by the Securities and Exchange
Commission a license to transact business in the
Philippines, that if at any time said corporation shall
cease to transact business in the Philippines, or shall
be without any resident agent in the Philippines on
whom any summons or other legal processes may be
served, then in any action or proceeding arising out of
any business or transaction which occurred in the
Philippines, service of any summons or other legal
process may be made upon the Securities and
Exchange Commission and that such service shall
have the same force and effect as if made upon the
duly-authorized officers of the corporation at its home
office."
- No, if there is a resident agent, the designation is
exclusive and service must be made only to the
resident agent or else the service is without force and
effect unless made to him
- Thus, while the law allows service upon the SEC or any
of its officers or agents within the Philippines
- The two modes may become effective only if the
foreign corporation failed or neglected to designate
such a person or an agent
- Summons must be made only to resident agent except
when there is no resident agent appointed
- Where such foreign corporation actually doing
business here has not applied for a license to do and
has not designated an agent to receive summons,
then service of summons on it will be made pursuant
to the provisions of the rules of court. If such foreign
corporation has a license to do business, then
summons to it will be served on the agent designated
by it for the purpose, or otherwise in accordance with
the Corporation Law (General Corporation of the
Philippines vs. Union Insurance Soc. Of Canton Ltd.)
 If the foreign corporation conducts business in the
Philippines without the license requirement. What is
the effect?
- Section 133 provides:
Section 133. Doing business without a
license. - No foreign corporation transacting business
in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
(69a)
- if they do so, the responsible officers may be
subjected to the penal sanctions provided for in
section 144 of the code, which may either be fine or
imprisonment
 What if it is not doing business without a license?

Whenever such service of summons or other
process shall be made upon the Securities and
Exchange Commission, the Commission shall, within
ten (10) days thereafter, transmit by mail a copy of
such summons or other legal process to the
corporation at its home or principal office. The sending
of such copy by the Commission shall be necessary
part of and shall complete such service. All expenses
incurred by the Commission for such service shall be
paid in advance by the party at whose instance the
service is made.
In case of a change of address of the
resident agent, it shall be his or its duty to
immediately notify in writing the Securities and
Exchange Commission of the new address. (72a; and
n)
- The necessity of the appointment of a resident agent
is only for the purpose of receiving summons and
other legal processes in any legal action or proceeding
against the foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
- If it is not transacting business in the Philippines, even
without a license, it can sue before the Philippine
Courts
 The general rule is that “it is not the lack of required
license but doing business without a license which
bars a foreign corporation form access to our courts.”
 Exception:
1. Foreign corporations can sue before the
Philippine Courts if the act or transaction involved
is an “isolated transaction” or the corporation is
not seeking to enforce any legal or contractual
rights arising from, or growing out of, any
business which it has transacted in the
Philippines
2. Neither is a license required before a foreign
corporation may sue before the forum if the
purpose of the suit is to protect its trademark,
trade name, corporate name, reputation or
goodwill;
3. Or where it is based on a violation of the Revised
Penal Code;
4. Or merely defending a suit filed against it
5. Or where a party is stopped to challenge the
personality of the corporation by entering into a
contract with it.

Section 127. Who may be a resident agent.  Rules laid down by the SC
- A resident agent may be either an individual residing
in the Philippines or a domestic corporation lawfully A. As to whether or B. As to whether or
transacting business in the Philippines: Provided, That not it can sue not it can be sued
in the case of an individual, he must be of good moral
A foreign corporation A foreign corporation
character and of sound financial standing. (n)
transacting or doing transacting business in the
business in the Philippines Philippines with the
 May a partnership be appointed as a resident agent? with a license can sue requisite license can be
before Philippine Courts sued in the Philippine Courts
Subject to certain A foreign corporation
- Yes, domestic corporation taken in its general sense exceptions, a foreign transacting business in the
not legal sense corporation doing business Philippines without a license
in the country without a can be sued in Philippine
license cannot sue in Courts
 If there is a resident agent appointed. May summons Philippine Courts
be served to any officers of the corporation? If it is not transacting if it is not doing business in
business in the Philippines, the Philippines, it cannot be
even without a license, it sued in Philippine Courts for
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

can sue before the lack of jurisdiction
Philippine Courts
 A foreign corporation not doing business in the
Philippines, may it be sued?
- If it is not transacting business in the country it cannot
be sued for lack of jurisdiction
 Is there any sanction that can be enforced to foreign
corporations which are doing business without the
required license?
- Penal sanctions under section 144
- Any violation of the code is subject to such penal
sanctions
 What would constitute doing business?
- The true test, however, seems to be whether the
foreign corporation is continuing the body or
substance of the business or enterprise for which it
was organized or whether it has substantially retired
from it and turned it over to another. The term implies
a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
of the functions normally incident to, and in
progressive prosecution of, the purpose and object of
its organization (Mentholatum Co. Inc. vs. Mangaliman)
• Mentholatum vs. Mangaliman
- The true test, however, seems to be whether the
foreign corporation is continuing the body or
substance of the business or enterprise for which it
was organized or whether it has substantially retired
from it and turned it over to another. The term implies
a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
of the functions normally incident to, and in
progressive prosecution of, the purpose and object of
its organization
- Whatever transaction the Philippine-American Drug
Co. had executed in view of the law, the Mentholatum
Co. did it itself. And the Mentholatum Co. being a
foreign corporation doing business in the Philippines
without the license required by section 68 of the
Corporation Law, it may not prosecute this action for
violation of trade mark and unfair competition
 Why is foreign corporations barred access from our
courts if they do business without a license?
- Marshall-Wells Co. vs. Henry W. Elser and Co.
• Marshall-Wells Co. vs. Henry W. Elser and Co.
- The object of the statute was to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of its courts. The object of the statute was
not to prevent the foreign corporation from performing
single acts, but to prevent it from acquiring a domicile
for the purpose of business without taking the steps
necessary to render it amenable to suit in local courts.
• Bulakhidas vs. Navarro
- It is settled that if a foreign corporation is not engaged
in business in the Philippines, it may not be denied the
right to file an action in Philippine courts for isolated
transactions
- The object of section 68 and 69 of the Corporation law
was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring
a domicile for the purpose of business without taking
the steps necessary to render it amenable to suit in
the local courts. It was never the purpose of the
Legislature to exclude a foreign corporation which
happens to obtain an isolated order for business from
the Philippines, from securing redress in the Philippine
courts
• The Swedish East Asia Co., Ltd. Vs. Manila Port Service
- It must stated that the section is not applicable to a
foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
66
petitioner has been in the Philippines engaged in
continuing business or enterprise for which it was
organized, when the sixteen bundles were erroneously
discharged in manila, for it to be considered as
transacting business in the Philippines. The fact is that
the bundles, the value of which is sought to be
recovered, were landed not as a result of a business
transaction, isolated or otherwise, but due to a
mistaken belief that they were part of the shipment of
forty similar bundles consigned to persons or entities
in the Philippines, there is no justification therefore, for
invoking the section
 There were 3 contracts entered into, how come they
were still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction
however, is not merely incidental or casual but
indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
- In the case at bar, the transaction entered into by the
respondent with the petitioners are not a series of
commercial dealings which signify an intent on the
part of the respondent to do business in the Philippines
but constitute an isolated one which does not fall
under the category of “doing business.”
- The records show that the only reason why the
respondent entered into the second and third
transactions with the petitioner was because it wanted
to recover the loss it sustained from the failure of the
petitioners to deliver the crude coconut oil under the
first transaction and in order to give the latter a
chance to make good on their obligation. From these
facts alone, it can be deducted that in reality there
was only one agreement between the petitioners and
the respondent.
- The three seemingly different transactions were
entered into by the parties only in an effort to fulfill the
basic agreement and in no way indicate an intent on
the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as
a foreign corporation doing business in the Philippines
- 3 contracts, but according to the court was not doing
business in the Philippines
• Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme
Court was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction
however, is not merely incidental or casual but
indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
- In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellant’s officers, that he was sent
to the Philippines to look into the operation of mines,
thereby revealing the defendant’s desire to continue
engaging in business here, after receiving the
shipment of the scrap iron under consideration,
making the Philippines a base thereof.
- In such a case, the single act of transaction is not
merely incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the
operations for the conduct of a part of corporation’s
ordinary business
 If a corporation appoints a distributor or a
representative, will it necessarily imply doing business
in the country?
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- Appointment of a distributor or representative in the
Philippines, unless it has an independent status
(transacts and does business in its own name and for
its account and not of the foreign corporation)
- if that be the case the mere appointment of a
distributor will not constitute doing business
 How do you know if it has an independent status?
- Communications Materials and Design vs. CA

• Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner ASPAC
and the respondents show that there are provisions
which are highly restrictive in nature, such as to
reduce petitioner ASPAC to a mere extension or
instrument of the private respondents
- ITEC was doing business without a license, however
ASPAC is estopped
- by entering into the Representative Agreement” with
ITEC, petitioner is charge with knowledge that ITEC
was not licensed to engage in business activities in the
country, and is thus stopped from raising in defense
such incapacity of ITEC, having chosen to ignore or
even presumptively take advantage of the same
- In top-weld we ruled that a foreign corporation may be
exempted from the license requirements in order to
institute an action in our courts if its representative in
the country maintained an independent status during
the existence of the disputed contract. Petitioner is
deemed to have acceded to such independent
character when it entered into the Representative
Agreement with ITEC
• Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal
or contract rights arising from, or growing out of any
business which it has transacted in the Philippine
Islands. The sole purpose of the action is to protect its
reputation, its corporate name, its goodwill, whenever
that reputation, corporate name or goodwill have
through the natural development of its trade,
established themselves
- And it contends that its rights to the use of its
corporate and trade name, is a property right, a right
in rem, which may assert and protect against all the
world, in any of the courts of the world even in
jurisdictions where it does not transact business just
the same as it may protect its tangible property, real
or personal, against trespass, or conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but
extends to every market where the trader’s goods
have become known and identified by the use of the
mark
• General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business
in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
favorably known in the Islands through the use therein
of its products bearing its corporate and trade name
has a legal right to maintain an action in the Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to “counteract the effects” of said
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts
for infringement of a mark or trade-name, for unfair
competition, or false designation of origin and false
description, “whether or not it has been licensed to do
business in the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as amended,
otherwise known as Corporation Law, at the time it
brings complaint.
• Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC
and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity
Fair Mills Inc. vs. T. Eaton Co. this court further said:
“By the same token, the petitioner should be
given the same treatment in the Philippines
as we make available to our own citizens.
We are obliged to assure to nationals of
countries of the Union an effective
protection against unfair competition on the
same way that they are obligated to
similarly protect Filipino Citizen and firms
- The ruling in the aforecited case is in consonance with
the Convention of the Union of Paris for the protection
of Industrial Property to which the Philippines became
a party. Article 8 thereof provides that a trade name
shall be protected in all the countries of the Union
without the obligation of filing or registration, whether
or not it forms part of the trademark
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
67
• Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts, in
the first place it was not doing business in the
Philippines
- The marketing of its products in the Philippines is done
through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which
buys and then markets not only products of the
petitioner but also many other products bearing
equally well-known and established trademarks and
trade-names
 Assuming Rustans had no independent status would
the SC grant Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it can
bring action because the case involves a violation of
our penal code
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the
preliminary investigation being conducted by the
Special Prosecutor the information shall be in the
name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party since a
criminal offense is essentially an act against the State.
It is the latter which is principally the injured party
although there is a private right violated
- The records show that the goodwill and reputation of
the petitioner’s products bearing the trademark
Lacoste date back even before 1964 when Lacoste
clothing apparels were forst marketed in the
Philippines. To allow Hemandas to continue using the
trademark Lacoste for the simple reason that he was
the first registrant in the Supplemental Register of a
trademark used in international commerce and not
belonging to him is to render nugatory the very
essence of the law on trademarks and trade names
• Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
- The law denies to a foreign corporation the right to
maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the fact
that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge of
appellants alone, and it would be unfair to impose
upon appellee the burden of asserting and proving the
contrary. It is enough that foreign corporations are
allowed by law to seek redress in our courts under
certain conditions: the interpretation of the law should
not go so far as to include, in effect, an inference than
those conditions have been met from the mere fact
that the party suing is a foreign corporation
• Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia it did
not
• Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos in
the case at bar, since the petitioner is not
“maintaining any suit” but is merely defending one
against itself; it did not file any complaint but only a
corollary defensive petition to prohibit the lower court
from further proceeding with a suit that it had no
jurisdiction to entertain
 What law govern foreign corporation doing and
transacting business in the Philippines with a license
- Laws of the Republic of the Philippines save and
except that would normally be those matters which
concern its formation, organization or dissolution, or
those fixing the relationship, liabilities, responsibilities,
or duties of the stockholders, members or officers of
the foreign corporation or their relations to each other.
- In effect, intra-corporate or internal matters not
affecting creditors or the public in general are
governed not by Philippine laws but the law under
which the foreign corporation was formed or organized
Section 129. Law applicable. - Any foreign
corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations
applicable to domestic corporations of the same class,
except such only as provide for the creation,

formation, organization or dissolution of corporations
or those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members, or
officers of corporations to each other or to the
corporation. (73a)
 Will the pre-emptive rights of a foreign corporation be
governed by the same section of the code? Is the pre-
emptive rights of a stockholder in a domestic
corporation same as the pre-emptive of a stockholder
of a foreign corporation.
- No
• M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign
corporation? How do you distinguish this case from a
Philippine law?
- Since it concerns the rights of stockholders it is the law
of New York that should govern
 Is the license to do business of a foreign corporation
subject to suspension or revocation? What are the
grounds?
- Section 134 provides:
Section 134. Revocation of license. -
Without prejudice to other grounds provided by special
laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as
required by this Code;
P.D. 902-A
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment
to its articles of incorporation or by-laws or of any
articles of merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of
or acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)
 SEC does not have the sole authority to suspend or
revoke the license of a foreign corporation doing
business in the Philippines, other government agencies
like the Central Bank , the Insurance Commission may
also do so within their respective dominion, despite
the provision of section 134
 If the SEC believes that revocation is warranted,
section 135 provides that:
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such license
to transact business in the Philippines, the Securities
and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
68
the appropriate government agency in the proper
cases.
The Securities and Exchange Commission
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of revocation.
(n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to withdraw
from the Philippines by filing a petition for withdrawal
of license. No certificate of withdrawal shall be issued
by the Securities and Exchange Commission unless all
the following requirements are met;
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions have been paid;
and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks
in a newspaper of general circulation in the
Philippines.
 P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
 The jurisdiction of SEC for cases falling under section 5
thereof was transferred to the courts of general
jurisdiction designated by the SC, they were called
special commercial courts, the only exceptions were
revocation of corporate franchise and calling of
elections
 However the SEC retained receivership or suspension
payments within June 20,2000
 Jurisdiction of special commercial courts are exclusive
and original, jurisdiction is conferred by law; 1 Special
Commercial Court per region except MAKATI and
QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-Special
Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special Commercial
Courts
- Allegation corporate officers employing schemes in
diverting
- Not only detrimental to corporation, but general
membership
- Fraud must be stated with particularity
• Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it
may be filed to any court
 Intra-corporate

- Exclusive and original jurisdiction of special
commercial courts
- Sole criteria is there must be an intra-corporate
relationship
- Pertaining to a controversy (speaks also of intra-
partnership controversy, that partnership must be
registered with the SEC)
 Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to put
it in the ambit of special commercial courts and courts
of general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel the
corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet fully
paid
- When the transferee has done all he can be required
to do to render the transfer effectual and the
corporation refuses to register the transfer, the
requirement of the registration is waived and the
transferee is considered technically a stockholder who
may sue to enforce the right to have the transfer
registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not yet
prima facie; it will not be considered intra-corporate
 Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer
elected or appointed by the BOD is always a corporate
act
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and exemplary
damages and attorney’s fees in his complaint will not
operate to prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The jurisdiction will not
wrest on the NLRC just because of that
• Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to special
commercial courts and not in the NLRC
- SEC has jurisdiction over cases of removal from
employment of corporate officers
- The relationship of a person to a corporation, whether
as officer or as agent or employee or not determined
by the nature of the servides performed, but by the
incidents of the relationship on they actually exist
- Corporate officers dismissal is always a corporate act
or intra-corporate controversy
• Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction exception will
not apply to mere recovery
 Main consideration
- Asserts his right to the office or questions the
propriety or validity of his ouster or removal, it will be
the special commercial courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to Special
Commercial Courts
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
69
- Suspension of payment, appointment of management
receivership
 What is the reason for suspension of all claims?
- The reason for suspending actions for claims against
the corporation is not really to enable the
management committee or the rehabilitation receiver
to substitute the defendant in any pending action
against it before any court, tribunal or body. The real
justification is to enable the management committee
or rehabilitation receiver to effectively exercise his
powers free from any Judicial or extra-judicial
interference that might unduly hinder or prevent the
“rescue” of the debtor company. To allow such other
actions to continue would only add to the burden of
the management committee pr rehabilitation receiver,
whose time, effort and resources would be wasted in
defending claims against the corporation instead of
being directed towards restructuring and
rehabilitation.(PAL vs. Spouses Sadic and Kurangking)
- To enable the receiver to effectively exercise his or her
power free form any judicial or extra-judicial that may
disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a
distress company; ask the court to be given time to
the payment of liability by postponing the payment
- When it has sufficient assets and liabilities but forces
the impossibility of meeting them when they
respectively fall due
2. Suspension of receiver with a management committee
with a rehabilitation play or suspension of payments
accompanied by a proposal for rehabilitation (with or
without rehabilitation)
- corporation has sufficient assets to cover its liabilities,
but sees the possibility; is or without rehabilitation
plans; normally would attach the rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation has no
sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities than assets
continue its operations profitably?
- Even if the distressed company has no sufficient
assets and liabilities it can go for suspension
- It asked for a management committee without a
receiver plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they became
stockholders instead of creditors
- After 5 years those who converted sold it back to the
corporation, thereby making profits
 Amendment is for the economic development of the
country
 What if walang amendment, e mas maraming liabilities
kesa assets
 Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
 Effect of suspension- you cannot foreclose
 70

 What are claims? - Save and except in the case of a close corporation in
case of deadlock management committee is allowed to
- Debts or demands of pecuniary nature. Assertion of a take over right away
right to have money paid
• Jacinto case
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must
- 2nd par of page 676
present a monetary claim, liquidated or unliquidated

- 2 requisites where present

 Nullification of corporations does not present a
monetary claim of pecuniary nature
- Wala ng mapautang, there was a paralyzation

• Union vs. CA
• Sy Chim

- It does not allow a mere individual to file the petition

- Did not appoint a management committee
which is limited to corporations partnership or
associations.
- In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction of
- Where no authority is granted to hear petitions of
assets or other properties of a corporation and
individuals for suspension of payments, such petition
paralysis of its business operations, the mere
are beyond the competence of the SEC
apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of
 What happens if there is a suspension order?
a management committee

 Explain the key phrase “quality is equity”

 Section 5 and 6(D) governed by separate rules; interim
rules and intra-corporate controversy
- All creditors stand on equal footing, secure or
unsecure, holding or lien or without a lien, no creditor
 Venue of actions
may enforce his lien while rehabilitation is going
(Alemar case)
- Rules of court- where the parties are residing

- No preference shall be given

- Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where the
• RCBC vs. IAC
principal office is located

- Decided on motion for reconsideration

 Rehabilitation proceedings venue

- It court 7 years to decide authentication

- In rem

 Rule of the thumb

- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments
- Automatic suspension even if not decreed in the thereof
decision itself
- A creditor may now file the suspension proceedings;
- Once lifted the preferred creditors will regain their provides that creditors owns at least 25%
preference
 Intra-corporate- rule 1 section 6
 Appointment of a management committee
 Service of summons- rule 2 section 5
- Take over the management committee of the
distressed corporation
- Summons may be made to anyone

- Extraordinary and drastic remedy

 In case of intra-corporate dispute, elections, fraud, etc;
if they are governed by interim rules of procedure on
- Without any remedy
intra-corporate controversies

 What is an intra-corporate controversy?

 Venue

- Section 5(B)
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Sole criteria is whether there exists an intra-corporate
dispute is that if there is an intra-corporate
- Matters of payment/suspension must be filed in the
relationship
city/ municipality where corporation is located

 Why is there suspension of all actions against claims

 Under old rule, creditors have no right to institute an
when a receiver is appointed?
action for receivership; now creditors, if they sold 20%
they can institute an action for receivership
- To enable the management committee to exercise its
powers
 Section 5

• Sy Chim vs. Sy Siy Ho (before a management

- Service of summons may be made by fax/e-mail
committee may be opt by a court)

• E.B. Villarosa vs. Benito

- 2 requisites for a valid appointment of management
committee
- Will apply only if it is not an intra-corporate
controversy
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
 If the controversy arose out of an intra-corporate
2. Paralysis of business operations, the mere dispute rules on interim rules of procedure of intra-
apprehension of future misconduct based upon prior corporate controversies shall govern
management
 Rule 4 section 17- immunity from suit

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva

 Rehabilitation receiver shall not subject to any action,
claim or demand in connection with any act done
omitted by him in good faith in the exercise of his
functions and powers herein conferred
 Claim
- Right to payment, whether or not it is reduced
judgment, liquidated or unliquidated, fixed
contingent, matured or unmatured, disputed
undisputed, legal or equitable and secured
unsecured
 Investment contracts
- A contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led
to expect profits primarily from the effects of others
 The management committee and rehabilitation
receiver are empowered to:
1. Take custody and control of all assets of
corporation
2. Evaluate assets and liabilities, earnings operations of
the corporation
3. Determine the best way to protect the investors and
creditors
4. Study, review evaluate the feasibility of continuing
operation and structures
5. Submit recommendations to the RTC regarding
rehabilitation plan
6. Rehabilitate the corporation if determined to be
feasible by the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was enacted to
protect the public from unscrupulous promoters who stake
business which have no basis and sell shares and interest
therein to investors, who are then left holding certificates
representing nothing more than a claim to a square of the blue
sky.
-SEC. 2. Declaration of State Policy. – The State shall establish a
socially conscious, free market that regulates itself, encourage
the widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the
capital market, protect investors, ensure full and fair disclosure
about securities, minimize if not totally eliminate insider trading
and other fraudulent or manipulative devices and practices
which create distortions in the free market.
BROKER - person who buys and sells securities for the account of
others.
DEALER - person who buys and sells securities for his/her own
account in the ordinary course of business.
NOTE: No person shall engage in the
business of buying or selling securities in the
Philippines as a broker or dealer, or act as a
salesman, or an associated person of any broker
or dealer unless registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or interests in a corporation or
in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instrument, whether written
or electronic in character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates
or similar instruments;
b) Other instruments as may in the future be determined
by the Commission;
c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates
of deposit for a future subscription;
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
71
f) Proprietary or non proprietary membership certificates
incorporations; and
g) Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or distribution
within the PH, without a registration statement filed with and
to approved by SEC. Prior to such sale, information on the
or securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
or
prospective purchaser. (Sec 8)
or
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the
Government of the PH, or by any political subdivision
or agency thereof, or by any person controlled or
supervised by, and acting as an instrumentality of said
Government.
b) Any security issued or guaranteed by the
government of any country with diplomatic relations
with the PH, or by any state, province or political
subdivision thereof on the basis of reciprocity:
Provided, that the SEC may require compliance with
the form and content of disclosures the Commission
may prescribe.
the c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the proper
adjudicatory body.
d) Any security or its derivatives the sale or
transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission,
Housing and Land Use Regulatory Board, or the Bureau
of Internal Revenue.
e) Any security issued by a bank except its own
shares of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona fide debt, a
security pledged in good faith as security for such
debt.
c) An isolated transaction in which any security
is sold, offered for sale, subscription or delivery by the
owner thereof, or by his representative for the owner’s
account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and
successive transactions of a like character by such
owner, or on his account by such representative and
such owner or representative not being the
underwriter of such security.
d) Distribution by a corporation, actively
engaged in the business authorized by its AOI, of
securities to its stockholders or other security holders
as a stock dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its
own stockholders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly in connection with the sale of such capital
stock.
f) Issuance of bonds or notes secured by
mortgage upon real estate or tangible personal
property, where the entire mortgage together with all
the bonds or notes secured thereby are sold to a single
purchaser at a single sale.
g) Issue and delivery of any security in
exchange for any other security of the same issuer
pursuant to a right of conversion entitling the holder of
the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered
has been registered under this Code or was, when
sold, exempt from the provisions of this Code, and that
the security issued and delivered in exchange, if sold
at the conversion price, would at the time of such
conversion fall within the class of securities entitled to
registration under this Code. Upon such conversion
the par value of the security surrendered in such
exchange shall be deemed the price at which the
securities issued and delivered in such exchange are
sold.
h) Broker’s transactions, executed upon
customer’s orders, on any registered Exchange or
other trading market.
i) Subscriptions for shares of the capital stock
of a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of
such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can

be registered and duly incorporated, or its authorized
capital increased.
j) The exchange of securities by the issuer with
its existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines during any
twelve-month period.
l) The sale of securities to any number of the
following qualified buyers: (i) Bank; (ii) Registered
investment house; (iii)insurance company; (iv) Pension
fund or retirement plan maintained by the Government
of the Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the
Commission may by rule determine as qualified
buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience
in financial and business matters, or amount of assets
under management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec
22)
TENDER OFFER – A publicly announced intention acting alone or
in concert with others to acquire equity securities of a company.
(2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or
more of the equity share of a public company pursuant
to an agreement made between or among the person
and one or more sellers;
2. When the person intends to acquire 30% or
more of the equity share of a public company within a
period of 12 months;
3. When the person intends to acquire shares
that would result in an ownership of more than 50% of
the equity shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the proxy for at
least ten per centum (10%) or such percentage as the
Commission may prescribe of the outstanding share of the
issuer, shall submit a report identifying the beneficial owner
within ten (10) days after such acquisition, for its own account or
customer, to the issuer of the security, to the Exchange where
the security is traded and to the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a
security which involves no change in the beneficial ownership
thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for
the purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same size, time
and price for the sale or purchase of such security has, or will be
entered by or for the same or different parties.
Note: Wash sale and matched orders become illegal
when they are used as a means to create false
appearance of active trading in the security
concerned.
3. Marking the close – placing the purchase order, at or
near the close of the trading period. The price that was closed
will then be the price that will be posted on the following trading
day.
4. Painting the tape – involves a series of transactions
that are reported publicly to give the impression of an activity in
a security.
5. Squeezing the float – the part of an outstanding
security intentionally held by dealers or other persons with a
view of reselling them later for profit.
6. Hype and dump – Act employed by a person or group
of persons of purchasing the outstanding capital stock of a
dormant public shell company for a nominal amount and merge
it with their privately held company. They would then gain
control of the majority stocks of the merged entity. Stock
certificates are often re-issued in the name of the merged entity
to relatives and associates who act as nominees of the person or
persons employing the device. They would then look for a
broker-dealer who would be willing to make a “hype” of the
securities. The broker-dealer then generates volume and
advance bid price. When the market reaches a high price, they
would “dump” their shareholdings and bail out.
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
72
7. Boiler Room Operations – involves an intensive
selling campaign through numerous salesmen by telephone or
through direct mail offerings for securities of either a certain type
or from a specific issuer. Investors are induced to purchase
through hard-sell based on unfounded predictions and mailing of
misleading market letters.
Note: Marking the close, Painting the tape, Squeezing
the float, Hype and dump, Boiler Room Operations
become unlawful if it is effected to either raise the
price or induce the purchase of a security or of a
controlling, controlled, or commonly controlled
company by others or to depress the price to induce
the sale of a security, whether of the same or of a
different class, of the same issuer or of a controlling,
controlled company or common controlled company by
others or to create active trading to induce the
purchase through said devices or schemes.
8. Circulating or Disseminating Information –
circulating an information that any of the security listed in the
exchange will or is likely to rise or fall because of manipulative
market operations of any one or more persons conducted for the
purpose of raising or depressing the price of the security and
thus inducing the purchase of such security.
9. Making False or Misleading Statements with
respect to any material fact which he knew or had reasonable
ground to believe was so false or misleading for the purpose of
inducing the purchase or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of
security effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for such
purpose.
11. Short sale – selling of security which the vendor does
not own unless done in accordance with the rules and regulations
of the SEC.
12. Insider Trading – the act of an insider to buy or sell
security of the issuer while in possession of material information
with respect to such security that is not generally made known to
the public unless (a) The insider proves that the information was
not gained from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified, the
insider proves: (i) that he disclosed the information to the other
party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information.
Note: When is information “material non-
public”? - if: (a) It has not been generally disclosed to
the public and would likely affect the market price of
the security after being disseminated to the public and
the lapse of a reasonable time for the market to
absorb the information; or (b) would be considered by
a reasonable person important under the
circumstances in determining his course of action
whether to buy, sell or hold a security.
Note: Who is an “insider”? - “Insider” means: (a)
the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling
the issuer; (c) a person whose relationship or former
relationship to the issuer gives or gave him access to
material information about the issuer or the security
that is not generally available to the public; (d) a
government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or (e) a person who learns such
information by a communication from any of the
foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual
having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director.
Corporations which require an Independent Director
1. An exchange; or
2. Any corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess of P50M and
having 200 or more holders, at least 200 of which are holding at
least 100 shares of a class of its equity securities or which has
sold a class of equity securities to the public pursuant to an
effective registration statement shall have at least two (2)
independent directors or such independent directors shall
constitute at least 20% of the members of such board, whichever
is the lesser.
OPTION TRADING
• Put – a transferrable option or offer to deliver a given
number of shares of stock at a stated price on any given time
during the stated period.
• Call – a transferrable option to buy a specified number
of share at a stated price
 73

• Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding
under this Code, parties being investigated and/or charged may
propose in writing an offer of settlement with the Commission.
The Commission may only agree to a settlement offer based on
its findings that such settlement is in the public interest. Any
agreement to settle shall have no legal effect until publicly
disclosed. Such decision may be made without a determination
of guilt on the part of the person making the offer.

DAMAGES
All suits to recover damages shall be brought before
the Regional Trial Court, which shall have exclusive jurisdiction to
hear and decide such suits. The Court is authorized to award
damages in an amount not exceeding triple the amount of the
transaction plus actual damages.

NOTES
• If there are goods involved in the multimarket, it is
beyond the jurisdiction of SEC (Ex First Quadrant)
• Criminal charge for violation of SRC is a specialized
dispute, hence it must be first referred with SEC (Baviera vs.
Paglinawan G.R. No. 168380 Feb 8, 2007)
• T3 Rule in trading of Securities – Trading day + 3
more days you must comply with your obligations.

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva