MERCANTILE LAW REVIEWER CORPORATION CODE Note: Effectivity of the Corporation Code (BR 68) May 1 1980 Coverage

of the corporation code: 1. Provides for the incorporation, organization and regulation of private corporations, both S and non-s, including educational and religious corporations 2. Defines their powers and provides for their dissolution 3. Fixes the duties and liabilities of directors or trustees and other officers thereof 4. Declares the rights and liabilities of stockhoders and members 5. Prescribes the conditions under which corporations including foreign corporations may transact business 6. Provides penalties for violation of the code 7. Repeals all laws and parts of laws in conflict and inconsistent with the code. Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence 4 attributes of a corporation: 1. It is an artificial being 2. It is created by operation of law 3. It has the right of succession 4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence. Consequence of separate juridical personality of corporations: 1. Liability for its own acts or contracts entered into by the corporation through its authorized agents and vice versa 2. Right to bring actions for its own benefit or protection. It does not have a cause of action to bring suit for its stockholders where the cause of action is personal to the SH under the reasoning of separate juridical personality a. A corporation cannot be entitled to moral damages since it is not a natural person hence it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock b. A cause of action of a corporation cannot be sued upon by the SH acting for themselves c. For purposes of venue, its place of business is considered as its residence 3. Right to acquire and possess property. Property so acquired belongs exclusively to the corporation and not to its SH. Hence to alienate it would require authorization by the corporation a. The interest of the SH in corporate property is purely inchoate and therefore, does not entitle them to intervene in a litigation involving corporate property. b. The power to pierce the corporate veil belongs to the courts and to no other, hence a sheriff acted with grave abuse of discretion when he levied property belonging to the president without due authorization from the court c. Note where the required percentage over the shares of the corporation by aliens are exceeded, the ownership over the said shares are not affected by the right of the corporation to hold property is affected thereby rendering it disqualified from holding private property. Doctrine of piercing the veil of corporate fiction or the doctrine of corporate alter ego
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The removal of the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. Effect of piercing: 1. The corporation will deemed merely as an association of persons and the SH or members will be considered as the corporation, that is liability will attach to the officers and SH personally or directly; or 2. Where there 2 or more corporation, they will be merged into one, the one being merely regarded as the instrumentality, agency, conduit or adjunct of the other. Requisites Doctrine of piercing the veil of corporate fiction is applicable 1. Control, a complete dominion, not only of finances but of policy and business 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 on its own. 2. Such control must have been used by the defendant to commit fraud or wrong in contravention of plaintiffs legal rights 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of Note The corporate entity is being used as a cloak to cover for fraud, or illegality or to defeat public convenience, justify wring, protect fraud or to defend a crime. The wrong doing must be clearly and convincingly established; it cannot be presumed Instances where the doctrine was applied: 1. Where the corporation functions for the benefit of a single person who has complete control over the funds and the said person is the sole owner thereof. (alter ego doctrine) 2. Transaction entered into by the president who was also the treasurer and general manager of a close family corporation where the incorporators and directors belong to one single family 3. Where a corporation is merely an instrumentality, an adjunct business conduit or alter ego of another corporation piercing the veil of corporate entity The doctrine of "piercing the veil of corporate entity," is the doctrine that allows the courts to look behind the separate juridical personality of a corporation and treat the corporation as an association of persons and thereby make the individual actors personally liable for corporate liabilities. The fiction of corporate identity is disregarded and the individuals comprising it can be treated identically. The stockholders can be held directly liable for corporate obligations, even to the extent of their personal assets (Concept Builders v. NLRC, Marabe, et al, G.R. No. 108734, May 29, 1996). To what circumstances will the doctrine apply? (2.5%) The doctrine is applicable when the notion of legal entity is used to 1) Defeat public convenience. 2) Justify wrong. 3) Protect fraud. 4) Defend crime (PNB v. Andrada Electric, G.R. No. 142936, April 17, 2002). 5) Shield a violation of the proscription against forum shopping (First Philippine International Bank v. Court of Appeals, G.R. No. 137537, January 24, 1996).
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6) Work inequities among members of the corporation internally, involving no rights of the public or third persons (Secosa v. Heirs ofErwin Suarez Francisco, G.R. No. 156104, June 29, 2004). 7) Evade the lawful obligations of the corporation like a judgment credit (Sibagat Timber Corp. v. Garcia, G.R. No. 112546, December 11, 1992). 8) Escape liability arising from a debt (Arcilla v. Court of Appeals, G.R. No. 88113, October 23, 1992). 9) Avoid inclusion of corporate assets as part of the estate of the decedent (Cease v. Court of Appeals, G.R. No. L-35861, October 18, 1979). 10) To promote or to shield unfair objectives (Villanueva v. Adre, G.R. No. 80863, April 27, 1989).

Note: A single circumstance is not sufficient to pierce the veil, there must be an act, an unlawful purpose and the use of the separate individual for the perpetration of fraud or as a vehicle for the evasion of existing obligations. Four Corporate Attributes Based on Section 2: 1. A CORPORATION IS AN ARTIFICIAL BEING (Ability to Contract and Transact) 2. CREATED BY OPERATION OF LAW (Creature of the Law) its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporation the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation.

3. WITH RIGHT OF SUCCESSION (Strong Juridical Personality) -

4. HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers) Corporation Separate legal personality Investors limited liability Free transfer of shares Centralized management Partnership Separate legal personality Contractual limited liability ( when a limited partnership is created) Transfer with consent of partner Every partner is agent

Cooperatives (Art. 3, R.A. No. 6938) A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.

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Cooperative Separate Juridical Personality Governed by principles of democratic control where the members have equal voting rights on a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membership that exercises all the rights and performs all of the obligations of the CORPORATION AS A PERSON:

Corporation SH vote their percentage share of the stocks subscribed by them BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or

(a) Entitled to Due Process The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are persons within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]). (c) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967). A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz , 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitled to the rights of due process and equal protection? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical personality given by the State through the primary franchise of the corporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or a juridical entity, which therefore extends to private corporations within the scope of the guaranty. Q: Why is the corporation entitled to the protection against unreasonable searches and seizures? A: The corporation being entitled to due process and equal protection is the consequence of the States grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not only the separate juridical personality of the corporation but also grants unto it all the rights and protections that a natural individual would possess which includes the right to due process and equal protection.
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However, a corporation is also entitled to protection against unreasonable searches and seizures. This right however does not emanate from the grant of the State by way of primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the Corporation Code, a corporation is still for all intents and purposes an association of individuals under an assumed name and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just compensation (2) it can only be proceeded against by due process of law (3) it is protected against unlawful discrimination. In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves physical intrusion into the premises of the corporation, and therefore also intrudes into the personal and business privacy of the stockholders or members who compose it. It can be seen that the right of the individual against unreasonable searches and seizures is extended to corporations upon whom they are members. (d) But Not incrimination Entitled to Privilege Against Self

It is elementary that the right against self-incrimination has no application to juridical persons. Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987). While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). Q: Why is a corporation entitled to equal protection but not the right against self- incrimination? A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being in the same class should be treated equally. However, the right to self-incrimation is not extended to corporation because: 1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest. It is to protect the individual from having to commit perjury just to keep himself from going to jail. However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a legal fiction. 2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere creature of the State is subject to the whims of its Creator. The corporation powers are limited by law.

CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the corporation is of an amoral personality, such right may not be attributable to it. 3. Practice of Profession Corporations cannot engage in the practice of a profession since they lack the moral and technical competence required by the PRC. A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002). 4. Liability for Torts
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A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. a PNB v. Court of Appeals, 83 SCRA 237 (1978). NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in the granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act, would the damages resulting therefrom be ascribable to the corporation. And such a direction by the corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning such an act. corporate tort. Essentially, tort consists in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation ofnoperations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997). Our jurisprudence is wanting as to the definite scope of Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express direction of authority from the stockholders or members acting as a body or through the Board of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through its board, has expressly or impliedly ratified such an act or estopped from impugning the same. Q: What is a derivative suit? A: Since, the act of the board is essentially corporate assets cannot escape enforcement victim. As a remedy, the stockholders may responsible board members and officers for the a result of the tort suit.

that of the corporation and therefore of the award of damage to the tort institute a derivative suit against the damages suffered by the corporation as

5. Corporate Criminal Liability (a West Coast Life Ins. Co. v. Hurd , 27 Phil. 401 (1914); a People v. Tan Boon Kong, 54 Phil. 607 [1930]; a Sia v. Court of Appeals, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

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WEST COAST LIFE INS. CO. v HURD Facts: The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doing business regularly and legally in the Philippines. An information was filed against the plaintiff corporation as well as John Northcott and Manue Grey charging the said corporation and said individuals with the crime of libel. The controversy started when Northcott, as general manager for the Philippines of said company and John Grey who was an agent and employee of the company, conspired to release certain circulars containing foul statements against Insular Life Company claiming that the Insular Life was then and there in a dangerous financial condition on the point of going into insolvency, to the detriment of the policy holders of the said company, and of those with whom said company have and had business transactions. The plaintiffs then filed a motion to quash summons sent by the Judge, on the ground that the court had no jurisdiction over said company, there being no authority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws of the Philippines, the court has no power or authority to proceed against a corporation, criminally, to bring it into court for the purpose of making it amenable to criminal laws. Issue: WON corporations can be held criminally liable. Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, it was held that under circumstances of their creation, they have only such authority in criminal matters as is expressly conferred upon them by statute or which is necessary to imply from such authority in order to carry out fully and adequately the express authority conferred. The SC did not feel that Courts have authority to created new procedure and new processes of criminal law. Although, there are various penal laws in the Philippines which the corporation may violate, still the SC does not believe that the courts are authorized to go to the extent of creating special procedure and processes for the purpose of carrying out the penal statutes, when the legislative itself has neglected to do so. This is true since the courts are creatures of the statute and have only powers conferred upon them by statute. Philippines courts have no common law jurisdiction or powers. PEOPLE v TAN BOON KONG Facts:

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During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be regarded as committed by the corporation and not its officials. Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers and agents where the business itself involves a violation law, the correct rule is that all who participate in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of taxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes a violation of law. Him being the author of the illegal act must be held liable. SIA v PEOPLE Facts: The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal Manufacturing Company of the Philippines engaged in the manufacturing of steel office equipment. When the company was in need of raw materials to be imported from abroad, Sia applied for a letter of credit to import steel sheets from Tokyo, Japan, the application being directed to Continental Bank and was opened in the amount of $18,300. According to the Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the trust receipt. While according to Sia, the steel sheets were already delivered and were even converted to equipment before the trust receipt was signed by him. However, there is no question that when the bill of exchange became due, neither the accused nor his company made payments, despite demands of the bank. On appeal, Sia contends that he should not be held liable. Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf of his company. Held : NO. The Court disputed the reliance of the lower court and the CA on the general principle that for a crime committed by a corporation, the responsible officers thereof would personally bear the criminal liability, as enunciated in Tan Boon Kong. The latter provides that: [t]he corporation was directly required by law to do an act in a given manner and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. The performance of an act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporations who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated.
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The Court concluded that the cited case does not fall squarely with the circumstances surrounding Sia since the act alleged to be a crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is imposed by the agreement of the parties in pursuit of the business. The intention of the parties is therefore a factor determinant of whether a crime or a civil obligation alone is committed. The absence of a provision of the laweven in the RPC making Sia criminally liable as the president of his company created a doubt that must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the accused.

CONTRASTING CASES

THE

THREE

In the case of West, the court in effect enunciated that for a person to proceed criminally against a corporation, it was necessary that express provisions of law be enacted, specifically providing that a corporation may be proceeded against criminally and brought to court. But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case of Tan Boon Kong provided that since a corporation acts through its officers and agents, any violation of law by any of the actors of the corporation in the conduct of its business involves a violation of law, the correct rule is that all who participate in it are liable. In making actors liable, the court here said attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a being since it lacks its own mind. To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a shield or cloak to hide their criminal activities behind such. However, the liability of officers were delineated in case of Sia where the court held that the responsible officer is personally liable is personally liable for crimes committed by the corporation only in a situation where the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law is currently undergoing changes such that juridical persons are also defined as offenders of criminal acts, as with the case of the Anti-Money Laundering Act. Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of establishments In default of the persons criminally liable, innkeepers, tavern-keepers and any other person or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have been committed by them or their employees. Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their houses from guests lodging therein, or for the payment of the value therefore, provided that such guests shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may have given them with respect to
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the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeepers employees. Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of duties. No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. People v. Concepcion, 44 Phil. 129 (1922). While it is true that a criminal case can only be filed against the officers and not against the corporation itself, it does not follow that the corporation cannot be a realparty-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).

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Revised Bagtas Reviewer by Ve and Ocfe 2A 23 Q: Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation, it is within the contemplation of every corporate act. 6. Recovery of Moral and Other Damages A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages . Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001). The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). 7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123)

Section 123: Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in 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. There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is vested. Situation #1: 51% Filipino 49% Japanese Under the control test, the
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nationality cannot be determined because for a group of stockholders to exercise control over a corporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person. Situation #2: 60% Filipino 40% Japanese considered a Under the control test, this is

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Filipino corporation. 3.) Principal place of business applied to determine whether a State has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights and liabilities of directors. Q: Do all three tests apply in the Philippines? A: Yes. The first test is considered the primary test, the second one is used to determine whether a corporation can engage in nationalized activities in the country, and the third one is used to determine the jurisdiction of the State to enforce for instance taxation laws. Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter into various transactions or engage in different industries. And also, the legal fiction supporting a corporation is valid only within Philippine territory. Q: It was said that the place of incorporation is the primary test to determine the nationality of the corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the controlling test in corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are primarily focused at making Filipino interests benefit directly from the bounties of this country. The place of incorporation test need not have been expressly provided by the Constitution since it is an integral part of our law specifically the power of Congress to grant primary franchise to corporations. The place of incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the place where it was incorporated, the corporation cannot escape said law. By providing for the control test, the Constitution is providing for a secondary test to determine which corporations are entitled to entry in nationalized sectors. Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the corporation may have been established but this does not mean that the corporation is entitled to enter every single economic sector of the Philippines. The control test determines now whether the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; a Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]). Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a
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report of its findings, including recommendations for correction.

their prevention or

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

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Revised Bagtas Reviewer by Ve and Ocfe 2A 25 In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as the other factors which are germane to the realization and promotion of business and industry. Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural resources are owned by the State. With the exception of agricultural lands, all other national resources shall under the full control and supervision of the State. The State may directly undertake such activities or it may enter into co- production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty percentum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays and lagoons The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development and utilization of minerals, petroleum and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. The President shall notify the Congress of every contract entered into in accordance with this provision within thirty days from its execution. (b) Public Utilities (Sec. 11, Art. XII, Constitution; a People v. Quasha, 93 Phil. 333) Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation of public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.
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NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such corporation to operate in industries concerning public utilities. (c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution) Sec. 11(1) Art. XVI The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combination in restraint of trade or unfair competition shall be allowed. Mass media includes the gathering, transmission of news, information, messages, signals and forms of written, oral and all visual communication and shall embrace the print medium, radio, television, films, movies, advertising in all its phases and their business managerial. It does not include commercial telecommunications because such is a public utility. The Constitutional requirements are much stricter for 100% Filipino owned and managed. it requires that socks are

Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4December, 1991), at p. 31. Cable Industry: Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity. (NTC Memo Circular No. 8-9-95) Cable TV as a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution. (DOJ Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70). The National Telecommunications Commission which regulates and supervises the cable television industry in the Philippines under Sec. 2 of EO 436 series of 1997 has provided under the NTC Memorandum Circular No. 8-9-95 under item 920(a) thereof provides that [c]able TV operations shall be governed by E.L. No. 205 series of 1987. If CATV operators offer public telecommunications services, they shall be treated just like public telecommunications industry. Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from Allied Broadcasting Inc. v. Federal Communications Commission 435 F.2d 70 considered CATV as a form of mass media, which must therefore be owned and managed by Filipinos, or corporations, cooperatives or associations, whollyowned and managed by Filipino citizens pursuant to the mandate of the Constitution. (d) Advertising Business Sec. 11(2) Art. XVI The advertising industry is impressed with public interest and shall be regulated by law for the protection of consumers and promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy percentum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry.
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(Sec. 11(2), Art. XVI, 1987 Constitution)

The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines. Only Filipino citizens or corporations or associations at least seventy percent of the capital shall be allowed to engage in the advertising industry. It also provides that the participation of foreign investors in the governing body shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines. (e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc. , 89 Phil. 54 [1951]; Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; Haw Pia v. China Banking Corp., 80 Phil. 604 [1948]). In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc. , the Court held that in times of war, the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders The court considered the juridical entity as an enemy based on the fact that the majority of the stockholders of the respondent corporation were German subjects. It ruled that the control test was applicable only in war-time. It refused the sole application of the place of incorporation test during the war- time to determine the nationality of an enemy corporation. (f) Investment Test as to Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign Investments Act of 1991) Under Sec. 3a of the FIA of 1991, the term Philippine national as it refers to a corporate entity shall mean a corporation organized under the laws of the Philippines of which at least 60% percent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. NOTE: In this aspect, FIA is more liberal than the Constitution which did not specify as to what type of share the 60% Filipinoownership requirement pertained to. FIA, in this aspect, only referred to voting shares. However, it provides that were a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least 60% of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that a corporation shall be considered a Philippine national. The law therefore limits the test to voting shares, but however makes it more stringent when itcomes to actual control by making a double 60% rule requirement as to both holding and held company, as well as their Board of Directors. Q: Why should not we infer that the 60% Filipino ownership requirement of the Constitution as pertaining to voting shares? A: Elementary rule of Statutory Construction that when the law does not distinguish, neither should we. Moreover, the right to vote is not the only right granted to stockholders, as the right to file suits against the Board of Directors is granted to them. Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors with respect to voting stocks and 40% Foreign investors with respect to nonvoting stocks, under the FIA, is it a Philippine national? A: Yes, since FIA limits its scope to voting stocks. Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16) and 20% Foreign (4), is it a Philippine national? Can it therefore own land under the Constitution? A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs contrary to the Constitution, which is the supreme law of the land, the former shall not apply.
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(g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990) Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Example: partnership between ABC and X companies. ABC owns 60% with 40% foreign and 60% Filipino-owned shares while X companie own 40% with 100% Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipinoowned. Moreover, under this rule once the 60% requirement is reached, there is no more need for tierring. It must be stressed however that the aforequoted SEC rule applies only for purposes of resolving issues on investments. The SEC was quick to add: [h]owever, while a corporation with 60% Filipino and 40% foreign equity ownership is considered a Philippine national for purposes of investment, it is not qualified to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or ownership of which under the constitution of other special laws are limited to Filipino citizens only. A joint venture arrangement would mean that such corporation has become a partner and is deemed then to be acting or involving itself in the operations of a nationalized activity by the acts of the local partners by virtue of the principle of mutual agency applicable to partnerships. There seems to be a conflict as to the applicability of the SEC Rule and to that of the Foreign Investments Act but each in itself has advantages and disadvantages, since both require stringent requisites for a corporation to avail of its privileges. But under the present scenario, the FIA is believed to be the default rule having been enacted more recently that the SEC Rule. GRANDFATHER RULE a method by which the percentage of Filipino equity in corporations engaged in nationalized or partly nationalized areas of activity provided for under the Constitution and other national laws is accurately computed, in cases where corporate shareholders are part of the ownership structure by considering the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. Q: When is the GFR applied? A: The GFR is applied in cases where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is not applied, the presence of such corporate srockholders could diminish the effective control of Filipinos. SITUATION #1 Silahis International Hotel, the capital stock of which is 69% owned by another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in turn is 53% alien-owned and 47% Filipino-owned. The SEC through the GFR stated that Silahis International Hotel can engage in partly nationalized business because the Filipino equity in said corporation is 63.43% while the foreign equity in said corporation is 36.57%. SILAHIS INTERNATIONAL HOTEL

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Hotel Properties Inc.

69%

1.) 53% Foreign 47% Filipino

Filipino stockholdings

31%

47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis) TOTAL: 63.43% SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% is owned by George, a German. Q: Can Pinoy, Inc. enter into the operation of a television station? A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is owned by George. But under the present investment regime of the Philippines, the FIA provides that corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40% foreign equity is allowed to invest in a corporation engaged in a nationalized sector. Q: Does this not contradict the very provisions of the Constitution? A: It does not because the main purpose of such provision of the law is to spur investments into the Philippine economy. What it specifically prohibits is for a corporation with a foreign equity to engage in nationalized industries. Note the difference in the use of terms, namely to engage as opposed to to invest. Engaging in nationalized industries involve direct participation in the exploitation or use of natural resources or entry into protected industries vested with public interest. This is what is prohibited from being entered into by non- nationals. Q: When should the GFR be applied? A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly nationalized sector of Philippine economy and (2) when there is tierring, meaning the corporation is partly-owned by another corporation. Up to what level do you apply the grandfather rule? (a Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]) Q: Why are we studying Palting? A: It is because Palting enunciated the doctrine that for a corporation to comply to the nationalization requirements of the Constitution, the equity requirements establishing the nationality of the controlling interest in the corporation should not be stretched to absurdity. The application of the GFR to determine the nationality of the ultimate controller of a subject corporation cannot go beyond the level of what is reasonable. (h) Special Classifications (Sec. 140) Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction.
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Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restrain or trade, to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as the other factors which are germane to the realization and promotion of business and industry. IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION See relevant portions of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993). IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS 1. Sources: Sec. 2; Article 44, Civil Code Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence. Article 44 The following are juridical persons: (2) other corporations, institutions and entities for public interest or purpose, created by law, their personality begins as soon as they have been constituted according to law; (3) corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. 2. Importance of Protecting Main Doctrine: The separate juridical personality includes the right of succession, limited liability, centralized management, and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes. FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE SEPARATE

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Revised Bagtas Reviewer by Ve and Ocfe 2A VEIL OF CORPORATE FICTION FOCUS ON? 1)

35

Centralized management Centralized management is not a natural occurrence. It is a creation of statute under Sec. 23 of the Corporation Code Compared to partnerships, partnerships have mutual agency under delectus personarum. Mutual agency is more of a natural occurrence since here the partner is a co-owner of the assets of the partnership, maintaining his control over his property. In property law, there is what is called the seven juses of ownership. In partnership however, a partner retains all this seven juses, albeit as a co-owner, through mutual agency. However, in a corporation, a stockholder abdicates his jus dispossidendi, jus abutendi, etc. as to the property he is placing inside a corporation retaining only to himself his jus fruendi, as to the dividends of his stocks. This is unnatural since a person is entitled to full use, enjoyment or dispossession of his property. But since under the Corporation Code, centralized management is provided therefore it is the means by which a corporation acts and conducts it business. As such, the piercing doctrine is not directed at the attribute of centralized management, because in most instances, investors in a corporation hand the management of the business of the corporation to professionals. To do away with the central management would place the investors who had taken no active part in the conduct of the corporation to be liable as partners with mutual agency. Free transferability of assets Shares of stock represent (1) right to profits/dividends (2) voting right (3) contingent right which recognizes a proprietary right of a mere aliquot share in the proceeds after dissolution and distribution of corporate assets. Therefore a stockholder is neither owner nor co-owner of assets of a corporation. The assets of a stockholder are distinct from the assets of a corporation. The stockholders have no control in the dispossession or acquisition of assets (only as to their voting capacity in the management of the corporation). The stockholders however have the right to freely dispose of his shares of stock to any and all person who may purchase it. There the corporation has no control. Applying the piercing doctrine as to the free transferability of his assets cannot be done since jurisprudence points out that the piercing doctrine is a remedy of last resort. If a third party claimant has a claim as to the assets to be disposed of or acquired by a corporation can be afforded in other remedies whether it be intra or inter corporate.

2)

3) Limited Liability and Separate Legal Personality Therefore it can be concluded that the piercing doctrine is directed at the limited liability attribute of the corporation (in consonance with the separate juridical personality attribute).The piercing doctrine in a way undermines the separate juridical personality of a corporation allowing a party to look behind the veil of corporate fiction to remedy a claim or fraud. In looking behind the veil, a plaintiff seeks to make somebody liable for a claim either based on tort, breach of contract, etc. Since a corporation can only act through its agents; it is the same agents that are to be held liable. Therefore the attribute of limited liability cannot be availed of in a piercing case since it is this attribute that is undermined so as a wrong can be remedied. CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine, the main doctrine actually pertains to equity. Equity refers to the part of the rights or interest an individual has in a corporation. Equity is comprised of two main parts which is (1) enterprise and (2)assets. It is the enterprise or the conduct of the business which in effect undermines equity. Assets are those brought in by the stockholders during the formation of the corporation or may have been
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acquired during its existence. They are inanimate objects that require human intervention to move or be used. Thus, it can be said that it is not the assets that undermine equity which bring about piercing. When an enterprise is conducted in fraud or in perpetuation of a wrong the equity of the corporation is undermined. Since, a corporation must act through its agents, so the corporation being the principal, commissions these agents to act under that special commission. If an agent acts beyond the commission of the principal (as provided under its by-laws) it is the actor that should be held liable not the corporation, since the corporation for all of its juridical existence is still abstract and a corporeal actor acts for it. Also a corporation cannot undermine equity, only the actors. So when these actors undermine equity, they lose limited liability and may be held liable. Therefore, the basis of piercing is on the enterprise not on equity or its assets. Piercing regulates the enterprise of the corporation.

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A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001). One of the advantages of a corporate form of business organization is the limitation of an investors liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. a San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998). SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA Facts: San Juan entered into an agreement with Motorich for the transfer of a parcel of land. San Juan paid a downpayment of 100,000, balance to be paid on or before March 2, 1989. San Juan requested for the recomputation of the balance, Motorichs broker Linda Aduca wrote the computation. San Juan and Motorich were supposed to meet in the office of San Juan but Motorich treasurer Mrs. Gruenberg did not appear. Despite repeated demands and in utter disregard of its commitments had refused toe execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title (title was transferred to spouses Gruenberg from ACL Corporation) Defendants, president and chairman of Motorich did not sign the agreement. Mrs. Gruenbergs signature as treasurer is insufficient. San Juan knew of this infirmity that is why it did not pay on time. The RTC and CA held that Mrs. Gruenberg did not have the authority as she did not obtain the signatures of president and chairman, as such it was not ratified by the corporation. Issue: WON the doctrine of piercing the corporate veil may be applied. Held: The Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders, or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner. Veil can only be disregarded when it is utilized as a shield to commit fraud, illegality or inequity, defeat public convenience, confuse legitimate issues or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. In Dulay, the sale of real property was contracted by the President of a close corporation with the knowledge and acquiescence of its board of directors. In the present case, Motorich is not a close corporation as previously discussed and the agreement was entered into by the corporate treasurer without the knowledge of the Board of Directors. The Court is not unaware that there are exceptional cases where an action by a director who singly is the controlling stockholder, may be considered a binding corporate act and a board action is nothing more
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than a mere formality. The present case is not of them. Granting arguendo that the corporate veil of Motorich may be pierced, said parcel of land would then be treated as conjugal property of the spouses Gruenberg, because the same was acquired during the marriage. There being no indication that said spouses who appear to have been married before the effectivity of the Family Code have agreed to different property regime, their property relations would be governed by a conjugal partnership of gains. Neither spouse can alienate in favor of another his interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved. 3. Applications:

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Revised Bagtas Reviewer by Ve and Ocfe 2A (a) Majority Equity Ownership and Interlocking Directorship:

37

Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. a DBP v. NLRC, 186 SCRA 841 (1990) DBP v NLRC Facts: Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting and steel manufacturing business. To secure the loan, PSC mortgaged to DBP real properties and chattels with its President Marcelo as co-obligor Because of this DBP became the majority stockholder of PSC with stockholdings of P 31M out of P 60 M subscribed and paid up capital stock and took over PSCs management. PSC failed to pay and DBP foreclosed on the mortgaged realties and chattels. 40 alleged unpaid employees filed a petition for involuntary insolvency in the RTC against PSC and DBP. Said employees were employed by Olecram Mining Corp., Jose Panganiban Ice Plant and Cold Storage, Inc. all impleaded as corespondent. They filed another complaint with the DOLE against PSC for nonpayment of salaries, 13th month pay, incentive leave and separation pay. DBP was impleaded because the employees considered DBP as the parent company of PSC. Since the DBP was the biggest creditor of PSC, it held majority of stock and involved in management through Board of Directors, DBP was considered to be by the employees as their employer. DBP was invoked absence of E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaid wages due to PSCs foreclosure which it caused as foreclosing creditor. NLRC sustained this, hence, this petition. Held : DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of the employees of PSC. The fact that DBP is a majority stockholder of PSC and PSC are from DBP does not sufficiently indicate the existence of an E-E relationship between the terminated employees of PSC and DBP. Said workers have no cause of action against DBP and the labor arbiter does not have jurisdiction to take cognizance of said case. Hence, ownership of a majority of capital stock and the fact the majority of directors of a corporation are the directors of another corporation creates no EE relationship with the latters employees. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000). Mere substantial identity of incorporators of two corporations does not
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necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996). Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v. Court of Appeals, 222 SCRA 466 (1993). (b) Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation, and viceversa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate

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property

which is owned by the

corporation as a distinct legal person. Good

Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). (c) Dealings Between Corporation and Stockholders: The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001). Use of a controlling stockholders initials in the corporate name is not sufficient reason to pierce the corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001). The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001). The creation by DBP as the mother company of the three mining corporations to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will not constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001). The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is
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insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally warrant alterego piercing.] (d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936). (e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347

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Revised Bagtas Reviewer by Ve and Ocfe 2A (1976) .

39

Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999). The majority stockholder cannot be held personality liable for the attorneys fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993). Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporations assets before the dissolution of the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998). The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997). B. PIERCING THE VEIL OF CORPORATE FICTION: 1. Source of Incantation: United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905). The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). 2. Nature of Doctrine (a Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997]) TRADERS ROYAL BANK v COURT OF APPEALS Facts: Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank Certificate of Indebtedness (CBCI) with a face value of 500,000. Such was then transferred to Philippine Underwriters Finance Corporation (Philfinance) under a Detached Assignment. Philfinance entered into a repurchase agreement with Traders Royal Bank over the CBCI whereby TRB buys the CBCI and Philfinance will repurchase it on April 27, 1981 for 519,361.11 Upon the default of Philfinance TRB sought to register the CBCI in its name. CB refused to register and transfer the CBCI due to the adverse claim of Filriters. (Filriters interjected the defense that Alfredo Banaria Senior VP of Filriters without any board resolution, knowledge or consent of the board of directors executed the detached assignment in favor of Philfinance. Subsequently, Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP Treasury, of Filriters
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and of Philfinance executed similar forms transferring the CBCI to TRB. As such the transfers were null and void.) TRB then went to the RTC of Manila and filed for mandamus to compel CB to register. Petitioner argued that the CBCI was a negotiable instrument and that it was a holder in due course. It also contended that Philfinance owned 90% of Filriters equity and the two corporations have identical officers, this demanding the application of the doctrine of piecing the veil of corporate fiction as to give validity to the transfer of the CBCI. Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.

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Held : The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put the latter on guard as to the title of Philfinance to dispose of the CBCI. Also the assignment of Filriters toPhilfinance was fictitious as the same is without consideration and was contrary to the rules of CB Circular 70 which provides that any assignment shall not be valid unless made by the registered owner in person or by a duly authorized representative in writing. Philfinance merely borrowed the CBCI from Filriters a sister corporation to guarantee financing corporations. The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. It requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. The court must be sure that the corporate fiction was misused.. It is the protection of innocent 3 rd parties dealing with corporate entity that the law seeks to protect by this doctrine. In this case, other than the allegation that Filriters is 90% owned by Philfinance and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under the circumstances to disregard their separate corporate personalities. There is no showing that TRB was defrauded at all when it acquired the subject certificate of indebtedness from Philfinance. The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregard their independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not itself a sufficient reason to disregard the fiction of separate corporate personalities. TRB being a commercial bank which deals with corporate entities with circumstances showing that the agents are acting in excess of corporate authority may not hold the corporation liable. This is only fair as everyone must in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith. When the legal fiction of separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez, 419 SCRA 422 (2004). The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forum-shopping. While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). The nature of the piercing doctrine is to disregard the separate juridical personality of a
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corporation and to hold the actors or the stockholders of the corporation liable for a wrong committed or a liability avoided. In our lessons in corporation law, we distinguish the cause of the piercing because it would explain of piercing is properly done. The Supreme Court does not go into an explanation or direct attribution as to cause of the piercing which at times cause confusion, so to clarify matters we classify the piercing case into three namely: (1) fraud (2) alter ego and (3) remedy. In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a person behind the wrong must be held liable which in a corporation are the directors, since the corporation acts through them. A piercing of the corporate veil in fraud cases is for the purpose of making the directors directly liable. In fraud cases, the SC looks into the circumstances of the case searching for

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elements of malice or evil motive. An absence of such an evil motive, the courts will not allow piercing. An example would be the case of TRB v. CA where the Court did not allow piercing because there was no injury caused. Also in the Umali case, the court did not allow piercing because the main intent was to annul a real estate mortgage under an allegation of fraud and not to hold the Directors liable. In both cases, piecing was not the proper remedy, even if fraud was actually alleged because the fraud committed was not attributed directly to the acts of the agents of the corporation. In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a person, whether natural or juridical, in order to avoid liability or gain advantage over another without really employing fraud. Here, if piercing is allowed then the corporate existence of the conduit corporation is disregarded and the person or corporation behind the corporation shall be considered as one and the liability of one is the liability of the other. The main intent here is not to make the board of directors of the conduit corporation liable but to make the corporation behind the existence of the conduit liable. It is the objective of the Corporation Code to foster public convenience in sanctioning the creation of a corporation not as a means or private convenience where it is to be used by other corporations or individuals as a means to circumvent liability or cause a disruption of normal business practice in dealing with corporations. Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing as an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter ego cases. As such it is of purely judicial discretion. The three cases may appear together in one application: FRAUD to prevent wrong PIERCING DOCTRINE public convenience ALTER EGO disrespect for the corporate fiction and to defeat

EQUITY to do justice The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which such doctrine was applied. (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. a PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). (b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. a Umali v. Court of Appeals, 189 SCRA 529 (1990). UMALI v. COURT OF APPEALS Facts: The Castillo family is the owner of a parcel of land which was given as security for a loan from the DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made known to Santiago Rivera, the nephew of plaintiff Mauricia Meer
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vda. De Castillo and president of Slobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the four parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself to pay the Castillos P70T after the execution of the contract and P400T after the property had been converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the unpaid balance. As further security, Slobec obtained

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through the Insurance Corporation of the Philippines a Surety Bond in favor of CounterGuaranty with REM executed by Rivera as president of Slobec and the Castillos as mortgagors and ICP as mortgagee. The Caterpillar Tractorwas delivered to Slobec. Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of ICP. The mortgagors had one year from the registration of the sale to redeem the property but they failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the title of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of Castillos filed an action for annulment of titles. They countered that all the transaction starting from the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in favor of Umali. This was reversed by the CA. Held : The SC is not convinced that the contract entered into by the parties are fraudulent. Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded (2) in such cases, the corporation will be considered as a mere association of person (3) the members or stockholders of the corporation will be considered as the corporation, making them liable directly. It is only applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect fraud, or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is the mere alter ego or business conduit of a person (4) where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit or adjunct of another corporation. The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to the respondent corporations. Petitioners also fail to establish by clear and convincing evidence that private respondents were purposely formed and operated, with the sole intention of defrauding the latter. The facts showed that the surety of ICP is good only for 12 months therefore the surety had already expired. The failure of ICP to give notice renders ICP to have no right to foreclosure. In this case, piercing need not be resorted to. Q: Why is Umali seeking to pierce the corporate entity? A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered into were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP & PM parts to acquire the property of Umali through the foreclosure of the mortgage by ICP. However, the court belied such allegation because the mere fact that the business of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent a sufficient showing that the corporate entity was purposely used as a
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shield to defraud creditors and third persons of their rights. Q: Why are we studying Umali? A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to annul the foreclosure of the mortgage. The Court found no reason to pierce since the main objective was not in consonance with the remedy of piercing in a fraud case would do, which was to hold the Board of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniary liable for corporate debts. Q: What if it was based on alter ego? A: The probative factor show that no alter ego existed since there was no disrespect of the corporate fiction, the corporations each having its own way of conducting business. Even if it may be that they compliment one another in their business conduct, it does not form enough basis for their

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circumvention of any liability. (c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189 SCRA 529 (1990); a Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992). INDOPHIL TEXTILE MILL WORKERS UNION v CALICA Facts: Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and Indophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired workers according to its criteria and standards. Sometime in July 1989, the workers of Acrylic unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and installations and to any extension and expansion thereat. The union sough that Acrylic be considered part of the bargaining unit. Their contention is that the articles of incorporation of the two corporation establish that the two entities are engaged in the same kind of business, which is the manufacture and sale of yarns of various counts and kinds and of other materials of kindred character or nature. Furthermore, they emphasize that the two corporations have practically the same incorporators, directors and officers. Also the two corporation have their facilities in the same compound. That many of Indophils own machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by the Acrylic plant. That services of a number of units, departments or sections of private respondents are provided by Acrylic and that the employees of Indophil are the same persons manning and servicing the units of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophil and stated that Acrylic is not extension of Indophil an hence their CBA does not extend to the employees of Acrylic. Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union representation. WON the operations in Acrylic are an extension or expansion of Indophil. Held : Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds of yarns. Two corporations cannot be treated as single bargaining unit just because they have related businesses. The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the application of the CBA. However the CA held that said doctrine is only used on the existence of valid grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that sometimes the employees of Indophil are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the same compound. It is the SCs considered opinion that these facts are not sufficient to justify the piercing of the corporation veil of
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Acrylic. Furthermore, the legal entity is disregarded only if sought to hold the officers and stockholders liable. In the instant case, the Union does not seek relief from Indophil. LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate of the larger union.

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Kaisahan with 66 members presented a demand for higher wages and more privileges to La Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified the issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed against two different entities with distinct personalities. This was denied, hence this petition. Held: La Compana Gawgaw and La Campana Factory are operating under one single management or as one business though with two trade names. The coffee factory is a corporation and by legal fiction, an entity separate and apart from the persons composing it namely, Tan Tong and his family. However, the concept of separate corporate personality cannot be extended to a point beyond reason and policy when invoked in support of an end subversive of this policy and will be disregarded by the courts. A subsidiary company which is created merely as an agent for the latter may sometimes be regarded as identical with the parent corporation especially if the stockholders or officers of the two corporations are substantially the same or their systems of operation unified. The facts showed that they had one management, one payroll prepared by the same person, laborers were interchangeable, there is only one entity as shown by the signboard ad in trucks, packages and delivery forms and the same place of business. The attempt to make the two factories appear as two separate businesses when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw has only 14 employees and only 5 are members of Kaisahan. CONTRASTING THE TWO CASES Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil when in fact the same circumstances in La Campana exist? A: It may seem that the facts and circumstances are nearly the same between the two cases but the remedies are different. La Campana sought the protection of separate juridical personality so as it may not fall under the jurisdiction of the CIR, there being a clear intent to be excused from the coverage of Labor Laws which conferred the CIRs jurisdiction over the issue at hand. Although there was no intent to defraud, the creation of La Campana Coffee Factory was meant to excuse itself from CIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing that Indophil meant to use Acrylic as a means of circumventing Labor Laws. Altough the CBA between Indophil and its union provides that any expansion of Indophils operations would also be covered by the CBA, Acrylic is an altogether different business. What showed that there was no intent by Indophil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its own employees. There was clear independence of action between the relation of Indophil and Acrylic as to their respective employees, each constituting its own bargaining unit. Q: Could Indophil be considered as have superseded La Campana? A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support or in contravention of this doctrine. It can be seen that actually there are no points where Indophil had substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases decided by the SC after Indophil, in the same way that Indophil continues to be cited. The criteria that when it is established that between two corporations which have one set of managers or board of directors; that there is a common
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stock ownership of both corporations; similarity of keeping corporate books and in conducting their businesses are mere probative factors that are to be considered when the corporate mask may be lifted and the corporate veil pierced. It does not mean that if these factors exist, piercing is automatically required. There is for one no hard and fast rule that can be laid down. So that in La Campana, the factors weighed heavily for piercing and in Indophil, against piercing.

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Piercing is not available when personal obligations of an individual are to be enforced against the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994). The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. a Francisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999). Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952). The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. Villanueva v. Adre, 172 SCRA 876 (1989). (d) Basis Must Be Clear Evidence: To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuri a Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999). The mere assertion by a Filipino litigant against the existence of a tandem between two Japanese corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001). To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001). The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381
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SCRA 244 (2002). (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of co-ownership to justify continued use and possession by stockholders of corporate properties. a Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). The piercing doctrine is an equitable remedy available only to persons outside the corporation. It cannot be availed of stockholders within the corporation forming part of the corporation. In comparison, CLV uses the Story of the Wall. This wall is the main doctrine, designed both to protect the stockholders by virtue of the attribute of limited liability and to hide from prying eyes the inner workings of the corporation. Stockholders are inside these

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walls. Piercing the veil of corporate fiction is like a battering ram that creates a hole through this wall to allow third persons to look into the corporation to see if there is a wrong committed inside those walls. A stockholder being inside the fort are afforded other remedies, they have intra-corporate remedies to avail of. The piercing doctrine cannot be availed of to dislodge from SECs jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. Union Bank v. Court of Appeals, 290 SCRA 198 (1998). (f) Applicable to Third-Parties: That respondents are not stockholders of the sister corporations does not make them non-parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors-petitioners, and that the sister corporations acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. a Gochan v. Young, 354 SCRA 207 (2001). (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff (?). Cruz v. Dalisay, 152 SCRA 482 (1987).

3. Consequences and Types of Piercing Cases: (Umali v. CA, 189 SCRA 529 [1990]) (a) Application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance, or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001). (b) Classification of Piercing Cases: Rundown on Piercing Application: This Court pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). (i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity (iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justice or equity.
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The three cases may appear together in one application. See R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964). 4. Cases: Fraud

When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. a Francisco v. Mejia, 362 SCRA 738 (2001). In accordance with the foregoing rule, this Court has disregarded the separate

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Revised Bagtas Reviewer by Ve and Ocfe 2A 47 personality of the corporation were the corporate entity was used to escape liability to third parties. In this case, however, we do not find any fraud on the part of the Marinduque Mining and its transferees to warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable soidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. a Namarco v. Associated Finance Co., 19 SCRA 962 (1967). CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable for acts done in behalf of the principal. However, when a wrong done by a corporation is through a person in its behalf, piercing makes both of them liable. In fact, an agents who commits a crime or fraud can be held liable despite the agency relation. Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). (b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). (c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by incorporating properties or the business. a Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962). Q: Why should a case be classified as a fraud case, an alter ego case, etc.? A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the stockholders or corporate officers. Since, in fraud cases only one act of fraud is necessary to hold them liable whereas in an alter ego case, a series of transaction has to proven before they may be held liable. When used to avoid a contractual commitment against non-competition. a Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968). (e) Avoiding Restrictions: Legal

The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. First Philippine International Bank v. Court of Appeals, 252
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SCRA 259 (1996). (d) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]).

Q: Why is there an inordinate showing of the alter ego elements? A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be considered in order to distinguish between a case of fraud or alter ego. There may be an inordinate showing of alter ego elements but that does not necessarily make it an alter ego case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud cases, the alter ego concept pertains to employing the corporation even for a single transaction to do evil while in pure alter ego cases, the courts go into systematic findings of

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utter disregard and disrespect of the separate juridical personality of the corporation. (e) Guiding Principles in Fraud Cases: 4 Why is there inordinate showing of alter-ego elements? 3 There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders. 5. Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617 (2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996). (b) Using Corporation as Conduit or Alter Ego: Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. a Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923). When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991). Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Francisco v. Mejia, 362 SCRA 738 (2001). Use of nominees to man the corporation for the benefit controlling stockholder. Marvel Building v. David, 9 Phil. 376 (1951). (c) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter ego situation. a La Campana Coffee Factory v. Kaisahan ng Manggagawa , 93 Phil. 160 (1953); a Shoemart v. NLRC, 225 SCRA 311 (1993). Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
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of

the

Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse the legitimate issues (as in this case where the actions of management of the two corporations created confusion as to the proper employer of claimants), it would be discarded and the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). Mixing of personal accounts with corporate bank deposit accounts. Ramirez

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Telephone Corp. v. Bank of America, 29 SCRA 191 (1969). (d) Avoidance of taxes: a Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961). YUTIVO & SONS INC. v CTA Facts: Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on its sales to the public. Southern Motors was then organized to engage in the business of selling cars, trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equal proportion by the children of Yutivos incorporators. Under this set-up, Yutivo would purchase the cars and tucks from GM then sell the same to SM which in turn sold them to the general public. Then GM withdrew its operations from the Philippines. Yutivo took over the importation of trucks and cars. It likewise continued to have the previous arrangement of selling exclusively to SM which in turn paid no such sales tax on its sales to the general public. The CIR made an assessment upon Yutivo and demanded a sum representing deficiency sales tax plus surcharges claiming that the taxable sales were the retail sales should be between SM to the general public and not the sale at wholesale made by Yutivo to SM since the two were one and the same corporation, SM being a mere subsidiary of Yutivo. CTA affirmed such a ruling and further stated that there was no legitimate purpose in the organization of SM apparently organized to evade the payment of taxes and that it was owned and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego of Yutivo. Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues? Held: SM was not organized for the purpose of defrauding the government of lawful tax revenues because: (1) The intention to minimize taxes as in tax evasion when used in the context of fraud, must be proven to exist by clear and convincing evidence amounting to more than the mere preponderance of evidence. The evidence of the collector falls short of such standard. (2) SM was organized at a time when there was not yet tax to evade, when GM was still the importer and was the one paying the sales tax. (3) The transactions between Yutivo and SM were and have always been in the open, embodied in private and public documents, constantly subject to inspection by tax authorities. (4) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes altogether avoid them by means which the law permits. (5) However, SM was actually owned and controlled by Yutivo to make it a mere subsidiary or branch of the latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in control if the majority stock of SM. The principal officers of both corporations are identical. Thus, the business, financial and management policies of both corporations could be directed towards common ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal only of Yutivo, SMs resources being under Yutivos control. The accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as a branch of Yutivo.
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(6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded the technical defense of separate corporate entity in order to arrive at the true liability of Yutivo. Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter ego case? A: The Court had in this case ruled as to the legitimacy of a corporation to act as to seek means to decrease its tax liability. The difference between Yutivo and Tan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond the scope of his authority. In the former, evidence was seen to be insufficient as to establish a willful desire to evade taxes.

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(e) Thinly-capitalized corporations: a McConnel v. CA, 1 SCRA 722 (1961). The fact that a corporation has no adequate capital enough basis for piercing. Such pronouncement limits the advantage of creating a corporation. For example, in cases where leveraging is undertaken which is considered as a legitimate business practice. (f) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990). The person who invokes the doctrine must always be the injured party. Absence of proof that control over a corporation is being used by a mother company to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (g) Summary of Probative Factors: a Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004). CONCEPT BUILDERS Inc. v NLRC Facts: Concept Builders is engaged in the construction business. Private respondents are employed by the company as laborers, carpenters and riggers. In November of 1981, private respondents were served individual notices of termination by the company. It stated that their contract had already expired. The NLRC discovered that the project for which they were hired was not yet even finished. In addition to this, Concept had to hire subcontractors whose works are the same as private respondents. A writ of execution was issued which was partially satisfied through the garnishment of money from MWSS which is a debtor of Concept and the balance was to be collected from Concept directly. But the sheriff reported that when the writ was to be served the guard on duty refused it on the ground that Concept no longer owned the premises and was now occupied by Hydro Pipes, which had the same Board of Directors as Concept. Held : The veil may be pierced when it its just the alter ego of a person of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be laid down, but there are some probative factors of identity that will justify the application of the doctrine. Summary probative factors: (1) stock membership by one ore common ownership of both (2) identity of directors and officers (management) (3) manner of keeping corporate books and records (management) (4) methods of conducting business (management).
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While petitioners claimed that it ceased operations in 1986, it filed an Information Sheet with the SEC in 1987 stating that its office address is their old address. Both information sheets were filed by Virgilio Casino, the same corporate secretary. They had the same President, Board of Directors and substantially the same subscribers. (h) Guiding Principles in Alter-Ego Cases: Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected

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Revised Bagtas Reviewer by Ve and Ocfe 2A 51 to be bound by the separate juridical entity; Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (i) Distinction Between Fraud Piercing and Alter-ego Piercing: a Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003). 6. Equity Cases: (a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981). (b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965). 7. Due Process Clause (a) Need to bring a new case against the officer. a Padilla v. Court of Appeals, 370 SCRA 208 (2001); McConnel v. Court of Appeals, 1 SCRA 723 (1961). A suit against individual shareholders in a corporation is not a suit against the corporation. Failure to implead the corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of due process for it would in effect be disregarding their distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001). Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and the former is merely a conduit of the other the Supreme Court held void the application of a writ of execution on a judgment held only against PKA, since the RTC obtained no jurisdiction over the person of Phoenix Omega which was never summoned as formal party to the case. The general principle is that no person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by the judgment rendered by the court. Padilla v. Court of Appeals, 370 SCRA 208 (2001). (b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965). (c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. a Jacinto v. Court of Appeals , 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

V. xCLASSIFICATIONS OF CORPORATIONS 1. In Relation to the State: a) Public Corporation (Sec. 3, Act No. 1459). - one formed or organized for the government or a portion of the state - its purpose is for general good and welfare b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991); - marriage of both a public and a private corp. - it is granted the same powers as a private corp. but they have no incorporators, SHs or members
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example: A water district, although established as a corporation, it was established for the greater good and with no stockholders. They are also placed under the jurisdiction of the LWUA not the SEC

c) Private Corporation (Sec. 3, Act 1459). - one formed for some private purpose, benefit or end. Governments majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924). A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999) While public benefit and public welfare may be attributable to the operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it performs are basically proprietary in naturethe promotion of economic and social development of Central Luzon, particularly, and the countrys goal for enhancement. Therefore, the rule that prescription does not run against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it Revised Bagtas Reviewer by Ve and Ocfe 2A 53 also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991). But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952). Beyond cavil, a GOCC has a personality of its own, distinct and separate from
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that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001). The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC , 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991). Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of Corporation Code renders the provisions supplementarily applicable to all corporations, including those with special or individual charters, such as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with such charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992). Water districts can validly exists as corporate entities under PD 198, and provided they are government-owned or controlled, and their board of directors and other personnel are government employees subject to civil service laws and anti-graft laws. Feliciano v. Commission on Audit , 419 SCRA 363 (2004). 2. As to Place of Incorporation: (a) Domestic Corporation - incorporated in the Philippines (b) Foreign Corporation (Sec. 123) Sec. 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 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 authority. incorporated in another country and that country grants the same rights to Filipinos in terms of doing business there; 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 & a certificate of authority from the appropriate government agency ( SEC license after obtaining BOI certificate )

3. As to Purpose of Incorporation: (a) Municipal Corporation LGUs - can sue be sued without their consent ( as provided for by the LGC) - in certain instances considered as an adjunct to the national government but has been recognized to have a personality separate and distinct from the national government. (b) Religious Corporation (Secs. 109 and 116)
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Section 109. Classes of religious corporations . - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. 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 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) Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001). Revised Bagtas Reviewer by Ve and Ocfe 2A 55 (c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
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Section 106. Incorporation. - Educational corporations shall be governed special laws and by the general provisions of this Code. (n)

by

Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by- laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) (d) Charitable, Scientific or Vocational Corporations (e) Business Corporation 4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]). 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) 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
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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) 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,
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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) Revised Bagtas Reviewer by Ve and Ocfe 2A 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) 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 corporation; of the

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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. The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land and the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986).3
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5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (c) Corporation by Estoppel (Sec. 21) 3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).

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Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Q. Why is there piercing in a de facto corporation? A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the corporation. 6. As to Existence of Shares (Secs. 3 and 5): Sec. 3 Classes of Corporation 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. Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (a) Stock Corporatio n (b) Non-Stock Corporation

MY START 2 Kinds of quasi corporation: 1. Corporation by prescription One which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law is given the status of a corporation. (Roman Catholic Church)

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2. Corporation by estoppel One which is in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporation in relation to those who, by reason of their acts or admissions, are precluded from asserting that it is not a corporation. Sec. 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. Requisites of a stock corporation: 1. It has capital stock divided into shares 2. It is authorized to distribute to the holder of such shares dividends or allotments of the surpolus profits on the basis of the shares held. 3. It it established for profit

Sec. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. Note: The enactment of special law creating a private corporation is subject to the following constitutional limitation: 1. It must be owned or controlled by the government 2. It must be established for interest of the common good and subject to the test of economic viability Note: Violation of the above limitation will render the charter or the special law creating the private corporation void for violating article XII section 16 of the 1987 constitution Note: Corporations created by a special law are outside the jurisdiction of the SEC, however the latter may determine whether or not they are GOCC. Sec. 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
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Corporators in a stock corporation are called stockholders or shareholders. Corporators in a nonstock corporation are called members. Classes of person composing a corporation: 1. Corporators Those who compose the corporation, whether as SH or M. 2. Incorporators Those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorporation and acknowledge the same before a notary public 3. SH Shareholders are the owners of the SS in a stock corporation. 4. Members Members are corporators of corporations without capital stocks. 5. Promoters Promoters are person who bring about or cause to bring about the formation and organization of a corporation by bringing together the incorporator or the person interested in the enterprise, procuring subscriptions or capital for the corporation and setting in motion the machinery which leads to the incorporation of the corporation itself. The term refers to persons who undertake the formation of a corporation without eing incorporators. 6. Subscribers Persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. 7. Underwriter A person, usually an investment banker who: a. Has agreed alone or with others, to buy at stated terms an entire issue of securities or a substantial part thereof b. Has guaranteed the sale of an issue by agreement to buy from the issuing party any unsold portion at a stated price c. Has agreed to use his best efforts to market all or part of an issue d. Has offered for sale stock he has purchased from a controlling stock holder 8. Note: The articles of incorporations cannot be amended by deleting the name of any of the incorporators or substituting any person in his place. Note: Natural and juridical person can be SH however only natural persons can be incorporators Section 10 Sec. 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
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except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Note: In order to provide classification or series of shares it must be provided in the AI and not merely in the by-laws. Hence the BOD cannot classify or provide a classification of SS without express authority in the AI, and without amendment thereof, issue preferred shares with superior rights and privileges than other
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shares, subscription contracts covering such shares are void. Series of shares Refers to a subdivision of a class of shares Shares may differ according: 1. Voting rights 2. Dividend rights 3. In case of liquidation, rights to corporate assets. General limitations on classification of shares 1. A corporation must at least have one class of SS with complete voting rights 2. No share shall be deprived of voting rights except those classified as preferred or redeemable shares 3. Banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. 4. That preferred shares of stock may be issued only with a stated par value 5. All shares will have voting rights on the following corporate matters: a. Amendment of the articles of incorporation; b. Adoption and amendment of by-laws; c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; d. Incurring, creating or increasing bonded indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation of the corporation with another corporation or other corporations; g. Investment of corporate funds in another corporation or business in accordance with this Code; and h. Dissolution of the corporation. 6. Except as otherwise provided above, the vote necessary to approve a particular corporate act as provided in the Corp code shall be deemed to refer only to stocks with voting rights 7. Doctrine of equality of shares; 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. 8. No-par value shares shall be treated as capital and shall not be available for distribution as dividends. 9. 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 provided it be issued for a consideration of not less than P5.00 10. Only preferred shares or redeemable shares may be deprived of voting rights save that of the rights granted to founders shares for a limited period. When classification of shares may be made: 1. By the incorporators upon the incorporation of the corporation in its articles of incorporation (AI) 2. By the board of directors (BOD) and the SH after the corporation has come into existence by amending the AI pursuant to section 16 Doctrine of equality of shares Except as otherwise provided by the AI and stated in the certificate of stock, each share shall be in all respect equal to every other share. Absence of any provision in the AI and in the CS to the contrary, all stocks, regardless of their class nomenclature, enjoy the same rights and privileges and subject to the same liabilities.
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Capital Stock Is the amount fixed in the articles of incorporations, to be subscribed and paid in or agreed to be paid in by the SH of a corporation, in money, property, services, or other means at the organization of the corporation or afterwards and upon which it is to conduct its business, such contribution being made either directly through stock subscription or indirectly through the declaration of stock dividends. It thereby limits the maximum amount or number of each class of shares that may be issued by the corporation without formal amendment of the AI. Authorized capital Stock Refers to the amount of capital stock where the shares of the corporation have par value. Subscribed capital stock Is the amount of the capital stock subscribed, whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation and would therefore preclude, the acquisition of shares by reason of subsequent transfer from a SH or resale of treasury shares Outstanding Shares of Stock It is the portion of the stock which is issued and held by person other than the corporation itself. The Code defines the term as total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. Paid-up capital stock/ actual capital stock It is that portion of the subscribed or outstanding capital stock that is actually paid. Unissued capital stock Is that portion of the CS that is not issued or subscribed. Legal capital The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily by, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can be loosely termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the considerations therefor.13 (Emphasis supplied.) In case of no par value shares the entire consideration received forms part of the legal capital and shall not be available for distribution.

Illustration: The AI of corporation X provides that the ACS of said corporation is 1000 divided into 1000 shares with par value of 1P per share, only 250 SS was subscribed and only 25% has been paid
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ACS: 1000 SS OCS or SCS: 250 Paid-up CS: P62.5 Legal capital: 250 Capital Indicates the entire property or assets of the corporation. It includes the mounts invested by the SH plus the undistributed earning less losses and expenses. In a strict sense the term refers to that portion of the net assets paid by the SH as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporations. It is the same amount that can loosely be termed as the trust fund for the payment of debts of the corporation, to which the creditors may look for satisfaction Stock dividends: It is the amount that the Corporation transfers from its surplus profit account to its capital account Capital Stock vs capital 1. Capital is the actual corporate property. It is therefore a concrete thing. Capital stock is an amount. It is therefore something abstract 2. Capital fluctuates or varies from day to day according as there are profits or losses or appreciation or depreciations of corporate assets. Capital stock is an amount fixed in the articles of incorporations (where shares are with par value) and is unaffected by profits and losses. Thus capital may be greater or lesser than the amount of the capital stock. 3. It is capital belongs to the corporation which may be real or personal property. Whereas capital stock when issued belongs to the SH and is always personal property. Capital stock vs legal capital 1. Capital stock limits the maximum numner or amount of shares that may be issued without formal amendment of the AI. Whereas Legal capital sets the minimum amount of the corporate assets which for the protection of corporate creditors may not be lawfully distributed to the SH. SS Is one of the units into which the capital stock is divided. It represents the interest or right which the owner has: 1. In the management of the corporation in which he takes part through his vote, provided that it has voting rights 2. In a portion of the corporate earnings, if and when segregated in the form of dividends 3. Upon dissolution and winding up, in the property and assets of the corporation remaining after payment of corporate debts and liabilities to creditors Nature of SS 1. It confers no immediate legal right or title to any of the property of the corporation, each share merely represents a distinct undivided share or interest in the common property of the corporation 2. It constitutes a distinct personal property of the SH from the capital or tangible property of the corporation 3. They do not constitute an indebtedness of the corporation to the SH and are therefore, not credits as to make the SH a creditor of the corporation. Cert of stock It is a written acknowledgment by the Corporation of the interest, right and participation of a person in the management, profits and assets of a corporation. It is a formal evidence of the holders ownership of SS
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and is a convenient instrument of transfer of title Cert stock vs SS 1. SS is incorporeal or intangible property 2. SS represents the right or interest of a person in a corporation, while certificate of stock in the written evidence of that right or interest 3. SS may be issued even if the subscription is not fully paid, except in no par value SS. As a general rule a cert of stock may not be issued unless the subscription is fully paid 4. The situs of the SS is deemed to be the state where the corporation has its domicile which ordinarily the state under whose laws it was created. While a cert of stock may have a situs at the place where it is located or at the domicile of the owner, even though the corporation is domiciled elsewhere. Situs of SS 1. For purposes of execution, attachment and garnishment domicile or residence of the corporation, which is the place where the principal office of the corporation is located 2. Purpose of registration of chattel mortgage province or city in which the corporation has its principal place of business 3. For purposes of taxation, as a general rule, the domicile of the owner, except: a. By express provision of the law b. Under the NIRC for purposes of estate tax, if susceptible in the Philippines regardless of the location of the situs of the SS it is deemed included in the estate of the deaceased person. Classes of SS 1. Par value or no par value 2. Voting or non voting 3. Common or preferred a. Preferred as to assets in case of liquidation b. Preferred as to dividends: i. Cumulative or non-cumulative ii. Participating or non-participating 4. Promotion share 5. Share in escrow 6. Convertible share 7. Founder share 8. Redeemable share 9. Treasury share

Watered stock Shares issued with less than the par value. Note: No par value shares has no par value but it always has an issued value, consideration paid for its issuance Limitations of no par value shares: 1. 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 2. Preferred shares of stock can only be issued with stated par value 3. Shares issued without par value shall be deemed fully paid and non-assessable and the holder of
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4. 5. 6. 7. 8.

such shares shall not be liable to the corporation or to its creditors in respect thereto, meaning the SH is only liable for the issued price It must be issued for an amount not less than P5. Consideration given for its issuance shall be treated as capital and shall not be available for distribution as dividends It can only be issued if the corporation also issued par value shares It cannot provide rights similar to the rights granted by par value shares It does not purport to represent a stated proportionate interest in the capital stock measured by value, but only to an aliquot part of the whole number of shares of the issuing corporation

Note: Each common share must be equal in all respects to every other common share, corporations are hereby prohibited from issuing multiple voting and non voting common shares nor can they limit the maximum number of votes per SH irrespective of the number he holds since to allow the same violates the equality of common shares as provided for sec 6 (1) Note: A SS originally issued as a voting share, cannot be deprived of its voting rights without consent of the owner. Common share Is SS which entitles the holder thereof to pre rata division of the profits, if there are any, and in its assets upon dissolution, without preference or advantage in that respect over other SH or class of SH but equally with all other SH except preferred SH. Note: Again they cannot be deprived of voting rights except by provision of law. Preferred Shares Is one with a stated par value, which entitles the holder thereof to certain preferences over holders of common stock. Note: Preferred shares of stock, absent a contrary provision in the AI and stated in the AI., they are presumed to have all the rights granted to the other shares even with respect to the common shares, hence it there is no prohibition or withdrawal of voting rights, even if granted preference on some matter, they are considered as voting shares. It is sometimes called as guaranteed Stock. Requisites for the issuance of a preferred share: 1. It must be authorized by the AI 2. It must be issued with stated par value 3. It must set forth what preference it provides Promotion shares Are shares which are ussued to promoters or those in some way interested in the company, for incorporating the company. Or for services rendered in launching or promoting the welfare of the company Shares in escrow Are shares subject to an agreement by virtue of which the share is deposited by the grantor or his agent
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with a 3rd person to be kept by the depositary until performance of a certain condition. Note: 1. The escrow agreement thereby makes the depositary a trustee under an express trust 2. The legal title remains with the grantor, thereby subjecting the share to a suspensive condition 3. Pending the fulfillment of the condition, the beneficiary not being the owner thereof, is not entitled to the rights belonging to a regular SH Convertible Share Is a share which is convertible or changeable by the SH from one class to another at a certain price and within a certain period. As a general rule subject to the discretion of the holder, unless otherwise provided by the AI. Note: Conversion of no par value to par value may be allowed provided that it shall not affect the SHs percentage of interest in the total assets of the corporation. Par value: Is the value indicated in the certificate of stocl which represents the amount of money or property contributed by the SH to the capital stock of the corporation which may or may not be equal to the actual value of the share Book value Is the actual or true value which may be determined by dividing the total SH equity or the net value of the total corporate assets by the number of shares issued or outstanding. It is the difference between the assets and liabilities of a corporation divided into as many shares as was issued. Note: Issued unpaid subscriptions are included in the determination of the book value.

Market value: Is the price a willing seller would sell and a willing buyer would buy, which may be different from the par value and the book value of the SS. Premium When the value of the SS is worth more than the face value Advantages of par value: 1. Are easily sold as the public is more attracted to buy this kind of shares 2. There is greater protection to creditors 3. There is unlikelihood of sale of subsequently issue shares at a lower price 4. There is unlikelihood of the distribution of dividends that are only ostensible profits Disadvantage of par value: 1. The subscribers are liable to corporate creditors for their unpaid subscription 2. The stated face value of the share is not an accurate criterion of its true value Advantages of no par value: 1. NP value shares are issued as fully paid and non- assessable 2. Their price is flexible
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3. Low-priced stocks dividends are more easily issued, thereby simplifying the accounting procedure Disadvantages of no par value: 1. They legalize large issues of stock for property 2. They conceal the money or property represented by the shares 3. They promote issuance of watered stock 4. There is lesser protection to creditors Kinds of preferred shares: 1. Preferred share as to assets Gives the holder preference in the distribution of the assets of the corporation in case of liquidation 2. Preferred share as to dividends: Or share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock Note: A corporation when allowed by its AI may issue preference over preferred shares. Note: 1. Stockholders do not have a lien upon the property of the corporation nor make them creditors of the corporation 2. Stocks cannot be issued with a fixed interest otherwise such subscription are in reality a contract of loan 3. Stocks issued with dividends payable guaranteed, the fact that dividends are guarantees, does not make them creditors. They are only entitled to dividends only when there are profits out of which dividends may be declared. However guaranteed stocks may have the effect of making dividends cumulative, that is, making the profits of one year make up for the deficiencies of the preceding year or years. 4. Stocks as payment of debts to a corporate creditor, does not give him a better right over the other stockholders holding the same class of shares. 4 legal limitations on issuance of preferred shares: 1. Preferred shares deprived of voting rights in the AI shall still be entitled to vote on the matters enumerated in section 6 (6) of the corp code 2. The preference of the preferred shares must not be violative of the provisions of this code 3. Preferred shares must only be issued with par value 4. The BOD may fix the terms and conditions of preferred shares of stocks or any series thereof only when so authorized by the AI and such terms and conditions shall be effective upon filing a certificate thereof with the SEC Note: The BOD may prescribed the terms and conditions of the preferred shares without the need of the concurrence of 2/3 vote of the OCS save those instance where they will change the terms and conditions of already issued preferred shares which would need the concurrence of the SH affected Note: Blanket authority granted by the AI to the BOD to determine T&Cs are not contemplated, the grant must be subject to certain terms and conditions as the SEC may prescribe which must not violate the provisions of the corporation code.
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Cumulative Preferred share It is a share which entitles the holder thereof not only to the payment of current dividends but also to dividends in arrears. In other words, if the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the holder of said preferred share before any dividends may be paid to the holders of common stock Non-cumulative preferred share Is a share which entitles the holder thereof to the payment of current dividends only in preference to common SH. Participating preferred share Is the share which gives the holder thereof not only the right to receive the stipulated dividends at the preferred rate but also to participate with the holders of common shares in the remaining profits pro rata, or as may be stipulated in the AI, after the common shares have been paid the amount of the stipulated dividend at the same preferred rate. Non-participating preferred share Is a share which entitles the holder thereof to receive the stipulated preferred dividends and no more. The balance, if any is given entirely to the common stock. Comment: The preferred rate is the rate (I.E 10%) of the value of the share not the dividends. Hence if the dividend is P 5100 and there is 300 with par value of P100 preferred shares with a preferred rate of 10%, the dividends to be allocated to the preferred share is P3000 (P30,000.00 x 10%) divided the number of preferred shares (P3000/300 shares = P10) Note: In the absence of express or implied stipulation or provision in the AI, preferred shares are deemed as non-cumulative and non-participating. Sec. 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. Founders share Are shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property. Note: Only the right to vote and be voted for in the election of the BOD is subjected to the non-extendible 5 year limitation and subject to the approval of the SEC. Sec. 8. Redeemable shares Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the
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corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares.

Trust fund doctrine The capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditor of a corporation are preferred over the stockholders in the final distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. An examination of the various cases will show that the trust fund doctrine usually applies in four case: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors 2. Where it had released the subscribers to the capital stock from their subscriptions; 3. Where it has transferred the corporate property in fraud of its creditors 4. Where the corporation is insolvent Note: Under the trust fund doctrine, it is only the assets of the corporation, as represented by the subscribed or OCS, that constitutes a fund to which creditors have a right to look for the satisfaction of their claims and which the corporation is not allowed to impair or prejudice Effect of the trust fund doctrine: 1. It allows the creditors of insolvent corporations to maintain an action to demand payment of unpaid subscription of SH 2. It prohibits the impairment of the capital of the corporation by way of distributing dividends 3. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim 4. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as trust fund for the payment of corporate debts

Redemption It is the repurchase, the reacquisition of stock by a corporation which issued the stock in exchange for cash or property, whether or not the acquired stock is cancelled, retired, or held in the treasury. Note: 1. Redeemable shares may only be issued when expressly authorized in the AI 2. The period and the terms and conditions of redemption must be expressly specified in the AI and the certificate of stock 3. Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings. Comment: It is an exception to section 41 below
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4.

5.

6.

7.

8.

9.

Sec. 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: XXXXX Redemption may not be made where the corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature ( SEC opinion), such limitation is in accordance with the trust fund doctrine Redemption cannot be made outside of the period or in violation of the T&Cs provided in the AI. It must be complied with strictly unless the AI is amended accordingly subject to the consent of the affected owners Except as otherwise provided in the AI and the COS (certificate of stock), the redemption rest entirely with the corporation, and the SH is without right to either compel or refuse the redemption of his stock. Redeemable shares are optional, not obligatory type For the protection of the SH, all corporations which have issued redeemable shares with mandatory redemption features are required by the SEC to maintain a sinking fund where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption price of redeemable shares at specified dates in the future The effect and purpose of redemption: a. is the retirement and/or cancellation of the redeemed stock, no longer re-issuable unless otherwise provided in the AI (different from treasury shares) b. Upon redemption, redeemable shares lose their status as part of the OCS or unissued ACS. They are considered treasurer shares after redemption if by provision of the AI they can be re-issued. c. Where the re-issuance of the redeemed shares is expressly or impliedly (by silence) is prohibited, the number of the ACS must be decreased accordingly, the AI must be amended accordingly to reflect such reduction. Redeemable share may be deprived of voting rights in the AI.

Sec. 9. Treasury shares. Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. Sec. 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. (n) Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.

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XXXXXXXXXXXXXXXX Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Note: 1. Treasury shares do not revert to the unissued shares of the corporation but are considered as property acquired by the corporation which may be reissued or resold by the corporation at a price to be fixed by the BOD. 2. Treasury shares may be retired by reducing the capital stock for that purpose 3. Treasury shares do not have the status of outstanding shares, in the sense they do not constitute liability of the corporation 4. They do not result in the reduction of issued shares since there are still considered as property of the corporation. 5. Treasury shares being unrealized income, are not considered as part of earned or surplus profits, and, therefore, not distributable as dividends, either in stock or in cash. However if there are retained earning arising from the business of the corporation, treasury shares being property of the corporation, may properly be distributed as property dividend. 6. It does not have any voting rights until it has been reissued. A corporation cannot be a SH in itself. Nor shall it be entitled to dividends 7. It may be sold at any reasonable amount as may be determined by the BOD, since the corporation has received its full consideration upon initial issuance subject, otherwise a SH may rightfully complain if the price is lower than reasonable. 8. Once reissued it shall have all the rights it previously provided, voting rights and rights to dividend 9. The sale of treasury shares should be considered as a sale of ordinary corporate property. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Sec. 10. Number and qualifications of incorporators. Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Franchise Includes any special privilege or right affected with public interest, conferred by the state on corporations or persons and which does not belong to the citizens of the country, generally as a matter of common right 2 kinds of corporate franchise 1. Primary/general franchise Is the right or privilege granted to individuals by the state to be and act as a corporation after incorporation. This privilege enables the incorporators to act for certain designated purposes as a
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single individual and exempts them, unless otherwise especially provided, from individual liability for corporate debts 2. Secondary franchise Is the franchise to exercise rights, privileges and powers granted to such corporations for the business for which it was created, including those conferred for purposes of public benefits which are usually granted to public utilities. Distinction: 1. The former is granted upon individuals whereas the latter is granted upon the corporation after its corporation 2. The former is granted upon individuals to enable them to form corporations whereas the latter is a grant to the corporation of certain powers and privileges 3. The former is inalienable, whereas the latter may be conveyed provided there is express legislatie authority to do so. Steps in the creation of a corporations 1. Promotion 2. Incorporation 3. Formal organization and commencement of business operations Stages in promotion 1. Discovery 2. Investigation 3. Assembly Note: The corporation is as a general rule not liable for the fees of the promoters unless after its incorporation, it binds itself to pay for the fees without prejudice to the rights of subsequent SH. Neither it the corporation bound to the contracts entered into by the promoters before its incorporation since at the time the said contracts are executed, the corporation is legally non-existent hence it cannot be said that it was the principal of such promoter. The only instance where a corporation will be bound by the contracts entered into by the promoters is when after its incorporation it ratifies such acts or unilaterally binds itself to enter into the said contract. 4 kinds of underwriting agreements: 1. Firm commitment Members severally but not jointly agree to purchase the whole issue outright at a particular price for resale at a price differential to the public, or to dealers who sell at another differential to the public 2. All or nothing commitment Under which they agree to accept liability for the purchase of an issue at a given price only if the entire issue is not sold within a given period (usually 30 days) 3. Standby commitment Under which they will purchase and distribute at predetermined prices to the public any amount of the issue not taken by stockholders in exercising their preemptive rights 4. Best effort commitment The syndicate will use its best efforts to distribute the issue to the public. Under such
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commitment, the syndicate does not agree to purchase the issue at predetermined prices.

Underwriting Is defined under the investment houses law as the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. Steps in incorporation: 1. Drafting and execution of AI by the incorporators and other documents required for registration of the corporation. a. An affidavit certifying compliance with the subscription and paid-up requirements as to capital stocl 2. Filing with the SEC of the AI together with the following a. Treasurers affidavit showing that at least 25% of entire ACS has been subscribed and at least 25% of the subscription has been paid in cash and property. To the corporation. b. In case of corporation governed by special law, a favorable recommendation of the appropriate agency. That such articles of incorporation is in accordance with law 3. Payment of the filing and publication fees 4. The issuance by the SEC of the certificate of incorporation Qualifications of incorporators: 1. They must be natural person 2. They must be at least 5 but not more than 15 persons 3. All of them must be of legal age, and have the capacity to enter into a contract 4. Majority of the incorporators must be residents of the Philippines 5. They must own or be a subscriber to at least 1 SS Note: The persons who are more than the 15th person are still considered a SH but not an incorporator. Note: A corporation may be aSH but not a incorporator since a corporation may own a SS in a different corporation but it is not vested by law the capacity to create another private corporation which is exclusively vested in natural persons and the legislative body. Note: Save corporations which must be exclusively Filipino, may be entirely composed of incorporators who are aliens provided majority of them are residents of the Philippines. However citizens of a country which the Philippines is at war with cannot be incorporators since they cannot lawfully contract with citizens of the Philippines Note: The term residents was held to mean as domiciled residents Non-violation of the minimum number of incorporators: 1. Subsequent reduction of SH or M to less than 5 2. Beneficial ownership in one individual 3. Subsequent accumulation of shares in one individual Note: The above circumstance coupled with justifying circumstance may allow the piercing of corporate fiction
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especially when there corporate veil is being used as a shield to circumvent the law or to perpetuate fraud. Sec. 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission Limitations to the extension of term 1. It shall not exceed fifty years in any one instance 2. Amendment is effected before the expiration of the corporate term of existence, for after dissolution by expiration there is no more corporate life to extend. Hence extension cannot be done during the 3 year period of liquidation 3. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons therefore as may be determined by the SEC Note: Extension of the term means the extension of existence of the old subsisting corporation and not the creation of a new one. Note: The expiration of the corporate term ipso facto terminates the corporate personality of the corporation however the law grants it limited personality to: 1. Prosecute and defend suits by or against it 2. Enabling it to settle and close its affairs 3. Dispose of an convey its property and to distribute its assets but not for the purpose of continuing the business for which it was established. Note: The corporate term may be extended as many time as needed unless the law subsequently provides otherwise. Sec. 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Filipino percentage regarding corporate capital: Business Special consideration Percentage of OCS 100%

Corporations engaged in mass Participation in the governing body limited to media their proportionate share in the capital thereof. And all executive and managing officers of such corporation must be Filipino Citizens Corporations engaged in retail trade Rural banks Natural, corporations, associations or

100% 100%
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cooperatives qualified under Philippine laws to own or hold such capital stock Corporations engaged in the operation of private detective, watchman or security guard agencies Corporations engaged in Authorized and voting capital stock pawnshops business Corporations engaged in Authorized and voting capital stock recruitment and placement of workers locally or overseas Under the flag law In the purchase of articles for the Government, preference shall be given to material ans supplied produced, made and manufactured in the Philippines and to domestic entities. 100%

75% 75%

Corporations engaged advertising industry

in Participation in the governing body limited to their proportionate share in the capital thereof. And all executive and managing officers of such corporation must be Filipino Citizens

Domestic entitiesany citizen of the Philippines or any corporate body at least 75% of the capital of which is owned by citizens of the philippines 70%

Corporations for explorations, development and utilization of natural resources Public service corporations Participation in the governing body limited to their proportionate share in the capital thereof Educational corporations Other than those established by religious orders and mission boards. The administration of educational institution shall be vested in Filipino citizens Banking Corporation Corporations engaged in coastwise shipping Financing companies

60%

60% 60%

60% 60% 60%

Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Requisites of incorporation of capital stock 1. At least 25% of the ACS has been subscribed at the time of subscription 2. At least 25% of the subscribed capital stock must have been paid upon subscription 3. The paid up capital cannot be less than P5K.

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Note: Violation of the above requisites may render the erring officer criminally liable for section 144 of the corporation code. Penalty Fine 1k to 10 k and/or imprisonment for not less than 30 days but not more than 5 years. If the violation is committed by the corporation, the same, after notice and hearing may be dissolved in appropriate proceedings before the SEC Note: The requisites is also required in case of increase of authorized capital stock. Note: What the law requires is that at least 25% of the subscribed capital stock is paid regardless even if some subscribers paid less than his 25%. Further the requirement is applicable only to par value SS since no par value SS shall be deemed fully paid. Hence if the initial series of stocks is composed of par and no par value, both must comply with the 25% requirement. Hence 25% of the aggregate value of all the SS with par value and 25% of all non-par value shares. Note: Both foreign and domestic corporations, if allowed by their charter may subscribe to shares of a corporation to be incorporated however such value shall not be included in the determination of the minimum paid up capital, nor will they be considered as incorporators of the corporation.

Sec. 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and
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10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Articles of incorporation Is the document that describes the charter of the corporation and the contractual relationships between the state and the corporation, the stockholders and the state and between the corporation and the stockholders. Note: It is a ministerial duty of the SEC to register a corporation which duly complies with the requirements of the law, hence it is susceptible to mandamus. However it is granted limitied judicial power to determine whether the purpose of the corporation is a lawful purpose or not, such determination is subject to the review of the courts.

Grounds to reject the AI bye the SEC: 1. Invalid purpose: a. Unlawful primary purpose b. The primary purpose was described indefinitely c. The purposes of the corporation are not capable of being combined (banking and insurance d. If the primary purpose is invalid, the AI will be rejected and the corporation will have no legal existence. But if there is a valid primary purpose but the AI assumes powers which are not authorized by law, the same shall be considered as surplusage 2. No corporate name 3. It lacks one of the mandatory provisions require by section 14 Place of principal office Refers to the place where the corporate books and records are ordinarily kept and its officers usually meet for the purpose of managing the affairs and transacting the business of the corporation. Note: A change of address in the same city or municipality a mere notice to the SEC will be sufficient. But if the change of address involves a change or transfer to another city or municipality, the change must be reflected in the AI by amendment Note: The AI must be notarized Sec. 16. Amendment of Articles of Incorporation Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of
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the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Requisites of an amendment: 1. It must be approved by the majority of the BOD or BOT 2. It must be with the written assent of at least 2/3rds of the OCS 3. The original and the amendment must contain all the provisions required by law underscoring the change/s made 4. It must be certified under oath by the corporate secretary and majority of the BOD/BOT stating that it was approved by the required vote of the SH/M Note: The amendment shall take effect on either, which ever is earlier: 1. Approval by the SEC 2. From the date of filing with the SEC if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation Components of a corporate charter: 1. AI 2. By laws 3. Corporation code 4. Relevant provisions of the constitution Components of charter of corporations created by special law 1. Creating law 2. Executive orders of the President 3. Rules and regulations applicable to such corporation 4. All law applicable thereto. 3 fold nature of a corporate charet 1. Contract between the state and the corporation 2. Contract between the SH and the corporation 3. Contract between the SH inter se. Note: A legislative act ordering a group of individuals to create a corporation or granting them a frnachise must be accepted, impliedly or expressly otherwise no corporation is created.

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Note: Matters which are deemed as accomplished facts can no longer be amended, such as: 1. The incorporators 2. Initial subscription and the corresponding paid up capital stock 3. Place of execution of the AI 4. The original corporate officers 5. Witnesses Note: As a general rule, unless required by law, amendments need only to be approved by the 2/3 members of the OCS in or without a meeting called for that purpose. Sample of required votes in a meeting called for that purpose: 1. Amendment to increase or decrease the capital stock 2. Extending or shortening the corporate term 3. Matters covered by section 103 for closed corporations: a. Those which seeks to delete or remove any provision required by this Title (closed corporation) to be contained in the articles of incorporation b. Reduce a quorum or voting requirement stated in said articles of incorporation Limitations on the power to amend: 1. When the amendment will be contrary to the law or that which would change an accomplished fact 2. It must be for a legitimate purpose and exercised in such a manner as to cause injustice 3. It must be approved by the required vote of the BOD/T and the SH/M 4. The original AI and the amended AI must underscore the changes to be made 5. It must be certified under oath by the corporate secretary and majority of the BOD/BOT stating that it was approved by the required vote of the SH/M 6. If the corporation is governed by a special law, the amendments must be accompanied by a Favorable recommendations of the appropriate government agency to the effect that such amendments are in accordance with law Note: In cases of foreign corporations authorized to do business here in the Philippines, the effectivity of the amendment is not dependent upon the registration and approval by the SEC, they are merely required to file a duly authenticated copy of the amended AI for records purposes. However, the filing thereof shall not enlarge or alter the purpose/s for which such corporation is authorized under its license to transact business in the Philippines. Sec. 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
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paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.

Note: The grounds enumerated are not exclusive. The rejection of the SEC of the registration is questionable by petition for review. Grounds for suspension and revocation for certificate of registration by the SEC ( PD 902-A): 1. Fraud in procuring its certificate of incorporation 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 with or defiance of a lawful order of the SEC restraining the commission of acts which would amount to grave violation of its franchise 4. Continuous inoperation for a period of at least 5 years 5. Failure to file by-laws within the required period. 6. failure to file require reports in appropriate forms as determined by the SEC iwhtin the prescribed period. Sec. 18. Corporate name. No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. Grounds for rejection of a corporate name: 1. Identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law 2. Patently deceptive, confusing 3. Contrary to existing laws. Note: The right to the exclusive use of a corporate name with freedom from infringement is determined by priority of adoption Test of infringement: Whether the similarity is such as to mislead a person using ordinary care and discrimination and the court must look to the record as well as the names themselves. It is settled however, that proof of actual confusion need not be shown, it suffices that confusion is probably or likely to occur. Note: A corporation must end its name by using incorporated, inc. corporation while a partnership must
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contain the word company. Prohibited words to be included in a corporate name: 1. It shall be unlawful for any person, association or corporation to use directly or indirectly, the emblem, official seal, and name of the UN, both in its full or abbreviated form, for commercial or business purpose 2. It shall be unlawful to use the word bonded, in p art or in whole, as a trade name or business name of those operating or maintaining any warehouse not licensed under the general bonded warehouse act. 3. No person, association or corporation unless duly authorized to engaged in the business of a bank, quasi-bank, trust entity, or saving or loan association, shall advertise or hold itself out as being engaged in the business of such bank, etc., or use in connection with its business titles the word or words, bank, banking, banker, quasi bank, quasi-banker, savings and loan association, trust corporation, trust company, or word of similar import or transact in any manner the business of any such bank, corporation or association. 4. No bank, person, association, or corporation doing the business of banking but not authorized under the rural banks act shall use the words rural bank as part of its name or title 5. It shall be unlawful for any person, association, partnership, or corporation to use the term savings and loan association, unless it is organized under the savings and loan association act, or the term development bank unless it is organized under the private development bank act. 6. All banks other than the PNB and such other banks now licensed to do business in the Philppines whose name already includes national are prohibited from using the word National as a portion of the name or title. 7. The use of UN, Olympic and bureau in full or abbreviated form for commercial or business purposes is prohibited 8. Financing company or finace company or finance and investment company unless organized as a financing company 9. The use of the word engineer or architect is prohibited unless used by persons properly registered an licensed as civil engineers 10. The use of the words geodetic engineer. Is prohibited except when majority of the members of the partnership or corporation are properly registered and licensed as geodetic engineers 11. The corporation which is a subsidiary of a foreign firm may carry the name of the principal company with the word phil. or (Philippines) affixed to the firm name. the written consent of the mother company as regards the use of the firm name must be submitted 12. The name of an internationally known foreign corporation or one similar to it may not be used by a domestic corporation without the proper consent of the former. 13. If the full name of a person forms part of the corporate name, the consent of such person or his heirs must be obtained 14. The word state, national maharlika and barangay cannot be used as part of the corporate name since this words are reserved for the exclusive use of the government. Note: As a general rule generic, geographical and descriptive terms and names are incapable of exclusive appropriation except where such words have acquired a secondary meaning or have become distinctive so as to distinguish not only the product of a particular service and its quality but also the name of the producer of the service Doctrine of secondary meaning A word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the
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purchasing public, the word or phrase has come to mean that the article was his product. Note: Modern law recognizes that the protection to which the owner of a trademark mark is entitled is not limited to guarding his goods or business from actual market competition with identical or similar products of the parties, but extends to all cases in which the use by a junior appropriator of a trademark or tradename is likely to lead to a confusion of source, as where prospective purchasers would be misled into thinking that the complaining party has extended his business into the field (see 148 ALR 56 et seq; 52 Am. Jur. 576) or is in any way connected with the activities of the infringer; or when it forestalls the normal potential expansion of his business Remedies: 1. Injunction 2. De-registration Note: The corporate name may be change by an amendment duly registered and approved by the SEC. note the amendment of the corporate name in the AI impliedly amends the corporate name in the by-laws, hence, the corporation need not amend its by-laws. Note: The change of name shall not affect the rights and obligations already existing in the said corporation, it is not a new corporation but the same corporation just operating under a new name. Effect of change of name: 1. Former name of same corporation The change of name or the abandonment of an old name will proscribe anyone from using the said name for a period of 5 years to avoid confusion, not to mention infringement of goodwill where said name has continued to be associated with the corporation. 2. Names of merged or consolidated corporation The corporate names of the merged or consolidated corporations may not be used by another corporation, without the consent of the surviving corporation although there is a dissolution of the absorbed corporation 3. Name of dissolved corporation acquired by a new corporation A new corporation which has acquired the property and name of the dissolved corporation is in the same position as the original corporation would have been had it continued to exist and may therefor, in a proper case, enjoin the use of such name by another 4. Name of corporation dissolved through expiration of term The corporate name of the dissolved corporation due to expiration of the term may be used by another corporation. Effect of misnomer: 1. The correct name may be proved by parole evidence 2. Contracts entered into remain valid if it can be proved that the corporation sought to be bound is the corporation who actually entered into the agreement 3. A corporation if sued by the wrong name is bound if duly served. Sec. 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
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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. Note: The corporation nmust formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation or, otherwise, its corporate powers shall cease and it shall be deemed dissolved. Note: Registration of a cooperative acquires juridical personality upon registration with the cooperatives development authority Sec. 20. De facto corporations. The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. De jure corporation Is one created in strict or substantial conformity with the mandatory statutory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questions by any party even in a direct proceeding for that purpose by the state De Facto Corporation Is one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the state. It is one which has not complied with all the requirement s necessary to be a de jure corporation but has complied sufficiently to be accorded corporate status as against 3rd parties although not against the state. Requisites of a defacto corporation 1. A valid law under which a corporation with powers assumed be incorporated 2. Attempt in good faith to incorporate 3. Assumption or actual exercise of corporate powers. Note: SH of de facto corporations enjoy exemption from personal liability for corporate obligations as do SH of de jure corporation. Note: The intent to incorporate must be accompanied by a bona fide attempt to incorporate to create a de facto corporation Defects which would preclude creation of a de facto corporation: 1. Absence of AI 2. Failure to file AI with the SEC 3. Lac of certificate of incorporation from the SEC. Hence any of the defects mention above, even if there is good faith with respect to the SH, would render them personally liable for obligations contracted by the defective corporation.

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Defects which would create a de facto corporation: 1. The AI fails to state all the matters required by the code to be stated, or some of them incorrectly 2. The name of the corporation closely resembles that of a pre-existing corporation that will tend to deceive the public 3. Where the required residency requirement of incorporators are not complied with 4. Acknowledgment of the AI or certificate of incorporation is insufficient or defective in form, ot it was acknowledge before the wrong officer 5. The percentage of Filipino ownership of the capital stock required for the business is less than that prescribed by law 6. The minimum paid-up capital stock has not been paid to and received by the corporate treasurer contrary to the affidavit 7. The failure to submit its by-laws on time. Note: Once the element of good faith is subsisting, meaning once the incorporators are aware of the defect of their title they must correct the defect. Failure to correct the defect or their failure to do anything would remove the privilege of de facto existence hence rendering the SH personally liable. Note: The primary distinction of the effect of a de jure and de facto corporation is that with respect to the state the ability to resist a direct attack of the state in a quo warranto proceeding is precisely the difference. With respect to individuals dealing with the corporation, there is no essential distinction. The SH/M of both are protected from individual liability for debts except to the extent provided by the charter or act of incorporation. Direct Attack Is one whereby the state, in a proceeding brought for that purpose, attacks the existence of an association claiming to be a corporation and can only be instituted by through the solicitor general. Collateral attack Is one whereby corporate existence is questioned in some incidental proceedings not provided by law for the express purpose of attacking the corporate existence. Note: Exception to the prohibition on collateral attack is when the attack is based on the lack of right or the wrong doing of the corporation is in issue because of violation of public policy or of express or implied statutory requirement, such as denial of its right to enforce contracts entered into without compliance with prohibitions of express or implied statutory policy. Sample: Where the suing foreign corporation lacks the license to transact business in the Philippines, the defendant in such a case can question the personality of the corporation to maintain a suit on the ground that it is not duly licensed to do business in our country. Note: If there is no de jure or de facto corporation its corporate existence may be challenge directly or indirectly provided that the person raising the challenge or objection is not barred by estoppel. Note: A corporation by estoppel shall not exempt its SH from personal liability Note:
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A de jure and de facto corporations are possesses the same rights and responsibilities save that: 1. A de facto corporation is subject to a direct attack by a quo warranto proceedings initiatied by the SOL GEN 2. It is under obligation to cure the defect of its title once it is aware of it 3. The obligations of SH or members are governed by their agreement. Hence a de facto corporation cannot hold its members liable as partners to third persons. Sec. 21. Corporation by estoppel. All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Note: An unincorporated association which represented itself to be a corporation, will be stooped from denying its corporate capacity in a suit against it by a third person who relied in food faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into by virtue of which it received advantages and benefits. Note: A corporation by estoppel is otherwise known as a ostensible corporation. It is founded on principles of equity and is designed to prevent injustice and unfairness. It exist only between the persons who misrepresented their status and the parties who relied on the misrepresentation. Note: A corporation whose corporate term has expired, but continues its business is a corporation by estoppel for purposes of being sued on contracts entered into by it after its term has expired. Persons estopped from deny the corporate existence: 1. The SH/M who knowingly participated in holding themselves out as a corporation. 2. Third persons who deal with such a corporation recognizing it as such and the pretended corporation itself, unless the third person was induced to deal with an apparent corporation by fraud, he will not be stooped from denying its corporate existence. 3. All persons not SH or members who assume to act as a corporation knowing it to be without authority shall be liable as general partners for all debts, liabilities and damages incurred or arising as result thereof. Note: In order for a person to be held liable as a general partner in an ostensible corporation it is required that the party sought to be held liable has knowledge of the defect of the corporation and benefited from it as well as those who actively participated in the misrepresentation cannot deny its corporate existence. Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has
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commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. Conditions precedent: 1. Filing of AI with the SEC 2. The issuance of COI by the SEC 3. The minimum number of 5 incorporators required 4. The legal requirement that 25% of the ACS must be subscribed and 25% thereof paid Conditions subsequent 1. The two required acts of organization and commencement of its business operations are conditions subsequent, failure to comply with which, it has been held, will result in the automatic cessation of corporate powers and the dissolution of the corporation. Any attempt to organize or commence operations after the prescribed period will not give it de facto existence and at best may be considered as a corporation by estoppel, for the protection of those with whom it contracted with. Note however that per the SEC opinion that the failure to organize and commence operation does not ipso facto result to the dissolution of the corporation. The charter of the corporation shall only be revoked upon order of the SEC after due notice and hearing in accordance with the last sentence. Acts constituting formal organization It is the process of structuring the corporation so that it can carry out the purposes for which it was incorporated. It would include the execution of its by-laws, establishment of the principal office, the election of the BOD and its officers, providing for the subscription and payment of the capital stock, and the taking of such other steps as are necessary to enable the corporation to transact legitimate business or accomplish the purpose for which it was created. Acts constituting commencement of business Is the performance of preparatory acts geared towards the fulfillment of the purposes for which it was established such as but not limited to the following: 1. Entering into contracts or negotiations for lease or sale of properties to be used as business or factory site 2. Making plans for the construction of the factory BOARD OF DIRECTORS/TRUSTEES/OFFICERS Sec. 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. 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
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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. Note: 1. Since all corporate powers are vested in the BOD/T: a. It is settled that contracts between the corporation and 3rd persons must be made by or under the authority of the BOD and not by its SH. Hence the actions of the SH are at best merely advisory and not in any wise binding on the corporation b. The acts of the BOD/T cannot be rescinded or any act refusing to acknowledge the validity of the corporate act approved by the BOD by the SHs shall be without any legal effect. 2. Business Judgment rule a. Questions of policy or of management are left solely to the honest decision of the BOD as the business manager of the corporation and the court is without authority to substitute its judgment for that of the BOD, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts b. Courts cannot undertake to control the discretion of the BOD about administrative matters as to which they have the legitimate power of action, and contracts intra vires entered into by the BOD are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of minority. 3. Any corporate act which does not require SH approval may be carried out by a mere board resolution. Note: The powers of the BOD are directly conferred by a statute and usually refer to the ordinary business transactions of the corporation and does not extend beyond the management of ordinary corporate affairs nor beyond the limits of its authority. Limitations of the powers of the BOD or BOT: 1. Limitations imposed by the constute, law, AI and its by-laws 2. It cannot perform constituent acts, acts involving fundamental changed in the corporation without the approval or ratification of the SH or members 3. It cannot exercise powers not possessed by the corporation 4. Powers which are reserved to the SH/M therefore cannot be exercised solely by the directors/trustees until ratified or approved by the SH/members. Note: In order for an act of the BOD/BOT to be valid they must meet as directors at a meeting where there is quorum hence if they act or give their consent separately, even if all may consent, the same is not a valid act of the board. Exceptions to the rules that D/T must act as a body: 1. When the directors happen to be the sole SHs 2. The execution of a contract by a corporate officer under the express or implied authority of the BOD 3. Where similar acts have been approved by the BOD/BOT as a matter of general practice, custom, and policy, the GM may bind the corporation without the previous formal authorization of the BOD/ BOT
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4. Where the transaction entered into was ratified in a subsequent board meeting. 5. The corporation is likewise bound by the acts of one of its directors or agents held out by the corporation to the public as possessing power to do those acts. 6. Where the corporate powers are vested in the corporate officers while the board is inactive and such acts are duly ratified expressly or impliedly by the SHs 7. Stockholders actions, where the board is inactive, and no creditors, minority stock holders or other person of the public are affected. 8. When the by-laws of a corporation may create an executive committee with authority to act on such specific matters within the competence of the board, as may be delegated to it in the by-laws of the corporation. Sec. 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.

9. Corporations which has validly entered into management contracts in accordance with section 44 10. In a close corporation, any action by the directors without a meeting or at a meeting improperly held, shall, unless the by-laws otherwise provide, be deemed valid or ratified in cases mentioned in article 101. Sec. 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. Rules as to the powers of the BOD to delegate its powers: 1. It may delegate the power to perform ministerial or discretionary acts 2. Corporate powers may be delegated to an individual, executive body or governing body for specific purposes 3. Limitations:
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a.

Discretionary powers which, by provision of law, by-laws or by the vote of the SH, are vested exclusively in the BOD or are especially delegated to them, cannot be delegated to subordinate officers and agents b. They cannot delegate the entire supervision and control of the corporation to others for this is not only unnecessary and contrary to usage but it is inconsistent with the law (section 23) c. The BOD cannot delegate special powers especially conferred upon it by resolution of the SH/M. Note: Delay to elect the successor will technically result to a hold over, however it shall not result to the extension of the term of the predecessor but the shortening of the term of the successor. Note: The term of office is not subject to change even by amendment of the AI or the by-laws since the term is provided by law. Number of D/T 1. Stock corporations: not less than 5 nor more than 15 2. Non-stock corporation: not less than five but may be more than 15 with the term of office of 1/3 of their number expiring every year 3. In a closed corporation, it may be provided in the AI that the corporation shall be managed by its SH rather than by a BOD. 4. T of non-stock education corporation: not less than 5 nor more than 15, provided that the number shall be multiples of five. With the term of office of 1/5 of their number expiring every year 5. BOD of religious societies, shall not be less than 5 nor more than 15. Note: The failure to elect all the Directors required shall not invalidate the titles of the elected provided that the required minimum number of D to constitute quorum is met. Since the vacancy may be filled in in a subsequent special SH meeting duly called for that purpose Qualifications of D 1. Every D must own at least one share of the capital stock 2. The SS held by the director must be registered in his name on the books of the corporation 3. Every D must continuously own at least a share of stock during his term, otherwise he shall automatically cease to be a director 4. Majority of the directors must be residents of the PH. Qualification of a T 1. Must be a member of the corporation is good standing 2. Majority of the Ts must be residents of the PH Note: The residency requirement refers to domicile in civil law. Note: A corporation who is an SH or M may by virtue of a board resolution designate its officer or representative to sit in the BOD or BOT of a corporation where it is a SH/M Note
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The registration of a SS in the name of the D simply means he must have legal title over the SH even if the beneficial title belongs to another, hence a voting trustee is qualified to be elected a D of the BOD. On the other hand a pledgee or beneficiary of a share held in escrow is not qualified to be elected as such. Note: The D must have legal title over the share before he enters the duties of his office. Note: A co-owner of a share of stock may be voted for as a D provided only one of the COr is voted and elected under such co-owned share. Note: Additional qualifications (at least 10 or more shares) may be required by the by-laws provided they do not contravene the provisions of the law. Note: The ineligibility of the D shall not ipso facto invalidate the acts of the board specially where third parties are concerned, since the latter are not required by law to verify the qualifications of the D of the corporation they are transacting with, provided that the said D, has been elected or appointed and allowed to act as such, the erring corporation is estopped from denying the authority of the ineligible D.

Sec. 24. Election of directors or trustees. At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. Rules in election of D: 1. Notice must be given to all SH of the election of Ds 2. The owners of the majority of the capital stock (including those owners of shares not entitled to vote) must be present, either in person or by representative authorized to act by written proxy.
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3. The election may be by ballot if requested by any voting SH entitled to vote. 4. Every voting share will be entitled to one vote 5. Where the by-laws are silent, at the time of election a SH may accumulate all his votes multiplied to the number of D to be elected and vote it in favor of a single person or in so many ways he may deem appropriate 6. No delinquent stock may be voted or be represented for any corporate purpose 7. The meeting of the SH may adjourn from time to time but not sine die or indefinitely until they have voted for the minimum number of directors required to constitute a quorum 8. Candidates receiving the highest number of votes shall be declared elected; plurality Rules in election of T: 1. Notice must be given to all SH of the election of Ts 2. The majority of the members must be present in the election 3. The election may be by ballot if requested by a member 4. A member may cast as many votes as there are T to be elected 5. Unless the contrary is provided in the AI or by laws, a member may not cast more than one vote per candidate. 6. The meeting of the M may adjourn from time to time but not sine die or indefinitely until they have voted for the minimum number of directors required to constitute a quorum 7. Candidates receiving the highest number of votes shall be declared elected; plurality Note: Election is required to create a valid BOT/BOT. The election of the BOT or BOD cannot be subject of an agreement of the SH, actual elections must be conducted under the reasoning that the law sets forth specifically the process to be followed. Note: The BOD/BOT cannot postpose the meeting for the election to lengthen their term except for justifiable cause with notice to the SHs or Ms Note: Every SH entitled to vote shall have the right to vote in person or by proxy the numbers of shares of stock standing at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election. Straight voting By this voting method the SH may vote such number of shares for as many persons as there are directors to be elected. Under this method the number of shares entitled to vote is multiplied to the number of directors to be elected which in turn is divided to the candidates he wishes to elect equally. Cumulative voting By this method a SH is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares entitled to vote shall equal. Note: A D who has been elected by vote of the minority by cumulative voting cannot be removed without cause (section 28 last sentence) Note: Where a corporation is a stock holder in another corporation, the minority SH of the former cannot demand proportional representation in the latter since it is within the exclusive discretion of the BOD of
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the former to nominate in the BOD of the latter. However the acts of the BOD of the latter shall be subjected to vigorous scrutiny where the interest of the latter is adverse to that of the former. The burden of proof of good faith and fairness is on the BOD. Note: Per the SEC opinion cumulative voting is a statutory right, hence a corporation is without power to deprive the SH of its use or even restrict the right to vote to only one way or method. Note: Section 24 is clear that at least majority of the OCS is present during the meeting held for the purpose of electing the BOD/BOT hence separate voting by zones or regions is not allowed. Sec. 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Requisites of a valid corporate act by the BOD/T: 1. Meeting of the directors duly assembled as a board 2. Meeting at the place, time and manner provided in the by-laws 3. The majority of the number of Ds or Ts fixed in the AI shall constitute a quorum, unless the AI provides for a greater number of majority 4. Corporate acts are valid provided that they are voted for by the majority of the D/T who are present in the meeting where there is a quorum. 5. D/Ts cannot attend or vote by proxy in board meetings Note: Election of corporate officers requires the majority vote of all the members of the BOD/BOT Corporate officers Are the officers who are given that character by law (pres, secretary, treasurer) or by the by-laws of the corporation or as may be created by the BOD if empowered by the by-laws to that effect. Note the determining factors are: 1. Whether the position was given the character of a corporate officer by: a. Law b. By-laws c. By the BOD/BOT, provided that the BOD/T is given such authority to create corporate officers by the provisions of the by-laws
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2. A corporate officer is elected by the BOD/T and not merely appointed Note: A corporate officer need not be a SH/M unless required by the by-laws: Minimum requisites of the corporate officers: 1. President: director 2. Treasurer: resident of the Philippines 3. Secretary, may or may not be a director incompatible combinations of corporate offices: 1. President and secretary 2. President and treasurer

Note: A provision in the by-laws which removes or limits the power of the incumbent or any BOD to elect its corporate officers is void for violating the prerogative of the BOD to elect its own set of corporate officers in accordance with section 25 General rule: The BOD is empowered to elect its own corporate officer, and is therefore necessarily empowered to remove any officer from office with or without cause provided it is not done in bad faith or in such a manner as to work injustice. Note: The election of a corporate officer requires the consent or acceptance of the person so elected, which may be given expressly or impliedly. Subject to the rules on estoppel r the subsequent ratification of the BOD, the acts a corporate officer, outside the ordinary course of business of the corporation and within the scope of corporate powers, shall not bind the corporation unless any of the following are present: 1. Express or implied authority of the BOD 2. Express or implied authority granted by the by-laws 3. It was done in accordance with corporate practice or custom Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. Sec. 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. 2 grounds for DQ of D/T 1. Conviction by final judgment of an offense punishable with imprisonment for a period exceeding 6 years
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2. Commission of a violation of the corporation code, committed within 5 years prior to the date of his election or appointment De facto D/T Is a D or T who under color of title is performing the functions of his office but has defective title by reason of: 1. Irregularity of election 2. Ineligibility 3. Disqualification Effect of de facto officers or board: 1. They may perform all acts which a de jure officer/board may perform 2. Acts committed within the scope of their authority will bind the corporation against 3rd persons who in good faith relied upon them 3. They may be ousted from office on the appropriate grounds with no rights to salaries not yet received unless they have acted in good faith Sec. 28. Removal of directors or trustees. Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. General rule: D or T may be removed with or without cause. Exception: Minority SH may not be deprived of their representation by removal of the D elected by cumulative voting as prescribed in section 24. The exception is not applicable when the it is the minority stockholder who initiated the removal. Note: D or T cannot be removed by just electing a new set of officers, otherwise it would amount to violation of section 28 of the code Note: If the reason for the removal is due to a DQ, there is no need to follow the procedure set forth a mere
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declaration to that effect is sufficient since the D or T is removed by operation of law. Note: The BOD cannot remove a D since the power is vested with the SHs Requisites of a valid removal of T or D 1. The removal must take place either at a regular meeting of the corporation or at a special meeting called for the purpose 2. There must be previous notice to the stockholders or members of the corporation of the intention to propose such removal at the special meeting 3. The removal must be by a vote of the SH representing 2/3 of the OCS, or if NS corporation by a vote of 2/4 of its members entitled to vote. Note: The election of a new BOD at the designated date is not removal contemplated by law it is the filling of vacancy in the BOD by reason of the expiration of the term of the old BOD Requisites of valid notice: 1. It must expressly state the intention to propose such removal. Requisites if the removal is conducted in a special meeting: 1. There must be a written demand of the SH epresenting majority of the OCS or, if NS corporation by written demand by the majority members entitled to vote 2. The meeting is called by the secretary on order of the president. 3. If there is no secretary, or he refuses to call the meeting, any signatory of the written demand may send the notice directly to the SH or members providing for the place and time of the meeting and the intention to propose such removal. Note: A D or T has a right to resign however he may be held liable for damages if he does the same in bad faith, under fraudulent scheme or in such a manner that it would amount to an abuse of right. Note: Resignation shall take effect upon the date provided by the resignee, nor does it require acceptance by the board. Note that the law does not require a form by which to resign hence so long as the intent to resign is certain and clear it will be an effective resignation Other grounds for removal: 1. Abandonment 2. Acceptance of an incompatible office 3. Commission of acts which under the by-laws would constitute automatic removal. Sec. 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. A directorship or trusteeship to be filled by reason of an increase in the number of directors or
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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. Instances where the vacancy of a T or D must be filled in by the SH/M by election: 1. If the vacancy is caused by the removal of a D/T 2. If the vacancy is caused by the expiration of the term of the D/T 3. If the vacancy is caused by the increase in the number of directors or trustees 4. Where the remaining D/T no longer constitute a quorum 5. If the BOD/T refers the filling up to the SH Note: Vacancy by removal and increase in number of seats may be filled in in the same meeting causing the vacancy. However with respect to the latter, the same must be included in the notice previously sent. Note: The tenure of the successor is only for the unexpired portion of the term of his predecessor Note: It is not allowed to elect an alternate or substitute D in the event that there will be a vacancy since there is no law authorizing the same.

Note: The power to fill in the vacancy on the part of the BOD is merely permissive, hence if the by-laws provide for a procedure, that must be followed. Sec. 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 pre 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. Requisites of compensation of D by resolution of the SH 1. It must be granted by the SH in a regular or special meeting 2. It must be by a vote of SH representing majority of the OCS 3. The total yearly compensation must not exceed 10% of the net income before income tax of the corporation during the preceding year. Note: The compensation to be granted to the Ds may be provided in the by-laws, and if so provided would not need any resolution by the SH but the limitation as to the amount is still applicable. Note: The limitation imposed on the additional compensation includes additional compensation regardless of form except that of those received by them in another personality (dividends-SH; compensation as corporate officers) and per diem.

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Note: Unreasonable or unauthorized per diem is recoverable. Note: The 10% limitation does not include compensation as a corporate officer, however if there is a provision or it may be reasonable deduced in the by-laws that the said corporate officer will not receive any compensation the BOD is without power to grant it unless they amend the by-laws. Sec. 31. Liability of directors, trustees or officers Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or 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.

Instances where D/T are personally liable for corporate acts: 1. Willfully and knowingly vote or assent to unlawful acts of the corporation 2. Where the D or T is guilty of gross negligence or bad faith in directing the affairs of the corporation 3. The D/T acquires any personal or pecuniary interest in conflict with his duty as such director or trustee 4. A D/T shall be liable to the corporation for any secret profit he may have received in violation of his duty, in any interest which has been reposed upon him in confidence. 5. When the D consents to the issuance of watered stock or if he failed to objet thereto provided he has knowledge thereof and does not forthwith file his written objection with the corporate secretary. (section 65) 6. When h is made by specific provision of law to personally answer for his corporate action (sec 114 PD 115 trust receipt law) 7. When he agrees to hold himself personally and solidarily liable with the corporation 8. Where the D/T is guilty of bad faith or malice in terminating employees 9. Where the D/T is guilty of disloyalty Ratione for liability The nature of the position of the T/D is of fiduciary in character they are considered agents of the corporation and of the stockholders and if the corporation is insolvent they are considered agents of the creditors of the corporation. Note: The D/T are not liable for corporate losses resulting from honest bad judgment provided that it does not amount to bad faith or gross negligence. Sec. 32. Dealings of directors, trustees or officers with the corporation.
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A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances General Rule: A contract between the corporation and the D/T is voidable unless the following are present: 1. The presence of the T/D in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. 2. That the vote of such D/T was not necessary for the approval of the contract 3. That the contract is fair and reasonable 4. That in case of a corporate officer, the contract with the officer has been previously authorized by the BOD. Note: If the first 3 requisites are present, the contract is valid. Requisites of a valid ratification 1. The contract must be fair and reasonable 2. It must be ratified by 2/3 vote of the OCS, or in case of NS corporation by 2/3 vote of the members, in a meeting called for that purpose 3. Full disclosure of the adverse interest of the D/T involved is made at such meeting Sec. 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors General Rule: A contract executed between corporations which has interlocking directors shall be rendered void on that ground alone provided that the contract is fair and reasonable under the circumstances provided further that it was not occasioned by fraud.

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Note: However, if the interlocking director has substantial interest (more than 20% of OCS) in one corporation and a nominal interest (20% or less of the OCS) he shall be considered as a self-dealing director and the applicable rules will be applied in favor of the and in relation to the corporation which he has nominal interest in. Note: If the contract is not fair or reasonable or has been induced by fraud and there is interlocking of directors between the parties the contract is voidable. Sec. 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. Doctrine of corporate opportunity Under this doctrine, a director who, by reason of his office acquires for himself a business opportunity which should belong to the corporation obtaining profits to the prejudice of the corporation, is guilty of disloyalty and should therefore, account to the latter for all such profits by refunding the same, notwithstanding that he risked his funds for the venture. Note: This provision is exclusive to D if the person involved is an officer he shall be liable under sec 31 (2) Requisites of Doctrine of corporate opportunity 1. The D, by virtue of his office, acquires for himself a business opportunity 2. Such business opportunity should belong to the corporation 3. He obtain profits to the prejudice of such corporation Instances where the doctrine is not applicable: 1. When the corporation is definitely no longer able to avail itself of the opportunity, which may arise from financial insolvency, or from legal restrictions, or from any other factor which prevents it from acting upon the opportunity for its own advantage 2. Where the opportunity is for a distinct enterprise from that of the corporation 3. That the opportunity or the knowledge of the opportunity did not arise or by virtue of his office. Note: The disloyal D shall not be liable to refund the profits if his acts was ratified by a vote of at least 2/3 of the OCS. Note: The test is whether the business opportunity belongs to the corporation and the director takes advantage of that business opportunity for his own benefit. Sec. 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
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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 filling 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 Note: The executive committee must be created or authorized by the by-laws. In the absence of a provision in the by-laws, they stand as de facto officers with respect to 3rd persons and mat render the board or the officers liable for penalty under section 144. Mandatory requisites of an executive committee: 1. They must be composed of at least 3 members of the board 2. Its creation must be authorized by the by-laws of the corporation Note: The executive committee acts for and behalf of the board, it is competent to perform all acts delegated to it by the by-laws or by the board itself (7) except: 1. Approval of any action for which the SH approval is also required 2. The filling of vacancies in the board 3. The amendment or repeal of the by-laws or adoption of a new by-laws 4. The amendment or repeal of any resolution of the BOD which by its express terms is not amenable or repealable. 5. Distribution of cash dividends to the SH 6. Blanket authority to act for the BOD 7. Entire supervision and control of the corporation Note: Aliens are prohibited to be appointed as corporate officers in wholly or partially nationalized businesses activities, they are allowed representation in the BOD/EXCOM/governing body In proportion to their share holdings. POWERS OF CORPORATIONS Sec. 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 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;
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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. Doctrine of limited capacity A corporation has only such powers as are expressly granted or those which are incidental to its existence. 3 classes of powers: 1. Those expressly granted by law 2. Those that are necessary to the exercise of the express or incidental powers 3. Those incidental to its existence. Implied powers Are those powers which are reasonably necessary to execute the express powers and to accomplish or carry out the purposes for which the corporation was formed.

Classification of implied powers: 1. Acts in the normal course of business 2. Acts to protect debts owing to a corporation. 3. Embarking in different business (see sec 42) 4. Acts in part or wholly to protect or aid employees. 5. Acts to increase business Incidental powers: Are powers which a corporation can exercise by the mere fact of its being a corporation or powers, which are necessary to corporate existence and are, therefore impliedly granted. Sample: Opening of branch offices as the need or exigency of the business requires. Note: The effect of ratification retro acts from the time the act subject of ratification was executed, it is equivalent to original authority. However void acts may not be ratified. Note: If the law, by-laws or AI does not provide for a manner by which a power may be exercise, the corporation may exercise it in any manner it deems sufficient to acquire its purpose. However if the Law BL or AI provides for a process it must be exercised in such a manner to be valid, unless it is merely permissive in character. Important notes on the power to be sued: 1. As a general rule a corporation is not entitled to moral damages as it is not an individual who has feelings however when the corporation has a good reputation and the acts of the defendant has
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besmirched its reputation it may be entitled to moral damages 2. Foreign corporation doing business in the Philippine WITHOUT a license can be sued buy CANNOT sue Note: The power to acquire, mortgage alienate or otherwise encumber property or any interest therein must be exercised in furtherance of its business or its corporate purpose, otherwise such act may be challenge as an act ultra vires therefore void. Limitation to hold public lands: 1. It cannot hold public alienable lands except by virtue of lease 2. Which must not be more than 1000 hectares 3. For a period of 25 years, renewable to another 25 years. Limitations on the power to donate: 1. It must be for a reasonable amount 2. It must be in aid of any political party or candidate or for purposes of partisan political activity. General rule: Corporations cannot guarantee obligations of another save instances where: 1. It is in the business of surety or guaranty 2. Where its corporate business will be enhanced. However where the benefit is remote and incidental or disproportionate the court has rendered the same unenforceable. Sec. 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) Note: 1. It must be approved by majority of the BOD/T 2. Ratified, not mere assent, of the SH representing 2/3rds of the OCS. 3. Written notice of the proposed action and of the time and place of the meeting Sec. 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.
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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) Note: 1. It must be approved by majority of the BOD/T 2. Ratified, not mere assent, of the SH representing 2/3rds of the OCS. 3. Written Notice must be given 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 4. The vote must be made in a meeting called for that purpose

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Note: 1. That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. 2. 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. 3. The requirement of subscription and paid up capital of 25% as in the incorporation must be complied with as well as the treasurers affidavit stating the same.

Note: All shares will have voting rights on the following corporate matters: 1. Incurring, creating or increasing bonded indebtedness; 2. Increase or decrease of capital stock; Limitations 1. A corporation cannot lawfully decrease capital stock if such decrease will prejudice the rights of the corporate creditors 2. A corporation cannot issue stock in excess of the amount limited by its AI, such stock so issued is void even in the hands of the a bona fide purchaser for value and not subject to ratification or estoppel 3. A reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law. 4. An increase of capital stock cannot be fully accomplished without an actual increased in the assets of the corporation and additional subscription except when such increase is for the purpose of effecting a stock dividend previously authorized. 5. Note if the purpose of the increase of capital stock is to declare stock dividends previously authorized, the Stocks so declared and issued must be fully paid. 6. If it is not for purposes of declaring stock dividends, the certificate of the majority of the directors must specify: a. The amount increased b. The persons, nationalities and residences of the subscribers c. The amount so subscribed d. Amount paid Note: The increase of capital stock shall be effected only upon the approval and issuance of the SEC of the certificate of filing of increase or decrease of CS Note: The over-issued of stock (spurious stock) is void for 2 reasons, for want of consideration and for illegality. Note: The amount of shares so increased 25% of which must be subscribed and 25% thereof paid to rule otherwise would circumvent the safeguard enunciated in section 13 Note: The appraisal right is not granted in the event of increase or decrease of capital stock, under the reasoning that the SH should come into the corporate setting fully aware that the expediencies of corporate life may require that eventually, the corporation may need to increase capitalization to fund its operations or expansions, and needs to look primarily into its equity investors to fund the same.
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Ways of increasing or decreasing the ACS 1. By increasing or decreasing the number of shares authorized to be issued without increasing or decreasing the par value thereof. 2. By increasing or decreasing the par value of each share without increasing or decreasing the number thereof. 3. By increasing or decreasing both the number of shares authorized to be issued and the par value thereof. Note: Par value shares cannot be sold less than the par value of the share however no par value share may be sold at any amount but in no wise less than P5.00 Note: If the reduction will impair the legal capital of the corporation or result in the release of unpaid subscription without valuable consideration, the corporate creditors shall be deemed to have been prejudiced as such, they are may question such decrease of capital stock. Corporate bonds Bond is a security representing denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay the maturity value at the end of a specified period which should not less than 360 days, where applicable, payment of interest on stipulated dates.

Bonds vs notes: If the amount loaned is large and obtained from a number of persons and extends over a periods of years it is usually evidence by a bond. Whereas if the amount loaned is small and if it is borrowed in a single sum, or from a few persons, or for a short time, notes are usually given. Note: The bond or note must be the primary security, this fact is what distinguishes it from other ordinary loans not requiring a 2/3rd vote and majority vote of the BOD and the corresponding approval of the SEC. Parties to a corporate bond: 1. Borrowing corporation 2. Trustee, usually a bank or trust company 3. Bondholders Trustees functions 1. Countersigning the bonds to assure authenticity 2. Collecting interest and principal payments from the debtor-corporation and distributing them to those entitled 3. Acting as mortgagee or collateral holder if the bonds are secured 4. Verifying the performance of the debtor corporations promises on behalf of the the bondholders 5. Taking legal action on behalf of the bondholders if necessary Note: 1. SEC has limited the term bonded indebtedness to cover only indebtedness of the corporation which are secured by mortgage on real or personal property. Debentures are issued on the basis of the general credit of the corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not require approval of the stockholders. (Page 243 of
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CLVs Textbook) 2. Particular Requirements of SEC. Under the SEC Interim Guidelines, an application for registration and issuance of bonds can only be filed by the issuing corporation which has a minimum net worth of P25M at the time of the filing of the application, and must have been in operation for 3 years. In addition, it must fulfill the financial ratios mandated by the SEC in the Interim Guidelines. An issuing corporation must also execute and submit a Trust Indenture with a trustee bank and an Underwriting Agreement, together with the printed prospectus and titles covering the securities for the bonded indebtedness. (Page 244 of CLVs Textbook) 3. no appraisal right is granted to dissenting stockholders when the corporation either validly incurs, creates or increases bonded indebtedness since, the granting of such appraisal right under such circumstances would drains the corporation of financial resources contrary to the purpose for which the power is exercised to raise funds for corporate affairs. (Page 245 of CLVs Textbook) Bond indenture Is the contract whereby the borrowing company binds itself to pay the loan and its interest to the bond holder, the trustee and all other necessary expenses. Whereas the bondholder binds itself to loan an amount of money in favor of the borrowing corporation. Finally, the trustee binds itself to hold in trust the security given by the borrowing company, if any, and to distribute payments made by the principal to the bondholders. Note: The bond itself is a certificate of participation in the bond indenture. Kinds of bonds: 1. Secured bonds: a. Mortgage bonds b. Collateral trust bonds c. Equipment obligations 2. Unsecure bonds a. Straight debenture bonds b. Guaranteed bonds subordinated debenture bonds 3. Special types a. Convertible debentures (bonds susceptible to conversion to stocks at a fixed price) b. Income bonds c. Bonds with warrant or stock purchase warrant. (bonds granting the right to the person to bondholder to purchase stocks for a given period for a predefined rate.) Sec. 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 preemptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Pre-emptive right Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the SH who are such at the time of the increase was made in proportion to their existing shareholdings and on equal terms with the other holders of the original stock before subscription
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are received from the general public Note: A sale of an SS by a holder to another shall carry with it the right of pre-emption unless the assignors previously exercised their pre-emptive rights to subscribed to new issues. To allow otherwise would allow the pre-emptive right attached to the original stock to be exercised twice. Comment: Does this mean you can only exercise the pre-emptive right once? Note: The right is subject to waiver, however since it is a personal right, it must be waived personally by the SH or by his duly authorized agent by way of SPA. It cannot be waived by a resolution by the SH or by the corporation. Note: A SH denied of such right may maintain an action to compel the corporation to give him that right. Question: What happens if an SH was deprived of his right but all the new issue have been sold to 3 rd person who acted in good faith?

Instances where the pre-emptive right is not available: 1. Where the right is denied by the AI or an amendment thereto 2. Where shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by the public 3. Shares to be issued in good faith with the approval of SH representing 2/3 of the OCS in exchange for property needed for corporate purposes 4. Shares issued in good faith with the approval of the SH representing 2/3 of the OCS in payment of a previously contracted debt Note: If an SH fails to exercised his right of pre-emption within the period prescribed, he shall be deemed to have waived such right, hence the unsubscribed portion may be offered to the general public or if there is a right of first refusal in the AI or by-laws, to the other SH prior to offering it to the public Note: An SH has a right to insist on legally adequate price since if the shares are sold at a much lower price the dilution of the control and division of profits and assets of an SH will also occur. Note: As a rule, no the right does not extend to the issuance of the shares originally part of the ACS, since it is assumed that he had the opportunity to purchase them before or at the time he became part of the corporation. However when the a portion of the original ACS was not offered before, the issuance of that portion will entitle the SHs to exercise his right to pre-emption. Sec. 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
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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. (28 1/2a)

Sale or other disposition of substantially all the corporate property and assets If the disposition would render the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated. Requisites of sale, lease, exchange mortgage, pledge otherwise dispose of all or substantially all of the corporate property: 1. The sale must be approved by the majority of the BOD/T 1. It must be authorized by the vote of SH representing 2/3 of the OCS; or vote of 2/3 members 1. The vote must be done in a SH meeting duly called for that purpose after written notice Limitations to the right: 1. It shall be subject to the provisions of existing laws on illegal combinations and monopolies 2. The provisions of the bulk sales law requires that when a sale of all or a portion of stock of goods, merchandise, provisions or materials otherwise than in the ordinary course of business is declared fraudulent and void as to creditors of the vendor unless specified formalities are observed such as the giving by the vendor of a list of creditors to whom said vendor may be indebted 3. Where it would constitute a violation of the trust fund doctrine. General rule:
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The sale or transfer of all of the properties or assets of one corporation to another shall not render the transferee/vendee liable for the debts and liabilities of the vendor/transferor, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances are present: 1. Where the purchaser expressly or impliedly agrees to assume such debts 2. Where the transaction amounts to consolidation or merger of the corporations 3. Where the purchasing corporation is merely a continuation of the selling corporation (piercing the veil of corporate fiction) 4. Where the transaction is entered into fraudulently to escape liability from such debts (Piercing) 5. When the requirement of the bulk sales law have not been complied with, both selling and buying corporations may be held solidarily liable to the creditor of the selling corporation Note: Such acts of ownership, though approved by the BOD and authorized by the SH may still be abandoned without the requirement of any further action subject only to the right of 3rd persons. Note: The sale of all of the properties of the corporation if done in the ordinary course of business does not require authorization of the SH. The BOD may even delegate the discretion to any of its corporate officers. Note: The test to determine whether the sale was in the ordinary course of business is whether the nature of the transaction is a normal transaction in the business of the corporation. Sec. 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; (1) 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 (1) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n) Requisites of the power to acquire own shares: 1. It must be for a legitimate purpose/s 2. The corporation has unrestricted retained earning in its books to cover the shares to be purchased or acquired. 3. The capital is not thereby impaired Limitations: 1. That the conditions of corporate affairs warrant it 2. The corporation acts in good faith and without prejudice to the rights of the creditors and SH Sec. 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor

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more than sixty (60) days from the date the stocks become delinquent. XXXXXXXXXXXXXXXX Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Lawful purpose 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. (n) 4. Redemption of redeemable shares 5. To effect a decrease in the capital stock 6. In close corporations, where there is a deadlock respecting the management of the business, the SEC may order the purchase at their fair value of shares of any SH by the corporation Exception to the requirement of URE: 1 When the shares are reacquired in the redemption of redeemable shares of the corporation or pursuant to the conversion right of convertible shares of the corporation, in accordance with the provisions expressly provided in its articles of incorporation and certificate of stock representing said shares 2 When the shares are reacquired to effect a decrease in capital stock of the corporation as approved by the SEC 3 Dissolution and eventual liquidation of the corporation. 4 When the shares are reacquired by close corporation pursuant to the order of the SEC acting to arbitrate a deadlock as provided for under section 104 Philippine Trust Co. vs. Rivera The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims.[23] This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock,[24] (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings,[25] and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares[26] and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with

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Sec. 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) 2 types of investment contemplates: 1. Investment in another corporation or business 2. Investment for any purpose other than the primary purpose reflected in the AI.

Note: Investment in a purpose outside the primary and secondary purpose mentioned in the AI is an ultra vires act. The AI must be amended to include such other purpose. Note: The violation of this provision renders the act as an ultra vires act, therefore voidable and subject to ratification. Sec. 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

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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) Rules: 1 Dividends may be declared only if there is unrestricted retained earnings 2 Dividends may be payable in cash 3 Cash and property dividends requires only the approval of the majority of the board 4 Stock dividends require approval of the majority of the board and approval by vote of SH representing 2/3 of the OCS. 5 Cash dividends must first be applied to the unpaid balance of the delinquent stock plus cost and expenses 6 Stock dividends shall be withheld from the SH until all his unpaid subscription has been fully paid. 7 A corporation is prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock except: a. when justified by definite corporate expansion projects or programs approved by the board of directors; b. 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; c. 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. 8 Dividends are given ratably to registered SH as of record date 9 Liquidating dividends may be paid out of the capital or outside URE since there are not really dividends but the share of an SH in the assets of the corporation at the time of dissolution 10 The profits secured by corporation for selling its stock on a premium may now be declared as dividends, assuming all other requirements are present. 11 Payments received in consideration of no par value shares are by operation of law part of the capital stock and may not be distributed by means of dividends. 12 Only actual earnings can be a source of dividends. 13 Dividends may not be declared as long as there is a deficit, the deficit must be first filled in before there can be a profit. Requisites of a valid declaration of a stock dividend: 1 There must be URE sufficient to cover the value of the stock dividends to be issued 2 The declaration must based upon the approval of the majority of the quorum of the BOD 3 It must be approved by a vote of the SH representing 2/3 of the OCS 4 There must be sufficient authorized unissued shares. Note: An increase in market value of a fixed asset, real property, by virtue of re-evaluation cannot be included in the determination of profit since it is not actual earnings but at best merely anticipatory earnings dependent on the actual sale of the property in the future. However if the following conditions are present the SEC has opined that it may be included:

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1 2 3

The corporation has sufficient income from operations from which the depreciation on the appraisal increased was charged It has no deficit at the time the depreciation on the appraisal increase was charged to operations Such operations on appraisal increase previously charged to operation has not been erased or impaired by subsequent losses; otherwise, only that portion not impaired by the subsequent losses is available for dividend.

Dividends Is that part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the SH on demand or at a fixed time. Dividends vs profit: 1 A dividend as applied to a corporate stock, is that portion of the profits or the net earnings which the corporation has set aside for ratable distribution among SH. Thus, dividends come from profits while profits are the source of dividends 2 Profits are not dividends until declared or set aside by the corporation. In the meantime profits are part of the assets of the corporation and do not belong to the SH individually. Rules regarding stock dividends: 1 It must be approved by the majority of the quorum of the BOD and 2/3 of the OCS 2 The dissenting SH cannot refuse to receive share of the stock dividends 3 However before stock dividends represented by one class of shares may be given to holders of another class of shares, it is necessary that the consent of such holders be first secured, they being given a class of shares different from the class they are holding Wasting assets doctrine A corporation, the capital of which is necessarily exhausted in the carrying on its operations, may rightfully declare and pay dividends out of the net income without making up for the loss of its capital which is thus being consumed. Exceptions to the trust fund doctrine, in declaring dividends from the property in which capital is invested: 1 Wasting assets doctrine 2 Utilize a lease or patent 3 To liquidate a business, a corporation formed for the purpose of liquidating the business of a partnership, and selling all of its property and dividing the proceeds among SH such property is, in no proper senses, its capital stock within the meaning of the rule prohibiting a corporation from distributing its capital in the form of dividends, but is rather to be regarded as property held by the corporation in trust for the benefit of its SH. And which may be distributed by it to them in the manner prescribed in the AI, at least where rights of creditors are not involved. Retained earnings It is the difference between the total present value of the corporations assets after deducting the losses and liabilities and the amount of its outstanding capital stock. Stated otherwise, it is the difference between all the corporate assets and the sum of all debts, liabilities and legal capital of the corporation. Unrestricted If the retained earnings has not been reserved or set aside by the BOD for some corporate purpose or for some other lawful purpose or requirement.

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Note: Under the trust fund doctrine, it is only the assets of the corporation, as represented by the subscribed or OCS, that constitutes a fund to which creditors have a right to look for the satisfaction of their claims and which the corporation is not allowed to impair or prejudice Note: The discretion to declare the existence of URE and to declare dividends based upon it is exclusively vested in the BOD, provided it has acted in good faith and subject to the limitation on retaining surplus profit in excess of 100% of their paid in capital stock except when justified by any of the reasons provided in section 43. Effect of failure to declare dividends on unjustified retained earnings: 1 The SEC may compel the BOD to declare dividends 2 The corporation shall be subject to a 10% surtax on the corporation improperly accumulated profits 3 The BOD may be compelled by an action of an SH provided that: a. The SH has made application to the BOD for the relief sought b. The directors wantonly violated their duty c. Or that an application by a SH to them for relied would be inefficacious, such application need not be made.

Note: The validity of the declaration of dividend shall be determined after considering the circumstance present at the time the dividends were declared. Hence if the declaration was valid then the subsequent insolvency of the Corporation shall not affect the validity of the declaration. Note: If the dividends were paid out from the capital, despite the good faith of the BOD and despite the ratification of the SHs will not render the same valid. Note: A stipulation stating that the payment for the unpaid subscription shall be taken from the dividends to be declared in the future is void since it creates no liability on the side of the SH to pay for the subscription and to an extend transgresses the trust fund doctrine since if there is no dividends to be declared there is no way the subscription will be paid. Note: Cash dividends shall be paid for the unpaid subscription of shares if it is a delinquent share only. Hence even if the SH has unpaid shares but such share are not delinquent, the SH is entitled to receive the entire cash dividend unless the SH has given their consent to the application of the cash dividend to the unpaid subscription. Note: It is not allowed to pay for unpaid subscription from the stock dividends so declared since it is prohibited by express provision of the law. Thus, any stipulation to the contrary being in contravention with the law is void. Neither does the declaration create a creditor debtor relationship which would call in the application of legal compensation. Finally it would violate the trust fund doctrine since in reality the unpaid shares remain unpaid and the shares received by the SH has been paid out of the retained earnings. Note:
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In stock dividends, the unpaid subscription need not be declared as delinquent, the mere fact of nonpayment bars the SH from receiving his share until the same has been fully paid. Note: Dividends wrongfully declared, even if received in good faith may be recovered from the SH since it is deemed a violation of the trust fund doctrine, since the distribution of wrongly declared dividends did in fact come from the legal capital to which is held as a trust fund in favor of the corporate creditors. However, the SH may seek reimbursement or recovery from the erring Directors. Note: As a general rule directors are not liable to creditors for wrongful declaration of dividends provided that they acted in good faith and with due diligence. However if they acted in bad faith or gross negligence, they may be personally liable to the creditors under the provision of section 31 (bad faith or gross negligence in the in directing the affairs of the corporation. 2 remedies of a creditor for improperly declared dividends: 1 If the dividends has not been distributed to file for an injunction 2 If the dividends has been distributed in violation of the trust fund doctrine they may pursue the same against any person, except that of an innocent purchaser or recipient of the same for a valuable consideration.

Note: It is the SH on record as of the date of declaration of dividends, unless a record date has been specified, the holders of record on such record date is the one who has the right to receive the dividends even if they are not the actual owners or the beneficial owners thereof. The recipient in such a case becomes a mere trustee of the real or beneficial owner of the SH. A transfer of shares between private individuals is only binding upon the parties unless the same is registered in the (stock and transfer book) books of the corporation. Hence the owner of the shares as reflected in the books has the right to claim the dividends against the corporation. However the recipient thereof holds the same in trust only in favor of the person to whom he transferred it to. SH who are not registered in the ST book pending approval of the SEC of the increase of the ACS, is not entitled to the dividends when declared or when the record date is during such pendency. Note: The rule that the declaration of cash dividend, unless there is a record date, is the determining act of creation of the cash dividend and the corresponding right of the SH to demand its payment is created is not applicable to stock dividends, since it may be withdrawn or rescinded at any time before its issuance, the same has been especially set apart by the corporation in favor of the SH since it does not grant an increase of the SHs proportionate claim of the SH in the corporate assets or income. Note: If no time has been fixed for the payment of a declared dividend the law presumes that it is payable upon demand. Note: Discrimination as to shares of the dividends is illegal. It must be distributed pro rata regardless of the time of acquisition of the shares, save that of SH not in the ST book at the time of declaration. It is the number of shares not the amount paid for which is the basis of the distribution of the dividends pro rate.
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Note: The time a person is considered a SH is the time the corporation accepts his subscription and not the time the stock certificates are issued. It is from that time he acquires the rights and responsibilities of an SH. However his right to participate in the distribution of dividends is reckoned from the date of declaration or upon the record date and the fact that he is a holder on record on such date. Par value share = stated percentage No par value share = number of shares

Samples Stock dividends 1 Real property 2 Personal property 3 Personal intangible property 4 Shares of stock of another corporation 5 Treasury share, since they are considered property of the corporation having been fully paid in the capital. Comment: Stock Dividends are in the nature of shares of stock, the consideration for which is the amount of URE converted into equity in the corporations book. It is actually 2 things, 1) a dividend and 2) the enforced use of the dividend money to purchase additional shares of stock. Optional dividend It is dividend which gives the holder an option to receive cash or stock dividend Composite Dividend It is dividend which is partly in cash and partly in stock Preferred or preferential dividend It is dividend which is payable, by virtue of contract, to one class of SH in priority to that to be paid to another class Cumulative dividend It is dividend which is contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend it is to be made out of subsequent net earnings Scrip dividend It is dividend in the form of a writing or certificate issued to a SH entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared has profit not in cash or has no sufficient cash, or has the cash but wishes to reserve it for some corporate purposes. It is in the form of promissory note or promise to pay and may be issued to bear interest. Bond Dividend It is dividend distributed in bonds of the corporation to the SH. The bond holder becomes a creditor of the corporation to the extent of the amount of the bond Liquidating dividends
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They are dividends which are actually distributions of the assets of the corporation upon dissolution or winding up of the same. Ordinary dividends They are dividends which are paid out of current earnings of a corporation according to some fixed plan or scheme, usually at regular intervals and sometimes limited to substantially fixed rate of return to the SH. Extraordinary Dividends Whether cash or stock, usually represent an accumulated excess of earnings over normal return on capital invested and constitute a distribution or a capitalization of surplus profits remaining after distribution of ordinary dividends. Note: The declaration of cash dividends, unlike stock dividends, is considered effective to create a debt from the corporation to each of its SH and segregate the amount thereof from the assets. Note: The main effect of a SH as far as a corporation and creditors are concerned is the transfer of funds from the URE into the capital. Note: A stock dividend, is an unrealized gain as such it is not taxable income. Note: The distribution of treasury shares as dividends are not stock dividends since there is no increase in the capital stock of the corporation. It is in effect a property dividend since the consideration of such treasury shares, in respect to the capital fund has already been paid when it was originally issued. Stock Split There is a mere increase in the number of shares which evidence ownership without altering the amount of the capital, surplus or segregated earnings. It is essentially one of form and not of substance. 2 ways by which stock split are accomplished: 1. If the stock is of the par value type, then the original certificate is exchange and a new certificate substituted, embodying the original shares, plus the new number of shares authorized by the split. 2. If no-par value shares to be split, then the SH retains his original certificate and receives additional certificates for the additional shares. Sec. 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 onethird (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
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(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)

General Rule Management contracts must be approved by majority of the BOD/T and by a vote of an SH representing majority of the OCS entitled to vote or majority members of a NS corporation. Exception If any of the following circumstances are present the management contract must be approved by a vote of the SH representing the 2/3 of the OCS entitled to vote or by a 2/3 vote of the members of a NS corporation of the managed corporation, to wit: 1. A SH or SHs representing the same interest of both the managing and the managed corporation own or control more than 1/3 of the OCS entitled to vote of the managing corporation. 2. The majority of members of the BOD of the managing corporation also constitute majority of the members of the BOD of the managed corporation Note: Hence if a SH of the managing corporation owns 1/3 of the interest in the managed corporation and no other SH or a group of SH owns more than 1/3 of the OCS entitled to vote in the managing corporation, a majority vote of the managed corporation shall be sufficient. Note: In any event the vote of the SH representing majority of the OCS entitled to vote of the managing corporation is sufficient. Only the SH/M of the managed corporation vote is subject to change depending on the existence of the circumstances mentioned above. Management Contract any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation which must not be longer than 5 years for any one term Requisites of a valid management contract 1. It must be ratified or approved by the majority of the quorum of the BOD/T and by the SH/M by the appropriate vote in a meeting called for that purpose 2. The rules set down on interlocking directors, if applicable, must be complied with 3. The period must not be longer than 5 years for any one term except those contracts which relates to the exploration, development, exploitation or utilization of natural resources that may be entered into for such periods as may be provided by pertinent laws or regulation 4. The BOD of the managed contract must not abdicate all its powers in favor of the managing corporation since this would contravene with section 23 of the corporation code and will render the managed corporation a mere instrumentality of the managed corporation. Sec. 45. Ultra vires acts of corporations. No corporation under this Code shall possess or exercise any corporate powers except those
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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) Ultra vires act Is an act not within the express, implied and incidental powers of the corporation conferred by the corporation code or the AI. It is an act not positively forbidden but is impliedly forbidden since it is outside the scope of the express, implied or incidental powers of the corporation conferred by the CC or the AI. Note: An ultra vires acts is subject to ratification being voidable only. Also it cannot be raised as a defense by a person who has been estopped from assailing the validity of the act. Further it can only be raised by a person who stands to be injured by the act such a creditor or a SH. Finally the state may assail the act even if it is not an injured party since it is within the scope of its power to see to it that its creation act within the bounds it has provided. ULTRA VIRES ACTS: (1) Acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation; (2) Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority; and (3) Acts or contracts which are per se illegal as being contrary to law. For Acts or contracts which are not per se illegal: General Rule: In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Exceptions: (1) Doctrine of Ratification or Estoppel- Acts of contracts which are not per se illegal can be validated. Even when the contract entered into in behalf of the corporation is outside the usual powers of the corporate officer, the corporations ratification of the contract and acceptance of the benefits have made such contract binding upon the corporation. Note: Ratification that would bind the corporation would have to come from the board of directors or a properly authorized representative. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. (2) Doctrine of Apparent Authority- If a corporation knowingly permits one of its officers, or any other agent to act within the scope of an apparent authority, it holds him out to the public possessing the power to do so those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Note: Existence of apparent authority must be ascertained through: (a) general manner in which the corporation holds out an officer or agent as having the power to act or in, other words, the apparent authority to act in general, with which it clothes him; or (b) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond of his ordinary powers.
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If the corporation desires to set up the defense that the contract was executed by one not authorized as agent, it must plead such fact. (Ramirez Doctrine) However, once the corporation has discharged its burden under the Ramirez Doctrine, then the burden of proof now shifts to the contracting party to show that indeed by previous acts and actuations, the acting officer had been clothed by the corporation with apparent authority for the public to take such

BY LAWS Sec. 46. Adoption of by-laws. Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of bylaws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a) Note: 1. If the by-laws is adopted after incorporation (1 month after SEC certI) needs to be approved by the vote of SH/M reflecting the majority OCS. A copy thereof must be certified by majority of the BOD and countersigned by the corporate secretary and filed with the SEC to be attached to the AI 2. If adopted to prior to incorporation it must be signed by all of the incorporators and filed together with the AI with the SEC 3. The by-laws so executed shall be kept in the principal place of business and be open for inspection by the SH/M during office hours 4. The filing of the adopted bylaws or any amendment thereto of a: a. Bank b. Banking institution
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c. Building and loan association d. Trust company e. Insurance company f. Public utility g. Educational institution h. Other special corporation governed by special laws Shall be rejected by the SEC if not accompanied with a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law 5. The by-laws shall take effect upon issuance of the SEC of a certification that the by-laws are not inconsistent with the corporation code. By-laws It governs the rights and duties of corporate officers and directors/T and of SH/M towards the corporation and among themselves with reference to the management of the corporate affairs and to regulate transaction of business of the corporation in a particular way. Note: Failure to file the by-laws within the 1 month period shall not cause the automatic dissolution of the corporation but may render it revocable or subject to suspension of imposition of an administrative fine by the SEC after due notice and hearing if its failure is unjustifiable. Elements of a valid by-law: 1. They must not be contrary to existing laws and be inconsistent with the code 2. They must not be contrary to morals and public policy 3. They must not impair obligations and contracts 4. They must be general and uniform in their operation and directed against particular individual 5. They must be consistent with the charter or articles of incorporation 6. They must be reasonable Instances where there is no impairment of obligations and contracts: 1. When the contract expressly provides that it will be governed by future laws and provisions of the bylaws Note: The AI is superior over the By-laws, in case of conflict the former shall prevail. Note: As a general rule 3rd persons are not bound to the content of the by-laws, unless the specifically bound themselves thereto, or they had actual or constructive notice. (referencing the by laws) Note: By-laws has the effect of laws among the parties however a provision which complies with all of the following is subject to waiver, like other rights: 1. The provision is not required by law 2. It operates in favor of the person seeking to waive it. 3. It shall not prejudice third parties. However, a provision in the by-laws which allow the waiver of any of its provision by a vote of the SH is void since it is a circumvention of the requirements on amendments. Sec. 47. Contents of by-laws.
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Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 7. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 8. The manner of election or appointment and the term of office of all officers other than directors or trustees; 9. The penalties for violation of the by-laws; 10. In the case of stock corporations, the manner of issuing stock certificates; and 11. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) Note: The SH/M meeting must always be placed within the city or municipality of the principal place of business, to provide otherwise would contravene with sec 51 of the CC. Sec. 51. Place and time of meetings of stockholders or members. - Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Note: As a general rule the by-laws may provide any matters it deems necessary provided that: 1. It is not contrary to laws, morals, public policy, public order or customs 2. It must not be in contravention with the AI 3. It cannot contravene the minimum requirements of the law like: a. quorum it can add but not lessen b. remove the minimum share requirement of Ds but it may add reasonable qualifications thereto c. it may provide for the manner by which voting by proxy can be made subject to the restrictions of the law d. it cannot order forfeiture of delinquent stock as it would contravene the provision on the corporation code on the manner delinquent stocks may be paid Sec. 48. Amendments to by-laws. The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or
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special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) Limitations on the delegated powers of the BOD to amend by laws: 1. it is subject to revocation by a majority vote of the members in a NS Corporation or the vote of the SH representing majority of the OCS 2. The power to amend the articles of incorporation as well as the adoption of the original by-laws cannot be delegated to the BOD. 3. It has been held in foreign jurisprudence that the BOD even if with delegated powers, cannot nullify or annul a provision in the by-law which imposes a limitation on its powers. Voting requirements: 1. Amendment of the by-laws: a. Majority of the BOD/T b. Majority of the SH/M 2. Delegation of power to amend the by-laws: a. 2/3rds vote of the OCS 2/3M 3. Revocation of power a. Majority vote. Note: A resolution delegating the authority to amend the by-laws is by its nature and revocable, as such is not appropriate to be included in the by-laws itself. Note: Previous notice to the meeting the intent to revoke is not required. Resolution vs By-laws A resolution is merely a declaration of the will of the corporation in a given matter and in the nature of ministerial act. A by-law on the other hand , is a permanent rule of action of the conduct of corporate affairs while a resolution ordinarily applies only to a single act of the corporation. In case of conflict the latter prevails over the former. AI vs BL 1. The former constitutes the charter or fundamental law of the corporation, while the latter are merely rules and regulations adopted by the corporation 2. The former is executed before the incorporation by the incorporators, while the latter may be executed after the corporation has been incorporated 3. The filing of the former is a condition precedent to corporate existence, while the filing of the latter is a condition subsequent

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MEETINGS Sec. 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Sec. 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. (24, 26) Note: As a general rule in order for a vote to be valid it must be made in a meeting, the only exception is where the law itself allows the vote without a meeting. Sample: 1. Amendment of the AI (written assent) 2. Those under section 101 with respect to closed corporation 3. Where a unanimous assent was given by all the SH although conducted not in a formal meeting Instances where a special meeting (called for that purpose) of SH is required:

Sec. 51. Place and time of meetings of stockholders or members. Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) Requisites of a valid meeting: 1. It must be held at the proper place 2. It must be held at the stated date and at the appointed time or at a reasonable time thereafter 3. It must be called by the proper person
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4. There must be a previous notice 5. There must be a quorum Note: Violation of the above requisites will render the acts made therein susceptible of being set aside subject to the exception provided in sec 51 (2) Exception: The business transacted in a meeting improperly held shall be valid provided the following are present: 1. The act is within the power or authority of the corporation. 2. All the stockholders or members of the corporation are present or duly represented at the meeting Note: Metro Manila for purposes of determining the proper locus of a meeting of the SH is considered a city or municipality. Note: A meeting is properly called by a person authorize to call a meeting directing the corporate secretary to notify the SH. Persons authorized to call a meeting: 1. The person/s designated in the by-laws 2. In the absence of a provision in the by-laws, a D/T or corporate office tasked with the management of the corporation, unless otherwise provided by law. 3. If no person is authorized to make a call A SH may make a call upon order of the SEC by his application for justifiable reasons. (Sec 50) 4. Special meeting for the removal of a D/T may be made by the secretary upon direction of the president or upon his failure or refusal, the call may be made by an SH who signed the demand for removal. General rule: Notice of meeting is always required save that of revocation of the delegated power to amend the by-laws. Notice The written document informing the SH of the meeting, its time and place and the purpose of the meeting. Instances where the purpose of the meeting must be stated in the notice: 1. Election of the BOD/T 2. Removal of D/T 3. Filling of vacancies in the BOD/T 4. Ratification of the contract of the corporation with a D/T (self dealing) 5. Extension or reduction of the corporate term 6. Increase or decrease of capital stock 7. Creation or increase of bonded indebtedness 8. Sale or disposition of all or substantially all of the corporate assets 9. Investment of corporate funds in another corporation 10. Declaration of stok dividents 11. Entering into a management contract with another corporation 12. Amendment to, repeal of , any by-laws or adoption of new by-laws 13. Fixing the issued price of no-par value shares 14. Plan of merger or consolidation 15. Amendment of the AI of a close corporation
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16. Voluntary dissolution where no creditors are affected 17. Voluntary dissolution where creditors are affected 18. Dissolution by shortening corporate term. Note: The above may be transacted in a regular meeting provided that the notice states the purpose mentioned above if applicable.

Requisites of notice of meetings: 1. It must be issued by one who has authority to issue it 2. It must be in writing 3. It must specify the date, time and place of the meeting, unless otherwise provided in the by-laws 4. It must state the business to be transacted thereat 5. It must be sent at a certain time before the scheduled meeting 6. It must comply with other requirements specified by law in certain circumstances: a. Notice of approval of merger or consolidation shall include a copy or summary of the plan of merger b. Sec 118 voluntary dissolution publication written notice by registered mail and personal delivery Note: Only matters mentioned in the notice may be taken up in the meeting unless there is a unanimous waiver Note: If the circumstance required for the exemption to apply to a improperly held meeting are present, the acts done thereat is void. The presence of the SH in the meeting although improperly held, if for their benefit is construed as a waiver on their behalf of the defect. Sec. 52. Quorum in meetings. Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. (n) Note: The by-laws may modify the quorum requirements provided it is not less than the minimum requirement stated above. Note: A withdrawal (after the existence of a quorum has been determined or declared) of enough shareholders leaving less than a quorum shall not affect the validity of the acts made in such a meeting. Note: As a general rule the annual meeting of the SH may not be rescheduled save that of justifiable circumstance provided that the meeting shall take place on a later date in accordance with the by-laws or in its absence within a reasonable time thereafter. Note:

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The reason why the law does not provide per diem or compensation to SH for attending corporate meetings is that they are not rendering service in favor of the corporation but rather they are exercising a personal right. No 2/3 vote 1. Power to enter into management contract approved by a vote of SH representing majority of the OCS- general rule 2. adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock 3. amendment of by laws- majority 4. revocation of delegation of authority to amend by laws- majority 5. election of a TD- majority of the OCS 6. to call for a special meeting to remove a D/T majority 7. to fix the issued price of no par value shares if the authorized by the AI, if in the absence of such authority by majority of the COS Instances where majority of the quorum of the BOD is required. The others is majority of the BOD: 1. issue stock dividend 2. enter into management contract 3. to fix the issued price of no par value shares if the authorized by the AI, if in the absence of such authority by majority of the OCS Instances where the BOD need not approve: 1. election of D/T 2. removal of D/T 3. to call for a special meeting to remove D/T 4. ratify a contract of a self-dealing D/T and a corporate office 5. adoption of by-laws 6. delegation of the power to amend by-laws to the BOD 7. revocation of the power delegated 8. to fix the issued price of no par value shares if the BOD is not authorized by the AI Note: The minimum votes required may be increased by the by-laws but not lessened. Note: In case there is a tie the proposition has failed since in reality there is no majority. Sec. 53. Regular and special meetings of directors or trustees. Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws.

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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) Note: The absence of a D/T in a meeting and without any notice to them is illegal and therefore void both as to the meetings and the acts and resolution performed therein cannot be considered as valid unless subsequently ratified, waived, expressly or impliedly by the absent directors or unless rights have been acquired by innocent 3rd person, as against whom the corporation must be held estopped to set up the failure to observe formalities. Sec. 54. Who shall preside at meetings. The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n) Sec. 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. (27a) Note: The date upon which it will be determine who of the SH has the right to vote is called the record date, if there is no date set by the BOD will be the date of the notice of hearing. Types of representative voting: 1. by means of a proxy 2. by a trustee under a voting trust agreement 3. by executors, administrators, receivers or other legal representatives duly appointed by the court. Requisites for pledgee of shares to vote: 1. They must be given the right in writing 2. The grant must be recorded in the appropriate corporate books by such pledger. Note: Shares of another corporation may be voted for by the person authorized in the by-laws of such corporation. In the absence of a provision in the by-laws, by the person authorized by the board. Note: In case of a deceased SH, only the executor or administrator appointed by the will or by the court can vote for such shares, until the estate of the deceased has been distributed and the owner of such shares has been
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determined. Sec. 56. Voting in case of joint ownership of stock. In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the coowners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. (n)

Rules: 1. If a share is co-owned, the share may be voted for in the following manners: a. By anyone of them with the consent of all his co-owners b. By a written proxy signed by all the COrs authorizing a person to vote for them 2 If the share is held in an and/or capacity, any one of the joint owners can vote said shares or appoint a proxy therefore. 3 Rule number 1 shall be applicable to a person who is married and whose property relations is governed by the absolute community of property, the rules on co-ownership shall apply Sec. 57. Voting right for treasury shares. Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n) Sec. 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n)

Requisites of a valid proxy 1. Proxy must be in writing 2. It must be signed by the SH, owner of the share to be voted for or member 3. It must be filed before the scheduled meeting with the corporate secretary 4. It is valid for the meeting intended, unless the contrary is provided 5. A continuing proxy must not be for a period longer than 5 years Proxy It is a written instrument which evidences the grant of authority by a shareholder/member to an agent to vote for the formers behalf Note: As a rule an SH/M may appoint any person he deems fit to be his proxy and any stipulation prohibiting him or restricting his choice of proxy in the by-laws is void. Nor is it allowed to prohibit the use of proxy since such is a right incident of a persons ownership of an interest in the corporation Extent of authority of proxies 1. General proxy It confers a general discretionary power of attorney to attend and vote an annual meeting with all the powers the undersigned would possess if personally present, to vote for directors and all ordinary matters that may properly come up before a regular meeting. It is no authority, unless expressly
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specified, to vote for fundamental change in the corporate charter or other unusual transaction such as merger or consolidation. 2. Limited proxy Is a grant of limited authority to vote for a specified matter only and may direct the manner in which the vote shall be cast. Note: The by-laws may provide for any other matter with respect on how the right of proxy may be exercised provided that it does not conflict with the provisions of the law and must not be discriminatory, unreasonable or oppressive as to work to the disenfranchisement of a majority of the voters Note: When a proxy authorizes several person to be its proxy, in case of disagreement the majority shall prevail unless a contrary instruction is provided by the SH Note: In case there are several proxies made, the person who has the most recent one shall prevail.

Note: A proxy is by nature revocable at will, unless it is coupled with an interest. Sec. 59. Voting trusts. One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

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Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) Control devises: 1. Voting agreements 2. Voting trust 3. The classification of common shares into voting and non-voting, with the voting power vested in a small class of management stock 4. Management contracts 5. Pyramiding (501) Voting Trust agreement It is an agreement in writing whereby one or more SH of a stock corporation transfer their shares to any person or persons or to a corporation having authority to act as a trustee for the purpose of vesting in such person or persons or corporation as trustee or trustee voting or other rights pertaining to the shares for a certain period and upon T&C stated in the agreement Note: A person whose shares are under a voting trust agreement must retain at least one share in his name in the books of the corporation in order to be eligible to be a director, unless a bigger number of shares is required by the by-laws. Powers of the trustees of a voting trust 1. The right to vote and other rights pertaining to the shares so transferred and registered in his or their names subject to the T&Cs of and for the period specified in the agreement 2. The trustee may vote in person or by proxy 3. They may exercise, like the transferor, the rights of inspection of all corporate books and record 4. The trustee is the legal title holder or owner of the shares so transferred under the agreement. He is therefore, qualified to be a director. Instances where the voting trust was held invalid due to improper purpose: 1. To make a profit for participating SH through contract with the corporation 2. To interrupt the harmonious conduct of the corporate business 3. To secure employment and salaries of the contracting parties 4. To force minority SH out of the corporation unless they surrender their stock for voting trust certificates which would result in depriving them of their substantial rights in addition to the loss of their right to vote. Note: The test is to determine whether the object sought to be attained and the acts which were done in pursuance to the objective is for a legitimate cause.

Requisites of a valid and enforceable voting trust 1. It must be for a period not exceeding 5 years, unless the voting trust is required by a loan agreement, it shall be valid so long as the loan subsists 2. It must be in writing and notarized
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3. It shall specify the T&Cs 4. A certified copy shall be filed with corporation and the SEC Note: If the above is not complied with the voting trust is ineffective and unenforceable Effects: 1. It shall grant the trustee the rights specified in the voting trust agreement 2. The certificate/s of stock covered by the VTA shall be cancelled and new one shall be issued in the name of the trustees 3. The new certificate of stocks shall state the fact that they are issued pursuant to the VTA 4. It shall be reflected in the books of the corporation that the certificates are issued due to the VTA 5. The transferors shall be given voting trust certificates by the trustee/s, which shall be transferable in the same manner and same effect a certificate of stock is transferred. 6. The purchaser or transferee of the VTC shall be the owner of the stock subject to the rights of the trustee in the VTA 7. The VTA as well as the certificates issued pursuant to it shall automatically be cancelled upon the expiration of the VTA and new certificates shall be issued in the name of the owner. Limitations: 1. It must be for a period not exceeding 5 years, unless the voting trust is required by a loan agreement, it shall be valid so long as the loan subsists 2. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. STOCKS AND STOCKHOLDERS Sec. 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) 3 ways by which a person may become a shareholder: 1. By subscription contract with an existing corporation for acquisition of unissued shares. 2. By purchase from the corporation of treasury shares 3. By transfer from a previous SH of the OCS Limitations of a subscription contract 1. It must not be contrary to law, public policy, public order or morals 2. It must not require performance of an act on the part of the corporation outside its corporate powers 3. It must not constitute fraud against other subscribers or SH or upon person who are or may become creditors of the corporation Kinds of subscription 1. Pre-incorporation subscription 2. Post incorporation subscription 3. Conditional subscription 4. Absolute subscription 5. Subscription with a special term

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Is a subscription which provides for a stipulation to be performed by the corporation the nonfulfillment of which does not annul the subscription but shall render the corporation liable for damages. Note: The determining factor of a subscription is the fact that it refers to the sale of unissued shares whether before or after incorporation. Thus sale of treasury shares are not covered thereto. Stock option It is a privilege granted to a party to subscribe to a certain portion of unissued capital stock of a corporation within a certain period and under the T&Cs of the grant exercisable by the grantee at any time within a period granted. Per the SEC it must have valuable consideration to be approved. Rules governing stock options 1. Approval of the SE is required before a corporation may grant stock option. The president of the corporation or other official authorized by the board shall file an application with the SEC 2. The grant of stock options to employees or officials who are not members of the BOD may be made provided it is approved by the SEC 3. SO granted to persons who are not SH may be granted upon showing by the BOD has been fully authorized to grant the same by its charter or by a resolution of the SH representing at least 2/3 of the OCS, voting or non voting, excluding treasury shares 4. SO granted to directors or managing groups and its officers must be approved in SH meeting by vote of 2/3 representing the OCS 5. The exercise of the option must be done within a period of 3 years from approval thereof unless sooner terminated by the SEC. an exercise after the 3 year period may be allowed if approved by the SEC on meritorious cases 6. No transfer of the right to an option shall be made without approval of the commission Requisites of collecting unpaid balance of an SH by a creditor: 1. The SH must have not paid in full his subscription 2. He must not have been lawfully released from his liability to pay for the balance 3. The creditor must first exhaust his legal remedies against the corporation except where the corporation is insolvent for in such case recourse against the corporation would be useless Note: The corporation cannot codone an unpaid subscritption since it would violate the trust fund doctrine. Note: A subscriber cannot be released from his unpaid subscription except upon: 1. Valuable consideration 2. Unanimous consent of all the SH and a showing that creditors of the corporation shall not be prejudiced. Any agreement to the contrary is void.

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Note: The remedy of rescission is not applicable to a subscription agreement since it would violate the trust fund doctrine. Ong yong vs Tiu However, although the Tius were adversely affected by the Ongs unwillingness to let them assume their positions, rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code Note: A SH who voluntarily remits an amount in excess of that stated in the call is estopped from claiming such excess because once payment is accepted by the corporation, it becomes a part of the assets of the corporation and any reduction thereof would result to violation of the trust fund doctrine. Note: When a corporation seeks to increase its ACS and performs some acts but not all of the acts to constitutes a valid increase, and the BOD acting in good faith may abandon such increase when justified. Once abandoned the corporation may refund the subscription paid. Sec. 61. Pre-incorporation subscription. A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n) Rules: 1. A subscription made before incorporation is irrevocable for a period of 6 months unless a longer period has been stipulated. However it may be revoked under any of the following situations: a. The incorporation of the said corporation fails to materialize b. All the subscribers consent to the revocation 2. No revocation can take place when the AI has been submitted to the SEC 3. A subscription may be annulled if any of the circumstances vitiating consent is present.

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Sec. 62. Consideration for stocks. Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) Rules in determining price of no par value shares: 1. If the value is stated in the AI, the price indicated therein shall govern 2. The BOD shall determine the price if the authority is granted by the AI or by-laws 3. If no such authority is given, the SH by majority vote representing majority of OCS at a meeting duly called for the purpose shall determine the price Requisites for tangible property as payment for SS: 1. It must be actually received by the corporation 2. It must be necessary or convenient for the corporation use and for lawful purpose 3. The value of the property shall be by fair valuation which must be at least equal to the par or issued value of the stock issued Requisites for intangible property (such as patents of copyrights) as payment for SS 1. It must be actually received by the corporation 2. It must be necessary or convenient for the corporation use and for lawful purpose 3. The valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the SEC Stocks cannot be issued in exchange for: 1. Promissory notes 2. Future services Note:

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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.

Equity securities Represent ownership rights which, in varying degrees, depending upon the typoe of the stock, entitle the holder to a right to participate in the earnings of the corporation and upon dissolution, those assets which remain after all corporate debts have been paid. Modes by way a corporation issue shares: 1. By subscription 2. By sale of treasury stock 3. by subscription to new issues of stock when all the original stick has been issued and the anount of the capital stock is increased 4. making a stock dividend Note: Corporation can issue bonus stock only for services actually rendered and never for gratuity unless in form of stock dividends. Note: Receivables may be accepted as consideration provided the following are present: 1. the SEC has verified the existence and collectability of the receivable 2. the shares to be issued will be held in escrow until actual payment or collection of the receivable. Conditions of property as payment for stocks: 1. it must be necessary in carrying on the corporate business 2. it must possess ascertainable pecuniary vale 3. capable of being transferred and applied to payment of debts Note: An agreement to issue stock for services before the same is rendered is void and the corporation is not estopped to deny services constituted payment of the stock subscription even though it has received the benefit thereof. The remedy is to secure reasonable compensation. Note: Section 62 refers to original issue of shares and not to treasury shares. Note: The Securities regulation code (SRC) prohibits the sale or offer for sale of any security except an exempt security or one sold in an exempt transaction, unless such security shall have been registered and permitted to be sold by the SEC

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Securities regulation code SEC. 3. Definition of Terms.

3.1. Securities are 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: (a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; (b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (f) Proprietary or non proprietary membership certificates incorporations; and (g) Other instruments as may in the future be determined by the Commission. SEC. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. 8.2. The Commission may conditionally approve the registration statement under such terms as it may deem necessary. 8.3. The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section. 8.4. A record of the registration of securities shall be kept in a Register of Securities in which shall be recorded orders entered by the Commission with respect to such securities. Such register and all documents or information with respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. 8.5. The Commission may audit the financial statements, assets and other information of a firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general.

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SEC. 9. Exempt Securities. 9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, 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 which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe. (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. 9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors. SEC. 10. Exempt Transactions. 10.1. The requirement of registration under Subsection 8.1. shall not apply to the sale of any security in any of the following transactions: (a) At any 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 owners 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.

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(d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. (e) The 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) The 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) The 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) Brokers transactions, executed upon customers 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;

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(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. 10.2. The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering. 10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities. 3.9. Pre-Need Plans are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve. SEC.16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and record keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans. Prohibitions on Fraud, Manipulation and Insider Trading SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:chanroblesvirtualawlibrary (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market (hereafter referred to purposes of this Chapter as Exchange): (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or

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(iii) By performing similar act where there is no change in beneficial ownership. (b) To effect, alone or with others, a series of transactions in securities that: (i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of a controlling, controlled, or commonly controlled company by others; (ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.chan robles virtual law library (c) To circulate or disseminate information that the price of any security listed in an 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 for the purpose of inducing the purchase or sale of such security. (d) To make false or misleading statement 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 any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the Commission. 24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section.

SEC. 25. Regulation of Option Trading. No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The terms put, call, straddle, option, or privilege shall not include any registered warrant, right or convertible security.

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SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to:chanroblesvirtualawlibrary

26.1. Employ any device, scheme, or artifice to defraud;

26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person.

SEC. 27. Insiders Duty to Disclose When Trading. - 27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available 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. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insiders spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material non-public information at the time of the purchase or sale.

27.2. For purposes of this Section, information is 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.

27.3. It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information.

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27.4. (a) It shall be unlawful where a tender offer has commenced or is about to commence for:chanroblesvirtualawlibrary (i) Any person (other than the tender offeror) who is in possession of material non-public information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is non-public and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and (ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material non-public information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27.4 (a)(i). (b) For purposes of this subsection the term securities of the issu er sought or to be sought by such tender offer shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities. Sec. 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 endorsed 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) Certificate of Stock Is a written instrument signed by the P or VP and countersigned by the secretary or assistant secretary of a corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of stock. Content of CS: 1. Name of the holder 2. Number, kind and class of shares represented 3. Date of issuance

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Note: 1. The person registered in the Stock and transfer book is considered as the SH, hence in the absence of recording of the transfer or endorsement even if coupled with delivery does not bind the corporation but is binding only on the parties. 2. The date of issuance of the CS is the date of payment of the documentary stamp tax Note: A CS may be transferred by endorsement coupled with delivery however it I not a negotiable instrument. It cannot be issued in the name of a bearer. Note: A bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on it by the real owner, or of any secret agreement relating to the use which might be made of the stock by the holder (12 Fletcher, Corporations, section 5562, p. 521). "Where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such loss. Hence, if a CS was endorsed in blank by the owner to another for purposes of sale, however the latter instead of selling the same pledge the CS in a bank of his own benefit, the real owner has no cause of action against the bank pledgee to cancel the pledge since: 1. He is estopped from denying the apparent authority of the pledger 2. "Where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such loss The real owner has a cause of action against the pledger. Note: The situation is different if the CS was lost or stolen Uncertified securities Securities not evidenced by a CS Street Certificate Certificate issued in the name of a broker. Note: A CS must be delivered, actual or constructive to the owner thereof in order to be an effective and valid issuance of a share of stock. Note: That delivery may not be required where the SH is a corporate officer who has custody of the stock book, in legal contemplation there is a delivery brevi manu.

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Remedies of a SH where the corporation refuses to issue CS: 1. Specific performance 2. Mandamus 3. If either SP or Mandamus is not possible an action for damages. Effect of over issuance of SS: 1. The over-issued stock is void 2. The CS evidencing the over-issued stock is void 3. Regardless of the good faith of the purchaser or a bona fide transferee he does not become an SH for the shares he has is void 4. An action by a corporation to cancel the over-issued shares may be maintained regardless of the innocence of the transferee 5. The corporation shall be liable for actual damages and return of the payment advance by the purchaser Note: A corporation can institute and maintain an action to cancel certificates which was forged, or under any circumstance which renders the share void or voidable. The effect of the cancellation or the pendency thereof is that the corporation may enjoin the right of the SH holding such defective share from voting or from receiving dividends. Rights of a holder: 1. If the SH has notice of the fraudulent issue of the CS or of facts sufficient to charge him with notice of the fraud is entitled to no rights as a SH 2. If a fraudulently issued CS has reached the hands of a bona fide holder for value, the corporation is bound to make good such certificate to the extent of any shares owned by the company, provided that the number of shares represented therein does not cause an over-issue of stock, provided further that the stock was issued by officers or agents held out by the corporation as having authority to issue a CS. The above is based on the principle of estoppel on the part of the corporation. Note: In the event that there is no CS issued yet due to unpaid subscription, the SH may sell the same by means of a deed of assignment provided the consent of the corporation via a board resolution or by some act it can be implied that the corporation has consented, is secured in consonance with article 1293 (novation by change of creditor). Requisite of a valid transfer of share represented by a CS: 1. Endorsement by the owner or his duly authorized representative 2. Delivery by the owner or the his duly authorized representative Note: Any sale or transfer of shares by an SH to a 3rd person does not require authority from the SEC or reported thereto since it is an exempted transaction.

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Rules regarding restrictions in transfer of stocks: 1. The authority to impose restriction must be granted either by the AI or BL 2. It does not confer authority to prohibit transfers 3. It may only impose reasonable restrictions regarding the formalities and procedures to be followed in effecting such transfers 4. Restrictions not covering formalities or procedures or requiring prior approval from the corporation is an ultra vires and illegal act of the corporation because: a. It is an undue encroachment of ownership of the SH b. It is deemed as in restraint of trade c. There is no law authorizing or granting such power to a corporation 5. Note that the only limitation imposed by law in favor of a corporation on such transfer is the right to refuse transfer in the books of the corporation by reason of any unpaid claim of the corporation on the stocks transferred. 6. Such restrictions must be embodied in the CS to bind third persons 7. A stipulation granting the right of first refusal is valid and enforceable provided that a reasonable period for its exercise is provided. 8. Note: The right of first refusal requires an absolute sale of a share and not a mere transfer of legal titled to another for purposes of qualifying the latter to a director position, while retaining the beneficial ownership in the former. Note: Recording of the transfer in the books of the corporation is not a requisite for the validity of the transfer, however it is a requisite to bind the corporation and third persons. Note: A corporation cannot cancel an issued CS and replace it with a new one except upon: 1. Surrender of the old one, failure of which will render the corporation liable for damages to a bona fide holder of the cancelled share 2. After complying with requirements of a lost, stolen or destroyed CS. 3. Upon lawful order of a court. Note: Transfers shall be recorded in the stock and transfer book of the corporation. If a valid transfer has been effected, it is a ministerial duty of the corporate secretary to register such transfer and therefore may be compelled by mandamus. Note: The corporation cannot inquire into the legality of a transfer, it is only limited to check if the formalities required by its by-laws or AI has been complied with. In case of conflicting claim it may refuse to make such transfer until the dispute has been resolved by virtue of an interpleader.

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Note: Although mandamus is an appropriate remedy, note must be taken that it is a special civil action and may be availed of only when there is no other plain speedy remedy available. Hence if applicable a party must first avail of the remedy of specific performance. Before seeking mandamus the following must be complied with: 1. Due application has been made 2. Said application has been denied 3. There are no unpaid claims against the stock by the corporation 4. An ordinary action for damages or specific performance would be inadequate Note: The requirement of registration in the ST book to bind 3rd persons refers only to absolute conveyances. Hence in case of pledge or other forms of encumbrance, except VTAs, need not be registered in the ST book but is required to comply with the requirement of the law such as the execution of the same in a public document (art 2096 NCC) or in case of chattel mortgage registration in the chattel mortgage registry. Note: The unjust refusal to register a valid transfer is a waiver of the registration requirement against the corporation and serves as actual notice to it, thereby binding it to the transfer made. Note: A transfer of a delinquent share may be recorded provided that the corporation consents expressly (board resolution) or impliedly (by recording the transfer) and as additional security the execution of an affidavit of assumption of obligation to pay the unpaid balance by the transferee Sec. 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) Note: Per the opinion of the SEC A subscription is a one, entire indivisible contract and therefore, it cannot be divided into portion, so that the SH shall not be entitled to a CS until he has paid the full amount of his subscription together with interest and expenses, if any is due SEC opinion march 6 2006 Section 64 of the Corporation Code clearly provides that a subscription is one, entire and indivisible whole contract. This principle of indivisibility of subscription is absolute as Section 64 of the Corporation Code speaks of no exception. Note: Partial payments shall be applied proportionately to the shares covered by the CS.

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Note: However that the SC in the case of baltazar vs lingayen stated that unless a contrary provision is found in the by-laws, the BOD has discretion whether to apply partial payment to some of the shares of stock as full payment therein or to apply them pro rated to all the shares, note that the issue in the case whether the stocks which had certificate of stock issued could be voted for despite partial payments. Note: The SC has held that when shares are sold without the CS being issued due to partial unpaid subscription, the purchaser cannot compel the corporation to register the sale in his name nor to issue a CS for the part whose par or issue value corresponds to paid amount of the original owner since it would violate the following: 1. The sale of shares of stock is effected by endorsement and delivery of the CS as provided in sec 63 2. A corporation cannot be compelled to register a transfer of unpaid shares. Comment: The appropriate mode here is to execute a deed of assignment between the original subscriber and the purchaser, thereafter effect the novation by seeking the consent of the board of directors by resolution and execution of the of an affidavit of assumption of obligation. Finally note must be taken that neither can the corporation be forced to issue a CS corresponding to a partial share since a subscription contract is considered as indivisible. General rule: Any person who buys SS in a corporation does so with the knowledge that its affairs are dominated by a majority of the SH and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the incorporation and lawfully enacted by-laws and not forbidden by law and done in good faith. Rights of minority SH 1. In appropriate instances exercise his appraisal right 2. In appropriate institute actions against the corporation for the protection of the rights like: a. Derivative suits b. Individual actions c. Representative actions Note: As a general rule a cause of action in favor of a corporation may only be litigated through the institution of an action by the BOD or a person duly authorized by a board resolution. Derivative suit It is a remedy based on equity brought by one or more SH/M in the name of the corporation to redress wrings committed against it or to protect or vindicate corporate rights, whenever the official of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation.

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Note: In a derivative suit, the SH is a mere nominal party and the corporation is real party in interest, hence it is imperative that the corporation be made party to the litigation. Requisites of a derivative suit: 1. There must be an existing cause of action in favor of the corporation 2. Exhaustion of corporate remedies 3. The SH/M must have been such at the time the cause of action accrue, action was filed and during the pendency of the action, regardless of his number of shares, unless such transactions continue and are injurious to him or affect him especially or specifically in some other way. 4. The suit is brought on behalf and for the benefit of Corporation Note: Under the interim rules of procedure governing intra-corporate controversies, the following additional requisites are required: 1. No appraisal rights are available for the acts or acts complained of 2. The suit is not a nuisance or harassment suit. Derivative cause of action Consist of the fact that the corporation will not or cannot sue for its own protection Instances where derivative suit is appropriate: 1. Where the BOD wastes or dissipates the funds of the corporation, fraudulently disposes of its property, or perform ultra vires acts Note: Allegations of injury to the SH in the complaint can co-exist with those pertaining to the corporation. Such injury in reality provides the SH an additional cause of action for his benefit, the derivative suit should not be dismissed so long as there is a valid cause of action in favor of the corporation. Coterminous ownership rule The SH/M must have been such at the time the action was filed and during the pendency of the action, regardless of his number of shares, unless such transactions continue and are injurious to him or affect him especially or specifically in some other way. Rules with respect to the requisite of exhaustion of intra-corporate remedies: 1. The SH/M must make an earnest, not simulated, effort, with the managing body of the corporation, to induce remedial action on their part. 2. Demand upon the directors or officers is not necessary where it would ne unavailing to protect the rights of the SH because the officers of whose management or misconduct a plaintiff SH complains of , are the one to whom he must seek redress from 3. A SH need not seek action by the SH as a body where under the facts he cannot do so or it would be useless or unreasonable to require it. Thus, if the body of the SH has no adequate power or

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authority to remedy the wrong asserted by the individual SH, an application to it to redress the wrong before bringing a representative action is unnecessary. SHs individual suit It is an action brought by a SH against the corporation for a direct violation of his contractual rights as such individual SH. 2 test to determine if individual or derivative suit: 1. To whom does the cause of action belong? 2. If the action is successful, the judgment rendered shall be in whose favor? SH representative suit: When a wrong is committed against a group of SH, a SH may bring suit in behalf of himself and all other who are similarly situated against the corporation. Note: The SC has ruled that the right of pre-emption is not susceptible to a representative suit under the reasoning that the same is personal to each SH and no SH has any right to, or any interest in , the stock to which another SH is entitled. Intra-corporate controversy It is one which arises between a SH and the corporation or among the SH involving internal affairs of the corporation. Liabilities of an SH: 1. To the corporation for unpaid subscription 2. To the corporation for interest on unpaid subscription 3. Liability for watered stock 4. Liability for dividends unlawfully paid 5. Liability for failure to create a corporation (huh?) Sec. 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) Who are liable for watered stock: 1. The SH who owns the watered stock 2. The D or officer of the corporation who consented to the issuance of stocks for: a. Consideration less than its value, if in money b. If other than money, where the property was valued in excess of its fair value

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3. Any D or officer having knowledge of the above who does not express his objection in writing and file the same with the corporate secretary. Liability: Solidarily liable with each other, to the corporation and its creditors, for payment of the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. Watered stock It is a stock issued not in exchange for its equivalent either in cast, property, share, stock dividends or services. Kinds of watered stock 1. Those issued with a consideration less than the par value of the stock so issued 2. Stocks issued without any consideration 3. Discount share, stock issued as fully paid when the corporation has received a lesser sum of money than its par or issued value 4. Issued as stock dividend when there are no sufficient retained earning or surplus to justify it (huh? Would this not be void?) Note: Watered stock refers only to the original issue of the shares and not on treasury shares which form part of the asset of the corporation and by express provision of section 9 may be resold at a reasonable price to be determined by the BOD. Note: The liability of an SH shall not be extinguished by the fact that he has transferred the watered stock to a bona fide purchaser. The latter may still be held liable for the difference in amount. However the latter may seek redress or damages from the persons who has caused the issuance of the watered stock. Sec. 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37) Instances where interest is demandable: 1. When the by-laws has provided for payment of interest the rate thereof 2. If the subscription contract provides. 3. By board resolution if so empowered by the by-laws 4. When the stock is delinquent (sec 68) Note: Interest shall become due when payment for the subscription becomes due, either from the date specified in the subscription or from the date of call.

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Note: Waiver of the interest is possible if the creditors would not be prejudiced. Sec. 67. Payment of balance of subscription. Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)

When should payments be made: 1. On the date prescribed in the subscription contract 2. In the absence of any specified date in the contract of subscription, on the date stated in the call made by the BOD by board resolution. When does a stock becomes delinquent? 1. If date of payment is provided in the subscription contract, upon failure to pay the balance due within the 30 day grace period counted from the date specified in the subscription contract. 2. If no date is specified in the subscription contract, upon failure of the SH to pay the balance within a period of 30 days from the date stated in the call made by the BOD. Consequences when stock becomes delinquent: 1. The right of the SH to cash dividend shall first be applied to the unpaid portion of his subscription 2. The right of the SH to stock dividends shall be withheld from the delinquent SH until his unpaid subscription is fully paid. 3. No delinquent stock shall be voted or entitled to vote or to representation at any SH meeting 4. It cannot be a basis to qualify an SH to be a D 5. It will give the following remedies to the corporation: a. Extrajudicial sale b. Judicial action 6. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance

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Call Is a declaration officially made by a corporation usually expressed in the form of a resolution of the board of directors requiring the payment of all or a certain prescribed portion of a SH stock subscription. Assessment 1. Paid assessment, it is a levy made upon the stock of a corporation, generally for the purpose of correcting an impairment of the capital and indicates the proportionate amount require to be paid by each SH. 2. With reference to unpaid subscription, the term is interchangeably with call or installment. Note: In the absence of STATUTORY authority, a corporation does not possess the power to assess fully paid stock. Requisites of a valid call: 1. It must be made in the manner prescribed by law 2. It must be made by the BOD 3. It must operate uniformly upon all the SH. Note: The call shall be applicable to shares which are unpaid at the time of the call and shall not affect subscriptions made after the call. Note: A call is only possible to those subscription which a due date is not specified in the contract of subscription. Instances where a call is not necessary: 1. When the corporation becomes insolvent 2. When the SH becomes insolvent 3. When a due date is specified in the subscription contract. Note: A call requires notice to the SH, without notice there is no call against the SH. Note: No other lien is created in favor of the corporation except that for delinquent stock. However the AI may provide for a stipulation creating a lien on the paid shares in favor of the corporation for any unpaid debts, liabilities, or assessment of SH to the corporation.

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Sec. 68. Delinquency sale. The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Note: Extrajudicial sale is a remedy available to the corporation only in the case of delinquency of stock and shall extend only to the sale of delinquent stock. Note: The BOD may order the removal of the delinquent status of the stock Note: Unless there was an agreement beforehand that the dividends earned by the delinquent stock before delinquency sale was effect shall inure to the winning bidder, the same shall belong to the delinquent SH. Procedure of delinquency sale: 1. The stock has become delinquent.

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2. The BOD shall, by resolution, order the sale of the delinquent stock stating the amount due and the date, time and place of sale. 3. Notice of the Board resolution shall be given to the delinquent SH and published in a newspaper of general circulation 1 a week for 2 consecutive weeks in the province or city where the principal office of the corporation is located. 4. Sale at public auction, the highest bidder paying for the following, shall be declared the owner: a. Amount of unpaid subscription b. Interest due c. Expenses of sale d. advertisement costs. 5. In case there is a failure of the auction since no bid was made nor is the corporation to purchase the said shares since it had no URE, the corporation cannot forfeit the unpaid shares. The only remedy it has is to proceed against the delinquent stockholder in a court action. Note: Deleon insists that due to the case of baltazar vs lingayen, the corporation may in its sole option apply all the partial payments made to a number of the shares and issue a CS for those covered by the payments as paid in full, those shares only which are left unpaid without a CS is subject to the delinquency shares. Sec. 69. When sale may be questioned. No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. (47a) Grounds for recovery of stock unlawfully sold: 1. Irregularity in the notice of sale 2. Irregularity or defect in the sale itself of the delinquent stock Note: Irregularity in the call or in the notice of delinquency is not a ground to question a delinquency share. Requisites of an action to recover stock unlawfully sold: 1. A valid ground exist 2. The party seeking to recover must first pay or tender 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 3. The action must be commened by filing of a complaint within 6 months from the date of sale. Note: No right of redemption exist in favor of the delinquent SH

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Sec. 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) Note: The action is only allowed after the unpaid subscription becomes due, after call or after date specified in the subscription contract. 10 years from the time the cause of action accrue if based on a written subscription. 6 months verbal Sec. 71. Effect of delinquency. No delinquent stock shall be voted for 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) Consequences when stock becomes delinquent: 1. No delinquent stock shall be voted for 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 2. The right of the SH to cash dividend shall first be applied to the unpaid portion of his subscription 3. The right of the SH to stock dividends shall be withheld from the delinquent SH until his unpaid subscription is fully paid. 4. It cannot be a basis to qualify an SH to be a D 5. Delinquent stock shall not be included in determining the existence of a quorum 6. Quo warranto proceedings may be instituted against the directors elected by delinquent SH 7. It will give the following remedies to the corporation: a. Extrajudicial sale b. Judicial action 8. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance Note: The prohibition to vote a delinquent stock shall subsist even if the date the stock became delinquent was after the record date but before the actual meeting. Sec. 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) Liabilities of an SH with unpaid stock which are not yet delinquent: 1. To pay interest if so stipulated from the time payments became due 2. To pay the amount due 3. To be proceeded against by the creditor to the extent of unpaid subscription when appropriate.

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Note: If the subscription contract is subject to a suspensive condition of full payment, the SH thereof has no rights since in legal contemplation he is not yet an SH. Sec. 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) Note: If the corporation followed the procedure it is not liable to any person for issuance of a new certificate except in case of fraud, bad faith, or negligence on the part of the corporation and its officers.

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Requirements of issuance of a new CS: 1. The owner or his legal representative shall execute an affidavit stating the following: a. The circumstance resulting to the theft, lost or destruction of the CS b. The number of shares covered in the CS c. Serial number of the CS d. Name of the corporation that issued the same 2. The corporation shall validate the above based on the records in the ST book 3. A notice of the application shall be published in a newspaper of general circulation in the principal place of business of the corporation once a week for 3 consecutive weeks providing for the following information (substantial compliance is applicable): a. The number of shares covered in the CS b. Serial number of the CS c. Name of the corporation that issued the same d. The name of the registered owner. 4. If no contest has been filed with the corporation within 1 year, the right to make such a contest shall be barred and shall cancel the lost, stolen or destroyed CS and issue new ones 5. However the corporation may issue a new one even during the one year period provided that the registered owner executes a bond in the amount or other security as the BOD may deem sufficient. 6. A new CS shall not be issued or be during the pendency of any of the following, and until it is determined by final decision of a court: a. If a contest has been presented to said corporation b. There is an action pending in court regarding the ownership of the said CS Instances where bond or security is not necessary and the corporation may be compelled to issue a CS or voluntary issue one: 1. Where no CS was ever issued 2. Where it is reasonably certain that the original CS would not reappear, such as the following cases a. Where the corporation was the one who caused the loss or destruction b. Where it can be shown by clear proof that the original was destroyed CORPORATE BOOKS AND RECORDS Sec. 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.

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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, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; B. P. No. 268.) stock and transfer book is a corporate book which keeps 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

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Books kept by the corporation: 1. A record of all business transactions 2. Minutes of all meetings of SH or members 3. Minutes of all meeting of D.T 4. ST book Note: All books are kept at the principal place of business except the ST book which may be kept by the ST agent. Note: If the reason for failure to transfer or register a transfer in the ST book is due to the sole fault of the corporation, the 3rd person is released from liability and the renders the corporation liable thereto. Note: If the SH is unknown or cannot be located, a trust relation is created between the SH and the C and the latter shall hold the stock in fiduciary capacity until the real owner appears Who has a right of inspection? 1. D/T/SH/M 2. VTA holder 3. Beneficial owners of shares. Who are liable for refusal to allow inspection? 1. Any officer or agent who refuses to allow the inspection unless in pursuance to an order of the BOD/T 2. The D/T who voted for the refusal in case it was ordered by the BOD/T Defenses to an action for mandamus and damages: 1. 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 2. That the person demanding to examine and copy excerpts from the corporation's records and minute was not acting in good faith or for a legitimate purpose in making his demand. 3. When the demand was made not during reasonable hours on business days. 4. The information sought is a trade secret 5. In violation of reasonable regulations in the manner of inspection provided in the by-laws. Note: The presumption is for legitimate purpose, the burden of proof is on the corporation to prove illegality or inappropriateness of the purpose.

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Note: The right to inspection relates only to the corporation in which an SH is an SH and does not extend to subsidiaries which are a different juridical person. Sec. 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)

MERGER AND CONSOLIDATION Sec. 76. Plan or merger of consolidation. Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Sec. 77. Stockholder's or member's approval. Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or

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by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n) Sec. 78. Articles of merger or consolidation After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n) Sec. 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)

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Note: Only corporations are allowed to merge or to be consolidated together. Sec. 80. Effects or merger or consolidation. The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n) Note: The absorbed corporation in case of merger and in the constituent corporations in case of consolidation are deemed ipso facto dissolved upon the issuance of the certificate of merger/consolidation by the SEC. Merger and consolidation vs sales and assets: 1. In M/C, a sale of assets is always involved while in the latter, the former is not always involved 2. In the former, there is automatic assumption by the surviving or consolidated corporation of the liabilities of the constituent corporations, while in the latter, the purchasing corporation is not generally liable for the debts and liabilities of the selling corporation. 3. In the former, there is a continuance of the enterprise and of the SH therein though in altered form, while in the latter, the selling corporation ordinarily contemplates liquidation of the enterprise 4. In the former, the title to the assets of the constituent corporation is by operation of law transferred to the new corporation, while in the latter, the transfer of title is by virtue of contract 5. In the former, the constituent corporations are automatically dissolved, while in the latter, the selling corporation is not dissolved by mere transfer of all its property.

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APPRAISAL RIGHT Sec. 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) Instances where the appraisal right may be exercised: 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 2. In case any amendment to the articles of incorporation has the effect of authorizing preferences in any respect superior to those of outstanding shares of any class 3. In case any amendment to the articles of incorporation has the effect of extending or shortening the term of corporate existence 4. In case the corporation decides to invest its funds in another corporation or business for any purposes other than its primary purpose stated in the AI 5. Any SH of a close corporation, for any reason, compel said corporation to purchase his shares at their fair value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock. Requisites of a valid exercise of appraisal rights: 1. The exercise must be based on a ground authorized by law 2. The dissenting SH must have voted against the proposed corporate action 3. A written demand on the corporation for payment of his shares must be made by him within 30 days after the date the vote was taken 4. The price must be based on the fair value of the shares 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 5. Such fair value must be determined by the agreement of the parties, if they cannot agree within 60 days from the approval of the corporate action, the same shall be determined by the appraisal of 3 disinterested person by majority vote, composed of: a. Named by the SH b. Named by the corporation c. Named by both of them. The corporation shall pay the award within 30 days from the date of award 6. Payment of the shares must be made only out of the URE of the corporation 7. Upon payment the SH must transfer his shares to the corporation.

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

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Reasons for non-payment 1. There is no URE 2. Withdrawal of the demand for payment by the SH with the consent of the corporation. 3. Abandonment or rescission of the corporate action 4. Disapproval of the SEC, when its approval of the corporate act is required 5. Determination by the SEC that the SH is not entitled to exercise his appraisal right 6. If the fails to surrender his CS within 10 days after demanding payment for his share, the corporation, at its option, terminate the SHs right to exercise this appraisal right 7. When he has transferred his shares to another person and the corresponding CS is cancelled and a new one issued to the transferee in lie thereof. Effect: 1. He shall retain his status as an SH 2. All his rights as an SH are restored 3. All dividends which may have been distributed which he may have received it if not for the exercise of his appraisal right shall be paid to him Sec. 85. Who bears costs of appraisal The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n) General rule: The corporation shall bear the cost of the appraisal of the shares unless any of the following occurs: 1. The parties could not agree on the price and the determination of the appraisers is approximately the same as that determined by the corporation 2. Where an action for recovery of the fair value , all cost and expenses shall be assessed against the corporation unless the refusal of the SH to receive payment was unjustified. Sec. 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 canceled, 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) Note: If the fails to surrender his CS within 10 days after demanding payment for his share, the corporation, at its option, terminate the SHs right to exercise this appraisal right

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Note: The transferee shall become a regular SH with a right to receive all dividend distribution which would have accrued to such shares. Non-stock Corporation Non-stock Corporation It is one organized for eleemosynary purpose and where no part of its income is distributable to its members, trustees, or officers, subject to the provision on dissolution. Note: That any profit which a NSC may obtain as an incident to its operation shall, whenever necessary or proper be used for the furtherance of the purpose or purposes for which the corporation was organized. Note: The determining factor is whether dividends or profit are distributed to the members, if so it is a SC Sec. 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) Note: A NSC cannot have a purpose is a business undertaking where profit is the main or underlying purpose Note: Nationalization laws are not applicable to NSC. An alien may be an officer of the corporation save that of a secretary which is exclusively granted to a Filipino. Sec. 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) 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. Rules Right to vote: 1. The by-laws may provide for reasonable regulations to the right to vote of a member, such as the limitation or procedure on how to vote by proxy or the denial thereof

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2. Voting by mail may be authorize by the by-laws if approved by the SEC under such conditions as may be prescribed. 3. Each member is entitled to one vote. Requisites to the right of the government to vote sequestered shares for ill-gotten wealth 1. There is a prima facie evidence showing that the said shares are ill-gotten and thus belong to the state 2. There is an imminent danger of dissipation, thus necessitating their continued sequestration and voting by the PCGG, while the main issue is pending with the SB. Sec. 90. Non-transferability of membership. Membership in a non-stock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. (n) Note: Membership is as a rule non-transferable and are personal to the holder thereof unless the AI or bylaws provide otherwise. Sec. 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) Note: The prescriptive period to contest a delinquency sale of membership in a NSC as provide in section 68 is not applicable and is only applicable to sales of shares. In case of extrajudicial sale of membership die to non-payment of dues is governed by 1140 of the NCC providing for a prescriptive period of 8 years Note: The AI or BL may provide for any cause it deems sufficient provided that the same is reasonable and subject to existing laws. Hence forfeiture of membership for nonpayment of dues is plausible specially when there is a provision on notice, and the value of the shares shall be returned to the owner less deductions for unpaid dues, was held as valid. Sec. 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period.

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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) Rules as to election and term: 1. T elected to fill a vacancy occurring before the expiration of a particular term shall hold office only for the unexpired term 2. Each trustee must be a member of the NCS 3. Officers are to be elected by the members unless a contrary provision is provided in the AI or BL. Sec. 93. Place of meetings. The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n) Requisites of a valid meeting: 1. Notice is sent to all members indicating the date, time and place of the meeting 2. The meeting can be held anywhere but must be within the Philippines. Rules of distribution of assets in case of liquidation: 1. All debts of the corporation must be paid, or adequately provided for 2. All assets held under condition of being returned in case of dissolution should be returned 3. All assets held subject to specific use (charitable institutions, education, etch) must be transferred to other corporation, societies, or organizations having the same purpose as the corporation dissolved 4. All other assets not included in the above, if any, shall be distributed to the members in accordance with the stipulations in the AI or by-laws 5. Any other remaining assets may then be distributed to such person, societies, organizations or corporations, profit or non-profit, as may be specified in the plan of distribution. Procedure for plan of distribution 1. The BOT, by majority vote is a resolution, shall adopt a plan for distribution of the assets of the corporation 2. Written notice for a meeting must be sent to all members entitled to vote, statin the time and place of such meeting and the purpose thereof 3. At such meeting, such plan of distribution must be approved by 2/3 votes of members having the right to vote, who are present or represented by proxy. Note: It is not legally feasible for a NS corporation to be converted into a SC (stock corporation) by mere means of amendment since the laws of governing its dissolution is different and further the funds of the NCS are considered held by it in trust for carrying out the objectives and purposes expressed in its charter. The appropriate mode would be is first to dissolve the NSC and incorporate the new SC

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Foundation It is a NS non-profit corporation with funds established to maintain or aid charitable, religious, educational, athletic, cultural, scientific, social welfare, or similar activities primarily through extending grants or endowment. Requirements of registration with SEC 1. Submission of modus operandi or plan of operation, executed, under oath by the president of such foundation, setting forth the mode of its operation, source of its funds, the proposed application of said funds, and the prospective beneficiaries of grants of endowment 2. Submission of bank deposit in the amount of not less than 1M representing funds to be used for extending grants or endowments Close Corporation Requisites of a close corporation: 1. The number of SH cannot exceed 20 persons 2. There must be one or more restriction like the right of first refusal in favor of the SH or the corporation 3. The stocks cannot be listed in the Stock exchange nor should they be publicly offered. Note: 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 The following cannot be stock corporations: 1. mining 2. oil companies 3. stock exchanges 4. banks 5. insurance companies 6. public utilities 7. educational institutions 8. corporations declared to be vested with public interest Sec. 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

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The restriction on transfer of stock must appear: 1. AI 2. BL 3. Stock certificates Note: 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 Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. 6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied.

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Note: Whenever any person to whom stock of a close corporation has issued or transferred who is not entitled under provision of the AI to be a holder of record of stock, he is conclusively presumed to have notice either that: 1. He is a person not eligible to be a holder of stock of the corporation 2. Transfer of stock to him would cause the stock of the corporation to be held more than the number of persons permitted by its articles of incorporation to hold stock of the corporation 3. With the transfer of stock, the corporations restrictions on transfer is violated, the n the corporation may at its option refuse to register the transfer of the stock in the name of the transferee. Exception to the right to refuse registration: 1. The restrictions may be waived by consent of all the SH 2. Amendment of the AI removing the restriction Sec. 102. Pre-emptive right in close corporations. The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise Rules as to management of a close corporation: 1. They may elect a board to possess the same powers of a SC 2. They may elect that the corporation shall be managed by the SHS by provision in the AI. The election of a BOD is no longer necessary 3. The corporate officers may be elected by the SH directly unless the AI or BL provides otherwise. Sec. 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of

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directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

Requisites for the validity of a pre-incorporation agreement to survive incorporation: 1. it is signed by all the SH 2. if there intent is for the agreement to survive the incorporation 3. to the extent that such agreements are not inconsistent with the AI Note: An agreement between 2 or more or all of the SH if: 1. in writing 2. signed by all the parties thereto Shall be binding and valid: 1. even when it provides that in exercising any voting rights, the shares held by them all be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon 2. even though relating to any phase of the corporate affairs, and even if the effect is to make them partners among themselves. 3. Even if it relates to the conduct of business and affairs of the corporation as to restrin or interfere with the discretion or powers of the BOD Effect of agreements: 1. Such agreements shall impose on the parties-SH the liabilities for managerial acts imposed by the code 2. The SH shall be held to be in fiduciary duties to each other and among themselves to the extent that they are actively engaged in the management or operation of the business affairs of the close corporation 3. The party-SH shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance Sec. 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

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4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. Sec. 104. Deadlocks. Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. Note: In case of deadlock respecting the management of corporate affairs, that the votes required for any corporate action cannot be obtained in the prejudice of the SH generally. An SH by written petition may request assistance from the SEC to arbitrate. Powers of the SEC if requested to arbitrate 1. Cancel or alter any of the provision contained in the articles of incorporation, by-laws, or any stockholder's agreement;

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2. Cancel, alter or enjoin any resolution or act of the corporation or its board of directors, stockholders, or officers; 3. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; 4. Require the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; 5. Appoint a provisional director; 6. Dissolve the corporation; 7. Grant such other relief as the circumstances may warrant. Rules of a Provisional director: 1. He must neither be a SH nor a creditor of the corporation or any of its subsidiaries or affiliates 2. His qualifications shall be determined by the SEC 3. He is not a receiver nor does he possess the powers of a receiver or custodian 4. He shall have the powers of a duly elected D, including the right to notice and to vote in a meeting of the BOD 5. 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 6. He shall be removed by order of the Commission or by all the stockholders Sec. 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. Note: The right to compel the corporation to pay fair value (which must be less than the Par or issued value) of his share is at the option of the SH provided that there is URE Note: 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.

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Sec. 103. Amendment of articles of incorporation Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. DISSOLUTION Sec. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. (n) Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a) Sec. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a

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newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa) Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n) Sec. 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) Sec. 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)

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Methods of corporate dissolution: 1. Voluntary Dissolution By filing the proper papers with the SEC. No hearing is required if there are no debts, but hearing is required where creditors are affected 2. Involuntary Dissolution: Upon verified complaint filed with the SEC on grounds authorized by law like when there is serious dissensions in the corporation, non-user of franchise. 3. Expiration of the term of the corporation 4. Shortening of corporate term 5. Failure to organize and commence business within 2 years from date of issuance of Certificate of incorporation 6. Legislative dissolution Requisites of voluntary dissolution without prejudicing creditors: 1. Majority vote of the BOD 2. 2/3 affirmative vote of the SH/M 3. Notice to the SH 3o days prior to the meeting 4. Publication in a newspaper of general circulation in the principal place of business or if none in the Philippines 5. Copy of the resolution certified by majority of the BOD/T and countersigned by the secretary and filed with SEC Dissolution shall take effect upon the issuance of the SEC of certificate of dissolution. Requisites of voluntary dissolution with debts: 1. Formal petition with the SEC: a. Signed by majority of the BOD/T or officers having management of its affairs, verified by the president or secretary or one of the D/T b. Setting forth all claims and demands against it c. Setting forth that dissolution was resolved upon affirmative vote of 2/3 of the OCS 2. SEC shall issue order reciting the purpose of the petition and shall fix a date before objections may be filed, which shall not be less than 30 days nor more than 60 days after entry of order 3. The order shall be published once a week for 3 consecutive weeks, in the place of business, if none, in the Philippines and a copy is to be posted for 3 consecutive weeks in 3 public places in the municipality or city. 4. After 5 days notice from the expiry date, SEC shall hear the petition and objections thereto 5. If lawful, it shall order the corporation dissolved, provide for the disposition of properties, and may appoint receiver Note: In shortening of the corporate term to effectuate a dissolution the SEC requires the following: 1. Notice of dissolution to be published in a newspaper of general circulation for 3 consecutive weeks 2. List of corporate creditors, with their consent ti the shortening of corporate term

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3. Submission by majority SH/Principal officers an undertaking to personally answer for any outstanding corporate obligations of the corporation 4. Latest audited financial statements which must not be earlier than the date of the SH meeting approving amendment to the AI and BIR clearance on the tax liabilities of the corporation. Grounds for involuntary dissolution 1. Fraud or misrepresentation as to the paid-up capital of the corporation 2. Misinterpretation 3. Ultra vires and mala prohibitia acts committed by the corporation despite persistent SEC warnings 4. Continuous inactivity of the corporation for at least 5 years 5. Refusal to adopt or approve by-laws Methods of liquidation: 1. With the BOD supervising the liquidation process, but their authority is good only within a period of 3 years from corporate dissolution 2. By transferring all of the assets to a trustee who handles the liquidation 3. Liquidation by a duly appointed receiver Note: National abaca corp vs Pore As a general rule failure to appoint or transfer all rights of action to a trustee so that he can continue the case until termination, will result in the dismissal of a pending case for lack of corporate personality

Note: Pepsi-Cola vs CA The expiration of the 3 year period without completing the liquidation process and without appointing a receiver or trustee to handle the corporate liquidation, the BOD itself, may be permitted to continue as trustees by legal implication to complete the corporation liquidation. Note: Several cases decided by the SC favors the implied authorization of the BOD since to allow the contrary would result to the unjust enrichment of the defendant. Note: The liability of the trustee, absent fraud, is limited only to the properties left to him for administration, he is neither jointly or solidarily liable to the creditors of the corporation. Preference of distribution of assets: 1. Corporate creditors 2. SH/M, D/T or officers of the corporation who are also its creditors as a result of a legitimate or proper loans or claims.

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3. The remaining assets are then distributed among the SH/M in proportion to their shareholding or interest in the absence of any provision to the contrary a. Holders of preferred stock as to assets b. To the other SH 4. Any creditor or SH whose whereabouts is unknown shall be escheated to the government Sec. 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) Chung Ka Bio v Intermediate Appellate Court While we agree that the board of directors is not normally permitted to undertake any activity outside of the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. 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. This was not prohibited by the Corporation Act. In fact, it was expressly allowed by Section 28-1/2. Note: Recovery of debts if the corporation against the liquidator thereof after the lapse of the winding up period is not barred. The dissolution of a corporation does not extinguish the debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of the trust fund, into the hands of its former SH. Note: The appointment of a receiver operates to suspend the authority of a corporation and of its directors/trustees and officers over its property and effects, such authority being reposed in the receiver, and in this respect the receivership is equivalent to an injunction to restrain the corporations officers from intermeddling with the property of the corporation in any way. Status of a receiver He is a representative not only of the court but both the SH and the corporate creditors, he has therefor the power to vote the shares owned by the latter in other corporations. Note: The appointment of an executive committee for the rehabilitation of a corporation shall stay all actions, it has no exceptions, the purpose of which is to free the committee or the rehabilitation receiver to effectively exercise its powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company.

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Note: The receivership, unless expressly limited in duration, shall exist indefinitely until the affairs of the dissolved corporation shall have been completely settled and liquidated. During its continuance claims can be presented and allowed if they are not barred by the statute of limitations. The 3 year period prescribed by section 22 is not applicable. Note: The appointment of a receiver is discretionary. FOREIGN CORPORATIONS Sec. 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) Note: Under our law the requirement of reciprocity is only a requirement or condition that needs to be complied with in order for a foreign corporation to secure a license to transact business in the Philippines. It is not an essential element of being a corporation. Note: A corporation being a creation of law, its existence is limited only to the territory over which the state in whose laws it was incorporated exercises sovereignty. Thus, it cannot exist in another state except when the consent (consent doctrine) of the receiving state is given expressly or impliedly. In our jurisdiction, the consent is secured by the acquisition of a license from the SEC and certificate of authority from the appropriate government agency, duly issued in favor of a foreign corporation to allow it to transact business in the Philippines. Note: Determination of nationality of a corporation using the control test 60% is of Philippine nationality Requisites of a license 1. Appointment of a resident agent and power of attorney for SEC to receive process 2. Prove that the FC country grants reciprocal rights to Filipinos and Philippine corporation 3. Establish an office in the Philippines, and bring assets 4. Undertaking that Filipino creditors will be preferred in the event of insolvency 5. Notice of six months should the FC desire to terminate operations 6. Franchise/patents must remain in the Philippines if possible 7. File a bond of 1M: surety bond, government securities, securities of political subdivisions, shares of stock of registered enterprises with the SEC; or shares of stock of any corporation being sold at stock exchange

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8. That within 6 months after each fiscal year, the SEC shall require the deposit of additional securities equivalent to 2% of the amount in excess of 5M of the gross income.

Sec. 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) Doing business It implies a continuity of commercial dealings and arrangements, and contemplates, to that extent the performance of acts or works or the exercise of some function normal incident to or in progressive prosecution of the purpose and subject of its organization for the purpose of securing profits. It covers any of the following: 1. Soliciting orders 2. Service contracts 3. Opening offices, whether called liasons offices or branches 4. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more 5. Participating in management supervision or control of any domestic business, firm, entity or corporation in the Philippines 6. Any other acts or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent, performance normally incident to, and in progressive prosecution of commercial gain or of the purpose and object of the business organization Doing business shall not include: 1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; 2. Having a nominee director or officer to represent its interest in such corporation; 3. Appointing a representative or distributor domiciled in the Philippines which transacts business in the representatives or distributors own name and account; 4. The publication of a general advertisement through any print or broadcast media; 5. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; 6. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; 7. Collecting information in the Philippines; and 8. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

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Agilent Technologies Ltd vs Integrated Silicon The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: 1. If a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts; 2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction 3. If a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before Philippine courts 4. If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. Test of doing business: 1. The subsequent test: whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another 2. Continuity test: It implies a continuity of commercial dealings and arrangements, and contemplates, to that extent the performance of acts or works or the exercise of some function normal incident to or in progressive prosecution of the purpose and subject of its organization Doctrine of quasi-estoppel (FC can be sued) It shall not be allowed, under any circumstances, to invoke its lack of license to impugn their jurisdiction. It is against justice and equity for an unlicensed FC to execute contracts with a domestic firm and then repudiate their obligations thereunder or plead immunity to Philippine jurisdiction just because it has not obtained a licensed. General rule: Foreign corporation doing business is the Philippines without a license cannot maintain a suit in the Philippines Exception: 1. When a counterclaim is filed by the defendant since in this case it cannot be said that the FC is maintaining the action. 2. One who dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity, will be applied to prevent a person contracting with a FC from later taking advantage of the latters non-compliance with the law, chiefly in cases where such person has received the benefits of the contract. A FC not doing business in the Philippines may sue and maintain an action on the following grounds: 1. On isolated transactions 2. To protect its corporate reputation, name, trademark, tradenames and goodwill. (right in rem + convention of the union of paris for the protection of industrial property)

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3. To enforce a right not arising out of a business transaction 4. To recover for actionable acts or omissions not based on a business transaction. Isolated transaction Where a foreign corporation enters into a single agreement, or engaged in some other isolated or casual business act or transaction within a particular state, with no intention to repeat the same or make such state a basis for the conduct of any part of its corporate business, such corporation cannot be said to be doing business within the state. Unless the single act constitutes an active prosecution of its purpose or subject of organization. Note: A contract entered into by an FC doing business in the Philippines without a license is valid but renders the FC without legal standing to institute an action in Philippine courts, however compliance with the requirement cures the defect and renders the contract enforceable Note: In order for an FC to institute an offense it must plead that it is an FC and whethet it has a license or not and its grounds for being able to sue in the Philippines. General rule: N FC not doing business cannot be sued in the Philippine for lack of jurisdiction Exceptions: 1. Consent or voluntary surrender to jurisdiction to local courts a. Stipulations to venue b. Personal appearance in court not to question the jurisdiction c. Participation in the litigation of the case 2. Doctrine of equality, where it would not be impossible for court processes to reach the FC since they are accorded the right to seek redress in the Philippine courts in certain controversies 3. Attachment of local properties to obtain jurisdiction (action quasi-in rem) Sec. 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) General rule: A foreign corporation licensed to do business in the Philippines is subject to the laws of the Philippine except matters relating to: 1. Creation, formation, organization or dissolution of corporation 2. Relations, liabilities, responsibilities, or duties of members, SH, or officers of corporations to each other or to the corporation, are governed by the laws of the state of creation.

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Note: In other words, matters relating to the internal affairs or organization of the corporation are governed by the law of the state of incorporation. Sec. 130. Amendments to articles of incorporation or by-laws of foreign corporations. Whenever the articles of incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. (n) Sec. 131. Amended license. A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases. (n) Sec. 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed. Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of it license in accordance with this Title. (n) Note: A corporation does not have an inherent right or power to merge or be consolidated. There being no law here in the Philippines allowing such corporate act it is considered as not possible at the time being. However the corporations involved may sell all its assets to the other to effectuate a transfer of interest and the selling corporation must undergo dissolution as per the law of the place of its incorporation. Sec. 134. Revocation of license.

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Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title; 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; 5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines. (n) Grounds for revocation: 1. Failure to: a. File annual reports b. Appoint or maintain resident agent c. Inform the SEC of change of resident agent or the latters change of address d. Submit copy of amended AI or BL; articles of merger or consolidation e. Pay taxes, imposts or assessment 2. Misrepresentation in material matters in reports 3. Engaging in business not authorized by the SEC: a. Performing acts outside the purpose/s for which the corporation is authorized under its license b. Acting as an agent to any FC not licensed to do business to the philippines 4. Acting as dummy of a foreign corporation not licensed to do business in the Philippines. Sec. 135. Issuance of certificate of revocation. Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.

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Sec. 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. THE NEGOTIABLE INSTRUMENTS LAW Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named Signature Any form of writing whereby a person intended it to be his own signature. Note: When a signature is denied by the maker the burden of proof is on the holder Promissory note: Is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Bill of exchange A negotiable bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed date, or determinable future time a sum certain in money or order or to bearer Acceptor Is the drawee upon his acceptance or after he indicates his willing to accept responsibility for the payment of the bill Note: The drawer and drawee can be the same person

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Note: Upon acceptance by the drawee, the drawer becomes secondarily liable only as a surety whereas the drawee becomes primarily liable. Note: If ample funds are in the possession of the drawee and he refuses to pay the obligation he becomes liable to the Drawer for damages he may have cause. Further in the event that the drawee pays the payee without ample funds, the holder is not liable to reimburse what he has received, the drawee must seek reimbursement from the drawer. Sec. 2. What constitutes certainty as to sum. The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. Sum certain The NI represents a fixed amount as stated on the face of the instrument or at least, may be ascertained upon its face by computation, independent of all extrinsic evidence. Note: If the instrument requires extrinsic evidence to prove the amount due, it is not negotiable. Note: An instrument which can be paid on a reduced or increased interest rate is negotiable provided the condition upon which rate to be used is provided in the instrument not requiring evidence aliunde. Rules as to interest rate: Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; Requisites of installments: 1. the amount to be paid on each installment 2. the determinable date upon which such installment shall be made. Note: The acceleration clause made dependent upon the discretion of the holder destroys the negotiability of the instrument because the sum due on what time is not longer certain or determinable.

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Exchange It is the charge for the expense of providing funds at the place where the instrument is payable to cover such instrument which is issued in another place. It may be fixed or at the current rate. Note: Payment with exchange rate is payable only to foreign bills (where the instrument is drawn in one country payable in another) Note: A provision which renders the sum uncertain after the maturity date of the instrument shall not affect the negotiability of the same before such maturity date. Hence if attys fees and cost without specifying the amount are included in the computation regardless of whether the instrument is due already destroys its negotiability Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. Note: The last sentence simply means that if the particular fund upon which to payment shall be taken destroys negotiability since it denotes a condition that there is a sufficient funds to cover the debt. As compared to the first exception, payment is absolute, only the place for reimbursement is conditional. The test is whether the instrument carries the general personal credit of the drawer or maker or if it carries only the credit of a particular fund, the former is negotiable the latter is not. Note: If one of the requisites set forth in section 1 requires the presentation of extrinsic evidence, the document is non-negotiable even if in truth it complies with the requisites. (I.E the sum certain in the contract executed on XXXX or according to the terms and conditions set forth in the contract executed by us, in the sample, even if the sum is certain or the payment is a pure obligation the fact that the determination of the same is subjected to the review of the contract renders the document non-negotiable) Note: There must be an unconditional promise or order to pay, not a mere request.

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Sec. 4. Determinable future time; what constitutes. An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Note: The fact that payment is subjected to a term does not destroy its negotiability but only affects its demandability, what destroys the negotiability is the subjection of the obligation to pay to a condition, even if the condition does occur. Note the obligation is valid but it is not negotiable. After sight Means after the instrument is seen by the drawee or upon presentment for acceptance. (I.E 15 days after sight 15 days after presentment for payment) Note: Year of payment is required, otherwise the date is indeterminable. Note: Per Deleon, the provision at a fixed period after date or sight, implies that when a period and an event is the determinable factor in the maturity of an instrument, like 7 days before christmass, the same is not negotiable since the law only state fixed period after date. Further the provision on or before is different since it implies demandability during the entire period of execution of the instrument until happening of the future event unlike the former it provides for a period of time not starting from the time of execution. Note: A instrument subjected to the period dependent on the will of the debtor, or according to the means of the debtor or within a reasonable time is not a date certain or determinable, under art 1197 of the NCC, this requires court action to set the term, as such not being determinable at the face of the instrument, it is not negotiable. Sec. 5. Additional provisions not affecting negotiability. An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or

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(d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Note: A stipulation confessing judgment in an instrument is illegal and is not acceptable in the courts as being contrary to public policy, however even if illegal it will not affect the negotiability of the instrument and only renders the stipulation of advance confession void for being contrary to public policy. Note: If the option to pay in money or performance of an act is given to the holder the same does not affect the negotiability however of the option is given to the maker or the requirement of performance of any other act plus payment of money renders the instrument non-negotiable. Sec. 6. Omissions; seal; particular money The validity and negotiable character of an instrument are not affected by the fact that: (a) (b) (c) (d) (e) it is not dated; or does not specify the value given, or that any value had been given therefor; or does not specify the place where it is drawn or the place where it is payable; or bears a seal; or designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Note: When the omission of the date is required to determine the date of maturity the holder may insert the true date, however the insertion of a false date shall not avoid the instrument in the hands of an innocent 3 rd party who may enforce the same notwithstanding the improper date. Sec. 7. When payable on demand. An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Sec. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or

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(c) (d) (e) (f)

The drawee; or Two or more payees jointly; or One or some of several payees; or The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Sec. 9. When payable to bearer. The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. Bearer Instrument Is a negotiable instrument that may be transferred by delivery without indorsement and payment to any person in possession thereof. Note: The bearer instrument mentioned in C D and E are order instruments on their face Note: It is essential that the payee is known to the maker or drawer to be fictitious or non-existing person, otherwise, it would be an order instrument. Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 11. Date, presumption as to. Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Note: The date specified on the instrument only creates a prima facie presumption of the date, which may be overcome by evidence aliunde except when the instrument is in the hands of a holder in due course Instances where date is material: 1. When the I is payable at a fixed period after date 2. When the I is payable after a fixed period after sight.

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Note: That a PN and BE need to be presented within a reasonable time under section 70 and 71 otherwise the persons secondarily liable may be released from their liability. Sec. 12. Ante-dated and post-dated. The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Note: The insertion of a wrong date shall avoid the instrument only to him who made the insertion specially if fraudulent purpose. But in all cases it shall be valid and the date so inserted shall be the true date with respect to a holder in due course Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Note: This section presupposes 2 situations: 1. An incomplete document was delivered but some of its material particular is missing 2. A blank document signed by the maker was delivered to another with the intention of making it a negotiable instrument within a reasonable period Requisites to bind the maker: 1. It must be filled in in accordance with the authority given 2. It must be completed within a reasonable time Note: In order for a signed blank delivered instrument be completed as a negotiable instrument it must have been delivered with the intent to make a negotiable instrument.

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General rule as to incomplete delivered instruments: The delivery of a incomplete instrument to another is prima facie authority to fill in the blanks. In order to bind the maker, it is required that the instrument be filled in in accordance of the authority granted which is presumed. The burden of proof is on the maker to show forth that the document was filled in contrary to the authority granted by submission of evidence aliunde. Exception: The defense mentioned above is a personal defense available only against the person who filled in the blanks and does not extend to a holder in due course under the reasoning that where of 2 persons must suffer by the bad faith of another, the loss must fall upon the one who first reposed confidence and made it possible for the loss to occur. Material particular: Is any particular proper to be inserted in a negotiable instrument to make it complete. Sec. 15. Incomplete instrument not delivered. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Rules: 1. If the instrument is incomplete and undelivered it shall serve as a real defense against any holder, even a holder in due course in favor of a person whose signature was included prior to delivery. 2. To all persons who signed the document as indorsers after delivery they are deemed to warrant the genuiness and therefore liable thereto since it is valid to them 3. However under certain circumstances, negligence on the part of the maker may render him liable to a holder in due course 4. If the instrument is in the hands of another not the maker thereof there arises a disputable presumption of valid and intentional delivery, hence the maker needs to prove non delivery to avail of this defense.

Sec. 16. Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

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Note: The above provision applies to completed documents but undelivered. Delivery: It is the transfer of possession, actual or constructive, from one person to another with intent to transfer title thereto and recognize him as the holder thereof. It is the final act essential to the perfection of the obligation Issue: Is defined as the first delivery of the instrument, complete in form, to a person who takes it as a holder. Note: In order for an instrument to produce effect in requires: 1. The mechanical act of completing the instrument 2. Delivery to another with the intent to transfer title thereto. 3. It is received by a person as a holder and not as General rule: Valid and intentional delivery is presumed, however the delivery may be shown to be for any other purpose other than transferring of the property in the instrument, conditional or for a special purpose, only against: 1. The immediate parties 2. Holders who are not holders in due course Exception: If delivery has been made to a bona fide holder in due course a valid delivery thereof of all parties prior to him so as to make them liable to him is conclusively presumed. Immediate and remote parties: Are parties chargeable with the knowledge or notice of any infirmities in the instrument or defect in the title of the person negotiating the same. Note: That per Deleon, where there was no physical delivery and the instrument was stolen without fault or negligence on the maker, he is not liable to any holder since in law it shall be deemed as a blank piece of paper. Sec. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;

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(b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Sec. 18. Liability of person signing in trade or assumed name. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. General Rule: Only signatories in the instrument are bound thereby Exceptions: 1. Where a person signs in a trade or asumed name 2. The principal is liable if duly authorized agent signs on his behalf 3. In case of forgery, the forger is liable eve if his signature does not appear on the instrument 4. Where the acceptor makes his acceptance of a bill on a separate paper 5. Where a person makes a written promise to accept a bill before it is drawn Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.

Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a

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representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Requisites to free an agent from liability 1. He is duly authorized 2. He adds words to his signature indicating that he signs as an agent, that is, or on behald of a principal, or in a representative capacity 3. He discloses his principal. Note: Failure to disclose the principal cannot be cured by evidence aliunde, the agent is personally bound to the instrument except against immediate parties who knew of the representative character of the signor. Sec. 21. Signature by procuration; effect of. A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Signature by procuration (per pro; per proc; P.P;PP.) It gives a warning that the agent has but limited authority so that it is the duty of the person dealing with him to inquire into the extent of his authority. Note: The power to make and indorse negotiable instruments must be expressly granted, it is not presumed in a general grant of authority, it is subject to strict interpretation and must be performed in strict conformity with the terms thereof. Sec. 22. Effect of indorsement by infant or corporation. The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Note: Incapacity to contract is a real defense personal only to the incapacitated himself and not be availed of any other person in the transaction. Note: An ultra vires act may release the corporation from liability but shall not affect the validity of the instrument nor the liability of other indorser. Note: The above rule is subject to the rules on estoppel.

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Sec. 23. Forged signature; effect of. When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. General Rule: Where the signature on the instrument is affixed by one who does not claim to act as an agent and who has not authority to bind the person whose signature he has forged or by one who purports to be an agent but has no authority to bind the alleged principal, the signature is wholly inoperative

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