CORPORATION LAW profits on the basis of the

shares (§3)
INTRODUCTION
Definition and attributes of a corporation Purpose Primarily to make profits May be formed or organized
for its shareholders for charitable, religious,
educational, professional,
A corporation is an artificial being created by operation of law, cultural, fraternal, literary,
having the right of succession and the powers, attributes and properties scientific, social, civic
expressly authorized by law or incident to its existence. service, or similar purposes
like trade, industry,
A corporation, being a creature of law, "owes its life to the state, its agricultural and like
birth being purely dependent on its will," it is "a creature without any chambers, or any
existence until it has received the imprimatur of the state acting according combination thereof. (§88)
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 Distribution Profit is distributed to Whatever incidental profit
acts of its state organs. (Tanyag v. Benguet Corporation) of Profits shareholders made is not distributed
among its members but is
A corporation has four (4) attributes: used for furtherance of its
purpose. AOI or by-laws
(1) It is an artificial being; may provide for the
(2) Created by operation of law; distribution of its assets
(3) With right of succession; among its members upon its
(4) Has the powers, attributes, and properties as expressly dissolution. Before then, no
authorized by law or incident to its existence. profit may be made by
members.
Composition Stockholders Members
CLASSIFICATION OF PRIVATE CORPORATIONS Scope of Each stockholder votes Each member, regardless
right to vote according to the of class, is entitled to one (1)
Stock v. Non-Stock Corporations proportion of his shares in vote UNLESS such right to
the corporation. No vote has been limited,
Stock Non-Stock shares may be deprived broadened, or denied in the
Corporations which have All other private of voting rights except AOI or by-laws. (Sec. 89)
Definition capital stock divided into corporations (§3) those classified and
shares and One where no part of its issued as "preferred" or
are authorized to income is distributable as "redeemable" shares, and
distribute to the holders of dividends to its members, as otherwise provided by
shares dividends or trustees or officers. (§87) the Code. (Sec. 6)
allotments of the surplus Voting by May be denied by the Cannot be denied. (Sec.

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proxy AOI or the by-laws. (Sec.
89)
Voting by May be authorized by the
mail by-laws, with the approval
of and under the
conditions prescribed by
the SEC. (Sec. 89)
58) Place of Philippines, if provided for must be held at the principal
meetings by the by-laws (Sec. 93) office of the corporation, if
practicable. If not, then
Not possible. anyplace in the city or
municipality where the
principal office of the
corporation is located. (Sec.
51)

Who Board of Directors or Members of the corporation Transferabilit Transferable. Generally non-transferable
exercises Trustees y of interest since membership and all
Corporate or rights arising therefrom are
Powers §23 membership personal. However, the AOI
or by-laws can provide
Governing Board of Directors or Board of Trustees, which otherwise. (Sec. 90)
Board Trustees, consisting of 5- may consist of more than 15
15 directors / trustees. trustees unless otherwise Distribution See Sec. 94.
provided by the AOI or by- of assets in
laws. (Sec, 92) case of
Directors / trustees shall Board classified in such a dissolution
Term of hold office for 1 year and way that the term of office of
directors or until their successors are 1/3 of their number shall
trustees elected and qualified expire every year. CIR VS. CLUB FILIPINO (5 SCRA 321; 1962)
(Sec. 23). Subsequent elections of
trustees comprising 1/3 of FACTS: Club Filipino owns and operates a club house, a sports complex,
the board shall be held and a bar restaurant, which is incident to the operation of the club and its
annually, and trustees so gold course. The club is operated mainly with funds derived from
elected shall have a term of membership fees and dues. The BIR seeks to tax the said restaurant as a
3 years. (Sec. 92) business.

Election of Officers are elected by
officers the Board of Directors
(Sec. 25), except in close
corporations where the
stockholders themselves
may elect the officers.
(Sec. 97)
Any place within the
Officers may directly elected
by the members UNLESS
the AOI or by-laws provide
otherwise. (Sec. 92)
Generally, the meetings
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:

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 Characteristic · natural · excludes corporations and
(1) a capital stock divided into shares persons partnerships
(2) an authority to distribute to the holders of such shares,
dividends or allotments of the surplus profits on the basis of shares held. Number · not less than · may be more than 15 for
5; not more non-stock corp. except
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be than 15 educational corp.
found an authority for the distribution of its dividends or surplus profits.
· does not prevent the “one-
man (person) corporation”
FORMATION AND ORGANIZATION OF CORPORATION wherein the other
incorporators may have only
Requirements in the formation of a corporation nominal ownership of only one
share of stock; not necessarily
Who may form a corporation (See SEC. 10) illegal

INCORPORAT REQUIREMENTS COMMENTS Age · of legal age

ORS
Stockholders or Compare with Corporators which Residence · majority · residence a requirement;
Definition members include all stockholders or should be citizenship requirement only in
mentioned in the members, whether incorporators residents of certain areas such as public
articles of or joining the corporation after its the Philippines utilities, retail trade banks,
incorporation as incorporation. investment houses, savings
originally forming and loan associations, schools
and composing
the corporation
and who are Steps in the formation of a corporation
signatories thereof
stockholders or Mutual Agreement to perform certain acts required for
members organizing a corporation
mentioned in the
articles of 1- Organize and establish a corporation
incorporation as 2- Comply with requirements of corporation code
originally forming 3- Contribute capital/resources
and composing 4- Mode of use of capital/resource and
the corporation control/management of capital/resource
and who are 5- distribution/disposition of capital/resource (embodied
signatories thereof in constitutive documents)

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STEPS COMMENTS
a. Promotional Promoter
Stage (See SEC. · brings together persons who become
2. Definitions) interested in the enterprise
· aids in procuring subscriptions and
sets in motion the machinery which leads
to the formation of the corporation itself
· formulates the necessary initial
business and financial plans and, if
necessary, buys the rights and property
which the business may need, with the
understanding that the corporation when
formed, shall take over the same.
d. Examination Process:
of articles; a) SEC shall examine them in order to
approval or determine whether they are in conformity w/ law.
rejection by b) If not, the SEC must give the incorporators
SEC. a reasonable time w/in w/c to correct or modify the
objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in
accordance w/ the form prescribed
b) purpose/s are patently unconstitutional,
illegal, immoral, or contrary to government rules &
regulations;

c) Treasurer’s Affidavit is false;

b. Drafting (see chart below)
articles of d) required percentage of ownership has not
incorporatio been complied with (Sec. 17)
n
(See SEC. 14) e) corp.’s establishment, organization or
operation will not be consistent w/ the declared
national economic policies (to be determined by the
c. Filing of · AOI & the treasurer’s affidavit duly signed & SEC, after consultation w/ BOI, NEDA or any
articles; acknowledged appropriate government agency -- PD 902-A as
payment of fees. · must be filed w/ the SEC & the corresponding amended by PD 1758, Sec. 6 (k))
fees paid
· failure to file the AOI will prevent due · Decisions of the SEC disapproving or rejecting
incorporation of the proposed corporation & will AOI may be appealed to the CA by petition for
not give rise to its juridical personality. It will not review in accordance w/ the ROC.
even be a de facto corp.
· Under present SEC rules, the AOI once filed ,
will be published in the SEC Weekly Bulletin at e. Issuance of Certificate of Incorporation will be issued if:
the expense of the corp. (SEC Circular # 4, certificate of
1982). incorporation. a) SEC is satisfied that all legal requirements
have been complied with; and

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 b) there are no reasons for rejecting or
disapproving the AOI.
· It is only upon such issuance that the
corporation acquires juridical personality.
(See Sec. 19. Commencement of corporate
existence)
· Should it be subsequently found that the
incorporators were guilty of fraud in procuring the
certificate of incorporation, the same may be
revoked by the SEC, after proper notice &
hearing.
b. Drafting articles of incorporation (See SEC. 14)
CONTENTS OF AOI COMMENTS
Corporate Name · Essential to its existence since it is through it
that the corporation can sue and be sued and
perform all legal acts
· A corporate name shall be disallowed by the
SEC if the proposed name is either:
(1) identical or deceptively or
confusingly similar to that of any
existing corporation or to any other
name already protected by law; or
(2) patently deceptive, confusing or
contrary to existing laws. (Sec. 18)
LYCEUM OF THE PHILS. VS. CA (219 SCRA
610)
The policy underlying the prohibition against the
registration of a corporate name which is “identical
or deceptively or confusingly similar” to that of any
existing corporation or which is “patently deceptive
or patently confusing” or “contrary to existing laws
is:
1. the avoidance of fraud upon the
public which would have occasion to
deal with the entity concerned;
2. the prevention of evasion of legal
obligations and duties, and
3. the reduction of difficulties of
administration and supervision over
corporations.
Purpose Clause · A corporation can only have one (1) primary
purpose. However, it can have several
secondary purposes.
· A corporation has only such powers as are
expressly granted to it by law & by its articles
of incorporation, those which may be incidental
to such conferred powers , those reasonably
necessary to accomplish its purposes & those
which may be incident to its existence.
· Corporation may not be formed for the
purpose of practicing a profession like law,
medicine or accountancy
Principal Office · must be within the Philippines
· specify city or province
· street/number not necessary
· important in determining venue in an action
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 by or against the corp., or on determining the
province where a chattel mortgage of shares
should be registered
Term of Existence · cannot specify term which is longer than 50
years at a time
· may be renewed for another 50 years, but
not earlier than 5 years prior to the original or
subsequent expiry date UNLESS there are
justifiable reasons for an earlier extension.
Incorporators and · names, nationalities & residences of the
Directors incorporators;
· names, nationalities & residences of the
directors or trustees who will act as such until
the first regular directors or trustees are
elected;
· treasurer who has been chosen by the pre-
incorporation subscribers/members to receive
on behalf of the corporation, all subscriptions
/contributions paid by them.
Capital Stock · amount of its authorized capital stock in
lawful money of the Philippines
· number of shares into which it is divided
· in case the shares are par value shares, the
par value of each,
· 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
· for a non-stock corporation, the amount of
its capital, the names, nationalities and
residences of the contributors and the amount
contributed by each
· 25% of 25% rule to be certified by Treasurer
· paid up capital should not be less than
P5,000
Other matters · Classes of shares into w/c the shares of
stock have been divided; preferences
of & restrictions on any such class;
and any denial or restriction of the pre-
emptive right of stockholders should
also be expressly stated in said
articles.
· If the corporation is engaged in a wholly or
partially nationalized business or
activity, the AOI must contain a
prohibition against a transfer of stock
which would reduce the Filipino
ownership of its stock to less than the
required minimum.
Any corporation may be incorporated as a close corporation,
except:
a) mining or oil companies;
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
f) educational institutions; &
g) corporations declared to be vested w/ public
interest
De Facto Corporations: Requisites
User of Corporate Powers
What is a ‘de facto’ corporation?
A ‘de facto’ corporation is a defectively organized
corporation, which has all the powers and liabilities of a
‘de jure’ corporation and, except as to the State, has a
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 juridical personality distinct and separate from its
shareholders, provided that the following requisites are
concurrently present:
(1) That there is an apparently valid statute under
which the corporation with its purposes may be
formed;
(2) That there has been colorable compliance with
the legal requirements in good faith; and,
(3) That there has been use of corporate powers,
i.e., the transaction of business in some way as if
it were a corporation.
Can a corporation transact business as a ‘de facto’
corporation while application is still pending with
SEC?
No. In the case of Hall v. Piccio (86 Phil. 603;
1950), where the supposed corporation transacted
business as a corporation pending action by the SEC on
its articles of incorporation, the Court held that there was
no ‘de facto’ corporation on the ground that the
corporation cannot claim to be in ‘good faith’ to be a
corporation when it has not yet obtained its certificate of
incorporation.
Formation under apparently valid statute.
MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969)
WON a corporation organized under a statute subsequently
declared void acquires status as ‘de facto’ corporation.
No. A corporation organized under a statute subsequently
declared invalid cannot acquire the status of a ‘de facto’ corporation unless
there is some other statute under which the supposed corporation may be
validly organized. Hence, in the case at bar, the mere fact that the
municipality was organized before the statute had been invalidated cannot
conceivably make it a ‘de facto’ corporation since there is no other valid
statute to give color of authority to its creation.
Colorable compliance with the legal requirements in good faith.
BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85)
The constitutive documents of the proposed corporation were
deposited with the Register of Deeds but not on file in said office. One of
the requirements for valid incorporation is the filing of constitutive
documents in the Register of Deeds.
Was there ‘colorable’ compliance enough to give the supposed
corporation at least the status of a ‘de facto’ corporation?
No. The filing of the constitutive documents in the Register of
Deeds is a condition precedent to the right to act as a corporate body. As
long as an act, required as a condition precedent, remains undone, no
immunity from individual liability is secured.
HARRIL V. DAVIS (168 F. 187; 1909)
The constitutive documents were filed with the clerk of the Court of
Appeals but not with the clerk of court in the judicial district where the
business was located. Arkansas law requires filing in both offices.
Was there ‘colorable’ compliance enough to give the supposed
corporation at least the status of a ‘de facto’ corporation?
No. Neither the hope, the belief, nor the statement by parties that
they are incorporated, nor the signing of the articles of incorporation which
are not filed, where filing is requisite to create the corporation, nor the use
of the pretended franchise of the nonexistent corporation, will constitute
such a corporation de facto as will exempt those who actively and
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knowingly use s name to incur legal obligations from their individual liability
to pay them. There could be no incorporation or color of it under the law
until the articles were filed (requisites for valid incorporation).
HALL v. PICCIO (29 SCRA 533; 1969)
In the case of Hall v. Piccio, where the supposed corporation
transacted business as a corporation pending action by the SEC on its
articles of incorporation, the Court held that there was no ‘de facto’
corporation on the ground that the corporation cannot claim to be in ‘good
faith’ to be a corporation when it has not yet obtained its certificate of
incorporation.
NOTE: The validity of incorporation cannot be inquired
into collaterally in any private suit to which such
corporation may be a party. Such inquiry must be
through a quo warranto proceeding made by the
Solicitor General. (Sec. 20)
CORPORATION BY ESTOPPEL (Sec. 21)
Distinguish a de facto corporation from a corporation by estoppel.
The ‘de facto’ doctrine differs from the estoppel doctrine in that
where all the requisites of a ‘de facto’ corporation are present, then the
defectively organized corporation will have the status of a ‘de jure’
corporation in all cases brought by and against it, except only as to the
State in a direct proceeding. On the other hand, if any of the requisites are
absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the
defendant association is estopped from defending on the ground of lack of
capacity to be sued, or the defendant third party had dealt with the plaintiff
as a corporation and is deemed to have admitted its existence.
(De facto – has status of ‘de jure’ corpo, except separate personality
against State, provided all requisites are present)
What are the effects of a Corporation by Estoppel in suits brought:
(1) against the Corporation? Considered a corporation in
suits brought against it if it held itself out as such and denies
capacity to be sued;
(2) against third party? Third party cannot deny existence of
corporation if it dealt with it as such.
EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881)
Company was sued on a promissory note. Its defense was that at
the time of its issuance, it was defectively organized and therefore could
not be sued as such.
The Corporation cannot repudiate the transaction or evade
responsibility when sued thereon by setting up its own mistake affecting
the original organization.
LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919)
Corporation sued a partnership on a promissory note. The latter
as defense alleged that the plaintiff was not a corporation.
One who enters into a contract with a party described therein as a
corporation is precluded, in an action brought thereon by such party under
the same designation, from denying its corporate existence.
ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924)
The corporation sued another corporation a promissory note. The
defense was that the plaintiff was not able to prove the corporate
existence of both parties.
The defendant is estopped from denying its own corporate
existence. It is also estopped from denying the other’s corporate
existence. The general rule is that in the absence of fraud, a person who
has contracted or otherwise dealt with an association is such a way as to
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recognize and in effect admit its legal existence as a corporate body is
thereby estopped from denying its corporate existence.
CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964)
IBM sued Cranson in his personal capacity regarding a typewriter
bought by him as President of a defectively organized company whose
Articles were not yet filed when the obligation was contracted.
IBM, having dealt with the defectively organized company as if it
were properly organized and having relied on its credit instead of
Cranson’s, is estopped from asserting that it was not incorporated. It
cannot sue Cranson personally.
SALVATIERRA VS GARLITOS (103 Phil. 757; 1958)
Salvatierra leased his land to the corporation. He filed a suit for
accounting, rescission and damages against the corporation and its
president for his share of the produce. Judgment against both was
obtained. President complains for being held personally liable.
He is liable. An agent who acts for a non-existent principal is
himself the principal. In acting on behalf of a corporation which he knew to
be unregistered, he assumed the risk arising from the transaction.
ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965)
Mariano Albert entered into a contract with University Publishing
Co., Inc. through Jose M. Aruego, its President, whereby University would
pay plaintiff for the exclusive right to publish his revised Commentaries on
the Revised Penal Code. The contract stipulated that failure to pay one
installment would render the rest of the payments due. When University
failed to pay the second installment, Albert sued for collection and won.
However, upon execution, it was found that University was not registered
with the SEC. Albert petitioned for a writ of execution against Jose M.
Aruego as the real defendant. University opposed, on the ground that
Aruego was not a party to the case.
The Supreme Court found that Aruego represented a non-existent
entity and induced not only Albert but the court to believe in such
representation. Aruego, acting as representative of such non-existent
principal, was the real party to the contract sued upon, and thus assumed
such privileges and obligations and became personally liable for the
contract entered into or for other acts performed as such agent.
The Supreme Court likewise held that the doctrine of corporation
by estoppel cannot be set up against Albert since it was Aruego who had
induced him to act upon his (Aruego's) willful representation that University
had been duly organized and was existing under the law.
BY-LAWS (Sec. 46 & 47)
When adopted:
(a) No later than one (1) month after receipt from SEC
of official notice of issuance of Cert. of incorporation.
Requirement: Affirmative vote of stockholders representing at
least majority of outstanding capital stock (Stock Corp.) or members (Non-
Stock)
Must be signed by stockholders or members
voting for them
(b) Prior to incorporation
Requirement: Approval of all incorporators; must be signed by
all of them
Where kept: (1) In the principal office of the corporation ; and
(2) Securities and Exchange Commission
When effective: Only upon the SEC’s issuance of a certification
that the by-laws are not inconsistent with the Corporation Code.
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 Special corporations: By-laws and/or amendments thereto must
be accompanied by a certificate of the appropriate government agency to
the effect that such by-laws / amendments are in accordance with law.
· banks or banking institutions
· building and loan associations
· trust companies
· insurance companies
· public utilities
· educational institutions
· other special corporations governed by special laws
Contents of By-laws - 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
and special meetings of the stockholders or members;
3) the required quorum in meetings of stockholders or
members and the manner of voting herein;
4) the form for proxies of stockholders and members and
the manner of voting them;
5) the qualifications, duties and compensation of directors
or trustees, officers and employees;
6) the time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
7) the manner of election or appointment and the term of
office of all officers other than directors or trustees;
8) the penalties for violation of the by-laws;
9) in the case of stock corporations, the manner of issuing
certificates; and
10) such other matters as may be necessary for the proper
or convenient transaction of its corporate business and
affairs.
FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925)
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objective of the
corporation and are not contradictory to the general policy of the laws of
the land. Under a statute authorizing by-laws for the transfer of stock, a
corp. can do no more than prescribe a general mode of transfer on the
corp. books and cannot justify an restriction upon the right of sale.
GOVT. OF P.I. V. EL HOGAR
Is a provision in the by-laws allowing the BOD, by vote of absolute
majority, to cancel shares valid?
No. It is a patent nullity, being in direct conflict with Sec. 187 of
the Corp. Law which prohibits forced surrender of unmatured stocks
except in case of dissolution.
Is a provision in the by-laws fixing the salary of directors valid?
Yes. Since the Corporation Law does not prescribe the rate of
compensation, the power to fix compensation lies with the corporation.
Is a provision requiring persons elected to the Board of Directors to own at
least P 5,000 shares valid?
Yes. The Corporation Law gives the corporation the power to
provide qualifications of its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 75)
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· Where the SEC grants a license to a foreign corporation, it is
deemed to have approved its
foreign-enacted by-laws. Sec. 46 of the Corporation Code which
states that by-laws are not valid without SEC approval applies only
to domestic corporations.
· A board resolution appointing an attorney-in-fact to represent the
corporation during pre-trial is not necessary where the by-laws
authorize an officer of the corporation to make such appointment.
LOYOLA GRAND VILLAS v. CA (276 SCRA 681)
ISSUE: Whether the failure of a corporation to file its by-laws within one
(1) month from the date of its incorporation, as mandated by Art. 46 of the
Corporation Code, results in the corporation's automatic dissolution.
RULING: No. Failure to file by-laws does not result in the automatic
dissolution of the corporation. It only constitutes a ground for such
dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534)
Incorporators must be given the chance to explain their neglect or
omission and remedy the same.
THE CORPORATE ENTITY
The Theory of Corporate Entity
When does the corporation’s existence as a legal entity
commence?
Upon issuance by the SEC of the certificate of incorporation (Sec. 19)
What rights does the corporation acquire?
The right to:
1) sue and be sued;
2) hold property in its own name;
3) enter into contracts with third persons; &
4) perform all other legal acts.
Since corporate property is owned by the corporation as a juridical person,
the stockholders have no claim on it as owners, but have merely an
expectancy or inchoate right to the same should any of it remain upon the
dissolution of the corporation after all corporate creditors have been paid.
Conversely, a corporation has no interest in the individual property of its
stockholders, unless transferred to the corporation. Remember that the
liability of the stockholders is limited to the amount of shares.
SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA
631)
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the corporation is
not the property of its stockholders or members and may not be sold by
the stockholders or members without express authorization from the
corporation's Board of Directors.
In this case, the sale of a piece of land belonging to Motorich
Corporation by the corporation treasurer (Gruenberg) was held to be
invalid in the absence of evidence that said corporate treasurer was
authorized to enter into the contract of sale, or that the said contract was
ratified by Motorich. Even though Gruenberg and her husband owned
99.866% of Motorich, her act could not bind the corporation since she was
not the sole controlling stockholder.
STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA
373)
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 Properties registered in the name of the corporation are owned by
it as an entity separate and distinct from its members. While shares of
stock constitute personal property, they do not represent property of the
corporation. A share of stock only typifies an aliquot part of the
corporation's property or the right to share in its proceeds to that extent
when distributed according to law and equity, but its holder is not the
owner of any part of the capital of the corporation. Nor is he entitled to the
possession of any definite portion of its property or assets.
The act of liquidation made by the stockholders of the corp of the
latter’s assets is not and cannot be considered a partition of community
property, but rather a transfer or conveyance of the title of its assets to the
individual stockholders. Since the purpose of the liquidation, as well as
the distribution of the assets, is to transfer their title from the corporation to
the stockholders in proportion to their shareholdings, that transfer cannot
be effected without the corresponding deed of conveyance from the
corporation to the stockholders. It is, therefore, fair and logical to consider
the certificate of liquidation as one in the nature of a transfer or
conveyance.
CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for the preparation of the project
study.
The petitioners were not involved in the initial stages of the
organization of the airline. They were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the strength
of the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corp and did
not have a separate juridical personality to justify making the petitioners,
as principal stockholders thereof, responsible for its obligations. As a
bona fide corp, the Airline should alone be liable for its corporate acts as
duly authorized by its officers and directors. Granting that the petitioners
benefited from the services rendered, such is no justification to hold them
personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in late, and regardless of the
amount of their shareholdings, would be equally and personally liable also
with the petitioner for the claims of the private respondent.
PALAY V. CLAVE (124 SCRA 640; 1983)
The case of the reliance on a default provision of the contract granting
automatic extra-judicial rescission.
The court found no badges of fraud on the part of the president of
the corporation. The BOD had literally and mistakenly relied on the default
provision of the contract. As president and controlling stockholder of the
corp, no sufficient proof exists on record that he used the corp to defraud
private respondent. He cannot, therefore, be made personally liable
because he appears to be the controlling stockholder. 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.
MAGSAYSAY V. LABRADOR (180 SCRA 266)
The case of the assignment by Senator Magsaysay of a certain portion of
his shareholdings in SUBIC granting his sisters the right to intervene in a
case filed by the widow against SUBIC.
The words "an interest in the subject," to allow petitioners to
intervene, mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in
the complaint, without the establishment of which plaintiff could not
recover.
Here, the interest, of petitioners, if it exists at all, is indirect,
contingent, remote, conjectural, consequential and collateral. At the very
least, their interest is purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in the profits thereof and
in the properties and assets thereof on dissolution, after payment of the
corporate debts and obligations.
While a share of stock represents a proportionate or aliquot
interest in the property of the corp, it does not vest the owner thereof with
12
any legal right or title to any of the property, his interest in the corporate
property being equitable and beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corp
as a distinct legal person.
PIERCING THE CORPORATE VEIL
Q: What is the theory of corporate entity?
A: That a corporation has a personality distinct from its stockholders, and
is not affected by the personal rights, obligations and transactions of the
latter.
Q: When Can the Veil of Corporate Entity be Pierced?
A: The veil of corporate fiction may be pierced when it is used as a
shield to further an end subversive of justice, or for purposes that could not
have been intended by law that created it or to defeat public convenience,
justify wrong, protect fraud or defend crime or to perpetuate fraud or
confuse legitimate issues or to circumvent the law or perpetuate deception
or as an alter ego, adjunct or business conduit for the sole benefit of the
stockholders.
Q: What are the effects of disregarding the corporate veil?
(1) Stockholders would be personally liable for the acts and contracts of
the corporation whose existence at least for the purpose of the particular
situation involved is ignored.
(2) Court is not denying corporate existence for all purposes but merely
refuses to allow the corporation to use the corporate privilege for the
particular purpose involved.
Contrary to law / public policy; evasion of liability to government
STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892)
Where all or a majority of stockholders comprising a corporation
do an act which is designed to affect the property and business of the
company, as if it had been a formal resolution of its Board of Directors and
the acts done is ultra vires, the act should be regarded as the act of the
corporation, and may be challenged by the state in a quo warrranto
proceeding.
LAGUNA TRANS V. SSS (107 Phil. 833; 1960)
Where the corporation was formed by and consisted of the
members of a partnership whose business and property was conveyed to
the corporation for the purpose of continuing its business, such corporation
is presumed to have assumed partnership debts.
MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954)
The fact that:
· certificates in possession of Castro were endorsed in blank;
· Castro had enormous profits and had motive to hide them;
· other subscribers had no incomes of sufficient magnitude; and
· directors never met;
shows that other shareholders may be considered dummies of Castro.
Hence, corporate veil may be pierced.
Evasion of liability to creditors
TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988)
Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the
latter fails to pay. G's printing machine levied upon to satisfy claim but
PADCO, another corpo intercedes, saying it is the owner of the machine,
having leased such to G.
13
 Printing machine was allowed by the Court to satisfy G's liability.
Both G and PADCO's corporate entities pierced because they have: the
same board of directors, PADCO owns 50% of G, PADCO never engaged
in the business of printing. Obviously, the board is using PADCO to shield
G from fulfilling liability to T.
NAMARCO v. AFCorp (19 SCRA 962; 1967)
Associated Financing Corp. (AFC), through its pres. F. Sycip (who
together with wife, own 76% of AFC) contracts with NAMARCO for an
exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not
have sugar to supply in the first place. N sues to recover sum of money
plus damages.
Sycip held jointly and severally liable with AFC. AFC's corporate
veil was pierced because it was used as Sycip's alter ego, corpo used
merely as an instrumentality, agency or conduit of another to evade
liability.
JACINTO V. CA (198 SCRA 211)
Jacinto, president/GM and owner of 52% of corpo, owes
MetroBank sum of money, signs trust receipts therefor. Jacinto absconds.
Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced
because it was used as a shield to perpetuate fraud and/or confuse
legitimate issues. There was no clear cut delimitation between the
personality of Jacinto and the corporation.
Evasion of liability / obligation to employees
CLAPAROLS V. CIR (65 SCRA 613; 1975)
Both predecessor and successor were owned and controlled by
petitioner and there was no break in the succession and continuity of the
same business. All the assets of the dissolved Plant were turned over to
the emerging corporation. The veil of corporate fiction must be pierced as
it was deliberately and maliciously designed to evade its financial
obligation to its employees.
INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA
698)
Rule: The doctrine of piercing the veil of corporate entity applies
when corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or when it is made as a shield to confuse
the legitimate issues or where a corporation is the mere alter ego or
business conduit of a person, or 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.
Case at bar: Union sought to pierce corporate veil alleging that the
creation of Acrylic is a devise to evade the application of the CBA Indophil
had with them (or it sought to include the other union in its bargaining
leverage).
SC: Legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation.
Union does not seek to impose such claim against Acrylic. Mere fact that
businesses were related, that some of the employees of Indophil are the
same persons manning and providing for auxiliary services to the other
company, and that physical plants, officers and facilities are situated in the
same compound - not sufficient to apply doctrine.
NAFLU V. OPLE (143 SCRA 125; 1986)
Libra/Dolphin Garments was but an alter ego of Lawman
Industrial, therefore, the former must bear the consequences of the latter's
unfair acts. It cannot deny reinstatement of petitioners simply because of
cessation of Lawman's operations, since it was in fact an illegal lock-out,
the company having maintained a run-away shop and transferred its
machines and assets there.
Here, the veil of corporate fiction was pierced in order to
safeguard the right to self-organization and certain vested rights which had
14
accrued in favor of the union. Second corporation sought the protective
shield of corporate fiction to achieve an illegal purpose.
ASIONICS PHILS. v. NLRC (290 SCRA 164)
A corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any
other legal entity to which it may be related. 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.
Where there is nothing on record to indicate the President and
majority stockholder of a corporation had acted in bad faith or with malice
in carrying out the retrenchment program of the company, he cannot be
held solidarily and personally liable with the corporation.
Evasion of liability on contract
VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968)
Jose M. Villarama, operator of a bus company, Villa Rey Transit,
which was authorized to operate 32 units from Pangasinan to Manila and
vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in
the contract of sale was that the seller (Villarama) "shall not, for a period of
10 years from the date of the sale, apply for any TPU service identical or
competing with the buyer (Pantranco)."
Barely 3 months after the sale, a corporation called Villa Rey
Transit, Inc. was organized, with the wife of Jose M. Villarama as one of
the incorporators and who was subsequently elected as treasurer of the
Corporation. Barely a month after its registration with the SEC, the
corporation bought 5 CPCs and 49 buses from one Valentin Fernando,
and applied with the Public Service Commission (PSC) for approval of the
sale. Before the PSC could take final action on the said application,
however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution
issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against
Valentin Fernando, judgment debtor. During the public sale conducted,
Ferrer was the highest bidder, and a certificate of sale was issued in his
name. Shortly thereafter, he sold the said CPCs to Pantranco, and they
jointly submitted their contract of sale to the PSC for approval.
The PSC issued an order that pending resolution of the
applications, Pantranco shall have the authority to provisionally operate
the service under the 2 CPCS that were the subject of the contract
between Ferrer and Pantranco. Villa Rey Transit took issue with this, and
filed a complaint for annulment of the sheriff's sale of the CPCs and
prayed that all the orders of the PSC relative to the dispute over the CPCs
in question be annulled. Pantranco filed a third-party complaint against
Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one
and the same, and that Villarama and/or the Corporation is qualified from
operating the CPCs by virtue of the agreement entered into between
Villarama and Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey,
Inc. were managed as if they were the private funds of Villarama and in
such a way and extent that Villarama appeared to be the actual owner of
the business without regard to the rights of the stockholders. Villarama
even admitted that he mingled the corporate funds with his own money.
These circumstances negate Villarama's claim that he was only a part-time
General Manager, and show beyond doubt that the corporation is his alter
ego. Thus, the restrictive clause with Pantranco applies. A seller may not
make use of a corporate entity as a means of evading the obligation
of his covenant. Where the Corporation is substantially the alter ego
of one of the parties to the covenant or the restrictive agreement, it
can be enjoined from competing with the covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely composed of the assets and
properties of the defunct Tiaong plantation whose license to operate
already expired. The legal fiction of separate corporate personality was
attempted to be used to delay and deprive the respondents of their
succession rights to the estate of their deceased father.
15

While originally, there were other incorporators of Tiaong, it has
developed into a closed family corporation (Cease). The head of the
corporation, Cease, used the Tiaong plantation as his instrumentality. It
was his business conduit and an extension of his personality. There is not
even a showing that his children were subscribers or purchasers of the
stocks they own.
DELPHER TRADES V. CA (157 SCRA 349; 1988)
The Delpher Trades Corp. is a business conduit of the Pachecos.
What they really did was to invest their properties and change the nature
of their ownership from unincorporated to incorporated form by organizing
Delpher and placing the control of their properties under the corporation.
This saved them inheritance taxes.
This is the reverse of Cease; however, it does not modify the
other cases. It stands on its own because of the facts.
Parent-Subsidiary Relationship
Q: What is the general rule governing parent-subsidiary relationship?
A: The mere fact that a corporation owns all or substantially all of the
stocks of another corporation is not alone sufficient to justify their being
treated as one entity.
Q: When may it be disregarded by the courts?
(1) if the subsidiary was formed for the payment of evading
the payment of higher taxes
(2) where it was controlled by the parent that its separate
identity was hardly discernible
(3) parent corporations may be held responsible for the
contracts as well as the torts of the subsidiary
Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1. the parent corp. owns all or most of the capital stock of
the subsidiary.
2. the parent and subsidiary have common directors and
officers
3. the parent finances the subsidiary
4. the parent subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation
5. the subsidiary has grossly inadequate capital
6. the parent pays the salaries and other expenses or
losses of the subsidiary
7. the subsidiary has substantially no business except with
the parent corp. or no assets except those conveyed to or
by the parent corp.
8. in the papers of the parent corp. or in the statements of
its officers, the subsidiary is described as a department or
division of the parent corp. or its business or financial
responsibility is referred as the parent’s own
9. the parent uses the property of the subsidiary as its
own
10. the directors or the executives of the subsidiary do not
act independently in the interest of the subsidiary but take
their orders from the parent corp. in the latter’s interest
11. the formal legal requirements of the subsidiary are not
observed. (Garrett vs. Southern Railway)
(Note: Sir Jack said that we must not stop after we’ve gone through the 11
points in order to determine whether or not there is a subsidiary or
instrumentality. We must go further and consider other circumstances
which may help determine clearly the true nature of the relationship. ---
Em)
16

GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn.
1959)
This case involved a Workers Compensation claim by a wheel
moulder employed by Lenoir Car Works. The plaintiff sought to claim from
Southern Railway Company, which acquired the entire capital stock of
Lenoir Car Works. Plaintiff contended that Southern so completely
dominated Lenoir that the latter was a mere adjunct or instrumentality of
Southern.
The general rule is that stock ownership alone by one corporation
of the stock of another does not thereby render the dominant corporation
liable for the torts of the subsidiary, unless the separate corporate
existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the
dominant corporation.
In the case, it was found that there were two distinct operations.
There was no evidence that Southern dictated the management of Lenoir.
In fact, evidence shows that Marius, the manager of the subsidiary, was in
full control of the operation. He established prices, handled negotiations in
CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a
Workmen’s Compensation Fund. There was also no evidence that Lenoir
was run solely for the benefit of Southern. In fact, a substantial part of its
requirements in the field of operation of Lenoir was bought elsewhere.
Lenoir sold substantial quantities to other companies. Policy decisions
remained in the hands of Marius. Hence, the complaint against Southern
Railway was dismissed.
KOPPEL VS. YATCO (77 Phil. 496; 1946)
This case involved a complaint for the recovery of merchant sales
tax paid by Koppel (Philippines), Inc. under protest to the Collector of
Internal Revenue. Although the Court of First Instance did not deny legal
personality to Koppel (Philippines), Inc. for any and all purposes, it
dismissed the complaint saying that in the transactions involved in the
case, the public interest and convenience would be defeated and would
amount to a perpetration of tax evasion unless resort was had to the
doctrine of "disregard of the corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were
owned by K-USA. K-Phil. acted as a representative of K-USA and not as
an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable
expenses) and also those of its “principal”. Moreover, K-Phil’s share in the
profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch
or dummy of K-USA, and was therefore liable for merchant sales tax. To
allow otherwise would be to sanction a circumvention of our tax laws and
permit a tax evasion of no mean proportion and the consequent
commission of a grave injustice to the Government. Moreover, it would
allow the taxpayer to do by indirection what the tax laws prohibit to be
done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of
its incorporation, 98% of the Liddel Inc.’s stock belonged to Frank Liddel.
As to Liddel Motors, Frank supplied the original capital funds. The bulk of
the business of Liddel Inc. was channeled through Liddel Motors. Also,
Liddel Motors pursued no other activities except to secure cars, trucks and
spare parts from Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the ground that the
sales were made through another and distinct corporation when it is
proved that the latter is virtually owned by the former or that they were
practically one and the same is to sanction the circumvention of tax laws.
YUTIVO VS. CTA (1 SCRA 160; 1961)
Southern Motors was actually owned and controlled by Yutivo as
to make it a mere subsidiary or branch of the latter created for the purpose
of selling vehicles at retail. Yutivo financed principally, if not wholly, the
business of Southern Motors and actually exceeded the credit of the latter
. At all times, Yutivo, through the officers and directors common to it and
the Southern Motors exercised full control over the cash funds, policies,
expenditures and obligations of the latter. Hence, Southern Motors, being
17
a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded
the technical defense of separate corporate identity in order to arrive at the
true tax liability of Yutivo.
LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953)
The La Campana Gaugau Packing and La Campana Coffee
Factory were operating under one single business although with 2 trade
names. It is a settled doctrine that the fiction of law of having the
corporate identity separate and distinct from the identity of the persons
running it cannot be invoked to further the end subversive of the purpose
for which it was created. In the case at bar, the attempt to make the two
businesses appear as one is but a device to defeat the ends of the law
governing capital and labor relations and should not be permitted to
prevail.
PROMOTER’S CONTRACTS PRIOR TO INCORPORATION
Liability of Corporation for Promoter’s Contracts
While a corporation could not have been
a party to a promoter's contract since it did yet
exist at the time the contract was entered into and
thus could not possibly have had an agent who
could legally bind it, the corporation may make the
contracts its own and become bound thereon if,
after incorporation, it:
(1) Adopts or ratifies the contract; or
(2) Accepts its benefits with knowledge
of the terms thereof.
It must be noted, however, that the contract must
be adopted in its entirety; the corporation cannot
adopt only the part that is beneficial to it and
discard that which is burdensome. Moreover, the
contract must be one which is within the powers of
the corporation to enter, and one which the usual
agents of the company have express or implied
authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a
promoter's contract be expressed, but it may be inferred from acts or
acquiescence on the part of the corporation, or its authorized agents, as
any similar original contract might be shown.
The right of agents to adopt an agreement originally made by
promoters depends upon the purposes of the corporation and the nature of
the agreement. The agreement must be one which the corporation itself
could make and one which the usual agents of the company have express
or implied authority to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal theory by which a corporation
may be bound by the contract (ratification, adoption, novation, a continuing
offer to be accepted or rejected by the corporation), it is necessary in all
cases that the corporation should have full knowledge of the facts, or at
least should be put upon such notice as would lead, upon reasonable
inquiry, to the knowledge of the facts.
CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)
A promoter could not have acted as agent for a corporation that
had no legal existence. A corporation, until organized, has no life
therefore no faculties. The corporation had no juridical personality to enter
into a contract.
Also see Caram v. CA
18
Corporate Rights under Promoter’s Contracts
Should the other contracting party fail to
perform its part of the bargain, the corporation
which has adopted or ratified the contract may
either sue for:
(1) Specific performance; or
(2) Damages resulting from breach of
contract.
The fact of bringing an action on the contract has
been held to constitute sufficient adoption or
ratification to give the corporation a cause of
action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon
themselves the whole thing, and ratified all that had been done on its
behalf. Though there was no formal assignment of the contract to the
corporation, the acts of the incorporators were an adoption of the contract.
Therefore the corporation has the right to sue for damages for the breach
of contract.
RIZAL LIGHT V. PSC (25 SCRA 285; 1968)
The incorporation of (Morong) and its acceptance of the franchise
as shown by this action in prosecuting the application filed with the
Commission for approval of said franchise, not only perfected a contract
between the municipality and Morong but also cured the deficiency pointed
out by the petition. The fact that Morong did not have a corporate
existence on the day the franchise was granted does not render the
franchise invalid, as Morong later obtained its certificate of incorporation
and accepted the franchise.
Personal Liability of Promoter on Pre-Incorporation Contracts
GENERAL RULE: Promoters are personally liable on their
contracts made on behalf of a corporation to be formed.
EXCEPTION: If there is an express or implied agreement to
the contrary. It must be noted that the fact that the corporation when
formed has adopted or ratified the contract does not release the promoter
from responsibility unless a novation was intended.
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy
machinery, receive them in their possession and authorize one member to
issue a note, in contemplation of organizing a corporation which was not
formed. (see Campos' notes p. 258-259). The agent is personally liable for
contracts if there is no principal. The making of partial payments by the
corporation, when later formed, does not release the promoters here from
liability because the corporation acted as a mere stranger paying the debt
of another, the acceptance of which by the creditor does not release the
debtors from liability over the balance. Hence, there is no adoption or
ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before
incorporation, the promoters solely are liable. Even if the promoter signed
"on behalf of corporation to be formed, who will be obligor," there was here
an intention of the parties to have a present obligor, because three-fourths
of the payment are to be made at the time the drawings or plans in the
architectural contract are completed, with or without incorporation. A
purported adoption by the corporation of the contract must be expressed in
a novation or agreement to that effect. The promoter is liable unless the
contract is to be construed to mean: 1) that the creditor agreed to look
solely to the new corporation for payment; or 2) that the promoter did not
have any duty toward the creditor to form the corporation and give the
corporation the opportunity to assume and pay the liability.
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QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed
no obligation on them to form a corporation and they were not named
there as obligors/promissors. The creditor-plaintiff was aware of the
inexistence of the corporation but insisted on naming it as obligor because
the planting season was fast approaching and he needed to dispose of the
seedlings. There was no intent here by plaintiff-creditor to look to the
promoters for the performance of the obligation. This is an exception to the
general rule that promoters are personally liable on their contracts, though
made on behalf of a corporation to be formed.
Fiduciary relationship between corporation and promoter
OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties to the corporation,
may still sell properties to it, but he must pursue one of four courses to
make the contract binding. These are: 1) provide an independent board of
officers in no respect directly or indirectly under his control, and make full
disclosure to the corporation through them; 2) make full disclosure of all
material facts to each original subscriber of shares in the corporation; 3)
procure a ratification of the contract after disclosing its circumstances by
vote of the stockholders of the completely established corporation; or 4) be
himself the real subscriber of all the shares of the capital stock
contemplated as a part of the promotion scheme. The promoter is liable,
even if owning all the stock of the corporation at the time of the
transaction, if further original subscription to capital stock contemplated as
an essential part of the scheme of promotion came in after such
transaction.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)
· To sue and be sued in its corporate name;
· Of succession by its corporate name for the period of
time stated in the articles of incorporation and the
certificate of incorporation;
· To adopt and use a corporate seal;
· To amend its articles of incorporation in accordance
with the provisions of this Code;
· To adopt by-laws not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
· In case of stock corporations, to issue of 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;
· To purchase, receive, take, grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
(NOTE: There are two (2) general restrictions on
the power of the corp. to acquire and hold
properties:
20
 (1) that the property must be reasonable
and necessarily required by the
transaction of its lawful business, and
(2) that the power shall be subject to the
limitations prescribed by other special
laws and the Constitution.)
· To adopt any plan of merger or consolidation as
provided in this Code;
· To make reasonable donations, including those for
the public welfare of for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided that: no corporation, domestic or
foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
· To establish pension, retirement and other plans for
the benefit of its directors, trustees, officers and
employees; and
· To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
stated in its articles of incorporation.
Specific Powers of Corporation
· Extension or shortening of the corporate term
(Sec. 37)
· Increase or decrease of the capital stock (Sec.
38)
· Incur, create or increase bonded indebtedness
(Sec. 38)
· Denial of the pre-emptive right (Sec. 39)
· Sale or other disposition of substantially all its
assets. (Sec. 40)
O A sale is deemed to substantially cover all
the corporate property and assets if such sale
renders the corporation incapable of
continuing the business or accomplishing the
purpose for which it was incorporated.
· Acquisition of its own shares. (Sec. 41)
· Investment in another corporation or business.
(Sec. 42)
· Declaration of dividends. (Sec. 43)
· Entering into management contracts. (Sec. 44)
Implied Powers
Under Sec. 36, a corporation is given such powers as are
essential or necessary to carry out its purpose or purposes as stated in the
articles of incorporation. This phrase gives rise to such a wide range of
implied powers, that it would not be at all difficult to defend a corporate act
versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a
contract is not its face necessarily beyond its authority; it will, in the
absence of proof to the contrary, be presumed valid.
The Ultra Vires Doctrine
Black’s Law Dictionary Definition:
Ultra vires acts are those acts beyond the scope of the powers of
the corporation, as defined by its charter or laws of state of incorporation.
21
The term has a broad application and includes not only acts prohibited by
the charter, but acts which are in excess of powers granted and not
prohibited, and generally applied either when a corporation has no power
whatever to do an act, or when the corporation has the power but
exercises it irregularly.
Q: What are the consequences of ultra vires acts?
· The corporation may be dissolved under a quo warrranto
proceeding.
· The Certificate of Registration may be suspended or
revoked by the SEC.
· Parties to the ultra vires contract will be left as they are, if
the contract has been fully executed on both sides. Neither
party can ask for specific performance, if the contract is
executory on both sides. The contract, provided that it is not
illegal, will be enforced, where one party has performed his
part, and the other has not with the latter having benefited
from the former’s performance.
· Any stockholder may bring an individual or derivative suit to
enjoin a threatened ultra vires act or contract. If the act or
contract has already been performed, a derivative suit for
damages against the directors maybe filed, but their liability
will depend on whether they acted in good faith and with
reasonable diligence in entering into the contracts. When the
suit against the injured party who had no knowledge that the
corporation was engaging in an act not included expressly or
impliedly in its purposes clause.
· Ultra vires acts may become binding by the ratification of all
the stockholders, unless third parties are prejudiced thereby,
or unless the acts are illegal.
REPUBLIC OF THE PHILS. v. ACOJE MINING (7 SCRA 361; 1963)
Resolution adopted by the company to open a post office branch
at the mining camp and to assume sole and direct responsibility for any
dishonest, careless or negligent act of its appointed postmaster is NOT
ULTRA VIRES because the act covers a subject which concerns the
benefit, convenience, and welfare of the company’s employees and their
families.
While as a rule an ultra vires act is one committed outside the
object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by law,
there are however certain corporate acts that may be performed outside of
the scope of the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation.
CARLOS v. MINDORO SUGAR CO. (57 SCRA 343, 1932)
The BOD of the Phil Trust Co. adopted a resolution which
authorized its president to purchase at par and in the name of the corp.
bonds of MSC. These bonds were later resold and guaranteed by PTC to
third persons. PTC paid plaintiff the corresponding interest payments until
July 1, 1928 when it alleged that it is not bound to pay such interest or to
redeem the obligation because the guarantee given for the bonds was
illegal and void.
Held: The act of guaranty by PTC was well within its corporate powers.
Furthermore, having received money or property by virtue of the contract
which is not illegal, it is estopped from denying liability. Even if the then
prevailing law (Corp. Law) prohibited PTC from guaranteeing bonds with a
total value in excess of its capital, with all the MSC properties transferred
to PTC based on the deed of trust, sufficient assets were made available
to secure the payment of the corresponding liabilities brought about by the
bonds.
GOV’T v. EL HOGAR (50 Phil 399; 1932)
(This case is an example of how the implied powers concept may be used
to justify certain acts of a corporation.)
22
A quo warranto proceeding instituted by the Gov't against El Hogar, a
building and loan ass'n to deprive it of its corp. franchise.
1. El Hogar held title to real property for a period in excess of 5 years in
good faith, hence this cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly
in excess of its reasonable requirements, held valid bec, it was found to be
necessary and legally acquired and developed.
3. El Hogar leased some office space in its bldg.; it administered and
managed properties belonging to delinquent SHs; and managed properties
of its SHs even if such were not mortgaged to them.
Held: first two valid, but the third is ultra vires bec. the administration of
property in that manner is more befitting of the business of a real
estate agent or trust company and not of a building and loan ass'n.
4. Compensation to the promoter and organizer allegedly excessive and
unconscionable.
Held: Court cannot dwell on the issue since the promoter is not a party
in the proceeding and it is the corp. or its SHs who may bring a
complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a
building and loan ass'n nor make its loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not
excessive, bec. accdg. to the SC, the by-laws expressly authorizes the
BOD to determine each year the amount to be written down upon the
expenses of installation and the property of the corp.
7. The Corp. Law does not expressly grant the power of maintaining
reserve funds but such power is implied. All business enterprises
encounter periods of gains and losses, and its officers would usually
provide for the creation of a reserve to act as a buffer for such
circumstances.
8. That loans issued to member borrowers are being used for purposes
other than the bldg. of homes not invalid bec. there is no statute which
expressly declares that loans may be made by these ass'ns solely for the
purpose of bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a
SH on a bldg. and loan ass'n. The word "person" is used on a broad
sense including not only natural persons but also artificial persons.
BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860)
Two railroad corporations contend that they transcended their own
powers and violated their own organic laws. Hence, they should not be
held liable for the injury of the plaintiff who was a passenger in one of their
trains.
Held: The contract between the two corporations was an ultra vires act.
However, it is not one tainted with illegality, therefore, the accompanying
rights and obligations based on the contract of carriage between them and
the plaintiff cannot be avoided by raising such a defense.
PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)
This case involved the issue of whether or not the defendant
corporation performed an ultra vires act by donating the life insurance
proceeds to the minor children of Pirovano, the deceased president of the
defendant company under whose management the company grew and
progressed to become a multi-million peso corporation.
Held: NO.
The AOI of the corporation provided two relevant items:
“(1) to invest and deal with moneys of the company not
immediately required, in such manner as from time to time
may be determined; and
23
 (2) to aid in any other manner any person, association or Who Exercises Corporate Powers
corporation of which any obligation or in which any
interest is held by this corporation or in the affairs of Board of directors or trustees
prosperity of which this corporation has a lawful interest.”
Q: What are the powers of the BOD?
From this, it is obvious that the corporation properly exercised
within its chartered powers the act of availing of insurance proceeds to the The BOD is responsible for corporate policies and the general
heirs of the insured and deceased officer. management of the business affairs of the corporation. (See Citibank v
Chua)
HARDEN v. BENGUET CONSOLIDATED (58 Phil 141)

A contract between Benguet and Balatoc provided that Benguet (a) Authority (Sec. 24)
will bring in capital, eqpt. and technical expertise in exchange for capital
shares in Balatoc. Harden was a SH of Balatoc and he contends that this (b) Requirements
contract violated the Corp.Law which restricts the acquisition of interest by
a (i) Qualifying share (Sec. 24)
mining corp. in another mining corp.
(ii) Residence (Sec. 24)
Held: Harden has no standing bec. if any violation has been committed,
the same can be enforced only in a criminal prosecution by an action of (iii) Nationality
quo warranto which may be maintained only by the Attorney-General.
(iv) Disqualifications (Sec. 27)
- conviction by final judgment of offense
CONTROL AND MANAGEMENT punishable > 6 yrs. prison
- violation of Corporation code within 5 years
Allocation of Power and Control prior to date of election or appointment

(c) How elected (Sec. 24)

Q: What are the three levels of corporate control/power?
The formula for determining the number of shares needed to elect a
Board of directors or trustees- responsible for corporate policies and the given number of directors is as follows:
general management of the business and affairs of the corporation.
X = Y x N1 +1
Officers- execute the policies laid down by the board. N+1

Stockholders or members- have residual power over fundamental X = being the number of shares needed to elect a given number of
corporate changes like amendments of articles of incorporation. directors
Y = being the total number of shares present or represented at the
meeting

24
 N1 = being the number of directors desired to be elected
N = being the total number of directors to be elected (f) How compensated (Sec. 30)

If provided in by-laws: That compensation stated in the by-

(d) How removed (Sec. 28) laws.

By a vote of the SHs holding or representing at least 2/3 of the If not provided in by-laws: Directors shall not receive any
outstanding capital stock, or by a vote of at least 2/3 of the compensation other than reasonable per diems, as directors.
members entitled to vote, provided that such removal takes place However, compensation other than per diems may be granted to
at either a regular meeting of the corporation or at a special directors by a majority vote of the SHs at a regular or special
meeting called for the purpose. In both cases, there must be stockholders' meeting.
previous notice to the SHs / members of the intention to propose
such removal at the meeting. Note: In no case shall the total yearly compensation of directors,
income before income tax of the corporation during the preceding year.
Removal may be with or without cause. However, removal
without cause may not be used to deprive minority SHs or (g) Matters requiring Board of Directors' action
members of the right of representation to which they may be
entitled under Sec. 24 of the Code. (h) Liability (See subsequent discussion under Duties of Directors
and Controlling Stockholders.)
(e) How vacancy filled (Sec. 29)
(i) In general (Sec. 31)
If vacancy due to removal: Must be filled by the SHs in a regular or
(ii) Business judgment rule
or expiration of term: special meeting called for that purpose.
(iii) Dealings with the corporation (Sec. 32)
If "vacancy" due to increase: Only by means of an election at a
regular or (iv) Contracts between corporations with interlocking directors
in number of directors special SHs meeting duly called for the (Sec. 33)
purpose,
or in the same or trustees: meeting authorizing the increase of (v) Disloyalty (Sec. 34)
directors or trustees
if so stated in the notice of the meeting. (vi) Watered stocks (Sec. 65)

(i) Executive Committee (Sec. 35)

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

Note: Directors or trustees so elected to fill vacancies shall be RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918)
elected only for the unexpired term of their predecessors in office.

25
 In this case, the board of directors, before the financial inability of
the corporation to proceed with the project was revealed, had already
recognized the contracts as being in existence and had proceed with the
necessary steps to utilize the films. The subsequent action by the
stockholders in not ratifying the contract must be ignored. The functions of
the stockholders are limited of nature. The theory of a corporation is that
the stockholders may have all the profits but shall return over the complete
management of the enterprise to their representatives and agents, called
directors. Accordingly, there is little for the stockholders to do beyond
electing directors, making by-laws, and exercising certain other special
powers defined by law. In conformity with this idea, it is settled that
contracts between a corporation and a third person must be made by
directors and not stockholders.
LOPEZ VS. ERICTA (45 SCRA 539; 1972)
In this case, the Board of Regents of the University of the
Philippines terminated the ad interim appointment of Dr. Blanco as Dean
of the College of Education by not acting on the matter. In the transcript of
the meeting which was latter agreed to be deleted, it was found out that
the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's
appointment 3 voted against, and 4 abstained.
The core of the issue is WON the 4 abstentions will be counted in
favor of Dr. Blanco's appointment or against it. The SC held that such
abstentions be counted as negative vote considering that those who
abstained, 3 of which members of the Screening Committee, intended to
reject Dr. Blanco's appointment.
ZACHARY VS. MILLIN (294 Mic. 622; 1940)
The issue in this case is regarding the validity of the director's
meeting at the company's laboratory on December 8, 1937 wherein
Zachary was removed as president of the company. Zachary that he was
not notified of the meeting thus, the action was void. On the other hand,
the defendants contend that the notice requirement was waived by
Zachary's presence at the meeting.
The SC held that the validity of the meeting was not affected by
the failure to give notice as required by the by-laws, provided that the
parties were personally present. Since all the parties were present at the
meeting of December 8, and understood that the meeting was to be a
directors' meeting, then the action taken is final and may not be voided by
any informality in connection with its being called.
PNB VS. CA (83 SCRA 238; 1978)
The action was brought by the mortgagor (Tapnio) against PNB
for damages in connection with the failure of the latter's board of directors
to act expeditiously on the proposed lease of the former's sugar quota to
one Tuazon.
The Supreme Court held that while the PNB has the ultimate
authority to approve or disapprove the proposed lease since the quota was
mortgaged to PNB, the latter certainly cannot escape liability for observing,
for the protection of the interest of the private respondents, that degree of
care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of the said sugar quota.
Corporate officers and agents
(a) Minimum set of officers and their qualifications (Sec. 25)
The minimum set of officers are:
(1) president (who shall be a director);
(2) secretary (who shall be a resident and
Filipino citizen); and
(3) treasurer (who may or may not be a
director)
The by-laws, however, may provide for other officers.
Any 2 or more positions may be held concurrently by the
same person, except that no one shall act as (a) president
26
 and secretary, or (b) president and treasurer at the same
time.
(b) Disqualifications (Sec. 27)
- Conviction by final judgment of an offense punishable
by imprisonment > 6 yrs.
- Violation of Corporation Code committed within 6 yrs.
prior to the date of election or appointment
(c) Liability in general (Sec. 31)
See discussion under Duties of Directors and Controlling
Stockholders. .
(d) Dealings with the corporation (Sec. 32)
- Generally voidable (See discussion under Duties of
Directors and Controlling Stockholders)
What is the doctrine of apparent authority?
The doctrine of apparent authority
provides that a corporation will be liable to
innocent third persons for the acts of its agent
where the representation was made by the agent
in the course of business and acting within his/her
general scope of authority even though, in the
particular case, the agent is secretly abusing his
authority and attempting to perpetrate a fraud
upon his/her principal or some other person for
his/her own ultimate benefit.
FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (January
24, 1996)
The authority of a corporate officer in dealing with third persons
may be actual or apparent. The doctrine of "apparent authority," with
special reference to banks, was laid out in Prudential Bank v. CA (223
SCRA 350) where it was held that:
A bank is liable for the wrongful acts of its
officers done in the interest of the bank or
in the course of dealings of the officers in
their representative capacity but not for
acts outside the scope of their authority.
A bank holding out its officers and agents
as worthy of confidence will not be
permitted to profit by the frauds they may
thus be enabled to perpetrate in the
apparent scope of their employment; nor
will it be permitted to shrink from its
responsibility for such frauds, even
though no benefit may accrue to the bank
therefrom.
Accordingly, a bank is liable to innocent third persons where the
representation is made in the course of its business by its agent acting
within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person for his own
ultimate benefit. Application of these principles is especially necessary
because banks have a fiduciary relationship with the public and their
stability depends on the confidence of the people in their honesty and
efficiency. Such faith will be eroded where banks do not exercise strict
care in the selection and supervision of its employees, resulting in
prejudice to their depositors.
YU CHUCK V. KONG LI PO (46 Phil. 608; 1924)
The power to bind a corporation by contract lies with its board of
directors or trustees. Such power may be expressly or impliedly be
27
delegated to other officers and agents of the corporation. It is also well
settled that except where the authority of employing servants or agents is
expressly vested in the board, officers or agents who have general control
and management of the corporation's business, or at least a specific part
thereof, may bind the corporation by the employment of such agents and
employees as are usual and necessary in the conduct of such business.
Those contracts of employment should be reasonable. Case at bar:
contract of employment in the printing business was too long and onerous
to the business (3-year employment; shall receive salary even if corp. is
insolvent).
THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20
SCRA 987; 1967)
Kalaw was a corporate officer entrusted with general management
and control of NACOCO. He had implied authority to make any contract or
do any act which is necessary for the conduct of the business. He may,
without authority from the board, perform acts of ordinary nature for as
long as these redound to the interest of the corporation. Particularly, he
contracted forward sales with business entities. Long before some of these
contracts were disputed, he contracted by himself alone, without board
approval. All of the members of the board knew about this practice and
have entrusted fully such decisions with Kalaw. He was never questioned
nor reprimanded nor prevented from this practice. In fact, the board itself,
through its acts and by acquiescence, have laid aside the by-law
requirement of prior board approval. Thus, it cannot now declare that
these contracts (failures) are not binding on NACOCO.
ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928)
A chattel mortgage, although not approved by the board of
directors as stipulated in the by-laws, shall still be valid and binding when
the corporation, through the board, tacitly approved and ratified it. The
following acts of the board constitute implied ratification:
1. Erquiaga is one of the largest stockholder, and was the all-in-one
officer (he was the President, GM, Attorney, Auditor, etc.)
2. Two other directors approved his actions and expressed satisfaction
with the advantages obtained by him in securing the chattel mortgage.
3. The corporation took advantage of the benefits of the chattel
mortgage. There were even partial payments made with the
knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING
ASSOCIATION (20 SCRA 526; 1967)
Acuna entered into an agreement with Verano, manager of
PROCOMA, in which the former would be constituted as the latter's agent
in Manila. Acuna diligently went about his business and even used
personal funds for the benefit of the corporation. During the face-to-face
meeting with the board, Acuna was assured that there need not be any
board approval for his constitution as agent for it would only be a mere
formality. Later on, the board disapproved the agency and did not pay
him. The SC ruled that the agreement was valid due to the ratification of
the corp. proven by these acts:
1. He was assured by the board that no board approval was
necessary.
2. He delivered P 20,000, performed his work with the
knowledge of the board.
3. Due to acquiescence, the board cannot disown or
disapprove the contract.
Board Committees
The By-laws of the corporation may create an
executive committee, composed of not less than 3
members of the Board, to be appointed by the Board. The
executive committee may act, by majority vote of all its
members, on such specific matters within the competence
of the board, as may be delegated to it in either (1) the By-
laws, or (2) on a majority vote of the board.
However, the following acts may never be delegated to an
executive committee:
28

(1) approval of any action for which shareholders'
approval is also required;
(2) the filling of vacancies in the board (refer to Sec.
29);
(3) the amendment or repeal of by-laws or the adoption
of new by-laws;
(4) the amendment or repeal of any resolution of the
board which by its express terms is not so amendable
or repealable; and
(5) a distribution of cash dividends to the shareholders.
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F.
289; 1910)
In this case, the Executive Committee:
a) removed the Treasurer and appointed a new one
b) fixed the annual salary of the members of the Executive
Committee
c) amended the by-laws by giving the President the sole authority
to call a stockholder's meeting and a board of directors meeting
d) amended the composition of the ExeCom by limiting it to just 2
persons.
Was these actions valid?
No, because the Executive Commmittee usurped the powers
vested in the board and the stockholders. If their actions was valid, it
would put the corp. in a situation wherein only two men, acting in their own
pecuniary interests, would have absorbed the powers of the entire
corporation. "Full powers" should be interpreted only in the ordinary
conduct of business and not total abdication of board and stockholders'
powers to the ExeCom. "FULL POWERS" does not mean unlimited or
absolute power.
Stockholders or Members
In the following basic changes in the corporation, although action is
usually initiated by the board of directors or trustees, their decision is not
final, and approval of the stockholders or members would be necessary:
(1) Amendment of articles of incorporation;
(2) Increase and decrease of capital stock;
(3) Incurring, creating or increasing bonded
indebtedness;
(4) Sale, lease, mortgage or other disposition of
substantially all corporate assets;
(5) Investment of funds in another business or
corporation or for a purpose other than the primary
purpose for which the corporation was organized;
(6) Adoption, amendment and repeal of by-laws;
(7) Merger and consolidation;
(8) Dissolution of corporation
In all of these cases, even non-voting stocks, or non-voting
members, as the case may be, will be entitled to vote. (Sec. 6)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS.
TAN (105 Phil. 426; 1959)
Meeting was invalid for lack of notice. By-laws provide for a 5-day
notice before meeting. March 26 posting not enough for March 28 election.
JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160; 1965)
As a general rule, a quorum at a stockholders' meeting, once
reached, cannot be nullified by a subsequent walkout.
However, the proceedings can be nullified if the walkout was for a
reasonable and justifiable cause. In this case, F. Logan Johnston, who
owned and/or represented more than 50% of the corporation's outstanding
shares, was prohibited from voting the shares of the Silos family (which he
had validly purchased) and of the minor children of Albert S. Johnston (of
whom he was guardian) on the ground that such shares must first be
29
registered in the names of the wards, thereby prompting the walkout. The
Court of Appeals held that the walkout was neither unreasonable nor
unjustifiable. It noted however that there was no formal declaration of a
quorum before the withdrawal from the meeting by F. Logan Johnston.
PONCE VS. ENCARNACION (94 Phil. 81; 1953)
Upon good cause, such as a Chairman of the Board failing to call
a meeting, either by his absence or neglect, the Court may grant a
stockholder the authority to call such a meeting.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA
225; 1968)
The Corporation Law says that every director must own at least
one (1) share of the capital stock of the corporation.
GOKONGWEI VS. SEC (89 SCRA 336; 1979)
· Section 21 of the Corporation Law provides that a corporation
may prescribe in its by-laws the qualifications, duties, and
compensation of its directors.
· A stockholder has no vested right to be elected director for he
impliedly contracts that the will of the majority shall govern.
· Amended by-laws are valid for the corporation has its inherent
right to protect itself.
ROXAS V. DELA ROSA (49 Phil. 609; 1926)
Under the Law, directors can only be removed from office by a
vote of the stockholders representing 2/3 of subscribed capital stock, while
vacancies can be filled by a mere majority.
A director cannot be removed by a mere majority by disguising it
as filling a vacancy.
ANGELES V. SANTOS (64 Phil. 697; 1937)
Court may appoint a receiver when corporate remedy is
unavailable when board of directors perform acts harmful to the
corporation.
Generally, stockholders cannot sue on behalf of the corporation.
The exception is when the defendants are in complete control of the
corporation.
CAMPBELL V. LEOW’S INC. (134 A. 2d 852; 1957)
The stockholders have an implied power to remove a director for
cause. Even when there is cumulative voting, stockholders can still
remove directors for cause.
DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247;
1969)
A corporation may use its funds to invest in another corporation
without the approval of the stockholders if done in pursuance of a
corporate purpose. However, if it is purely for investment, the vote of the
stockholders is necessary.
VOTING
Pledgors, mortgagors, executors, receivers, and
administrators (Sec. 55)
- Pledgors or mortgagors have the right to attend and
vote at stockholders' meetings.
Exception: If the pledgee or mortgagee is
expressly given by the pledgor or mortgagor such right in writing
which is recorded on the appropriate corporate books.
30
 - Executors, administrators, receivers and other legal
representatives duly appointed by the court may
attend and vote in behalf of the stockholders or
members without need of any written proxy.
Joint owners of stock (Sec. 56)
- Generally, consent of all co-owners shall be
necessary.
Treasury shares (Sec. 57)
- Treasury shares have no voting right for as long as
such shares remain in the Treasury.
Proxies (Sec. 58)
- Proxies must be in writing, signed by the
stockholder/member, filed before the scheduled
meeting with the corporate secretary.
- Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No
proxy shall be valid and effective for a period longer
than five (5) years at any one time.
- Voting trusts may be voted by proxy unless the
agreement provides otherwise. (Sec. 59)
- It must be noted however that directors or trustees
cannot vote by proxy at board meetings. (Sec. 25)
- Note that in Sec. 89, non-stock corporations are
permitted to waive the right to use proxies via their AOI
or by-laws.
Voting trust (Sec. 59)
- Voting trusts must be in writing, notarized,
specifying the terms and conditions thereof, certified
copy filed with SEC. Failure to comply with this
requirement renders the agreement ineffective and
unenforceable.
- As a general rule, voting trusts are valid for a period
not exceeding 5 years at any one time, and
automatically expire at the end of the agreed period
unless expressly renewed.
However, in the case of a voting trust specifically
required as a condition in a loan agreement, said
voting trust may exceed 5 years but shall
automatically expire upon payment of the loan.
- Voting trusts may be voted by proxy unless the
agreement provides otherwise. (Sec. 59)
Pooling agreement
- Pooling agreements refer to agreements between 2
or more SHs to vote their shares the same way. They
are different from voting trust agreements in that they
do not involve a transfer of stocks but are merely
private agreements between 2 or more SHs to vote in
the same way.
- Sec. 100, par. 2 of the Corporation Code provides
for pooling and voting agreements in close
corporations. Although there is no equivalent
provision for widely-held corporations, Justice and
Prof. Campos are of the opinion that SHs of widely-
held corporations should not be precluded from
entering into voting agreements if these are otherwise
valid and are not intended to commit any wrong or
fraud on the other SHs that are not parties to the
agreement.
31

Non-voting shares (Sec. 6)
- Preferred or redeemable shares.
ITF shares
And/or shares (Sec. 56)
- Any one of the joint owners can vote said shares or
appoint a proxy thereof.
Devices Affecting Control
Proxy Device
Sec 58. Proxies. – Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members. Proxies shall be 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.
Character: agency relationship; revocable at will (by express revocation,
by attending the meeting) and by death, except when coupled with interest
or is a security.
IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941)
Even if stocks are sold, the stockholder of record remains the
owner of the stocks and has the voting right until the by-law requiring
recording of transfer in the transfer book is complied with. Thus, a proxy
given by the stockholder of record even if he has already sold the share/s
of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159
A.L.R. 297; 1945)
The general rule is that a proxy is revocable even though by its
express terms it is irrevocable. The exceptions are: (a) when authority is
coupled with interest; (b) where authority is given as part of a security and
is necessary to effectuate such a security. It is coupled with interest when
there is interest in the share themselves (such as a right of first refusal in
case of sale) and the rights inherent in the shares (such as voting rights;
capacity to obtain majority).
DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930)
Where a stockholder’s meeting was validly convened, the proxies
must be deemed present even if the proxies were not presented, provided:
(a) their existence is established; (b) the agents were so designated to
attend and act in SH’s behalf; (c) the agents were present in the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128
N.E. 2d 291; 1955), it was held that in a contest over policy (as opposed to
a purely personal power contest), corporate directors have the right to
make reasonable and proper expenditures, subject to the scrutiny of the
courts when duly challenged, from the corporate treasury for the purpose
of persuading the SHs of the correctness of their position and soliciting
their support for policies which the directors believe, in all good faith, are in
the best interests of the corporation. The SHs, moreover, have the right to
reimburse successful contestants for the reasonable and bona fide
expenses incurred by them in any such policy contest, subject to like court
scrutiny.
However, where it is established that such monies have been spent for
personal power, individual gain or private advantage, and not in the belief
that such expenditures are in the best interest of the stockholders and the
corporation, or where the fairness and reasonableness of the amounts
allegedly expended are duly and successfully challenged, the courts will
not hesitate to disallow them.
32
ROSENFELD V. FAIRCHILD (128 N.E. 2d 291; 1955)
In a contest over policy, as compared to a purely personal power
contest, corporate directors have the right to make reasonable and proper
expenditures. Reason: in these days of giant corporations with vast
numbers of SH’s, if directors are not allowed to authorize reasonable
expenses in soliciting proxies, corporate business may be hampered by
difficulty in procuring quorum; or corporations may be at the mercy of
persons seeking to wrest control for their purposes if the directors may not
freely answer their challenge. But corp expense may be disallowed by
courts where money was shown to have been spent for personal power,
individual gain or private advantage, or where fairness and
reasonableness of amount spent has been successfully challenged.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the
real ownership of the shares is separated from the voting rights, the usual
aim being to insure the retention of incumbent directors and remove from
the stockholders the power to change the management for the duration of
the trust.
Advantages
· Accumulates power. Small shareholders are given the chance
to have a representation in the BOD or at least a spokesperson
during stockholders’ meetings.
· Continuity of management.
· More effective than proxies because it is irrevocable.
· Ensures that the required number of stockholders is met thereby
facilitating smooth corporate operations.
Disadvantages
· Stockholders give up rights (voting and naked title)
· Susceptible to abuse
· Not used in widely held corporations
Rights given up by the shareholder in a VTA in exchange for the
fiduciary obligation of the trustee:
· Voting rights
· Proprietary rights/naked title/legal ownership
· Incidental rights such as to attend meetings, to be elected, to
receive dividends)
Rights retained by the shareholder
· Beneficial or equitable ownership
· Right to revoke VTA in case of breach by trustee
· Regain full ownership after the lapse of the period
· Right to an accounting by the trustee after the period of the VTA
How is a voting trust created?
(1) A VTA is prepared in writing, notarized, and filed with the
corporation and SEC.
(2) The certificates of stock covered by the VTA are cancelled
and new ones (voting trust certificates) are issued in the name
of the trustee/s stating that they are issued pursuant to the
VTA.
(3) The transfer is noted in the books of the corporation.
(4) The trustee/s execute and deliver to transferors the voting
trust certificates. (Note that these certificates shall be
transferable in the same manner and with the same effect as
certificates of stock.)
(5) At the end of the period of the VTA (or the full payment of
the loan to which the VTA is made a condition, as the case
may be), in the absence of any express renewal, the voting
trust certificates as well as the certificates of stock in the name
of the trustee/s shall be deemed cancelled and new
33
 certificates of stock shall be reissued in the name of the
transferors.
EVERETT V. ASIA BANKING (49 Phil. 512; 1926)
This case illustrates how VTA can give rise to effective control and
how it can be abused. Original stockholders can set aside the VTA when
their rights are trampled upon by the trustee.
MACKIN, ET AL. V. NICOLLET HOTEL (25 F. 2d 783; 1928)
Invalidating circumstances of a VTA are:
· Want of consideration
· Voting power not coupled with interest
· Fraud
· Illegal or improper purpose
NIDC V. AQUINO (163 SCRA 153; 1988)
A VTA transfers only voting or other rights pertaining to the shares
subject of the agreement, or control over the stock. Stockholders of a
corp. that lost all its assets through foreclosures cannot go after those
properties. PNB-NIDC acquired those properties not as trustees but as
creditors.
Pooling and voting agreements
What are the advantages/disadvantages of a pooling agreement?
Advantages:
1. there is a commitment to agree to a certain manner of
voting
2. minority stockholders are able to control the corpo
Disadvantages:
1. possibility of disagreement thus the need for an
arbitration clause
2. there is no compelling reason for stockholders to act
together
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not
constituted as agents. However, the will of the parties may not be carried
out due to non-compliance with the pooling agreement.
RINGLING v. RINGLING (29 Del. Ch. 318, 49 A. 2d 603; 1946)
Generally, agreements and combinations to vote stock or control
corporate fiction & policy are valid if they seek without fraud to accomplish
only what parties might do as stockholders and do not attempt it by illegal
proxies, trusts or other means in contravention of statutes or law.
BUCK RETAIL STORE v. HARKERT (62 N.W. 2d 288; 1954)
Stockholders’ control agreements are valid where it is for the
benefit of corporation where it works no fraud upon creditors or other
stockholders and where it violates no statute or recognized public policy.
MCQUADE v. STONEHAM (189 N.E. 234; 1934)
An agreement among stockholders to divest directors of their
power to discharge an unfaithful employee is illegal as against public
policy. Stockholders may not by agreement among themselves control the
directors in the exercise of the judgment vested in them by virtue of their
office to elect officers and fix salaries.
34
CLARK v. DODGE (199 N.E. 641; 1936)
X= # of shares required
If the enforcement of a particular contract damages nobody-not Y= # of shares represented at meeting
even the public, there is no reason for holding it illegal. Test is WON it D= # of directors the minority wants to elect
causes damage to the corporation and stockholders. D’= total # of directors to be elected

X= Y x D + 1
Cumulative voting (see sec. 24) D' + 1

Methods of Voting NOTES

1. Straight voting: If A has 100 shares and there are 5 directors · Levels playing field or at least ensures that the minority can
to be elected, he shall multiply 100 by five (equals 500) and elect at least one representative to the board of directors
distribute equally among the five candidates without preference (BOD)

2. Cumulative voting: (one candidate) · Cannot of itself give the minority control of corporate affairs,
If A has 100 shares and there are 5 directors to be elected, he but may affect and limit the extent of the majority’s control
shall multiply 100 by five (equals 500) and he can vote the 500 for
only one candidate. · By-laws cannot provide against cumulative voting since this
right is mandated by law in Section 24.
3. Cumulative voting: (multiple candidates)
If A has 100 shares, there are 5 directors to be elected, and he Classification of shares (see sec. 6)
only wants to vote for two nominees, he can divide 500 votes Type of shares
between the two, giving each one 250 votes.
1. Common: share with right to vote
How to compute votes needed to get a director elected by cumulative
voting: 2. Preferred: share has preference over dividends and
distribution of assets upon liquidation; right to vote may be
1. Frey’s formula (minimum no. of votes to elect one director) restricted (Sec. 6)

X= # of shares required 3. Redeemable: share is purchased or taken up by the

Y= # of outstanding votes corporation upon the expiration of a fixed period (Sec. 8); right to
Z= # of directors to be elected vote may be restricted (Sec. 6)

X = _ Y__ + 1 NOTES
Z+1
· Stock can also be both preferred and redeemable.
2. Baker & Cary’s formula (minimum no. of votes needed to elect
multiple directors)

35
 · Even though the right to vote of preferred and redeemable
shares may be restricted, owners of these shares can still vote
on certain matter provided for in Sec. 6.
· SEC requires that where no dividends are declared for three
consecutive years, in spite of available profits, preferred
stocks will be given the right to vote until dividends are
declared.
GOTTSCHALK V. AVALON REALTY (23 N.W. 2d 606; 1946)
· Provision granting right to vote to preferred stock previously
prohibited from voting, constitutes diminution of the voting power of
common stock.
· Provision in the articles of incorporation granting holders of preferred
stock right to vote in case of default in payment of dividends after July
1, 1951 was construed as denial by necessary implication of the right
to vote even prior to July 1, 1951.
Restriction on transfer of shares
· Peculiar to close corporations.
· Most common restriction: granting first option to the other
stockholders and/or the corporation to acquire the shares of a
stockholder who wishes to sell them.
· Restrictions on shares of stock must conform to the
requirements in Sec. 98
· This gives to the corporation and/or to its current
management the power to prevent the transfer of shares to
persons who they may see as having interests adverse to
theirs.
Prescribing qualifications for directors; founder’s shares
Directors (See Sec. 23, 27, 47)
· As long as the qualifications imposed are reasonable and not
meant to unjustly or unfairly deprive the minority of their rightful
representation in the BOD, such provisions are within the power of
the majority to provide in the by-laws.
· According to Gokongwei vs. SEC, aside from prescribing
qualifications, by-laws can also provide for the disqualification of
anyone in direct competition with the corporation.
Founder’s shares
See Sec. 7 for definition
· Exception to the rule in sec. 6 that non-voting shares shall be
limited to preferred and redeemable shares
· If founder’s shares enjoy the right to vote, this privilege is limited
to 5 years upon SEC’s approval, so as to prevent the perpetual
disqualification of other stockholders.
Management contracts (sec. 44)
· Contract to manage the day-to-day affairs of the corporation in
accordance with the policies laid down by the board of the
managed corporation.
· BOD can and usually delegate many of its functions but it can’t
abdicate its responsibility to act as a governing body by giving
absolute power to officers or others, by way of a management
contract or otherwise. It must retain its control over such officers
so that it may recall the delegation of power whenever the
interests of the corporation are seriously prejudiced thereby.
36
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; · The requirement of unanimous vote to amend by-laws is valid. Once
1930) proper by-laws have been adopted, the matter of amending them is no
concern of the State.
Although corporations may, for a limited period, delegate to a
stranger certain duties usually performed by the officers, there are duties,
the performance of which may not be indefinitely delegated to outsiders. Device Favorable To: Limitations

Cumulative voting MINORITY: assures Can’t give minority

UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for them of representation control of corp. affairs
close corporations]) on the board

· Increases veto power of the minority in some cases. Classification of MINORITY: so long as Preferred and
shares they hold more redeemable stock can
· In exchange for the numerical majority in the BOD, minority common stock as still vote on certain
can ask for a stronger veto power in major corporate opposed to the matters as provided in
decisions. majority who holds Sec. 6 or as may be
more preferred stock provided by the corp.
BENITENDI VS. KENTON HOTEL (60 N.E. 2d 829; 1945)
Restriction on MAJORITY: they can See Sec. 98
· A requirement that there shall be no election of directors at all unless transfer of shares choose whether to
every single vote be cast for the same nominees, is in direct *applicable only to keep or release shares
opposition to the statutory rule that the receipt of plurality of the votes close corporations and they can prevent
entitles a nominee to election. (See Sec. 24) opposition from
acquiring shares
· Requiring unanimity before the BOD can take action on any
corporate matter makes it impossible for the directors to act on any Prescribing MAJORITY: they’re the Qualifications must be
matter at all. In all acts done by the corporation, the major number qualifications for ones who can reasonable and do not
must bind the lesser, or else differences could never be determined directors; founder’s prescribe the deprive minority of
nor settled. shares qualifications in the by- representation on the
laws board
· The State has decreed that every stock corporation must have a
representative government, with voting conducted conformably to the
Management MAJORITY: allows · Cannot exceed
statutes, and the power of decision lodged in certain fractions, always
contracts them to delegate five years
more than half, of the stock. This whole concept is destroyed when
certain functions and · BOD must retain
the stockholders, by agreement, by-law or certificates of corporation
duties without losing control over corp.
provides for unanimous action, giving the minority an absolute,
control over the policies
permanent and all-inclusive power of veto.
corporation · BOD must have
power to recall

37
 contract (2) If the meeting is for the
election of officers, which
Unusual voting and MINORITY: gives them Subject to the requires the vote of a
quorum requirements stronger veto power in limitations in Sec. 103. majority of all the
certain corp. affairs members of the Board

MEETINGS WHO PRESIDES: The president, unless the by-laws provide

otherwise. (Sec. 54)
Meetings of Directors / Trustees
Meetings of Stockholders / Members
KINDS: Meetings of the Board of Directors or Trustees
may be either regular or special. (Sec. 49) KINDS: Meetings of stockholders or members may be either
regular or special. (Sec. 49)
REGULAR: Held monthly, unless otherwise provided in
the by-laws. (Sec. 53) REGULAR: Held annually on a date fixed in the by-laws.
If no date is fixed, on any date in April of every year as determined
SPECIAL: At any time upon call of the president or as by the Board of Directors or trustees.
provided in the by-laws.
Notice: Written, and sent to all
NOTICE: Must be sent at least 1 day prior to the stockholders or members of
scheduled meeting, unless otherwise record at least 2 weeks prior to
provided by the by-laws. the meeting, unless a different
Note: Notice may be waived expressly period is required by the by-laws.
or impliedly. (Sec.53)
SPECIAL: At any time deemed necessary or as
WHERE: Anywhere in or outside the Philippines, provided in the by-laws.
unless the by-laws provide otherwise.
Notice: Written, and sent to all
QUORUM: Generally, a majority of the number of stockholders or members of
directors or trustees as fixed in the record at least 1 week prior to the
articles of incorporation shall constitute a meeting, unless otherwise
quorum for the transaction of corporate provided in the by-laws.
business. (Sec. 25)
Note: Notice of any meeting
Exceptions: may be waived expressly or
impliedly by any SH or member.
(1) If the AOI or by-laws (Sec. 50)
provide for a greater
majority;

38
 WHERE: In the city of municipality where the
principal office of the corporation is
located, and if practicable in the principal
office of the corporation. Metro Manila is
considered a city or municipality. (Sec.
51)
QUORUM: Generally, a quorum shall consist of the
stockholders representing a majority of
the outstanding capital stock, or a majority
of the members.
Exception: If otherwise provided for in
the Code or in the by-laws.
WHO PRESIDES: The president, unless the by-laws provide
otherwise. (Sec. 54)
WHAT IS THE EFFECT IF A STOCKHOLDER'S
MEETING IS IMPROPERLY HELD OR CALLED?
Generally, the proceedings had and/or
any business transacted shall be void. However,
the proceedings and/or transacted business may
still be deemed valid if:
(1) Such proceedings or business are
within the powers or authority of the
corporation; and
(2) All the stockholders or members of
the corporation were present or duly
represented at the meeting. (Sec. 51)
DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS
Duties and Liabilities of Directors
WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE
CORPORATION?
(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act only within corporate powers and are liable
for damages if they acted beyond their powers unless in good faith.
Assuming that they acted within their powers, liability may still arise if they
have not observed due diligence or have been disloyal to the corporation.
WHEN DOES LIABILITY ON THE PART OF
DIRECTORS, TRUSTEES OR OFFICERS ARISE?
In general, liability of directors, trustees or officers
arises when they either:
(1) willfully and knowingly vote for or assent to
patently unlawful acts of the corporation; or
(2) are guilty of gross negligence of bad faith in
directing the affairs of the corporation; or
(3) acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees.
In such cases, the directors or trustees shall be liable
jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members
and other persons.
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
39
 account for the profits which would otherwise have
accrued to the corporation. (Sec. 31)
In addition to this general liability, the Corporation
Code provides for specific rules to govern the following
situations:
(1) Self-dealing directors (Sec. 32)
(2) Contracts between interlocking
directors (Sec. 33)
(3) Disloyalty to the corporation (Sec.
34)
(4) Watered stocks (Sec. 65)
Duty of Diligence: Business Judgment Rule.
WHAT IS THE BUSINESS JUDGMENT RULE?
As a general rule, directors and trustees of the
corporation cannot be held liable for mistakes or errors in
the exercise of their business judgment, provided they
have acted in good faith and with due care and prudence.
Contracts intra vires entered into by the board of directors
are binding upon the corporation, and the courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of the
rights of the minority.
However, if due to the fault or negligence of the
directors the assets of the corporation are wasted or lost,
each of them may be held responsible for any amount of
loss which may have been proximately caused by his
wrongful acts or omissions. Where there exists gross
negligence or fraud in the management of the corporation,
the directors, besides being liable for damages, may be
removed by the stockholders in accordance with Sec. 28
of the Code. (Campos & Campos)
GENERAL RULE: Contracts intra vires entered into
by BoD are binding upon the corporation and courts will
not interfere.
EXCEPTION: When such contracts are so
unconscionable and oppressive as to amount to a
wanton destruction of the rights of the minority.
WHAT KIND OF DILIGENCE IS EXPECTED OF
DIRECTORS?
Directors are expected to manage the corporation
with reasonable diligence, care and prudence, i.e. the
degree of care and diligence which men prompted by self-
interest generally exercise in their own affairs. Thus, they
can be held liable not only for willful dishonesty but also
for negligence.
Although they are not expected to interfere with the
day-to-day administrative details of the business of the
corporation, they should keep themselves sufficiently
informed about the general condition of the business.
WHAT FACTORS SHOULD BE CONSIDERED IN
DETERMINING WHETHER REASONABLE DILIGENCE
HAS BEEN EXERCISED?
The nature of the business, as well as the particular
circumstances of each case. The court should look at the
facts as they exist at the time of their occurrence, not
aided or enlightened by those which subsequently took
place. (Litwin v. Allen)
OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. (155 F. 2d 522;
1946)
If in the course of management, the directors arrive at a decision
for which there is a reasonable basis and they acted in good faith, as a
40
result of their independent judgment, and uninfluenced by any
consideration other than what they honestly believe to be for the best
interest of the railroad, it is not the function of the court to say that it would
have acted differently and to charge the directors for any loss or
expenditures incurred.
In the present case, the bond issue was adequately deliberated
and planned, properly negotiated and executed; there was no lack of good
faith; no motivation of personal gain or profit; there was no lack of
diligence, skill or care in selling the issue at the price approved by the
Commission and which resulted in a saving of approximately $9M to the
corporation.
MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. (5 SCRA 36;
1962)
The Bacolod-Murcia Milling Co. adopted a resolution which
granted to its sugar planters an increase in their share in the net profits in
the event that the sugar centrals of Negros Occidental should have a total
annual production exceeding one-third of the production of all sugar
central mills in the province. Later, the company amended its existing
milling contract with its sugar planters, incorporating such resolution. The
company, upon demand, refused to comply with the contract, stating that
the stipulations in the resolution were made without consideration and that
such resolution was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate
directors to adopt. This is an action by the sugar planters to enforce the
contract.
The terms embodied in the resolution were supported by the same
cause and consideration underlying the main amended milling contract;
i.e., the premises and obligations undertaken thereunder by the planters,
and particularly, the extension of its operative period for an additional 15
years over and beyond the thirty years stipulated in the contract.
As the resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will cause losses
or decrease the profits of the central, the court has no authority to review
them. They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing, they cannot
be controlled in the reasonable exercise and performance of such duty. It
is a well-known rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors of a corporation,
and the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so
long as it acts in good faith, its orders are not reviewable by the courts.
LITWIN (ROSEMARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL.
(25 N.Y.S. 2d 667; 1940)
FACTS: Alleghany Corp. bought terminals in Kansas City and St.
Joseph. It needed to raise money to pay the balance of the purchase
price but could not directly borrow money due to a borrowing limitation in
its charter. Thus, it sold Missouri Pacific bonds to J.P. Morgan and Co.
worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to
Guaranty Trust Company. Under the contract, the seller was given an
option to repurchase at same price within six months.
HELD: Option given to seller is invalid. It is against public policy
for a bank to sell securities and buy them back at the same price; similarly,
it is against public policy for the bank to buy securities and give the seller
the option to buy them back at the same price because the bank incurs the
entire risk of loss with no possibility of gain other than the interest derived
from the securities during the period that the bank holds them. Here, if the
market price of the securities rise, the holder of the repurchase option
would exercise it to recover the securities at a lower price at which he sold
them. If the market price falls, the seller holding the option would not
exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an express trust who,
regardless of good faith, are personally liable. In this case, the directors
are liable for the transaction because the entire arrangement was
improvident, risky, unusual and unnecessary so as to be contrary to
fundamental conceptions of prudent banking practice. Yet, the advice of
counsel was not sought. Absent a showing of exercise of good faith, the
directors are thus liable.
41
WALKER VS. MAN, ET. AL. (253 N.Y.S. 458; 1931)
FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T
evidenced by a promissory note executed by Avram and endorsed by
Lacey. The loan was not authorized by any meeting of the board of
directors and was not for the benefit of the corporation. The note was
dishonored but defendant-directors did not protest the note for non-
payment; thus, Lacey, the indorser who was financially capable of meeting
the obligation, was subsequently discharged.
HELD: Directors are charged not with misfeasance, but with non-
feasance, not only with doing wrongful acts and committing waste, but with
acquiescing and confirming the wrong doing of others, and with doing
nothing to retrieve the waste. Directors have the duty to attempt to
prevent wrongdoing by their co-directors, and if wrong is committed, to
rectify it. If the defendant knew that an unauthorized loan was made and
did not take steps to salvage the loan, he is chargeable with negligence
and is accountable for his conduct.
STEINBERG VS. VELASCO (52 Phil. 953; 1929)
FACTS: The board of directors of Sibuguey Trading Company
authorized the purchase of 330 shares of stock of the corporation and
declared payment of P3T as dividends to stockholders. The directors from
whom 300 of the stocks were bought resigned before the board approved
the purchase and declared the dividends. At the time of purchase of
stocks and declaration of dividends, the corporation had accounts payable
amounting to P9,241 and accounts receivable amounting to P12,512, but
the receiver who made diligent efforts to collect the amounts receivable
was unable to do so.
It has been alleged that the payment of cash dividends to the
stockholders was wrongfully done and in bad faith, and to the injury and
fraud of the creditors of the corporation. The directors are sought to be
made personally liable in their capacity as directors.
HELD: Creditors of a corporation have the right to assume that so
long as there are outstanding debts and liabilities, the BOD will not use the
assets of the corporation to buy its own stock, and will not declare
dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an
actual bona fide surplus from which dividends could be paid. Moreover,
the Court noted that the Board of Directors purchased the stock from the
corporation and declared the dividends on the stock at the same Board
meeting, and that the directors were permitted to resign so that they could
sell their stock to the corporation. Given all of this, it was apparent that the
directors did not act in good faith or were grossly ignorant of their duties.
Either way, they are liable for their actions which affected the financial
condition of the corporation and prejudiced creditors.
Barnes v. Andrews (298 F. 614; 1924)
A complaint was filed against a corporate director for failing to give
adequate attention (he relied solely on the President’s updates on the
status of the corp) to the affairs of a corporation which suffered depletion
of funds.
The director was not liable. The court said that despite being guilty
of misprision in his office, still the plaintiff must clearly show that the
performance of the director’s duties would have avoided the losses. When
a business fails from general mismanagement, business incapacity, or bad
judgment, it is difficult to conjecture that a single director could turn the
company around, or how much dollars he could have saved had he acted
properly.
Foster v. Bowen (41 N.E. 2d 181; 1942)
Cushing, a director and in charge of leasing a roller skating rink of
the corp, leased the same to himself. Minority stockholders filed suit
against Bowen, the corporation's President, to recover for company losses
arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were
not actually dishonest or fraudulent; (2) Cushing performed personal work
such as keeping the facility in repair which redounded to the benefit of the
company and even increased its income; (3) Bowen did not profit
42
personally through Cushing's lease; and (4) the issue of the possible
illegality of the lease was put before the Board of Directors, but the Board
did not act on it but instead moved on to the next item on the agenda.
Absent any bad faith on Bowen's part, and a showing that it was a
reasonable exercise of judgment to take no action on the lease agreement
at the time it was entered into, Bowen was not liable.
Lowell Hoit & Co. V. Detig (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against directors of a cooperative grain
company for an alleged willful conversion by the manager of grain stored
in the company facility. The court said that the directors were not
personally liable. There was no evidence that the directors had knowledge
of the transaction between the manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single
act of fraud on the part of a subordinate officer/agent. But directors could
be held liable if the act of fraud was habitual and openly committed as to
have been easily detected upon proper supervision. To hold directors
liable, he must have participated in the fraudulent act; or have been guilty
of lack of ordinary and reasonable supervision; or guilty of lack of ordinary
care in the selection of the officer/agent.
Bates v. Dresser (40 S.Ct.247; 1920)
Coleman, an employee of the bank, was able to divert bank
finances for his benefit, resulting in huge losses to the bank. The receiver
sued the president and the other directors for the loss.
The court said that the directors were not answerable as they
relied in good faith on the cashier’s statement of assets and liabilities
found correct by the government examiner, and were also encouraged by
the attitude of the president that all was well (the president had a sizable
deposit in the bank). But the president is liable. He was at the bank daily;
had direct control of records; and had knowledge of incidents that
ordinarily would have induced scrutiny.
The self-dealing director
WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32)
A self-dealing director is one who enters into a contract with the
corporation of which he is a director.
WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-
DEALING DIRECTORS?
Voidable at the option of the corporation, whether or not it suffered
damages. It is possible that the self-dealing director may have the
greatest interest in its welfare and may be willing to deal with it upon
reasonable terms.
However, such contract may be upheld by the corporation if
all of the following
conditions are present:
(1) The presence of the self-dealing director or
trustee in the board meeting for which the
contract was approved was not necessary to
constitute a quorum for such meeting;
(2) The vote of such self-dealing director or
trustee was not necessary for the approval of the
contract;
(3) The contract is fair and reasonable under the
circumstances;
(4) In the case of an officer, the contract has been
previously authorized by the Board of Directors.
In the event that either of or both conditions (1)
and (2) are absent (i.e., the presence of the
director/trustee was necessary for a quorum and/or his
vote was necessary for the approval of the contract), the
contract may be ratified by a 2/3 vote of the OCS or all of
the members, in a meeting called for the purpose. Full
43
 disclosure of the adverse interest of the directors or
trustees involved must be made at such meeting.
DOCTRINE: A director of a corporation holds a position of
trust and as such, he owes a duty of loyalty to his corporation. In
case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate
managers, directors are committed to seek the maximum amount
of profits for the corporation. This trust relationship "is not a
matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders."
(Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)
Palting v. San Jose Petroleum (Dec. 17, 1966)
The articles of inc. of respondent included a provision that relieves
any director of all responsibility for which he may otherwise be liable by
reason of any contract entered into with the corp., whether it be for his
benefit or for the benefit of any other person, firm, association or
partnership in which he may be interested, except in case of fraud.
SC: This is in direct contravention of the Corp Law, of the traditional
fiduciary relationship between directors and the SH. The implication is that
they can do anything short of fraud, even to their benefit, and with
immunity.
Note: This case was decided in 1966 under the Corporation Law,
which had no provisions on self-dealing directors.
Mead v. McCullough (21 Phil. 95; 1911)
Issue: validity of sale of corp. property and assets to the directors who
approved the same.
Gen Rule: When purely private corporations remain solvent, its directors
are agents or trustees for the SH.
Exception: when the corp. becomes insolvent, its directors are trustees of
all the creditors, whether they are members of the corp. or not, and must
manage its property and assets with strict regard to their interest; and if
they are themselves creditors while the insolvent corp is under their
management, they will not be permitted to secure to themselves by
purchasing the corp property or otherwise any personal advantage over
the other creditors.
Exception to Exception: A director or officer may in good faith and
or an adequate consideration purchase from a majority of the
directors or SH the property even of an insolvent corp, and a sale
thus made to him is valid and binding upon the minority.
In the case at bar, the sale was held to be valid and binding.
Company was losing. 4 directors present during meeting all voted for the
sale. They likewise constitute majority of SH. Contract was found to be fair
and reasonable.
PRIME WHITE CEMENT CORP. v. iac (220 SCRA 103; 1993)
Prime White Cement Corp. (through the President and Chairman
of the Board) and Alejandro Te, a director and auditor of the corporation,
entered into a dealership agreement whereby Te was obligated to act as
the corporation's exclusive dealer and/or distributor of its cement products
in the entire Mindanao area for 5 years. Among the conditions in the
dealership agreement were that the corporation would sell to and supply
Te with 20,000 bags of white cement per month, and that Te would
purchase the cement from the corporation at a price of P 9.70 per bag.
Relying on the conditions contained in the dealership agreement,
Te entered into written agreements with several hardware stores which
would enable him to sell his allocation of 20,000 bags per month.
However, the Board of Directors subsequently imposed new conditions,
including the condition that only 8,000 bags of cement would be delivered
per month. Te made several demands on the corporation to comply with
the dealership agreement. However, when the corporation refused to
comply with the same, Te was constrained to cancel his agreements with
the hardware stores. Notwithstanding the dealership agreement with Te,
the corporation entered into an exclusive dealership agreement with a
44
certain Napoleon Co for marketing of corporation's products in Mindanao.
The lower court held that Prime White was liable to Te for actual and moral
damages for having been in breach of the agreement which had been
validly entered into.
On appeal, the Supreme Court held that the dealership agreement
is not valid and enforceable, for not having been fair and reasonable: the
agreement protected Te from any market increases in the price of cement,
to the prejudice of the corporation. The dealership agreement was an
attempt on the part of Te to enrich himself at the expense of the
corporation. Absent any showing that the stockholders had ratified the
dealership agreement or that they were fully aware of its provisions, the
contract was not valid and Te could not be allowed to reap the fruits of his
disloyalty.
Using inside information
USE OF INSIDE INFORMATION: Do directors and officers of a company
owe any duty at all to stockholders in relation to transactions whereby the
officers and directors buy for themselves shares of stock from the
stockholders?
MINORITY RULE: YES. Directors and officers have an obligation
to the stockholders individually as well as collectively.
MAJORITY RULE: NO. Directors and officers owe no fiduciary
duty at all to stockholders, but may deal with them at arm’s length. No
duty of disclosure of facts known to the director or officer exists.
Nondisclosure cannot constitute constructive fraud.
SPECIAL FACTS DOCTRINE: IT DEPENDS. Where special
circumstances or facts are present which make in inequitable to withhold
information from the stockholder, the duty to disclose arises, and
concealment is fraud.
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the
Supreme Court, quoting from the US case of Pepper v. Litton (308 U.S.
295-313; 1939) stated that a director cannot, "by the intervention of a
corporate entity violate the ancient precept against serving two masters …
He cannot utilize his inside information and his strategic position for his
own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do directly. He cannot use his
power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis."
Seizing Corporate Opportunity (Sec. 34)
If a director acquires for himself, by virtue of his
office, a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of
the corporation, he must account to the corporation for all
such profits by refunding the same. However, if his act
was ratified by 2/3 stockholders' vote, he need not refund
said profits. This provision applies even though the
director may have risked his own funds in the venture.
Note: This provision is to be distinguished from Sec.
32 on contracts of self-dealing
directors: contracts of self-dealing directors are
voidable at the option of the corporation even if it
has not suffered any injury; on the other hand,
Sec. 34 applies only if the corporation has been
prejudiced by the contract.
Singer vs. Carlisle (27 N.Y.S. 2d 190; 1941)
In this case, it was held that the general allegations in the
complaint of conspiracy of the directors to obtain corporate opportunity
were deficient. The complaint should state specific transactions.
Directorship in 2 competing corporations does not in and of itself
constitute a wrong. It is only when a business opportunity arises which
45
places the director in a position of serving two masters, and when,
dominated by one, he neglects his duty to the other, that a wrong has
been done.
Irving Trust Co. vs. Deutsch (79 L. Ed. 1243; 1935)
Fiduciary duty applies even if the corporation is unable to enter
into transactions itself.
Litwin v Allen (25 N.Y.S. 2d 667; 1940)
In this case, it was held that the common stock purchased by the
defendants wasn’t a business opportunity for the corporation. Having
fulfilled their duty to the corporation in accordance with their best
judgment, the defendant directors were not precluded from a transaction
for their own account and risk.
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who occupies a
position in 2 companies dealing with each other.
WHAT IS THE RULE ON CONTRACTS INVOLVING
INTERLOCKING DIRECTORS?
Except in cases of fraud, and provided the contract
is fair and reasonable under the circumstances, a contract
between 2 or more corporations having interlocking
directors shall not be invalidated on that ground alone.
This practice is tolerated by the Courts because such an
arrangement oftentimes presents definite advantages to
the corporations involved.
However, if the interest of the interlocking director
in one corporation is substantial (i.e., stockholdings
exceed20% of the OCS) and his interest in the other
corporation or corporations is merely nominal, he shall be
subject to the conditions stated in Sec. 32, i.e., for the
contract not to be voidable, the following conditions must
be present:
(1) The presence of the self-dealing
director or trustee in the board
meeting for which the contract was
approved was not necessary to
constitute a quorum for such meeting;
(2) The vote of such self-dealing
director or trustee was not necessary
for the approval of the contract;
(3) The contract is fair and reasonable
under the circumstances;
(4) In the case of an officer, the
contract has been previously
authorized by the Board of Directors.
In the event that either of or both conditions (1)
and (2) are absent (i.e., the presence of the
director/trustee was necessary for a quorum and/or his
vote was necessary for the approval of the contract), the
contract may be ratified by a 2/3 vote of the OCS or all of
the members, in a meeting called for the purpose. Full
disclosure of the adverse interest of the directors or
trustees involved must be made at such meeting.
Note: The Investment House Law prohibits a
director or officer of an investment house to be
concurrently a director or officer of a bank, except
as otherwise authorized by the Monetary Board.
In no event can a person be authorized to be
concurrently an officer of an investment house
and of a bank except where the majority or all of
the equity of the former is owned by the bank.
(P.D. 129, Sec. 6, as amended)
The Insurance Code likewise prohibits a
person from being a director and/or officer of an
46
 insurance company and an adjustment company.
(Sec. 187)
Globe Woolen Co. v. Utica Gas & Electric (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH
in Utica Gas, obtained a cheap, 10-year contract for Utica to supply power.
Maynard did not vote during the meeting for the approval of the contract.
Can Globe seek to enforce contract? The Supreme Court held
that Globe could not enforce the contract and that said contract was
voidable at the election of Utica. It was found that based on the facts of
the case, the contract was clearly one-sided. Maynard, although he did not
vote, exerted a dominating influence to obtain the contract from beginning
to end.
The director-trustee has a constant duty not to seek harsh
advantage in violation of his trust.
Watered stocks (Sec. 65)
Any director or officer of the corporation:
(1) consenting to the issuance of stocks for
a consideration less than its par or issued
value or for a consideration in any form
other than cash, valued in excess of its
fair value, or
(2) who, having knowledge thereof, does
not forthwith express his objection in
writing and file the same with the
corporation secretary shall be solidarily
liable with the stockholders concerned to
the corporation and its creditors for the
difference between the fair value received
at the time of the issuance of the stock
and the par or issued value of the same.
Fixing compensation of directors and officers
GENERAL RULE: Directors as such are not entitled to
compensation for performing services
ordinarily attached to their office.
EXCEPTIONS: (1) If the articles of incorporation or the by-laws
expressly so provide;
(2) If a contract is expressly made in advance.
WHO FIXES THE COMPENSATION? The stockholders only (majority
of the OCS)
EXCEPTION: Per diems, which can be fixed by the directors
themselves
APPLICABILITY OF COMPENSATION: Only to future and NOT past
services.
MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly
income of the directors shall not exceed 10% of
the net income before income tax of the
corporation during the preceding year (Sec. 30)
GOV'T OF THE PHILIPPINES vs. EL HOGAR FILIPINO (50 Phil. 399;
1927)
The compensation provided in sec. 92 of the by-laws of El Hogar
Filipino which stipulated that 5% of the net profit shown by the annual
balance sheet shall be distributed to the directors in proportion to the
attendance at board meetings is valid. The Corporation Law does not
prescribe the rate of compensation for the directors of a corporation. The
power to fix it , if any is left to the corporation to be determined in its by-
laws. In the case at bar, the provision in question even resulted in
extraordinarily good attendance.
47
BARRETO vs. LA PREVISORA FILIPINA
This action was brought by the directors of defendant corporation
to recover 1% from each of the plaintiffs of the profits of the corporation for
1929 pursuant to a by-law provision which grants the directors the right to
receive a life gratuity or pension in such amount for the corporation.
The SC held that the by-law provision is not valid. Such provision
is ultra vires for a mutual loan and building association to make. It is not
merely a provision for the compensation of directors. The authority
conferred upon corporations refers only to providing compensation for the
future services of directors, officers, and employees after the adoption of
the by-law in relation thereto. The by-law can't be held to authorize the
giving of continuous compensation to particular directors after their
employment has terminated for past services rendered gratuitously by
them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC vs. TIBE (33 SCRA 596;
1970)
The questioned resolutions which appropriated the funds of the
corporation for different expenses of the directors are contrary to the by-
laws of the corporation; thus they are not within the board's power to
enact. Sec. 8 of the by-laws explicitly reserved to the stockholders the
power to determine the compensation of members of the board and they
did restrict such compensation to actual transportation expenses plus an
additional P30 per diems and actual expenses while waiting. Hence, all
other expenses are excluded. Even without the express reservation,
directors presumptively serve without pay and in the absence of any
agreement in relation thereto, no claim can be asserted therefore.
FOGELSON vs. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948)
A retirement plan which provides a very large pension to an officer
who has served to within one year of the retirement age without any
expectation of receiving a pension would seem analogous to a gift or
bonus. The size of such bonus may raise a justifiable inquiry as to whether
it amounts to wasting of the corporate property. The disparity also between
the president's pension plan and that of even the nearest of the other
officers and employees may also be inquired upon by the courts.
KERBS vs. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the California Eastern Airways
from putting into effect a stock option plan and a profit-sharing plan. The
SC held that the stock option plan was deficient as it was not reasonably
created to insure that the corporation would receive contemplated benefits.
A validity of a stock option plan depends upon the existence of
consideration and the inclusion of circumstances which may insure that
the consideration would pass to the corporation. The options provided
may be exercised in toto immediately upon their issuance within a 6 month
period after the termination of employment. In short, such plan did not
insure that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it
was reasonable and was ratified by the stockholders pending the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it
shall be managed by the stockholders rather than the BoD. So long as
this provision continues in effect:
· No stockholder’s meeting need be called to elect directors;
· Generally, stockholders deemed to be directors for
purposes of this Code, unless the context clearly requires
otherwise;
· Stockholders shall be subject to all liabilities of directors.
The AOI may likewise provide that all officers or employees or
that specified officers or employees shall be elected or
appointed by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
48
 · They shall be personally liable for corporate torts (unlike
ordinary directors liable only upon finding of negligence)
· If however there is reasonable adequate liability insurance,
injured party has no right of action v. stockholders-managers
Duty of Controlling Interest
A SH/director is still entitled to vote in a stockholder’s meeting
even if his interest is adverse to a corporation. But a stockholder able to
control a corp. is still subject to the duty of good faith to the corp. and the
minority.
Persons with management control of corporation hold it in behalf
of SHs and can not regard such as their own personal property to dispose
at their whim.
The ff. acts are legal:
· Transfer of managerial control through BoD resignation &
seriatim election of successors if concomitant with the sale
and actual transfer of majority interest or that which
constitutes voting control;
· Disposal by controlling SH of his stock at any time & at such
price he chooses
The ff. are illegal:
· Selling corp. office or management control by itself, that is
NOT accompanied by stocks or stocks are insufficient to carry
voting control;
· Transferring office to persons who are known or should be
known as intending to raid the corporate treasury or otherwise
improperly benefit themselves at the expense of the corp.
(Insuranshares Corp. V. Northern Fiscal);
· Receiving a bonus or premium specifically in consideration
of their agreement to resign & install the nominees of the
purchaser of their stock, above and beyond the price premium
normally attributable to the control stock being sold;
Insurance shares Corp. v. Northern Fiscal Corp. (35 F. Supp. 22; 1940)
The corp. is suing its former directors to recover damages as a
result of the sale of its control to a group (corporate raiders) who
proceeded to rob it of most of its assets mainly marketable securities.
Are previous directors who sold corp. control liable? Yes, they are
under duty not to sell to raiders.
Owners of corp. control are liable if under the circumstances, the
proposed transfer are such as to awaken a suspicion or put a prudent man
on his guard. As in this case, control was bought for so much aside from
being warned of selling to parties they knew little about, and also from fair
notice that such outsiders indeed intended to raid the corp.
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not
the directors for mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed trustees of the
creditors and should therefore manage its assets with due consideration to
the creditor’s interest.
If directors are also creditors themselves, they are prohibited from
gaining undue advantage over other creditors.
Personal Liability of Directors
49
 In what instances does personal liability of a
corporate director, trustee or officer validly attach
together with corporate liability?
When the director / trustee / officer:
I. (1) assents to a patently unlawful act of the
corporation;
(2) is in bad faith or gross negligence in directing
the affairs of the corporation;
(3) creates a conflict of interest, resulting in
damages to the corporation, its stockholders or
other persons
II. Consents to the issuance of watered stocks,
or who, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto;
III. Agrees to hold himself personally and
solidarily liable with the corporation;
IV. Is made, by a specific provision of law, to
personally answer for his corporate action.
(Tramat Mercantile v. CA, 238 SCRA 14)
UICHICO v. NLRC (G.R. No. 121434, June 2, 1997)
In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of employment of
corporate employees done with malice or in bad faith.
In the instant case, there was a showing of bad faith: the Board
Resolution retrenching the respondents on the feigned ground of serious
business losses had no basis apart from an unsigned and unaudited Profit
and Loss Statement which had no evidentiary value whatsoever.
CORPORATE BOOKS AND RECORDS AND THE RIGHT OF
INSPECTION
Corporate Books and Records
WHAT BOOKS AND RECORDS MUST A CORPORATION
KEEP? (Sec. 74)
(1) Record of all business transactions;
(2) Minutes of all meetings of stockholders or members;
(3) Minutes of all meetings of Board of Directors or
Trustees;
(4) Stock and Transfer book
WHAT IS A STOCK AND TRANSFER BOOK? (Sec. 75)
A stock and transfer book is a record of all stocks
in the names of the stockholders alphabetically arranged.
It likewise contains the following information:
· Installments paid and unpaid on all stock for
which subscription has been made, and the
date of any installment;
· A statement of every alienation, sale or
transfer of stock made, the date thereof, and
by whom and to whom made;
· 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.
50
 WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)
A stock transfer agent is one who is engaged
principally in the business of registering transfers of stocks What Records Covered
in behalf of a stock corporation. He or she must be
licensed by the SEC; however, a stock corporation is not 1.
precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of
a license fee, shall be applicable.
WHO IS THE CUSTODIAN OF CORPORATE
RECORDS? 2.
In the absence of any provision to the contrary, the
corporate secretary is the custodian of corporate records.
Corollarily, he keeps the stock and transfer book and
makes the proper and necessary entries. (Torres, et al.
vs. CA, 278 SCRA 793; 1997)
3.
Basis of the Right of Inspection
Ordinary stockholders, the beneficial owners of the
corporation, usually have no say on how business affairs of the corp. are 4.
run by the directors. The law therefore gives them the right to know not
only the financial health of the corp. but also how its affairs are managed 5.
so that if they find it unsatisfactory, they can seek the proper remedy to
protect their investment.
WHAT IS THE NATURE OF THE RIGHT TO INSPECT?
PREVENTIVE : deterrent to an ill-intentioned
management knowing its acts are subject to scrutiny; and
REMEDIAL: A dissatisfied SH may avail of this right as 6.
a preliminary step towards seeking
more direct and appropriate
remedies against mismanagement.
Records of ALL business transactions
This includes book of inventories and balances, journal,
ledger, book for copies of letters and telegrams, financial
statements, income tax returns, vouchers, receipts,
contracts, papers pertaining to such contracts, voting trust
agreements (sec. 59)
By-laws
These are expressly required to be open to inspection by
SH/members during office hours (Sec. 46). Note: There
is no similar provision as to AOI, but these are filed with
the SEC anyway.
Minutes of director’s meetings
This is to inform stockholders of Board policies. Such right
arises only upon approval of the minutes, however.
Minutes of stockholders' meetings
Stock and transfer books
These are records of all stocks in the names of the
stockholders alphabetically arranged. contain all names
of the stockholders of record. Useful for proxy solicitation
for elections. SEC has however ruled that a SH cannot
demand that he be furnished such a list but he is free to
examine corp. books.
Most recent financial statement
51
 Sec. 75 of the Code provides that within 10 days from
the corporation's receipt of a written request from any
stockholder or member, the corporation must furnish the
requesting party with a copy of its most recent financial
statement, which shall include a balance sheet as of the
end of the last taxable year and a profit or loss statement
for said taxable year.
Note: Under the Secrecy of Bank Deposits Act, records
of bank deposits of the corporation are NOT open to
inspection, EXCEPT under the following
circumstances:
3. A corp. may regulate time and manner of inspection but
provisions in its by-law which gives directors absolute discretion to
allow or disallow inspection are prohibited.
Limitations as to time and place:
· Exercise of right only at REASONABLE HOURS on
BUSINESS DAYS.
· Such business days should be THROUGHOUT
THE YEAR. BoD cannot limit such to merely a few
days within the year. (Pardo v. Hercules Lumber)
4. By-laws cannot prescribe that authority of president must first be
obtained.

(1) Upon written consent of concerned depositor 5. Inspection should be made in such a manner as not to impede
(presumably the corporation); the efficient operations
(2) In cases of impeachment;
(3) Upon court order in cases of bribery or dereliction of 6. Place of inspection: Principal office of the corp. SH cannot
duty of a public official; and demand that such records be taken out of the principal office.
(4) In cases where the money deposited / invested is the
subject of litigation 7. As to purpose:
(5) Upon order of a competent court in cases of
unexplained wealth under RA 3019 or the Anti-Graft and Corrupt · PRESUMPTION: that SH’s purpose is proper. Corp.
Practices Act cannot refuse on the mere belief that his motive is
(6) Upon order of the Ombudsman improper (sec 74).

· BURDEN OF PROOF: lies with corp. which should

Extent and Limitations on Right show that purpose was illegal.

· To be legitimate, the purpose for inspection must be

1. The exercise of this right is subject to reasonable limitations
similar to a citizen’s exercise of the right to information. Otherwise,
the corp. might be impaired, its efficiency in operations hindered,
to the prejudice of SHs.
2. Such limitations to be valid must be reasonable and not
inconsistent with law ( Sec. 36[5] and 46).
GERMANE to the INTEREST of the stockholder as such,
and it is not contrary to the interests of the corporation.
Legitimate: inquiry about failure to declare dividends
Not legitimate: for mere satisfaction or speculation.
· Belief in good faith that a corp. is being mismanaged
may be given due course even if later, this is proven
unfounded.

52

· If motive can be clearly shown as inimical to corp., right
may be denied.
Who May Exercise Right
Every director, trustee, stockholder, member may exercise
right personally or through an agent who can better understand and
interpret records (impartial source, expert accountant, lawyer).
As to VTA: both voting trustee and transferor
SH of parent corp. over subsidiary:
If the two are operated as SEPARATE entities : NO right of
inspection
If they are ONE AND THE SAME with respect to management
and control, and inspection is demanded due to mismanagement
of subsidiary by the parent’s directors who are directors of the
subsidiary : With right of inspection
If the subsidiary is wholly-owned by the parent and its books &
records are in the possession and control of the parent corporation : With
right of inspection (Gokongwei v. SEC)
Remedies available if Inspection Refused
WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY
THE CORPORATION?
(1) Writ of mandamus.
NOTE: Writ shall not issue where it is shown that the petitioner’s
purpose is improper and inimical to the interests of the corporation.
Writ should be directed against the corporation. The
secretary and the president may be joined as party defendants.
(2) Injunction
(3) Action for damages against the officer or agent refusing inspection.
Also, penal sanctions such as fines and / or imprisonment (Sec. 74; Sec.
144)
What defenses are available to the officer or agent?
(1) The person demanding has improperly used any
information secured through any prior examination; or
(2) Was not acting in good faith; or
(3) The demand was not for a legitimate purpose.
Pardo v. Hercules Lumber (47 Phil. 965; 1924)
BOD/Officers may deny inspection when sought at unusual hours
or under improper conditions. But they cannot deprive the stockholders of
the right altogether. In CAB, by-law provided that the inspection be made
available only for a few days in a year, chosen by the directors. This is
void.
Gonzales v. PNB (122 SCRA 490; 1983)
G acquired 1 share of stock purposely to be able to exercise right
to inspection with respect to transactions before he became a SH. G not
in good faith. His obvious purpose was to arm himself with materials
which he can use against the bank for acts done by the latter when G was
a total stranger to the same. Right not available here.
Veraguth v. Isabela Sugar Co. (57 Phil. 266; 1932)
There was nothing improper in the secretary’s refusal since the
minutes of these prior meetings have to be verified, confirmed and signed
53
by the directors then present. Hence, Veraguth has to wait until after the
next meeting.
Gokongwei v. SEC (April 11, 1979)
The law takes from the SH the burden of showing impropriety of
purpose and places upon the corporation the burden of showing
impropriety of purpose and motive.
Considering that the foreign subsidiary is wholly owned by SMC
and therefore under its control, it would be more in accord with equity,
good faith and fair dealing to construe the statutory right of Gokongwei as
petitioner as SH to inspect the books and records of such wholly
subsidiary which are in SMC’s possession and control.
DERIVATIVE SUITS
Nature and Basis of derivative suit
Suits of stockholders/ members based on wrongful or fraudulent acts
of directors or other persons:
a. Individual suits - wrong done to stockholder personally and
not to other stockholders (ex. When right of inspection is
denied to a stockholder)
b. Class suit - wrong done to a group of stockholders (ex.
Preferred stockholders' rights are violated)
c. Derivative suit - wrong done to the corporation itself
· Cause of action belongs to the corp. and
not the stockholder
· But since the directors who are charged
with mismanagement are also the ones who
will decide WON the corp. will sue, the corp.
may be left without redress; thus, the
stockholder is given the right to sue on behalf
of the corporation.
· An effective remedy of the minority against
the abuses of management
· An individual stockholder is permitted to
bring a derivative suit to protect or vindicate
corporate rights, whenever the officials of the
corp. refuse to sue or are the ones to be sued
or hold the control of the corp.
· Suing stockholder is merely the nominal
party and the corp. is actually the party in
interest.
· A SH can only bring suit for an act that took
place when he was a stockholder; not before.
(Bitong v. CA, 292 SCRA 503)
Requirements Relating to Derivative Suits
WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE
SUITS?
1) Stockholder/ member must have exhausted all remedies
within the corp.
2) Stockholder/ member must be a stockholder/ member at the
time of acts or transactions complained of or in case of a
stockholder, the shares must have devolved upon him since
by operation of law, unless such transaction or act continues
and is injurious to the stockholder.
54
 3) Any benefit recovered by the stockholder as a result of
bringing derivative suit must be accounted for to the corp. who
is the real party in interest.
4) If suit is successful, plaintiff entitled to reimbursement from
corp. for reasonable expenses including attorneys' fees.
Evangelista vs. Santos (86 Phil. 387; 1950)
The injury complained of is against the corporation and thus the
action properly belongs to the corporation rather than the stockholders. It
is a derivative suit brought by the stockholder as a nominal party plaintiff
for the benefit of the corporation, which is the real party in interest. In this
case, plaintiffs brought the suit not for the benefit of the corporation's
interest, but for their own. Plaintiffs here asked that the defendant make
good the losses occasioned by his mismanagement and to pay them the
value of their respective participation in the corporate assets on the basis
of their respective holdings. Petition dismissed for venue improperly laid.
Republic Bank vs. Cuaderno (19 SCRA 671; 1967)
In a derivative suit, the corporation is the real party in interest, and
the stockholder merely a nominal party. Normally, it is the corp. through
the board of directors which should bring the suit. But as in this case, the
members of the board of directors of the bank were the nominees and
creatures of respondent Roman and thus, any demand for an intra-
corporate remedy would be futile, the stockholder is permitted to bring a
derivative suit.
Should the corporation be made a party? The English practice is
to make the corp. a party plaintiff while the US practice is to make it a
party defendant. What is important though is that the corporation should
be made a party in order to make the court's ruling binding upon it and
thus bar any future re-litigation of the issues. Misjoinder of parties is not a
ground to dismiss the action.
Reyes vs. Tan (3 SCRA 198; 1961)
The importation of textiles instead of raw materials, as well as the
failure of the board of directors to take actions against those directly
responsible for the misuse of the dollar allocations constitute fraud, or
consent thereto on the part of the directors. Therefore, a breach of trust
was committed which justified the suit by a minority stockholder of the
corporation.
The claim that plaintiff Justiniani did not take steps to remedy the
illegal importation for a period of two years is also without merit. During
that period of time plaintiff had the right to assume and expect that the
directors would remedy the anomalous situation of the corporation brought
about by their wrong-doing. Only after such period of time had elapsed
could plaintiff conclude that the directors were remiss in their duty to
protect the corporation property and business.
BITONG v. CA (292 SCRA 503)
· The power to sue and be sued in any court by a corporation
even as a stockholder is lodged in the Board of Directors that
exercises its corporate powers and not in the president or
officer thereof.
à It was JAKA's Board of Directors, not Senator Enrile,
which had the power to grant Bitong authority to
institute a derivative suit for and in its behalf.
· The basis of a stockholder's suit is always one in equity.
However, it cannot prosper without first complying with the
legal requisites for its institution. The most important of these
is the bona fide ownership by a stockholder of a stock in his
own right at the time of the transaction complained of which
invests him with standing to institute a derivative action for the
benefit of the corporation.
55
 FINANCING THE CORPORATION

Sources of Financing

WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE

SOURCED?

1) Contributions (stockholders); also known as stockholder

equity/equity investment
2) Loans or advances (creditors)
3) Profits (corporation itself)

Capital Structure

WHAT IS MEANT BY CAPITAL STRUCTURE?

This refers to the aggregate of the securities -- instruments which

represent relatively long-term investment -- issued by the corporation.
There are basically 2 kinds of securities: shares of stock and debt
securities.

Capital and Capital Stock Distinguished

CAPITAL STOCK CAPITAL

the amount fixed, usually
DEFINITION by the corporate charter, to
be subscribed and paid in or
secured to be paid in by the
SHS of a corporation, and
upon which the corporation
is to conduct its operation
actual property of the
corporation, including
cash, real, and personal
property. Includes all
corporate assets, less any
loss which may have been
incurred in the business.

CONSTANCY CONSTANT, unless FLUCTUATING

amended by the AOI

56
Shares of Stock: Kinds but eventu
not ally.
lowe
COMM PREFERR PAR NO TREAS REDEEM FOUND r,
ON ED PAR* URY ABLE ER’S than
that
DEFINITI Stock Stock which Shares Shares Special fixed
ON which entitles the that issued by shares in
entitles holder to have the whose the
the some been corporatio exclusiv AOI.
owner preference issued n that may e rights
of such either in the and fully be taken and VOTING Usually Can vote Dep Depen No Usually
stocks dividends paid but up by the privilege RIGHTS vested only under end ds if voting denied
to an or subsequ corporatio s are with certain s if it’s rights for voting
equal distribution ently n upon determin the circumstanc it’s commo as long rights.
pro of assets reacquir expiration ed by exclusi es com n or as such
rata upon ed by of a fixed the AOI. ve right mon preferr stock
division liquidation, the period. to vote or ed. remains
of or in both issuing à pref in the
profits corporati regardless erre treasury
on by of the d. (Sec.
lawful existence 57)
means. of
unrestricte
PREFER No First crack
d retained
ENCE advant at dividends
earnings
UPON age, / profits /
LIQUIDA priority, distribution
VALUE Depen Stated par Fixe Value TION or of assets
ds if it’s value d in not prefere
par or the fixed in nce
no par AOI, the over
and AOI, any
indic and other
ated therefo SH in
in re not the
the indicat same
stoc ed in class
k the
certi stock
ficat certific NOTE: Only preferred and redeemable shares may be deprived of the
e. ate. right to vote. (Sec. 6, Corporation Code)
May Price
EXCEPTION: As otherwise provided in the Corporation Code.
be may be
sold set by
at a BOD, * No-par value shares may not be issued by the following entities: banks,
valu SH’s or trust companies, insurance companies, public utilities, building & loan
e fixed in
association (Sec. 6)
high the
er, AOI Nature of Subscription Contract

57
WHAT IS A SUBSCRIPTION CONTRACT?
It is any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed. This is notwithstanding the
fact that the parties refer to it as a purchase or some other contract. (Sec.
60)
WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT?
· Subscriptions constitute a fund to which the creditors have a
right to look for satisfaction of their claims.
· 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 subscription contract is INDIVISIBLE (Sec. 64).
· A subscription contract subsists as a liability from the time
that the subscription is made until such time that the
subscription is fully paid.
Garcia v. Lim Chu Sing (59 Phil. 562; 1934)
A share of stock or the certificate thereof is not an indebtedness to
the owner nor evidence of indebtedness and therefore, it is not a credit.
Stockholders as such are not creditors of the corporation.
The capital stock of a corporation is a trust fund to be used more
particularly for the security of the creditors of the corporation who
presumably deal with it on the credit of its capital.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are
deemed not only to make a continuing offer to the corporation, but also to
have contracted with each other as well. Thus, no one may revoke the
contract even prior to incorporation without the consent of all the others.
WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?
1) For a period of at least 6 months from the date of
subscription;
EXCEPTIONS: (1) unless all of the other subscribers consent to the
revocation; or
(2) unless the incorporation of said corporation fails
to materialize within the said period or within a longer period as may be
stipulated in the contract of subscription
2) After the AOI have been submitted to the SEC (Sec. 61)
Utah Hotel Co v. Madsen (43 utah 285, 134 pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders
“to regulate the mode of making subscriptions to its capital stock and
calling in the same by-laws or by express contract.”
Since it may be done by express contract, this shows that it was intended
that a contract to that effect may be entered into even before the
corporation is organized, and the contract agreement is enforced if the
corporation is in fact organized.
Wallace v. Eclipse Pocahontas Coal Co (98 S.E. 293; 1919)
One who has paid his subscription to the capital stock of the
corporation may compel the issuance of proper certificates therefor.
58
Post-incorporation subscription
NOTE: Under the Corporation Code, there is no longer any
distinction between a subscription and a purchase. Thus, a subscriber is
liable to pay for the shares even if the corporation has become insolvent.
The Pre-emptive Right to Shares
WHAT IS THE PRE-EMPTIVE RIGHT?
It is the option privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corporation,
before the same can be disposed of in favor others.
WHY A PRE-EMPTIVE RIGHT?
To protect existing stockholder equity. If the right is not recognized,
the SH’s interest in the corporation will be diluted by the subsequent
issuance of shares.
Basis of Right; Common Law Rule
Under the prevailing view in common law, the preemptive right is
limited to shares issued in pursuance of an increase in the authorized
capital stock and does not apply to additional issues of originally
authorized shares which form part of the existing capital stock.
This common law principle which was generally understood to be
applicable in this jurisdiction has now to give way to the express provisions
of the Corporation Code on the matter.
Extent and Limitations of Pre-emptive Right under the Code
WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT?
All stockholders of a stock corporation shall enjoy pre-emptive right to
subscribe to
all issues or dispositions of shares of any class, in proportion to their
respective
shareholdings.
Exception: When such right is denied by the AOI or an amendment
thereto.
LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)
1) Initial Public Offerings (IPOs);
2) Issuance of shares in exchange for property needed for
corporate purposes, including cases wherein an absorbing
corporation issues new stocks to the SH’s in pursuance to
the merger agreement (Sec. 39)
Why? (a) Because it is beneficial for the corporation to
save its cash;
(b) A swap is more expedient than determining the
monetary equivalent of the property.
3) Issuance of shares in payment of a previously
contracted debt (Sec. 39)
Why? (a) The obligation is extinguished outright;
(b) Corporation does not have to shell out money
to fulfill its obligations;
(c) Money that would have otherwise been used
for interest payments can be channelled to more
productive corporate activities.
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the
OCS or 2/3 of total members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock
to be issued, including re-issuance of treasury shares, EXCEPT if provided
59
otherwise by the AOI. (Sec. 102). Note that the limitations in Sec. 39 do
not apply.
Waiver of Pre-emptive Right
The waiver of the pre-emptive right must appear in the Articles of
Incorporation or an amendment thereto in order to be binding on ALL
stockholders, particularly future stockholders. (Sec. 39)
If it appears merely in a waiver agreement and NOT in the AOI,
and was unanimously agreed to by all existing stockholders:
· The existing stockholders cannot later complain since
they are all bound to their private agreement.
· However, future stockholders will NOT be bound to such
an agreement.
Any stockholder who has not exercised his preemptive right within
a reasonable time will be deemed to have waived it.
When the issue is in breach of trust
The issue of shares may still be objectionable if the Directors have
acted in breach of trust and their primary purpose is to perpetuate or shift
control of the corporation, or to “freeze out” the minority interest.
Remedies when right violated/denied
WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS
UNLAWFULLY DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares (NOTE: but only if no innocent 3rd
parties are prejudiced)
(4) In certain cases, a derivative suit
Stokes v. Continental Trust Co. (78 N.E. 1090; 1906)
The directors were under the legal obligation to give the SH-
plaintiff an opportunity to purchase at the price fixed before they could sell
his property to a third party. By selling to strangers without first offering to
sell to him, the defendant wrongfully deprived him of his property and is
liable for such damages as he actually sustained.
Thom v. Baltimore Trust (148 Atl. 234; 1930)
Independently of the charters, the SHs of a corporation have a
preferential right to purchase new issues of shares, to the proportional
extent of their respective interests in the capital stock then outstanding,
when the privilege can be exercised consistently with the object which the
disposition of the additional stock is legally designed to accomplish. In the
present case, every SH of the bank, for each of the shares, was to receive
1 1/2 shares of the stock co. (share in exchange for property). It would not
be feasible to consummate a transfer based upon such consideration if the
preemptive right were to be held enforceable with respect to every new
issue of stock regardless of the object of the disposition.
Fuller v. Krogh (113 N.W. 2d 25; 1962)
Pre-emptive right is not to be denied when the property is to be
taken as consideration for the stock except in those peculiar
circumstances when the corporation has great need for the particular
property, and the issuance of stock is the only practical and feasible
method by which the corp. can acquire it for the best interest of the SHs.
Ground: practical necessity. [cf. Sec. 39]
Dunlay v. M. Garage and Repair (170 N.E. 917; 1930)
If the issue of shares is reasonably necessary to raise money to
be issued in the business of the corporation rather than the expansion of
such business beyond original limits, the original SHs have no right to
count on obtaining and keeping their proportional part of original stock.
60
 But even if pre-emptive right does not exist, the issue of shares DEBENTURES: à issued on the general credit of the corporation
may still be objectionable if the directors have acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or à not secured by any collateral;
to ‘freeze out’ minority interest. THEREFORE, are not bonded
indebtedness in the true sense,
Ross Transport v. Crothers (45 A. 2d 267; 1946) and stockholder approval is NOT
required (although it would
The doctrine of preemptive right is not affected by the identity of generally be a good idea to obtain
the purchasers. What it is concerned with is who did not get it. But when it)
officers and directors sell to themselves and thereby gain an advantage,
both in value and in voting power, another situation arises. In the case at Convertible securities; stock options
bar, the directors were not able to prove good faith in the purchase and
equity of transaction, since the corp. was a financial success. There was NOTE: Under the SEC rules, stock option must
constructive fraud upon the other SHs. first be approved by the SEC.
Also, if the stock option is granted to non-
stockholders, or to directors, officers, or
Debt Securities managing groups, there must first be SH
approval of 2/3 of the OCS before the
Borrowings matter is submitted to the SEC for
approval.
Borrowings are usually represented by promissory notes,
bonds or debentures. Of course it goes without saying that
the corporation must set aside enough of
Oftentimes, a financial institution will be willing to lend the junior securities in case the holders of
large amounts to private corporations only on the condition that the option decide to exercise such option.
such institution will have some representation on the Board of
Directors. The role of such representative is to see to it that his Merritt-Chapman & Scott Corp. vs. New York Trust Co. (184 F. 2d 954;
institution's investment is protected from mismanagement or 1950)
unfavorable corporate policies.
If the corporation is allowed to declare stock dividends without
Bonds and Debentures taking account of the warrant holders (who have not yet exercised their
warrant), the percentage of interest in the common stock capital of the
BONDS: à secured by a mortgage or pledge of corporate corporation which the warrant holders would acquire, should they choose
property to do so, could be substantially reduced/diluted. Thus, the corporation is
wrong in contending that a warrant holder must first exercise his warrant
à must be registered with the SEC, as before they may be issued stock dividend.
provided by Sec. 38 of the
Corporation Code

61
Hybrid securities RANK ON Ranked together Superior to
DISSOLUTION with other stockholders,
Because preferred shares and bonds are created by contract, it is corporate inferior to corporate
possible to create stock which approximates the characteristics of debt creditors creditors
securities. Hybrid securities, as the name implies, therefore combine the
features of preferred shares and bonds.

Determining the true nature of the security is crucial for tax
purposes. The American courts use the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed
maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it
dependent on earnings?
(3) Does the security rank at least equally with the claims of other
creditors, or is it subordinate to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT
MADE?
BONDS STOCK
John Kelly vs. CIR Talbot Mills vs. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on
indebtedness (therefore, a bond is held) because there were sales of the
debentures as well as exchanges of preferred stock for debentures, a
promise to pay a certain annual amount if earned, a priority for the
debentures over common stock and a definite maturity date in the
reasonable future.
In the Talbot Mills case, the annual payments made were
dividends and not interest (therefore, shares are held), because of the
presence of fluctuating annual payments with a 2% minimum, and the
limitation of the issue of notes to stockholders in exchange only for stock.
Besides, it is the Tax Court which has final determination of all tax issues
which are not clearly delineated by law.

WHAT IS PAID? Interest Dividends Jordan Co. vs. Allen (85 F. Supp. 437; 1949)

TO WHOM PAID? Creditor-investor Stockholder The payments made, regardless of what they are called, are in
fact dividends (on stocks) because of the absence of a maturity date and
WHEN PAID? Whether the Only if there are the right to enforce payment of the principal sum by legal action, among
corporation has profits other factors.
profits or not
The following criteria should be used in determining whether a
NATURE Expense Not an expense payment is for interest or dividends:
(1) maturity date and the right to enforce collection;
TAXABILITY Can be deducted CANNOT be (2) treatment by the parties;
(3) rank on dissolution;
for tax purposes deducted
(4) uniform rate of interest payable or income payable
only out of profits;
MATURITY DATE? Yes No
(5) participation in management and the right to vote.

62
It must be noted that these criteria are not of equal importance and cannot
be relied upon individually. E.g. treatment accorded the issuance by the
parties cannot be sufficient as this would allow taxpayers to avoid taxes by
merely naming payments as interest.
The trust indenture
Here, the bond issue usually involves 3 parties:
(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders
Aladdin Hotel Co. vs. BLoom (200 F. 2d 627; 1953)
The rights of bondholders are to be determined by their contract
and courts will not make or remake a contract merely because one of the
parties may become dissatisfied with its provisions. If the contract is legal,
the courts will interpret and enforce it.
In the deed of trust and bonds in this case, there are provisions
empowering bondholders of 2/3 of the principal amount or more, by
agreement with the company, to modify and extend the date of payment of
the bonds provided such extension affected all bonds alike. When this was
done, the bondholders only followed such provisions in good faith. The
company benefited because of such move, and the bondholders were not
necessarily prejudiced, as defendants Joneses in this case were
themselves owners of 72% of the bond issue.
CONSIDERATION FOR ISSUANCE OF SHARES
Form of Consideration
WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR
ISSUANCE OF SHARES?
· cash;
· property actually received by the corporation: must be
necessary or convenient for its use and lawful purposes;
· labor performed for or services actually rendered to the
corporation
(NOTE: Future services are NOT acceptable!);
· previously incurred indebtedness by the corporation;
· amounts transferred from unrestricted retained earnings
to stated capital;
· outstanding shares exchange for stocks in the event of
reclassification or conversion
WHAT FORMS ARE UNACCEPTABLE?
· future services
· promissory notes
· value less than the stated par value
HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED?
It may be fixed as follows:
(1) In the AOI; or
(2) By the BOD pursuant to authority conferred upon it
by the AOI or the by-laws; or
(3) In the absence of the foregoing, by the SHs
representing at least a majority of the outstanding
capital stock at a meeting duly called for the purpose
(Sec. 62)
IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW
IS THE VALUE THEREOF DETERMINED?
It is initially determined by the incorporators or the Board of Directors,
subject to approval by the SEC. (Sec. 62)
63
Watered Stocks
WHAT IS WATERED STOCK?
Stocks issued as fully paid up in consideration of property at an
overvaluation. Oftentimes, the consideration received is less than the par
value of the share.
NOTE: No-par shares CAN be watered stock: when they are
issued for less than their issued value as fixed by the corp. in
accordance with law.
WHAT ARE THE WAYS BY WHICH WATERED STOCK CAN BE
ISSUED?
(1) Gratuitously, under an agreement that nothing shall be
paid to the corporation;
(2) Upon payment of less than its par value in money or
for cost at a discount;
(3) Upon payment with property, labor or services, whose
value is less than the par value of the shares; and
(4) In the guise of stock dividends representing surplus
profits or an increase in the value of property, when there
are no sufficient profits or sufficient increases in value to
justify it.
WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF
WATERED STOCK?
Directors and officers who consented to the issuance of watered
stocks are solidarily liable with the holder of such stocks to the corp. and
its creditors for the difference between the fair value received at the time of
the issuance and the par or issued value of the share.
The liability will be to all creditors, whether they became such prior or
subsequent to the issuance of the watered stock. Reliance by the creditors
on the alleged valuation of corporate capital is immaterial and fraud is not
made an element of liability.
NOTE: In the Philippines, it is the statutory obligation
theory that is controlling (cf. Sec. 65).
PRIVATE Triplex Shoe v. Rice & Hutchinstc \l 1 "Triplex Shoe v. Rice &
Hutchins" (72 A.L.R. 932; 1930)
In this case, the stocks issued to the Dillman faction were no par
value shares, the consideration for which were never fixed as required by
law. Hence, their issuance was void. Moreover, the stocks were issued to the
Dillmans for services rendered and to be rendered. Future services are not
lawful consideration for the issuance of stock.
PRIVATE McCarty v. Langdeautc \l 1 "McCarty v. Langdeau" (337 S.W.
2d 407; 1960)
McCarty agreed to purchase shares of a corp. with a downpayment of
only $20, with the balance due to be evidenced by a note. McCarty failed to
pay a big portion of the balance. The Court affirmed the judgement against
McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits
the issuance of stock. If it is understood that the stock will not be issued to
the subscriber until the note is paid, the contract is valid and not illegal.
If a security such as a note, which is not a valid consideration, is
accepted, the law does not say that such note, or the stock issued for it, shall
be void. What is void by express provision of law is the fictitious increase of
stock or indebtedness. The law was designed for the protection of the
corporation and its creditors. It emphasizes the stockholder’s obligations to
make full and lawful payment in accord with its mandate, rather than furnish
him with a defense when he has failed in that obligation. Its purpose is to
give integrity to the corporation’s capital. None of these objects would be
64
promoted by declaring a note given by a subscriber for stock uncollectible in
the hands of a bona fide stockholder.
Rhode v. Dock-Hop Co. (12 A.L.R. 437; 1920)
This case involves an action to collect unpaid balances on par value
of shares. It was held that innocent transferees of watered stock cannot be
held to answer for the deficiency of the stocks even at the suit of the creditor
of the company. The creditor’s remedy is against the original owner of the
watered stock.
PRIVATE Bing Crosby v. Eatontc \l 1 "Bing Crosby v. Eaton" (297 P. 2d 5;
1956)
A subscriber to shares who pays only part of what he agreed to pay is
liable to creditors for the balance.
Holders of watered stock are generally held liable to the corporation’s
creditors for the difference between the par value of the stock and the
amount paid in.
Under the misrepresentation theory, the creditors who rely on the
misrepresentation of the corporation’s capital stock are entitled to recover the
“water” from holders of the watered stock. Reliance of creditors on the
misrepresentation is material. However, under the statutory obligation
theory, reliance of creditors on the capital stock of the corporation is
irrelevant. (It must be noted that here in the Philippines, it is the statutory
obligation theory which is prevailing.)
Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE: payment of full amount of
subscription price plus interest, if any is due (Sec. 64)
CERTIFICATION THAT: person named therein is a holder or
owner of a stated number of shares in the corporation.
INDICATES: 1. kind of shares
2. date of issuance
3. par value, if par value shares
BEARS: Signatures of the proper officers, usually president or
secretary, as well as the corporate seal
AMOUNT ISSUED: For no more than the number of shares
authorized in articles of incorporation; excess would be void
Nature and function of a certificate of stock
A certificate of stock is not necessary to render one a
stockholder in a corporation. Nevertheless, a certificate of stock is
the paper representation or tangible evidence of the stock itself
and of the various interests therein. The certificate is not stock in
the corporation but is merely evidence of the holder's interest and
status in the corporation, his ownership of the shares represented
thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the SH, but it
is not essential to the existence of a share in stock or the creation
of the relation of shareholder to the corporation. (Tan v. SEC, 206
SCRA 740)
Requisites for valid issuance of formal certificate of stock (Sec. 63)
(1) The certificates must be signed by the President / Vice-
President, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation.
à A mere typewritten statement advising a SH of the
extent of his ownership in a corporation without
qualification and/or authentication cannot be considered
as a formal certificate of stock. (Bitong v. CA, 292 SCRA
503)
65

(2) Delivery of the certificate
à There is no issuance of a stock certificate where it is
never detached from the stock books although blanks
therein are properly filled up if the person whose name is
inserted therein has no control over the books of the
company. (Bitong v. CA, 292 SCRA 503)
(3) Par value of par value shares / Full subscription of no par
value shares must be fully paid.
(4) Surrender of the original certificate if the person requesting
the issuance of a certificate is a transferee from a SH.
bitong v. ca (292 SCRA 503)
Stock issued without authority and in violation of law is void and
confers no rights on the person to whom it is issued and subjects him to no
liabilities. Where there is an inherent lack of power in the corporation to
issue the stock, neither the corporation nor the person to whom the stock
is issued is estopped to question its validity since an estoppel cannot
operate to create stock which under the law cannot have existence.
Unpaid Subscriptions
· Unpaid subscriptions are not due and payable until
a call is made by the corporation for payment. (Sec.
67)
· An obligation arising from non-payment of stock
subscriptions to a corporation cannot be offset against
a money claim of an employee against the employer.
(Apodaca v. NLRC, 172 SCRA 442)
· Interest on all unpaid subscriptions shall be at the
rate of interest fixed in the by-laws. If there is none, it
shall be the legal rate. (Sec. 66)
How Payment of Shares Enforced
HOW ARE UNPAID SUBSCRIPTIONS COLLECTED?
(1) Call for payment as necessary, i.e. the BOD
declares the unpaid subscriptions due and payable
(Sec. 67);
(2) Delinquency sale (Sec. 68; to be discussed in the
next section)
(3) Court action for collection (Sec. 70)
Velasco vs Poizat (37 Phil. 802; 1918)
Poizat subscribed to 20 shares but only paid for 5. Board made a
call for payment through a resolution. Poizat refused to pay. Corporation
became insolvent. Assignee in insolvency sued Poizat whose defense
was that the call was invalid for lack of publication.
It was held that the Board call became immaterial in insolvency
which automatically causes all unpaid subscriptions to become due and
demandable.
Lingayen Gulf Electric vs Baltazar (93 Phil. 404; 1953)
Company’s president subscribed to shares and paid partially. The
Board made a call for payment through a resolution. However, the
president refused to pay, prompting the corporation to sue. The defense
was that the call was invalid for lack of publication.
66
 It was held that the call was void for lack of publication required by
law. Such publication is a condition precedent for the filing of the action.
The ruling in Poizat does not apply since the company here is solvent.
Da Silva vs Aboitiz (44 Phil. 755; 1923)
Da Silva subscribed to 650 shares and paid for 200. The
company notified him that his shares will be declared delinquent and sold
in a public auction if he does not pay the balance. Da Silva did not pay.
The company advertised a notice of delinquency sale. Da Silva sought an
injunction because the by-laws allegedly provide that unpaid subscriptions
will be paid from the dividends allotted to stockholders.
The Court held that by-laws provide that unpaid subscriptions may
be paid from such dividends. Company has other remedies provided for
by law such as a delinquency sale or specific performance.
National Exchange vs Dexter (51 Phil. 601; 1928)
Dexter subscribed to 300 shares. The subscription contract
provided that the shares will be paid solely from the dividends. Company
became insolvent. Assignee in insolvency sued Dexter for the balance.
Dexter's defense was that under the contract, payment would come from
the dividends. Without dividends, he cannot be obligated to pay.
The Court held that the subscription contract was void since it
works a fraud on creditors who rely on the theoretical capital of the
company (subscribed shares). Under the contract, this theoretical value
will never be realized since if there are no dividends, stockholders will not
be compelled to pay the balance of their subscriptions.
Lumanlan vs Cura (59 Phil. 746; 1934)
Lumanlan had unpaid subscriptions. Company’s receiver sued
him for the balance and won. While the case was on appeal, the company
and Lumanlan entered into a compromise whereby Lumanlan would
directly pay a creditor of the company. In exchange, the company would
forego whatever balance remained on the unpaid subscription. Lumanlan
agreed since he would be paying less than his unpaid subscription.
Afterwards, the corporation still sued him for the balance because the
company still had unpaid creditors. Lumanlan’s defense was the
compromise agreement.
The Court held that the agreement cannot prejudice creditors.
The subscriptions constitute a fund to which they have a right to look to for
satisfaction of their claims. Therefore, the corporation has a right to collect
all unpaid stock subscriptions and any other amounts which may be due it,
notwithstanding the compromise agreement.
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
WHAT ARE THE RIGHTS OF UNPAID SHARES?
Holders of subscribed shares not fully
paid which are not delinquent shall have all the
rights of a stockholder. (Sec. 72)
Fua Cun v. Summers (44 Phil. 704; 1923)
Chua Soco bought 500 shares of China Banking Corp. at par
value of P100.00, paying the sum of P25,000.00, 50% of the subscription
price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of P25,000.00. In the meantime,
Chua Soco's interest in the 500 shares were attached and levied upon to
satisfy his debt with China Banking Corp. Fua Cun brought an action to
have himself declared to hold priority over the claim of China Bank, to
have the receipt for the shares delivered to him, and to be awarded
damages for wrongful attachment, on the ground that he was owner of 250
shares by virtue of Chua Soco's payment of half of the subscription price.
The Court held that payment of half the subscription price does
not make the holder of stock the owner of half the subscribed shares.
Plaintiff's rights consist in an equity in 500 shares and upon payment of
the unpaid portion of the subscription price he becomes entitled to the
issuance of certificate for the said 500 shares in his favor.
67
 WHAT IS DELINQUENT STOCK? (Sec. 67)
Baltazar v. Lingayen Gulf Electric Power (14 SCRA 522; 1965)
Stock that remains unpaid 30 days after the date
Baltazar, et al. subscribed to a certain number of shares of specified in the subscription contract or the date
Lingayen Gulf Electric Power. They had made only partial payment of the stated in the call made by the Board.
subscription but the corporation issued them certificates corresponding to
shares covered by the partial payments. Corporation wanted to deny WHAT ARE THE EFFECTS OF DELINQUENCY?
voting rights to all subscribed shares until total subscription is paid.
1. The holder thereof loses all his rights as a stockholder
The Court held that shares of stock covered by fully paid capital except only the rights to dividends;
stock shares certificates are entitled to vote. Corporation may choose to
apply payments to subscription either as: (a) full payment for 2. Dividends will not be paid to the stockholder but will be
corresponding number of stock the par value of which is covered by such applied to the unpaid balance of his subscription plus
payment; or (b) as payment pro-rata to each subscribed share. The costs and expenses. Also, stock dividends will be
corporation chose the first option, and, having done so, it cannot withheld until full payment is made.
unilaterally nullify the certificates issued.
3. Such stockholder cannot vote at the election of directors
Note: The Camposes are of the opinion that § 64 of Corporation or at any meeting on any matter proper for stockholder
Code makes action.
the Lingayen Gulf inapplicable at present.
Nava v. Peers Marketing (74 SCRA 65; 1976) 4. Stockholder cannot be counted as part of the required
quorum.
Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at
P100.00 a share for a total of P8,000.00. He, however, paid only 5. Stockholder cannot be voted for as director of the
P2,000.00 corresponding to 20 shares or 25% of total subscription. Nava corporation.
bought 20 shares from Co and sought its transfer in the books of the
corporation. The corporation refused to transfer said shares in its books.

It was held that the transfer is effective only between Co and Nava WHAT IS THE PROCEDURE FOR THE CONDUCT OF A
and does not affect the corporation. The Fua Cun ruling applies. Lingayen DELINQUENCY SALE? (Sec. 68)
Gulf does not apply because, unlike in Lingayen Gulf, no certificate of
stock was issued to Co. (1) Issuance of Board resolution

The BOD issues a resolution ordering the

Effect of delinquency sale of delinquent stock, specifically stating
the amount due on each subscription plus all
accrued interest, and the date, time and place
of the sale.

68
 Note: The sale shall not be less than 30
days nor more than 60 days from the date
the stocks become delinquent.
(2) Notice of sale and publication
Notice of the date of delinquency sale and a
copy of the resolution is sent to every
delinquent stockholder either personally or by
registered mail. The notice is likewise
published once a week for 2 consecutive
weeks in a newspaper of general circulation
in the province or city where the principal
office of the corporation is located.
(3) Sale at public auction
If the delinquent stockholder fails to pay the
corporation on or before the date specified for
the delinquency sale, the delinquent stock is
sold at public auction to such bidder who shall
offer to pay the full amount of the balance on
the subscription together with accrued
interest, costs of advertisement and expenses
of sale, for the smallest number of shares
or fraction of a share.
(4) Transfer and issuance of certificate of
stock
The stock so purchased is transferred to such
purchaser in the books of the corporation and
a certificate of stock covering such shares is
issued.
If there is no bidder at the public auction who
offers to pay the full amount of the balance on the
subscription and its attendant costs, the
corporation may bid for the shares, and the total
amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested
in the corporation as treasury shares and may be
disposed of by said corporation in accordance
with the Code.
Note that this is subject to the restrictions
imposed by the Code on corporations as
regards the acquisition of their own
shares. (See the discussion under
Dividends and Purchase by Corporation
of its Own Shares.)
CAN A DELINQUENCY SALE BE QUESTIONED? (Sec.
69)
Yes. This is done by filing a complaint within 6
months from the date of sale, and paying or tendering to
the party holding the stock the sum for which said stock
was sold, with interest at the legal rate from the date of
sale. No action to recover delinquent stock sold can be
sustained upon the ground of irregularity or defect in the
notice of sale, or in the sale itself of the delinquent stock
unless these requirements are complied with.
Lost or Destroyed Certificate
WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW
CERTIFICATES TO REPLACE THOSE STOLEN, LOST OR
DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate with the corporation.
The affidavit must state the following:
(a) Circumstances as to how the
certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation
69
(2) The corporation will publish notice after the
affidavit and other information and evidence have
been verified with the books of the corporation, (Note
however that this is not mandatory. The corporation
has the discretion to decide whether to publish or not.)
The notice will contain the following information:
(a) Name of the corporation
(b) Name of the registered owner;
(c) Serial number of the certificate;
(d) Number of shares represented by
the certificate;
(e) Effect of expiration of 1 year period
from publication and failure to present
contest within that period.
(3) SLD certificate is removed from the books if after
one year from date of last publication, no contest is
presented.
NOTE: One-year period will not be required if the
applicant files a bond good for 1 year.
(4) The corporation will then issue new certificates.
However, if a contest has been presented to the
corporation, or if an action is pending court regarding
the ownership of the SLD certificate, the issuance of
the new certificate shall be suspended until the final
decision by the court.
NOTE: Should corporation issue new certificates
without the conditions being fulfilled and a third
party proves that he is the rightful owner of the
shares, the corporation may be held liable to the
latter EVEN IF it acted in good faith.
NOTE: Even if the above procedure was
followed, if there was fraud, bad faith, or
negligence on the part of the corporation and its
officers, the corporation may be held liable.
TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED?
By delivery of the certificate/s indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. (Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID
TRANSFER?
(1) Delivery;
(2) Indorsement by the owner or his attorney-in-
fact or other persons legally authorized to
make the transfer
à Indorsement of the certificate of stock
is a mandatory requirement of law for an
effective transfer of a certificate of stock.
(Razon v. CA, 207 SCRA 234)
(3) Recording of the transfer in the books of the
corporation (so as to make the transfer valid
as against third parties)
à Until registration is accomplished, the
transfer, though valid between the parties,
cannot be effective as against the
corporation. Thus, the unrecorded
transferee cannot enjoy the status of a
SH: he cannot vote nor be voted for, and
he will not be entitled to dividends.
70

rural bank of salinas, inc. V. ca (210 SCRA 510)
A corporation, either by its board, its by-laws or the act of its
officers, cannot create restrictions in stock transfers.
TAn v. sec (206 SCRA 740)
A by-law which prohibits a transfer of stock without the consent or
approval of all the SHs or of the President or Board of Directors is illegal
as constituting undue limitation on the right of ownership and in restraint of
trade (citing Fleisher v. Botica Nolasco Co., Inc., 47 Phil. 583)
While Sec. 47 (9) of the Corporation Code grants to stock
corporations the authority to determine in the by-laws the "manner of
issuing certificates" of shares of stock, however, the power to regulate is
not the power to prohibit, or to impose unreasonable restrictions of the
right of SHs to transfer their shares. To uphold the cancellation of a stock
certification as null and void for lack of delivery of the cancelled "mother"
certificate whose endorsement was deliberately withheld by petitioner, is to
prescribe certain restrictions on the transfer of stock in violation of the
Corporation Code as the only law governing transfer of stocks.
Uson v. Diosomito (61 Phil. 535; 1935)
Toribia Uson filed a civil action for debt against Vicente
Dioisomito. Upon institution of said action, an attachment was duly issued
and D's property was levied upon, including 75 shares of the North Electric
Co., which stood in his name on the books of the company when the
attachment was levied on 18 January 1932. The sheriff sold said shares
at a public auction with Uson being the highest bidder. Jollye claims to be
the owner of said certificate of sock issued to him by the co. on 13
February 1933.
There is no dispute that Diosomito was the original owner of said
shares, which he sold to Barcelon. However, Barcelon did not present
these certificates to the corporation for registration until 19 months after
the delivery thereof by Barcelon, and 9 months after the attachment and
levy on said shares. The transfer to Jollye was made 5 months after the
issuance of a certificate of stock in Barcelon's name.
Is a bona fide transfer of the shares of corp., not registered or noted on the
books of the corp., valid as against a subsequent lawful attachment of said
shares, regardless of whether the attaching creditor had actual notice of
said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North
Electric Co., Inc made by the defendant Diosomito as to the defendant
Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932,
the date on which she obtained her attachment lien on said shares of
stock which still stood in the name of Diosomito on the books of the corp.
Sec. 35 says that No transfer, however, is valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of
shares transferred.
All transfers of shares not so entered are invalid as to attaching or
execution creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and indeed, as to all persons
interested, except the parties to such transfers.
No registration of transfer of unpaid shares
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation. (Sec. 63)
Remedy if registration refused
The proper remedy is a petition for a writ of
mandamus to compel the corporation to record the
transfer or issue a new certificate in favor of the
transferee, as the case may be. The writ will be granted
provided it is shown that he transferee has no other plain,
speedy and adequate remedy and that there are no
unpaid claims against the stocks whose transfer is sought
to be recorded. It must be noted that unless the latter fact
71
 is alleged, mandamus will be denied due to failure to state
a cause of action. (Campos & Campos)
rural bank of salinas, inc. V. ca (210 SCRA 510)
The right of a transferee/assignee to have stocks transferred to his
name is an inherent right flowing from his ownership of the stocks. Thus,
whenever a corporation refuses to transfer and register stock, mandamus
will lie to compel the officers of the corporation to transfer said stock in the
books of the corporation. This is because the corporation's obligation to
register is ministerial. (Note, however, that in such cases, the person
requesting the registration must be the prima facie owner of the shares.
Cf. Lim Tay v. CA, 293 SCRA 634)
torres v. ca (278 SCRA 793)
It is the corporate secretary's duty and obligation to register valid
transfers of stocks and if said corporate officer refuses to comply, the
transferor SH may rightfully bring suit to compel performance.
Note: In this case, Judge Torres had no right to enter the
assignments (conveyances) of
his shares himself in the corporation's stock and transfer
book since he was not corporate secretary.
Rivera v. Florendo (144 SCRA 647; 1986)
Isamu Akasako, a Japanese national who was allegedly the real
owner of the shares of stock in the name of one Aquilino Rivera, a
registered SH of Fujuyama Hotel and Restaurant, Inc., sold 2550 shares of
the same to Milagros Tsuchiya along with the assurance that Tsuchiya
would be made President of the corporation after the purchase. Rivera
assured her that he would sign the stock certificates because Akasako
was the real owner. However, after the sale was consummated and the
consideration paid, Rivera refused to make the indorsement unless he is
also paid.
Tsuchiya, et al. attempted several times to have the shares
registered but were refused compliance by the corp. They filed a special
action for mandamus and damages.
The Supreme Court held that mandamus was improper in this case
since the shares of stock were not even indorsed by the registered owner
who was specifically resisting the registration thereof in the books of the
corporation. The rights of the parties would have to be threshed out in an
ordinary action.
Restrictions on Transfer; Close Corporations
General rule: Shares of stock are freely transferable, without restriction.
Exception: In close corporations, restrictions may be
placed on the transfer of shares. Such
restrictions must appear in the AOI and in
the by-laws, as well as in the certificate of
stock. Otherwise, the restriction shall not
be binding on any purchaser thereof in
good faith.
The restrictions imposed shall be no more
onerous than granting the existing
stockholders or the corporation the option
to purchase the shares of the transferring
stockholder with such reasonable terms,
conditions or period stated therein. If this
option is not exercised upon the
expiration of the period, the transferring
stockholder may sell his shares to any
third person. (Sec. 98)
72
WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN
BREACH OF THE RESTRICTIONS?
The corporation may, at its option, refuse to register the
transfer of stock in the name of the transferee. (Sec. 99.4)
However, this shall not be applicable if the transfer, though
otherwise contrary to subsections (1), (2) and (3) of Sec. 99, has
been consented to by all the stockholders of the close corporation,
or if the close corporation has amended its AOI in accordance with
Title XII of the Code.
For his part, the transferee may rescind the transfer or
recover from the transferor under any applicable warranty,
whether express or implied.
UNAUTHORIZED TRANSFERS
Certificates indorsed in blank; when quasi-negotiable
A possessor, even without authority, may transfer
good title to a bona fide purchaser if:
· the real owner endorses the certificate in
blank
· the conveyance is for purposes other than
transfer
· that relying on the stock certificate, the
purchaser believes the possessor to be the owner
thereof or has authority to transfer the same.
This proceeds from the theory of quasi-negotiability which
provides that in endorsing a certificate in blank, the real
owner clothes the possessor with apparent authority, thus,
estopping him later from asserting his rights over the
shares of stock against a bona fide purchaser.
Quasi-negotiability does not apply in cases where
the real owner:
a. did not entrust the certificate to
anyone; and
b. is not otherwise guilty of estoppel
For example, in case the transfer is made
by a finder or a thief.
Forged Transfers
A corporation does not incur any
misrepresentation in the issuance of a certificate made
pursuant to a forged transfer. It can always recall from the
person the certificate issued, for cancellation.
In case where the certificate so issued comes into
the hands of a bona fide purchaser for value from the
original purchaser, the corporation is estopped from
denying its liability. It must recognize both the original and
the new certificate. But if recognition results to an over-
issuance of shares, only the original certificate may be
recognized, without prejudice to the right of the bona fide
purchaser to sue the corporation for damages.
Santamaria vs. Hongkong (89 Phil. 780; 1951)
Santamaria secured her order for a number of shares with
Campos Co. with her stock certificate representing her shares with
Batangas Minerals. The said certificate was originally issued in the name
of her broker and endorsed in blank by the latter. As Campos failed to
make good on the order, Santamaria demanded the return of the
certificate. However, she was informed that Hongkong Bank had acquired
possession of it inasmuch as it was covered by the pledge made by
Campos with the bank. Thereafter, she instituted an action against
73
Hongkong Bank for the recovery of the certificate. Trial court decided in
her favor. The bank appealed.
Issues: 1) WON Santamaria was chargeable with negligence which gave
rise to the case
2) WON the Bank was obligated to inquire into the ownership of
the certificate
(1) The facts of the case justify the conclusion that she was
negligent. She delivered the certificate, which was endorsed in blank, to
Campos without having taken any precaution. She did not ask the
Batangas Minerals to cancel it and instead, issue another in her name. In
failing to do so, she clothed Campos with apparent title to the shares
represented by the certificate. By her misplaced confidence in Campos,
she made possible the wrong done. She was therefore estopped from
asserting title thereto for it is well-settled that “where one of the innocent
parties must suffer by reason of a wrongful or unauthorized act, the loss
must fall on the one who first trusted the wrongdoer.”
(2) The subject certificate is what is known as a street certificate.
Upon its face, the holder is entitled to demand its transfer into his name
from the issuing corporation. The bank is not obligated to look beyond the
certificate to ascertain the ownership of the stock. A certificate of stock,
endorsed in blank, is deemed quasi-negotiable, and as such, the
transferee thereof is justified in believing that it belongs to the transferor.
De los Santos vs. McGrath (96 Phil. 577; 1955)
De los Santos filed a claim with the Alien Property Custodian for a
number of shares of the Lepanto corporation. He contended that said
shares were bought from one Campos and Hess, both of them dead. The
Philippine Alien Property Administrator rejected the claim. He instituted the
present action to establish title to the aforementioned shares of stock.
The US Attorney General, the successor of the Alien Property
Administrator, opposed the action on the ground that the said shares of
stock were bought by one Madrigal, in trust for the true owner, Matsui, and
then delivered to the latter indorsed in blank.
Issue: Had de los Santos in fact purchased the shares of stock?
De los Santos’ sole evidence that he purchased the said shares
was his own unverified testimony. The alleged vendors of the stocks who
could have verified the allegation, were already dead. Further, the receipt
that might have proven the sale, was said to have been lost in a fire. On
the other hand, it was shown that the shares of stock were registered in
the records of Lepanto in the name of Madrigal, the trustee of Matsui; that
Matsui was subsequently given possession of the corresponding stock
certificates, though endorsed in blank; and, that Matsui had neither sold,
conveyed nor alienated these to anybody.
It is the rule that if the owner of the certificate has endorsed it in
blank, and is stolen, no title is acquired by an innocent purchaser of value.
This is so because even though a stock certificate is regarded as quasi-
negotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, the holder thereof takes it without prejudice to such
rights or defenses as the registered owner or credit may have under the
law, except in so far as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be
pledged or mortgaged. However, such pledge or mortgage cannot have
any legal effect if it is registered only in the corporate books.
Where a certificate is delivered to the creditor as a security, the
contract is considered a pledge, and the Civil Code will apply.
If the certificate of stock is not delivered to the creditor, it must be
registered in the registry of deeds of the province where the principal office
of the corporation is located, and in case where the domicile of the
stockholder is in a different province, then registration must also be made
there.
74

In a situation where, the chattel mortgage having been registered,
the stock certificate was not delivered to the creditor but transferred to a
bona fide purchaser for value, it is the rule that the bona fide purchaser for
value is bound by the registration in the chattel mortgage registry. It is said
that such a rule tends to impair the commercial value of stock certificates.
Chua Guan vs. Samahang Magsasaka (62 Phil. 473; 1935)
To guarantee payment of a debt, Co mortgaged his shares of
Samahang Magsasaka stock to Chiu. The said mortgage was duly
registered in the City of Manila. Chiu later assigned his rights in the
mortgage to Guan who soon foreclosed the same after Co failed to pay.
Guan won in the public bidding. He requested the corporation that new
certificates be issued in his name. The corporation refused because
apparently prior to Guan’s demand, several attachments against the
shares covered by the certificates had been recorded in its books.
Did the chattel mortgage in the registry of deeds of Manila gave
constructive notice to the attaching creditors?
The Chattel Mortgage Law provides two ways of executing a valid
chattel mortgage: 1) the possession of mortgaged property is delivered
and retained by the mortgagee; and, 2) without delivery, the mortgage is
recorded in the register of deeds. But if chattel mortgage of shares may be
made validly, the next question then becomes: where should such
mortgage be properly registered?
It is the general rule that the situs of shares is the domicile of the
owner. It is also generally held that for the purpose of execution,
attachment, and garnishment, it is the domicile of the corporation that is
decisive. Going by these principles, it is deemed reasonable that chattel
mortgage of shares be registered both at the owner’s domicile and in the
province where the corporation has its principal office. It should be
understood that the property mortgaged is not the certificate but the
participation and share of the owner in the assets of the corporation.
It is recognized that this method of hypothecating shares of stock
in a chattel mortgage is rather tedious and cumbersome. But the remedy
lies in the legislature.
Note: The provision of the Chattel Mortgage Law
(Act No. 1508) providing for delivery of mortgaged
property to the mortgagee as a mode of
constituting a chattel mortgage is no longer valid
in view of the Civil Code provision defining such
as a pledge.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Although shares of stock are as a rule freely transferable,
membership in a non-stock corporation is personal and non-transferable,
unless the articles of incorporation or by-laws provide otherwise. The court
may not strip him of his membership without cause. (Sec. 90)
DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN
SHARES
Form of Dividends
IN WHAT FORMS CAN DIVIDENDS BE ISSUED?
1. Cash
2. Property
· scrip - certificate issued to SHs instead of cash
dividends which entitles them to a certain amount
in the future

75
 3. Stock dividends NIELSON v LEPANTO (26 SCRA 540; 1968)

· Stock dividends are distribution to the SHs of
the company’s own stock.
· Stock dividends cannot be declared without first
increasing the capital stock unless unissued
shares are available.
· New shares are issued to the SHs in proportion
to their interest.
· No new income unless sold for cash.
· Civil fruits belong to the usufructuary and not to
the naked owner.
· Can only be issued to SHs.
· Whenever fractional shares result, corp may pay
in cash or issue fractional share warrants.
Stock dividends are issued only to SHs This is so because only
stockholders are entitled to dividends. A stock dividend really adds
nothing to the interest of each stockholder; the proportional interest of
each stockholder remains the same. If a stockholder is deprived of his
stock dividends - and this happens if the shares of stock forming part of
the stock dividends are issued to a non-stockholder - then the proportion
of the stockholder's interest changes radically. Stock dividends are civil
fruits of the original investment, and to the owners of the shares belong the
civil fruits.
FROM WHERE CAN DIVIDENDS BE SOURCED?
Dividends can be sourced only out of the
unrestricted retained earnings of the corporation.

DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK Unrestricted retained earnings is defined as "the
DIVIDENDS. undistributed earnings of the corporation which have not
been allocated for any managerial, contractual or legal
Cash Dividend Stock Dividend purposes and which are free for distribution to the
stockholders as dividends." (SEC Rules Governing
Voting Board of Directors Board of Directors + Redeemable and Treasury Shares, 1982)
requirements for 2/3 OCS
issuance Retained earnings has been defined as "net
accumulated earnings of the corporation out of
Effect on Shall be applied to Shall be withheld transactions with individuals or firms outside the
delinquent stock the unpaid balance from the corporation." (Simmons, Smith, Kimmel, Intermediate
on the subscription delinquent Accounting, 1977, ed. P. 635) The term implies the
plus costs and stockholder until limitation that no corporation can declare dividends unless
expenses. his unpaid its legal or stated capital is maintained. It does not
subscription is include:
fully paid.
· premium on par stock i.e. difference
Can this be No. (Sec. 35) No, since this between par value and selling price of
issued by requires SH stock by corp since this is regarded as
Executive approval. (Sec. paid-in capital; but SEC allowed
Committee? 35) declaration of stock dividends out of such
premiums

76

· transactions involving treasury stocks
which are considered expansions and
contractions of paid-in capital;
· donations as additional paid- in capital;
· increase in value of existing assets,
being merely unrealized capital element
If subscribed shares have not been fully paid, the unpaid
portion of subscribed capital stock is an asset, and as long
as the net capital asset (after payment of liabilities)
including this unpaid portion is at least equal to the total
par value of the subscribed shares, any excess would be
surplus or earnings from which dividends may be
declared. However, if a deficit exists, subsequent profits
must first be applied to cover the deficit.
Restrictions on dividend distribution include:
· BOD’s appropriation of certain
earnings for certain purposes;
· Agreements with creditors,
bondholders and preferred SHs
requiring retention of certain
percent of corporate earnings to
protect their interest and to
secure redemption of their
securities upon maturity;
· SEC-imposed restrictions
pursuant to law, like those
imposed on banks and insurance
companies;
· Restriction on the retained
earnings equivalent to the cost of
treasury shares held by the
corporation, which is lifted only
after such shares are reissued or
retired (Sec. 195, PD 612)
BERKS BROADCASTING v CRAUMER (52 A.2d 571; 1947)
Dividends can only be declared only from the surplus, i.e. the
excess in the value of the assets over the liabilities and the issued capital
stock. To do otherwise would be illegal The object of the prohibition is to
protect the creditors in view of the limited liability of the SHs and also to
protect the SHs by preserving the capital so that the purposes of the corp.
may be performed.
Surplus must be bona fide i.e. founded upon actual earnings or
profits and not to be dependent for its existence upon a theoretical
estimate of an appreciation in the value of the company’s assets.
The prohibition does not apply, however, to stock dividends
because creditors and SHs will not be affected by their declaration since
they do not decrease the company’s assets.
LICH v UNITED STATES RUBBER (39 F. Supp. 675; 1941)
Dividends on non-cumulative preferred stock are payable only out
of net profits and for the years in which said net profits are actually earned.
The right to dividends is conditional upon: (1) accrual of net profits,
and (2) retention in the business.
If the annual net earnings of a corp. are justifiably applied to
legitimate corp. purposes, such as payment of debts, reduction of deficits
and restoration of impaired capital, the right of non-cumulative preferred
stockholders to the payments of dividends is lost. If they are applied
against prior losses and thereby completely absorbed, there are no net
profits from which dividends may be lawfully paid.
77
SOME RULES ON DIVIDEND DECLARATION:
1. BOD has discretion whether or not to declare
dividends and in what form.
Exception: Stock dividends, in which case a
2/3 vote of OCS is necessary.
However, such discretion cannot be abused and the
BOD cannot accumulate surplus profits unreasonably
on the excuse that it is needed for expansion or
reserves.
2. BOD should declare dividends when surplus profits
of the corporation exceed 100% of the corporation's
paid-in capital stock.
Exceptions:
(a) When justified by definite corporate
expansion projects or programs approved by
the Board;
(b) When creditors prohibit dividend declaration
without their consent as a condition for the
loan, and such consent has not yet been
secured;
(c) When retention is necessary under special
circumstances obtaining in the
corporation, e.g. when there is a need for
special reserve for probable contingencies.
(Sec. 43)
4. The corporation may be subjected to additional tax
when it fails to declare dividends, thereby
unreasonably accumulating profits. (See Sec. 25,
NIRC)
5. The dividends received are based on stock held
whether or not paid. However, if the stocks are
delinquent, the amount will first be applied to the
payment of the delinquency plus costs and expenses;
stock dividends will not be given to a delinquent SH.
KEOGH v ST. PAUL MILK (285 N.W. 809; 1939)
The mere fact that a large corporate surplus exists is not enough
to warrant equitable intervention; the test is good faith and reasonableness
of the policy of retaining the profits. However, where dividends are
withheld for an unlawful purpose – to deprive a SH of his right to a just
proportion of the corporation's profit, the court may compel the corporation
to declare dividends.
DODGE v FORD MOTOR CO (170 N.W. 668; 1919)
This case involves an action against the Ford Motor Company to
compel declaration of dividends. At the time this complaint was made,
Ford had concluded its most prosperous year of business, and the
demand for its cars at the price of the previous year continued. While it
had been the practice, under similar circumstances, to declare larger
dividends, the corporation refused to declare any special dividends. The
Board justified its refusal to declare larger dividends on the expansion
plans of the company by erecting a smelting plant, but maintaining the
selling price of its cars (instead of reducing it as had been the practice in
previous years). The plaintiffs contend that such a proposal would be
tantamount to the business being conducted as a semi-eleemosynary (or
charitable) institution instead of a business institution.
The court pointed out that a business corporation is organized and
carried on primarily for the profit of SHs. The discretion of the directors is
to be exercised in the choice of means to attain that end and does not
extend to a change in the end itself – reduction of profits or to devote
profits to another purpose. While the Court noted the capable
management of the affairs of the corporation and therefore was not
convinced that the motives of the directors were prejudicial to the
78
company's interests, it likewise noted that the annual dividends paid were
very small in relation to the profits that the company had been making. It
therefore affirmed the amount fixed by the lower court to be distributed to
the stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this
case is possible under the present Code, even without changing
the AOI.
Preference as to Dividends
Review discussion under kinds of stock.
Wabash Railway Co. v. Barclay (67 A.L.R. 762; 1930)
In the AOI and the certificate of stock of Stock A, it was stated that
the holders of said stocks are entitled to receive to receive preferential
dividends of 5% per fiscal year, non-cumulative, before dividends are paid
to other stocks. From 1915 to 1926, no dividends were declared. The net
earnings were instead used for the improvements and additions to
property and equipment. Due to this, the corporation became prosperous
and proposed to pay dividends to A & B common stock. Plaintiffs filed this
case in order to collect the dividends for fiscal years 1915-1926 before the
other classes of stock are paid.
Were the Class A stockholders entitled to dividends for FY 1915 to 1926?
No, they were not. By the plain meaning of the words in the AOI
and the certificates of stock, the holders are not entitled to dividends
unless directors declare so. It is likewise generally understood that in
cases where the company's net earnings are applied for improvements
and no dividend is declared, the claim for such year is gone in case of
non-cumulative stock, and cannot be later asserted.
Burk v. Ottawa Gas & Electric Co. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the
directors of Ottawa to (1) require the directors to account for all the
property and assets of the corporation, (2) declare such dividends from the
net profits of the business of such co. as should have been declared since
1 Jan. 1906, and (3) restrain the officers and directors during the
pendency of the action from paying out any of the money or disposing of
the assets of the company except such amounts as should be necessary
to pay the actual necessary current expenses of conducting the business
of the corporation.
The BOD maintained that the corporation's funds were exhausted
by expenditures for the extension of the co’s plant, hence it was unable to
declare dividends. Expenditures were said to be necessary and for the
betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs
entitled to dividends?
The case was remanded to the trial court, with instructions to
make further findings to protect the preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS
is that if in any year net profits are earned, a dividend is to be declared.
To hold otherwise, meaning if the BOD had absolute discretion when to
declare dividends and when not to, when the corporation has funds for
such dividends, would result in temptation to unfair dealing, giving one
party the option to pay the other or not. In the case at bar, the
accumulated profits would be lost forever since the dividends were non-
cumulative.
Preferred SHs, however, are not generally creditors until dividends
are declared. In the case at bar, if dividends should have been declared to
such SHs, they are considered creditors from that time.
When Right to Dividends Vests; Rights of Transferee
79
WHEN DOES THE RIGHT TO DIVIDENDS VEST?
As soon as the BoD has declared dividends. From this time, it
becomes a debt owed by the corporation, and therefore can no longer be
revoked (McLaran v. Crescent Planning).
EXCEPTION: If the declaration has not yet been announced or
communicated to the stockholders.
NOTE: When no dividends are declared for 3 consecutive
years, preferred SHs are given the right to vote for
directors until dividends are declared.
NOTE: The extent of the SH’s share in the dividends will
depend on the capital contribution; NOT the number of
shares he has.
McLaran v. Crescent Planning Mill Co. (93 S.W. 819; 1906)
CPM Corp., having a surplus of $29,000, declared a 6% cash
dividend payable in four installments. The first installment was paid by the
Board after which an error was discovered in the computation of the
assets: from the initial recognized surplus of $29,000 to $6,000. Mainly for
this reason, the Board adopted a resolution rescinding the dividends
payable on the three other installments despite the solvency of the corp
and the existence of ample funds to pay said dividends. The original P
was Humber, a SH, and was substituted by McLaran, the administrator of
his estate when he died. The defendant corp maintained that there was no
valid declaration of dividends because the corporation failed to set aside
funds to pay for the same.
A cash dividend, properly declared, cannot be revoked by the
subsequent action of the corp. for by its declaration, the corp had become
the debtor of the SH and it goes without saying that the debtor cannot
revoke, recall or rescind the debt or otherwise absolve itself from its
payment by a unilateral action or without the consent of the creditor. Thus,
the rescission by the BOD of the subsequent installments was of no force.
Dividends are defined as portions of profits/surplus funds of the
corp. which have been actually set apart by a valid board resolution or by
the SH at a corp. mtg. for distribution among SH according to their
respective interests. The mere declaration of the dividend, without more,
by competent authority under proper circumstances, creates a debt
against the corporation in favor of the stockholders the same as any other
general creditor of the corporation. By the mere declaration, the dividend
becomes immediately fixed and absolute in the stockholder and from
henceforth the right of each individual stockholder is changed by the act of
declaration from that of partner and part owner of the corporate property to
a status absolutely, adverse to every other stockholder and to the
corporation itself, insofar as his pro rata proportion of the dividend is
concerned.
Liability for Illegal Dividends
WHAT ARE ILLEGAL DIVIDENDS?
Illegal dividends are dividends declared in violation of law.
WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF
DIVIDENDS?
(1) If the directors acted wilfully, or with negligence or in
bad faith, they will be liable to the corporation. If the
corporation has become insolvent, they are liable to the
corporation's creditors for the amount of dividends based
out of capital. (Based on Sec. 31)
(2) If the directors cannot be held liable because they
acted with due diligence and in good faith, in the absence
of an express provision of law, an innocent stockholder is
not liable to return the dividends received by him out of
capital, unless the corporation was insolvent at the time
of payment. (Majority view; Campos)
80
Purchase by Corporation of its own shares
WHAT ARE THE REQUISITES FOR ACQUISITION BY THE
CORPORATION OF ITS OWN SHARES? (Sec. 41)
1. unrestricted retained earnings to cover the shares to be
acquired;
2. legitimate corporate purpose
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN
SHARES? (Sec. 41)
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale;
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the Corporation Code (Appraisal
Right).
Appraisal Right (Sec. 81)
WHAT IS THE APPRAISAL RIGHT?
The appraisal right refers to the right of a stockholder who dissented
and voted against a proposed fundamental corporate action to get out of
the corporation by demanding payment of the fair value of his shares.
IN WHAT INSTANCES CAN THE APPRAISAL RIGHT BE EXERCISED?
The Corporation Code lists 4 instances:
(1) In case any amendment to the AOI has the effect of
changing or restricting the rights of any SH 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 (Sec. 81);
(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 this Code (Sec. 81; Sec. 40);
(3) In case of merger or consolidation (Sec. 81);
(4) In case the corporation invests its funds in any other
corporation or business or for any purpose other than
the primary purpose for which it was organized (Sec.
42)
WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE
APPRAISAL RIGHT? (Sec. 82)
(1) SH must have voted against he proposed corporate
action;
(2) Written demand on the corporation for payment of the
fair value of his shares;
(3) Such demand must have been made within 30 days
after the date on which the vote was taken;
(4) Surrender of the stock certificate/s representing his
shares;
(5) Unrestricted retained earnings in the books of the
corporation to cover such payment.
81
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE
WITH THE APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the shares, including voting and dividend rights,
are suspended in accordance with the Corporation Code, except for the
right of the SH to receive payment of the fair value thereof.
Such suspension shall be from the time of demand until either:
(1) abandonment of the corporate action involved; or
(2) the purchase of the said shares by the corporation.
However, if said dissenting SH is not paid the value
of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.
WHAT ARE THE DUTIES OF THE DISSENTING
STOCKHOLDER IN RELATION TO THE EXERCISE OF
THE APPRAISAL RIGHT?
The dissenting SH must submit the certificates of
stock representing his shares to the corporation for
notation thereon that such shares are dissenting shares
within 10 days after demanding payment for his shares.
Failure to do so shall, at the option of the corporation,
terminate his rights under Title X of the Corporation
Code. (Sec. 86)
WHAT ARE THE EFFECTS OF TRANSFER OF THE
CERTIFICATES BEARING THE NOTATION THAT THEY
REPRESENT DISSENTING SHARES?
If the certificates are consequently cancelled, the
rights of the transferor as a dissenting SH cease and the
transferee has all the rights of a regular stockholder. All
dividend contributions which would have accrued on the
shares will be paid to the transferee. (Sec. 86)
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.
Amendment by Legislature
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
82
 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;
· Treasurer’s 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 stockholder’s 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 amendment—these were sufficient to
qualify her to invoke her statutory appraisal right.
83
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
84
 required and a 2/3 vote must approve the amendment,
unless otherwise provided by the articles of
incorporation.
DISSOLUTION
Modes of 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
85
 corporation's Note: The SEC may
principal office is appoint a receiver to
situated, or there collect such
be no such assets and pay
newspaper, in a the debts of the
newspaper of corporation.
general
circulation in the (3) Involuntary dissolution (Sec. 121):
Philippines
(a) Revocation of Certificate of Registration by
Posting: For 3 consecutive SEC (Sec. 121)
weeks in 3 public
places in the city A corporation may be dissolved
or municipality by the SEC upon filing of a verified
where the complaint and after proper notice and
corporation's hearing on grounds provided by existing
principal office is laws, rules and regulations.
situated
(b) Quo Warranto proceedings (See Sec. 5b, PD
(4) Hearing of the petition for 902-A and Rule 66, Rules of
dissolution Court. Previously, the SEC had exclusive
jurisdiction over quo warranto
Upon 5 days notice, proceedings involving corporation. Under
given after the date on which the the Securities Regulation Code or RA
right to file objections to the order 8799, however, the jurisdiction of the SEC
has expired, the SEC shall over all cases enumerated under Sec. 5
proceed to hear the petition and of PD 902-A have been transferred to the
try any issue made by the Regional Trial Courts.
objections filed.
The grounds for involuntary dissolution of
If no objection is sufficient, a corporation under quo warranto
and the material allegations are proceedings are:
true, the SEC shall render
judgment dissolving the (1) When the
corporation and directing such corporation has
disposition of its assets as justice offended against a
requires. provision of an act for
its creation or
renewal;

86
 Dissolution of close corporations
(2) When it has
forfeited its privileges In close corporations, any stockholder may, by
and franchises by written petition to the SEC, compel the dissolution of such
non-user; corporation when:

(3) When it has (1) Any of the acts of the directors, officers, or
committed or omitted those in control
an act which amounts of the corporation is:
to a surrender of its
corporate rights, · Illegal;
privileges or · Fraudulent;
franchises; · Dishonest;
· Oppressive or unfairly prejudicial to
(4) When it misused a the corporation
right, privilege or or any other SH;
franchise conferred
upon it by law, or (2) Corporate assets are being misapplied or
when it has exercised wasted. (Sec. 105)
a right, privilege or
franchise in Effects of Dissolution
contravention of law

(PNB v. WHAT ARE THE EFFECTS OF DISSOLUTION?

CFI, 209
SCRA · Corporation ceases to be a juridical person and
294; consequently can no longer continue transacting
1992) its business.

· Corporate existence continues for 3 years

(4) Shortening of corporate term (Sec. 120) following dissolution for the ff. purposes only:

NOTE: The simplest and most expedient way of (a) winding up of affairs; and
effecting dissolution is by shortening the corporate term (b) liquidation of corporate assets.
and waiting for such term to expire.
· Corporation can no longer continue its
business, except for winding up.

87
 · 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 incurred……shall 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."
Liquidation
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.
88
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
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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.
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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
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Merger or Consolidation
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
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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)
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IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING In times of war: For purposes of security
STOCKHOLDERS? of the state, the
citizenship of the
Yes. However, it must be stressed that this right is controlling stockholders
generally available only to dissenting stockholders of the determines the
selling corporation, not the purchasing corporation. (It corporation’s nationality.
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 IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN
investment is necessary, and anyone who objects thereto THE PHILS.?
will have the appraisal right under Sec. 42.)
(1) Wholly-owned subsidiary; or

Exchange of stocks (2) Branch office; or

(3) Joint venture with a local partner.

In this method, all or substantially all the stockholders of the
"acquired" corporation are made stockholders of the acquiring Permitted areas of investment
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 100% EQUITY: Mass media, except recording
sale of assets, from the point of view of the acquiring (parent) corporation, The practice of a profession (law, medicine,
there is hardly any difference between owing the acquired corporation's etc.)
business directly and operating it through a controlled subsidiary. In fact, Operation of rural banks
the parent corporation would have the power to buy all the subsidiary's Cooperatives
assets and dissolve it, achieving the same result as in the other methods Private security agencies
of combination. (Campos & Campos) Small-scale mining
Utilization of marine resources
FOREIGN CORPORATIONS Ownership, operation, and
management of cockpits;
WHAT IS A FOREIGN CORPORATION? (Sec. 123) Manufacture, repair, stockpiling of
nuclear, biological, chemical,
A corporation formed and organized under laws other than those of and radiological weapons;
the Philippines, regardless of the citizenship of the incorporators and
stockholders. Such corporation must have been organized and must Note: Retail trade is no longer required to be 100%
operate in a country which allows Filipino citizens and corporations to do Filipino-owned on account of the Retail Trade
business there. Liberalization Act.

94
 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
95
 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.
96
 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 plaintiff’s
capacity to sue, must be affirmatively pleaded. In short, facts showing
foreign corporation’s 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)
97

Domestic corporation General Garments registered “Puritan”
trademark for its men’s 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: Rustan’s 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;
98
 · 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.)
99
 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.
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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 3rd 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
As a rule, jurisdiction over a foreign corporation is acquired by the
courts through service of summons on its resident agent.
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
corporation’s domestic subsidiary will only vest
jurisdiction if there is sufficient ground to disregard the
separate personalities.
General Corporation of the Philippines vs Union Insurance (87 Phil. 313;
1950)
General Corporation and Mayon investment sued Union Insurance
and Firemen’s Fund Insurance (FFI) for the payment of 12 marine
insurance policies. The summons was served on Union which was then
acting as FFI’s settling agent in the country. At that time, it was not yet
registered and authorized to transact business in the Philippines.
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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
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 (9) Any other ground as would render it unfit
to transact business in the Philippines.
SPECIAL AND MISCELLANEOUS PROVISIONS
Educational corporations (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)
Religious corporations (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)
103

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.
Close Corporations (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
104
 DISTINGUISH CLOSE CORPORATIONS FROM corporation.
REGULAR CORPORATIONS.

Close Corporation "Regular" Dissolution May be petitioned by Generally requires a

Corporation any stockholder 2/3 vote of the
whenever any of the stockholders and a
No. of stockholders Not more than 20 No limit acts of the directors or majority vote of the
(Sec. 96) officers or those in BOD.
control of the
Management Can be managed by Managed by Board corporation is illegal, (Note however that
the stockholders (Sec. of Directors fraudulent, dishonest, in case of
97) oppressive or unfairly involuntary
prejudicial to the dissolution under
Meetings May be dispensed with Actual meetings are corporation or any Sec. 121, a
(Sec. 101) required. stockholder, or corporation may be
whenever corporate dissolved by the
assets are being SEC upon filing of a
Quorum and Voting Greater quorum and misapplied or wasted. verified complaint
voting requirements (Sec. 105) and after proper
allowed. (Sec. 97) notice and hearing.)

Pre-emptive right Extends to all stock, Does not extend to WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104)
including treasury treasury shares.
shares (Sec. 102) 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
Buy-back of shares Must be > par value May be < par value
be determined by the SEC. He is not a receiver of the corporation
(Sec. 105)
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
Resolution of SEC has the power to
director of the corporation, including the right to notice of and to
deadlocks arbitrate disputes in
vote at meetings of directors, until such time as he shall be
case of deadlocks,
removed by order of the SEC or by all the stockholders. (Sec.
upon written petition
104)
by any stockholder.
(Sec. 104) This
includes the power to
COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE
appoint a provisional
CORPORATIONS. (Sec. 105)
director, as well as to
dissolve the

105
 Withdrawal Right Appraisal Right members, directors, trustees or officers, may be
removed or impaired by the subsequent dissolution of
Type of corporation Close corporation "Regular" said corporation or by any subsequent amendment or
involved corporation repeal of the Code. (Sec. 145)

When availed of For any reason (Sec. Only the grounds · Violations of the Corporation Code not otherwise
105) enumerated in Sec. specifically penalized therein are punishable by a fine
81 and Sec. 42 of not less than P 1,000.00 but not more than P
10,000.00 or by imprisonment for not less than 30
Fair value of Must be > par or May be < par or days but not more than 5 years, or both, in the
shares issued value (Sec. issued value discretion of the court. If the violation is committed by
105) a corporation, the same may be dissolved in
appropriate proceedings before the SEC. (Sec. 144)

Miscellaneous Provisions (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,

106