Professional Documents
Culture Documents
INTRODUCTION
Definition and attributes of a corporation A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence
until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that
of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1) It is an artificial being;
(2) Created by operation of law;
(3) With right of succession;
(4) Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.
CLASSIFICATION OF PRIVATE CORPORATIONS
Stock v. Non-Stock Corporations
Stock Non-Stock
Definition Corporations which have capital stock divided into All other private corporations (3)
shares and are authorized to distribute to the One where no part of its income is distributable as
holders of shares dividends or allotments of the dividends to its members, trustees or officers. (87)
surplus profits on the basis of the shares (3)
Purpose Primarily to make profits for its shareholders May be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes
like trade, industry, agricultural and like chambers,
or any combination thereof. (88)
Distribution of Profits Profit is distributed to shareholders Whatever incidental profit made is not distributed
among its members but is used for furtherance of its
purpose. AOI or by-laws may provide for the
distribution of its assets among its members upon
its dissolution. Before then, no profit may be made
by members.
Composition Stockholders Members
Scope of right to vote Each stockholder votes according to the proportion Each member, regardless of class, is entitled to one
of his shares in the corporation. No shares may be (1) vote UNLESS such right to vote has been
deprived of voting rights except those classified and limited, broadened, or denied in the AOI or by-
issued as "preferred" or "redeemable" shares, and laws. (Sec. 89)
as otherwise provided by the Code. (Sec. 6)
Voting by proxy May be denied by the AOI or the by-laws. (Sec. 89) Cannot be denied. (Sec. 58)
Voting by mail May be authorized by the by-laws, with the approval Not possible.
of and under the conditions prescribed by the SEC.
(Sec. 89)
Who exercises Corporate Powers 23 Board of Directors or Trustees Members of the corporation
Governing Board Board of Directors or Trustees, consisting of 5-15 Board of Trustees, which may consist of more than
directors / trustees. 15 trustees unless otherwise provided by the AOI or
by-laws. (Sec, 92)
Term of directors or trustees Directors / trustees shall hold office for 1 year and Board classified in such a way that the term of office
until their successors are elected and qualified (Sec. of 1/3 of their number shall expire every year.
23). Subsequent elections of trustees comprising 1/3 of
the board shall be held annually, and trustees so
elected shall have a term of 3 years. (Sec. 92)
Election of officers Officers are elected by the Board of Directors (Sec. Officers may directly elected by the members
25), except in close corporations where the UNLESS the AOI or by-laws provide
stockholders themselves may elect the otherwise. (Sec. 92)
officers. (Sec. 97)
Place of meetings Any place within the Philippines, if provided for by Generally, the meetings must be held at the
the by-laws (Sec. 93) principal office of the corporation, if practicable. If
not, then anyplace in the city or municipality where
the principal office of the corporation is
located. (Sec. 51)
Transferability of interest or membership Transferable. Generally non-transferable since membership and
all rights arising therefrom are personal. However,
the AOI or by-laws can provide otherwise. (Sec. 90)
FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its
gold course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business.
HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its
stockholders and members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and
restaurants used were to defray its overhead expenses and to improve its golf course.
For a stock corporation to exist, 2 requisites must be complied with:
(1) a capital stock divided into shares
(2) an authority to distribute to the holders of such shares, dividends or allotments
of the surplus profits on the basis of shares held.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.
FORMATION AND ORGANIZATION OF CORPORATION
Requirements in the formation of a corporation Who may form a corporation (See SEC. 10)
AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law under which it is
organized.
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to make changes in existing corporations through
an amendment to the Corporation Code.
Amendment by Stockholders One of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. This,
in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change the basic agreement between the corporation and its stockholders,
making such change binding on all the stockholders, subject only to the right of appraisal, if proper.
WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND?
PURPOSE: must be legitimate
VOTE: 2/3 of OCS / membership
(1) The appraisal right must be recognized in case the amendment has the effect of changing rights of any stockholder or class of shares,
or of authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate
existence.
(2) Extension of corporate term cannot exceed 50 yrs. in any one instance
(3) A copy of the amended articles should be filed with the SEC, and with the proper governmental agencies, as appropriate (e.g., in the
case of banks, public utilities, etc.)
(4) Original and amended articles should contain all matters required by law to be set out in said articles.
(5) An amendment to increase/decrease capital stock as well as to extend/shorten corporate term cannot be made under Sec. 16, but must
be made under Sec. 37-38, respectively, both of which require a meeting; and
(6) Amendment must be in the form prescribed by the Code
ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS?
The same grounds as for the disapproval of the original articles (Sec. 17):
Not substantially in accordance with the form prescribed by the Code;
Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;
Treasurers Affidavit concerning amount of capital stock subscribed/paid is false;
Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been complied with as required by the
Constitution or existing laws;
Absence of a favorable recommendation from the appropriate government agency.
Amendment changing stockholders rights
The law expressly allows amendments which would change or restrict existing rights of stockholders or any class of shares. (Sec. 81)
MARCUS v. RH MACY (74 N.E. 2d 228; 1947)
The Board of Directors gave notice to SH that among the matters to be acted upon in its annual meeting would be a proposal to amend certificate of
incorporation to add to the rights of preferred stockholders, voting rights equal to those of common stockholders. Marcus, objected and demanded
payment for the common stock owned by her.
The Court held that Marcus may invoke her appraisal right. The aggregate number of shares having voting rights equal to those of common shares
was substantially increased and thereby the voting power of each common share outstanding prior to the meeting was altered or limited by the
resulting pro rata diminution of its potential worth as a factor in the management of the corporate affairs. Considering that she held diminished voting
power; that she notified the corpo of her objection; that her shares were voted against the amendmentthese were sufficient to qualify her to invoke
her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection must be made within six months of filing of
amendment; otherwise it shall take effect even w/o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec.
16)
Special amendments
Increase of capital stock
After the authorized capital stock has been fully subscribed and the corporation needs to increase its capital, it will have to amend its articles to
increase its capital stock. A corporation does not have the implied power to increase capital stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised in accordance with the provisions of Sec. 38 of the Code.
Reduction of capital stock
Reduction of capital stock is not allowed if it will prejudice the rights of corporate creditors.
PHILIPPINE TRUST CO. v. RIVERA (44 Phil. 469; 1923)
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment
of its debts.
A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without valuable
consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions
prescribed by the statute or charter or the articles of incorporation.
Change in corporate term
The Code allows a corporation not only to extend but also to shorten its term of existence. As in the case of increase/decrease of capital stock,
change must be approved at a members/stockholders meeting by 2/3 of the members/outstanding capital stock.
Amendments in close corporations
To recall, the provisions required to be contained in the AOI of a close corporation:
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on transfer permitted by law;
(3) Corporation should not be listed in the stock exchange or make any public offering of its stock.
If any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. Thereafter,
it will be governed by the general provisions of the Code. Since such amendment involves a change in the nature of the corporation, even non-voting
stocks are given a voice in the decision. A stockholders meeting is required and a 2/3 vote must approve the amendment, unless otherwise provided
by the articles of incorporation.
DISSOLUTION
HOW MAY A CORPORATION BE DISSOLVED?
(1) Failure to organize and commence business (Sec. 22);
(2) Cessation of business for 5 years (Continuous inoperation; Sec. 22);
(3) Expiration of original, extended, or shortened term;
(4) Voluntary dissolution (Sec. 118-119);
(a) Where no creditors are affected (Sec. 118)
This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the special notice requirements.) The copy of the resolution
authorizing the dissolution shall be certified by a majority of the BOD and countersigned by the secretary of the corporation. THE SEC shall thereupon
issue the certificate of dissolution.
(b) Where creditors are affected (Sec. 119)
(1) Filing of petition for dissolution with SEC
A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD, verified by the president or secretary or one
of the directors, and resolved upon by the affirmative vote of 2/3 of the OCS or members. The petition must set forth all claims and demands against
the corporation, and the fact that the dissolution was approved by the SHs with the requisite 2/3 vote.
(2) Fixing of date by SEC for filing of objections to petition
If the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections thereto may be filed by any person.
Date: not less than 30 days nor more than 60 days after the
entry of the order
(3) Publication of order
Before the date fixed by the SEC, the SEC order shall be published and posted accordingly.
Newspaper: Once a week for 3 weeks in a newspaper of general circulation published in the municipality or city where the corporation's principal
office is situated, or there be no such newspaper, in a newspaper of general circulation in the Philippines
Posting: For 3 consecutive weeks in 3 public places in the city or municipality where the corporation's principal office is situated
(4) Hearing of the petition for dissolution
Upon 5 days notice, given after the date on which the right to file objections to the order has expired, the SEC shall proceed to hear the petition and
try any issue made by the objections filed.
If no objection is sufficient, and the material allegations are true, the SEC shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires.
Note: The SEC may appoint a receiver to collect such
assets and pay the debts of the corporation.
(3) Involuntary dissolution (Sec. 121):
(a) Revocation of Certificate of Registration by SEC (Sec. 121)
A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing
laws, rules and regulations.
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation. Under the Securities Regulation Code or
RA 8799, however, the jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been transferred to the Regional Trial
Courts.
The grounds for involuntary dissolution of a corporation under quo warranto proceedings are:
(1) When the corporation has offended against a provision of an act for its creation or renewal;
(2) When it has forfeited its privileges and franchises by non-user;
(3) When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises;
(4) When it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention
of law
(PNB v. CFI, 209 SCRA 294; 1992)
(4) Shortening of corporate term (Sec. 120)
NOTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
Dissolution of close corporations
In close corporations, any stockholder may, by written petition to the SEC, compel the dissolution of such corporation when:
(1) Any of the acts of the directors, officers, or those in control
of the corporation is:
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
(2) Corporate assets are being misapplied or wasted. (Sec. 105)
WHAT ARE THE EFFECTS OF DISSOLUTION?
Corporation ceases to be a juridical person and consequently can no longer continue transacting its business.
Corporate existence continues for 3 years following dissolution for the ff. purposes only:
(a) winding up of affairs; and
(b) liquidation of corporate assets.
Corporation can no longer continue its business, except for winding up.
Corporation CANNOT even be a de facto corporation.
Corporate existence may be subject to COLLATERAL attack.
NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against, nor any liability incurred
by, any corporation, its stockholders, members, directors, trustees or officers. (Sec. 145)
Loss of juridical personality
National Abaca v. Pore (2 SCRA 989; 1961)
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of money advanced to her for the purchase of hemp. She
moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950. Plaintiff objected to such
by saying that it shall nevertheless be continued as a corporate body for a period of 3 years from the effective date of said order for the purpose of
prosecuting and defending suits by or against it and to enable the Board of Liquidators to close its affairs.
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for the purposes of prosecuting
and defending suits by or against it. But at any time during the 3 years, the corporation should convey all its property to trustees so that the latter may
be the ones to continue on with such prosecution, with no time limit on its hands. Since the case against Pore was strong, the corp.'s amended
complaint was admitted and the case was remanded to the lower court.
CLEMENTE V. CA (242 SCRA 717)
The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the right and liabilities of such entity nor
those of its owners and creditors. If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the
corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. In the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not
only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which
has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns.
Executory contracts
The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of the Code states that "No right or remedy in favor of
or against any corporation.nor any liability incurredshall be removed or impaired either by the subsequent dissolution of said corp. or by any
subsequent amendment or repeal of this Code or of any part thereof."
WHAT IS LIQUIDATION? (Sec. 122)
Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining
assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective
interests.
WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE LIQUIDATION OF A CORPORATION?
1. Liquidation by the corporation itself through its board of directors
Although there is no express provision authorizing this method, neither is there any provision in the Code prohibiting it.
2. Conveyance of all corporate assets to trustees who will take charge of liquidation.
If this method is used, the 3-year limitation will not apply provided the designation of the trustees is made within said period. There is no time limit
within which the trustee must finish liquidation, and he may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited
in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)
3. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of the corp.
As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver, without anything more, does not result
in the dissolution of the corporation nor bar it from the exercise of its corporation rights.
FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?
Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after the time when it would have so
dissolved. (Sec. 122) However, it was held in the case of Clemente v. CA (supra) that if the 3-year period has expired without a trustee or receiver
having been expressly designated by the corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)
(1) Collection of corporate assets and property;
(2) Conveyance of all corporate property to trustees for the benefit of SHs, members, creditors, and other persons in interest;
(3) Payment of corporation's debts and liabilities;
(4) Distribution of assets and property
Distribution of assets after payment of debts
GENERAL RULE: No corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities. (Sec. 122)
EXCEPTION: In cases of decrease of capital stock, and as otherwise allowed by the Corporation Code
WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON ENTITLED TO IT?
Any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality
where such assets are located. (Sec. 122)
China Banking v. Michelin & Cie. (58 Phil. 261; 1933)
The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does not empower
the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver of an
insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting the debts and claims, that is,
of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts, all claims must be
presented for allowance to the receiver or trustees or other proper persons during the winding-up proceedings within the 3 years provided by the
Corporation Law as the term for the corporate existence of the corporation, and if a claim is disputed so that the receiver cannot safely allow the
same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for
payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal
is taken to the latter ruling, and during the winding-up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to
acquire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors.
Note: Under the Corporation Code, it is the SEC which may
appoint the receiver.
RP v. Marsman development company (44 SCRA 418; 1972)
Defendant corp. was a timber license holder with concessions in Camarines Norte. Investigations led to the discovery that certain taxes were due on
it. BIR assessed Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the corp., received the first 2 assessments. He requested for
reinvestigations. As a result, corp. failed to pay within the prescribed period. Numerous BIR warnings were given. After 3 years of futile notifications,
BIR sued the corp.
Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however bars an action for recovery of corporate debts against the
liquidators. In fact, the 1st assessment was given before dissolution, while the 2nd and 3rd assessments were given just 6 months after dissolution
(within the 3-year rule). Such facts definitely established that the Government was a creditor of the corp. for whom the liquidator was supposed to
hold assets of the corp.
Tan Tiong Bio v. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the stockholders. The
dissolution of a corp. does not extinguish the debts due or owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the corp. The hands of
government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from
the corporation, and to collect them from persons, who by reason of transactions with the corporation hold property against which the tax can be
enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the
government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly
possessed. Thus, petitioners can be held personally liable for the corporation's taxes, being successors-in-interest of the defunct corporation.
Distribution of assets of non-stock corporations
WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec. 94-95)
(1) All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or adequate provision shall be made therefor.
(2) Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance with such requirements.
(3) Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, education or
similar purposes, but not subject to condition (2) above, shall be transferred or conveyed to one or more corporations, societies or organization
engaged in activities in the Philippines substantially similar to those of the dissolving corp. according to a plan of distribution adopted pursuant to Sec.
95 of the Code.
(4) Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the AOI or by-laws.
(5) In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit,
as may be specified in a plan of distribution adopted pursuant to Sec. 95.
* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and approval of 2/3 of the members having voting
rights present or represented by proxy at the meeting during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title XI of the Code.
CORPORATE COMBINATIONS
Techniques to achieve corporate combinations WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange for the stock of the acquiring corporation
WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION?
(1) Board of Directors of the constituent corporations must prepare and approve a plan of merger or consolidation.
(2) 2/3 vote of OCS of the constituent corporations.
(3) Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and certified by the secretary / assistant secretary.
(4) Submission to the SEC for approval.
WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. 80)
(1) The constituent corporation shall become a single corporation:
If merger: the surviving corporation designated in the plan of
merger
If consolidation: the consolidated corporation designated in the plan of
Consolidation.
(2) The separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation.
(3) The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under the Corporation Code.
(4) The surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of
the constituent corporations;
(5) All property (real or personal) and all receivables due on whatever account (including subscriptions to shares and other choses in action), and
all and every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or
consolidated corporation without further act or deed.
(6) The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated
corporation. (Note: The merger or consolidation does not impair the rights of creditors or liens upon the property of any such constituent corporations.)
lozano v. de los santos (274 SCRA 452)
Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the
SEC. There can be no intra-corporate nor partnership relation between 2 jeepney drivers' and operators' associations whose plans to consolidate
into a single common association is still a proposal.
WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION LICENSED IN THE
PHILIPPINES? (Sec. 132)
A foreign corporation authorized to transact business in the Philippines may merge or consolidate with any domestic corporation if such is
permitted under Philippine law and by the law of its incorporation.
The requirements on merger or consolidation as provided in the Corporation Code must be complied with.
Whenever a foreign corporation authorized to transact business in the Philippines is a party to a merger or consolidation in its home country or
state, such foreign corporation shall file a copy of the articles or merger or consolidation with the SEC and the appropriate government agencies within
60 days after such merger or consolidation becomes effective. Such copy of the articles must be duly authenticated by the proper officials of the
country or state under the laws of which merger or consolidation was effected.
If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business in the Philippines, it shall file a
petition for withdrawal of its license in accordance with Sec. 136.
Sale of substantially all corporate assets WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE
CORPORATE PROPERTY AND ASSETS?
If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated. (Sec. 40)
WHAT ARE THE REQUIREMENTS? (Sec. 40)
(1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose;
(2) Compliance with the laws on illegal combinations and monopolies
Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion, abandon such sale or other disposition without
further action or approval by the SHs. This, of course, is subject to the rights of third parties under any contract relating thereto.
WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?
(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its remaining business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of the selling corporation, not the
purchasing corporation. (It can be argued, though, that in instances wherein the purchase constitutes an investment in a purpose other than its
primary purpose, stockholders' approval of such investment is necessary, and anyone who objects thereto will have the appraisal right under Sec.
42.)
In this method, all or substantially all the stockholders of the "acquired" corporation are made stockholders of the acquiring corporation. With the
exchange, the acquired corporation becomes a subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses
under a single corporation as in merger and sale of assets, from the point of view of the acquiring (parent) corporation, there is hardly any difference
between owing the acquired corporation's business directly and operating it through a controlled subsidiary. In fact, the parent corporation would
have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination. (Campos &
Campos)
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)
A corporation formed and organized under laws other than those of the Philippines, regardless of the citizenship of the incorporators and
stockholders. Such corporation must have been organized and must operate in a country which allows Filipino citizens and corporations to do
business there.
In times of war: For purposes of security of the state, the citizenship of the controlling stockholders determines the corporations nationality.
IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?
(1) Wholly-owned subsidiary; or
(2) Branch office; or
(3) Joint venture with a local partner.
Permitted areas of investment 100% EQUITY: Mass media, except recording
The practice of a profession (law, medicine, etc.)
Operation of rural banks
Cooperatives
Private security agencies
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological, chemical,
and radiological weapons;
Note: Retail trade is no longer required to be 100% Filipino-owned on account
of the Retail Trade Liberalization Act.
75%-25% EQUITY: Inter-island shipping (R.A. 1937, Sec. 8)
Private recruitment
Contracts for construction and repair of locally-funded public
works
Except: Public works that would fall under the Build-
Operate-Transfer Law, as well as those that are foreign-funded
70%-30% EQUITY: Advertising
60%-40% EQUITY: Other industries.
WHAT IS THE SO-CALLED "GRANDFATHER RULE"?
Where a domestic corporation which has both Philippine and foreign stockholders is an investor in another domestic corporation which has also both
Philippine and foreign stockholders, the so-called "grandfather rule" is used to determine whether or not the latter corporation is qualified to engage
in a partially nationalized business, i.e. by determining the extent of Philippine equity therein.
Under present SEC rules, if the percentage of Filipino ownership in the first corporation is at least 60%, then said corporation will be considered as a
Philippine national and all of its investment in the second corporation would be treated as Filipino equity. On the other hand, if the Philippine equity
in the first corporation is less than 60%, then only the number of shares corresponding to such percentage shall be counted as of Philippine
nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in Opinion # 18, Series of 1989, Department of Justice, dated 19 January 1989.)
NOTE: The reader would be well-advised to cross-reference this
definition of the "grandfather rule" with a trusted commentary.
Legal Requirements Prior to Transaction of Business Documentary Requirements (Sec. 125)
(1) BOI certificate
The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the foreign corp. will contribute to the sound
and balanced development of the national economy on a self-sustaining basis. (See Omnibus Investments Code, Sec. 48-49)
NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered automatically approved! (Art. 53, Omnibus
Investments Code)
(2) SEC license to do business (Sec. 125)
Application under oath setting forth the information specified in Sec. 125;
Additional information as may be necessary or appropriate to enable the SEC to determine whether the corporation is entitled to a license to
transact business in the Philippines, and to determine and assess the fees payable;
Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation, attesting to the fact that the laws
of the country of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good
standing;
Statement under oath of the president or any other person authorized by the corporation showing that the applicant is solvent and in good
financial condition, and setting forth the assets and liabilities of the corporation within 1 year immediately prior to the application.
(3) Certificate from appropriate government agency
NOTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. (Sec. 17)
Deposit requirement (Sec. 126)
Within 60 days after the issuance of the license, the licensee shall deposit with the SEC securities with an actual market value of at least P
100,000.00. These securities are for the benefit of present and future creditors, and shall consist of any of the following:
Bonds or other evidence of indebtedness of the Government or its instrumentalities, etc.;
Shares of stock in "registered enterprises" as defined in R.A. 5186;
Shares of stock in domestic corporations registered in the stock exchange;
Shares of stock in domestic insurance companies and banks.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's application and proof to
the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
Designation of a resident agent (Sec. 128)
The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the Philippines.
WHO: A resident of the Philippines.
PURPOSE: To be served any summons and other legal processes which may be served in all actions or other legal proceedings against such
corporation. Service upon such resident shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation
at its home office.
Laws applicable to foreign corporations Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and
regulations applicable to domestic corporations of the same class.
Exceptions: (1) As regards the creation, formation, organization or dissolution
of the corporation;
(2) As regards the fixing of relations, liabilities, responsibilities, or
duties of stockholders, members, or officers or corporations to each other or to the corporation (Sec. 129)
Effects of Failure to Secure SEC License WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?
(1) The corporation will not be permitted to maintain agency in the Philippines;
(2) The corporation will be subject to penalties and fines;
(3) The corporation will not be permitted to maintain or intervene in any action before Philippine courts or administrative agencies; it can be SUED.
Isolated transactions
MARSHALL WELLS V. ELSER (46 Phil. 71; 1924)
Marshall Wells, a corporation organized under the State of Oregon, sued a domestic corp. for the unpaid balance on a bill of goods. Defendant
demurred to the complaint on the ground that it did not show that plaintiff had complied with the law regarding corp. desiring to do business in the
Phil., nor that the plaintiff was authorized to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was to subject the foreign corp. doing business in the Phil. to the
jurisdiction of its courts. The object of the statute was not to prevent it from performing single acts but to prevent it from acquiring a domicile for the
purpose without taking the steps necessary to render it amenable to suit in the local courts. The implication of the law is that it was never the purpose
of the Legislature to exclude a foreign corp. which happens to obtain an isolated order for business from the Phil., from securing redress in Phil.
Courts, and thus, in effect to permit persons to avoid their contract made with such foreign corporation.
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly licensed. If a foreign corp. is not engaged in business
in the Phil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no license is required. In either case, the fact of
compliance with the requirement of license, or the fact that the suing corp. is exempt therefrom, as the case may be, cannot be inferred from the mere
fact that the party suing is a foreign corp. The qualifying circumstance, being an essential part of the element of the plaintiffs capacity to sue, must
be affirmatively pleaded. In short, facts showing foreign corporations capacity to sue should be pleaded.
Curing of defect
HOME INSURANCE V. EASTERN SHIPPING (123 SCRA 424; 1983)
A contract entered into by a foreign insurance corp. not licensed to do business in the Phil. is not necessarily void and the lack of capacity to sue at
the time of execution of the contract is cured by its subsequent registration.
Protection of intellectual property rights
GENERAL GARMENTS CORP. V. DIR. OF PATENTS (41 SCRA 50; 1971)
Domestic corporation General Garments registered Puritan trademark for its mens wear. US corporation Puritan Sportswear petitioned the Phil.
Patent Office for cancellation of said trademark, alleging its ownership and prior use in the Phil.
The Supreme Court held that a foreign corp. which does not do business in the Phil. and is unlicensed but is widely known in the Phil. through the
use of its products here has legal right to maintain an action to protect its reputation, corporate name and goodwill. The right to use the corporate
name is a property right which the corp. may assert and protect in any of the courts of the world.
LE CHEMISE LACOSTE V. FERNANDEZ (129 SCRA 377; 1984)
A foreign corporation not doing business in the Phil. needs no license to sue in the Phil. for trademark violations.
Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack of capacity to sue of injured foreign corp. becomes immaterial
(because a criminal offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any foreign national or juridical person who meets the requirements of Sec.
3 of the Act (i.e., is a national or is domiciled in a country party to any convention, treaty or agreement relating to intellectual property rights or the
repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to Philippine nationals by law) and does not
engage in business in the Philippines may bring a civil or administrative action for opposition, cancellation, infringement, unfair competition, or false
designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing laws.
What Constitutes Transacting Business WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE
LICENSING REQUIREMENT?
Mere investment as a shareholder and the exercise of the rights as such investor;
Having a nominee director or officer represent the foreign investors interests;
Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own account
Example: Rustans exclusive distributorship of Lacoste t-shirts
Publication of a general advertisement;
NOTE: Under the Code of Commerce, the publication of an ad is prima
facie evidence (or at least creates a presumption) of doing business in the Philippines.
Maintaining stock of goods for processing by another entity in the Philippines;
Consignment of equipment to be used in processing products for export;
Collecting information in the Philippines;
Performing services incidental to an isolated contract of sale
Example: Installing machinery sold by a foreign corporation to a Philippine buyer
WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES?
Whether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (Metholatum v. Mangaliman)
Mentholatum v. Mangaliman (72 Phil. 525; 1941)
The true test as to whether a foreign corporation is doing business in the Philippines seems to be whether the foreign corp. is continuing the body or
substance of the business for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a
continuity of dealings and arrangements and contemplates performance of acts/works or the exercise of the functions normally incident to and in
progressive prosecution of the purpose and object of its organization.
Facilities Management Corp. v. De la Osa (89 SCRA 131; 1979)
The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa his overtime compensation, swing shift and
graveyard shift premiums. FMC filed a petition for review on certiorari on the issue of whether the CIR can validly affirm a judgment against persons
domiciled outside and not doing business in the Phil. and over whom it did not acquire jurisdiction.
The Supreme Court held that the petitioner may be considered as doing business in the Philippines within the scope of Sec. 14, Rule 14 of the Rules
of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp., or a non-resident joint stock corporation or association, doing business
in the Phil., service may be made on its resident agent, on the government official designated by law to the effect, or to an y of its officers or agents
within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive, on behalf of the corp., legal services
from, and be bound by processes of the Phil. Courts, for as long as he remains an employee of FMS. If a foreign corp. not engaged in business in
the Phil., through an Agent, is not barred from seeking redress from courts in the Phil., that same corp. cannot claim exemption done against a person
or persons in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business" has been replaced with the phrase "has transacted
business," thereby allowing suits based on isolated transactions.
Merrill Lynch Futures Inc. v. CA (211 SCRA 824)
Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the recovery of a debt. MLF is a non-resident foreign corp. not doing
business in the Phil., organized under the laws of Delaware, USA. It is a futures commission merchant duly licensed to act as such in the futures
markets and exchanges in the US, essentially functioning as a broker executing orders to buy and sell futures contract received from its customers
on US futures exchanges. (Futures contract is a contractual commitment to buy and sell a standardized quantity of a particular item at a specified
future settlement date and at a price agreed upon with the purchase or sale being executed on a regulated futures exchange.)
The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no legal capacity to sue because (1) MLF is doing business in
the country without a license; and (2) the transactions were made with Merrill Lynch Pierce, Fenner and Smith and not with plaintiff MLF.
Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses in light of the undeniable fact that it had transacted
business without a license?
Legal capacity to sue may be understood in two senses: (1) That the plaintiff is prohibited or otherwise incapacitated by law to institute suit in the
Phil. Courts, or (2) although not otherwise incapacitated in the sense just stated, that it is not a real party in interest.
The Court finds that the Laras were transacting with MLF fully aware of its lack of license to do business in the Phils., and in relation to those
transactions had made payments and the spouses are estopped to impugn MLF's capacity to sue them. The rule is that a party is estopped to
challenge the personality of a corp after having acknowledged the same by entering into a contract with it. The principle is applied to prevent a person
contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract.
Pacific Vegetable Oil v. Singson (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for damages suffered by the plaintiff
as a consequence of the failure of the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff. Defendant filed a motion
to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the Phil and, consequently, it had no personality to file an
action.
Has appellant transacted business in the Philippines in contemplation of law?
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the plaintiff in the US, the agreed price to be
covered by an irrevocable letter of credit to be opened at the Bank of California, and delivery to be made at the port of destination. It follows that the
appellant corporation has not transacted business in the Phil in contemplation of Sec. 68 and 69 which require any foreign corporation to obtain a
license before it could transact business, or before it could have personality to file a suit in the Phil.. It was never the purpose of the Legislature to
exclude a foreign corporation which happens to obtain an isolated order of business from the Phil., from securing redress in the Phil. Courts, and
thus, in effect, to permit persons to avoid their contracts made with such foreign corp.. The lower court erred in holding that the appellant corporation
has no personality to maintain the present action.
Aetna Casualty & Surety Co. vs. Pacific Star Line (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen & Cotton piece goods due to pilferage and
damage amounting to US$2,300.00. PSL contends that Aetna has no license to transact insurance business in the Philippines as gathered from the
Insurance Commission and SEC . It also argues that since said company has filed 13 other civil suits, they should be considered as doing business
here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not transacting business in the Philippines for
which it needs to have a license. The contract was entered into in New York and payment was made to the consignee in the New York branch.
Moreover, Aetna was not engaged in the business of insurance in the Philippines but was merely collecting a claim assigned to it by
consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of the Corporation Law and therefore was not
barred from filing the instant case although it had not secured a license to transact insurance business in the Philippines.
Topweld Manuel vs. ECED (138 SCRA 120; 1985)
Topweld entered into 2 separate contracts with foreign entities: a license and technical assistance agreement with IRTI, and a distributor agreement
with ECED, SA. When Topweld found out that the foreign corporations were looking into replacing Topweld as licensee and distributor, the latter
went to court to ask for a writ of preliminary injunction to restrain the foreign corporations from negotiating with 3 rd parties as violative of RA 5445 (4).
Although IRTI and ECED were doing business in the Philippines, since they had not secured a license from BOI, the foreign corporations were not
bound by the requirement on termination and Topweld could not invoke the same against the former. Moreover, it was incumbent upon Topweld to
know whether or not IRTI and ECED were properly authorized to engage in such agreements. The Supreme Court held that both parties were guilty
of violating RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed for.
Antam Consolidated vs. CA (143 SCRA 289; 1986)
Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and Unicorn for the collection of a sum of money for failure to deliver
500 tons of crude coconut oil. Antam et al asked for dismissal of case on ground that Stokely was a foreign corporation not licensed to do business
in the Philippines and therefore had no personality to maintain the suit.
The SC held that the transactions entered into by Stokely with Antam et al (3 transactions, either as buyer or seller) were not a series of commercial
dealings which signify an intent on the part of the respondent to do business in Philippines but constitute an isolated transaction. The records show
that the 2nd and 3rd transactions were entered into because Antam wanted to recover the loss it sustained from the failure of the petitioners to deliver
the crude oil under the first transaction and in order to give the latter a chance to make good on their obligation. There was only one agreement
between the parties, and that was the delivery of the 500 tons of crude coconut oil.
How Courts Acquire Jurisdiction over Foreign Corporations If there is no assigned resident agent, the government official designated by law can
receive the summons on their behalf and transmit the same to them by registered mail within 10 days. This will complete the service of the summons.
Summons can also be served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court.
Note that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed a valid process.
v Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of settling claims against it is valid since
no other agent was duly appointed.
v Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there is sufficient ground to disregard
the separate personalities.
General Corporation of the Philippines vs Union Insurance (87 Phil. 313; 1950)
General Corporation and Mayon investment sued Union Insurance and Firemens Fund Insurance (FFI) for the payment of 12 marine insurance
policies. The summons was served on Union which was then acting as FFIs settling agent in the country. At that time, it was not yet registered and
authorized to transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over FFI?
Yes. The service of summons for FFI on its settling agent was legal and gave the court jurisdiction upon FFI. Section 14, Rule 7 of ROC embraces
Union in the phrase, or agents within the Philippines. The law does not make distinctions as to corporations with or without authority to do business
in the Philippines. The test is whether a foreign corporation was actually doing business here. Otherwise, a foreign corporation doing business
illegally because of its refusal or neglect to obtain the corresponding authority to do business may successfully though unfairly plead such neglect or
illegal act so as to avoid service and thereby impugn the jurisdiction of the courts.
Withdrawal of Foreign Corporation (Sec. 136)
HOW: By filing a petition for withdrawal of license
REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL:
(1) All claims which have accrued in the Philippines have been paid, compromised and settled;
(2) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions
have been paid; and
(3) The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general circulation in the
Philippines.
Revocation and Suspension of License (Sec. 134)
WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN CORPORATION?
(1) Failure to file its annual report or pay any fees as required by the Corporation Code;
(2) Failure to appoint and maintain a resident agent in the Philippines as required;
(3) Failure, after change of resident agent or of his address, to submit to the SEC a statement of such change;
(4) Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of any articles of merger or consolidation within
the time prescribed by the Code;
(5) A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to
Title XV;
(6) Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine government or any of its agencies
or political subdivisions;
(7) Transacting business in the Philippines outside of the purpose/s for which such corporation is authorized under its license;
(8) Transacting business in the Philippine as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do
business in the Philippines; or
(9) Any other ground as would render it unfit to transact business in the Philippines.
SPECIAL AND MISCELLANEOUS PROVISIONS
(Sec. 106-108)
Educational corporations other than government-run institutions are governed first by special laws, second, by the special provisions of the
Corporation Code, and lastly, by the general provisions of the Corporation Code. (Sec. 106)
At least 60% of the authorized capital stock of educational corporations must be owned by Filipino citizens, and Congress may require increased
Filipino equity participation therein. (With the exception of educational institutions established by religious groups and mission boards, which are not
subject to this equity requirement.) However, control and administration of educational institutions must be vested exclusively in citizens of the
Philippines. (Art. XIV, Sec. 4 (2), 1987 Constitution) This means that no alien may be elected as a member of the BOD nor appointed as Principal
or officer thereof.
Once a school, college or university has been granted government recognition by the DECS, it must incorporate within 90 days from the date
of such recognition, unless it is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it must file a copy of its AOI and by-
laws with the DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or approve such articles. (Sec. 107,
Corporation Code)
(Sec. 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the general provisions of the Code on non-stock
corporations insofar as they may be applicable. (Sec. 109)
Corporation sole (Sec. 110-115)
A corporation sole is an incorporated office, composed of a single individual who may be a bishop, priest, minister or presiding officer of a
religious sect, denomination or church. Its purpose is to administer and manage as trustee the property and affairs of such religious sect, denomination
or church, within the territorial jurisdiction of such office. (Sec. 110; Sec. 111 (3))
In case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation sole. The
property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation he represents. On
the other hand, he is the person authorized by law as the administrator thereof and the court may take judicial notice of such fact and of the fact that
the parish priests have no control over such property.
In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural lands, the
Supreme Court has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the office, which
must be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be registered in the name of the corporation
sole, although the holder of the office is an alien. This ruling is based on the fact that the corporation sole is not the owner but merely the administrator
of the property, and that he holds it in trust for the faithful of the diocese concerned. (See Gana v. Roman Catholic Archbishop of Manila, 43 O.G.
No. 8, 3225; 1947)
Religious societies (Sec. 116)
In contrast to a corporation sole, religious societies are composed of more than one person. The requirements for incorporation of such
societies are set forth in Sec. 116 of the Code.
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of
persons not exceeding 20;
(2) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of the Code; and
(3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.
Notes:
A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and Steel Fabricators v. CA, 296 SCRA
631)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation.
CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE CORPORATION?
YES, provided that said corporation owns less than 2/3 of voting stock or voting rights.
WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? (Sec. 96)
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest
DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS.
Close Corporation "Regular" Corporation
No. of stockholders Not more than 20 (Sec. 96) No limit
Management Can be managed by the stockholders (Sec. Managed by Board of Directors
97)
Meetings May be dispensed with (Sec. 101) Actual meetings are required.
Quorum and Voting Greater quorum and voting requirements
allowed. (Sec. 97)
Pre-emptive right Extends to all stock, including treasury Does not extend to treasury shares.
shares (Sec. 102)
Buy-back of shares Must be > par value (Sec. 105) May be < par value
Resolution of deadlocks SEC has the power to arbitrate disputes in
case of deadlocks, upon written petition by
any stockholder. (Sec. 104) This includes
the power to appoint a provisional director,
as well as to dissolve the corporation.
Dissolution May be petitioned by any stockholder Generally requires a 2/3 vote of the
whenever any of the acts of the directors or stockholders and a majority vote of the
officers or those in control of the corporation BOD.
is illegal, fraudulent, dishonest, oppressive (Note however that in case of
or unfairly prejudicial to the corporation or involuntary dissolution under Sec. 121,
any stockholder, or whenever corporate a corporation may be dissolved by the
assets are being misapplied or SEC upon filing of a verified complaint
wasted. (Sec. 105) and after proper notice and hearing.)
WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104)
A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose qualifications, if any, may be determined by the SEC. He is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected director of the corporation, including the right to notice
of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. (Sec. 104)
COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. (Sec. 105)
Withdrawal Right Appraisal Right
Type of corporation involved Close corporation "Regular" corporation
When availed of For any reason (Sec. 105) Only the grounds enumerated in
Sec. 81 and Sec. 42
Fair value of shares Must be > par or issued value (Sec. 105) May be < par or issued value
(Sec. 137-149)
The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code, particularly in
the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (Sec. 143)
Whenever the SEC conducts any examination of the operations, books and records of any corporation, the results thereof must be kept strictly
confidential, unless the law requires them to be made public or where they are necessary evidence before any court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its operations, with a
financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec. 141)
No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers,
may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. (Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P 1,000.00 but not
more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation
is committed by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)