AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
CHAPTER 2: DEFINITION AND ATTRIBUTES
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A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.
Attributes:
1.
Artificial being;
2.
Created by operation of law;
3.
Right of succession; and
4.
Powers, attributes and properties expressly authorized by law or incident to its existence.
A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code in cases of libel,
slander or any form of defamation. (Filipinas Broadcasting Network vs. Ago Medical and
Educational Center)
Advantages of corporate form of business:
1.
Capacity to act as a single unit;
2.
Limited shareholder‟s liability;
3.
Continuity in existence;
4.
Feasibility of greater undertaking;
5.
Transferability of shares;
6.
Centralized management; and
7.
Standardized method of organization, management and finance
Disadvantage of corporate form of business:
1.
To have valid and binding corporate act, formal proceedings, such as board meetings are
required.
2.
The business transactions of a corporation is limited to the State of its incorporation and
may not act as such corporation in other jurisdiction unless it has obtained a license or
authority from the foreign state.
3.
The shareholders‟ limited liability tends to limit the credit available to the corporation as a
separate legal entity.
4.
By the very nature of shares of stock which are personal properties, transferable at will by
the owners thereof, transfers of share may result to uniting incompatible and conflicting
interests.
5.
The minority shareholders have practically no say in the conduct of corporate affairs.
6.
In large scale enterprises, stockholders‟ voting rights may become merely fictitious and
theoretical because of disinterest in management, wide-scale ownership and inaccessible
place of meeting.
7.
Double taxation may be imposed on corporate income.
8.
Corporations are subject to governmental regulations supervision and control including
submission of reportorial requirements not otherwise imposed in other business form.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Distinctions between a corporation and a partnership
CORPORATION
1. Created by law or operation of law
2. Generally there must be at least 5
incorporators
3. Can exercise only such powers and
functions expressly granted to it by law
and those necessary or incident to its
existence
4. Unless validly delegated expressly or
impliedly, must transact its business
through the board of directors
5. Has the right of succession which
presupposes that it continues to exist
despite the death, withdrawal, incapacity
or civil interdiction of the stockholders or
members
6. Any stockholder can ordinarily transfer,
sell or assign his shares of stock without
the consent of the other stockholders
7. The liability of the stockholders or
members in is limited to the extend of
their subscription or their promised
contribution
8. Term of existence is limited only to 50
years unless extended
9. Consent of the State is necessary for its
dissolution
PARTNERSHIP
1. Created by mere agreement of the
parties
2. May be formed by 2 or more natural
persons
3. Can do anything by agreement of the
parties provided only that it is not
contrary to law, morals, good customs,
public policy and public order
4. In absence of agreement to the contrary,
any one of the partners may validly bind
the partnership
5. Based on mutual trust and confidence
such that the death, incapacity,
insolvency, civil interdiction or mere
withdrawal of one partner would result in
it dissolution
6. A partner cannot transfer his rights or
interest in the partnership so as to make
the transferee a partner without the
consent of the other partners
7. All partners are liable pro rata with all
their property and after all the partnership
property has been exhausted, for all
partnership liability
8. May exist for an indefinite period
9. Partners may dissolve at will
CHAPTER 3: CLASSIFICATION OF CORPORATIONS
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Classes of corporations:
1.
Stock
2.
Non-stock
Requisites to be classified as a stock corporation:
1.
That they have a capital stock divided into shares; and
2.
That they are authorized to distribute dividends or allotments as surplus profits to its
stockholders on the basis of the shares held by them
Non-stock corporations – no part of their income is distributable as dividends to its members,
trustees or officers subject to the provisions on dissolution. (Sec. 87)
The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when used without qualification, should
be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. (CIR
vs. Club Filipino, Inc.)
The test in determining whether a government owned or controlled corporation is subject to the
Civil Service Law is the manner of its creation, such that government corporations created by
special charter are subject to its provisions while those incorporated under the General Corporation
Law are not within its coverage. (PNOC-EDC vs. NLRC)
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Other classes of corporations:
1.
2.
3.
4.
5.
6.
7.
Public and Private.
a.
Public corporations – those created, formed or organized for political or
governmental purposes with political powers to be exercised for purposes
connected with the public good in the administration of civil government.
b.
Private corporations – those formed for some private purpose, benefit, aim or
end.
Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or civil).
a.
Ecclesiastical or religious corporations – those composed exclusively of
ecclesiastics organized for spiritual purposes or for administering properties held
for religious ones. They are further classified as religious societies or corporation
sole.
b.
Lay corporations – those established for the purposes other than religion. They
are further classified as eleemosynary or civil. Eleemosynary corporations are
created for charitable and benevolent purposes. Civil corporations are organized
not for the purpose of public charity but for the benefit, pecuniary or otherwise, of
its members.
Aggregate and Sole.
a.
Aggregate corporations – those composed of a number of individuals vested with
corporate powers.
b.
Corporations sole – those that consist of one person or individual only and who
are made as bodies corporate and politic in order to give them some legal
capacity and advantage which, as natural persons, they cannot have.
Close and Open.
a.
Close corporations – those whose shares of stock are held by limited number of
persons.
b.
Open corporations – those formed to openly accept outsiders as stockholders or
investors.
Domestic and Foreign.
a.
Domestic corporations – those that are organized or created under or by virtue of
the Philippine laws. Note: issues of intra-corporate nature are governed by
Philippine law.
b.
Foreign corporations – those formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
Parent or Holding Companies and Subsidiaries and Affiliates.
a.
Holding corporations – corporations that confine their activities to owning stock
in, and supervising management of other companies.
b.
Subsidiary corporations – those which another corporation owns at least a
majority of the shares, and thus have control.
c.
Affiliates – those corporations which are subject to common control and operated
as part of a system.
Quasi-public.
a.
Quasi-public corporations – private corporations which have accepted from the
State the grant of a franchise or contract involving the performance of public
duties (public service corporations).
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
8.
Quasi corporations.
a.
9.
Quasi corporations – public bodies or municipal societies such as townships,
counties, school districts, road or highway districts which, though not vested with
the general powers of corporations, are organized by statutes or immemorial
usage, as persons or aggregate corporations with precise duties which may be
enforced, and privileges which may be maintained, by suits of law.
De jure corporations.
a.
De jure corporations – juridical entities created or organized in strict or
substantial compliance with the statutory requirements of incorporation and
whose right to exist as such cannot be successfully attacked even by the State in
a quo warranto proceeding.
10. De facto corporations.
a.
De facto corporations – those which exist by virtue of an irregularity or defect in
the organization or constitution or from some other omission to comply with the
conditions precedent by which corporations de jure are created, but there was
colorable compliance with the requirements of the law under which they might be
lawfully incorporated for the purposes and powers assumed, and user of the
rights claimed to be conferred by law.
11. Corporations by estoppel.
a.
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Corporations by estoppel – those which are so defectively formed as not to be
either de jure or de facto corporations but which are considered as corporations
in relation only to those who cannot deny their corporate existence due to their
agreement, admission or conduct.
The mere fact that the government happens to be a majority stockholder does not make it a public
corporation. (National Coal vs. CIR)
CHAPTER 4: FORMATION AND ORGANIZATION
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Stages in the life of a corporation:
1.
Creation
2.
Reorganization or quasi-reorganization
3.
Dissolution and winding up
Steps in creation:
1.
Promotional stage
2.
Process of incorporation
3.
Organization and commencement of business
PROMOTIONAL STAGE
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A promoter acting for a proposed corporation has 3 options:
1.
He may make a continuing offer on behalf of the corporation, which, if accepted after
incorporation, will become a contract. In this case, the promoter does not assume any
personal liability, whether or not the corporation will accept the offer.
2.
The promoter may make a contract at the time binding himself, with the understanding
that if the corporation, once formed, accepts or adopts the contract, he will be relieved of
responsibility.
3.
The promoter may bind himself personally and assume the responsibility of looking to the
proposed corporation, when formed, for reimbursement.
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
PROCESS OF INCORPORATION
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Process of incorporation:
1.
Drafting the articles of incorporation
2.
Preparation and submission of additional and supporting documents
3.
Filing with the SEC
4.
Subsequent issuance of certificate of incorporation
Contents of the articles of incorporation
1.
Name
2.
Purpose
3.
Principal office
4.
Term
5.
Incorporators
6.
Number of directors/trustees
7.
Names, nationalities and residences of directors/trustees
8.
If a stock corporation, amount of authorized capital stock, number of shares, par value,
original subscribers
9.
If a non-stock corporation, amount of capital, contributors
10. Such other matters not inconsistent with law and which the incorporator may deem
necessary and convenient
11. Treasurer‟s certificate
CORPORATE NAME
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A corporation cannot use a name which is:
1.
identical or deceptively or confusingly similar to that of any existing corporation or to any
other name protected by law; or
2.
patently deceptive, confusing or contrary to law.
The law gives a corporation no express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is expressly set apart from it and
protected by law. (Red Line Transportation Co. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to mean that the article was his
product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
A corporation's right to use its corporate and trade name is a property right, a right in rem, which it
may assert and protect against the world in the same manner as it may protect its tangible
property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a
property right and one which cannot be impaired or defeated by subsequent appropriation by
another corporation in the same field. (Philips Export B.V. vs. CA)
To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely:
1.
That the complainant corporation acquired a prior right over the use of such corporate
name; and
2.
The proposed name is either: (a) identical or (b) deceptively or confusingly similar to that
of any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law. (Philips Export B.V. vs. CA)
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
In determining the existence of confusing similarity in corporate names, the test is whether the
similarity is such as to mislead a person using ordinary care and discrimination. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export
B.V. vs. CA)
A corporation has an exclusive right to the use of its name, which may be protected by injunction
upon a principle similar to that upon which persons are protected in the use of trademarks and
tradenames. (Philips Export B.V. vs. CA)
A mere change in the name of a corporation, either by the legislature or by the corporators or
stockholders under legislative authority, does not, generally speaking, affect the identity of the
corporation, nor in any way affect the rights, privileges or obligations previously acquired or
incurred by it.
PURPOSE CLAUSE
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A corporation has only such powers as are expressly granted to it by law and by its articles of
incorporation including those which are incidental to such conferred powers, those reasonably
necessary to accomplish its purpose and those which may be incidental to its existence.
Reasons for requiring a statement of purposes or objects:
1.
In order that the stockholder who contemplates on an investment in a business enterprise
shall know within what lines of business his money is to be put at risk.
2.
So that the board of directors and management may know within what lines of business
they are authorized to act.
3.
So that anyone who deals with the company may ascertain whether a contract or
transaction into which he contemplates entering is one within the general authority of the
management.
If the corporate purpose or objective includes any purpose under the supervision of another
government agency, prior clearance and/or approval of the concerned government agencies or
instrumentalities will be required.
General limitations on the purpose clause:
1.
The purpose must be lawful.
2.
The purpose must be specific or stated concisely although in broad or general terms.
3.
If there is more than one purpose, the primary as well as the secondary ones must be
specified.
4.
The purpose must be capable of being lawfully combined.
THE PRINCIPAL OFFICE
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The residence of the corporation is the place of its principal office as may be indicated in its articles
of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
TERM OF EXISTENCE
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Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from
the date of incorporation unless sooner dissolved or unless said period is extended. The corporate
term as originally stated in the articles of incorporation may be extended for periods not exceeding
fifty (50) years in any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission.
INCORPORATORS
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Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than
five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the
Philippines, may form a private corporation for any lawful purpose or purposes. Each of the
incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: Only natural persons can be incorporators.
Exception: Cooperatives and corporations primarily organized to hold equities in rural banks.
Minors are not qualified to become incorporators.
THE DIRECTORS/TRUSTEES
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General rule: There must be at least 5 but not more than 15 directors or trustees in a private
corporation.
Exceptions:
1.
Educational corporations registered as a non-stock corporation whose number of trustees,
though not less than 5 and not more than 15 should be divisible by 5;
2.
In close corporations where all the stockholders are considered as members of the board
of directors thereby effectively allowing 20 members in the board; and
3.
Corporation sole.
The by-laws may provide for additional qualifications and disqualifications. However, it may not do
away with the minimum disqualifications laid down by the Code.
Qualifications:
1.
Directors must own at least one (1) share of the capital stock of the corporation. Trustees
must be members.
2.
A majority of the directors or trustees must be residents of the Philippines.
Disqualifications:
1.
Conviction by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
the date of election or appointment.
2.
Other disqualifications under applicable special laws.
A by-laws may validly provide that no person may be elected as director unless he owns a
specified number of shares required for the directorate qualification.
It may likewise disqualify a stockholder from being elected into office if he has a substantial interest
in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director.
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of
the stock as appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent director shall
continue to act as such in a hold over capacity until the election is held and a qualified candidate is
so elected. (Detective and Protective Bureau vs. Cloribel)
CAPITALIZATION
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Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or
secured to be paid by the subscribers.
Subscribed capital stock – the total number of shares and its total value for which there are
contracts for their acquisition or subscription.
Paid-up capital stock – the actual amount or value which has been actually contributed or paid to
the corporation in consideration of the subscriptions made thereon.
Stocks shall not be issued for a consideration less than the par or issued price thereof.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Consideration for the issuance of stock may be any or a combination of any two or more of the ff:
1.
Actual cash paid to the corporation;
2.
Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3.
Labor performed or services actually rendered to the corporation;
4.
Previously incurred indebtedness by the corporation;
5.
Amounts transferred from unrestricted retained earnings to stated capital; and
6.
Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory notes or future services.
Shares of stock and their classification
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Shares of stock designate the interest or right which the stockholder has in the management of the
corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the
payment of its debts.
Stock certificate is a document or instrument evidencing the interest of a stockholder in the
corporation.
The shares of stock of stock corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation.
Purpose of classification:
1.
To specify and define the rights and privileges of the stockholders.
2.
For regulation and control of the issuance of sale of corporate securities for the protection
of purchasers and stockholders.
3.
As a management control device.
4.
To comply with statutory requirements.
5.
To better insure return on investment.
6.
For flexibility in price.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
Common and preferred shares
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Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be
any, but without any preference or advantage in that respect over any other stockholder or class of
stockholders.
Preferred stock – a stock that gives the holder a preference over the holder of common stocks with
respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
Limitations on preferred stock:
1.
Must be issued with a stated par value; and
2.
The preferences must be stated in the articles of incorporation and in the certificate of
stock, otherwise, each share shall be, in all respect, equal to every other share.
The guarantee to preference as to dividends does not create a relation of debtor and creditor
between the corporation and the holders of such stock. The board has the discretion to determine
whether or not to declare dividends.
Preferred shares are presumed to be non-participating.
Participating preferred shares – the holders thereof are still given the right to participate with the
common stockholders in dividends beyond their stated preference.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Cumulative preferred share – those that entitle the owner thereof to payment not only of current
dividends but also back dividends not previously paid whether or not, during the past years,
dividends were declared or paid.
In absence of express stipulation, preferred shares are presumed to be non-cumulative.
Non-cumulative preferred shares – those which grant the holders of such shares only to the
payment of current dividends but not back dividends, when and if dividends are paid, to the extent
agreed upon before any other stockholders are paid the same.
Types of non-cumulative preferred shares:
1.
Discretionary dividend type – gives the holder of such shares the right to have dividends
paid thereon in a particular year depending on the judgment or discretion of the board of
directors.
2.
Mandatory if earned type – impose a positive duty on directors to declare dividends every
year when profits are earned.
3.
Earned cumulative or dividend credit – gives the holder thereof the right to arrears in
dividends if there were profits earned during the previous years but dividends were not
declared.
Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal
footing with other shares.
Par and no par value shares
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Par value shares – those whose value are fixed in the articles of incorporation.
Par value shares cannot be issued nor sold by the corporation at less than par.
No par value shares – those whose issued price are not stated in the certificate of stock but which
may be fixed in the articles of incorporation, or by the board of directors when so authorized by the
said articles or by the by-laws, or in the absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1.
Such shares, once issued, are deemed fully paid and thus, non assessable;
2.
The consideration for its issuance should not be less than P5.00;
3.
The entire consideration for its issuance constitutes capital, hence, not available for
dividend declaration;
4.
They cannot be issued as preferred stock; and
5.
They cannot be issued by banks, trust companies, insurance companies, public utilities
and building and loan associations.
Advantages to the issuance of no par value shares:
1.
Flexibility in price;
2.
Evasion of the danger of liability upon watered stock; and
3.
Disappearance of personal liability on the part of the holder thereof for unpaid
subscription.
Voting and non-voting shares
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Voting shares – gives the holder thereof the right to vote and participate in the management of the
corporation through the exercise of such right, either at the election of the board of directors, or in
any manner requiring the stockholder‟s approval.
Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate
paragraph of Sec. 6.
Only preferred and redeemable shares may be denied the right to vote.
There must always be a class or series of shares which have complete voting rights.
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Non-voting shares shall nevertheless be entitled to vote on the following matters:
1.
Amendment of the articles of incorporation;
2.
Adoption and amendment of by-laws;
3.
Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;
4.
Incurring, creating or increasing bonded indebtedness;
5.
Increase or decrease of capital stock;
6.
Merger or consolidation of the corporation with another corporation or other corporations;
7.
Investment of corporate funds in another corporation or business in accordance with this
Code; and
8.
Dissolution of the corporation.
Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.
Founders’ shares
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Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles of incorporation may
be given certain rights and privileges not enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election of directors is granted, it must be
for a limited period not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.
Redeemable shares
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Redeemable shares may be issued by the corporation when expressly so provided in the articles of
incorporation.
They may be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the corporation, and
upon such other terms and conditions as may be stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock representing said shares.
Treasury shares
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Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other
lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of
directors.
Treasury shares may again be issued for a price less than par.
Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding
shares of stock. (CIR vs. Manning)
CAPITAL REQUIREMENT
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Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated
under this Code shall not be required to have any minimum authorized capital stock except as
otherwise specifically provided for by special law, and subject to the provisions of the following
section.
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At
least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per
cent of the total subscription must be paid upon subscription, the balance to be payable on a date
or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date
or dates, upon call for payment by the board of directors: Provided, however, That in no case shall
the paid-up capital be less than five Thousand (P5,000.00) pesos.
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RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
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General rule: Corporations may or may not provide for restrictions and preferences regarding the
transfer, sale or assignment of shares in the articles of incorporation. It is discretionary.
Exception: Close corporations are required to subject their shares to specified restrictions as
required in Sec. 96.
General rule: Restrictions or preferences must be contained in the articles of incorporation and in
all stock certificates to be issued by the corporation.
Exception: In close corporations, such restrictions and preferences must also be embodied in the
by-laws.
NO TRANSFER CLAUSE
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No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the
required percentage of the capital stock as provided by existing laws shall be allowed or permitted
to be recorded in the books of the corporation and this restriction shall be indicated in all of the
stock certificates to be issued by the corporation.
GROUNDS FOR DISAPPROVAL
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Only substantial and not strict compliance is required.
Grounds for disapproval:
1.
The articles of incorporation or any amendment thereto is not substantially in accordance
with the form prescribed;
2.
The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations;
3.
The Treasurer‟s Affidavit concerning the amount of capital stock subscribed and/or paid is
false;
4.
The percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution,
5.
The articles of incorporation of corporations subject to government supervision are not
accompanied by a favorable recommendation from the appropriate government agency.
The grounds are not exclusive.
COMMENCEMENT OF CORPORATE EXISTENCE
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It is only from the time of the issuance of the certificate of incorporation that a corporation acquires
juridical personality and legal existence.
Prior to incorporation, a corporation has no juridical personality to enter into contracts. (Cagayan
Fishing Development vs. Sandiko)
DE FACTO CORPORATION
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De facto corporation – one that is so defectively created as not to be a de jure corporation but
nevertheless exists, for all practical purposes, as a corporate body, by virtue of its bona fide
attempt to incorporate under existing statutory authority, coupled with the exercise of corporate
powers.
Requisites:
1.
There is a valid law under which the corporation could have been created as a de jure
corporation;
2.
An attempt, in good faith, to form a corporation according to the requirements of law
(colorable compliance);
3.
A user of corporate powers; and
4.
Good faith in claiming to be and doing business as a corporation.
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Rules on collateral and direct attack against corporate existence:
1.
The corporate existence of a de jure corporation cannot be directly attacked either directly
or collaterally, even by the State.
2.
The corporate existence of a de facto corporation can be directly attacked on a quo
warranto proceeding.
3.
The corporate existence of a de facto corporation is not subject to collateral attack by any
party.
A municipal corporation created by an unconstitutional law cannot be cannot exist as a de facto
corporation unless there is some other valid law giving corporate vitality to the organization. An
unconstitutional law confers no rights. (Municipality of Malabang vs. Benito)
Without having obtained a certificate of incorporation, a corporation – even its stockholders – may
not claim in good faith to be a corporation. (Hall vs. Piccio)
CORPORATION BY ESTOPPEL
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Sec. 21. Corporation by estoppel. - All persons who assume to act as corporation knowing it be
without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof; Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.
The doctrine of corporation by estoppel may apply to the alleged corporation or to a third party
transacting with the former.
The principle of estoppel cannot be invoked in favor of a person who is a member of the
association and therefore must be presumed to know that it is not a corporation. (Lozano vs. De
Los Santos)
The principle of estoppel applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons. Where there is no third
person involved and the conflict arises only among those assuming to form a corporation, who
therefore know that it has not been registered, there is no corporation by estoppel. (Lozano vs. De
Los Santos)
One who has induced another to act upon his willful misrepresentation that a corporation was duly
organized and existing under the law, cannot, thereafter set up against his victim the principle of
corporation by estoppel. Such persons becomes liable for the contracts entered into by such
ostensible corporation. (Albert vs. University Publishing Co., Inc.)
A person who has contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an action arising out of such
transaction or dealing, yet this doctrine may not be held to be applicable where fraud takes part in
the said transaction. (Salvatierra vs. Garlitos)
Persons who have continuously and for a long period misrepresented themselves as a corporation
as estopped from denying such personality to defeat claims against it. (Chiang Kai Shek School vs.
CA)
In the absence of fraud, a person who has contracted or dealt with an association in such a way as
to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny
its corporate existence in an action leading out of or involving such contract or dealing, unless the
existence is attacked for causes which have arisen since making the contract or other dealing
relied on as an estoppel. (Asia Banking Corp. vs. Standard Products Co., Inc.)
The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract
from which he has benefited. It does not apply when the third party is the one claiming from the
contract. (International Express Travel & Tours Services, Inc. vs. CA)
The doctrine of estoppel applies to foreign as well as domestic corporations. Foreign corporations
doing business in the Philippines may sue in Philippine courts although not authorized to do
business here against the Philippine citizen who had contracted with and been benefited by said
corporation. (Georg Grotjahn GMBH & Co. vs. Isnani)
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If a corporation by estoppel exists and enters into a contract or transacts business with a third
party, the latter has three remedies:
1.
He may file a suit against the ostensible corporation to recover from the corporate
properties;
2.
He may file the case directly against the associates personally who held out the
association a corporation; and
3.
Against both the ostensible corporation and persons forming it, jointly and severally.
As regards the liability of the associates of the alleged corporation, only those who actively
participated in holding out the association as a corporation should be held personally liable.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
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Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a
corporation does not formally organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a corporation has commenced
the transaction of its business but subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or revocation of its corporate
franchise or certificate of incorporation.
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the
control of the corporation as may be determined by the Securities and Exchange Commission.
Organization – the election of officers, providing for the subscription and payment of capital stock,
the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which it was created.
Failure of the corporation to organize within the prescribed period would result in its automatic
dissolution, unless its failure to do so is due to causes beyond its control.
Substantial compliance is sufficient.
Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise.
Dissolution is not automatic.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
CORPORATE CHARTER
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Corporate charter – an instrument or authority from the sovereign power, bestowing rights and
power.
The corporate charter is a three-fold contract:
1.
Between the corporation and the state insofar as it concerns its primary franchise to be
and act as a corporation;
2.
Between the corporation and the stockholders or members insofar as it governs their
respective rights and obligations; and
3.
Between and among the stockholders or members themselves as far as their relationship
with one another is concerned.
The charter of corporations created under the Corporation Code consists of the articles of
incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all
pertinent provisions of any statute governing them.
The charter of corporations created by special laws consists of the special law creating the same
and any and all laws, rules and regulations affecting or applicable to them.
Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.
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Kinds of franchises:
1.
Primary franchise – the right or privilege of being a corporation which the state confers
upon the applicant for this faculty.
2.
Secondary franchise – the powers and privileges vested in, and to be exercised by the
corporate body as such.
CORPORATE ENTITY THEORY
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The corporation is possessed with a personality separate and distinct from the individual
stockholders or members.
A corporation is a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by the personal rights, obligations
and transactions of its stockholders or members. Conversely, a corporation has no interest in the
individual property of its stockholders unless transferred to the corporation, even in case of a oneman corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)
A bona fide corporation should alone be liable for its corporate acts as duly authorized by its
directors and officers. (Caram vs. CA)
The president and manager of a corporation who entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to
that effect due to the personality of the corporation being separate and distinct from the person
composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)
A corporation has a personality distinct and separate from its individual stockholders or members.
The mere fact that one is president of a corporation does not render the property he owns and
possesses the property of the corporation, since the president, as an individual, and the corporation
are separate entities. (Cruz vs. Dalisay)
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. (Palay Inc. vs. Clave)
In a right of action against the corporation, the officers may not be held personally liable as long as
they act within the scope of their authority. (Soriano vs. CA)
PIERCING THE VEIL OF CORPORATE FICTION
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Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or
being used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate issues, or to circumvent the law or perpetuate deception, or an alter-ego, adjunct or
business conduit for the sole benefit of a stockholder or a group of stockholders or another
corporation.
Test in determining the applicability of the doctrine of piercing the veil of corporation fiction:
1.
Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
2.
Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3.
The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
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Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate
transactions. (Remo, JR vs. IAC)
For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be
clearly and convincingly established. (Del Rosario vs. NLRC)
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Mere corporate ownership of all the stocks of another corporation will not justify their being treated
as single entity. (PNB vs. Ritratto)
There being not the least indication that the second corporation is a dummy or serves as a client of
the first corporation, the fiction of separate and distinct corporate entities cannot be disregarder and
brushed aside. (Yu vs. NLRC)
AMENDMENT OF THE CORPORATE CHARTER
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Steps to be followed for an effective amendment of the articles of incorporation:
1.
Resolution by at least a majority of the board of directors or trustees.
2.
Vote or written assent of the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporation.
3.
Submission and filing of the amendments with the SEC as follows:
a.
The original and amender articles together shall contain all the provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended, shall be indicated by underscoring the change or changes made.
b.
A copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that such amendments have
been duly approved by the required vote of the stockholders or members.
c.
Favorable recommendation of the appropriate government agency concerned in
the case where the corporation is under its supervision.
Time when the amendments shall take effect:
1.
Upon approval of the SEC; or
2.
From the date of filing with the SEC if not acted upon with 6 months from the date of filing
for a cause not attributable to the corporation. (Note: not applicable to special
amendments)
Special amendments:
1.
Extension or shortening of corporate term (Sec. 37)
2.
Increase or decrease of capital stock (Sec. 38)
3.
Incurring, creating or increasing bonded indebtedness (Sec. 38)
PROVISIONS SUBJECT TO AMENDMENT
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Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the corporation, nor in any
way affect the rights, privileges, or obligations previously acquired or incurred by it. (Philippine First
Insurance Co. vs. Hartigan)
AMENDMENT OF THE CORPORATE TERM
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Procedure to amend the corporate term:
1.
Approval by a majority vote of the board or directors or trustees.
2.
Written notice of the proposed action and the time and place of meeting shall be served to
each stockholder or member either by mail or by personal service.
3.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4.
In case of extension of corporate term, the extension should be for periods not exceeding
50 years in any single instance, and provided that no extension can be made earlier than
5 years prior to the original or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by the SEC.
5.
In cases of extension of corporate term, a dissenting stockholder may exercise his
appraisal rights.
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Extension may be made only before the term provided in the corporate charter expires. (Alhambra
Cigar & Cigarette Mfg. Co., Inc. vs. SEC)
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
POWERS OF THE BOARD
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Sec. 23. The board of directors and trustees. - Unless otherwise provided in the Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees.
The authority of the board of directors does not extend to the fundamental changes in the corporate
charter.
The board may delegate the exercise of corporate powers.
A corporation is bound by the acts of its corporate officers if they act within the scope of the 5
classifications of powers of corporate agents:
1.
Those expressly conferred or those granted by the articles of incorporation, the corporate
by-laws or by the official act of the board of directors.
2.
Those that are incidental or those acts as are naturally and ordinarily done which are
reasonable and necessary to carry out the corporate purpose or purposes.
3.
Those that are inherent or acts that go with the office.
4.
Those that are apparent or those acts which although not actually granted, the principal
knowingly allows or permits it to be done.
5.
Powers arising out of customs, usage or emergency.
Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the
part of the person who assumed to act for it, such defense should be specially pleaded. Failure to
make an issue as to such authority eliminates any questions regarding it. (Ramirez vs. Orientalist
Co.)
The fact that the power to make corporate contracts is thus vested in the board of directors does
not signify that a formal vote of the board must always be taken before contractual liability can be
fixed upon a corporation; for the board can create liability, like an individual, by other means than
by a formal expression of its will. (Ramirez vs. Orientalist Co.)
The power to make corporate contracts resides primarily in the company's board of directors; but
the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in
this case is held to have occurred when the board, with knowledge that the contract had been
made, adopted a resolution recognizing the existence of the contract and directing that steps be
taken to enable the corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)
Where a corporate contract has been effected with the approval of the board of directors, a
resolution adopted at a meeting of stockholders refusing to recognize the contract or repudiating it
is without effect. (Ramirez vs. Orientalist Co.)
Contracts between a corporation and third persons must be made by or under the authority of its
board of directors and not of its stockholders. (Barreto vs. La Previsora)
QUALIFICATIONS AND DISQUALIFICATIONS

Qualifications:
1.
Directors must own at least one (1) share of the capital stock of the corporation. Trustees
must be members.
2.
A majority of the directors or trustees must be residents of the Philippines.
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Disqualifications:
1.
Conviction by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
the date of election or appointment.
2.
Other disqualifications under applicable special laws.
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of
the stock as appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent director shall
continue to act as such in a hold-over capacity until the election is held and a qualified candidate is
so elected. (Detective and Protective Bureau vs. Cloribel)
ELECTION AND VOTING
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In stock corporations, the majority of the outstanding capital stock, in person or by representative
authorized to act by written proxy, must be present at the election of directors.
In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if
allowed in its articles of incorporation or by-laws, must be present in the election.
The election may be adjourned if, for any reason, no election is held, or if the required quorum is
not obtained. However, it may not be adjourned indefinitely.
The election must be by ballot if requested by any voting stockholder or member.
Candidates receiving the highest number of votes shall be declared elected.
In stock corporations, cumulative voting is a matter of right.
In non-stock corporations, cumulative voting is not available unless provided for in the articles of
incorporation or by-laws. I.e., a member may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate.
In stock corporations, the stockholder may:
1.
Vote such number of shares for as many persons as there are directors to be elected;
2.
Cumulate said shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal;
3.
Distribute them on the same principle among as many candidates as he shall see fit.
No delinquent stock shall be voted.
Officers to be elected
1.
President, who shall be a director
2.
Treasurer, who may or may not be a director
3.
Secretary, who shall be a resident and citizen of the Philippines
4.
Such other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held concurrently by the same person, except that no one
shall act as president and secretary or as president and treasurer at the same time.
The directors or officers shall hold office for one (1) year until their successors are elected and
qualified.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
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General rule: the quorum requirement for a valid board meeting is the majority of the number of the
directors or trustees as fixed in the articles of incorporation.
Exception: The articles of incorporation or the by-laws may provide for a greater majority.
General rule: To have a valid corporate act, the decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum is required.
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Exception: The election of corporate officers requires the vote of a majority of all the members.
General rule: Individual directors cannot bind the corporation by their individual acts.
Exceptions:
1.
By delegation of authority;
2.
Where expressly conferred; or
3.
Where the officer or agent is clothed with actual or apparent authority.
Although an officer or agent acts without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent authority, as where an officer
is allowed to exercise a particular authority with respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time. Also, if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to perform acts for it, the corporation
will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents. This apparent authority may result from (1) the general
manner by which the corporation holds out an officer or agent as having power to act or, in other
words, the apparent authority with which it clothes him to act in general, or (2) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, whether within or
without the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)
Any action of the board without a meeting and without the required voting and quorum requirement
will not bind the corporation unless subsequently ratified, expressly or impliedly. (Lopez vs.
Fontecha)
Where a general business manager of a corporation is clothed with apparent authority to borrow
money and the amount borrowed does not exceed the ordinary requirements of the business, the
authority is implied and that the corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
An invalid contract may be validated by the ratification only of the board of directors; the president
has no authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
Silence coupled with acceptance of benefits constitutes a binding ratification. (Francisco vs. GSIS)
A corporate officer entrusted with the general management and control of its business, has implied
authority to make any contract or do any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation. As such officer, he may, without any special authority
from the Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters arising in the usual
course of business. Where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. (Board of liquidators vs. Kalaw)
Lack of repudiation, acquiescence and acceptance of benefits are equivalent to an implied
ratification by the Board of Directors and binds the corporation even without formal resolution
passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)
Express ratification: through formal board action.
Implied ratification:
1.
Silence or acquiescence;
2.
Acceptance and/or retention of benefits; or
3.
By recognition or adoption.
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REMOVAL AND FILLING UP OF VACANCIES
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Requirements and procedure:
1.
The removal should take place at a general or special meeting duly called for that
purpose;
2.
The removal must be a vote of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock corporations;
3.
Prior notice of the proposed removal must be made stating the time and place of meeting
either by publication or by written notice.
The special meeting must be called by the secretary, on order of the president or on the written
demand of the stockholders representing a majority of the outstanding capital stock, or a majority of
the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give notice, or if there is no secretary, the call for the meeting may
be addressed directly to the stockholders or members by any stockholder or member signing the
demand.
General rule: Directors or trustees may be removed with or without just cause.
Exception: Removal without just cause may not be used to deprive minority stockholders or
members of the right of representation to which they may be entitled under Sec. 24.
PD 902-A grants the court the power and authority to remove or oust a director and it can do so,
even motu propio by the appointment of a management committee.
In case of a deadlock in a close corporation, the SEC is authorized to issue an order cancelling,
altering, or enjoining any resolution or other act of the corporation or its board of directors or
directing or prohibiting any act of the corporation or the board of directors thereby effectively taking
away the rights of the directors to act as managers of the corporation.
Vacancies to be filled by the stockholders or members in a regular or special meeting:
1.
Vacancy due to removal;
2.
Vacancy due to expiration of term;
3.
Vacancy due to an increase in the number of board of directors; and
4.
Vacancy due to other causes when the remaining directors or trustees do not constitute a
quorum.
Vacancy due to removal may be filled by an election at the same meeting without further notice.
Any change in the constitution of the board of directors or trustees must be reported to the SEC.
The tenure of the director filling up the vacancy shall only be for the unexpired term of his
predecessor in office.
If the successor is not qualified, the predecessor shall hold office in a hold-over capacity until such
successor is duly elected and qualified. (Detective and Protective Bureau vs. Cloribel)
COMPENSATION OF DIRECTORS
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General rule: Directors shall not receive any compensation, as such directors, except for
reasonable per diems.
Exceptions:
1.
When there is a provision in the by-laws fixing their compensation;
2.
When the stockholders, by a majority vote the outstanding capital stock grant the same;
and
3.
If the director renders extra-ordinary or unusual service.
In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the
net income before income tax of the corporation during the preceding year.
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If there is wastage of corporate assets, the courts may be justified to look into the reasonableness
and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to
the by-laws and by the vote of the majority of the holders of the outstanding capital stock of the
corporation.
The board may not grant compensation upon itself without authorization of the by-laws or in
contravention of the by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
Members of the board of directors may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as directors or trustees.
(Western Institute of Technology, Inc. vs. Salas)
The fact that the amount paid as compensation to directors under a by-law provision has increased
beyond what would probably be necessary to secure adequate service from them is a matter that
cannot be corrected by the court. The remedy is in the hands of the stockholders who have the
power at any lawful meeting to change the rule. (Govt. vs. El Hogar Filipino)
LIABILITY OF CORPORATE OFFICERS
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The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly
or criminally liable for acts done by him as such officer or agent.
Personal liability of a corporate director, trustee or officer along with the corporation may validly
attach, as a rule, only when:
1.
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2.
He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3.
He agrees to hold himself personally and solidarily liable with the corporation; or
4.
He is made, by specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile, Inc. vs. CA)
Where a check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act. (Sec. 1, BP 22)
In labor cases, 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. (Uichico vs.
NLRC)
THREE-FOLD DUTY OF DIRECTORS




Three-fold duty of directors:
1.
Obedience
2.
Diligence
3.
Loyalty
Solidarily liability for all damages suffered by the corporation, its stockholders or members or other
persons shall be imposed upon directors or trustees:
1.
Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
2.
Who are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
3.
Who acquire any personal property or pecuniary interest in conflict with their duty as such
directors or trustees.
Business judgment rule – directors are not liable for losses due to imprudence or honest error of
judgment. Questions of policy and management are left solely to the honest decision of the board
of directors and the courts are without authority to substitute its judgment as against the former.
Resolutions passed in good faith by the board of directors are valid and binding, and whether or not
it will cause losses or decrease in profits are not subject to the review of the court. (Montelibano vs.
Bacolod Murcia Milling, Co., Inc.)
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General rule: A director is not liable for misconduct of co-directors or other officers.
Exceptions:
1.
He connives or participates in it; or
2.
He is negligent in not discovering or acting to prevent it.
The duty of loyalty is violated in the following instances:
1.
When a director or trustee acquires any personal or pecuniary interest in conflict with his
duty as such director or trustee;
2.
When he attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect to 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; and
3.
When he, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profit to the prejudice of such corporation.
Corporate opportunity doctrine – It places a director of a corporation in the position of a fiduciary
and prohibits him from seizing a business opportunity and/or developing it at the expense and with
the facilities of the corporation. He cannot appropriate to himself a business opportunity which in
fairness should belong to the corporation.
Distinction between Secs. 31 & 34:
1.
Sec. 31, where a director is liable to account for profits if he attempts to acquire or
acquires any interest adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf is
not subject to ratification by the stockholders.
2.
Sec. 34, where the director acquires for himself a business opportunity which should
belong to the corporation, he is bound to account for such profits unless his act is ratified
by the stockholders owning or representing at least 2/3 of the outstanding capital stock.
Directors are liable for fraud committed by concealment of information as to the state and probable
result of the negotiations for the sale of corporate assets which may affect the price of the
corporation‟s stock. (Strong vs. Repide)
SELF-DEALING DIRECTORS



A contract of the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all of the following conditions are present:
1.
That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2.
That the vote of such director or trustee was not necessary for the approval of the
contract;
3.
That the contract is fair and reasonable under the circumstances; and
4.
That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified, provided:
1.
The contract is ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members
2.
Such ratification is made at a meeting called for that purpose;
3.
Full disclosure of the adverse interest of the directors or trustees involved is made; and
4.
The contract is fair and reasonable under the circumstances.
In the absence of express delegation, a contract entered into by the president, on behalf of the
corporation, may bind the corporation if the board should ratify the same expressly or impliedly.
Furthermore, the president as such may bind the corporation by a contract in the ordinary course of
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business, provided the same is reasonable under the circumstances. These rules only apply where
the president or other officer, purportedly acting for the corporation, is dealing with a third person,
i.e., person outside the corporation. It does not apply to self-dealing directors or officers. (Prime
White Cement Corp. vs. IAC)
A director or officer may in good faith and for an adequate consideration purchase from a majority
of the directors or stockholders the property even of an insolvent corporation. (Mead vs. Mc
Cullough)
INTERLOCKING DIRECTORS


Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
A director who owns a substantial interest in one corporation dealing with another where he has a
nominal interest is a regarded as a self-dealing director in so far as the latter corporation is
concerned.
DERIVATIVE SUIT

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
Suits that stockholders may bring against erring directors or officers:
1.
Individual or personal suit – one brought by the shareholders for direct injury to his rights,
such as denial of his right to inspect corporate books and records or pre-emptive right;
2.
Representative of class suit - ; and
3.
Derivative suit – an action based on injury to the corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and recovery is in favor of the
corporation.
A stockholder in a corporation who was not such at the time of the transactions complained of, or
whose shares had not devolved upon him since by operation of law, can not maintain a derivative
suit unless such transactions continue and are injurious to the stockholder, or affect him specifically
in some other way. (Pascual vs. Orozco, et al.)
When the board is under the complete control of the principal defendants in the case, demand
upon such board to institute action and prosecute the same is not required. The law does not
require litigants to do useless acts. (Everett vs. Asia Banking Corporation)
The corporation should be made a party, in order to make the court‟s judgment binding upon it, and
thus bar future relitigation of the issue. On what side the corporation appears is not important.
(Republic Bank vs. Cuaderno)
The minority shareholder who is suing for and in behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join. This is necessary to vest
jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vest
jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of
the action. (Western Institute of Technology, Inc. vs. Salas)
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with
standing to bring a derivative action for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him, individually, but in behalf and for
the benefit of the corporation. (SMC vs. Khan)
Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of
discretion – and intra-corporate remedy is futile or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for the benefit of the corporation, to bring about a
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redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
(Reyes vs. Tan, et al.)
The stockholders in a derivate suit cannot allege or vindicate their own individual interests or
prejudice. (Gamboa vs. Victoriano, et al.)
In a derivative suit, the injury complained of is primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders. The stockholders
may not directly claim those damages for themselves for that would result in the appropriation by,
and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. (Evangelista vs. Santos)
Rules, requirements and procedure so that a derivative suit may proceed or prosper:
1.
The party bringing the action should be a stockholder as of the time the act or transaction
complained of took place, or whose shares have evolved upon him since by operation of
law. This rule, however, does not apply if such act or transaction continues and is injurious
to the stockholder or affects him specifically in some other way. The number of shares is
immaterial.
2.
He has tried to exhaust intra-corporate remedies, i.e. he has made a demand on the
board of directors for the appropriate relief but the latter had failed or refused to heed his
plea. Demand, however, is not required if the company is under the complete control of
the directors who are the very ones to be sued (or where it becomes obvious that a
demand upon them would have been futile and useless) since the law does not require a
litigant to perform useless acts.
3.
The stockholder bringing the suit must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders similarly
situated, otherwise, the case is dismissible.
4.
The corporation should be made a party, either as party-plaintiff or defendant, in order to
make the court‟s judgment binding upon it.
5.
Any benefit or damages recovered shall pertain to the corporation.
EXECUTIVE COMMITTEE



An executive committee may be created when authorized by the by-laws.
General rule: 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 the by-laws or on
a majority vote of the board.
Exceptions:
1.
Approval of any action for which shareholders' approval is also required;
2.
The filling of vacancies in the board;
3.
The amendment or repeal of by-laws or the adoption of new by-laws;
4.
The amendment or repeal of any resolution of the board which by its express terms is not
so amendable or repealable; and
5.
A distribution of cash dividends to the shareholders.
CHAPTER 7: CORPORATE POWERS AND AUTHORITY

Classification of corporate authority:
1.
Those expressly granted or authorized by law inclusive of the corporate charter or articles
of incorporation
2.
Those impliedly granted as are essential or reasonably necessary to the carrying out of
the express powers
3.
Those that are incidental to its existence.
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Powers expressly granted
1.
Power to sue and be sued (Sec. 36)
2.
Power of succession (Sec. 36)
3.
Power to adopt and use a corporate seal (Sec. 36)
4.
Power to amend its articles of incorporation (Sec. 36)
5.
Power to adopt, amend or repeal by-laws (Sec. 36)
6.
Power to issue or sell stocks/ to admit members (Sec. 36)
7.
Power to acquire or alienate real or personal property (Sec. 36)
8.
Power to enter into merger or consolidation (Sec. 36)
9.
Power to make reasonable donations (Sec. 36)
10. Power to establish pension, retirement, and other plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37)
12. Power to increase or decrease capital stock (Sec. 38)
13. Power to incur, create or increase bonded indebtedness (Sec. 38)
14. Power to deny pre-emptive right (Sec. 39)
15. Power to sell or dispose corporate assets (Sec. 40)
16. Power to acquire own shares (Sec. 41)
17. Power to invest corporate funds in another corporation or business or for any other
purpose (Sec. 42)
18. Power to declare dividends (Sec. 43)
19. Power to enter into management contract (Sec. 44)
POWER TO SUE AND BE SUED




The residence of the corporation is the place of its principal office as may be indicated in its articles
of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
Service of summons upon a corporation must be made upon:
1.
President,
2.
Managing partner,
3.
General manager,
4.
Corporate secretary,
5.
treasurer, or
6.
In-house counsel
Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must be one who is named in the statute;
otherwise the service is insufficient. (Delta Motor Sales Corp. vs. Mangosing)
Under the new rules, service of summons upon an agent of the corporation is no longer authorized.
(E.B. Villarosa & Partner Co., LTD. vs. Benito)
POWER OF SUCCESSION

Right of succession – a corporation persists to exist despite the death, incapacity, civil interdiction
or withdrawal of the stockholders or members thereof.
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POWER TO ADOPT AND USE COMMON SEAL

Statutes empowering corporations to make and own a seal are not mandatory but merely
permissive.
POWER TO AMEND ARTICLES OF INCORPORATION


General rule: Amendment of the articles of incorporation is a matter of right (Note: procedure differs
for special amendments)
Exception: Corporations created by special law
POWER TO ADOPT BY-LAWS

A corporation, once formed is required to adopt its by-laws, not contrary to law, morals or public
policy, within one month from receipt of official notice of the issuance of certificate of incorporation
or registration.
POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS

The power of a corporation to issue or sell stock is an inherent right except where it sells or issues
stocks of other corporations (Securities Regulation Code).
POWER TO ACQUIRE/ALIENATE PROPERTY




Real or personal properties must be acquired, held or conveyed as the transaction of the lawful
business of the corporation may reasonably and necessarily require. Furthermore, it shall be
subject to the limitations imposed by law and the Constitution.
A corporation cannot undertake acquisition of property which would have no purpose and would
have no necessary connection with its legitimate business. (Luneta Motors Co. vs. A.D. Santos,
Inc.)
A corporation whose business may properly conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with facilities in excess of its own immediate
requirements. (Govt. vs. El Hogar)
A corporation may register alienable public lands if it has been held by it, personally or through its
predecessor-in-interest, openly, continuously and publicly within the prescribed statutory period of
30 years under the Public Land Law, as amended, since it is converted into private property by
mere lapse of completion of said period. (Dir. of Lands vs. CA)
POWER TO MAKE REASONABLE DONATIONS

Limitations imposed upon corporate donations:
1.
The donation must be reasonable;
2.
It must be for public welfare, or for hospital, charitable, scientific, cultural or similar
purpose; and
3.
It shall not be in aid of any political party or candidate, or for purpose of partisan political
activity.
POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS

While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by 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. (Republic vs. Acoje Mining Co., Inc.)
POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS
PURPOSES (IMPLIED POWERS)

Classification of implied powers:
1.
Acts in the usual course of business
2.
Acts to protect debts owing to the corporation
3.
Embarking on a different business
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4.
Acts in part or wholly to protect or aid employees
5.
Acts to increase business
A corporation has authority to do what will legitimately tend to effectuate the express purposes and
objects; that it may ordinarily do all things that are convenient, suitable or necessary to enable it to
fully perform the undertaking designated in its charter, and for which it is organized.
There must be a logical and necessary relation of the act to the corporate purpose. (NPC vs. Vera)
If the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of
serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial
and not in a remote and fanciful sense, it may be fairly considered within the corporation‟s charter
powers. (NPC vs. Vera)
Examples:
1.
Operation and maintenance of an electric plant for a cement factory. (Teresa Electric
Power Co., Inc. vs. PSC)
2.
NPC‟s undertaking of stevedoring services for its power plant. (NPC vs. Vera)
3.
International School‟s imposition of a development fee for expansion and maintenance.
(Powers vs. Marshall)
POWER TO EXTEND/SHORTEN CORPORATE TERM

Requirements and procedure:
1.
Approval by the majority vote of the board of directors or trustees;
2.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations;
3.
The ratification must be at a meeting duly called for that purpose;
4.
Prior written notice of the proposal to extend or shorten the corporate term must be made
stating the time and place of meeting addressed to each stockholder or member at his
place of residence, either by mail or personal service;
5.
In case of extension, the same cannot be made ealier than five (5) years prior to the
original or subsequent expiry date unless there are justifiable reasons for an earlier
extension;
6.
In case of extension, the same must be made during the lifetime of the corporation;
7.
Any dissenting stockholder may exercise his appraisal right;
8.
Submission of the amended articles with the SEC; and
9.
Approval thereof by the SEC.
POWER TO INCREASE/DECREASE
INDEBTEDNESS

CAPITAL;
INCUR,
CREATE
OR
INCREASE
BONDED
Requirements and procedure:
1.
Approval by the majority vote of the board of directors or trustees;
2.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations;
3.
The ratification must be at a meeting duly called for that purpose;
4.
Prior written notice of the proposed action must be made stating the time and place of
meeting addressed to each stockholder or member at his place of residence, either by
mail or personal service;
5.
A certificate in duplicate must be signed by a majority of the directors of the corporation,
countersigned by the chairman and the secretary of the stockholder‟s meeting, setting
forth the matters contained in subsection 1 to 7 of Sec. 38;
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6.
In case of increase in capital stock, 25% of such increased capital must be subscribed and
that at least 25% of the amount subscribed must be paid either in cash or property;
7.
In case of decrease in capital stock, the same must not prejudice the right of the creditors;
8.
Filing of the certificate of increase and amended articles with the SEC; and
9.
Approval thereof by the SEC.
1.
Increasing the par value of the existing number of shared without increasing the number of
shares;
2.
Increasing the number of existing shares without increasing the par value thereof; and
3.
Increasing the number of existing shares and at the same time increasing the par value of
the shares.
 3 ways of increasing the capital stock:






Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the
increase of capital stock.
Reasons for decreasing capital stock:
1.
To reduce or wipe out existing deficit where no creditors would thereby be affected;
2.
When capital is more than what is necessary to procreate the business or reduction of
capital surplus; or
3.
To write down the value of its fixed assets to reflect the present actual value in case where
there is a decline in the value of the fixed assets of the corporation.
A corporation has no power to release an original subscriber to its capital stock from the obligation
of paying for his shares, without a valuable consideration for such release; and as against creditors
a reduction of the capital stock can take place only in the manner and under the conditions
prescribed by law. Moreover, strict compliance with the statutory regulations is necessary.
(Philippine Trust Company vs. Rivera)
A reduction of capital stock may not be used as a subterfuge, a deception as it were, to camouflage
the fact that a corporation has been making profits to obviate a just sharing to labor. (Madrigal &
Co. vs. Zamora)
A corporation which has the power to borrow or raise money, to contract for labor or services, or
otherwise contract a debt has the implied power to issue bonds in payment or as a security
provided it violates no prohibition or restriction in its charter or any other statutes.
Corporate bonds must be registered and approved by the SEC before they are issued.
POWER TO DENY PRE-EMPTIVE RIGHTS




Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to
subscribe to all issues or disposition of shares of any class, in proportion to their respective
stockholdings, subject only to the limitations imposed under Sec. 39.
The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old
stockholders‟ relative and proportionate voting strength and control, that is, the existing ratio of their
proprietary interest and voting power in the corporation.
All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment thereto.
Exceptions:
1.
Shares to be issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; or
2.
Shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
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The exceptions do not apply to stockholders of a close corporation.
The right may be lost by waiver, expressly or impliedly by inability or failure to exercise it after
having been notified.
The pre-emptive right covers all issues or disposition of share of any class. It includes new share
issued pursuant to an increase in capital stock, unissued shares which form part of the original
capital stock and treasury shares.
POWER TO SELL/DISPOSE ASSETS






There is a sale or other disposition of substantially all the corporate property and assets if the
corporation would thereby be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
Conditions for the valid exercise of this right:
1.
Resolution by the majority vote of the board of directors or trustees;
2.
Authorization from the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations;
3.
The ratification must be at a meeting duly called for that purpose;
4.
Prior written notice of the proposed action must be made stating the time and place of
meeting addressed to each stockholder or member at his place of residence, either by
mail or personal service;
5.
The sale of the assets shall be subject to the provisions of existing laws on illegal
combinations and monopolies; and
6.
Any dissenting stockholder shall have the option to exercise his appraisal right.
7.
(Note: In non-stock corporations where there are no members with voting rights, the vote
of at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into such transaction.)
Exception to application of the procedure and requirements:
1.
The sale, lease, exchange, mortgage, pledge or other dispose of property and assets is
necessary in the usual and regular course of business of the corporation; or
2.
The sale or other disposition of property and assets is appropriated for the conduct of the
corporation‟s remaining business.
The sale or other disposition of all or substantially all of the corporate property or assets must be
voted for by the legitimate board and concurred in by the bona fide stockholders or members. (IDP
vs. CA)
General rule: Where a corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor.
Exceptions:
1.
Where the purchaser expressly or impliedly agrees to assume such debts;
2.
Where the transaction amounts to a consolidation or merger of the corporations;
3.
Where the purchasing corporation is merely a continuation of the selling corporation; and
4.
Where the transaction is entered into fraudulently in order to escape liability for such
debts.
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POWER TO ACQUIRE OWN SHARES




A stock corporation shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following cases:
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; and
4.
To redeem redeemable shares.
General rule: the corporation must have unrestricted retained earnings.
Exceptions:
1.
Redemption of redeemable shares; and
2.
Stockholder‟s right to compel a close corporation to purchase his shares when the
corporation has sufficient assets to cover its debts and liabilities.
The acquisition of shares must be made in good faith, free from fraud, actual or constructive, and
that the corporation is not insolvent or in the process of dissolution and that the rights of creditors
and other stockholders are in no way injuriously affected.
POWER TO INVEST FUNDS




The right refers to investment in the form of money, stock, bonds and other liquid assets and does
not include real properties or other fixed assets.
Requirements and procedure:
1.
Resolution by the majority vote of the board of directors or trustees;
2.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations;
3.
The ratification must be at a meeting duly called for that purpose;
4.
Prior written notice of the proposed investment and the time and place of meeting shall be
made, addressed to each stockholder or member at his place of residence, either by mail
or personal service; and
5.
Any dissenting stockholder shall have the option to exercise his appraisal right.
The approval of the stockholders or members is not required where the investment is reasonably
necessary to accomplish its primary purpose.
An unauthorized investment which is not illegal or void ab initio or not contrary to law, morals,
public order or public policy, is merely voidable and may become binding and enforceable when
ratified by the stockholders. (Gokongwei, Jr. vs. SEC)
POWER TO DECLARE DIVIDENDS



Dividends – are corporate profits set aside, declared and ordered by the Board of Directors to be
paid to the stockholders.
Dividends can only be declared out of unrestricted retained earnings.
Unrestricted retained earnings – undistributed earnings of a corporation which have not been
allocated for any managerial, contractual or legal purpose and which are free for distribution to the
stockholders as dividends.
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Types of dividends:
1.
Cash dividend – those that are payable in lawful money.
2.
Property dividend – those that take form of bonds, notes, evidences of indebtedness or
stock in other corporations.
3.
Stock dividends – refer to the corporation‟s shares of stock.
Rules on dividends due on delinquent stock:
1.
Cash dividend – first applied to the unpaid balance on subscription costs and expenses.
2.
Stock dividend – withheld until subscription is fully paid.
General rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock.
Exceptions:
1.
When justified by definite corporate expansion projects or programs approved by the
board of directors; or
2.
When the corporation is prohibited under any loan agreement with any financial institution
or creditor, whether local or foreign, from declaring dividends without its/his consent, and
such consent has not yet been secured; or
3.
When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special reserve
for probable contingencies.
General rule: The board of directors exercise exclusive authority in declaring dividends.
Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3
of the outstanding capital stock is required.
The judgment of the board of directors in the matter of declaring dividends is conclusive except
when they act in bad faith, or for a dishonest purpose or act fraudulently, oppressively,
unreasonably or unjustly or abuse of discretion can be shown so as to impair the rights of the
complaining stockholders to their just proportion of corporate profits.
The essential test of bad faith is to determine if the policy of the directors is dictated by their
personal interest rather than the corporate welfare.
The right of the stockholders to be paid dividends vest as soon as they have been lawfully and
finally declared by the Board of Directors.
No revocation of dividend may be had unless it has not been officially communicated to the
stockholders or is in the form of stock dividends which is revocable at any time prior to distribution.
Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs.
Lepanto Consolidated Mining Co.)
Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith,
gross negligence or willful and knowing assent. (Ladia)
POWER TO ENTER INTO MANAGEMENT CONTRACTS

Requirements and procedure:
1.
Resolution by the board of directors or trustees;
2.
Approval by the stockholders representing a majority of the outstanding capital stock or
majority of the members in case of non-stock corporations;
3.
The approval must be at a meeting duly called for that purpose;
4.
The contract shall not be for a period longer than 5 years for any one term, except those
which relate to exploration, development or utilization of natural resources which may be
entered into for such periods as may be provided by pertinent laws and regulations.
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When approval of the stockholders of the managed corporation owning at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock corporations are required:
1.
Where a stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than 1/3 of the total outstanding
capital stock entitled to vote of the managing corporation;
2.
Where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation; or
3.
Where the contract would constitute the management or operation of all or substantially all
of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise.
ULTRA-VIRES ACTS
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Ultra-vires acts – are those that can not be executed or performed by a corporation because they
are not within its express, inherent or implied powers as defined by its charter or articles of
incorporation.
Consequences of ultra-vires acts:
1.
On the corporation itself – the proper forum may suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is doing to the great damage or
prejudice of the general public.
2.
On the rights of the stockholders – a stockholder may either an individual or derivative suit
to enjoin a threatened ultra-vires act or contract.
3.
On the immediate parties – (a) if the contract is fully executed on both sides, the contract
is effective; (b) if the contract is executory on both sides, neither party can maintain an
action for its non-performance; and (c) if the contract is executory on one side only, and
has been fully performed on the other, the party who has received the benefits is estopped
to set up that the contract is ultra-vires.
Acts which are clearly beneficial to the company or necessary to promote the interest or welfare of
the corporation, its employees and their families, or in the legitimate furtherance of its business are
within corporate powers. (Republic vs. Acoje Mining)
Mere ultra-vires acts which are not illegal per se may become binding and enforceable either by
ratification, estoppel or on equitable grounds unless the public or third parties are thereby
prejudiced. (Privano vs. De la Rama Steamship)
Corporations authorized to acquire the bonds have the implied power to guarantee them in order to
place them upon the market under better, more advantageous conditions, and thereby secure the
profit derived from their sale. When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of
ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it
would defeat the ends of justice or work a legal wrong. (Carlos vs. Midoro Sugar Co.)
Actions which are beyond the powers of the corporation as embodied in its articles of incorporation
and have absolutely no relation to the avowed purpose of the corporation are ultra-vires. (Japanese
War Notes Claimants Assoc., Inc. vs. SEC)
Corporate officers have no power to execute for mere accommodation a negotiable instrument of
the corporation for their individual debts or transactions arising from or in relation to matters in
which the corporation has no legitimate concern. Since such accommodation paper cannot thus be
enforced against the corporation, especially since it is not involved in any aspect of the corporate
business or operations, the signatories thereof shall be personally liable therefor, as well as for the
consequences arising from their acts in connection therewith. (Crisologo-Jose vs. CA)
CHAPTER 8: BY-LAWS

By-laws – are rules and ordinances made by a corporation for its own government; to regulate the
conduct and define the duties of the stockholders or members towards the corporation and among
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themselves. They are rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or member and
directors and officers with relation thereto and among themselves in their relation to it.
Requirements and procedure for adoption of by-laws:
1.
The by laws must not be inconsistent with the Code;
2.
If adopted prior to incorporation:
3.
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a.
Approved and signed by all the incorporators;
b.
Submitted together with the articles of incorporation to the SEC;
If adopted subsequent to incorporation:
a.
Adopted within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC;
b.
Affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of nonstock corporations,
c.
Signed by the stockholders or members voting for them
d.
Kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours.
e.
A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, must be filed with the SEC
which shall be attached to the original articles of incorporation.
4.
Certification of the appropriate government agency concerned to the effect that such bylaws or amendments are in accordance with law.
5.
Issuance by the Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
Contents of by-laws:
1.
The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2.
The time and manner of calling and conducting regular or special meetings of the
stockholders or members;
3.
The required quorum in meetings of stockholders or members and the manner of voting
therein;
4.
The form for proxies of stockholders and members and the manner of voting them;
5.
The qualifications, duties and compensation of directors or trustees, officers and
employees;
6.
The time for holding the annual election of directors of 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 stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
By-laws are subordinate to the articles of incorporation, the Corporation Code and other statutes
which form part of the corporate charter.
By-laws become effective only upon the approval of the SEC
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Time of filing:
1.
Prior to incorporation – must be signed by all the incorporators, must be filed together with
the articles of incorporation
2.
After incorporation – approval of at least a majority of the outstanding capital stock
Failure to file by-laws may result to suspension or revocation of corporate franchise after proper
notice and hearing
Failure to file by-laws does not result in automatic dissolution. (LGVHA vs. CA)
By-laws are internal rules an cannot bind, effect or prejudice third persons without knowledge.
(Fleisher vs. Botica Nolasco)
Two modes of amending or repealing by laws or adopting a new one:
1.
By a majority vote of the directors or trustees and the majority vote of the outstanding
capital stock or members, at a regular or special meeting called for that purpose; or
2.
By the board of directors alone when delegated by 2/3 of the outstanding capital stock or
members
Delegated power to amend, repeal or adopt by-laws may be revoked
Incorporation of an invalid by-law provision is not a misdemeanor. It does not justify the dissolution
of the corporation. (Govt. vs. El Hogar)
The by-laws may disqualify a stockholder from being elected into office if he has a substantial
interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a
director. (Gokongwei, Jr. vs. SEC)
Elements of a valid by laws:
1.
It must not be contrary to law, public policy or morals.
2.
It must not be inconsistent with the articles of incorporate.
3.
It must be general and uniform in its effect or applicable to all alike or those similarly
situated.
4.
It must not impair obligations and contracts or vested rights.
5.
It must be reasonable.
CHAPTER 9: MEETINGS
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Meetings – applies to every duly convened assembly either stockholders, members, directors or
trustees, manages, etc. for any legal purpose, or the transaction of business of a common interest.
Classes of meetings:
1.
General
2.
Special
STOCKHOLDER’S MEETINGS

Requirements to have a valid stockholder‟s meeting:
1.
It must be held on the date fixed in the by-laws or in accordance with law.
2.
Prior notice must be given.
3.
It must be held at the proper place.
4.
It must be called by the proper party.
5.
Quorum and voting requirements must be met
It must be held on the date fixed in the by-laws or in accordance with law.

Regular meetings shall be held annually on a date fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by the board of directors or trustees.
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Special meetings of stockholders or members shall be held at any time deemed necessary or as
provided in the by-laws.
Prior notice must be given.
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Regular – 2 weeks prior notice
Special – 1 week prior notice
The by-laws may provide for a different period (shorter or longer)
Failure to give notice of a meeting would render the resolution made thereunder voidable at the
option of the stockholder or member who was not notified. (Board of Directors vs. Tan)
Notice may be waived, expressly or impliedly.
Notice must state the agenda otherwise it may become voidable.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
It must be held at the proper place.
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General Rule: Stockholders' or members' meetings, whether regular or special, shall be held in the
city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation.
Exceptions to the rule:
1.
A non-stock corporation, in its by laws, may provide for any place within the Philippines.
2.
Metro Manila is considered a city or municipality.
It must be called by the proper party.
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Persons who may call the meeting:
1.
The person or persons authorized under the by-laws;
2.
Absent of any provision in the by-laws, the president;
3.
Under Sec. 28 (removal of director), by the secretary on order of the president or on
written demand of the stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled to vote in a non-stock
corporation, or the stockholder or member making the demand if there is no secretary or
he refuses to do so; and
4.
On order of the proper forum under Sec. 50.
A stockholder may only petition the SEC to issue an order directing the petitioner to call a meeting
when there is no person authorized to call a meeting. Otherwise, the remedy is to file a petition for
mandamus.
Quorum and voting requirements must be met
 A quorum shall consist of the stockholders representing a majority of the outstanding capital stock.
 The by-laws or the Code itself may provide for a greater quorum.
 The basis of determining the presence of a quorum:
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
1.
Stock corporation – total subscription irrespective of the amount paid by them.
2.
Non-stock corporation – total number of registered voting members.
A quorum once present is not broken by the subsequent withdrawal of a part or fraction of the
stockholders.
If the voting requirement is met, any resolution passed in the meeting, even if improperly held or
called will be valid if all the stockholders or members are present or duly represented.
DIRECTORS’/TRUSTEES’ MEETING

Regular meetings – held monthly, unless the by-laws provide otherwise
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Special meetings – held at any time upon the call of the president or as provided in the by-laws
Meetings may be held anywhere in or outside of the Philippines, unless the by-laws provide
otherwise.
Notice must be sent at least one (1) day prior to the scheduled meeting, unless otherwise provided
by the by-laws.
Notice may be waived, expressly or impliedly.
If the notice requirement is not complied with the meeting is illegal and will not bind the corporation
except when subsequently ratified. (Lopez vs. Fontecha)
In a close corporation, the act of any one director may bind the corporation without a meeting.
Presence at a meeting waives want of notice.
Physical presence at the meeting is not required; teleconferencing and videoconferencing is
allowed. (RA 8792)
The president shall preside at the meeting, unless the by-laws provide otherwise.
A director or trustee cannot attend or vote by proxy at any board meeting.
STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
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General rule: The right to vote is an inherent right and the stockholder may vote any way he
pleases.
Exceptions:
1.
Non-voting shares are not entitled to vote except in those instances provided for in the
penultimate paragraph of Sec. 6
2.
Treasury shares
3.
Delinquent shares
4.
Unregistered transferee of stock
General rule: Stockholders or members may vote personally or through a representative by way of
proxy, voting trust agreement or by the executor, administrator, receiver of other legal
representative.
Exception: In non-stock corporations, the right to vote may be limited, broadened or denied in the
articles of incorporation or in the by-laws.
The right to vote is vested with the legal owner of the shares.
In case of pledged or mortgaged shares, the pledgor or mortgagor is entitled to vote in absence of
a written agreement (recorded in the corporate books) to the contrary. (Sec. 55)
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.
(Sec. 50)
An executor or administrator of a stockholder may not be elected unless he owns at least 1 share.
General Rule: In case of shares jointly owned, the consent of all the co-owners shall be necessary.
Exceptions:
1.
Written proxy signed by all the co-owners
2.
The shares are owned in an "and/or" capacity
PROXY

Proxy – the authority given by the stockholder or member to another to vote for him at a
stockholders‟ or members‟ meeting. It also refers to the instrument or paper which is evidence of
the authority of the agent or the holder thereof to vote for and in behalf of the stockholder or
member.
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Two types of proxies:
1.
General – gives a general discretionary power of attorney to vote for directors and all
ordinary matters that may properly come before a meeting. It is not an authority, however,
to vote for fundamental changes in the corporate charter or for other unusual transactions,
unless specified.
2.
Limited – restricts the authority to vote on specified matters only and may direct the
manner in which the vote will be cast.
Proxy voting may not be denied except in a non-stock corporation.
Requirements:
1.
In writing
2.
Signed by the stockholder or member
3.
Filed before the scheduled meeting with the corporate secretary
By-laws may reasonably regulate the form and execution of proxies.
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.
A proxy is revocable unless coupled with an interest.
Revocation may be expresses:
1.
To the proxy holder
2.
To the election committee
3.
By a subsequent proxy to another
4.
By sale of the shares
VOTING TRUST
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A voting trust is one created by an agreement between a group of stockholders of a corporation
and a trustee, or a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
shall be lodged in the trustee, either with or without reservation to the owners or persons
designated by them the power to direct how such control shall be used. It is a device of binding
stockholders to vote as a unit and thus assuring a desirable stability and continuity in management
in situations where it is needed.
Requirements:
1.
It should confer upon the trustee or trustees the right to vote and other rights pertaining to
the shares;
2.
It should be for a period not exceeding five (5) years at any time unless the voting trust is
specifically required as a condition in a loan agreement, in which case, the voting trust
may be for a period exceeding five (5) years but shall automatically expire upon full
payment of the loan;
3.
It must be in writing and notarized, and shall specify the terms and conditions thereof;
4.
A certified copy thereof must be filed with the corporation and with the Securities and
Exchange Commission, otherwise, said agreement is ineffective and unenforceable;
5.
The certificate or certificates of stock covered by the voting trust agreement shall be
canceled and new ones shall be issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement;
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6.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates,
which shall be transferable in the same manner and with the same effect as certificates of
stock.
7.
It should not be entered into for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud.
Voting trust distinguished from proxy
VOTING TRUST
The beneficial owner of the shares ceases
to be a stockholder of record of the
corporation
The trustee votes as owner of the shares
The beneficial owner of the shares is
disqualified to be a director
The purpose is to acquire voting control of
the corporation
Irrevocable
The trustee can act and vote at any meeting
during the duration of the voting trust
agreement
The trustee may vote in person or by proxy
The duration may exceed 5 years
Must be notarized and filed with the SEC
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PROXY
Legal title remains with the beneficial owner
The proxy holder votes merely as an agent
The owner of the shares may be elected as
a director since legal title remains with him
Generally used to secure voting and quorum
requirements or merely for the purpose of
representing an absent stockholder
Revocable unless coupled with an interest
A proxy holder can generally act as such
only at a particular meeting
A proxy holder must vote in person
The duration may not exceed 5 years
Need not be notarized nor filed with the SEC
A corporation is not a party to a voting trust agreement therefore it is not a real party interest in a
suit to enforce the same. (NIDC vs. Aquino)
A voting trust transfers only voting and other rights pertaining to the shares subject of the
agreement or control over the stock. It does not include the assets, operation and management of
the corporation. (NIDC vs. Aquino)
CHAPTER 10: STOCKS AND STOCKHOLDERS

3 ways in which a person may become a stockholder:
1.
By a contract of subscription with the corporation;
2.
By the purchase of treasury shares from the corporation; and
3.
By purchase or acquisition of shares from existing stockholders (includes purchase from
the stock exchange).
SUBSCRIPTION CONTRACT
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Subscription – the mutual agreement of the subscribers to take and pay for the stocks of a
corporation.
Subscription contract – any contract for the acquisition of unissued stock in an existing corporation
or a corporation still to be formed, not withstanding the fact that the parties refer to it as a purchase
or some other contract.
A subscription contract is not required to be written; an oral contract for subscription is valid and
enforceable. The statutes of fraud do not apply to a subscription contract because such
subscription does not fall under the statutory definition of a sale.
Conditional subscription – one made upon a condition precedent, does not make the subscriber a
stockholder, or render him to pay the amount of his subscription, until the performance or fulfillment
of the condition.
Subscription upon special terms – an absolute subscription, making the subscriber a stockholder,
and rendering him liable as such, as soon as the subscription is accepted, the special term being
an independent stipulation.
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In case of doubt, a subscription shall be considered one upon special terms in order to protect the
creditors and other subscribers.
General rule: Conditional subscriptions are valid.
Exceptions:
1.
The charter or enabling act prohibits the same; or
2.
The conditions are such as to render their performance beyond the powers of the
corporation or in violation of law or contrary to public policy.
An application for subscription which is at variance with the terms evidenced in a general form of
subscription must be accepted by the corporation to create a binding contract. (Trillana vs. Quezon
College, Inc.)
A condition facultative as to the debtor renders the whole obligation void. (Trillana vs. Quezon
College, Inc.)
PRE-INCORPORATION SUBSCRIPTIONS
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Types of subscriptions as to time of execution:
1.
Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to
be formed; and
2.
Post-incorporation subscriptions – those made or executed after the formation or
organization of the corporation.
General rule: A subscription for shares of stock of a corporation still to be formed is irrevocable.
Exceptions:
1.
Lapse of a period of 6 months from the date of subscription;
2.
All the subscribers consent to the revocation; or
3.
The incorporation of said corporation fails to materialize within 6 months or within a longer
period as may be stipulated in the contract of subscription.
Exception to the exceptions: No pre-incorporation subscription may be revoked after the
submission of the articles on incorporation to the SEC.
Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which mandates that a
corporation may be registered as such only if at least 25% of its authorized capital stock has been
subscribed and that at least 25% of the total subscription has been paid.
Stocks shall not be issued for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be any or a combination of any two or more of the ff:
1.
Actual cash paid to the corporation;
2.
Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3.
Labor performed or services actually rendered to the corporation;
4.
Previously incurred indebtedness by the corporation;
5.
Amounts transferred from unrestricted retained earnings to stated capital; and
6.
Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory notes or future services. Their realization is
uncertain.
Issue – the making of a share contract or contract of subscription; transaction by which a person
becomes the owner of shares and by which new share contracts are created.
The issuance of shares is not dependent on the delivery of a certificate of stock.
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Par or issue price – indicates the amount which the original subscribers are supposed to contribute
to the corporate capital as the basis of the privilege of profit sharing with limited liability.
Valuation of properties given as a consideration for issuance of stock:
1.
2.
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Tangible properties (particularly real properties):
a.
Appraisal report of an independent appraiser;
b.
Zonal valuation as certified by the BIR; or
c.
Market value indicated in the Real Estate Tax Declaration.
Intangible properties (such as patents or copyrights):
a.
Initial determination by the incorporators or the board of directors subject to the
approval of the SEC; or
b.
Appraisal report of an independent appraiser.
Labor performed or services actually rendered to the corporation must be capable of valuation and
in fact fairly valued.
Two theories in the valuation of property or services:
1.
True value rule – the motives or intent of those making the valuation are disregarded and
the sole and decisive factor or question is whether or not the property or services are in
fact worth the value placed on them.
2.
Good faith rule – the value of the property or services is a matter about which there can be
an honest difference of opinion. Therefore, if the parties have acted in good faith without
fraud or intentional over-valuation, the transaction cannot be overturned even if the later
becomes evident that the property or services were in fact worth much less than the value
fixed on them initially.
The set-off or satisfaction of a debt due from the corporation is a lawful and valid consideration for
the issuance of stock.
Amounts transferred from unrestricted retained earnings to stated capital – refers to the declaration
and distribution of stock dividends where corporate earnings are capitalized.
Outstanding shares exchanged for stocks in the event of reclassification or conversion – refers to
stocks surrendered to the corporation in exchange for a new or different type of shares. (Ex.
conversion of founder‟s shares to common shares.)
The prohibition against the issuance of shares by corporations except for actual cash or property at
its fair valuation secures absolute equality among stockholders with respect to their liability upon
stock subscriptions. A stipulation is a stock subscription which obligates the subscriber to pay
nothing for the shares except as dividends may accrue upon the stock is a discrimination in favor of
the particular subscriber, and hence, illegal. (National Exchange Co., Inc. vs. Dexter)
A corporation has no power to receive a subscription upon such terms as will operate as a fraud
upon the other subscribers as stockholders by subjecting the particular subscribers to lighter
burden, or by giving his greater rights and privileges, or as fraud upon creditors of the corporation
by withdrawing or decreasing capital. Therefore, an agreement between a corporation and a
particular subscriber, by which the subscription is not to be payable, or is to be payable in part only,
is illegal and void. (National Exchange Co., Inc. vs. Dexter)
CERTIFICATES OF STOCK AND THEIR TRANSFER
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Certificate of stock – the piece of paper or document which evidences the ownership of shares and
a convenient instrument for the transfer of the title.
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Requisites for the issuance of a certificate of stock:
1.
It must be signed by the president or vice-president and countersigned by the secretary or
assistant secretary;
2.
It must be sealed with the corporate seal; and
3.
The full amount of subscription together with interest and expenses (in case of delinquent
shares) if any is due, has been paid.
General rule: Holders of subscribed shares not fully paid are entitled to all the rights of a
stockholder.
Exceptions:
1.
The shares have been declared delinquent; or
2.
The stockholder exercises his appraisal right.
The issuance of a stock certificate is not a condition sine quanon to consider a subscriber as a
stockholder.
Two modes of transferring shares of stock:
1.
When the corporation has already issued stock certificates – only by delivery of the
certificate or certificates of stock indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer.
2.
When the corporation has not yet issued certificates of stock – by a duly notarized deed.
No transfer shall be valid, except as between the parties, until the transfer is recorded in the books
of the corporation.
Until registration is accomplished, the transfer of stock, though valid between the parties, cannot be
effective as against the corporation. The corporation looks only though its books for the purpose of
determining who its stockholders are.
Non-registration of a transfer of stock will not, however, affect the validity thereof at least in so far
as the contracting parties are concerned.
Reasons for the necessity of the registration of transfers of stock:
1.
To enable the corporation to know who its stockholders are;
2.
To enable the transferee to exercise his rights as a stockholder;
3.
To afford the corporation an opportunity to object or refuse registration of the transfer in
cases allowed by law (as when it has unpaid claims on the shares transferred);
4.
To avoid fictitious and fraudulent transfers; and
5.
To protect creditors who have the right to look upon stockholders, in case of non-payment
or watered shares, for the satisfaction of their claims.
The duty of the corporate secretary to record a valid transfer of shares of stock is ministerial. Thus,
he may be compelled by mandamus.
General rule: A certificate of stock is not a negotiable instrument. A bona-fide purchaser of a
certificate of stock will acquire no better title to the shares than his transferor had and will be
subject to all rights, remedies and defenses which the true and lawful owner may have.
Exception: When the general principles of estoppel apply. Thus, if the legal owner thereof, by his
act or negligence, is estopped from claiming ownership, (as when he clothes another with apparent
title or authority to dispose of the same) a purchaser in good faith and without notice will acquire a
better title as against the owner so estopped.
Shares of stock are personal properties and the owners thereof have the unbridled right to transfer
the same to anyone they please subject only to reasonable charter provisions.
The duty of the corporate secretary to register a valid transfer of shares is ministerial. Therefore,
mandamus will lie to compel registration in case the corporation or the corporate secretary refuses
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registration. (Rural Bank of Salinas vs. CA) However, the transferee has no such right when his title
to said shares has no prima facie validity of is uncertain. (Tay vs. CA)
The right to transfer shares of stock may not be unreasonably restricted or prohibited. Every owner
of corporate shares has the same uncontrollable right to alienate them and is under no obligation
from selling them at his sacrifice and for the welfare and benefit of the corporation and other
stockholders. (Padgett vs. Bobcock & Templeton; Fleischer vs. Botica Nolasco)
However, the right to transfer may be “regulated” to give the corporation protection against
colorable or fraudulent transfer or to enable it to know who its stockholders are. Also, as a matter of
policy, the SEC allows the grant of “preferential rights” to existing stockholders and/or the
corporation, giving them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding 30 days provided that the same is contained in the articles of
incorporation and in all of the stock certificates to be issued by the corporation. This is considered
“reasonable” since it merely suspends the right to transfer within the period specified.
A corporation may classify its shares and grant such “rights, privileges or restrictions” provided that
such are made in the articles of incorporation and subject to reasonable terms, conditions or
period. (Go Soc & Sons vs. IAC)
Other restrictions on the right to transfer shares:
1.
It is not valid, except as between the parties, until recorded in the books of the
corporation;
2.
Share of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation; unpaid claims, refer to claims arising from
unpaid subscription and not to any indebtedness which a stockholder may owe the
corporation such as monthly dues;
3.
Restrictions required to be indicated in the articles of incorporation, by-laws and stock
certificates of a close corporation;
4.
Restrictions imposed by special law, such as the Public Service Act requiring the approval
of the government agency concerned if it will vest unto the transferee 40% of the capital of
the public service company;
5.
Sale to aliens in violation of maximum ownership of shares under the Nationalization
Laws; and
6.
Those covered by reasonable agreement of the parties.
Transfer – refers to absolute and unconditional conveyance of the title and ownership of a share of
stock to warrant registration in the books of the corporation in order to bind the latter and other third
persons. (Monserrat vs. Ceron)
Only the transfer or absolute conveyance of the ownership of the title to a share need be entered
and noted upon the books of the corporation in order that such transfer may be valid, therefore,
inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of
the dominion and ownership thereof, its entry and notation upon the books of the corporation is not
a necessary requisite to its validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock should be registered both at the owner‟s domicile and in
the province where the corporation has its principal office or place of business in order to bind third
persons. The ownership of shares in a corporation is property distinct from the certificates which
are merely the evidence of such ownership. The property in the shares are deemed to be situated
in the province in which the corporation has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc.)
All transfers of shares should be entered in the books of the corporation. Transfers 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 transfer. (Uson vs. Diosomito)
A clause contained in the by-laws of a corporation which provides that the owner of a share of
stock cannot sell it to another person except to the defendant corporation is ultra-vires, violative of
the property rights of shareholders, and in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
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Shares of stock being regarded as property, the owner of such shares may, as a general rule,
dispose of them as they see fit, unless the corporation has been dissolved, or unless the right to do
so is properly restricted, or the owner‟s privilege of disposing of his shares has been hampered by
his own action. (Padgett vs. Babcock & Templeton)
Any restriction on a stockholder‟s right to dispose of his shares must be construed strictly; and any
attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a
valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements
exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or
restrained from exercising his right to transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor or the company, or to an insolvent person, or
even though a controlling interest is sold to one purchaser. Therefore, restrictions consisting in the
word “non-transferable” is illegal. (Padgett vs. Babcock & Templeton)
The suspension of the power to sell shares of stock which has a beneficial purpose, results in the
protection of the corporation as well as of the individual parties to the contract, and is reasonable
as to the length of time of suspension is valid. (Lambert vs. Fox)
An indorsee of an undelivered certificate of stock has no power to effectively transfer the shares to
other persons or his nominees. For an effective transfer of shares of stock the mode and manner of
transfer prescribed by law must be followed. (Embassy Farms, Inc. vs. CA)
Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of
a certificate of stock. (Razon vs. IAC)
The right of a transferee/assignee to have stocks transferred to his name is an inherent right
flowing from his ownership of the stocks. The corporation‟s obligation to register is ministerial.
(Rural Bank of Salinas vs. CA)
The pledge of shares of stock does not vest ownership of such shares to the pledgee. The pledgor
remains the owner during the pendency of the pledge and prior to foreclosure and sale. Therefore,
the pledgee has no right to demand the registration of the pledged shares in his name. In order that
a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear
legal right to the thing demanded and that is it the imperative duty of the respondent to perform the
act required. (Tay vs. CA)
Without a stock certificate, which is the evidence of ownership of corporate stock, the assignment
of corporate shares is effective only between the parties to the transaction. (Nava vs. Peers
Marketing)
For a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed
by law.
1.
There must be delivery of the stock certificate;
2.
The certificate must be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and
3.
To be valid against third parties, the transfer must be recorded in the books of the
corporation.
An assignment, without endorsement and delivery, while valid as among the parties, does not
necessarily make the transfer effective. The assignees cannot enjoy the status of a stockholder,
cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares
are concerned. (Rural Bank of Lipa City, Inc. vs. CA)
Delivery is not essential where it appears that the person sought to be held as stockholders are
officers of the corporation, and have custody of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to have such registered commences to exist. However, it
would not follow that said right should be exercised immediately or within a definite period. (Won
vs. Wack Wack Golf & Country Club, Inc.)
Certificates of stock are not negotiable instruments. Consequently, a transferee under a forged
assignment acquires no title which can be asserted against the true owner, unless his own
negligence has been such as to create an estoppel against him. If the owner of the certificate has
endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for
value. (De Los Santos vs. Republic)
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FORGED AND UNAUTHORIZED TRANSFERS
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Forged and unauthorized transfer – what is forged or unauthorized is the transfer of the certificate
from the true and lawful owner to another person.
Unauthorized issuance of certificate of stock – the act of the corporation in issuing a certificate,
either fraudulently or by mistake.
General rule: In forged or unauthorized transfer of stock the purchaser acquires no title as against
the lawful owner and will have no right or remedy against the corporation (non-negotiability of stock
certificates).
Exception: If after such forged or unauthorized transfer, the corporation issues a new certificate and
such certificate passes into the hands of subsequent bona fide purchaser, the latter may rightfully
acquire title thereto since the corporation will be estopped to deny the validity thereof. The
subsequent purchaser in good faith took the shares by virtue of the genuiness of the certificates
issued by the corporation or of the representation made by the corporation that the same is valid
and subsisting and that the person named therein is a stockholder of the corporation. He may
therefore, compel the corporation to recognize him as a stockholder or claim reimbursement and
damages against the latter.
ISSUANCE OF STOCK CERTIFICATES
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Subscriptions to shares of stock are indivisible. Thus, no certificate of stock shall be issued to a
subscriber until the full amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock
certificate.
The duty of the corporate officers to issue stock certificates to those entitled is a ministerial duty
enforceable by mandamus.
A stockholder whose subscription is not fully paid may not be issued a stock certificate for that
portion already paid. (Fua Cun vs. Summers and China Banking Corporation)
WATERED STOCK
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Watered stock – one which is issued by the corporation as fully paid-up shares when in fact the
whole amount of the value thereof has not been paid.
Directors or officers shall be solidarily liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value received at the time of issuance of the stock
and the par or issued value of the same for the following acts:
1.
Consenting to the issuance of watered stocks; or
2.
Having knowledge thereof, failing to forthwith express his objection in writing and file the
same with the corporate secretary.
All creditors, whether prior or subsequent to the issuance of watered stock may enforce payment of
such water.
Ways in which watered stocks may be issued:
1.
For a monetary consideration less than its par or issued value;
2.
For a consideration in property, tangible or intangible, valued in excess of its fair market
value;
3.
Gratuitously or under an agreement that nothing shall be paid at all; or
4.
In the guise of stock dividends when there are no surplus profits of the corporation.
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Evil effects of stock watering:
1.
The corporation is deprived of its capital thereby hurting its business prospects, financial
capability and responsibility;
2.
Stockholders who paid their subscriptions in full, or promised to pay the same, are injured
and prejudiced by the reduction of their proportionate interest in the corporation; and
3.
Present and future creditors are deprived of corporate assets for the protection of their
interest.
Two theories advanced as the basis for the liability on water stocks:
1.
Trust fund doctrine – treating the capital of the corporation, inclusive of the unpaid portion
of subscriptions to said capital, as a “trust fund” which the creditors have a right to look up
to for the satisfaction of their claims.
2.
Fraud or misrepresentation theory – liability is based on the false representation made by
the corporation and the stockholder concerned to the creditors that the true par value or
issued price of the shared has been paid or promised to be paid full.
Effects of issuance of watered stock:
1.
As to the corporation – when a corporation is guilty of ultra-vires acts which constitute an
injury to or fraud upon the public, or which will tend to injure or defraud the public, the
State may institute a quo-warranto proceeding to forfeit its charter for the misuse or abuse
of its franchise.
2.
As between the corporation and the subscriber – the subscription is void; the subscriber is
liable to pay the full par or issued value thereof, to render it valid and effective.
3.
As to the consenting stockholders – they are estopped from raising any objection thereto.
4.
As to dissenting stockholder – in view of the dilution of their proportionate interest in the
corporation, they may compel the payment of the “water” in the stock solidarily against the
responsible and consenting directors and officers inclusive of the holder of the watered
stock.
5.
As to creditors – they may enforce payment of the difference in the price, or the water in
the stock, solidary against the responsible directors/officers and the stockholders
concerned.
6.
As against transferees of the watered stock – his right is the same as that of his transferor.
If however, a certificate of stock has been issued and duly indorsed to a bona fide
purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at
least as against the corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited from issuing certificates of stock
until the full value of the subscriptions have been paid and could not, therefore, deny the
validity of the stock certificate it issued as against a purchaser in good faith.
Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date
of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest
is fixed in the by-laws, such rate shall be deemed to be the legal rate.
ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
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When unpaid subscription or any percentage thereof, together with interest if required, shall be
paid:
1.
On the date or dates fixed in the contract of subscription; or
2.
On the date or dates that may be specified by the board of directors pursuant to a “call”
declaring any or all unpaid portion thereof to be so payable.
Two possible remedies available to the corporation to enforce payment of unpaid subscription:
1.
By board action (delinquency sale);
2.
By a collection case in court.
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Failure or refusal of the corporation, through its board of directors to enforce or collect payment of
unpaid subscription will not prevent the creditors or the receiver of the corporation to institute a
court action to collect the unpaid portion thereof (trust fund doctrine).
Procedure for the enforcement of payment through board action:
1.
The board of directors, by a formal resolution, declares the whole or any percentage of
unpaid subscriptions to be due and payable on a specific date. However, if the contract of
subscription provides the date or dates when payment is due, no “call” declaration of the
board is necessary;
2.
The stockholders concerned are given notice of the board resolution by the corporation
either personally or by registered mail. Publication of the notice of call is not required
unless the by-laws provide otherwise. Notice is not likewise necessary if the contract of
the subscription stipulates a specific date when any unpaid portion is due and payable;
3.
Payment shall be made in the date specified in the call or on the date provided for in the
contract of subscription;
4.
Failure to pay on the date required in the call or as specified in the contract of subscription
will render the entire balance due and payable and making the stockholder liable for the
interest;
5.
If within 30 days from the date stated in the call or as may be provided in the contract of
subscription no payment is made, all the stock covered by the subscription shall become
delinquent and shall be subject to a delinquency sale;
6.
The board, by resolution, orders the sale of the delinquent stock stating the amount due
and the date, time and place of the sale;
7.
The sale shall be made not less than 30 days nor more than 60 days from the date the
stocks became delinquent;
8.
Notice of the sale, with the copy of the board resolution should be sent to every delinquent
stockholder either personally or by registered mail;
9.
Publication of the notice of sale must be made once a week for two consecutive weeks in
the newspaper of general circulation in the province or city where the principal officer is
located;
10. Sale at public auction if no payment is made by the delinquent stockholder in favor of the
bidder who offered to pay the full amount of the balance in the subscription, inclusive of
interest, cost of advertisement and expenses for the smallest number of shares;
11. Registration or transfer of the shares of stock in the name of the bidder and corresponding
issuance of the stock certificate covering the shares successfully bidded;
12. If there be any remaining shares, the same shall be credited in favor of the delinquent
stockholder who shall be entitled to the issuance of a certificate of stock covering such
shares;
13. If there is no bidder at the public auction who offers to pay the total amount due plus
interest, cost and expenses, the corporation may, subject to the provisions of the Code,
bid for the same and the total amount due shall be credited or paid in full in the corporate
books; and
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14. The shares so purchased by the corporation shall be vested in the latter as treasury
shares.
Highest bidder – is such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, cost of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share.
Grounds to question the delinquency sale:
1.
Irregularity or defect in the notice of sale; or
2.
Irregularity or defect in the sale itself.
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Two conditions before an action to recover delinquent stocks irregularly sold may be allowed:
1.
The party seeking to maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the date of the sale at the
legal rate; and
2.
The action shall be commenced by the filing of a complaint within six months from the
date of the sale.
A “call” is a condition precedent before the right of action to institute a recovery suit accrues. A
demand is required before a debtor may incur a delay in the performance of his obligation.
Instances when a “call” is not necessary:
1.
The contract of subscription provides for a date or dates when payment is due; or
2.
The corporation has become insolvent.
A subscription for shares of stock does not require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the part of the subscriber. The subscriber is as
much bound to pay the amount of the share subscribed by him as he would be to pay any other
debt, and the right of the company to demand payment is no less incontestable. (Velasco vs.
Poizat)
Notwithstanding the fact that the by-laws of the corporation provides for a method for the collection
of the unpaid portion of stock subscriptions, the corporation may still make use of the methods
provided by the Code. (De Silva vs. Aboitiz & Co.)
General rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as
to release the subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
1.
Bona fide compromise;
2.
Set-off of a debt due from the corporation; or
3.
Release supported by consideration. (Lingayen Gulf vs. Baltazar)
The NLRC has no jurisdiction to determine intra-corporate disputes between the stockholder and
the corporation as in the matter of unpaid subscriptions. (Apocada vs. NLRC)
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment.
(Apocada vs. NLRC)
Subscription to the capital of a corporation constitutes a fund to which the creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize assets for the payment of its debt. (Lumanlan vs.
Cura)
The President of the Philippines is devoid of the prerogative of suspending the operation of any
stature or any of its items. Thus the President cannot condone the payment of stock subscriptions
in the event that the counterpart fund to be invested by the government would not be available.
(PNB vs. Bitulok Sawmill, Inc.)
A stockholder is personally liable for the financial obligations of a corporation to the extent of his
unpaid subscription. (Edward Keller & Co., Ltd. vs. Cob Group Marketing, Inc.)
The subscription to capital stock of the corporation, unless otherwise stipulated, is not payable at
the moment of the subscriptions but on a subsequent date which may be fixed by the corporation.
(Garcia vs. Suarez)
Shares of stock become delinquent when no payment is made on the balance of all or any portion
of the subscription on the date or dates fixed in the contract of subscription without need of call, or
on the date specified by the board of directors pursuant to a call made by it.
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General rule: No delinquent stock shall not be entitled to:
1.
Be voted for or to vote;
2.
Representation at any stockholder's meeting; or
3.
Any of the rights of a stockholder.
Exception: Delinquent stocks are entitled to the right to dividends (any cash dividends due on
delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost
and expenses, while stock dividends shall be withheld until his unpaid subscription is paid in full).
General rule: Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.
Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock.
Requirements and procedure for issuance of new certificates of stock in lieu of those lost, stolen or
destroyed:
1.
The registered owner of a certificate of stock in a corporation or his legal representative
shall file with the corporation an affidavit in triplicate setting forth:
a.
The circumstances as to how the certificate was lost, stolen or destroyed;
b.
The number of shares represented by such certificate;
c.
The serial number of the certificate; and
d.
The name of the corporation which issued the same.
2.
He shall also submit such other information and evidence which he may deem necessary.
3.
Publication of a notice in a newspaper of general circulation published in the place where
the corporation has its principal office, once a week for 3 consecutive weeks at the
expense of the registered owner of such certificate of stock.
4.
If no contest has been presented within 1 year from the date of the last publication, the
right to make such contest shall be barred and said corporation shall cancel in its books
the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof
new certificate of stock. However, the registered owner may file a bond or other security,
effective for a period of 1 year, for such amount and in such form and with such sureties
as may be satisfactory to the board of directors, in which case a new certificate may be
issued even before the expiration of the one 1 year period.
5.
If a contest has been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock, the issuance of the new certificate of
stock shall be suspended until the final decision by the court regarding the ownership of
said certificate of stock.

Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
above-described.
RIGHTS AND LIABILITIES OF STOCKHOLDERS

Certain basic rights for the protection of stockholders:
1.
Participation in the management of the corporate affairs by exercising their right to vote
and be voted upon either personally or by proxy;
2.
To enter into a voting trust agreement;
3.
To receive dividends and to compel their declaration if warranted;
4.
To transfer shares of stock subject only to reasonable restrictions inclusive of the right of
the transferee to compel the registration of the transfer in the books of the corporation;
5.
To be issued a certificate of stock for fully paid-up shares;
6.
To exercise pre-emptive rights;
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7.
To exercise their appraisal right;
8.
To institute and file a derivative suit;
9.
To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
11. To be furnished the most recent financial statements of the corporation;
12. To be issued a new stock certificate in lieu of the lost or destroyed one;
13. To have the corporation dissolved;
14. To participate in the distribution of the assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and
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16. In the case of a close corporation, to withdraw therefrom, for any reason, and to compel
the purchase of his shares.
Certain obligations and liabilities of stockholders:
1.
To pay the corporation the balance of his unpaid subscriptions;
2.
To pay interest on his unpaid subscription if required by the by-laws or by the contract of
subscription;
3.
To answer to creditors for the unpaid portion of their subscription;
4.
To answer the “water” in their stocks;
5.
To be liable, as general partners, for all debts, liabilities and damages of ostensible
corporations; and
6.
In case of a close corporation, to be personally liable for corporate torts when they actively
participate in the management of the corporation.
CHAPTER 11: CORPORATE BOOKS AND RECORDS
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Records to be kept and maintained by the corporation:
1.
Records of all business transactions – which include, among others, journals, ledgers,
contracts, vouchers and receipts, financial statements and other books of accounts,
income tax returns, and voting trust agreement which must be kept and carefully
preserved at its principal office.
2.
Minutes of all meetings of stockholders or members and of the directors or trustees setting forth in detail the time and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done thereat which must likewise be kept at the
principal office of the corporation.
3.
Stock and transfer book – showing the names of the stockholders, the amount padi or
unpaid on all stock for which subscription has been made, a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to whom made which must be
kept either in the principal office of the corporation or in the office of its stock transfer
agent.
These corporate books and records, inclusive of all business transactions and minutes of
meetings, are subject to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and a copy of excerpts of said records may be
demanded.
General rule: Any officer or agent of the corporation who refuses to allow the inspection of
corporate books and records, or any director or trustee who through a resolution by the board votes
for such refusal shall be liable for damages and shall be guilty of an offense which shall be
punishable under Sec. 144.
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Exception. It shall be a defense that the person demanding inspection
1.
Has improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation; or
2.
Was not acting in good faith or for a legitimate purpose in making his demand.
Within ten (10) days from receipt of a written request of any stockholder or member, the corporation
shall furnish to him its most recent financial statement, which shall include a balance sheet as of
the end of the last taxable year and a profit or loss statement for said taxable year, showing in
reasonable detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall present
to such stockholders or members a financial report of the operations of the corporation for the
preceding year, which shall include financial statements, duly signed and certified by an
independent certified public accountant. However, if the paid-up capital of the corporation is less
than P50,000.00, the financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation.
The basis of the right of the stockholder to inspect the books and records of the corporation for a
proper purpose is to protect his interest as a stockholder.
General rule: The right of stockholders to examine corporate books extends to a wholly owned
subsidiary which is completely under the control and management of the parent company where he
is such a stockholder. (Gokongwei vs. SEC)
Exception: The subsidiary and the parent are legally being operated as separate and distinct
entities.
The right to inspect corporate books, although personal, may be exercised through an agent or
representative since it may be unavailing in many instances. (W.G. Philpotts vs. Philippine
Manufacturing Co.)
The corporation, or its responsible directors and officers cannot unduly restrict the right of
inspection and may not arbitrarily set a few days of the year within which the stockholder may make
the inspection. (Pardo vs. Hercules Lumber, Co.)
Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable hours. However, there is no absolute right to secure certified copies of
the minutes of the corporation until these minutes have been written up and approved by the
directors. (Vegaruth vs. Isabela Sugar Co., Inc.)
It is a required condition for the inspection of corporate books that the one requesting it must not
have been guilty of using improperly any information secured through a prior examination and that
the person asking for such examination must be acting in good faith and for a legitimate purpose in
making his demand. (Gonzales vs. PNB)
Remedies of a stockholder who is denied inspection of corporate books:
1.
Mandamus;
2.
Damages either against the corporate or the responsible officer; or
3.
Criminal complaint based on Sec. 144 of the Code.
CHAPTER 12: MERGER AND CONSOLIDATION
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Merger – a union effected by absorbing one or more existing corporations by another which
survives and continues the combined business; the uniting of two or more corporations by the
transfer of property to one of them which continues in existence, the other or others being dissolved
and merged therein.
Consolidation – the uniting or amalgamation of two or more existing corporations to form a new
corporation and the termination of existence of the old ones.
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Requirements and procedure for merger or consolidation:
1.
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The board of directors or trustees of each constituent corporation shall approve a plan of
merger or consolidation setting forth the following:
a.
The names of the constituent corporations;
b.
The terms of the merger or consolidation and the mode of carrying the same into
effect;
c.
A statement of changes, if any, in the articles of incorporation; and
d.
Other provisions deemed necessary and desirable.
2.
Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock
or 2/3 of the members in a non-stock corporations of each constituent corporation at
separate corporate meetings called for the purpose;
3.
Prior notice of such meeting, with a copy or summary of the plan of merger or
consolidation shall be given to all stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail stating the purpose thereof;
4.
Execution of the articles of merger or consolidation by each constituent corporation to be
signed by the president or vice-president and certified by the corporate secretary or
assistant secretary setting forth the following:
a.
The plan of the merger or consolidation;
b.
As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
c.
As to each corporation, the number of shares or members voting for and against
such plan, respectively.
5.
Submission of the articles of merger or consolidation in quadruplicate to the SEC subject
to the requirement of that if it involves corporations under the direct supervision of any
other government agency or governed by special laws the favorable recommendation of
the government agency concerned shall first be secured; and
6.
Issuance of the certificate of merger or consolidation by the SEC at which time the merger
or consolidation shall be effective. If the plan, however, is believed to be contrary to law,
the SEC shall set a hearing to give the corporations concerned an opportunity to be heard
upon proper notice and thereafter, the SEC shall proceed as provided in the Code.
Any amendment to the plan of merger or consolidation must be approved by majority vote of the
respective boards of directors or trustees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock or of 2/3 of
the members of each of the constituent corporations.
Mergers and consolidations may not be entered into for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or for purposes of fraud.
Effects of merger or consolidation:
1.
There will only be a single corporation. In case of merger, the surviving corporation, or in
case of consolidation, the consolidated corporation;
2.
Termination of the corporate existence of the constituent corporations, except that of the
surviving or the consolidated corporation;
3.
The surviving or the consolidated corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under the Code;
4.
The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of the constituent corporations; and all property and all
receivables due on whatever account, including subscriptions to shares and other choses
in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
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The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors
or liens upon the property of any of such constituent corporations shall not be impaired by
such merger or consolidation.
Merger or consolidation does not become effective upon the mere agreement of the constituent
corporations. It shall be effective only upon the issuance of a certificate of merger. (Associated
Bank vs. CA)
CHAPTER 13: APPRAISAL RIGHT
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Appraisal right – the method of paying a shareholder for the taking of his property; the statutory
means whereby a stockholder can avoid the conversion of his property into another property not of
his own choosing. The purpose of the right is to protect the property rights of dissenting
stockholders from actions by the majority shareholders which alters the nature and character of
their investment. It is a right granted to dissenting stockholders on certain corporate or business
decisions to demand payment of the fair market value of their shares.
Instances when a stockholder may have the right to dissent and demand payment of the fair value
of his shares:
1.
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In case any amendment to the articles of incorporation has the effect of:
a.
Changing or restricting the rights of any stockholder or class of shares;
b.
Authorizing preferences in any respect superior to those of outstanding shares of
any class; or
c.
Extending or shortening the term of corporate existence.
2.
In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3.
In case of merger or consolidation.
Other instances provided for in the Code:
1.
Investment of corporate funds in another corporation or business or for any other purpose;
2.
In a close corporation, a stockholder has the right to compel the corporation for any
reason to purchase his shares at their fair value which shall not be less than the par or
issued value when the corporation has sufficient assets to cover it debts and liabilities,
exclusive of capital stock.
Requirements and procedure for the exercise of the appraisal right:
1.
The stockholder must have voted against the proposed corporate action in any of the
instances allowed by law for the exercise of the appraisal right;
2.
A written demand for payment must be made by the dissenting stockholder within 30 days
after the date on which the vote was taken. Failure to make the demand within the said
period shall be deemed a waiver of the appraisal right;
3.
Surrender of the certificate of stock by the dissenting stockholder for notation in the
corporate books and payment by the corporation of the fair market value of said shares as
of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action. If the stockholder and the corporation
cannot agree on the fair market value thereof, the same shall be determined by
appraisers;
4.
The corporation must have unrestricted retained earnings in it books to cover the
payment of the fair value of the shares of the dissenting stockholder;
5.
Upon payment of the shares by the corporation, the dissenting stockholder shall transfer
his shares to the corporation.
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Effects of demand for payment of the fair value of a stockholder‟s shares:
1.
From the time of demand for payment – all rights accruing to such shares, including voting
and dividend rights, are suspended, except the right to receive payment.
2.
After either the right ceases or the purchase of the said shares by the corporation – all
rights accruing to such shares are restored and all dividend distributions which would have
accrued on the shares shall be paid to the holder thereof.
If the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.
No demand for payment may be withdrawn unless the corporation consents thereto.
Instances when the right to payment ceases:
1.
The stockholder withdraws his demand for payment with the consent of the corporation;
2.
The proposed corporate action is abandoned or rescinded by the corporation;
3.
The proposed corporate action is disapproved by the SEC where such approval is
necessary;
4.
The SEC determines that such stockholder is not entitled to the appraisal right;
5.
The stockholder fails within 10 days after demanding payment for his shares to submit the
certificates of stock representing his shares to the corporation for notation and the
corporation, at its option, terminates the right.
6.
The shares represented by the certificates bearing such notation are transferred and the
certificates subsequently canceled.
General rule: The costs and expenses of appraisal shall be borne by the corporation.
Exception: The fair value ascertained by the appraisers is approximately the same as the price
which the corporation offered to pay the stockholder.
General rule: In an action to recover the fair value of stocks, all costs and expenses shall be
assessed against the corporation.
Exception: The refusal of the stockholder to receive payment is unjustified.
A dissenting stockholder is required within 10 days after demanding payment for his shares to
submit the stock certificates representing his shares to the corporation for notation. His failure to do
so shall, at the option of the corporation, terminate his rights.
The dissenting stockholder is not prohibited from selling, transferring or assigning his shares. If
such be the case, once the certificates are subsequently canceled, the rights of the transferor as a
dissenting stockholder shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions which would have accrued on such shares shall be paid
to the transferee.
A director who exercises his appraisal right remain to be a director until his shares are no longer
registered in his name.
A stockholder whose subscription is not fully paid is still entitled to exercise his appraisal right.
CHAPTER 14: NON-STOCK CORPORATIONS
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Non-stock corporation - one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of the Code on dissolution.
Even if a corporation has capital stock divided into shares it is considered as non-stock so long as it
does not distribute dividends to its members and officers. (CIR vs. Club Filipino de Cebu)
Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.
The fact that a non-profit corporation earns a profit, gain or income for the corporation or members
does not make it a profit-making corporation where such profit or income is used for the purpose
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set forth in the articles of incorporation and is not distributable to its incorporators, members or
officers, since mere intangible or pecuniary benefits of the members does not change the nature of
the corporation.
The determination of whether or not a non-stock corporation can engage in profit-making business
or activity depends largely on the purpose or purposes indicated in the articles of incorporation. If
the business activity is authorized in the said articles, necessary, incidental or essential thereto, the
same may be undertaken by the corporation, otherwise, not, as it would be an ultra-vires act.
Purposes: Charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any
combination thereof (non-exclusive).
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations.
MEMBERSHIP AND VOTING RIGHTS
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General rule: Each member, regardless of class, shall be entitled to one vote (no cumulative
voting).
Exception: The right to vote is limited, broadened or denied in the articles of incorporation or the bylaws.
General rule: A member may vote by proxy.
Exception: Proxy voting is denied in the articles of incorporation or the by-laws.
Voting by mail or other similar means by members of non-stock corporations may be authorized by
the by-laws of non-stock corporations with the approval of, and under such conditions which may
be prescribed by the SEC.
General rule: Membership in a non-stock corporation and all rights arising therefrom are personal
and non-transferable.
Exception: The articles of incorporation or the by-laws provide otherwise.
Membership in non-stock corporations may be acquired by complying with the provisions of its
rules prescribed in the by-laws. In absence of restrictions, a non-stock corporation may act
arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere. It is
free to fix qualifications for membership and to provide for termination of membership.
General rule: The board of directors of a non-stock corporation shall have the authority to admit
members.
Exception: The by-laws provide otherwise.
Membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws.
General rule: Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property.
Exception: The articles of incorporation or the by-laws provide otherwise.
In terminating membership, strict compliance with the manner and procedure laid down in the bylaws must be observed, otherwise it may render the expulsion ineffective and invalid. (Carmoan vs,
PED)
In absence of any provision in the articles of incorporation or by-laws relative to the manner and
causes of termination, the power is nonetheless inherent in the following situations:
1.
When an offense is committed which, although it has no immediate relation to a member‟s
duty as such, it is so infamous as to render him unfit for society of honest men, and which
is indictable at common law;
2.
When the offense is a violation of his duty as a member of the corporation; and
3.
When the offense is of a mixed nature, being both against his duty as a member of the
corporation, and also indictable at common law.
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As to whether or not a member should be expelled or maintained is the established right of the
corporation to determine and the courts are without authority to strip a member of his membership
without cause.
Courts cannot strip a member of a non-stock corporation of his membership therein without cause.
Otherwise, that would be an unwarranted and undue interference with the well established right of
a corporation to determine its membership. (Chinese YMCA vs. Ching)
TRUSTEES AND OFFICERS
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Non-stock or special corporations may designate their governing boards by any name through their
articles of incorporation or their by-laws.
General rule: The number of trustees in a non-stock corporation may exceed 15.
Exception: The articles of incorporation or the by-laws provide otherwise.
General rule: The term of office of the board of trustees may be staggered. They shall classify
themselves in order that 1/3 of their number shall expire every year and subsequent elections of
trustees comprising 1/3 shall be held annually.
Exception: The articles of incorporation or the by-laws provide otherwise.
Qualifications of trustees:
1.
He is a member of the corporation;
2.
Majority thereof must be residents of the Philippines; and
3.
Other qualifications as may be provided for in the by-laws.
General rule: officers of a non-stock corporation may be directly elected by the members.
Exception: The articles of incorporation or the by-laws provide otherwise.
Trustees elected to fill vacancies occurring before the expiration of a particular term hold office only
for the unexpired period.
General rule: The courts will not interfere on matters involving the internal affairs of an
unincorporated association such as elections, the manner by which it was conducted and the
results thereof. (Lions Club International vs. CA)
Exceptions:
1.
There is fraud, oppression or bad faith;
2.
The action complained of is capricious, arbitrary or unjustly discriminatory;
3.
Property and civil rights are invaded;
4.
The proceedings are violative of the laws of society, or the law of the land, as by depriving
a person of due process of law;
5.
There is lack of jurisdiction on the part of the tribunal conducting the proceedings;
6.
The organization exceeds its powers;
7.
The proceedings are illegal; or
8.
An incorporated association or its members avail of the remedy of instituting an intracorporate dispute case.
General rule: Regular or special meetings of members of a non-stock corporation shall be held in
the city or municipality where the principal office is located, and if practicable in the principal office
of the corporation.
Exceptions:
1.
The by-laws of the corporation provide otherwise; and
2.
Metro Manila is considered a city or municipality.
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Requirements for meetings held outside the location of the principal office as provided for by the
by-laws:
1.
Proper notice is sent to all members indicating the date, time and place of the meeting;
and
2.
The place of meeting must be within the Philippines.
General rule: All proceedings and business transactions at a meeting improperly held or called are
invalid.
Exception: All of the members are present or duly represented at the meeting.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
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Rules of distribution:
1.
All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or
adequate provision shall be made therefore;
2.
Assets held by the corporation upon a condition requiring return, transfer or conveyance,
and which condition occurs by reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3.
Assets received and held by the corporation subject to limitations permitting their use only
for charitable, religious, benevolent, educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution;
4.
Assets other than those mentioned in the preceding paragraphs, if any, shall be
distributed in accordance with the provisions of the articles of incorporation or the by-laws,
to the extent that the articles of incorporation or the by-laws, determine the distributive
rights of members, or any class or classes of members, or provide for distribution; and
5.
In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of
distribution.
Procedure and requirements for a plan of distribution of assets:
1.
Majority vote of the board of trustees adopting a plan of distribution;
2.
Approval of such plan by at least 2/3 of the members having voting rights present or
represented by proxy at a regular or special meeting for that purpose; and
3.
Prior written notice setting forth the proposed plan of distribution or a summary thereof
and the date, time and place of such meeting shall be given to each member entitled to
vote, within the time and in the manner provided in the Code for the giving of notice of
meetings to members.
CHAPTER 15: CLOSE CORPORATIONS
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Close corporation - 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 XV 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.
Absent any of the three requisites, a corporation cannot be considered a close corporation and
would thus be governed by the general provisions on ordinary corporations.
A corporation does not become a close corporation just because a husband and wife owns 99.86%
of the capital stock. (San Juan Structural Steel vs. CA)
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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.
General rule: Any corporation may be incorporated as a close corporation.
Exceptions:
1.
Mining or oil companies;
2.
Stock exchanges;
3.
Banks;
4.
Insurance companies;
5.
Public utilities;
6.
Educational institutions; and
7.
Corporations declared to be vested with public interest.
Sec. 140 authorizes the NEDA to recommend to the legislature the setting of maximum limits to
family or group ownership of stock in corporation vested with public interest, and the determination
of whether or not it should be vested with public interest is within its domain.
The provisions of Title XV of the Code shall primarily govern close corporations. However, the
provisions of other Titles of the Code apply suppletorily.
A close corporation may partake the nature of a partnership in that the stockholders thereof take an
active role in the management of the corporate affairs either as directors, officers or even perhaps
as partners in management which is akin to the partnership form of business.
The articles of incorporation of a close corporation may provide:
1.
For a classification of shares or rights and the qualifications for owning or holding the
same and restrictions on their transfers as may be stated therein;
2.
For a classification of directors into one or more classes, each of whom may be voted for
and elected solely by a particular class of stock;
3.
For a greater quorum or voting requirements in meetings of stockholders or directors;
4.
That the business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision continues in
effect:
5.
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a.
No meeting of stockholders need be called to elect directors;
b.
Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors; and
c.
The stockholders of the corporation shall be subject to all liabilities of directors.
That all officers or employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
In order to bind purchasers in good faith, restrictions on the right to transfer shares must appear in:
1.
The articles of incorporation;
2.
The by-laws; and
3.
The certificate of stock.
Restrictions on the right to transfer shares shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
within reasonable terms, conditions or period. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person.
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Effects of issuance or transfer of stock in breach of qualifying conditions:
CONDITIONS
1. The stock is issued or transferred to a
person not entitled under the articles of
incorporation; and
2. The stock certificate conspicuously
shows the qualifications of the persons
entitled.
1. The articles of incorporation states the
number of persons, not exceeding 20,
who are entitled to be holders of record
of its stock
2. The stock certificate conspicuously states
such number; and
3. The issuance or transfer of stock causes
the stock to be held by more than such
number of persons.
1. The stock certificate conspicuously
shows a restriction on transfer of stock;
2. The transfer violates the restriction.
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EFFECTS
The transferee is conclusively presumed to
have notice of his ineligibility to be a
stockholder.
The transferee is conclusively presumed to
have notice of this fact.
The transferee is conclusively presumed to
have notice of this fact.
General rule: A close corporation may refuse to register the transfer of stock in the name of the
transferee who has or is conclusively presumed to have notice that:
1.
He is not eligible to be a holder of stock of the corporation;
2.
Transfer of stock to him causes the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to hold stock of the
corporation; or
3.
The transfer of stock is in violation of a restriction on transfer of stock.
Exceptions:
1.
The transfer of stock has been consented to by all the stockholders; or
2.
The close corporation has amended its articles of incorporation.
Options granted to the transferee:
1.
Rescind the transfer; or
2.
Recover under any applicable warranty, express or implied.
The term "transfer" is not limited to a transfer for value.
Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to
the extent that such agreements are not inconsistent with the articles of incorporation, irrespective
of where the provisions of such agreements are contained, except those required by this Title to be
embodied in said articles of incorporation.
An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
them.
No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make
them partners among themselves.
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A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability insurance.
Sec. 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall nevertheless
be deemed valid if:
General rule: Any action by the directors of a close corporation without a meeting is invalid.
Exceptions:
1.
Written consent is signed by all the directors;
2.
All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing;
3.
The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4.
All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.
(If a director's meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless he
promptly files his written objection with the secretary of the corporation after having
knowledge thereof.)
Exception to the exceptions: The by-laws provide otherwise.
General rule: The pre-emptive right of stockholders in close corporations shall extend to all stock to
be issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts.
Exception: The articles of incorporation provide otherwise.
Any amendment to the articles of incorporation which seeks to:
1.
Delete or remove any provision required by Title XV of the Code to be contained in the
articles of incorporation, or
2.
Reduce a quorum or voting requirement stated in said articles of incorporation,
must be approved by the affirmative vote of at least 2/3 of the outstanding capital stock, whether
with or without voting rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions,
at a meeting duly called for the purpose.
Deadlock - the directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action cannot be
obtained, with the consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally.
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In case of a deadlock and upon written petition by any stockholder, the SEC has the power to
arbitrate the dispute and the authority to:
1.
Cancel or alter any provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement;
2.
Cancel, alter or enjoin any resolution or act of the corporation or its board of directors,
stockholders, or officers;
3.
Direct or prohibit any act of the corporation or its board of directors, stockholders, officers,
or other persons party to the action;
4.
Require the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books, or
by the other stockholders;
5.
Appoint a provisional director;
6.
Dissolve the corporation; or
7.
Grant such other relief as the circumstances may warrant.
Provisional director:
1.
A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose
further qualifications, if any, may be determined by the SEC.
2.
A provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver.
3.
A provisional director shall have all the rights and powers of a duly elected director of the
corporation, including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the SEC or by all the stockholders.
4.
His compensation shall be determined by agreement between him and the corporation
subject to approval of the SEC, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the
corporation.
Any stockholder of a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value, when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock.
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution
of such corporation whenever:
1.
Any of acts of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder; or
2.
Corporate assets are being misapplied or wasted.
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Close corporations distinguished ordinary stock corporations
CLOSE CORPORATION
1. The number of stockholders cannot
exceed 20.
2. The number of directors can effectively
be more than 15.
3. Shares of stock are subject to specified
restrictions.
4. Shares of stock are prohibited from
being listed in the stock exchange or
offered for sale to the public.
5. Stockholders may take an active part in
corporate management by vesting
management to them rather than the a
board of directors.
6. Those active in management are
personally liable for corporate torts
unless the corporation has obtained an
adequate liability insurance.
7. Directors can validly act even without a
meeting.
8. Agreements
between
stockholders
regarding the operations of the business
can validly be made.
9. To the extent that directors may be
classified into one or more classes and
to be voted solely by a particular class of
stock, cumulative voting may, in effect,
be restricted.
10. The articles of incorporation may provide
that all officers shall be elected or
appointed by the stockholders.
11. It may provide for greater quorum and
voting requirements in meetings of
stockholders and directors.
12. Restrictions on transfer of shares should
be indicated in the articles of
incorporation,
by-laws
and
stock
certificates.
13. Pre-emptive rights of stockholders is
broader as it includes all issues without
exception.
14. A stockholder may withdraw and compel
the corporation to purchase his shares
for any reason with the limitation only
that the corporation has sufficient assets
to cover its liabilities exclusive of capital
stock.
15. The proper forum may interfere in the
management of a close corporation in
case of deadlocks under Sec. 104, even
if the directors/stockholders are acting in
good faith.
16. Any stockholder may petition the Sec for
corporate dissolution on grounds among
others, provided for in Sec. 105.,
ORDINARY STOCK CORPORATION
1. No limitation as to number of
shareholders.
2. Maximum number of directors is 15
3. Generally no restriction on transfer of
shares.
4. No prohibition.
5. Management is lodged in the board of
directors.
6. Directors are liable for torts only if they
have acted negligently or fraudulently.
7. Directors must, as a rule, act as a body
at a duly constituted meeting.
8. Not valid and binding since stockholders‟
agreement cannot limit the discretion of
the Board to manage corporate affairs.
9. Ordinarily, no such classification and no
restrictions on cumulative voting.
10. Officers are elected by the Board of
Directors.
11. Although the articles of incorporation or
by-laws may provide for greater quorum
and voting requirements in directors‟
meetings under Sec. 25, those for
stockholders‟ meetings cannot generally
be altered.
12. Valid and binding if indicated in the
articles of incorporation and stock
certificates.
13. Pre-emptive rights may be denied as
provided for in Sec. 39.
14. Unless he sells his shares, a stockholder
cannot get back his investment nor
compel the corporation to buy his shares
except in the exercise of his appraisal
right.
15. Courts cannot interfere in the business
judgment of the directors/stockholders.
16. Dissolution may be had only on the
grounds provided by the provisions of
the Code on dissolution and PD 902-A,
as amended.
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In a close corporation, a corporate action taken at a board meeting without proper call or notice is
deemed ratified by the absent director unless the latter promptly files his written objection with the
secretary of the corporation after having knowledge of the meeting. (Manuel Dulay Enterprises vs.
CA)
Stockholders who actively engage in the management or operation of the business and affairs of a
close corporation shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. Essentially a tort consists in the violation of a right given or
the omission of a duty imposed by law. Article 283 of the Labor Code mandates the employer to
grant separation pay to employees in case of closure or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses. CFTI failed to comply with this
law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the
management or operation of the business should be held personally liable. (Naguiat vs. NLRC)
CHAPTER 16: SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS
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Educational corporations – those which provide facilities for teaching or instruction.
Educational corporations are governed primarily by special laws and secondarily by the Code.
Educational institutions are required to incorporate within 90 days after their recognition as such.
However, failure to comply will not immune the educational institution from suit as a corporation.
A favorable recommendation of the Secretary of Education, Culture and Sports is required before
the SEC accepts or approves the articles of incorporation or by-laws of any educational institution.
Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15, in
multiples of 5.
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of 1/5 of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold
office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for 5 years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall be defined in the bylaws.
For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.
General rule: Educational institutions shall be owned solely by citizens of the Philippines or
corporations or associations at least 60% of the capital of which is owned by such citizens. The
control and administration of educational institutions shall be vested in citizens of the Philippines.
Exception: Educational institutions established by religious groups and mission boards.
General rule: No educational institution shall be established exclusively for aliens and no group of
aliens shall comprise more than 1/3 of the enrollment in any school.
Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their
dependents and, unless otherwise provided by law, for other foreign temporary residents.
RELIGIOUS CORPORATIONS
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Religious corporation – one composed entirely of spiritual persons which is created for the
furtherance of religion or perpetuating the rights of the church or for the administration of church or
religious work or property.
Classes of religious corporations:
1.
Corporations sole; and
2.
Religious societies.
Religious corporations are governed by the appropriate chapter of the Code and the general
provisions on non-stock corporations.
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Corporation Sole
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Corporation sole – consists of one person only and his successor in some particular station, who
are incorporated by law in order to give them some legal capacities and advantages, particularly
that of perpetuity, which in their natural persons they could not have had.
Purpose – Administration and management, as trustee, of the affairs, properties and temporalities
of any religious denomination, sect or church.
Who – Chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sect or church.
Requirements and procedure of incorporation:
1.
The chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church must file the articles of incorporation with the SEC
which must contain the following:
a.
That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder
of his religious denomination, sect or church and that he desires to become a
corporation sole;
b.
That the rules, regulations and discipline of his religious denomination, sect or
church are not inconsistent with his becoming a corporation sole and do not
forbid it;
c.
That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder,
he is charged with the administration of the temporalities and the management of
the affairs, estate and properties of his religious denomination, sect or church
within his territorial jurisdiction, describing such territorial jurisdiction;
d.
The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be filled, according
to the rules, regulations or discipline of the religious denomination, sect or church
to which he belongs; and
e.
The place where the principal office of the corporation sole is to be established
and located, which place must be within the Philippines.
2.
The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.
3.
The articles of incorporation must be:
Verified by affidavit or affirmation of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be;
Accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder; and
Duly certified to be correct by any notary public.
4.
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From and after the filing of the aforementioned documents with the SEC, such chief
archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation
sole.
All temporalities, estate and properties of the religious denomination, sect or church administered
or managed by the corporation sole shall be held in trust for the use, purpose, behalf and sole
benefit of the religious denomination, sect or church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
A provision relative to its term of existence is not required since a corporation sole is supposed to
exist in perpetuity.
General rule: A corporation acquires juridical personality only upon the issuance of a certificate of
incorporation by the SEC.
Exception: A corporation sole becomes endowed with corporate personality after filing of the
verified articles of incorporation together with other required documents.
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A corporation sole may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or gifts for such
purposes.
General rule: A court order is required before a corporation sole may sell or mortgage real property
held by it. Before such an order is granted, a verified petition must be made by the chief
archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole and it must
be shown that notice of the application has been given as directed by the court and that it is to the
interest of the corporation that the petition be granted. However, such application may be opposed
by any member of the religious denomination, sect or church represented by the corporation sole.
Exception: Court intervention is not necessary when the rules, regulations and discipline of the
religious denomination, sect or church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and
personal property.
Registration of real property in the name of the corporation sole does not vest ownership unto the
head thereof.
The constitutional requirement that 60% of the capital of a corporation must be owned by Filipino
citizens before it may register land in its own name does not apply to a corporation sole. A
corporation sole has no nationality and the framers of the constitution did not have in mind the
corporation sole when it provided for such requirement. (Roman Catholic Apostolic Adm. of Davao,
Inc. vs. LRC)
Whether or not a corporation sole, or any private corporation for that matter, can acquire alienable
land of the public domain depends upon the character of the land at the time of the institution of the
registration proceeding. If it still forms part of the public domain, no. If it is private, yes. (Republic
vs. INC)
Under the Public Land Act, alienable public land may be subject to registration by a possessor if
he, personally or through his predecessor-in-interest, had openly, continuously, exclusively and
notoriously possessed the same for 30 years. The law creates the legal fiction whereby the land,
upon completion of the requisite period ipso jure and without the need of judicial or other sanction,
ceases to be public land and becomes private property. (Director of Lands vs. CA)
In case of vacancy in the office of the “head” of the corporation, the person authorized by the rules,
regulations or discipline of the denomination shall exercise all the powers and authority of the
corporation sole during such vacancy and until such vacancy has been filled-up.
The successors in office shall become the corporation sole and shall be permitted to transact
business as such only upon the filing with the SEC of a copy of their commission, certificate of
election, or letters of appointment, duly certified by a notary public.
Requirements for the voluntary dissolution of corporations sole:
1.
2.
Filing with the SEC of a verified declaration of dissolution which must set forth the
following:
a.
The name of the corporation;
b.
The reason for dissolution and winding up;
c.
The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
d.
The names and addresses of the persons who are to supervise the winding up of
the affairs of the corporation.
Approval of the SEC.
Religious Societies
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Religious society – a body of person associated together for the purpose of maintaining religious
worship.
Purpose – the administration of its temporalities or for the management of its affairs, properties and
estate
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Who – any religious society or religious order, or any diocese, synod, or district organization of any
religious denomination, sect or church.
Requirements and procedure for incorporation:
1.
Filing of the articles of incorporation with the SEC;
2.
The articles of incorporation must set forth the following:
a.
That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
b.
That at least 2/3 of its membership have given their written consent or have
voted to incorporate, at a duly convened meeting of the body;
c.
That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of the
religious denomination, sect, or church of which it forms a part;
d.
That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs, properties
and estate;
e.
The place where the principal office of the corporation is to be established and
located, which place must be within the Philippines; and
f.
The names, nationalities, and residences of the trustees elected by the religious
society or religious order, or the diocese, synod, or district organization to serve
for the first year or such other period as may be prescribed by the laws of the
religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than 5 nor more than 15.
3.
The articles of incorporation must be verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church.
4.
Issuance of the SEC of the certificate of incorporation.
The articles of incorporation of a religious society need not indicate a term since it is supposed to
exist in perpetuity.
CHAPTER 17: DISSOLUTION
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Dissolution – the extinguishment of the corporate franchise and the termination of corporate
existence.
General rule: When a corporation is dissolved, it ceases to be a juridical entity and can no longer
pursue the business for which it is incorporated.
Exception: The corporation will continue as a body corporate for another period of 3 years from the
time it is dissolved for the purpose of winding up its affairs and the liquidation of its assets.
Three modes of dissolution:
1.
By expiration of the corporate term;
2.
By voluntary surrender of its primary franchise (voluntary dissolution); or
3.
By the revocation of its corporate franchise (involuntary dissolution).
EXPIRATION OF CORPORATE TERM
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General rule: A corporation registered under the Corporation Code is required to indicate its term of
existence in the articles of incorporation.
Exceptions:
1.
Corporations sole; and
2.
Religious societies.
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A corporation ceases to exist and is automatically dissolved upon the expiration of the term
indicated in its articles of incorporation without the need of formal proceeding. There is no need to
for the institution of a proceeding for quo warranto to determine the time and date of the dissolution
of a corporation because the period of corporate existence is provided in the articles of
incorporation. (PNB vs. CFI)
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)

Three modes of voluntary dissolution:
1.
Voluntary dissolution where no creditors are affected;
2.
Voluntary dissolution where creditors are affected; and
3.
Shortening of corporate term.
Voluntary dissolution where no creditors are affected
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Formal and procedural requirements for voluntary dissolution where no creditors are affected:
1.
Majority vote of the board of directors or trustees;
2.
Sending of notice to each stockholder or member either by registered mail or personal
delivery at least 30 days prior to the meeting (scheduled by the board for the purpose of
submitting the board action to dissolve the corporation for approval of the stockholders or
members);
3.
Publication of the notice of time, place and subject of the meeting for 3 consecutive weeks
in a newspaper published in the place where the principal office of said corporation is
located or in a newspaper of general circulation in the Philippines;
4.
Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the
outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose;
5.
A copy of the resolution authorizing the dissolution must be certified by a majority of the
board of directors or trustees and countersigned by the corporate secretary; and
6.
Issuance of a certificate of dissolution by the SEC.
The requirements and formalities provided by law for the dissolution of corporations are mandatory
such that failure to comply therewith will have no effect on the legal existence of the corporation. A
corporation being a creation of law may only terminate its existence in the manner prescribed by
law.
A mere resolution by the stockholders or the board of directors of a corporation to dissolve the
same does not affect the dissolution of a corporation. (Daguhoy Enterprises vs. Ponce)
Voluntary dissolution where creditors are affected

Formal and procedural requirements for voluntary dissolution where creditors are affected:
1.
Affirmative vote of the stockholder representing at least 2/3 of the outstanding capital
stock or at least 2/3 of the members at a meeting duly called for that purpose;
2.
Petition for the dissolution shall be filled with the SEC signed by the majority of its board of
directors or trustees or other officers having the management of its affairs, verified by the
president or secretary or one of its directors or trustees, setting forth all claims and
demands against it;
3.
Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on
or before which objections thereto may be filed by any person, which date shall not be
less than 30 days nor more than 60 days after entry of the order;
4.
Before such date, a copy of the order must be published once a week for 3 consecutive
weeks in a newspaper of general circulation published in the city or municipality where the
principal office is situated or in a newspaper of general circulation in the Philippines;
5.
Posting of the same order for 3 consecutive weeks in 3 public places in such city or
municipality;
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6.
Upon 5 days notice, given after the date on which the right to file objects has expired, the
SEC shall hear the petition and try any issue made by the objections filed; and
7.
Judgment dissolving the corporation and directing disposition of its assets as justice
requires and the appointment of a receiver (if necessary in the court‟s discretion) to collect
such assets and pay the debts of the corporation.
The appointment of a receiver is only permissive and not mandatory. The law is intended to let the
stockholders have control of the assets of the corporation upon dissolution and winding up of its
affairs.
Dissolution by shortening the corporate term
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Procedure to shorten the corporate term:
1.
Approval by a majority vote of the board or directors or trustees.
2.
Written notice of the proposed action and the time and place of meeting shall be served to
each stockholder or member either by mail or by personal service.
3.
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4.
Submission of the amended articles of incorporation to the SEC.
5.
Approval of the SEC.
In case of a corporation sole, an authorization for the dissolution by the particular religious
denomination, sect or church is necessary.
A vote must cast at a duly constituted meeting. Written assent is insufficient.
It is only upon the approval of the SEC that the corporation is deemed dissolved.
INVOLUNTARY DISSOLUTION
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Requirements for involuntary dissolution by the SEC:
1.
Filing of a verified complaint; and
2.
Proper notice and hearing on the grounds provided by laws, rules and regulations.
Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC under Sec. 5 of PD
902-A to the Special Commercial Courts, the same law granted the SEC concurrent jurisdiction
over revocation proceedings. Sec. 5 (m) of RA 8799 provides that the SEC shall have the power to
suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any ground provided by law.
Grounds for involuntary dissolution under Sec. 6, PD 902-A:
1.
Fraud in procuring the certificate of registration;
2.
Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of or damage to the general public;
3.
Refusal to comply or defiance of any lawful order of the Commission restraining
commission of acts which would amount to a grave violation of its franchise;
4.
Continuous inoperation for a period of at least 5 years;
5.
Failure to file by-laws within the required period; and
6.
Failure to file required reports in appropriate forms as determined by the Commission
within the prescribed period.
Other grounds provided for the in Corporation Code:
1.
Violation of any provision of the Code (Sec. 144);
2.
In case of deadlock in a close corporation (Sec. 105);
3.
In a close corporation, any acts of directors, officers or those in control of the corporation
which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the
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corporation or any stockholder or whenever corporate assets are being misapplied or
wasted (Sec. 105).
Other grounds can be found in special laws, e.g. the Securities Regulation Code and the General
Banking Act.
Courts proceed with extreme caution in the proceeding which have for their object the forfeiture of
corporate franchises, and a forfeiture will not be allowed, except under express limitation, or for a
plain abuse of power by which the corporation fails to fulfill the design and purpose of its
organization. But when such abuses and violations constitute or threaten a substantial injury to the
public or such as to amount to a violation of the fundamental conditions of the contract (charter) by
which the franchise were granted and thus defeat the purpose of the grant, then dissolution will be
granted. (Government vs. Philippine Sugar Estates Co.)
The court has a discretion with respect to the infliction of capital punishment upon corporations and
there are certain misdemeanors and misusers of franchises which should not be recognized as
requiring their dissolution. (Government vs. El Hogar)
That the corporation is guilty of willful and repeated violation of the law and that its continuance
inflicts substantial injury to the public warrants its dissolution. (Republic vs. Security Credit)
Relief by dissolution will be awarded only where no other adequate remedy is available, and is not
available where the rights of the stockholders can be, or are, protected in some other way. The
several acts of misuse and misapplication of the funds and/or assets of the corporation were
committed more particularly by the corporation‟s president, for the commission of which they may
be held personally liable. (Republic vs. Bisaya Land Transportation Co., Inc.)
Under the present state of law, any stockholder or member of a corporation can institute a
dissolution proceeding against his own corporation before the proper forum.
The Special Commercial Courts, shall hear and decide cases involving intra-corporate dispute or
partnership relations between and among stockholders, members or associates; between any or all
of them and the corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such entity. (PD 902-A)
The SEC has concurrent jurisdiction to suspend, revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnership or associations upon any of the
grounds provided by law. (Sec. 5(m) RA 8799)
The existence of a de jure corporation may be determined in a private suit for its dissolution
between stockholders, without intervention of the State. (Hall vs. Piccio)
In a close corporation, a petition for the dissolution of the corporation may be instituted by any
shareholder on the ground of mere dishonesty.
EFFECTS OF DISSOLUTION
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No right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired by the subsequent dissolution of said
corporation.
Dissolution terminates a corporation‟s primary franchise and generally prevents it from further
exercising other or secondary franchises which have been conferred to it.
Dissolution terminates the corporation‟s power to enter into contracts or to continue the business as
a going concern. (Hall vs. Piccio)
General rule: In a lease to a corporation, the rights and obligations thereunder are not extinguished
by the corporation‟s dissolution since leases affect property rights and survives the death of parties.
The stockholders succeed to the rights and liabilities of the dissolved corporation in an unexpired
leasehold state which may be enforced by or against the receiver or liquidating trustee.
Exception: The lease, by its terms, terminates when the corporation ceases to exist.
Contracts for personal services are deemed terminated by the dissolution of the corporation. There
is an implied condition that the contract shall terminate in such event. (Gelano vs. CA)
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A dissolved corporation has no juridical personality; it ceases to exist as a corporation and cannot
apply for a new certificate or a secondary franchise. (Buenaflor vs. Camarines Sur Industry Corp.)
The 3-year period allowed by the law is only for the purpose of liquidation or winding up of
corporate affairs. No act can be done for the purpose of continuing the business for which it was
established. Neither can it enforce a contract executed prior to its dissolution. (Cebu Port Labor
Union vs. State Marine Co.)
The termination of the life of a juridical entity does not, by itself, imply the diminution or extinction of
rights demandable against such juridical entity. Debts due to or against the corporation will not be
extinguished. Otherwise, it will amount to an impairment of contracts or a denial of due process.
(Gonzales vs. Sugar Regulatory Administration)
LIQUIDATION AND WINDING UP
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Liquidation and winding up – the collection of all corporate assets, the payments of all its debts and
settlement of its obligations and the ultimate distribution of the corporate assets, if any of it remains,
to all stockholders in accordance with their proportionate stockholdings in the corporation or in
accordance with their respective contracts of subscription (e.g. preferred stocks).
A dissolved corporation continues as a body corporate for a period of 3 years from the time of
dissolution for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all
of its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated to the city or municipality where
such assets are located.
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.
Exceptions:
1.
By decrease of capital stock; or
2.
As otherwise allowed the Code.
Three methods of liquidation:
1.
By the corporation itself though the Board of Directors.
2.
By a Trustee appointed by the corporation.
3.
By appointment of a receiver.
Mere appointment of a receiver without anything more does not imply the dissolution of a
corporation.
Pending actions by or against a corporation are abated upon expiration of the period allowed by
law for the liquidation of its affairs; but trustees to whom the corporate assets have been conveyed
may sue or be sued as such in all matters connected with the liquidation. The effect of conveyance
is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest
therein of creditors and stockholders. (National Abaca Other Fibers Co. vs. Pore)
If the corporation carries out the liquidation of its assets through its own officers and continues and
defends the actions brought by or against it, its existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or assignee is appointed, as has been done in the
present case, with or without a transfer of its properties within three years, the legal interest passes
to the assignee, the beneficial interest remaining in the members, stockholders, creditors and other
interested persons; and said assignee may bring an action, prosecute that which has already been
commenced for the benefit of the corporation, or defend the latter against any other action already
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instituted or which may be instituted even outside of the period of three years fixed for the offices of
the corporation. (Sumera vs. Valencia)
(Board of Liquidators vs. Kalaw)
The counsel who prosecuted and defended the interest of the corporation and who appeared in
behalf of the corporation may be considered a trustee of the corporation at least with respect to the
matter in litigation only. The word “trustee” must be understood in its general concept. (Gelano vs.
CA)
A claim established against the corporation may be prosecuted against the liquidator of such
corporation even after the three years from its dissolution. (Republic vs. Marsman Development
Company)
Upon dissolution of the corporation its assets are held for the benefit of its stockholder after
payment of its debts and will be so distributed to the said stockholder in accordance with their
proportionate interest in the corporation or their contracts of subscription.
Holders of preferred shares may be granted certain rights or privileges upon dissolution.
General rule: The board of directors of a dissolved corporation is not permitted to undertake any
activity outside of the usual liquidation of the corporation.
Exception: The stockholders of a dissolved corporation may convey their respective shareholdings
toward the creation of a new corporation to continue the business of the old. Winding up is the sole
activity of a dissolved corporation that does not intend to incorporate a new. (Chung Ka Bio vs.
IAC)
If the three year period of liquidation has elapsed and no effort to finally settle or close the
corporate affairs was undertaken, those having pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors, acting for and its behalf, may make proper
representations with the SEC for working out a final settlement of the corporate concern. (Clemente
vs. CA)
Note: The above decision is an aberrant ruling. Once the three year period for liquidation and
winding up has elapsed without any trustee or receiver being appointed, the assets of the
corporation will be escheated in favor of the Government thus barring the claims of stockholders
and creditors.
CHAPTER 18: FOREIGN CORPORATIONS
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Foreign corporation – one formed, organized or existing under any laws other than those of the
Philippines (and whose laws allow Filipino citizens and corporations to do business in its own
country or state).
The phrase “whose laws allow Filipino citizens and corporations to do business in its own country
or state” is a mere condition precedent to the grand of a license of a foreign corporation to do
business in the Philippines.
General rule: The “incorporation test” is applied in determining whether a corporation is domestic or
foreign. If it is incorporated in another state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the nationality of its
stockholders.
Exception: In times of war, the “control test” would apply in determining the corporate nationality,
i.e., the citizenship of the controlling stockholders determines the nationality of the corporation.
General rule: A corporation can have no legal existence outside the boundaries of the sovereign by
which it is created.
Exception: By virtue of state comity, a corporation created by laws of one state is usually allowed to
transact business in other states and to sue in the courts of the forum, subject to restrictions and
certain requirements imposed therein.
Requisites for a foreign corporation to transact business in the Philippines:
1.
A license or permit to do so; and
2.
A certificate of authority from the appropriate government agency.
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Procedure for application of a license:
1.
Submission to the SEC of its articles of incorporation and by-laws, certified in accordance
with law, and their translation to an official language of the Philippines, if necessary.
2.
The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
a.
The date and term of incorporation;
b.
The principal office of the corporation in the country or state of incorporation;
c.
The resident agent;
d.
The place in the Philippines where the corporation intends to operate;
e.
The purpose or purposes of the corporation;
f.
The directors and officers of the corporation;
g.
Its authorized capital stock;
h.
Its outstanding capital stock;
i.
The amount actually paid in; and
j.
Such additional information as may be necessary or appropriate in order to
enable the SEC to determine whether such corporation is entitled to a license to
transact business in the Philippines, and to determine and assess the fees
payable.
3.
Attached to the application for license shall be a duly executed certificate under oath by
the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact
that the laws of the country or state of the applicant allow Filipino citizens and corporations
to do business therein, and that the applicant is an existing corporation in good standing. If
such certificate is in a foreign language, a translation thereof in English under oath of the
translator shall be attached thereto.
4.
The application for a license to transact business in the Philippines shall likewise be
accompanied by a statement under oath of the president or any other person authorized
by the corporation, showing to the satisfaction of the Securities and Exchange
Commission and other governmental agency in the proper cases that the applicant is
solvent and in sound financial condition, and setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year immediately prior to the filing of the
application.
5.
Foreign banking, financial and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the case
of all other foreign corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange Commission without
previous authority from the appropriate government agency, whenever required by law.
Foreign corporations already issued a license to transact business in the Philippines prior to the
effectivity of the Code continue to have such authority under the terms and conditions of its license,
subject to the provisions of the Code and other special laws.
Upon compliance with the provisions of Sec. 125, other special laws and the rules and regulations
implementing them, the SEC shall thereafter issue the license.
Upon issuance of the license, such foreign corporation may commence to transact business in the
Philippines and continue to do so for as long as it retains its authority to act as a corporation under
the laws of the country or state of its incorporation, unless such license is sooner surrendered,
revoked, suspended or annulled in accordance with this Code or other special laws.
Within 60 days after the issuance of the license, a foreign corporation, except those engaged in
foreign banking or insurance, shall deposit with the SEC, for the benefit of creditors, securities
consisting of bonds or other evidence of indebtedness of the Philippine government or its political
subdivisions or instrumentalities, or of government owned or controlled corporations and entities,
shares of stock in “registered enterprises,” shares of stock in domestic insurance companies and
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banks, or any combination thereof, with an actual market value of P100,000.00. Additional
securities may be required by the SEC if the actual market value of the securities on deposit has
decreased by at least 10%.
The objective of the law requiring the license is not to prevent the foreign corporation from
performing isolated or single acts, but to prevent it from acquiring a domicile for the purpose of
pursuing its business without taking steps to render it amendable to suit in the local courts.
(Marshall-Wells Co. vs. H. W. Elser & Co.)
MODES OF ENTRY OF FOREIGN CORPORATIONS
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Modes of entry of foreign corporations:
1.
Branch office;
2.
Representative or liaison office;
3.
Local subsidiary;
4.
Regional or area headquarters;
5.
Regional operating headquarters;
6.
Regional warehouse; or
7.
Joint venture.
RESIDENT AGENT
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The appointment of a resident agent is a condition precedent to the issuance of a license to
transact business in the Philippines by a foreign corporation.
The following may be appointed as a resident agent:
1.
An individual residing in the Philippines, of good moral character and of sound financial
standing; or
2.
A domestic corporation lawfully transacting business in the Philippines (includes
partnerships such as law firms and accounting firms).
The necessity of the appointment of a resident agent is only for the purpose of receiving summons
and other legal processes in any legal action or proceeding against the foreign corporation.
Modes of service of summons upon a foreign corporation:
1.
Service upon the resident agent – service upon the resident agent is mandatory if the
foreign corporation is license to do business in the Philippines;
2.
Service upon the SEC – if the licensed foreign corporation has ceased to transact
business in the Philippines or has no resident agent in the Philippines; or
3.
Service upon any of its officers or agents within the Philippines.
DOING BUSINESS WITHOUT A LICENSE
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General rule: No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines
Exception: Such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.
A foreign corporation cannot transact business in the Philippines without the requisite license. If it
does so, the responsible officers may be subjected to the penal provisions of Sec. 144.
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General rules regarding whether or not a foreign corporation may sue or be sued in the Philippines:
1.
2.
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As to whether or not it can sue.
a.
A foreign corporation transacting or doing business in the Philippines with a
license can sue before Philippine Courts.
b.
Subject to certain exceptions, a foreign corporation doing business in the country
without a license can not sue in Philippine Courts.
c.
If it is not transacting business in the Philippines, even without a license, it can
sue before the Philippine Courts.
As to whether it can be sued or not.
a.
A foreign corporation transacting business in the Philippines with the requisite
license can be sued in the Philippines.
b.
A foreign corporation transacting business in the Philippines without a license
can be sued in Philippine courts.
c.
If it is doing business in the Philippines, it cannot be sued in Philippine courts for
lack of jurisdiction.
It is not the lack of required license but doing business without a license which bars a foreign
corporation from access to our courts. (Universal Shipping vs. IAC)
General rule: A foreign corporation must have the requisite license to sue before the Philippine
courts.
Exceptions:
1.
The act or transaction involved is an “isolated transaction;”
2.
The foreign corporation is not seeking to enforce any legal or contractual rights arising
from, or growing out of any business which it has transacted in the Philippines;
3.
The purpose of the suit is to protect its trademark, tradename, corporate name, reputation
or goodwill;
4.
The suit is based on a violation of the Revised Penal Code;
5.
The foreign corporation is merely defending a suit filed against it;
6.
The party is estopped to challenge the personality of the corporation by entering into a
contract with it.
Exception to an exception: Where a single act or transaction however, is not merely incidental or
casual but indicates the foreign corporation‟s intention to do other business in the Philippines, said
single act or transaction constitutes „doing‟ or „engaging in‟ or „transacting‟ business in the
Philippines.
The true test regarding “doing” or “engaging in” or “transacting” business is whether the foreign
corporation is continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another. The term
implies a continuity of commercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions normally incident to, and
in progressive prosecution of, the purpose and object of its organization. (Mentholatum Co., Inc. vs.
Mangaliman)
The object of the statute was to subject the foreign corporation doing business in the Philippines to
the jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation
from performing single acts, but to prevent is from acquiring domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in the local courts. The law simply
means that no foreign corporation shall be permitted “to transact business in the Philippine Islands”
unless it shall have the license required by law, and until it complies with the law, shall not be
permitted to maintain any suit in the local courts. (Marshall-Wells Co. vs. Henry W. Elser & Co.)
A foreign corporation not engaged in business in the Philippines may not be denied the right to file
an action in Philippine courts for isolated transactions. (Bulakhidas vs. Navarro)
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If A foreign corporation not engaged in business in the Philippines has the right to sue on an
isolated transaction, more so may it sue based on a mistake. (Swedish East Asia Co., Ltd. vs.
Manila Port Service)
There was only one agreement between petitioners and the respondent. The three seemingly
different transactions were entered into by the parties only in an effort to fulfill the basic agreement
and in no way indicate an intent on the part of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as a foreign corporation doing business in the
Philippines. The respondent, being a foreign corporation not doing business in the Philippines,
does not need to obtain a license to do business in order to have the capacity to sue. (Atnam
Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase „doing business‟ has been exemplified with illustrations,
among them being as follows:
1.
Soliciting orders, purchase (sales) or service contracts. Concrete and specific solicitations
by a foreign firm, not acting independently of the foreign firm amounting to negotiation or
fixing of the terms and conditions of sales or service contract, regardless of whether the
contracts are actually reduced to writing, shall constitute doing business even in the
enterprise has no office or fixed place of business in the Philippines.
2.
Appointing a representative or distributor who is domiciled in the Philippines unless said
representative or distributor has an independent status, i.e., it transacts business in its
name and for its own account, and not in the name or for the account of the pricipal.
3.
Opening offices, whether called „liaison‟ offices, agencies or branches, unless provided
otherwise.
4.
Any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, or in the progressive prosecution of, commercial gain or
of the purpose and objective of the business organization. (Facilities Management Corp.
vs. De La Rosa)
A single act may bring the corporation within the purview of the statute where it is an act of the
ordinary business of the corporation. In such a case, the single act of transaction is not merely
incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of the corporation‟s ordinary business. (Far East Int‟l Import vs.
Nankai)
ITEC‟s arrangement with its various business contacts in the country indicate its purpose to bring
about the situation among its customers and the general public that they are dealing directly with
ITEC and that ITEC is actively engage in business in the country. In determining whether a
corporation does business in the Philippines or not, aside from their activities within the forum,
reference may be made to the contractual agreements entered into by it with other entities in the
country. (Communication Materials and Design, Inc. vs. CA)
A foreign corporation doing business in the Philippines may sue in Philippine courts although no
authorized to do business here against a Philippine citizen or entity who had contracted with and
benefited by said corporation. To put it another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering into a contract with it.
An the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic
corporations. One who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity. The principle will be 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.
(Communication Materials and Design, Inc. vs. CA)
The right of a corporation to use its corporate and trade name is a property right, a right in rem,
which it may assert and protect against all the world, in any of the courts of the world – even in
jurisdictions where it does not transact business – just the same as it may protect its tangible
property, real or personal, against trespass, or conversion. Since it is the trade and not the make
that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or
states or nations, but extends to every market where the trader‟s goods have become known and
identified by the use of the mark. (Western Equipment and Supply Co. vs. Reyes)
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A foreign corporation which has never done business in the Philippine Islands and which is
unlicensed and unregistered to do business here, but is widely and favorably known in the Islands
through the use therein of its products bearing its corporate and trade name has a legal right to
maintain an action in the Islands. Parenthetically the Trademark Law allows a foreign corporation or
juristic person to bring an action in Philippine courts for infringement of a mark or trade-name, for
unfair competition, or false designation of origin and false description, whether or not it has been
licensed to do business in the Philippines. (General Garments Corporation vs. Director of Patents)
Article 8 of the Paris Convention to which the Philippines became a party provides that a trade
name shall be protected in all the countries of the Union without the obligation of filing or
registration, whether or not it forms part of the trademark. (Puma vs. IAC)
A foreign corporation not doing business not doing business in the Philippines needs no license to
sue before Philippine courts for infringement of trademark and unfair competition. (Le Chemise
Lacoste vs. Fernandez)
In a suit involving the violation of the Revised Penal Code the complainant foreign corporation‟s
capacity to sue is not significant. (Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE
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General rule: A foreign corporation must affirmatively plead its capacity to sue in order that it may
proceed and effectively institute a case in Philippine courts.
Exceptions:
1.
The action involves a complaint for violation of the Revised Penal Code.
2.
The foreign corporation is not suing or maintaining a suit but is merely defending itself
from one filed against it.
The qualifying circumstance of whether or not a foreign corporation has engaged in business in the
Philippines is an essential part of the element of a foreign corporation‟s capacity to sue and must
be affirmatively pleaded. (Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
If the dismissal of the case, based on failure of the foreign corporation to aver its capacity to sue,
would not, however, bar the institution of the same action, dismissal should not be allowed,
especially so if it would be an idle, circuitous ceremony considering the absence of any meritorious
substantial defense of the defense of the defendant. Technical rules should not be accorded undue
importance to frustrate and defeat a plainly valid claim. (Olympia Business Machines Co. vs.
Razon, Inc.)
Since petitioner is not maintaining any suit but is merely defending one against itself (it did not file
any complaint but only a corollary defensive petition to prohibit the lower court from further
proceeding with a suit that it had no jurisdiction to entertain), its failure to aver its legal capacity to
institute the present petition is not fatal. (Time, Inc. vs. Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS
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General rule: Any foreign corporation lawfully doing business in the Philippines shall be bound by
all laws, rules and regulations applicable to domestic corporations of the same class.
Exceptions:
1.
Laws which provide for the creation, formation, organization or dissolution of corporations;
or
2.
Laws which fix the relations, liabilities, responsibilities, or duties of stockholders, members
or officers of a corporation to each other or to the corporation.
Intra-corporate or internal matters not affecting creditors or the public in general are governed not
by Philippine laws but the law under which the foreign corporation was formed or organized.
Special laws may provide or grant certain restrictions, limitations, privileges or incentives to a
foreign corporation not otherwise applicable or granted to domestic corporations (e.g. import duties
and tax incentives under the Omnibus Investments Code).
A foreign corporation authorized to transact business in the Philippines which amends its articles of
incorporation or by-laws must file a copy of such amended articles of incorporation or by-laws with
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the SEC or the appropriate government agency within 60 days from the effectivity of such
amendment.
Instances when a foreign corporation authorized to transact business in the Philippines must obtain
an amended license:
1.
The foreign corporation changes its corporate name; or
2.
The foreign corporation desires to pursue other or additional purposes in the Philippines.
Requirements in a merger or consolidation of a foreign corporation licensed in the Philippines:
With a domestic corporation:
Such must be permitted under Philippines laws and by the law of its incorporation;
and
The requirements on merger or consolidation provided by the Code must be followed.
With a foreign corporation:
Such must be permitted by the law of its incorporation;
A duly authenticated articles of merger or consolidation must be filed with the SEC or
the appropriate government agency within 60 days from the effectivity of the
merger or consolidation; and
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If the absorbed corporation is the foreign corporation doing business in the
Philippines, a petition for withdrawal of its license must also be filed.
Requirements and procedure for the withdrawal of foreign corporations:
1.
Filing of a petition for withdrawal of license;
2.
All claims which have accrued in the Philippines have been paid, compromised or settled;
3.
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;
4.
Publication of the petition for withdrawal once a week for 3 consecutive weeks in a
newspaper of general circulation in the Philippines; and
5.
Issuance of the certificate of withdrawal by the SEC.
Grounds for the revocation or suspension of license:
1.
Failure to file its annual report or pay any fees as required by the Code;
2.
Failure to appoint and maintain a resident agent in the Philippines;
3.
Failure, after change of its 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 articles of
incorporation or by-laws or of any articles of merger or consolidation within the time
prescribed by the Code;
5.
Misrepresentation of any material matter in any application, report, affidavit or other
document submitted;
6.
Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political subdivisions;
7.
Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8.
Transacting business in the Philippines as agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines; or
9.
Any other ground as would render it unfit to transact business in the Philippines.
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Other grounds for revocation of license under special laws:
1.
General Banking Act – imminent danger of insolvency;
2.
Insurance Code – unsound condition, failure to comply with the provisions of law or
regulation obligatory upon it, a condition or method of business hazardous to the public or
its policy holders, impairment of its security deposit, or deficiency in the margin of
solvency.
3.
Omnibus Investments Code – willful violation of the provisions of existing laws and
implementing guidelines or violation of the terms and conditions of its license.
In case the revocation is warranted the SEC shall:
1.
Issue a certificate of revocation;
2.
Furnish a copy thereof to the appropriate government agency; and
3.
Mail a notice of such revocation accompanied by a copy of the certificate of revocation to
the corporation at its registered office in the Philippines.
CHAPTER 18: MISCELLANEOUS PROVISIONS
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Outstanding capital stock – the total shares of stock issued under binding subscription agreements
to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
Non-stock or special corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
The NEDA shall, from time to time, make a determination of whether the corporate vehicle has
been used by any corporation or by business or industry to frustrate the provisions thereof or of
applicable laws, and shall submit to Congress, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or correction.
Maximum limits may be set by Congress for stockholdings in corporations declared by it to be
vested with a public interest pursuant to the provisions of this section, belonging to individuals or
groups of individuals related to each other by consanguinity or affinity or by close business
interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or
combinations in restraint or trade, or to implement national economic policies declared in laws,
rules and regulations designed to promote the general welfare and foster economic development.
In recommending to Congress corporations, business or industries to be declared vested with
a public interest and in formulating proposals for limitations on stock ownership, the NEDA shall
consider the type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and promotion of business
and industry.
Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the
SEC an annual report of its operations, together with a financial statement of its assets and
liabilities, certified by any independent certified public accountant in appropriate cases, covering the
preceding fiscal year and such other requirements as the SEC may require. Such report shall be
submitted within such period as may be prescribed by the SEC.
All interrogatories propounded by the SEC and the answers thereto, as well as the results of any
examination made by the Commission or by any other official authorized by law to make an
examination of the operations, books and records of any corporation, shall be kept strictly
confidential, except insofar as the law may require the same to be made public or where such
interrogatories, answers or results are necessary to be presented as evidence before any court.
The SEC shall have the power and authority to implement the provisions of this Code, and to
promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling stockholders,
members, directors, trustees or officers.
Violations of any of the provisions of this Code or its amendments not otherwise specifically
penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but
not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30)
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days but not more than five (5) years, or both, in the discretion of the court. If the violation is
committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such dissolution
shall not preclude the institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.
No right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.
All corporations lawfully existing and doing business in the Philippines on the date of the effectivity
of this Code and heretofore authorized, licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been authorized, licensed or registered under the provisions
of this Code, subject to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a period of not more
than two (2) years from the effectivity of this Code within which to comply with the same.
PD 902-A, AS AMENDED
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The SEC‟s quasi-judicial functions under Sec. 5 of PD 902-A, as amended were transferred to the
Special Commercial Courts by RA 8799.
General rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over
cases falling under Sec. 5 of PD 902-A.
Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and
corporate rehabilitation filed on or before June 30, 2000.
Distribution of Special Commercial Courts:
1.
Two in Makati City;
2.
Two in Quezon City;
3.
One in each in other cities in Metro Manila; and
4.
One per region.
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a])
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General rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear
and decide cases involving devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the SEC.
Exception: The complaint is based on the violation of the Revised Penal Code (Ex. Syndicated
Estafa)
Even if the action is for recovery of sums of money paid or given to the corporation through devices
and schemes amounting to fraud or misrepresentation detrimental to the investing public, the same
must be filed, heard and tried by the Special Commercial Courts.
Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction
of the Special Commercial Courts:
1.
Fraud committed by a corporation in failing to pay individual money market placements.
(Orosa, Jr. vs. CA)
2.
Corporations act of duping persons into investing money when such corporations authority
to issue commercial papers has already expired. (Mangalad vs. Premier Corporation)
3.
Corporate officer‟s act of diverting corporate funds and assets for his personal use. (Alleje
vs. CA)
4.
Pyramiding schemes.
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The allegation of fraud must be stated with particularity to place the case with the jurisdiction of the
Special Commercial Courts.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
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Intra-corporate controversies include those of corporations, partnerships and associations.
Elements of intra-corporate controversies:
1.
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2.
An intra-corporate relationship:
a.
Between and among the stockholders, members, associates of a corporation,
partnership or association;
b.
Between them and the corporation, partnership or association; or
c.
Between the corporation, partnership or association and the State.
The controversy must arise out of said relationship.
The dispute among the parties must be intrinsically connected with the regulation of the
corporation. If the nature of the controversy involves matters that are purely civil in character
necessarily the case does not involve an intra-corporate controversy. (Speed Distributing Corp. vs.
CA)
The fact that shares of stock were issued to be used as part payment for lease rentals does not
convert it into a intra-corporate controversy. (DMRC Enterprises vs. Este del Sol Mountain
Reserve, Inc.)
Recovery of the control and management of a corporation in the guise of a complaint for rescission
of a memorandum of agreement which vested such control and management is an intra-corporate
controversy. (DPB vs. Ilustre, Jr.)
If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and
is within the jurisdiction of the Special Commercial Court. (Abejo vs. de la Cruz; Rural Bank of
Salinas, Inc. vs. CA)
If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name
the dispute is not intra-corporate and the ordinary or regular court can assume jurisdiction over the
case. (Rivera vs. Florendo; Tay vs. CA)
A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the
sale of shares of a group of stockholders to another group of stockholders is intra-corporate.
(Saavedra vs. SEC)
Where the conflict involves the enforcement of rights and obligations under the Corporation Code
or the inter and intra-corporate affairs of the corporation, jurisdiction would fall with the Special
Commercial Courts. But if it requires a mere determination of the contractual rights of the parties
under an ordinary agreement, the ordinary/regular courts can acquire jurisdiction thereto.
The factor which decides whether the action is within the jurisdiction of the Special Commercial
Courts is that the controversy arose out of an intra-corporate relation between and among the
parties. (SEC vs. CA)
The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and
concomitant filing of a criminal action before the regular courts; such that, a fraudulent act may give
rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as
well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts,
both charges to be filed and proceeded independently, and may be simultaneously, with the other.
(Fabia vs. CA)
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS AND
OFFICERS (Sec. 5 [c])
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The Special Commercial Courts have original and exclusive jurisdiction to hear and decide cases
involving controversies in the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations.
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General rule: A corporate officer‟s election, appointment or termination by the board of directors is
always a corporate act, and the fact that the officer asks for backwages does not alter the picture.
The original and exclusive jurisdiction rests with the Special Commercial Courts.
Exception: The main cause of action is for the recovery of unpaid wages and separation pay.
(Midland Construction Co., Inc. vs. Movilla)
The main aspect to be considered is whether the corporate officer asserts his rights as such officer
or questions his removal or ouster. If so, the case would fall within the ambit of the jurisdiction of
the Special Commercial Courts and not the NLRC.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])
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Petitions for suspension of payments of corporations, partnerships or associations, and
appointment of receivership, management committee, board or body are lodged within the
jurisdiction of the Special Commercial Courts.
A corporation, partnership or association, whether or not insolvent, can file a petition for suspension
of payments provided it is placed under a rehabilitation receiver or management committee or
rehabilitation receiver.
Three types of suspension of payments:
1.
Simple suspension of payments – mere deferment of payment of debts and it refers to a
petition which is filed by a corporation which possesses sufficient assets to cover its
liabilities but foresees the possibility of meeting them when they respectively fall due
owing to temporary liquidity problems.
2.
Suspension of payments with the appointment of a receiver with or without a rehabilitation
plan. The rehabilitation plan is a plan under which the corporation will reschedule the
payment of its debts and liabilities. Either the petitioner corporation will propose the plan
or ask for the appointment of a receiver who will study and make the plan.
3.
Suspension of payments where the corporation has no sufficient assets to cover its debts
and liabilities with or without the appointment of a management committee with or without
a rehabilitation plan.
EFFECTS OF SUSPENSION OF PAYMENTS
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The proper court may issue an order suspending payments of claims due from a distress
corporation.
Upon the appointment of a management committee, rehabilitation receiver, board or body all
actions for claims against the corporation, partnership or association under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
The reason for suspension of payments for claims against a distressed corporation is to enable the
management committee to effectively exercise its powers free from judicial or extrajudicial
interference that might unduly hinder or prevent the „rescue‟ of the debtor company. (PAL vs. Sps.
Sadic and Kurangking)
The suspension of all actions for claims against a corporation embraces all phases of the suit, be it
before the trial court or any tribunal or before this Court. No other action may be taken, including
the rendition of judgment during the state of suspension. It must be stressed that what are
automatically stayed or suspended are the proceedings of a suit and not just the payment of claims
during the execution stage after the case had become final and executory. Once the process of
rehabilitation, however, is completed, this Court will proceed to complete the proceedings on the
suspended actions. Furthermore, the actions that are suspended cover all claims against the
corporation whether for damages founded on a breach of contract of carriage, labor cases,
collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims is
mentioned in the law. (PAL vs. Zamora)
Claims – refers to debts or demands of pecuniary nature; the assertion of right to have money paid.
Suspended proceedings include extra judicial foreclosures. You cannot even consolidate. All
proceedings at whatever stage are suspended.
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Even if the suspension order is issued after a creditor‟s action in court has already become final but
pending execution, the execution of the decision is likewise suspended. (Filinvest vs. Ejercito)
Note the words “against the corporation.”
If a corporation secures a loan, and one of its key officers uses his private properties to guarantee
the loan, corporation files for suspension, the bank want to foreclose on the prop, may the bank
foreclose? Yes. It is not an action for ac claim against the corporation. Union bank case.
Properties of an individual stockholder, director or officer, as surety of corporate liabilities, are not,
and will not be covered by the suspension of payments order issued by the court pursuant to PD
902-A.
Same with regard to criminal proceedings, personal to corporate officer concerned.
Despite the appointment of a receiver for a corporation under PD 902-A, an action against a
corporation seeking the nullification of corporate documents cannot be suspended by reason
thereof, since the civil action does not present a monetary claim against the corporation. (Finasia
Investment and Finance Corporation vs. CA)
The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by
parties other than corporations, partnerships or associations. (Union Bank vs. CA)
Equality is Equity – during suspension the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by the
expediency of an attachment, execution or otherwise. The creditors should stand on equal footing.
Not anyone of them should be given any preference by paying one of them ahead of the others.
(Alemars Sibal and Son, Inc. vs. Elibenas)
The issue of whether or not preferred creditors of distressed corporations stand on equal footing
with all other creditors gains relevance and materiality only upon the appointment of a management
committee, rehabilitation receiver, board or body. Suspension of claims against the corporation
under rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver. (RCBC vs. IAC)
VERY IMPORTANT!!!
1.
All claims against corporations, partnerships or associations that are pending before any
court, tribunal or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board or body in accordance with the provisions of PD
902-A.
2.
Secured creditors retain their preference over unsecured creditors, but enforcement of
such preferences is equally suspended upon the appointment of a management
committee, rehabilitation receiver, board or body. In the event that the assets of the
corporation, partnership or association are finally liquidated, however, secured or
preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones.
If the rehabilitation of the corporation is not feasible, the court muto propio or the management
committee may petition the lifting and the preferences will be there again.
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6 [d])
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Special Commercial Courts may create or appoint a management committee, board or body upon
petition or muto propio to undertake the management of corporations, partnerships or association
not supervised or regulated by other government agencies in appropriate cases where there is
imminent danger of dissipation, loss or wastage or destruction of assets or other properties or
paralyzation of business operations of such corporation or entities which may be prejudicial to the
interest of minority stockholders, parties-litigant or the general public.
It may also create or appoint a management committee, board or body to undertake the
management of corporations, partnerships or other associations supervised or regulated by other
government agencies such as banks and insurance companies, upon the request of the
government agency concerned.
Requisites before a management committee, board or body may be appointed or created:
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1.
Dissipation, loss, wastage or destruction of assets or other properties; and
2.
Paralyzation of its business operations which may be prejudicial to the interest of the
minority stockholders, parties-litigants or the general public. (Sy Chim vs. Sy Siy Ho &
Sons, Inc.)
Danger – a general term, including peril, jeopardy, hazard and risk; refers to exposure or liability to
injury.
Imminent – something which is threatening to happen at once, something close at hand, something
to happen upon the instant, close although not yet happening, and on the verge of happening.
In the absence of a strong showing of an imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of a corporation and paralysis of its business operations,
the mere apprehension of future misconduct based upon prior mismanagement will not authorize
the appointment of a management committee/receiver. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)
Mere disagreement among stockholder as to the fairness of the corporation would not in itself
suffice as a ground for the appointment of a management committee. However, where the
dissention among the stockholders is such that the corporation cannot successfully carry on its
corporate functions, the appointment of a management committee becomes imperative. (Jacinto
vs. First Women‟s Credit Corporation)
A management committee shall have the power to take custody of and control all assets and
properties owned and possessed by the entity under management. It shall take the place of the
management and board of directors of the entity under management, assume their rights and
responsibilities, and preserve the entity‟s assets and properties in its possession.
The rehabilitation receiver shall not take over the management and control of the debtor but shall
closely oversee and monitor the operations of the debtor during the pendency of the proceedings.
He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the
value of the debtor‟s property is reasonably maintained pending the determination of whether or not
the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval.
Venue of actions in intra-corporate controversies – Special Commercial Court which has jurisdiction
over the principal office of the corporation, partnership or association.
Nature of proceedings is in rem. Jurisdiction acquired upon publication of the proceeding.
Creditors have the personality (at least 25% of the total outstanding liablitities) may file, ex.
Bayantel.
Their compensation is subject to agreement of the parties.
Actuations of the board, body, committee subject to….
Service of pleadings . Sec. 6 rule 1. may be by fax or email. When authorized by the court.
Service of summons. Sec. 5 rule 2. made upon any of the statutory or corporate officers or their
respective secretaries. vs. Eb Villarosa case. (Rule of Court)
SECURITIES REGULATION CODE (SRC)
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Full disclosure rule – as long as there is full and complete disclosure relative to the issue of
securities the investing public should determine for themselves whether or not to invest.
Doctrine of primary jurisdiction – courts will not determine a controversy involving a question within
the jurisdiction of the administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the specialized knowledge and expertise of said administrative
tribunal to determine technical and intricate matters of fact.
A criminal charge for violation of the SRC is a specialized dispute. Hence, it must first be referred to
an administrative agency of special competence, i.e., the SEC… The SRC is a special law. Its
enforcement is particularly vested in the SEC. Hence, all complaints for any violation of the Code
and its implementing rules and regulations should be filed with the SEC. Where the complaint is
criminal in nature, the SEC shall indorse the complaint to the DOJ for preliminary investigation and
prosecution as provided in Section 53.1. (Baviera vs. Paglinawan)
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Securities
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Securities – are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character. It includes:
1.
Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed
securities;
2.
Investment contracts, certificates of interest or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
3.
Fractional undivided interests in oil, gas or other mineral rights;
4.
Derivatives like option and warrants;
5.
Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
6.
Proprietary or non proprietary membership certificates incorporations; and
7.
Other instruments as may in the future be determined by the Commission.
The definition of securities is extra-ordinarily broad. It is a catch all phrase meant to include all
novel devices which are of the same nature. Investment contracts and golf club shares are included
in the definition of securities.
General rule: Securities cannot be sold or offered for sale or distribution to more than 19 persons
without a Registration Statement duly filed and approved by the SEC. Once the securities are sold
or offered to more than 19 persons, it becomes a public offering requiring prior registration with the
SEC. Violation thereof renders the person administratively, civilly and criminally liable.
Exception: The securities involved are covered by Sec. 9 (exempt securities) and Sec. 10 (exempt
transactions).
Persons engaging in the business of buying or selling securities in the Philippines as a broker or
dealer, or acting as a salesman for such entities must be registered and authorized as such by the
SEC.
Investment contract – a contract or scheme whereby a person invests his money in a common
venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others.
Issuance of certificates of participation in a multi-level marketing scheme, solely on the
management of others without goods or services is an investment contract and thus a security.
(Justee vs. SEC)
Pyramiding schemes partakes of a nature of an investing contract which cannot be sold to more
than 19 persons without prior approval of the SEC.
When an investor is relatively uninformed and turns over his money to others, essentially
depending upon their representations and their honesty and skill in managing it, the transaction
generally is considered as an investment contract. The touchstone is the presence of an
investment in a common venture premised on a reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of others. (People vs. Petralba)
Exempt Securities
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Exempt Securities (Sec. 9):
1.
Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
2.
Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the Commission may require
compliance with the form and content of disclosures the Commission may prescribe.
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3.
Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
4.
Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, HLURB, or BIR.
5.
Any security issued by a bank except its own shares of stock.
Exempt Transactions
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Exempt Transactions (Sec. 10):
1.
Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
2.
By or for the account of a pledge holder, or mortgagee or any other similar lien holder
selling or offering for sale or delivery in the ordinary course of business and not for the
purpose of avoiding the provisions the SRC, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.
3.
An isolated transaction in which any security is sold, offered for sale, subscription or
delivery by the owner thereof, or by his representative for the owner‟s account, such sale
or offer for sale, subscription or delivery not being made in the course of repeated and
successive transactions of a like character by such owner, or on his account by such
representative and such owner or representative not being the underwriter of such
security.
4.
The distribution by a corporation, actively engaged in the business authorized by its
articles of incorporation, of securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.
5.
The sale of capital stock of a corporation to its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in connection with
the sale of such capital stock.
6.
The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, where the entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
7.
The issue and delivery of any security in exchange for any other security of the same
issuer pursuant to a right of conversion entitling the holder of the security surrendered in
exchange to make such conversion: Provided, That the security so surrendered has been
registered under the SRC or was, when sold, exempt from the provisions of the SRC, and
that the security issued and delivered in exchange, if sold at the conversion price, would at
the time of such conversion fall within the class of securities entitled to registration under
the SRC. Upon such conversion the par value of the security surrendered in such
exchange shall be deemed the price at which the securities issued and delivered in such
exchange are sold.
8.
Broker‟s transactions, executed upon customer‟s orders, on any registered Exchange or
other trading market.
9.
Subscriptions for shares of the capital stock of a corporation prior to the incorporation
thereof or in pursuance of an increase in its authorized capital stock under the Corporation
Code, when no expense is incurred, or no commission, compensation or remuneration is
paid or given in connection with the sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital stock of a corporation which
should be subscribed before it can be registered and duly incorporated, or its authorized
capital increased.
10. The exchange of securities by the issuer with its existing security holders exclusively,
where no commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange.
11. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any
twelve-month period.
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12. The sale of securities to any number of the following qualified buyers:
a.
Bank;
b.
Registered investment house;
c.
Insurance company;
d.
Pension fund or retirement plan maintained by the Government of the Philippines
or any political subdivision thereof or managed by a bank or other persons
authorized by the Bangko Sentral to engage in trust functions;
e.
Investment company; or
f.
Such other person as the Commission may by rule determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of
assets under management.
Tender Offer
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Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of
equities of a company through open market purchases or private negotiations.
A tender offer is required of any person or group of persons acting in concert who intend to acquire:
1.
At least 15% of any class of any equity security of a listed corporation or of any class of
any equity security of a corporation with assets of at least P50M and having 200 or more
stockholders with at least 100 shares each; or
2.
At least 30% of such equity over a period of 12 months.
Proxies
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Proxies must be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission.
Requisites for proxies:
1.
In writing;
2.
Signed by the stockholder or his duly authorized representative; and
3.
Filed before the scheduled meeting with the corporate secretary.
General rule: A proxy shall be valid only for the meeting for which it is intended.
Exception: It is otherwise provided in the proxy.
No proxy shall be valid and effective for a period longer than 5 years at one time.
No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried
for the account of a customer, to a person other than the customer, without the express written
authorization of such customer.
A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the
Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying
the beneficial owner within 10 days after such acquisition, for its own account or customer, to the
issuer of the security, to the Exchange where the security is traded and to the Commission.
Independent Director
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Any corporation with a class of equity securities listed for trading on an Exchange or with assets in
excess of P50M and having 200 or more holders, at least of 200 of which are holding at least 100
shares of a class of its equity securities or which has sold a class of equity securities to the public
pursuant to an effective registration statement shall have at least 2 independent directors or such
independent directors shall constitute at least 20% of the members of such board, whichever is the
lesser.
Independent director – a person other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
The SEC may exempt corporations from the required independent directors as it did in the
rehabilitation of Victorias Milling Co. Inc..
Insider Trading
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Insider:
1.
The issuer;
2.
A director or officer (or person performing similar functions) of, or a person controlling the
issuer;
3.
A person whose relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to the
public;
4.
A government employee, or director, or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5.
A person who learns such information by a communication from any of the foregoing
insiders.
General rule: An insider may not sell or buy a security of the issuer while in possession of material
information with respect to the issuer or the security that is not generally available to the public.
Exceptions:
1.
The insider proves that the information was not gained from such relationship; or
2.
The insider disclosed the information to a party reasonably believed by the insider to
possess the information.
Material non-public information – has not been generally disclosed to the public and:
1.
would likely affect the market price of the security after being disseminated to the public
and the lapse of a reasonable time for the market to absorb the information; or
2.
would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
An insider may not communicate material non-public information to any person who will likely buy
or sell a security of the issuer while in possession of such information.
Trading by persons who have material non-public information about a tender offer is prohibited.
Registration of Brokers, Dealers, Salesmen and Associated Persons
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Persons engaging in the business of buying or selling securities in the Philippines as a broker or
dealer, or acting as a salesman for such entities must be registered and authorized as such by the
SEC.
Broker – a person engaged in the business of buying and selling securities for the account of
others.
Dealer – any person who buys and sells securities for his/her own account in the ordinary course of
business.
Salesman - a natural person, employed as such or as an agent, by a dealer, issuer or broker to
buy and sell securities.
A stockbrokerage firm can have no other business than that.
Purchase of shares should be coursed through a broker. However a private transaction can be
made.
Fraudulent Transactions and Other Market Manipulations

Fraudulent and manipulative devices:
1.
Wash sale – any transaction in a security which involves no change in the beneficial
ownership thereof.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
2.
Matched order – an order or orders for the purchase or sale of security with the knowledge
that a simultaneous order or orders of substantially the same size, time and price for the
sale or purchase of such security has, or will be entered by or for the same or different
parties.
3.
Marking the close – place of purchase or sale order, at or near the close of the trading
period.
4.
Painting the tape – the activity is made during normal trading hours. It involves buying
activity among nominee accounts at increasingly higher or lower prices or causing
fictitious reports to appear on the “ticker tape.”
5.
Squeezing the float – the part or portion of the issue/security which is outstanding but
intentionally held by dealers or other persons with a view of reselling them later for profit.
6.
Hype and dump – the act employed by a person or group of persons of purchasing the
outstanding capital stock of a dormant public shell company for a nominal amount and
merge it with their privately held company. They would then gain control of the majority of
the stocks of the merged entity. The shares of the Shell Company are often reverse-split
four to one or more to reduce the number of shares. Stock certificates are often re-issued
in the name of the merged entity to relatives and associates who act as nominees of the
person or group of persons employing the device. They would then look for a brokerdealer who would be willing to make a market relative to the stocks of the newly merged
company; then hire a promoter who would “hype” the virtues of the company, its products
and stocks. The broker-dealer then generates volume and advance bid price. When the
market reaches a high price, they would “dump” their shareholdings and bail out.
7.
Boiler room operations – involves an intensive selling campaign through numerous
salesmen by telephone or through direct mail offerings for securities of either a certain
type or from a specific issuer. Investors are induced to purchase through hard-sell
techniques based on unfounded predictions and mailing of misleading market letters.
8.
Circulating or dissemination information that the price of any security listed in the
Exchange will or is like to rise or fall (illegal)
9.
Making false or misleading statements with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading for the purpose of inducing
the purchase or sale of any security (illegal).
10. Pegging or fixing or stabilizing the price of security effected either alone or with others
through any series of transactions for the purchase or sale thereof (illegal)
11. Short sale – sale of securities which the vendor does not own (illegal unless done in
accordance with the rules and regulations of the SEC) (T3 rule).
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12. Insider trading – the act of an insider of buying or selling securities of the issuer while in
possession of material information with respect thereto that is not generally available to
the public (illegal unless exempted).
Wash sale and matched order is illegal when used as a means to create a false or misleading
appearance of active trading in the security concerned.
Marking the close, painting the tape, squeezing the float, hype and dump, and boiler room
operations are illegal when they are effected to:
1.
Raise the price or induce the purchase of a security or of a controlling, controlled or
commonly controlled company by others;
2.
Depress their price to induce the sale of a security, whether of the same or of a different
class, of the same issuer or of a controlling, controlled company, or common controlled
company of others; and
3.
Creates active trading to induce such purchase or sale through said devices or schemes.
Other fraudulent transactions:
1.
Employing any device, scheme, or artifice to defraud;
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Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
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2.
Obtaining money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading; or
3.
Engaging in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.
Fraud – akin to bad faith which implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.
Settlement Offer
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At any time, during an investigation or proceeding under this Code, parties being investigated
and/or charged may propose in writing an offer of settlement with the Commission.
Upon receipt of such offer of settlement, the Commission may consider the offer based on timing,
the nature of the investigation or proceeding, and the public interest.
The Commission may only agree to a settlement offer based on its findings that such settlement is
in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed.
Such decision may be made without a determination of guilt on the part of the person making the
offer.
Limitation of Actions
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SEC. 62. Limitation of Actions. - 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the
untrue statement or the omission, or, if the action is to enforce a liability created under Subsection
57.1(a), unless brought within two (2) years after the violation upon which it is based. In no event
shall any such action be brought to enforce a liability created under Section 56 or Subsection 57.1
(a) more than five (5) years after the security was bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of this
Code unless brought within two (2) years after the discovery of the facts constituting the cause of
action and within five (5) years after such cause of action accrued.
Fasle registration statement - liable civily - sec. 56
Ceiling as to amount of damages - triple of the amount involved
limitation of actions - not later than 5 years after the cause of action accrues