Corporation Law
7.
III. CORPORATION LAW
(Provisions of B.P. Blg. 68, as amended by
R.A. No. 11232)
8.
R.A No. 11232, otherwise known as the Revised
Corporation Code of the Philippines (RCC), took
effect on February 23, 2019, upon completion of its
publication in the Manila Bulletin and the Business
Mirror on Saturday, February 23, 2019.
9.
2.
3.
4.
5.
6.
The minimum number of incorporators
required to organize a corporation was
removed, unlike its predecessor – B.P. 68, which
mandated that the number of incorporators
should not be less than five (5). (Sec. 10, RCC)
No foreign corporation shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity. (Sec. 35,
RCC)
A. GENERAL PRINCIPLES
Definition of Corporation
The formation of one-person corporation with
a single stockholder is now allowed. (Sec. 10,
RCC)
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 incidental to its existence. (Sec.
2, RCC)
Corporations now have perpetual existence
unless otherwise stated in their articles of
incorporation (AOI). (Sec. 11, RCC)
Attributes of a Corporation (A-L-S-P-A-P-I)
Participation and voting via remote
communication or in absentia is now allowed
during stockholders’ and members’ meetings.
(Secs. 23, 49, 57, and 88, RCC)
1.
2.
3.
4.
A corporate name has to be distinguishable
from one already reserved or registered for the
use of another corporation, and no corporate
name shall be allowed if such name is already
protected by law, or its use is contrary to
existing law, rules, and regulations. (Sec. 17,
RCC)
A vacancy in the Board may be temporarily
filled from among the officers of the corporation
when a vacancy prevents the remaining
directors from constituting a quorum and an
emergency action is required to prevent grave,
substantial, and irreparable loss or damage to
the corporation. (Sec. 28, RCC)
Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
provided by special law. (Sec. 12, RCC)
10. An arbitration agreement may be provided in
the AOI or bylaws of an unlisted corporation.
(Sec. 181, RCC)
Salient Changes
1.
The development and implementation of an
electronic filing and monitoring system was
prescribed. (Sec. 180, RCC)
It is an Artificial being;
It is created by operation of Law;
It enjoys the right of Succession; and
It has the Powers, Attributes, and Properties
expressly authorized by law or Incidental to its
existence.
1. ARTIFICIAL BEING
A corporation is a legal or juridical person with a
personality separate and distinct from its individual
stockholders or members and from any other legal
entity into which it may be connected or related.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2. CORPORATION AS A CREATION OF LAW OR
BY OPERATION OF LAW
GOVERNMENT CORPORATIONS
Q: A Special Audit Team from COA audited the
accounts of Leyte Metropolitan Water District
(LMWD). Subsequently, LMWD received a
request for payment of auditing fees from
COA. LMWD General Manager Feliciano sent a
reply informing COA that the water district
could not pay the auditing fees, citing as basis for
his action P.D. 198 as well as R.A. No.
6758. Thereafter, Feliciano asked COA for a
refund of all auditing fees LMWD previously
paid to COA. The COA Chairman denied LMWD’s
request.
A corporation is not created by mere agreement of
the incorporators nor by their execution of the AOI.
There ought to be a law from which the corporation
derives its legal existence. This may be a general law
governing the formation of private corporations,
which is the RCC, or a special law passed by
Congress to create a government-owned and
controlled corporation.
Since Feb. 8, 1935, the legislature has not passed a
single law creating a private corporation. This is
because the Constitution itself precludes the
passage of such statute, particularly, Sec. 16, Art. XII
of the 1987 Constitution which states that “The
Congress shall not, except by general law, provide
for the formation, organization, or regulation of
private corporations.” (Divina, 2020)
Feliciano maintains that Local Water Districts
(LWDs) are not GOCCs with original charters. He
argues that LWDs are private corporations, and
thus, not subject to COA’s jurisdiction. Is an LWD
created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
The Creation of a Corporation is by Operation of
Law
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
laws mandate COA to audit all government agencies,
including GOCCs with original charters. An LWD is a
GOCC with an original charter.
NOTE: Philippine jurisprudence adopted the
Concession or Fiat Theory, which states that a
corporation is conceived as an artificial person
owing its existence through creation by a sovereign
power. Further, a corporation is without any
existence until it has received the imprimatur of the
State acting according to law, through the SEC.
(Tayag v. Benguet Consolidated, Inc., G.R. No. L23145, 29 Nov. 1968)
The Constitution recognizes two classes of
corporations. The first refers to private
corporations created under a general law. The
second refers to GOCCs created by special charters.
Congress cannot enact a law creating a private
corporation with a special charter. Such legislation
would be unconstitutional. Private corporations
may exist only under a general law. The Constitution
authorizes Congress to create GOCCs through
special charters. Since private corporations cannot
have special charters, it follows that Congress can
create corporations with special charters only if
such corporations are government-owned or
controlled. Obviously, LWDs are not private
corporations because they are not created under the
Corporation Code. (Feliciano v. COA, et al., G.R. No.
147402, 14 Jan. 2004)
Q: Since Feb. 8, 1935, the legislature has not
passed even a single law creating a private
corporation. What provision of the constitution
precludes the passage of such law? (2008 BAR)
A: Sec. 16, Art. XII of the 1987 Constitution provides
that the Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations. Governmentowned and controlled corporations may be created
or established by special charters in the interest of
the common good and subject to the test of
economic viability.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: Is the Philippine National Red Cross (“PNRC”)
a GOCC?
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Corporation Law
A: Initially, the Supreme Court held PNRC is not a
GOCC. Although the PNRC was created by a special
charter, it cannot be considered a GOCC in the
absence of the essential elements of ownership and
control by the government. In creating the PNRC as
a corporate entity, Congress was in fact creating a
private corporation. However, the constitutional
prohibition against the creation of private
corporations by special charters provides no
exception even for non-profit or charitable
corporations. Consequently, the PNRC Charter,
insofar as it created the PNRC as a private
corporation and granted it corporate powers, is void
for being unconstitutional.
in these particular matters, the PNRC can be treated
as a GOCC. (Liban, et al., v. Gordon, G.R. No. 175352,
18 Jan. 2011, in Divina, 2020; Torres v. De Leon, G.R.
No. 199440, 18 Jan. 2016)
Q: Pursuant to E.O. 123, the Ministry of National
Defense and the Philippine Tourism Authority
executed a MOA for the development of
Corregidor. The Philippine Tourism Authority
Board of Directors adopted a Resolution,
approving the creation of a foundation for the
development of Corregidor. The Corregidor
Foundation, Inc. was incorporated.
The Commission on Audit (COA) issued an Audit
Observation Memorandum noting that certain
personnel of the Philippine Tourism Authority
who were concurrently rendering services in
Corregidor Foundation, Inc. received honoraria
and cash gifts. The Legal and Adjudication
Office-Corporate of the COA issued Notice of
Disallowance, disallowing in audit the
honoraria and cash gift paid to said personnel.
The personnel
argue
that
Corregidor
Foundation, Inc. is a private corporation created
under the Corporation Code and, therefore,
cannot be audited by the COA. Is Corregidor
Foundation, Inc. a GOCC under the audit
jurisdiction of the COA?
Upon a motion for reconsideration, however, the
Supreme Court held that while PNRC does not have
government assets and does not receive any
appropriation from the Philippine Congress, this
does not mean that the charter of PNRC is
unconstitutional. PNRC has a sui generis status.
Although it is neither a subdivision, agency, or
instrumentality of the government nor a
government-owned or -controlled corporation or a
subsidiary thereof, so much so that Senator Gordon
was correctly allowed to hold his position as
Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
that the PNRC is a “private corporation” within the
contemplation of the provision of the Constitution
that must be organized under the Corporation Code.
The PNRC enjoys a special status as an important
ally and auxiliary of the government in the
humanitarian field in accordance with its
commitments under international law. The court
cannot all of a sudden refuse to recognize its
existence, especially since the issue of the
constitutionality of the PNRC Charter was never
raised by the parties. (Liban, et al., v. Gordon, G.R.
No. 175352, 18 Jan. 2011, in Divina, 2020)
A: YES. The Corregidor Foundation, Inc. is a
government-owned or controlled corporation
under the audit jurisdiction of the COA. Corregidor
Foundation, Inc. was organized as a non-stock
corporation under the Corporation Code. It was
issued a certificate of registration by the SEC on 28
Oct. 1987 and, according to its Articles of
Incorporation, Corregidor Foundation, Inc. was
organized and to be operated in the public interest.
Corregidor Foundation, Inc. was organized
primarily to maintain and preserve the war relics in
Corregidor and develop the area's potential as an
international and local tourist destination.
Corregidor Foundation, Inc.'s purposes as stated in
its AOI are related to the promotion and
development of tourism in the country, a declared
state policy and, therefore, a function public in
character. Even a cursory reading of the statutory
definitions of "government owned-or controlled
As to what sui generis means, the Supreme Court
ruled that the sui generis character of the Philippine
National Red Cross requires the Court to approach
controversies involving the PNRC on a case-to-case
basis. The Civil Service Commission has jurisdiction
over the PNRC if the issue at hand is the
enforcement of labor laws and penal statutes, thus,
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
In order to qualify as a GOCC, a corporation must
also, if not more importantly, be owned by the
government.
corporation" readily reveals that a non-stock
corporation may be government-owned or
controlled. Further, there is nothing in the law
which provides that government-owned or
controlled corporations are always created under
an original charter or special law. (Oriondo v. COA,
G.R. No. 211293, 04 June 2019)
The government owns a stock or non-stock
corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling
interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the
corporate capital stock. In a non-stock corporation,
like MECO, jurisprudence shows that the controlling
interest of the government is affirmed when "at
least majority of the members are government
officials holding such membership by appointment
or designation" or there is otherwise "substantial
participation of the government in the selection" of
the corporation’s governing board. None of MECO’s
members, officers or trustees were found to be
government appointees or public officers
designated by reason of their office.
Q: Dennis A.B. Funa requested the COA for a copy
of the latest financial and audit report of the
Manila Economic and Cultural Office (MECO).
MECO was organized as a non-stock, non-profit
corporation under the Corporation Code, in
view of the desire of the Philippines and Taiwan
to maintain an unofficial relationship in lieu of
official diplomatic ties severed by the One-China
policy. Upon receipt of COA’s reply that it does
not audit MECO, Funa filed a petition for
mandamus to compel COA to audit MECO as the
latter was a GOCC as it performs functions
relating to public needs and is controlled by the
government through the appointment of its
board of directors. Is Funa correct?
The Supreme Court ruled that MECO is a sui generis
private entity especially entrusted by the
government with the facilitation of unofficial
relations with the people in Taiwan without
jeopardizing the country’s faithful commitment to
the One China policy of the PROC. However, despite
its non-governmental character, MECO handles
government funds in the form of the "verification
fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Sec. 2(6) of E.O. 15,
s. 2001. Hence, under existing laws, the accounts of
MECO pertaining to its collection of such
"verification fees" and "consular fees" are subject to
the audit jurisdiction of COA. (Funa v. Manila
Economic and Cultural Office and COA, G.R. No.
193462, 4 Feb. 2014)
A: NO. MECO is not owned or controlled by the
government, hence it is not a GOCC or a government
instrumentality. GOCCs are "stock or non-stock"
corporations "vested with functions relating to
public needs" that are "owned by the Government
directly or through its instrumentalities." By
definition, three attributes thus make an entity a
GOCC:
a.
b.
c.
First, its organization as stock or non-stock
corporation;
Second, the public character of its function; and
Third, government ownership over the same.
3. RIGHT TO SUCCESSION
Possession of all three attributes is necessary to
deem an entity a GOCC. In this case, there is not
much dispute that MECO possesses the first and
second attributes. It is the third attribute, which
MECO lacks.
The right of succession of a corporation does not
connote that a corporation is immortal. It simply
means that it has the power to exist continuously,
either by opting to have perpetual existence or to
extend its corporate life if a fixed term is specified in
its AOI. Its capacity for continued existence is not
affected by any changes in the composition of
corporators. (Divina, 2020)
MECO is not owned or controlled by the
government. Organization as a non-stock
corporation and the mere performance of functions
with a public aspect, however, are not by
themselves sufficient to consider MECO as a GOCC.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
94
Corporation Law
4. POWERS, ATTRIBUTES AND PROPERTIES OF
A CORPORATION
Q: May a corporation enter into a joint venture?
(1996 BAR)
This means that a corporation can only exercise
powers conferred upon it by law, its AOI, those
implied from the conferred powers, or incidental to
its existence. Any act of the corporation contrary to
or outside these powers is ultra vires. (Divina, 2020)
A: YES. A corporation may enter into a joint venture
with another where the nature is in line with the
business authorized by its charter. (Tuason v.
Bolaños, G.R. No. L-4935, 28 May 1954)
As far back as the case of Aurbach v. Sanitary Wares
Manufacturing Corporation, (G.R. No. 75875, 75951,
75975-76, 15 Dec. 1989) the Supreme Court had
already ruled that a joint venture is a form of
partnership and should thus be governed by the law
of partnerships. The Supreme Court, however,
recognized a distinction between these two
business forms and held that although a corporation
cannot enter into a partnership contract, it may
however engage in a joint venture with others.
(Divina, 2020)
TEST: Whether the corporate act or transaction is
related to or in furtherance of the purposes of the
corporation.
For instance, whether or not a corporation may
acquire property will not only be tested by the
lawfulness of the consideration but whether such
property is necessary to achieve the purpose of the
corporation.
Thus, a corporation engaged in mining cannot
acquire properties for urban development. (Heirs of
Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A
corporation organized as a lending investor cannot
engage in pawnbroking. (Divina, 2020)
Advantages vs. Disadvantages of a Corporation
(Divina, 2020)
ADVANTAGES
It may sue and be
sued,
enter
into
contracts, and acquire
properties in its own
name and in its own
right.
Stockholders are not
liable
for
the
obligations of the
corporation beyond
their subscription.
Engagement into a Contract of Partnership or a
Joint Venture
Corporations are empowered to enter into a
partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and
juridical persons. (Sec. 35(h), RCC)
Another significant revision under the new law is
the express grant of power to corporations to enter
into any commercial agreement, including but not
limited to partnership, joint venture, merger,
consolidation.
It continues to exist
despite changes in
corporators’
composition.
It shall be noted that under Sec. 36 of the OCC,
corporations were expressly allowed to only enter
into merger or consolidation with other
corporations as a form of corporate combination.
Shares
are
transferable
even
without the consent of
the corporation and
other stockholders.
Management is clearly
defined
and
centralized through its
In the past, jurisprudence is replete with cases
prohibiting a corporation from entering into a
partnership contract. (Divina, 2020)
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DISADVANTAGES
The ability of the
stockholder to transfer
shares without having
to secure the consent of
the corporation and/or
other stockholders may
result in persons having
conflicting
interests
against
the
same
corporation.
It is subject to more
stringent
administrative
and
reportorial
requirements.
Minority stockholders
may be denied the right
to actively participate
in the management of
the corporation and are
subject to the will of the
majority stockholders.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
board of directors or
trustees.
It can mobilize more
capital through the
issuance of its shares.
The
term
of
a Incorporation by the
partnership may be SEC.
established for any
period
of
time Has
perpetual
stipulated by the existence, unless its
partners.
AOI provide otherwise.
Number of Formators
Business activities are
limited by the powers
provided by law, its
AOI, and those which
are incidental thereto.
Joint Account vs. Partnership (Divina, 2020)
JOINT ACCOUNT
Has no firm name and
is conducted in the
name of the ostensible
partner.
PARTNERSHIP
Has
no
juridical
personality and can sue
or be sued only in the
name of the ostensible
partner.
Has
juridical
personality and may
sue or be sued under
its firm name
The ostensible partner
manages its business
operations.
All general partners
have the right of
management.
Has no common fund.
Liquidation thereof can
only be done by the
ostensible partner.
May be organized by at
least 2 persons.
Has a firm name.
GR: May exercise any
power authorized by
the partners.
XPN: Acts which are
contrary
to
law,
morals, good customs,
public order, public
policy.
Liquidation may, by
agreement,
be
entrusted to a partner
or partners.
May exercise only such
powers as may be
conferred by law and
its AOI, those implied
therefrom or incidental
thereto.
Management
Partnership vs. Corporation
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: A corporation
with
a
single
stockholder
is
considered
a
One
Person Corporation.
Powers
Has a common fund.
PARTNERSHIP
CORPORATION
As to Creation and Governing Law
Created
by
the
Created
by
mere
operation of law and
agreement of the
governed
by
the
parties and governed
Revised
Corporation
by the Civil Code.
Code.
Commencement of Juridical Personality and
Term of Existence
Existence
of
the
From the moment of
corporation
the meeting of minds
commences from the
of the partners.
date of issuance of the
Certificate
of
Any
person,
partnership,
association,
or
corporation, singly or
jointly with others but
not more than 15.
Managed
by
the
Managing Partner, or
in the absence of
designation, by any of
the General Partners.
The business of a
corporation
is
generally conducted by
the Board of Directors.
Extent of Liability to Third Persons
GR: Partners are liable
personally
and
subsidiarily
(sometimes solidarily)
for partnership debts
to third persons,
XPN: Limited partner
96
Stockholders are liable
only to the extent of the
shares subscribed by
them whether paid or
not.
Corporation Law
Right of Succession
No right of succession.
(i.e., a partnership
dissolves upon death
of a partner)
Has right of succession.
A partner cannot
transfer his interest in
the
partnership
without the consent of
all the other existing
partners.
A stockholder has the
right to transfer his
shares without prior
consent of the other
stockholders, subject to
limitations embodied in
the AOI.
in the 60-40 Filipino equity ownership requirement
in the corporation, then it may apply the
"grandfather rule." With that, the use of the
Grandfather Rule as a “supplement” to the Control
Test is not proscribed by the Constitution or the
Philippine Mining Act of 1995.
Transferability of Interest
The Grandfather Rule implements the intent of the
Filipinization provisions of the Constitution. (Narra
Nickel Mining and Development Corp., et al. v.
Redmont Consolidated Mines Corp., G.R. No. 195580,
28 Jan. 2015; SEC Opinion No. 16-15)
a. CONTROL TEST
Dissolution
May be dissolved any
time by the will of any
or all of the partners.
Death,
civil
interdiction,
and
insolvency of a partner
dissolve
the
partnership.
It is a mode of determining the nationality of a
corporation engaged in nationalized areas of
activities, provided for under the Constitution and
other
applicable
laws,
where
corporate
shareholders with foreign shareholdings are
present, by ascertaining the nationality of the
controlling stockholder of the corporation. If the
capital of the investing Corporation is at least 60%
owned by Filipinos, then the entire shareholdings of
the investing Corporation shall be recorded as
Filipino-owned thus making both the investing and
investee - corporations Philippine national. (Divina,
2021)
Can only be dissolved
with the consent of the
State.
Death or insolvency of
shareholders will note
result to dissolution of
the corporation.
1. NATIONALITY OF CORPORATIONS
Tests in Determining
Corporations
1.
2.
3.
the
Nationality
of
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
Place of Incorporation test
Control test
Grandfather rule
A corporation organized/incorporated abroad and
registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place
of incorporation test. (SEC Opinion No. 04-14, 3
Mar. 2004; De Leon, 2010).
There are various tests to determine the nationality
of a corporation. The place of incorporation test is
applied if the corporation is not engaged in activities
reserve, in whole or in part, for Filipinos. Under such
test, the nationality of the corporation is determined
by the state of incorporation.
However, with respect to a corporation engaged in
nationalized areas of activities, provided for under
the Constitution and other laws, the primary mode
of determining the nationality is the control test.
When in the mind of the Court, there is doubt, based
on the attendant facts and circumstances of the case,
Who are Considered as Philippine Nationals
Under R.A. No. 7042 (Foreign Investments Act of
1991), other than a citizen of the Philippines, the
following are also considered Philippine Nationals:
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
1.
2.
nationality of the second or even subsequent tier of
ownership to determine the nationality of the
corporate shareholder.
Corporations organized under Philippine laws
of which at least sixty percent (60%) of the
capital stock outstanding and entitled to
vote is owned and held by Filipino citizens.
Thus, to arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined. In
the case of a multi-tiered corporation, the stock
attribution rule must be allowed to run
continuously along the chain of ownership until it
finally reaches the individual stockholders. (Divina,
2020)
Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the
capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the
benefit of Philippine nationals:
The purpose of this rule is to trace the nationality of
the stockholder of investor corporations to
ascertain the nationality of the corporation where
the investment is made. (SEC Opinion, 4 May 1987,
as cited in Divina, 2020)
NOTE: R.A. No. 7042 provides that where a
corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of each of both corporations and
at least 60% of the members of the Board of
Directors of each of both corporations must be
citizens, in order that the corporation shall be
considered a Philippine national. (DOUBLE
60% RULE)
Rules Governing
Grandfather Rule
NOTE: The fact that the religious organization has
no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of
the 60% requirement is obviously to ensure that
corporations or associations allowed to acquire
agricultural land or to exploit natural resources
shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital
stock, the controlling membership should be
composed of Filipino citizens. (Register of Deeds v.
Ung Siu Si Temple, G.R. No. L-6776, 21 May 1955)
b. GRANDFATHER RULE
This is the method by which the percentage of
Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and
other applicable laws, is accurately computed, in
cases where corporate shareholders with foreign
shareholdings are present, by attributing the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
98
the
Application
of
the
1.
The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation. (SEC-OGC
Opinion No. 10-31, 9 Dec. 2010)
2.
The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt. If the stockholder
corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder
corporation is deemed to be held by Filipinos.
(DOJ Opinion No. 19, s. 1989)
3.
When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule. (SEC-OGC Opinion No. 22-07,
7 Dec. 2007)
Corporation Law
Q: What is the prevailing mode of determining
the nationality of corporations engaged in
nationalized activities?
ownership. The application of the control test will
already yield the result that the company is a
Philippine national. The grandfather rule no longer
applies. (Leo Querubin v. COMELEC, G.R. No. 218787,
08 Dec. 2015; Divina, 2021)
A: The "control test" is the prevailing mode of
determining the nationality of corporations
engaged in nationalized activities. However, when
in the mind of the Court there is doubt as to where
beneficial ownership and control reside, based on
the attendant facts and circumstances of the case,
then it may apply the "grandfather rule."
Q: Redmont, a mining company, sought to
invalidate the Mining Production and Sharing
Agreement (MPSA) applications of three
domestic mining companies, namely: Narra,
Tesoro and McArthur, on the ground that at least
60% of the capital stock of Narra, Tesoro, and
McArthur are owned and controlled by MBMI, a
100% Canadian corporation; thus they were
disqualified to engage in mining activities
through MPSAs, which are reserved only for
Filipino citizens.
In fact, the Control Test can be, as it has been,
applied jointly with the Grandfather Rule to
determine the observance of foreign ownership
restriction in nationalized economic activities. The
Control Test and the Grandfather Rule are not, as it
were,
incompatible
ownership-determinant
methods that can only be applied alternative to each
other. Rather, these methods can, if appropriate, be
used cumulatively in the determination of the
ownership and control of corporations engaged in
fully or partly nationalized activities. (Narra Nickel
Mining and Development Corp. v. Redmont
Consolidated Mining Corp., G.R. No. 195580, 21 April
2014)
Narra, Tesoro, and McArthur claimed that the
issue on nationality should not be raised since
they are in fact Philippine Nationals as 60% of
their capital is owned by citizens of the
Philippines. They asserted that though MBMI
owns 40% of the shares of PLMDC, SMMI, and
MMC (which in turn each own majority shares of
Narra, McArthur, and Tesoro, respectively), the
shares of MBMI will not make it the owner of at
least 60% of the capital stock of each of
petitioners. They added that the best tool used
in determining the nationality of a corporation
is the “control test,” embodied in Sec. 3 of RA
7042 or the Foreign Investments Act of 1991.
The Grandfather Rule, standing alone, should not be
used to determine the Filipino ownership and
control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is
first complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject
corporation's Filipino equity falls below the
threshold of 60%, the corporation is immediately
considered foreign-owned, in which case, the need
to resort to the Grandfather Rule disappears. (Narra
Nickel Mining and Development Corp. v. Redmont
Consolidated Mining Corp., G.R. No. 195580, 28 Jan.
2015)
The controversy reached the CA, which used the
grandfather rule to hold that MBMI in effect
owned majority of the common stocks of Narra,
et al., and thus the latter were foreign
corporations.
a.
Was the CA wrong in applying the
Grandfather Rule instead of the Control
Test?
b. Will the Grandfather Rule apply only when
less than 60% of the capital stock are
Filipino-owned? (2016 BAR)
The Supreme Court stressed, however, that when
the 60% Filipino ownership, is never in doubt, the
control test prevails. In the relevant case, it was held
that the petition is severely wanting in facts and
circumstances to raise legitimate challenges to the
joint venture company's 60-40 Filipino-Foreigner
99
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
A:
a. NO. Basically, there are two acknowledged tests
in determining the nationality of a corporation:
the control test and the grandfather rule. The
"control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII, of the 1987 Constitution, entitled to
undertake the exploration, development, and
utilization of the natural resources of the
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipinoequity ownership in the corporation, then it
may apply the "grandfather rule".
b.
exists in the present case that gives rise to a
reasonable suspicion that the Filipino
shareholders do not actually have the requisite
number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur.
Moreover, the ultimate Filipino ownership of
the shares must first be traced to the level of the
Investing Corporation and added to the shares
directly owned in the Investee Corporation.
Concluding from the above-stated facts, it is
quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or
more of their equity interests. Such conclusion
is derived from grandfathering petitioners’
corporate owners, namely: MMI, SMMI and
PLMDC.
NO. The assertion of Narra, et al. that “doubt”
only exists when the stockholdings are less than
60% fails to convince this Court. It would be
ludicrous to limit the application of the said
word only to the instances where the
stockholdings of non-Filipino stockholders are
more than 40% of the total stockholdings in a
corporation. The corporations interested in
circumventing our laws would clearly strive to
have “60% Filipino Ownership” at face value. It
would be senseless for these applying
corporations to state in their respective articles
of incorporation that they have less than 60%
Filipino stockholders since the applications will
be denied instantly. Thus, various corporate
schemes and layerings are utilized to
circumvent the application of the Constitution.
Hence, the Court is correct in using the
Grandfather Rule in determining the nationality
of the petitioners. (Narra Nickel Mining and
Development Corp. v. Redmont Consolidated
Mines Corp, G.R. No. 195580, 28 Jan. 2015)
NOTE: "Corporate layering" is admittedly allowed
by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes
illegal.
Nationalized Activities Reserved for Filipinos
under the Constitution and Special Laws (12th
Negative List, E.O. 175, s. 2022)
A corporation that complies with the 60-40
Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no
doubt as to who has the “beneficial ownership”
and “control” of the corporation. In this case, a
further investigation as to the nationality of the
personalities with the beneficial ownership and
control of the corporate shareholders in both
the investing and investee corporations is
necessary. “Doubt” refers to various indicia that
the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. Even
if at first glance the petitioners comply with the
60-40 Filipino to foreign equity ratio, doubt
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
100% Filipino Owned
Zero Percent (0%) Foreign Equity
(Co-Fi-A-M-Ma-N-Co-Mi-Se-US$2.5M)
1.
2.
3.
100
Cooperatives; (Art. 26, Ch. III, R.A. No. 6938)
Manufacture of Firecrackers and other
pyrotechnic devices; (Sec. 5, R.A. No. 7183)
Manufacture, repair, stockpiling and/or
distribution of biological, chemical, and
radiological weapons and Anti-personnel
mines; (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
Corporation Law
Mass media, except recording;
Utilization of Marine resources; (Sec. 2, Art. XII,
1987 Constitution)
6. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons; (Sec. 8, Art. II,
1987 Constitution)
7. Cockpits; (Sec. 5, P.D. 449)
8. Small-scale Mining; (Sec. 3, R.A. No. 7076)
9. Private Security agencies; (Sec. 4, R.A. No. 5487)
and
10. Retail trade enterprises with paid-up capital of
less than US$2.5 M. (Sec. 5, R.A. No. 8762)
70% Filipino Owned
4.
5.
Up to Twenty Percent (30%) Foreign Equity
(Ad-Pawn)
1.
2.
60% Filipino Owned
Up to Twenty Percent (40%) Foreign Equity
(Go-L-E-A-R-N-C-U-P-I-D-Co)
80% Filipino Owned
Up to Twenty Percent (20%) Foreign Equity (P-R-C)
1.
Contracts for the supply of materials, goods, and
commodities to GOCC, agency or municipal
corporation; (Sec. 1, R.A. No. 5183)
2. Ownership of private Lands; (Sec. 7, Art. XII,
1987 Constitution; Sec. 22, Ch. 5, C.A. 141; Sec. 4,
R.A. No. 9182)
3. Ownership/establishment and administration
of Educational institutions; (Sec. 4, Art. XIV,
1987 Constitution)
4. Adjustment Companies; (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
Rice and corn and the by-products thereof; (Sec.
5, P.D. 194)
6. Exploration, development and utilization of
Natural resources; (Sec. 2, Art. XII, 1987
Constitution)
7. Ownership of Condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units or
owned by a corporation; (Sec. 5, R.A. No. 4726)
8. Operation and management of public Utilities;
(Sec. 11, Art. XII, Constitution; Sec. 16, C.A. 146)
9. Project Proponent and Facility Operator of a
BOT project requiring a public utilities
franchise; (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. No. 7718)
10. Manufacture, repair, storage and/ or
distribution of products/ Ingredients requiring
PNP clearance; (R.A. No. 7042 as amended by
R.A. No. 8179)
11. Operation of Deep-Sea commercial fishing
vessel; (Sec. 27, R.A. No. 8550) and
1.
Private Radio Communications network (R.A.
No. 3846)
75% Filipino Owned
Up to Twenty Percent (25%) Foreign Equity
(Lo-R-D-F)
1.
Contracts for the construction and repair of
Locally-funded public works (Sec. 1, C.A. 541,
L.O.I. 630) except:
a. infrastructure/development
projects
covered in R.A. No. 7718; and
b. projects which are foreign funded or
assisted and required to undergo
international competitive bidding; (Sec.
2(a), R.A. No. 7718)
2.
Private Recruitment, whether for local or
overseas employment; (Art. 27, P.D. 442)
Contracts for the construction of Defenserelated structures; (Sec. 1, C.A. 541) and
Under the Flag Law, in the purchase of articles
for the Government, preference shall be given
to materials and supplies produced, made, or
manufactured in the Philippines, and to
domestic entities. “Domestic entity” means any
citizen of the Philippines or commercial
company at least 75% of the capital of which is
owned by citizens of the Philippines. (Sec. 2, C.A.
138)
3.
4.
Advertising; (Sec. 11(2), Art. XVI, 1987
Constitution) and
Corporations engaged in Pawnshop business.
(Sec. 8, P.D. 114)
101
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
12. Corporations engaged in Coastwise shipping.
(Sec. 806, P.D. 1464)
Teves, G.R. No. 176579, 28 June 2011; Sec. 19, Art. II,
1987 Constitution)
40% Filipino Owned
Q: Following the decision of the Court in the case
of Gamboa v. Teves, the SEC issued a
Memorandum Circular (SEC-MC No. 8), which
are guidelines on compliance with the Filipinoforeign ownership requirement prescribed in
the Constitution and/or existing laws by
corporations engaged in nationalized and partly
nationalized activities. The dispositive portion
of the Gamboa Decision stated that the term
‘capital’ referred only to shares of stock entitled
to vote in the election of directors, while there
were certain statements made in the body of the
Resolution to the effect that the 60-40 Filipinoforeign ownership requirement applies to each
class of shares, whether voting or non-voting.
Hence, Roy filed a case alleging that SEC-MC No.
8 is not compliant with the Gamboa Decision and
Resolution as it did not apply the 60 to 40
Filipino-foreign
ownership
requirement
separately to each class of share. Is Roy correct?
Up to Twenty Percent (60%) Foreign Equity
[F-I-(SEC)]
1.
2.
Financing companies regulated by the SEC (Sec.
6, R.A. No. 5980, as amended by R.A. No. 8556)
Investment houses regulated by the SEC (Sec. 5,
P.D. 129, as amended by R.A. No. 8366)
Q: Bell Philippines, Inc. (BellPhil.) is a public
utility company, duly incorporated and
registered with the SEC. Its authorized capital
stock consists of voting common shares and
non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
and outstanding capital stock of BellPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
with 40%.
A: NO. While there is a passage in the body of the
Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision, the
definiteness and clarity of the fallo of the Gamboa
Decision must control over the obiter dictum in the
Gamboa Resolution.
To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
equivalent to the currently outstanding
common shares. A suit was filed questioning the
corporation action on the ground that the
foreign equity holdings in the company would
now exceed 40% foreign equity limit allowed
under the Constitution for public utilities. Rule
on the legality of Bernard Fleet’s current
holdings. (2013 BAR)
The Gamboa Decision already held, in no uncertain
terms, that what the Constitution requires is "full
and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent
of the voting rights must rest in the hands of Filipino
nationals." And, precisely that is what SEC-MC No. 8
provides, viz.: “For purposes of determining
compliance with the constitutional or statutory
ownership, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to
vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or
not entitled to vote." (Roy v. Herbosa, G.R. No.
207246, 18 Apr. 2017, J. Caguioa)
A: The holdings of Bernard Fleet equivalent to the
outstanding common shares is illegal. His holdings
of preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino
ownership of the capital of public utilities applies
not only to voting control but also to beneficial
ownership of the corporation, it should also apply to
the preferred shares. Preferred shares are also
entitled to vote in certain corporate matters. The
state shall develop a self-reliant and independent
national economy effectively controlled by Filipinos
The effective control here should be mirrored
across the board on all kinds of shares. (Gamboa v.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
102
Corporation Law
entered into a Joint Venture Agreement with
SBMA, Biwater and DMCI. Pursuant to this
agreement, Subic Water – a new corporate entity
– was incorporated, with the following equity
participation from its shareholders: SBMA 20%;
OCWD 10%; Biwater 30%; and DMCI 40%.
2. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
The doctrine of corporate juridical personality
states that a corporation is a juridical entity with
legal personality separate and distinct from those
acting for and, in its behalf, and, in general, from the
people comprising it. (Francisco v. Mallen Jr., G.R. No.
173169, 22 Sept. 2010)
Subic Water was granted the franchise to
operate and to carry on the business of
providing water and sewerage services in the
Subic Bay Free Port Zone, as well as in Olongapo
City. Hence, Subic Water took over OCWD’s
water operations in Olongapo City. To finally
settle their money claims against each other,
Olongapo City and OCWD entered into a
compromise agreement.
Q: An employee of Price Richardson Corporation
executed a sworn affidavit at the NBI’s Interpol
Division, alleging that Price Richardson was
"engaged in boiler room operations, wherein
the company sells non-existent stocks to
investors using high pressure sales tactics." The
SEC filed before the DOJ its complaint against,
among with its incorporators and directors,
Price Richardson, for violation of Art. 315(1)(b)
of the Revised Penal Code (RPC) and Secs.
26.3 and 28 of the Securities Regulation Code
(SRC). Velarde-Albert was its Director for
Operations and Resnick was its Associated
Person. Can Velarde-Albert and Resnick be
indicted for violations of the SRC and the RCC?
To enforce the compromise agreement,
Olongapo City filed a motion for the issuance of
a writ of execution with the RTC. OCWD’s former
counsel filed a manifestation alleging that
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because
of this assertion, Subic Water also filed a
manifestation informing the RTC that as borne
out by the articles of incorporation and general
information sheet of Subic Water, OCWD is not
Subic Water. The manifestation also indicated
that OCWD was only a ten percent (10%)
shareholder of Subic Water; and that its 10%
share was already in the process of being
transferred to Olongapo City pursuant to a Deed
of Assignment.
A: NO. Velarde-Albert and Resnick cannot be
indicted for violations of the SRC and the RPC.
Petitioner failed to allege the specific acts of
respondents Velarde-Albert and Resnick that could
be interpreted as participation in the alleged
violations. There was also no showing, based on the
complaints, that they were deemed responsible for
Price Richardson's violations. To be held criminally
liable for the acts of a corporation, there must be a
showing that its officers, directors, and
shareholders actively participated in or had the
power to prevent the wrongful act. A corporation’s
personality is separate and distinct from its officers,
directors, and shareholders. (SEC v. Price Richardson
Corp, G.R. No. 197032, 26 July 2017)
Can Subic Water be made liable under the writ
of execution issued by RTC in favor of Olongapo
City?
A: NO. OCWD and Subic Water are two separate and
different entities. Subic Water clearly demonstrated
that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Subic Water. As a mere shareholder, OCWD’s
juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in
Corporation Law that a corporation is a juridical
entity vested with a legal personality separate and
distinct from those acting for and, in its behalf, and,
in general, from the people comprising it. Under this
Q: Olongapo City filed a complaint for sum of
money and damages against Olongapo City
Water District (OCWD). It alleged that OCWD
failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
pursuant to OCWD’s acquisition of Olongapo
City’s water system. In the interim, OCWD
103
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
It should be noted in this regard that while Nuccio
was the signatory of the loan and the money was
delivered to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed
business plan. That the business did not materialize
is not also sufficient proof to justify a piercing, in the
absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the
respondent for the petitioners’ undisclosed goals.
NSI’s liability should not attach to Nuccio. (Saverio v.
Puyat, G.R. No. 186433, 27 Nov. 2013)
corporate reality, Subic Water cannot be held liable
for OCWD’s corporate obligations in the same
manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate
entity. (Olongapo City v. Subic Water and Sewerage
Co., Inc., G.R. No. 171626, 06 Aug. 2014)
Q: Puyat granted a loan to NS International, Inc.
(NSI). The loan was made pursuant to the
Memorandum of Agreement and Promissory
Note between Puyat and NSI, represented by
Nuccio. It was agreed that Puyat would extend a
credit line with a limit of P500,000.00 to NSI, to
be paid within thirty (30) days from the time of
the signing of the document. The loan carried an
interest rate of 17% per annum, or at an
adjusted rate of 25% per annum if payment is
beyond the stipulated period. NSI and Nuccio
received a total amount of P300,000.00 and
certain machinery intended for their business.
The proposed business, however, failed to
materialize.
Q: Richard owns 90% of the shares of the capital
stock of GOM Co. On one occasion, GOM
represented by Richard as President and
General Manager executed a contract to sell a
subdivision lot in favor of Tomas. For failure of
GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
and Richard. Will the action prosper? Explain
(1996 BAR)
A: The action will prosper against GOM Corporation
but not against Richard. Richard has a separate and
distinct personality from GOM. His mere ownership
of 90% of the shares of the capital stock of GOM does
not make him one and the same as the corporation.
Mere ownership by a single stockholder, or by
another corporation, of all or nearly all of the capital
stock of a corporation is not itself a sufficient ground
for disregarding the separate corporate personality.
(Secosa v. Heirs of Erwin Suarez Francisco, G.R. No.
160039, 29 June 2004)
When the petitioners defaulted in the payment
of the loan, Puyat filed a collection suit alleging
mainly that the NSI and Nuccio still owe him the
value of the machinery. The RTC ordered them,
jointly and severally, to pay the balance. The CA
also affirmed the RTC ruling that they are one
and the same. Did the CA commit a reversible
error in affirming the RTC’s decision holding
them jointly and severally liable for the amount
claimed?
A: YES. Piercing the veil of corporate fiction is not
justified. The NSI and Nuccio are not one and the
same. The records of the case do not show that
Nuccio had control or domination over NSI’s
finances. The mere fact that it was Nuccio who, on
behalf of the corporation, signed the MOA is not
sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a
board resolution authorizing him to contract the
loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among
others, may point to the proof required to justify the
piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof
required to support the desired conclusion.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: A contract of sale was entered into between
petitioner DHLFMC and respondent ASIAMED
whereby the former agreed to purchase
machines from the latter for a consideration of
P31 million to be paid no later than (2) days
from the date of delivery. Despite receiving the
machines, with invoices signed by Anthony and
Alejandro, DHLFMC did not pay the whole
consideration which led ASIAMED to file a
complaint for sum of money with a writ of
preliminary attachment against the DHLFMC
and Anthony demanding the payment of the
balance of the contract. The RTC found DHLFMC
and Anthony jointly and severally liable. On
appeal, the CA ruled that the DHLFMC and
104
Corporation Law
letter demanding the reimbursement
P420,000, but Tan refused.
Anthony were estopped from raising the
separate juridical personality of DHLFMC in
view of their denial of the allegation that
DHLFMC "[was] an entity representing itself to
be a corporation duly organized and existing,"
stating that they "never represented that
[petitioner] DHLFMC [was] a corporate entity
duly organized and existing. Hence, he should be
held solidarily liable. Are the petitioners
estopped from invoking the separate juridical
personality of DHLFMC?
of
Union Bank then debited the available balance
in Tan’s account as a set-off, and thereafter
instituted a Complaint for Sum of Money for the
recovery of the remaining balance. Tan argues
that Union Bank should not be allowed to
recover the amount erroneously deposited in
his account because of Union Bank’s own gross
negligence. On an appeal before the CA, Tan
named Yon Mitori as co-appellant. In appealing
to the Supreme Court, Yon Mitori was named as
sole petitioner in the Petition.
A: YES. Petitioners do not dispute that they
specifically denied the allegation regarding
petitioner DHLFMC's corporate circumstances, the
truth being that the petitioners never represented
that petitioner DHLFMC is a corporate entity duly
organized and existing under and by virtue of the
laws of the Republic of the Philippines. Petitioners
merely insist that petitioner Anthony was not
shown to have acted in bad faith, and thus, cannot
be held solidarily liable with petitioner
DHLFMC. However, petitioners do not point to
anything on record to counter their own specific
denial that would establish DHLFMC's existence as
a corporation with separate juridical personality.
(Dee Hwa Liong Foundation v. ASIAMED, G.R. No.
205638, 23 Aug. 2017)
a. Is Yon Mitori a real party in interest?
b. Is Tan obligated to return the value of the
BPI Check?
A:
a.
Q: Rodriguez Tan, doing business under the
name and style of Yon Mitori, is a depositor
maintaining a Current Account with Union Bank.
In said account, Tan deposited P420,000
through BPI Check drawn against the account of
Angli Lumber & Hardware, Inc, which is one of
Tan’s clients. The BPI Check was entered in
Tan’s bank records. Tan withdrew from said
account the amount of P480,000.00. Later that
day, however, the BPI Check was returned to
Union Bank as the account against which it was
drawn had been closed. Union Bank discovered
that Tan’s account had been mistakenly credited
so their branch manager immediately called Tan
to recover the funds mistakenly released but
Tan refused. During Union Bank’s investigation,
it was discovered that Tan previously deposited
five BPI checks drawn by Angli Lumber against
the same BPI account, and these checks were all
previously dishonored. Union Bank sent Tan a
NO. Yon Mitori has no separate juridical
personality. A single proprietorship is not
considered a separate juridical person under
the Civil Code. The Petition should have been
filed in Tan's name, the latter being the real
party in interest who possesses the legal
standing to file this Petition. Nevertheless, the
Court permits the substitution of Tan as
petitioner. Sec. 4, Rule 10 of the Rules of Court
provides that “a defect in the designation of the
parties and other clearly clerical or
typographical errors may be summarily
corrected by the court at any stage of the
action, at its initiative or on motion, provided
no prejudice is caused thereby to the adverse
party.”
b. YES. Tan is bound to return the proceeds of the
dishonored BPI Check based on the principle of
unjust enrichment. Art. 22 of the Civil Code
states that “every person who through an act of
performance by another, or any other means,
acquires or comes into possession of
something at the expense of the latter without
just or legal ground, shall return the same to
him.” For the principle to apply, the following
requisites must concur: (i) a person is unjustly
benefited; and (ii) such benefit is derived at the
expense of or with damages to another.
105
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
may be made on the president, managing
partner, general manager, corporate secretary,
treasurer, or in-house counsel of the
corporation wherever they may be found, or in
their absence or unavailability, on their
secretaries.
Here, it was unequivocally established that Tan
withdrew and utilized the proceeds of the BPI
Check fully knowing that he was not entitled
thereto. To note, Tan had deposited five other
checks drawn against the same account. He
was fully aware that Angli Lumber's account
with BPI had been closed. So he could not have
expected that the BPI Check in question would
be honored. (Yon Mitori International
Industries v. Union Bank of the Philippines, G.R.
No. 225538, 14 Oct. 2020, J. Caguioa)
If such service cannot be made upon any of the
foregoing persons, it shall be made upon the
person who customarily receives the
correspondence for the defendant at its
principal office.
Significance of the Doctrine of Separate Juridical
Personality
1.
In case the domestic juridical entity is under
receivership or liquidation, service of summons
shall be made on the receiver or liquidator, as
the case may be.
Liability for acts or contracts – As a general
rule, the obligation of the corporation is not the
liability of the stockholders, directors, or
officers. (1992, 1996, 2010 BAR)
Should there be a refusal on the part of the
persons above-mentioned to receive summons
despite at least three (3) attempts on two (2)
separate dates, service may be made
electronically, if allowed by the court, as
provided under Section 6 of Rule 14. (Sec. 12,
Rule 14, Rules of Court)
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected, and vice versa. (Cease v. CA, G.R. No.
L-33172, 18 Oct. 1979)
2.
Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons. (Art. 46, NCC)
5.
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter own
substantial majority of the shares in that
corporation; and rights of the stockholders,
directors and officers cannot be invoked by the
corporation. (Stonehill v. Diokno, G.R. No. L19550, 19 June 1967)
3.
4.
Stockholders are NOT the Owners of Corporate
Properties and Assets
A corporation is a juridical person distinct from the
members composing it. Properties in the name of
the corporation are owned by it as an entity
separate and distinct from its members. While
shares of stocks constitute personal property, they
do not represent property of the corporation. The
corporation has properties of its own. A share of
stock only represents an aliquot part of the
corporation’s property, or the right to share in its
proceeds but its holder is not the owner of any.
(Silverio v. Filipino Business Consultants, Inc., G.R. No.
143312, 12 Aug. 2005)
Right to acquire and possess property –
property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members.
Acquisition of jurisdiction – When the
defendant is a corporation, partnership or
association organized under the laws of the
Philippines with a juridical personality, service
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Changes in individual membership –
corporation remains unchanged and unaffected
in its identity by changes in its individual
membership or ownership of its stocks.
At the very least, the interest of stockholders is
purely inchoate, or in sheer expectancy of a right in
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Corporation Law
the management of the corporation and to share in
the profits thereof and in the properties and assets
thereof on dissolution, after payment of the
corporate debts and obligations. The interest of the
stockholders over the properties are merely
inchoate. (Saw v. CA, G.R. No. 90580, 08 Apr. 1991;
1996, 2000 BAR)
equitable rights over the subject properties?
Moreover, under the trust fund doctrine, the capital
stock, property, and other assets of a corporation
are regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
the corporation unless the indispensable conditions
and procedures for the protection of corporate
creditors are followed. (Yamamoto v. Nishino
Leather Industries, Inc., G.R. No. 150283, 16 Apr.
2008)
Aznar, et al., who are stockholders of RISCO, cannot
claim ownership over the properties at issue in this
case on the strength of the Minutes which, at most,
is merely evidence of a loan agreement between
them and the company. There is no indication or
even a suggestion that the ownership of said
properties were transferred to them which would
require no less that the said properties be registered
under their names. At the very least, their interest is
purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in
the profits thereof and in the properties and assets
thereof on dissolution, after payment of the
corporate debts and obligations.
A: NO. Aznar, et al., have no right to ask for the
quieting of title of the properties at issue because
they have no legal and/or equitable rights over the
properties that are derived from the previous
registered owner which is RISCO.
Q: RISCO ceased operation due to business
reverses. Due to Aznar et. al’s desire to
rehabilitate RISCO, they contributed a total
amount of P212,720.00 which was used in the
purchase of three (3) parcels of land located in
various areas in the Cebu Province. Pursuant to
the Minutes of the Special Meeting of the Board
of Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the
titles of the said parcels of land. Thereafter,
various subsequent annotations were made on
the same titles in favor of PNB. As a result, a
Certificate of Sale was issued in favor of PNB,
being the lone and highest bidder of the three
(3) parcels of land and was also issued Transfer
Certificate of Title over the said parcels of land.
While a share of stock represents a proportionate or
aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right
or title to any of the property, his interest in the
corporate property being equitable or beneficial in
nature. Shareholders are in no legal sense the
owners of corporate property, which is owned by
the corporation as a distinct legal person. (PNB v.
Aznar, et al, G.R. No. 171805, 30 May 2011)
NOTE: Where stockholders granted a loan to the
corporation to finance the acquisition of property
which was eventually mortgaged to a bank to secure
a corporate loan, the right of the stockholders is
subordinate to the mortgagee. The stockholder has
the right to be paid the loan but not to the property
of the corporation. (Divina, 2021 citing PNB v. Aznar,
supra)
Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
properties. They alleged that the subsequent
annotations on the titles are subject to the prior
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere
stockholders of RISCO, they do not have any
legal or equitable right over the properties of
the corporation. Do Aznar et. al. have the legal or
Q: National Galleon Shipping Corporation
(Galleon) took out several loans from different
sources such as foreign financial institutions, its
shareholders and other entities. DBP
guaranteed Galleon's foreign loans. Galleon and
its stockholders, Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio, executed
107
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
a Deed of Undertaking and obligated themselves
to guarantee DBP's potential liabilities. Galleon
undertook to secure a first mortgage on its new
and second-hand vessels. Despite the loans,
Galleon’s financial condition did not improve.
President Marcos issued a Letter of Instruction
ordering NDC to acquire 100% of the
shareholdings of Galleon Shipping Corporation
from its present owners.
members, having "powers, attributes and
properties expressly authorized by law or incident
to its existence.”
Novation is a mode of extinguishing an obligation by
"changing its object or principal conditions,
substituting the person of the debtor or subrogating
a third person in the rights of the creditor." While
novation, "which consists in substituting a new
debtor in the place of the original one may be made
even without the knowledge or against the will of
the latter, it must be with the consent of the
creditor.”
Galleon's stockholders, represented by Cuenca,
and NDC, through its then Chairman of the Board
of Directors, Ongpin, entered into a
Memorandum of Agreement where NDC and
Galleon undertook to prepare and sign a share
purchase agreement covering 100% of Galleon's
equity. DBP paid off Galleon's debts to its foreign
bank creditor. NDC took over Galleon's
operations "even prior to the signing of a share
purchase agreement." However, despite NDC's
takeover, the share purchase agreement was
never formally executed. President Marcos
issued another letter to DBP and NDC directing
that they take steps, including foreclosure of
Galleon vessels and other assets.
Aside from Ongpin being the concurrent head of
DBP and NDC at the time the Memorandum of
Agreement was executed, there was no proof
presented that Ongpin was duly authorized by DBP
to give consent to the substitution by NDC as a coguarantor of Galleon's debts. Ongpin is not DBP,
therefore, it is wrong to assume that DBP impliedly
gave its consent to the substitution simply by virtue
of the personality of its Governor. (DBP v. Sta. Ines
Melale Forest Products Corp., G.R. No. 193068, 01 Feb.
2017)
Sta. Ines, Cuenca, Tinio, Cuenca Investment and
Universal Holdings, major stockholders of
Galleon, filed a Complaint with Application for
Injunction. They claimed that DBP can no longer
go after them for any deficiency judgment since
NDC had been subrogated in their place as
borrowers, hence the Deed of Undertaking they
executed had been extinguished and novated.
Did the Memorandum of Agreement novate the
Deed of Undertaking executed between DBP and
respondents?
Stockholders are NOT Real Parties in Interest to
Claim Damages and Recover Compensation
The stockholders were clearly not vested with any
direct interest in the personal properties coming
under the levy on attachment by virtue alone of
their being stockholders of the corporation. Their
stockholdings represented only their proportionate
or aliquot interest in the properties of the
corporation but did not vest in them any legal right
or title to any specific properties of the corporation.
Without doubt, the corporation remained the owner
as a distinct legal person. Given the separate and
distinct legal personality of the corporation, the
stockholders lacked the legal personality to claim
the damages sustained from the levy of the former’s
properties. (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, 06 Mar. 2013)
A: NO. The Court of Appeals erred when it ruled that
DBP was privy to the Memorandum of Agreement
since Ongpin was concurrently Governor of DBP and
chairman of NDC Board of Directors at the time the
Memorandum of Agreement was signed.
The general rule is that, "in the absence of an
authority from the board of directors, no person, not
even the officers of the corporation, can validly bind
the corporation." A corporation is a juridical person,
separate and distinct from its stockholders and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: Ronald Sham, doing business under the name
of SHAMRON Machineries (Shamron), sold to
Turtle Mercantile (Turtle) a diesel farm tractor.
In payment, Turtle’s President and Manager
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Corporation Law
Respondents refused to obey Capt. Cura, who
then told them that they were dismissed. Is
Arcega solidarily liable for the obligations of
Symex to respondents?
Dick Seldon issued a check for P50,000 in favor
of Shamron. A week later, Turtle sold the tractor
to Briccio Industries (Briccio) for P60,000.
Briccio discovered that the engine of the tractor
was reconditioned so it refused to pay Turtle. As
a result, Dick Seldon ordered the “Stop
Payment” of the check issued to Shamron.
Shamron sued Turtle and Dick Seldon. Shamron
obtained a favorable judgment holding codefendants Turtle and Dick Seldon jointly and
severally liable. Comment on the decision of the
trial court. Discuss fully. (1995 BAR)
A: NO, there was no showing that Arcega, as
President of Symex, willingly and knowingly voted
or assented to the unlawful acts of the company. A
corporation is a juridical entity with a legal
personality separate and distinct from those acting
for and in its behalf and, in general, from the people
comprising it. Thus, as a general rule, an officer may
not be held liable for the corporation's labor
obligations unless he acted with evident malice
and/or bad faith in dismissing an employee. Sec. 31
of the Corporation Code (now Sec. 30 of the RCC) is
the governing law on personal liability of officers for
the debts of the corporation. To hold a director or
officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in
the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the
officer was guilty of gross negligence or bad faith;
and (2) there must be proof that the officer acted in
bad faith.
A: I disagree with the trial court’s ruling. Dick
Seldon should not be held solidarily liable with
Turtle in his capacity as President and Manager of
Turtle. Turtle has a separate juridical personality
from its officers. (Consolidated Bank and Trust Corp.
v. CA, G.R. No. 114286, 19 Apr. 2001)
Non-Applicability of Doctrine of Separate
Juridical Personality in Examination of Officers
to Ascertain Properties, Income which can be
Subjected to Execution
The doctrine of separate juridical personality does
not apply if the judgment creditor wanted the
officers to be examined not for the purpose of
passing unto them the liability of the judgment
obligor but to ascertain the properties and income
of the latter which can be subjected for execution in
order to satisfy the final judgment and nothing else.
(Linden Suites, Inc. v. Meridien Far East Properties,
Inc., G.R. No. 211969, 04 Oct. 2021)
Respondents failed to specifically allege either in
their complaint or position paper that Arcega, as an
officer of Symex, willfully and knowingly assented
to the acts of Capt. Cura, or that Arcega had been
guilty of gross negligence or bad faith in directing
the affairs of the corporation. In fact, there was no
evidence at all to show Arcega's participation in the
illegal dismissal of respondents. Clearly, the twin
requisites of allegation and proof of bad faith,
necessary to hold Arcega personally liable for the
monetary awards to the respondents, are lacking.
(Symex Security Services, Inc. v. Rivera, Jr., G.R. No.
202613, 08 Nov. 2017, J. Caguioa)
Officers NOT liable for Dismissal of Employee
Except in Cases of Evident Malice and/or Bad
Faith
Q: Respondents had been employed as security
guards by petitioner Symex. They were not given
a rest day, and were not paid their overtime pay,
five-day service incentive leave pay, and 13th
month pay. Thus, respondents filed a complaint
against Symex and its President and Chairman of
the Board, Arcega. Capt. Cura, the operations
manager of Symex, told respondents that they
would not be given a duty assignment unless
they withdrew the complaint they filed.
Entitlement of Corporations to Constitutional
Rights
Corporations are entitled to the following rights
under the Constitution:
1.
109
Right to Due Process (Sec. 1, Art. III, 1987
Constitution);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2.
Liability of a Corporation in Cases of Crimes
Right against Unreasonable Searches and
Seizures. (Sec. 2, ibid.)
GR: If the crime is committed by a corporation or
other juridical entity, the directors, officers,
employees, or other officers thereof responsible
for the offense shall be charged and penalized for
the crime, precisely because of the nature of the
crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot
be penalized for a crime punishable by
imprisonment. (Ching v. Secretary of Justice, G.R. No.
164317, 06 Feb. 2006)
NOTE: Corporations are not entitled to the right
against self-incrimination, being a mere creature of
law. It is presumed to be incorporated for the
benefit of the public. It received certain special
privileges and franchises and holds them subject to
the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make
no contract not authorized by its charter. Its rights
to act as a corporation are only preserved to it so
long as it obeys the laws of its creation. There is a
reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its
powers. It would be a strange anomaly to hold that
a state, having chartered a corporation to make use
of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been
employed, and whether they had been abused, and
demand the production of the corporate books and
papers for that purpose. (Bataan Shipyard &
Engineering Co. v. PCGG, G.R. No. 75885, 27 May
1987)
XPN: However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined. (Ibid.)
RECOVERY OF DAMAGES
Recovery of Moral Damages
GR: A corporation is not entitled to moral damages
because, being an artificial person and having
existence only in legal contemplation, it has no
feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental
anguish, which can be experienced only by one
having a nervous system. (ABS-CBN Broadcasting
Corp. v. CA, G.R. No. 128690, 21 Jan. 1999)
LIABILITY FOR TORTS AND CRIMES
A Corporation may be held Liable for Torts
A corporation is liable whenever a tortious act is
committed by an officer or agent under express
direction or authority from the stockholders or
members acting as a body, or, generally, from the
directors as the governing body. (PNB v. CA, G.R. No.
L-27155, 18 May 1978)
XPNs:
1. A corporation may recover moral damages
under item 7 of Art. 2219, of the NCC because
said provision expressly authorizes the
recovery of moral damages in cases of libel,
slander, or any other form of defamation.
Reason for Liability in Cases of Torts
A corporation is civilly liable in the same manner as
natural persons for torts, because generally
speaking, the rules governing the liability of a
principal or master for a tort committed by an agent
or servant are the same, whether the servant or
agent is a natural person or a corporation and
whether the servant or agent be a natural or
artificial person . (Ibid.)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: Art. 2219(7) does not qualify whether
the injured party is a natural or juridical person.
Therefore, a corporation, as a juridical person,
can validly complain for libel or any other form
of defamation and claim for moral damages.
(Filipinas Broadcasting Network, Inc. v. AMECBCCM, G.R. No. 141994, 17 Jan. 2005)
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the
110
Corporation Law
damages. (Filipinas Broadcasting Network, Inc., v.
AMEC-BCCM, supra)
business realm. But in such a case, it is
imperative for the claimant to present proof to
justify the award. It is essential to prove the
existence of the factual basis of the damage and
its causal relation to petitioner’s acts. (MERALCO
v. T.E.A.M. Electronics Corp., et. al., G.R. No.
131723, 13 Dec. 2007)
Q: Meralco and T.E.A.M. Electronics Corporation
(TEC) were parties to two separate contracts for
the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
electric power. One day, Meralco conducted a
surprise inspection of the electric meters
installed at the DCIM building. Two meters
were found to be allegedly tampered with and
did not register the actual power consumption
in the building. Meralco informed TEC of the
results of the inspection and demanded from the
latter the payment of its unregistered
consumption. TEC failed to pay the same.
NOTE: While the court may allow the grant of moral
damages to corporations, it is not automatically
granted; there must still be proof of the existence of
the factual basis of the damage and its causal
relation to the defendant’s acts. This is so because
moral damages, though incapable of pecuniary
estimation, are in the category of an award designed
to compensate the claimant for actual injury
suffered and not to impose a penalty on the
wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov.
2008)
For failure to pay, Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to
do with the alleged tampering, but the latter
refused to heed the demand. The Energy
Regulatory Board (ERB) immediately ordered
the reconnection of the service, but Meralco did
not immediately comply. TEC filed a complaint
for damages against Meralco before the RTC.
The RTC ruled in favor of TEC, and it awarded,
among others, moral damages. Is TEC entitled to
moral damages?
Q: "Exposé" is a radio documentary program
hosted by Rima and Alegre. It is aired every
morning over DZRC-AM which is owned by FBNI.
One morning, Rima and Alegre exposed various
alleged complaints from students, teachers and
parents against AMEC and its administrators
and called it the dumping ground for misfits.
Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
Medicine, filed a complaint for damages against
FBNI, Rima and Alegre. As a defense, FBNI claims
that AMEC is not entitled to moral damages
because it is a corporation. Is AMEC is entitled to
moral damages?
A: NO. TEC is not entitled to moral damages. TEC’s
claim was premised allegedly on the damage to its
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a
natural person, it cannot experience physical
suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business realm.
But in such a case, it is imperative for the claimant
to present proof to justify the award. It is essential
to prove the existence of the factual basis of the
damage and its causal relation to Meralco’s acts. In
the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC
has been debased as a result of Meralco’s acts.
(MERALCO v. T.E.A.M. Electronics Corp. et al., supra)
A: YES. AMEC is entitled to moral damages. A
juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish,
or moral shock. Nevertheless, AMEC’s claim for
moral damages falls under item 7 of Art. 2219 of the
NCC. This provision expressly authorizes the
recovery of moral damages in cases of libel, slander,
or any other form of defamation. Art. 2219(7) does
not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such
as a corporation can validly complain for libel or any
other form of defamation and claim for moral
111
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
3. DOCTRINE OF PIERCING THE
CORPORATE VEIL
Grounds for Application of Doctrine of Piercing
the Corporate Veil
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard, for
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct
from the persons composing it.
It applies upon the following circumstances:
(F-A-C-O)
Where it appears that business enterprises are
owned, conducted, and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to
protect the rights of third persons. (Vicmar
Development Corporation v. Elarcosa, et al., G.R. No.
202215, 09 Dec. 2015)
2.
If the complete control of one corporate entity
to another which perpetuated the wrong is the
proximate cause of the injury (Control Test);
4.
If a certain corporation is only an adjunct or an
extension of the personality of the corporation
(Alter Ego or Instrumentality Test); or
If the fiction is pierced to make the stockholders
liable for the obligation of the corporation
(Objective Test).
Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System (SSS),
informing her that she cannot avail of their
retirement benefits since per their record she
has only paid 16 months. Aggrieved, Lorezo
then filed her Amended Petition before the
Social Security Commission (SSC), alleging that
she was employed as laborer in Cataywa
managed by Jose Marie Villanueva in 1970 but
was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her
wages from 1970 to 1995, but not all were
remitted to the SSS which, subsequently, caused
the rejection of her claim. She also impleaded
Talisay Farms, Inc. by virtue of its Investment
Agreement with Mancy and Sons Enterprises.
She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and Sons
Enterprises and Manuel and Jose Marie
Villanueva are one and the same. Should Mancy
and Sons Enterprises’ veil of corporate fiction be
pierced?
Effect of Piercing the Corporate Veil
2.
If the fiction is used to perpetrate fraud (Fraud
Test);
3.
Absent any allegation or proof of fraud or other
public policy considerations, the existence of
interlocking directors, officers and stockholders is
not enough justification to pierce the veil of
corporate fiction as in the instant case. (Hacienda
Luisita Incorporated v. Presidential Agrarian Reform
Council, G.R. No. 171101, 22 Nov. 2011)
1.
1.
The corporation will be treated merely as an
association of persons, undertaking a business
and the liability will attach directly to the
officers and stockholders.
Where there are two (2) corporations, they will
be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit, or adjunct of the other.
NOTE: Notwithstanding that the corporate veil has
been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
necessarily abrogated. (Reynoso IV v. CA, G.R. Nos.
116124-25, 22 Nov. 2000)
A: NO. It was not alleged nor proven that Mancy and
Sons Enterprises, Inc. functions only for the benefit
of Manuel Villanueva, thus, one cannot be an alter
ego of the other. The piercing doctrine when applied
to alter ego cases applies where the stock of a
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
112
Corporation Law
corporation is owned by one person whereby the
corporation functions only for the benefit of such
individual owner. In such case, the corporation and
the individual should be deemed one and the same.
family corporation was intended merely as a case of
“estate tax planning.”
Q: Mr. Pablo, a rich merchant in his early forties,
was a defendant in a lawful suit which could
subject him to substantial damages. A year
before the court rendered judgment, Pablo
sought his lawyer’s advice on how to plan his
estate to avoid taxes. He suggested that he
should form a corporation with himself, his wife,
and his children (all students and still
unemployed) as stockholders and then transfer
all his assets and liabilities to this corporation.
Mr. Pablo followed the recommendation of his
lawyer.
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc.
With the judgment attaining finality, the sheriff
levied on execution various personal properties
found at what was supposed to be Kukan’s office.
Kukan International Corporation (KIC) filed a
third-party complaint, alleging that it was the
owner of the levied properties. Morales prayed
that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
the judgment debt of Kukan. The RTC granted
the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
affirmed the RTC. Did the RTC properly apply the
doctrine?
Accordingly, this separate personality of the
corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used
as a cloak or cover for fraud or illegality, or to work
an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors.
Corporations are composed of natural persons and
the legal fiction of a separate corporate personality
is not a shield for the commission of injustice and
inequity. Likewise, this is true when the corporation
is merely an adjunct, business conduit or alter ego
of another corporation. In such case, the fiction of
separate and distinct corporation entities should be
disregarded. (Tan Boon Bee v. Jarencio, G.R. No. L41337, 30 June 1988)
There is no need to pierce the corporate veil since
Lorezo failed to substantiate her claim that Mancy
and Sons Enterprises, Inc. and Manuel and Jose
Marie Villanueva are one and the same. She based
her claim on the SSS form wherein Manuel
Villanueva appeared as employer. However, this
does not prove, in any way, that the corporation is
used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as
a shield to confuse the legitimate issues, warranting
that its separate and distinct personality be set
aside. (Hacienda Cataywa/Manuel Villanueva, et al.
v. Rosario Lorezo, G.R. No. 179640, 18 Mar. 2015)
One year later, the court rendered judgment
against Pablo and the plaintiff sought to enforce
this judgment. The sheriff, however, could not
locate any property in the name of Pablo and
therefore returned the writ of execution
unsatisfied. What remedy, if any, is available to
the plaintiff? (1994 BAR)
A: NO. The principle of piercing the veil of
corporate fiction, and the resulting treatment of
two related corporations as one and the same
juridical person with respect to a given transaction,
is basically applied only to determine established
liability; it is not available to confer on the court a
jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its
property would infringe on its right to due process.
A: The plaintiff can avail himself of the doctrine of
piercing the veil of corporate fiction which can be
invoked when a corporation is formed or used in
avoiding a just obligation.
The factual settings indicate the existence of a lawful
suit that could subject Pablo to a substantial amount
of damages. It would thus be difficult for Pablo to
convincingly assert that the incorporation of the
113
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
it because it was its owner, it had not been made
a party to the case, and it was a corporation
entirely different from TTAI. Is Gold Line’s
contention, correct?
Two-fold Implication:
1.
2.
The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and
A: NO. Whenever necessary for the interest of the
public or for the protection of enforcement of their
rights, the notion of legal entity should not and is not
to be used to defeat public convenience, justify
wrong, protect fraud or defend crime. There is
sufficient factual basis to find that Goldline and TTAI
were one and the same entity, specifically: (a)
documents submitted showing that Cheng, who
claimed to be the operator of TTAI, is also the
President/Manager and an incorporator of Gold Line;
and (b) Travel and Tours Advisers, Inc. had been
known in Sorsogon as Goldline.
The doctrine of piercing the veil of corporate
entity can only be raised during a full-blown
trial over a cause of action duly commenced
involving parties duly brought under the
authority of the court by way of service of
summons or what passes as such service.
(Kukan International Corp v. Reyes, G.R. No.
182729, 29 Sept. 2010)
NOTE: The Supreme Court, however, ruled
differently in Gold Line Tours v. Lacsa (G.R. No.
159108, 18 June 2012). It held that if the RTC had
sufficient factual basis to conclude that the two
corporations are one and the same entity as when
they have the same president and controlling
shareholder and it is generally known in the place
where they do business that they are one, the thirdparty claim filed by the other corporation was
properly set aside and the levy on its property held
valid even though the latter was not made a party
to the case. The judgment may be enforced against
the other corporation to prevent multiplicity of
suits and save the parties unnecessary expenses
and delays. (Divina, 2021)
The RTC was correct in finding that the two
companies are actually one and the same, hence the
levy for the bus in question was proper. The RTC thus
rightly ruled that Goldline might not be shielded from
liability under the final judgment through the use of
the doctrine of separate corporate identity. Truly,
this fiction of law could not be employed to defeat the
ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
Concepcion Lacsa, G.R. No. 159108, 18 June 2012)
Q: Eric Livesey filed a complaint for illegal
dismissal with money claims against CBB
Philippines Strategic Property Services, Inc.
(CBB) and Paul Dwyer, its president. Livesey and
CBB, through Keith Elliot, entered into a
compromise agreement. Unless and until the
agreement is fully satisfied, CBB shall not sell,
alienate, or otherwise dispose of all or
substantially all of its assets or business;
suspend its business operations; substantially
change the nature of its business; and declare
bankruptcy or insolvency.
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
with a passenger jeepney, causing her instant
death. The Heirs of Concepcion instituted a suit in
the RTC for damages due to breach of contract,
with the complaint set against “Travel & Tours
Advisers, Inc. (Goldline)” and the bus driver. The
RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A
writ of execution was served upon TTAI and
Cheng, operator of the Goldline bus. Cheng failed
to settle the judgment; thus a tourist bus was
levied.
CBB failed to pay the rest of the amount as the
company ceased operations. Livesey moved for
the issuance of an alias writ of execution,
alleging that CBB and Elliot have organized
another corporation, “Binswanger Philippines,
Inc.” He claimed that there was evidence
showing that CBB and Binswanger Philippines,
Inc. are one and the same corporation, pointing
Gold Line Tours Inc. filed a third-party claim,
claiming that the levied tourist bus be returned to
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
114
Corporation Law
Circumstances which did NOT Result to the
Piercing of the Corporate Veil
out that CBB stands for Chesterton Blumenauer
Binswanger. Is the doctrine of piercing the veil
of corporate fiction applicable?
The mere fact that: (Fi-Co-S)
A: YES. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB
ceased to exist only in name; it re–emerged - to
avoid payment by CBB of the last two installments
of its monetary obligation to Livesey, as well as its
other financial liabilities. A reasonable mind would
arrive at the conclusion that Binswanger is CBB’s
alter ego or that CBB and Binswanger are one and
the same corporation. There are also indications of
badges of fraud in Binswanger’s incorporation. It
was a business strategy to evade CBB’s financial
liabilities, including its outstanding obligation to
Livesey. (Livesey v. Binswanger Philippines, G.R. No.
177493, 19 Mar. 2014)
1.
2.
3.
A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
ownership of the stocks of a corporation is not
per se a cause for piercing the veil.
Two corporations have Common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is
not in itself sufficient ground to disregard
separate corporate entities.
There is a Substantial identity of the
incorporators of the two (2) corporations does
not necessarily imply fraud and does not
warrant piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended
a series of credit accommodations to ECO using
the trust funds of PVTA. The proceeds of the
credit accommodations were received on behalf
of ECO by Emmanuel Oñate. Upon maturity of the
loans, ECO failed to pay the same. ECO then
submitted a Plan of Payment to LBP, however,
the latter rejected the same. LBP filed a
complaint for collection of sum of money against
ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
treated as one holding Oñate liable for the loans
incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
loans incurred from LBP?
Tax Avoidance Does Not Justify Piercing
Corporate Veil
There is one case where it was held that the
corporation is a business conduit of the
stockholders when the latter transferred their
properties to a corporation in exchange for its
shares of stock. The Supreme Court said that what
the transferors did was to invest their properties
and change the nature of their ownership from
unincorporated to incorporated form by
organizing a corporation to take control of their
properties and at the same time save on estate tax.
There was no sale of property that would violate
the right of first refusal of the lessee over the said
properties. Even through the corporation is a
conduit of the shareholders, its corporate veil was
not pierced. Tax avoidance, being valid and
legitimate, does not justify piercing the veil of
corporate fiction. (Divina, 2020, citing Delphers
Traders Corp. v. Intermediate Appellate Court, G.R.
No. 69259, 26 Jan. 1988)
A: NO. Oñate should not be held jointly and severally
liable with ECO. A corporation, upon coming into
existence, is invested by law with a personality
separate and distinct from those persons composing
it as well as from any other legal entity to which it
may be related. By this attribute, a stockholder may
not, generally, be made to answer for acts or
liabilities of the said corporation, and vice versa.
The mere fact that Oñate owned the majority of the
shares of ECO is not a ground to conclude that Oñate
and ECO are one and the same. Mere ownership by
115
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
autonomy and the parent corporation, though
acting through the subsidiary in form and
appearance, “is operating the business directly for
itself.”
a single stockholder of all or nearly all of the capital
stock of a corporation is not by itself sufficient
reason for disregarding the fiction of separate
corporate personalities. Neither is the fact that the
name “ECO” represents the first three letters of
Oñate’s name sufficient reason to pierce the
veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation
acquiring the name or as in this case, the initials of
one of its shareholders. (Land Bank of the Philippines
v. CA, et al., G.R. No. 127181, 04 Sept. 2001)
2. Fraud Test
This test requires that the parent corporation’s
conduct in using the subsidiary corporation be
unjust, fraudulent, or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
Three-pronged Test to Determine the
Application of the Alter Ego or Instrumentality
Theory (C-F-H)
3. Harm Test
1.
2.
3.
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 (Instrumentality or Control test);
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal,
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it would have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
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 right (Fraud
test); and
NOTE: Piercing the corporate veil based on the alter
ego theory requires the concurrence of the three
elements – (1) control, (2) fraud or fundamental
unfairness, and (3) harm or damage. The absence of
any of these elements prevents piercing the
corporate veil. (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar.
2013)
The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of. (Harm test)
1. Instrumentality or Control Test
This test requires that the subsidiary be completely
under the control and domination of the parent. It
examines the parent corporation’s relationship with
the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation
such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Piercing the Veil of Corporate Fiction On The
Basis Of Equity
Equity cases applying the piercing doctrine are what
are termed the "dumping ground," where no fraud
or alter ego circumstances can be culled by the
Court to warrant piercing.
116
Corporation Law
Specifically, the equity test can be applied when:
Piercing the Corporate Veil May Apply to Natural
Persons
2.
When the Corporation is the Alter Ego of a
Natural Person – the piercing of the corporate veil
may apply to corporations as well as natural
persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego
of a person or of another corporation."
1.
3.
The corporate personality would be
inconsistent with the business purpose of the
legal fiction;
The piercing the corporate fiction is necessary
to achieve justice or equity for those who deal
in good faith with the corporation; or
The use of the separate juridical personality is
used to confuse legitimate issues.
Reverse Piercing of the Corporate Veil – from
American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership, "in
a traditional veil-piercing action, a court disregards
the existence of the corporate entity so a claimant
can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff seeks
to reach the assets of a corporation to satisfy claims
against a corporate insider. Reverse-piercing flows
in the opposite direction (of traditional corporate
veil-piercing) and makes the corporation liable for
the debt of the shareholders." (IAM/E v. Litton and
Company Inc., G.R. No. 191525, 13 Dec. 2017)
Indications that a Subsidiary Corporation is a
Mere Instrumentality of its Parent Corporation
1.
The parent corporation owns all or most of the
capital stock of the subsidiary;
2. The parent and subsidiary corporations have
common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation;
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation, or its business or financial
responsibility is referred to as the parent
corporation’s own;
9. The parent corporation uses the property of the
subsidiary as its own;
10. The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation;
11. The formal legal requirements of the subsidiary
are not observed. (PNB v. Ritratto Group, G.R.
No. 142616, 13 July 2001)
Two (2) Types of Reverse Piercing
1.
2.
Outsider reverse piercing occurs when a party
with a claim against an individual or
corporation attempts to be repaid with assets of
a corporation owned or substantially controlled
by the defendant.
Insider reverse piercing, the controlling
members will attempt to ignore the corporate
fiction in order to take advantage of a benefit
available to the corporation, such as an interest
in a lawsuit or protection of personal assets.
(IAM/E v. Litton and Company Inc., supra)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's
decision, X Corporation was found to be without
assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two
117
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
corporations have the same board of directors
and Y Corporation financed the operations of X
corporation. May Y Corporation be held liable
for the debts of X Corporation? Why? (2001
BAR)
b.
A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
veil of corporation fiction applies to this case. The
two corporations have the same board of directors,
Y Corporation owned substantially all of the stocks
of X Corporation, and Y Corporation controls the
finances of X Corporation. These facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. An overall
appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the X
Corporation is merely an adjunct, business conduit
or alter ego, of Y Corporation and that the fiction of
corporate entities, separate and distinct from each,
should be disregarded. (CIR v. Norton & Harrison
Company, G.R. No. L‐17618, 31 Aug. 1964)
2.
As to Place of Incorporation:
a.
b.
3.
NOTE: There is no hard and fast rule when to apply
the doctrines of separate legal entity and piercing
the veil of corporate fiction. Each case must be
judged based on its own particular circumstances.
The undeniable yardstick though is that lacking any
harm or injury to another, or in the absence of
abuse of the legal fiction of the corporation, the
doctrine of separate legal entity stands. (Divina,
2020)
a.
The following are the classes of corporations:
1.
As to Existence of Shares of Stock:
a.
c.
Stock – one which has:
i. Capital stock divided into shares; and
ii. Are authorized to distribute to the
holders of such shares dividends or
allotments of the surplus profits on
the basis of the shares held. (Sec. 3,
RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
118
Domestic – incorporated and organized
under the laws of the Philippines.
Foreign – 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. (Sec. 140, RCC)
As to their Legal Status:
b.
CLASSES OF CORPORATIONS
Nonstock – All other corporations not
classified as stock corporation are
nonstock corporations (Sec. 3, RCC). It is
one where no part of its income is
distributable as dividends to its members,
trustees, or officers (Sec. 86, RCC). These
corporations may be formed or organized
for charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes. (Sec. 87, RCC)
De jure – one that has fulfilled all the
requirements mandated by law and can
successfully resist a suit by the State to
challenge its existence. De jure means “a
matter of law” that validates the
corporation as a legal entity.
De facto – one organized with colorable
compliance with the requirements of a
valid law. Its existence cannot be inquired
collaterally. Such inquiry may be inquired
only by a direct attack by the State through
a quo warranto proceeding. (Sec. 19, RCC)
By Estoppel – exists when two or more
persons assume to act as a corporation
knowing it to be without authority to do
so. They are 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
Corporation Law
d.
4.
By Prescription – one which has exercised
corporate powers for an indefinite period
without interference on the part of the
sovereign power, e.g., Roman Catholic
Church. (Divina, 2020)
Other Classifications:
a.
As to their Relationship of Management and
Control:
a.
b.
c.
d.
5.
6.
allowed to use as a defense its lack of
corporate personality. (Sec. 20, RCC)
Holding Corporation – a corporation that
holds stocks in other companies for
purposes of control rather than for mere
investment.
Subsidiary Corporation – a company that
is owned or controlled by another
company, called the parent company.
b.
Affiliates – two companies are affiliates
when one company owns less than the
majority of the voting stock of the other.
c.
Parent Company – a corporation that
owns enough voting stock in another
company to control management and
operation by influencing or electing its
board of directors. Companies that
operate under this management are
deemed subsidiaries of the parent
company. (Divina, 2020)
As to whether they are for Public
(government) or Private Purpose or
Function: (2001, 2004 BAR)
a.
Public – formed or organized for the
government of a portion of the State (like
cities and municipalities) for the purpose
of serving the general good and welfare.
(Aquino, 2014)
b.
Private – one formed for some private
purpose, benefit, or end. It may either be a
stock or non-stock. (Ibid.)
119
Closed Corporation ‐ one whose AOI
provides that all of the corporation’s
issued stock of all classes, exclusive of
treasury shares, shall be held of record by
not more than a specified number of
persons, not exceeding twenty (20);
subject to specified restrictions on
transfers; and it shall not list in any stock
exchange or make any public offering of its
stocks of any class.
A corporation is “going private” when it is
adopting the features of a closed
corporation. (Divina, 2020)
Special
Corporations
–
include
educational corporations and religious
corporations. (Secs. 105-107, RCC)
Religious
corporations
include
corporation sole and religious societies.
(Secs. 108, 114, RCC)
One-Person Corporation – a corporation
wherein all of the stocks are held directly
or indirectly by one person. It is not
necessarily illegal for as long as it follows
and observes the law throughout its
existence and conducts its business affairs
lawfully, otherwise, the doctrine of
piercing the veil may be applied in such a
case. (Divina, 2020; Sec. 116, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
entering into a subscription agreement,
adopting by-laws, and electing directors.
B. DE FACTO CORPORATIONS VERSUS
CORPORATIONS BY ESTOPPEL
De Facto Corporation vs. De Jure Corporation
DE FACTO
One which actually
exists for all practical
purposes
as
a
corporation, but which
has no legal right to
corporate existence as
against the State.
There is a colorable
compliance with the
requirements of the
law
creating
the
corporation.
DE FACTO CORPORATION
A de facto corporation is one that is organized with
colorable compliance with the requirements of
incorporation under the law and allowed to exist
and exercise the powers of a corporation until its
corporate existence is assailed by the State in a quowarranto proceeding. (Divina, 2021)
Organized under a valid Law;
2.
Colorable Compliance – Bona fide Attempt in
good faith to form a corporation according to
the requirements of the law; and
As such, if the law under which it is
incorporated is declared unconstitutional,
there is neither de jure nor de facto existence.
For instance, if Congress enacts a law to create
a private corporation, such corporation cannot
be considered de facto because the law creating
it is unconstitutional. Congress can enact a law
to create a corporation only if it is owned and
controlled by the government. (Divina, 2021)
The Existence of a De Facto Corporation Cannot
be Collaterally Attacked
The due incorporation of a de facto corporation shall
not be inquired into collaterally in any private suit
to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a
quo warranto proceeding. (Sec. 19, RCC)
The execution of the articles of incorporation
and adoption of bylaws, per se, are not enough
to warrant de facto existence. There is no bona
fide attempt to incorporate until the SEC at the
very least issues the certificate of incorporation
(Divina, 2021). The filing of articles of
incorporation and the issuance of the certificate
of incorporation are essential for the existence
of a de facto corporation. (Missionary Sisters of
Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug. 2018)
3.
Liabilities of Officers and Directors and/or
Trustees of a De Facto Corporation
The liabilities and penalties attending to officers
and directors/ trustees of a de jure corporation shall
be the same as those of a de facto corporation. This
includes the liability under the criminal law.
Actual Use – Use of corporate Powers.
Q: University Publishing Company (UPC),
through its president, entered into a contract
with Albert to publish the commentaries on the
The corporation must have performed the acts
which are peculiar to a corporation like
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
One created in strict or
substantial conformity
with the mandatory
statutory
requirements
for
incorporation.
There is substantial
compliance with the
requirements of the
law
creating
the
corporation.
Its right to exist as a
corporation cannot be
successfully attacked
Can
be
attacked
or questioned by any
directly
but
not
party even in direct
collaterally.
proceeding for that
purpose by the State.
(De Leon, 2010)
Stockholders enjoy exemption from personal
liability for corporate obligations.
Requisites of a De Facto Corporation (L-A-P)
1.
DE JURE
120
Corporation Law
Revised Penal Code. UPC published the
commentaries, but it did not remit the amount
due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When
the Sheriff was about to implement the writ of
execution against the company, he discovered
that UPC is not a registered corporation.
Consequently, the president of UPC was
substituted in the writ of execution. The
president
invoked
the
separate
legal
personality of the corporation as his defense.
2.
3.
a. Is UPC a de facto corporation?
b. Can the defense that UPC is a corporation by
estoppel be invoked by the president?
c. Who is liable for the debts of the
corporation?
c.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation. (Sec. 20, RCC)
De Facto Corporation vs. Corporation by
Estoppel
NO. 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.
DE FACTO
CORPORATION
There is existence in
law.
The State reserves the
right to question its
existence through a
quo
warranto
proceeding.
The president who negotiated with Albert is
liable. A person acting or purporting to act on
behalf of a corporation which has no valid
existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts
performed as such agent. (Albert v. University
Publishing Co., G.R. No. L-19118, 30 Jan. 1965)
Stockholders in a de
facto corporation are
liable as a de jure
corporation.
CORPORATION BY ESTOPPEL
CORPORATION BY
ESTOPPEL
There is no existence in
law.
Quo
proceeding
applicable.
warranto
is NOT
Stockholders are liable
as general partners for
all debts, liabilities, and
damages incurred.
Q: On behalf of Ocean Quest Fishing Corporation
(Ocean Quest), Antonio Chua and Peter Yao
entered into a contract for the purchase of
fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (PFGI) They
claimed that they were engaged in a business
venture with Lim Tong Lim, who however was
not a signatory to the agreement. The buyers
failed to pay for the fishing nets and the floats;
hence, PFGI filed a collection suit against Chua,
A corporation by estoppel is one that exists when
two or more persons assume to act as a corporation
knowing it to be without authority to do so. (Divina,
2021; Sec. 20, RCC)
Rules Governing a Corporation by Estoppel
1.
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; and
NOTE: Where there is no third person involved and
the conflict arises only among those assuming the
form of a corporation who know that the
corporation has not been registered, there is NO
corporation by estoppel. (Lozano v. Santos, G.R. No.
125221, 19 June 1997)
A:
a. NO. UPC cannot be considered a de facto
corporation because it was not registered with
the SEC.
b.
be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result;
All persons who assume to act as a corporation
knowing it to be without authority to do so shall
121
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
corporation. (Pioneer Insurance v. CA, G.R. No. 84197,
28 July 1989)
Yao, and Lim Tong Lim. The suit was brought
against the three in their capacities as general
partners, on the allegation that Ocean Quest was
a nonexistent corporation.
However, a passive subscriber who obtained benefit
from a contract entered into by others with whom
he previously had an existing relationship is
deemed to be part of said association and is covered
by the scope of the doctrine of corporation by
estoppel. (Lim Tong Lim v. PH Fishing Gear
Industries, supra in Divina, 2021)
The trial court ruled in favor of PFGI that Chua,
Yao and Lim are liable as general partners. Lim
contends that the Doctrine of Corporation by
Estoppel applies only to Yao and Chua. Lim
insists that only those who dealt in the name of
the ostensible corporation should be held
liable. Since his name does not appear on any of
the contracts and since he never directly
transacted with the Ocean Quest, he cannot be
held liable. Is Lim jointly liable with Chua and
Yao?
Q: Francisco Co, Jr. sued Abante Tonite, a daily
tabloid of general circulation, and its publisher
and staff – claiming damages because of an
allegedly libelous article they published in an
issue. Macasaet, et al. moved, among others, to
drop Abante Tonite as a defendant by virtue of
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil
action.
A: YES. Lim should be held liable jointly with Chua
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the
partnership. Lim, Chua, and Yao decided to form a
corporation. Although it was never legally formed
for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to
be without valid existence, are held liable as general
partners. Technically, it is true that Lim did not
directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered
into by persons with whom he previously had an
existing relationship, he is deemed to be part of said
association and is covered by the scope of the
Doctrine of Corporation by Estoppel. (Lim Tong Lim
v. Philippine Fishing Gear Industries, Inc., G.R. No.
136448, 03 Nov. 1999)
The RTC denied the motion, holding that
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a Corporation by Estoppel
considering that it possesses attributes of a
juridical person, otherwise it cannot be held
liable for damages and injuries it may inflict to
other persons. The CA affirmed the RTC ruling.
Was the CA correct in upholding the inclusion of
Abante Tonite as a party defendant despite its
lack of juridical personality?
A: YES. The petitioners’ contention that Abante
Tonite could not be sued as a defendant due to its
not being either a natural or a juridical person
cannot be sustained. In rejecting the contention, the
CA categorized Abante Tonite as a corporation by
estoppel as the result of its having represented itself
to the reading public as a corporation despite its not
being incorporated. The non-incorporation of
Abante Tonite with the SEC was of no consequence,
for, otherwise, whoever of the public who would
suffer any damage from the publication of articles in
the pages of its tabloids would be left without
recourse. The SC cannot disagree with the CA,
considering that the editorial box of the daily tabloid
disclosed that although Monica Publishing
Corporation had published the tabloid on a daily
basis, nothing in the box indicated that Monica
Q: Are all those who subscribed for the stock of
a proposed corporation which was never legally
formed liable as general partners?
A: The doctrine of corporation by estoppel does not
apply against a person who takes no part except to
subscribe for stock in the proposed corporation
which was never legally formed, and hence, cannot
be liable as a partner of those who engaged in
business under the name of the pretended
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
122
Corporation Law
Publishing Corporation had owned Abante Tonite.
(Macasaet, et al. v. Co, G.R. No. 156759, 05 June 2013)
Q: Who cannot invoke
corporation by estoppel?
the
doctrine
C. CORPORATE POWERS
of
Kinds of Corporate Powers
A: The doctrine can only be invoked by the
aggrieved party who relied on the representations
by others that they are legally formed as a
corporation. It cannot be invoked by the one who
benefitted from the transaction.
1.
2.
In another case though, it was held that the doctrine
of corporation by estoppel is founded on principles
of equity and is designed to prevent injustice and
unfairness. It applies when a non-existent
corporation enters into contracts or dealings with
third persons. In which case, the person who has
contracted or otherwise dealt with the non-existent
corporation is estopped to deny the latter’s legal
existence in any action leading out of or involving
such contract or dealing. (Divina, 2021 citing
Missionary Sisters of Our Lady of Fatima v. Alzona,
supra)
3.
Express Powers – granted by law, the
Corporation Code, and its Articles of
Incorporation or Charter, and administrative
regulations;
Inherent/Incidental Powers – not expressly
stated but are deemed to be within the capacity
of corporate entities; and
Implied/Necessary Powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter.
1. HOW POWERS ARE EXERCISED
Q: Eliodoro Cruz was the former president of
Filport. During the general stockholders’
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
creation of certain positions and their
corresponding monthly remuneration. Because
his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he
describes as a derivative suit against the
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to
the interest of the corporation and its
shareholders at large.
Application of Doctrine of Corporation by
Estoppel in Reverse
While the doctrine is generally applied to protect
the sanctity of dealings with the public, nothing
prevents its application in the reverse, in fact the
very wording of the law which sets forth the
doctrine of corporation by estoppel permits such
interpretation. Such that a person who has assumed
an obligation in favor of a non-existent corporation,
having transacted with the latter as if it was duly
incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of
the contract.
Did Filport’s BOD act within its powers in
creating the executive committee and the
positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and
those of the Special Assistants to the President
and the Board Chairman, each with
corresponding remuneration?
Jurisprudence dictates that the doctrine of
corporation by estoppel applies for as long as there
is no fraud and when the existence of the association
is attacked for causes attendant at the time the
contract or dealing sought to be enforced was
entered into, and not thereafter. (Missionary Sisters
of Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug. 2018)
A: YES. The governing body of a corporation is its
board of directors. Sec. 22 of the RCC provides that
123
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
unless otherwise provided in this Code, the Board of
directors or Trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation. Thus, with the
exception only of some powers expressly granted by
law to stockholders (or members, in case of nonstock corporations), the board of directors (or
trustees, in case of non-stock corporations) has the
sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its
AOI, by-laws and relevant provisions of law. Verily,
the authority of the board of directors is restricted
to the management of the regular business affairs of
the corporation, unless more extensive power is
expressly conferred.
The general powers of a corporation are the
following: (Su-Per-C-A-B-S-P-E-D-R-O)
1.
2.
3.
4.
5.
6.
7.
In the present case, the board’s creation of the
subject positions was in accordance with the regular
business operations of Filport as it is authorized to
do so by the corporation’s by-laws, pursuant to the
Corporation Code. (Filipinas Port Services, Inc., v. Go,
et al., G.R. No. 161886, 16 Mar. 2007)
8.
9.
Three (3) Levels of Control in the Corporate
Hierarchy
1.
2.
3.
The board of directors – responsible for
corporate policies and the general
management of the business affairs of the
corporation;
a.
b.
c.
Any political party;
Candidate; or
Partisan political activity.
NOTE: It shall be unlawful for any foreigner,
whether judicial or natural person, to aid any
candidate or political party, directly or
indirectly, or take part in or influence in any
manner any election, or to contribute or make
any expenditure in connection with any
election campaign or partisan political activity.
(Sec. 81, Omnibus Election Code)
The officers of the corporation – execution of
the policies laid down by the board, but in
practice often have wide latitude in
determining the course of business operations;
The stockholders – have the residual power
over fundamental corporate changes, like
amendments of the AOI. (Citibank, N.A. v. Chua,
G.R. No. 102300, 17 Mar. 1993)
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers, and employees – basis of which is the
Labor Code; and
11. To exercise Other powers essential or
necessary to carry out its purpose or purposes
as stated in the articles of incorporation. (Sec.
35, RCC)
GENERAL POWERS
Theory of General Capacity
Under the Theory of General Capacity, a corporation
holds such powers which are not prohibited or
withheld from it by general laws. (Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
To Sue and be sued;
To have Perpetual existence unless the
certificate of incorporation provides otherwise;
To adopt and use of Corporate seal;
To amend its Articles of Incorporation;
To adopt its By-laws;
For stock corporations: issue and Sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
To Purchase, receive, take, or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds subject to the Constitution and existing
laws;
To Enter into merger or consolidation, (To
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons);
To make reasonable Donations, including those
for public welfare, or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give
donations in aid of:
124
Corporation Law
Limitation on Corporation’s Exercise of Acts of
Property of Ownership
When Board Resolution is Required for the
Signing of the Verification and Certification
Against Forum Shopping
The power of the corporation to exercise acts of
ownership over its assets and properties is limited
by the following:
1.
2.
GR: The verification and certification against forum
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution.
The transaction of corporate property is
reasonably and necessarily required by the
lawful business of the corporation; and
XPN: The following officers may sign even in the
absence of a board resolution:
The transaction is done within the limits
prescribed by law or Constitution. (Sec. 35(g),
RCC)
1.
2.
3.
4.
5.
Commencement of the Power to Sue and be Sued
Chairperson of the Board of Directors;
President;
General Manager;
Personnel Officer; or
Employment Specialist in labor cases.
The power to sue and be sued commences upon
issuance by SEC of the Certificate of Incorporation.
These officers are in the position to verify the
truthfulness and correctness of the allegations in
the petition. (Mid Pasig Land and Development
Corporation v. Tablante, G.R. No. 162924, 04 Feb.
2010)
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical
acts of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board.
Absent the said board resolution, a petition may not
be given due course. (Esguerra, et al. vs Holcim
Philippines, Inc., G.R. No. 182571, 02 Sept. 2013)
The chairperson and president of a corporation may
sign the verification and certification without need
of board resolution. Moreover, lack of authority of a
corporate officer to undertake an action on behalf of
the corporation may be cured by ratification
through the subsequent issuance of a board
resolution. (Jorgenetics Swine Improvement Corp. v.
Thick & Thin Agri-Products, Inc., G.R. Nos. 201044 &
222691, 5 May 2021)
If the real party in interest is a corporate body, an
officer of the corporation can sign the verification
against forum shopping so long as he has been duly
authorized by a resolution of its board of directors.
The court did not commit grave abuse of discretion
in dismissing the petition for lack of authority of the
officer who signed the certification of forum
shopping in representation of the corporation. (San
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al., G.R. No. 153653, 02, Oct. 2009;
Republic v. Coalbrine International Philippines, et al.,
G.R. No. 161838, 07 Apr. 2010)
Q: Steamship insures its members-shipowners
against "third party risks and liabilities" for
claims arising from (a) death or injury to
passengers; (b) loss or damage to cargoes; and
(c) loss or damage from collisions. Sulpicio
insured its fleet of inter-island vessels with
Steamship. One of these vessels, the M/V
Princess of the World, was gutted by fire
resulting in total loss of its cargoes. Sulpicio
claimed indemnity from Steamship. Steamship
denied the claim and subsequently rescinded
the insurance coverage.
The Power of the Corporation to Sue and be Sued
is Exercised by the Board of Directors
Sulpicio filed a Complaint with the RTC against
Steamship. The RTC denied Steamship’s motion
to dismiss. Hence, Steamship assailed the trial
125
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
court’s orders and filed a Petition for Certiorari
with the Court of Appeals. Steamship's Petition's
Verification and Certification against forum
shopping was signed by its counsel. Did the
Verification and Certification against Forum
Shopping signed by Steamship's counsel
substantially comply with the requirements of
the Rules of Court?
petition and certify on non-forum shopping
considering that "it has handled the case for
Steamship since its inception." (Steamship Mutual
Underwriting Association v. Sulpicio Lines, G.R. No.
196072, 20 Sept. 2017)
A: YES. In case the petitioner is a private
corporation, the verification and certification may
be signed, for and on behalf of the corporation, by a
specifically authorized person, including its
retained counsel, who has personal knowledge of
the facts required to be established by the
documents.
“Lideco Corporation” had no personality to
intervene since it had not been duly registered as a
corporation. If petitioner “Laureano Investment &
Development Corporation” legally and truly wanted
to intervene, it should have used its corporate name
as the law requires and not another name which it
had not registered. (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 06 May
1997)
An Unregistered Corporation has No Right to Sue
or be Sued for Want of Corporate Personality
In this case, Steamship's Petition's Verification and
Certification against forum shopping was signed by
its counsel. A Power of Attorney was appended to
the Petition, which purportedly authorized "Atty.
Charles Jay D. Dela Cruz or any of the partners of Del
Rosario & Del Rosario to sign the verification or
certification" against forum shopping of petitions
and appeals in appellate courts necessary in
representing and defending Steamship. It was
notarized, in accordance with the law of Bermuda
and authenticated by the Philippine consulate in
London, United Kingdom. However, a closer look
into the Power of Attorney reveals that the
signatory of the document was not identified. This
was pointed out by Sulpicio in its Comment.
Limitations of the Corporation in Dealing with
Property
1.
2.
Constitutional
limitations
–
Private
corporations or associations may not hold such
alienable lands of the public domain except by
lease; (Sec. 3, Article XII, 1987 Constitution)
With regard to private land, 60% of the
corporation must be owned by the Filipinos,
same with the acquisition of a condominium
unit.
Nonetheless, in Steamship’s reply, it attached two
Secretary's Certificates signed by Davis containing
excerpts of board resolutions showing Davis'
authority to execute the Power of Attorney on its
behalf, and Davis' reappointment as Corporate
Secretary, respectively. The Court holds that there is
substantial compliance with the rules on
verification and certification against forum
shopping. Steamship's subsequent submission of
the Secretary's Certificates showing Davis'
authority to execute the Power of Attorney in favor
of Del Rosario & Del Rosario cured the defect in the
verification and certification appended to the
petition. Under the circumstances of this case,
Steamship's counsel would be in the best position to
determine the truthfulness of the allegations in the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
It must be in the furtherance of the purpose for
which the corporation was organized;
NOTE: No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter
will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. (JG
Summit Holdings, Inc. v. CA, G.R. No. 124293, 31 Jan.
2005)
3.
126
Special law – subject to the provisions of the
Bulk Sales Law and law against monopoly,
illegal combination, or restraint of trade.
Corporation Law
Requisites for a Valid Donation (P-A-I-R)
1.
2.
3.
4.
9.
The donation must be Reasonable;
It must be for valid Purposes including public
welfare, hospital, charitable, cultural, scientific,
civic, or similar purposes;
The donation must bear a reasonable relation to
the corporation’s Interest and must not be so
remote and fanciful; and
For foreign corporations, it must not be an Aid
in any:
a. Political party;
b. Candidate; or
c. Partisan political activity. (Divina, 2020)
10.
11.
12.
13.
14.
15.
Power to Extend or Shorten Corporate Term
Implied Powers of a Corporation
Procedural Requirements in Extending or
Shortening Corporate Term
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. (NAPOCOR v. Vera, G.R.
No. 83558, 27 Feb. 1989)
1.
2.
SPECIFIC POWERS
Theory of Specific Capacity
3.
Under the Theory of Specific Capacity, a corporation
cannot exercise powers except those expressly or
impliedly given to it. (Divina, 2021)
The specific powers of a corporation are the
following:
1.
2.
3.
4.
5.
6.
7.
8.
Enter into management contract with another
corporation;(Sec. 43, RCC) and
Amend Articles of Incorporation. (Sec. 15, RCC)
Elect, Appoint, and Remove Directors and
Corporate Officers. (Secs. 23, 24, and 27, RCC)
Create Executive Committees and Special
Committees. (Sec 34, RCC)
Adopt and Amend Bylaws. (Secs. 45 and 46, RCC)
Enter into merger and consolidation. (Sec. 75,
RCC)
Apply for voluntary dissolution. (Secs. 134 and
135, RCC)
Power to extend or shorten corporate term;
(Sec. 36, RCC)
Increase or decrease capital stock; (Sec. 37, RCC)
Incur, create, or increase bonded indebtedness;
(Sec. 37, RCC)
Deny pre-emptive right; (Sec. 38, RCC)
Sell, dispose, lease, encumber all or
substantially all of corporate assets; (Sec. 39,
RCC)
Purchase or acquire own shares; (Sec. 40, RCC)
Invest corporate funds in another corporation
or business or for other purpose other than
primary purpose; (Sec. 41, RCC)
Declare dividends; (Sec. 42, RCC)
4.
5.
127
Majority vote of the Board of Directors or Board
of Trustees;
Ratification by shareholders representing at
least 2/3 of the outstanding capital stock (OCS),
or by at least 2/3 of the members in case of nonstock corporation;
Written notice of the proposed action and of the
time and place of the meeting shall be
addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally or when allowed in the bylaws or
done with the consent of the stockholder, sent
electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data messages;
Copy of the amended AOI shall be submitted to
the SEC for its approval; (Sec. 36, RCC)
In case of banks, banking, and quasi-banking
institutions, preneed, insurance and trust
companies, NSSLAS, pawnshops, and other
financial
intermediaries,
a
favorable
recommendation of appropriate government
agency; (Sec. 16, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
6.
The extension must be done during the lifetime
of the corporation not earlier than 3 years prior
to the expiry date unless there is justifiable
reason for an earlier extension (Sec. 11, RCC)
Power to Increase or Decrease Capital Stock or
Incur, Create, Increase Bonded Indebtedness
Procedural Requirements in Increasing or
Decreasing Capital Stock
Q: What is the effect of the failure of the
corporation to extend its corporate term?
1.
A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No.
63201, 27 May 1992), the Supreme Court ruled that
upon the expiration of the period fixed in the AOI, in
the absence of compliance with the legal requisites
for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto.
2.
3.
The automatic dissolution of the corporation is
no longer applicable under the RCC given the
option available to the corporation to revive the
corporate term (Sec. 11, RCC). Since the period of
revival is not indicated in the RCC, the option may
be exercised within a reasonable period, but prior to
the dissolution and liquidation of the corporation.
What is a reasonable period is for the SEC to
determine. (Divina, 2021)
4.
Remedy of the Stockholder Not in Favor of
Extending or Shortening the Corporate Term
The stockholder not in favor of extension of the
corporate term may exercise his appraisal right,
that is, he may get out of the corporation and
demand for the payment of the fair value of his
shares subject to the conditions specified in Sec. 80
of the RCC. (Ibid.)
Approved by majority vote of the Board of
Directors;
Approved by stockholders representing at least
2/3 of the OCS;
Written notice of the time and place of the
stockholder’s meeting and the purpose of the
said meeting must be sent to the stockholders
at their places of residence as shown in the
books of the corporation and served on the
stockholders personally or through electronic
means recognized in the corporation’s bylaws
and/or the Commission’s rules as a valid mode
for service of notices;
A certificate in duplicate must be signed by a
majority vote of the directors of the corporation
and countersigned by the chairperson and the
secretary of the stockholders’ meeting, setting
forth:
a.
b.
c.
A stockholder may also exercise appraisal right in
case of shortening of the corporate term. While Sec.
36 of the RCC refers to the remedy of appraisal right
only in case of extension of corporate term, Sec. 80
of the RCC also provides for the same remedy in case
a stockholder votes against the shortening of
corporate term. (Ibid.)
d.
e.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
128
That the requirements of Sec. 37 of the RCC
have been complied with;
The amount of increase or decrease of the
capital stock;
In case of an increase of the capital stock,
the amount of capital stock or number of
shares of no par stock actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no par stock
subscribed by each, and the amount paid by
each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized;
Any bonded indebtedness to be incurred,
created, or increased;
The amount of stock represented at the
meeting; and
Corporation Law
f.
Limitation on Power to Decrease Authorized
Capital Stock
The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating, or increasing of any
bonded indebtedness. (Sec. 37, RCC)
No decrease in the capital stock shall be approved
by the Commission if its effect shall prejudice the
rights of corporate creditors. (Sec. 37, RCC)
Prior to the approval of the SEC of the increase in the
authorized capital stock, such payments cannot yet
be deemed part of the corporation’s paid-up capital,
technically speaking, because its capital stock has
not yet been legally increased. Such payments
constitute deposits on future subscriptions, money
which the corporation will hold in trust for the
subscribers until it files a petition to increase its
capitalization and a certificate of filing of increase of
capital stock is approved and issued by the SEC.
(Central Textile Mills, Inc. v. NWPC, et al., G.R. No.
104102, 07 Aug. 1996)
Q: If the subscribed capital stock is P60,000,000
divided into 60,000,000 shares with par value of
Php 1.00 per share and the paid-up capital stock
is Php 50,000,000 divided into 50,000,000
shares with par value of P 1.00 per share, can the
corporation reduce the capital stock to Php
50,000,000?
A: NO, the capital stock of the corporation may be
decreased only if it will not result in prejudice to
corporate creditors. In this case, the reduction of the
capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription,
thereby causing prejudice to the creditors as
subscriptions to the capital stock are funds held in
trust for their benefit under the trust fund doctrine.
(Divina, 2021)
Additional Requirement with Respect to
Increase of Capital Stock – Treasurer’s Affidavit
(25%-25% Rule)
The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was
subscribed and that at least 25% of the said amount
has been paid either in actual cash to the
corporation or that property, the valuation of which
is equal to 25% of the subscription. (Sec. 37, RCC)
The Board of Directors may Issue Additional
Shares of Stock Without Stockholder Approval
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
stockholders’ meeting is required to consider it
because additional issuance of stock (unlike
increase in capital stock) does not need approval of
the stockholders. What is only required is the board
resolution approving the additional issuance of the
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC. (Majority
Stockholders of Ruby Industrial Corp. v. Miguel Lim
and Minority Stockholders of Ruby Industrial Corp.,
G.R. Nos. 165887 & 165929, 06 June 2011)
Ways of Effecting the Increase or Decrease of the
Capital Stock
By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the
number of shares; or
3. Number of shares as well as the par value.
NOTE: The following will result to decrease in
capital stock, provided the shares are cancelled or
retired thereafter:
1.
2.
3.
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special
stockholders' meeting:
Redemption of redeemable shares; (Sec. 8, RCC)
Purchase of own shares; (Sec. 40, RCC)
Cancelling shares which have not yet been
issued.
1. Resolution increasing the authorized capital
stock of PPI; and
129
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2. Resolution authorizing the Board of
Directors to issue, for cash payment, the new
shares from the proposed capital stock
increase in favor of outside investors who
are non‐stockholders.
Registration of the Bonds Issued by the
Corporation
Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to
determine the sufficiency of the terms thereof. (Sec.
37, RCC)
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter
was Jimmy Morato who owned 1% of the stock.
Power to Deny Pre-emptive Right
Pre-emptive Right
a.
Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting stockholder?
b. What remedies, if any, are available to
Morato? (1998 BAR)
All stockholders shall enjoy the pre-emptive right to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto. (Sec. 38,
RCC)
A:
a. The resolutions are not binding on the
corporation and its stockholders including
Jimmy Morato. While these resolutions were
approved by the stockholders, there is no
showing that directors' approval, which is
required by law, exists.
b.
This means that except in the cases provided by law,
shares of stock of the corporation should first be
offered to the stockholders prior to any offer to nonstockholders. (2019 BAR)
Purpose of Pre-emptive Right
Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken
by the Board of Directors thereunder, null and
void.
The purpose of pre-emptive right is to enable the
shareholder to retain his proportionate control in
the corporation and to retain his equity in the
surplus.
Bonded Indebtedness
NOTE: Pre-emptive right shall not extend to shares
issues in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares issued in good faith with the
approval of the stockholders representing twothirds (2/3) of the OCS, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt; (Sec. 38, RCC)
It is a borrowing by the corporation which is long
term in nature involving a large number of lenders
and secured by the encumbrance on corporate
assets. Since bonds are securities, they should also
be registered with the SEC. (Divina, 2020)
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
same with the power to increase or decrease capital
stock, except that this power may also be exercised
by a non-stock corporation.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Pre-emptive Right is Available on the Reissuance of Treasury Shares
130
Since Sec. 38 of the RCC uses the phrase “all issues
or disposition of shares of any class”, pre-emptive
right extends not only to the issuance of new shares
resulting from an increase in capital stock but also
to the issuance of previously subscribed shares
which form part of the existing authorized capital
1.
2.
3.
Corporation Law
appraisal right as such action restricts his rights as
a stockholder. (Sec. 80(a), RCC)
stock, as well as to the disposition of treasury
shares. (Divina, 2020)
Pre-emptive Right may be Waived (2019 BAR)
Non-Existence of Pre-Emptive Right does NOT
Bar Challenge to Validity of Issuance of
Additional Shares if done in Breach of Trust
The pre-emptive right may be waived by the
stockholder. However, the waiver should be given
individually by the stockholder concerned or by
another by way of Special Power of Attorney. Being
a personal right, the waiver cannot be waived by the
corporation itself through a stockholders’
resolution. (SEC Opinion, 12 Dec. 1994)
Even if pre-emptive right does not exist either
because the issue comes within the exceptions in
Sec. 38, RCC or because it is denied in the AOI, an
issue of shares may still be objectionable if the
directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
The issuance of unissued shares out of the original
authorized capital stock pursuant to a rehabilitation
plan the propriety or validity of which was on
question by the minority stockholders and
subsequently disapproved by the Supreme Court
amounts to unlawful dilution of the minority
shareholdings. (Majority Stockholders of Ruby
Industrial Corp. v. Miguel Lim and Minority
Stockholders of Ruby Industrial Corp., supra; Divina,
2014)
A stockholder cannot be forced to waive the right
even if the majority of the stockholders opt to waive
it. (SEC Opinion No. 08-08, 31 Mar. 2008)
NOTE: If the board resolution approving the
issuance of shares prescribes a certain number of
days to exercise pre-emptive right and the
stockholder fails to exercise such right within the
fixed period, the stockholder is deemed to have
impliedly waived his right. (Divina, 2020)
Q: X Corporation has already issued the 1000
originally authorized shares of the corporation
so that its Board of Directors and stockholders
wish to increase X's authorized capital stock.
After complying with the requirements of the
law on increase of capital stock, X issued an
additional 1000 shares of the same value.
Assume that stockholder A presently holds 200
out of the 1000 original shares. Would A have a
pre‐emptive right to 200 of the new issue of
1000 shares? Why?
Pre-emptive Right vs. Right of First Refusal
RIGHT OF FIRST
REFUSAL
Description
PRE-EMPTIVE RIGHT
A: YES. A would have a pre‐emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation.
According to the RCC, each stockholder has the pre‐
emptive right to all issues of shares made by the
corporation in proportion to the number of shares
he holds on record in the corporation.
Right to subscribe to all
issuance
or
dispositions of shares
of the corporation even
to the subsequent sale
of treasury stocks.
Right to purchase
shares
of
a
stockholder.
Pertains
to
unsubscribed portion
of
the
authorized
capital stock.
Pertains to the sale of
the stocks already
owned by another
stockholder.
Right exercised against
the corporation.
Right exercised against
a co-stockholder.
To What does it Pertain
NOTE: A stockholder whose pre-emptive right is
violated may maintain an action to compel the
corporation to give him that right. If the denial is by
amendment to the AOI, he may exercise his
Against Whom is it Exercised
131
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
into any transaction authorized by this section. (Sec.
39, RCC)
Effect of the Absence of Express
Provision in the AOI
May be exercised even
when there is no
express provision in
the AOI or amendment
thereto.
Can only be exercised
when so provided in
the AOI, by-laws and
printed in the stock
certificate.
It includes
shares.
Does
not
include
treasury shares.
Substantially All of Corporate Assets
A sale or other disposition shall be considered shall
be deemed to cover substantially all the corporate
property and assets if in the process thereof, the
corporation would be rendered:
Treasury Shares
treasury
1.
2.
Instances When Approval of Stockholders or
Members is NOT Required
Power to Sell or Dispose Corporate Assets
Procedural Requirements for Sale, Lease,
Exchange, Mortgage, Pledge, and any Other
Disposition
(Sa-L-E-M-P-O)
of
All
or
Substantially All of Corporate Assets
1.
Majority vote of the BOD or BOT;
3.
Written notice of the proposed action and of the
time and place of the meeting addressed to each
stockholder or member at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, served personally, or
when allowed by the bylaws or done with the
consent of the stockholder, sent electronically:
Provided, That any dissenting stockholder may
exercise the right of appraisal under the
conditions provided in this Code. (Sec. 39, RCC)
2.
1.
2.
Approval by stockholders representing at least
2/3 of the OCS, or by at least 2/3 of the
members in case of nonstock corporation; and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
If sale is necessary in the usual and regular
course of business; or
If the proceeds of the sale or other disposition
of such property and assets are to be
appropriated for the conduct of the remaining
business.
Abandonment of the Plan for SaLEMPO Even
After Approval of the Stockholders or Members
The BOD, in its discretion, may abandon the plan for
SaLEMPO even after such authorization or approval
by the stockholders, subject to the rights of third
parties under any contract relating thereto, without
further action or approval by the stockholders or
members. (Sec. 39, RCC)
Nell Doctrine (2017 BAR)
GR: Where one corporation sells or otherwise
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
transferor.
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
and monopolies, including R.A. No. 10667,
otherwise known as the “Philippine Competition
Act.”
Further, in case of 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
Incapable of continuing the business; or
Incapable of accomplishing the purpose for
which it was incorporated. (Sec. 39, RCC)
XPNs: The transferee of corporate assets or
property is liable for the debts of the transferor in
case of:
1.
132
Express assumption of liability - where the
purchaser expressly or impliedly agrees to
assume such debts;
Corporation Law
2.
3.
4.
Transaction amounts to a consolidation or
merger of the corporations - The surviving or
the consolidated corporation shall possess all
the rights, privileges, immunities and franchises
of each constituent corporation; and all real or
personal property, all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and every
other interest of, 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; (Sec. 79 (d), RCC)
b.
Business Enterprise Transfer – where the
purchasing
corporation
is
merely
a
continuation of the selling corporation; and
Entered Fraudulently - Where the transaction
is entered into fraudulently in order to escape
liability for such debts. (Nell v. Pacific Farms,
G.R. No. L-20850, 29 Nov. 1965)
YES. The law does not prohibit sale of all or
substantially all of corporate assets to
competitor-company provided said sale is
subject to laws against illegal combination,
monopoly, or restraint of trade and Bulk Sales
Law.
The facts did not state that the
competitor-company
lies
within
the
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote
of its board of directors and approval of the
stockholders representing at least 2/3 of
outstanding capital stock. Further, the
provisions of the Bulk Sales Law must be
complied with:
a.
The seller must provide the buyer with a
verified list containing the name of the
creditors, their addresses, amounts owing
to each of them, and the respective
maturity dates;
b. A full detailed inventory of the properties
or assets to be sold, including their cost or
acquisition price; and
c. The list of inventory must be filed with the
DTI.
Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or
disposition of all the corporate property and assets
of the corporation falling squarely within the
contemplation of Sec. 39 of the RCC. Hence, for the
sale to be valid, the majority vote of the legitimate
Board of Trustees, concurred in by the vote of at
least 2/3 of the bona fide members of the
corporation should have been obtained. (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
117897, 14 May 1997)
Q: Divine Corporation, engaged in the
manufacture of garments for export, was able to
obtain loans from individuals and financing
institutions. However, due to the drop in the
demand for garments in the international
market, Divine Corporation could not meet its
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines,
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials
to Top Grade Fashion Corporation, its
competitor.
a.
accomplishing the purpose for which it was
incorporated.
How would you classify the transaction?
b. Can Divine Corporation sell aforesaid items
to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items? Explain. (2005 BAR)
Power to Acquire Own Shares
Q: May a corporation acquire its own shares of
stock?
A:
a. The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
because the corporation would be rendered
incapable of continuing the business or
133
A: Ordinarily, a stock corporation has no power to
acquire its own shares as it is illogical for the
corporation to be its own stockholder. Moreover,
the funds of the corporation should be devoted to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
attain the purposes of incorporation. However, the
RCC allows the corporation to acquire or purchase
its own shares in certain instances. (Divina, 2020)
1.
2.
Instances When a Corporation May Acquire its
Own Shares (1991, 1992, 2005 BAR)
1.
2.
3.
4.
5.
6.
7.
3.
To eliminate fractional shares arising out of
stock dividends; (Sec. 40, RCC)
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; (Ibid.)
To pay dissenting or withdrawing stockholders;
(Ibid.)
To acquire treasury shares; (Sec. 9, RCC)
To acquire redeemable shares; (Sec. 8, RCC)
To effect a decrease of capital stock; (Sec. 37,
RCC) and
In close corporations, when there is a deadlock
in the management of the business, the SEC may
order the purchase at their fair value of the
shares of any stockholder by a corporation (Sec.
103 par. 1(d), RCC)
Not appropriated by its BOD for corporate
expansion projects or programs;
Not covered by a restriction for dividend
declaration under a loan agreement; and
Not required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for a special
reserve for probable circumstances. (SEC
Circular No. 11, Series of 2008)
Guidelines for Acquisition of Own Shares
1.
2.
3.
4.
5.
The capital of the corporation must not be
impaired. There shall be URE’s to purchase the
shares.
Legitimate or proper corporate objective is
advanced.
Condition of the corporate affairs warrants it.
Transaction is designed and carried out in good
faith.
Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine.
(Sec. 41, SEC Opinions, 12 Oct. 1992, 11 Sept.
1985, and 11 Apr. 1994)
Trust Fund Doctrine
Rule in Acquisition of Own Shares
The requirement of unrestricted retained earnings
to cover the share is based on the trust fund doctrine
which means that the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
of corporate assets. (Boman Environmental
Development Corp v. CA, G.R. No. 77860, 22 Nov.
1988)
GR: The corporation may only acquire its own
stocks if there are unrestricted retained earnings
(URE).
XPNs: (R-D-L-D)
1.
2.
3.
4.
Redemption of redeemable shares;
Donation of shares to the corporation;
Levy/garnishment of shares to satisfy the
judgment in favor of the corporation;
Conveyance of shares to the corporation in
payment of a Debt. (Divina, 2020)
See also discussion on Trust Fund Doctrine – page
145.
Unrestricted Retained Earnings (URE)
Unrestricted Retained Earnings represent the
amount of accumulated profits and gains realized
out of the normal and continuous operations of the
company after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts, and which are:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
134
Corporation Law
A:
a. Since a powerplant project and a concrete road
project are neither primary purposes nor
reasonably necessary for the accomplishment
thereof, majority votes of the board of directors
plus the ratification of the stockholders
representing 2/3 of the outstanding capital
stock are needed.
Power to Invest Corporate Funds in
Another Corporation or Business
Statutory Requirements for Investing In
Another Corporation, Business, or Purpose
Other Than Primary Purpose (1995, 1996 BAR)
1.
2.
3.
4.
Approval by the majority vote of the BOD or
BOT;
Ratification by stockholders representing at
least 2/3 of the OCS or by at least 2/3 of the
members in case of non-stock corporations;
Ratification must be made at a meeting duly
called for the purpose; and
b.
Notice of the proposed investment and the time
and place of the meeting shall be addressed to
each stockholder or member at the place of
residence as shown in the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, served
personally, or sent electronically in accordance
with the rules and regulations of the
Commission on the use of electronic data
message, when allowed by the bylaws or done
with the consent of the stockholders. (Sec. 41,
RCC)
On the other hand, quarry operations for
limestone are reasonably necessary or
incidental to attain the primary purpose of the
corporation, i.e. the manufacture of cement.
Hence, only the majority approval of the board
of directors is needed. The ratification by the
stockholders is no longer necessary.
Notice of the proposed investment and the time
and place of the meeting shall be addressed to
each stockholder or member at the place of
residence as shown in the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, served
personally, or sent electronically in accordance
with the rules and regulations of the
Commission on the use of electronic data
message, when allowed by the bylaws or done
with the consent of the stockholders. (Sec. 41,
RCC)
In the case of pawnshops organized as corporations
and partnerships, they may be allowed to engage in
ancillary activity of directly purchasing or selling
goods or articles. The Pawnshop Regulation Act
contains no prohibition to engage in ancillary
activities. Hence, by implication, their scope may be
extended to other unrelated business unless clearly
prohibited by the said Act.
NOTE: Any dissenting stockholder shall have
appraisal right as provided in the RCC. Ratification
of stockholders is not needed where the investment
by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the AOI.
Q: Stikki Cement Co. was organized primarily for
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest
in: a) a powerplant project; b) a concrete road
project; and c) quarry operations for limestone
in the manufacture of cement.
The only requirement is that the person or entity
engaged at the same time in other business not
directly related or not incidental to pawnshop
business, shall keep such business distinct and
separate from his pawnshop operations. (SEC
Opinion, 28 Mar. 1985)
a.
What corporate approvals or votes are
needed for the proposed investments?
Explain.
b. Describe the procedure in securing these
approvals. (1992 BAR)
135
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Form of Dividends
Power to Declare Dividends
1.
2.
3.
Dividends
Dividends are corporate profits allocated, lawfully
declared, and ordered by the directors to be paid
proportionately to the stockholders in the form of
cash, property, or stocks. (Divina, 2020)
Cash Dividends vs. Stock Dividends
CASH DIVIDENDS
STOCK DIVIDENDS
As to Where it Forms Part
Q: Are profits the same as dividends?
A: Profits are the sources of dividends. Profits are
dividends only when they have been set aside for
distribution to stockholders under the conditions
specified by law.
Part of capital.
Results
outlay.
No cash outlay.
in
cash
As to Levy by Corporate Creditors
Not subject to levy
by
corporate
creditors.
Q: Under what circumstances may a corporation
declare dividends? (2005 BAR)
Once issued, can be levied
by creditors of the
corporate
stockholder
because they are part of
corporate asset.
As to how Approvals Needed
A: A corporation may declare dividends when there
are unrestricted retained earnings, a resolution of
the Board of Directors, and in case of stock
dividends, the declaration must likewise be
approved by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock.
Q: During the annual stockholders meeting,
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
capitalized, and stock dividends be distributed
to the stockholders, arguing that as owners of
the company, the stockholders, by a majority
vote, can do anything. As chairman of the
meeting, how would you rule on the motion to
declare stock dividends? (1991, 2001 BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Part of general fund.
As to Cash Outlay
Profits belong to the corporation while dividends
once declared, belong to the stockholder. (Divina,
2020; 2005 BAR)
A: As the chairman of the meeting, I would rule
against the motion considering that a declaration of
stock dividends should initially be taken by the BOD
and thereafter to be concurred in by the vote of the
stockholders representing 2/3 of the outstanding
capital stock (RCC, Sec. 42). The stockholders cannot
compel the corporation to declare dividends as the
determination thereof rests with the sound
discretion of the board (business judgment rule).
Cash
Stock
Property
Declared only by the
board of directors at
its discretion.
(majority of the
quorum only, not
majority of all the
board)
Declared by the board
with the concurrence of
the
stockholders
representing at least 2/3
of the outstanding capital
stock at a regular/special
meeting.
Does not increase
the corporate capital
Corporate
increased.
As to Effect on Corporate Capital
136
capital
is
As to whether Declaration creates Debt
Its
declaration
creates a debt from
No debt is created by its
the corporation to
declaration.
each
of
its
stockholders.
As to Taxability
If
received
by
individual: subject to Not subject to tax
tax;
Whether received by
If
received
by individual
or
a
corporation:
not corporation.
subject to tax.
Corporation Law
Q: Can the board be compelled to declare
dividends every year?
As to Revocation
Cannot be revoked
after announcement.
Can be revoked despite
announcement but before
issuance.
Applied
to
the
unpaid balance if
delinquent shares.
Can be withheld until
payment
of
unpaid
balance if delinquent
shares.
A: NO. Declaration of dividends is discretionary
upon the board. Dividends are payable only when
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine
whether or not dividends are declared. (Republic
Planters Bank v. Agana, G.R. No. 51765, 03 Mar. 1997)
As to Application on Unpaid Balance
Prohibition Imposed by Law on UREs of a Stock
Corporation
NOTE: Declaration of cash dividends may not be
revoked since, upon declaration, a creditor-debtor
relationship is established between the stockholder
and the corporation. Hence, the debtor-corporation
is bound to make good its obligation to the creditorstockholder to pay the cash dividends. Stock
dividends may be revoked even after declaration
but prior to the actual issuance of shares because
what consummates stock dividend is not the
declaration but the share issuance.
GR: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock.
XPNs: (2001 BAR)
1.
Q: From what funds are cash and stock dividends
sourced? Explain why. (2005 BAR)
2.
A: Dividends either cash or stock dividend must be
declared out of unrestricted retained earnings
because of the Trust Fund Doctrine. The Trust Fund
Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
creditors have the right to look for the satisfaction
of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr.
2003) Thus, dividends must never impair the
subscribed capital stock.
STOCK SPLIT
A mere increase in the
number of shares
which
evidence
ownership
without
altering the amount of
the capital, surplus, or
segregated earnings.
3.
When justified by definite corporate
expansion projects or programs approved by
the board of directors;
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
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. (Sec. 42, RCC)
Q: For the past three years of its commercial
operation, X, an oil company, has been earning
tremendously in excess of 100% of the
corporation’s paid-in capital. All of the
stockholders have been claiming that they must
share in the profits of the corporation by way of
dividends, but the Board of Directors failed to
lift its finger. Is Corporation X guilty of violating
a law? If in the affirmative, state the basis. (2001
BAR)
STOCK DIVIDENDS
Capitalization
of
earnings or profits,
together
with
a
distribution of the
added shares which
evidence the assets
transferred to capital.
A: YES. Corporation X is guilty of violating Sec. 42 of
the RCC. This provision prohibits stock corporations
137
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
A: NO. Only stockholders are entitled to payment of
stock dividends. (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. L-217601, 17 Dec.
1966)
from retaining surplus profits in excess of 100% of
their paid-in capital, except on certain situations
provided under the RCC.
Wrongful or Illegal Declaration of Dividends
Distinction between Distribution in Liquidation
and Ordinary Dividend
The Board of Directors is liable in case of wrongful
or illegal declaration of dividends. The stockholders
should return the dividends to the corporation
based on the principle of solutio indebiti.
If the distribution is in the nature of a recurring
return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the
distribution may properly be treated as incomplete
or partial liquidation and as payment by the
corporation to the stockholder for his stock or as
return of the capital invested by him. (Wise & Co.,
Inc. v. Meer, G.R. No. 48231, 30 June 1947)
Persons Entitled to Receive Dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record on a certain future date, as the
case may be, unless the parties have agreed
otherwise. (Cojuangco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, 24 Apr. 2009)
Power to Enter into Management Contract
Transfers of Shares Unrecorded in the Books of
the Corporation
Management Contract
A Management Contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise. (Sec. 43, RCC)
Transfer of shares which is not recorded in the
books of the corporation is valid only as between
the parties, hence, the transferor has the right to
dividends as against the corporation without notice
of transfer, but it serves as trustee of the real owner
of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to
receive the dividends. (Ibid.)
NOTE: Sec. 43 refers only to a management contract
with another corporation. Hence, it does not apply
to management contracts entered into by a
corporation with natural persons.
Receipt of Dividends in Case of Mortgaged or
Pledged Shares
Requirements for Validity of Management
Contract
GR: The mortgagor or the pledgor has the right to
receive the dividends.
1.
XPN: When the mortgagor or pledgor defaults and
the mortgagee or pledgee acquires the pledged
stocks and the transfer is recorded in the books of
the corporation, the mortgagee or pledgee is
entitled to receive the dividends.
2.
Q: May stock dividends be issued to a person
who is not a stockholder in payment of services
rendered?
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
138
The contract must be approved by at least
majority of the BOD or BOT of both managing
and managed corporation;
The contract must be approved by the
stockholders owning at least the majority of the
OCS, or members in case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly called
for the purpose;
Corporation Law
3.
a.
b.
4.
would suggest that the managing corporation
should instead be given a net profit participation
and, if it later so desires, to then convert the amount
that may be due thereby to equity or shares of stock
at no less than the par value thereof.
The contract must be approved by the
stockholders of the managed corporation
owning at least 2/3 of the OCS entitled to vote
or 2/3 of the members when:
Stockholders representing the same
interest in both of the managing and the
managed corporation own or control more
than 1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking Stockholders);
a. ULTRA VIRES DOCTRINE
No corporation shall possess or exercise any
corporate powers except those conferred by this
Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of
the powers so conferred. (Sec. 44, RCC)
Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation. (Interlocking Directors)
Ultra Vires Act
An ultra vires act is one committed outside the
object for which a corporation is created as defined
by the law of its organization and therefore beyond
the power conferred upon it by law. (Atrium
Management Corporation v. CA, G.R. No. 109491, 28
Feb. 2001)
No management contract shall be entered into
for a period longer than five (5) years for any
one (1) term except for service contracts or
operating agreements which relate to the
exploration, development, exploitation or
utilization of natural resources may be entered
into for such periods as may be provided by the
pertinent laws or regulations. (Sec. 43, RCC)
Unlike illegal acts which contemplate the doing of an
act that is contrary to law, morals, or public policy
or public duty, and are void, ultra vires acts are not
illegal and void ab initio but are not merely within
the scope of the articles of incorporation. They are
merely voidable and may become binding and
enforceable when ratified by the stockholders.
(Maria Clara Pirovana, et al. v. the De La Rama
Steamship Co., G.R. No. L-5377, 29 Dec. 1954)
Q: ABC Management Inc. presented to the DEF
Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF
may declare during the lifetime of the
Management Contract. Would you approve of
such provision? If not, what would you suggest
as an alternative? (1991 BAR)
Types of Ultra Vires Acts
1.
A: NO. I would not approve of a proposed
stipulation in the management contract that the
managing
corporation,
as
an
additional
compensation to it, should be entitled to 10% of any
stock dividend that may be declared. Stockholders
are the only ones entitled to receive stock dividends.
(Nielson & Co., Inc. v. Lepanto Consolidated Mining,
G.R. No. L-21601, 17 Dec. 1966)
2.
3.
Acts done beyond the powers of the corporation
as provided in the law or its articles of
incorporation;
Acts entered into on behalf of the corporation
by persons who have no corporate authority or
exceeded the scope of their authority; and
Acts or contracts which are per se illegal as
being contrary to law. (Divina, 2020)
Q: When is there an ultra vires act on the part of
(a) the corporation; (b) the board of directors;
and (c) the corporate officers? (2009 BAR)
I would add that the unsubscribed capital stock of a
corporation may only be issued for cash or property
or for services already rendered constituting a
demandable debt. (Sec. 61, RCC) As an alternative, I
139
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
A:
a. The Corporation – Under Sec. 45 (now Sec. 44,
RCC) of the Corporation Code, no corporation
shall possess or exercise any corporate power
except those conferred by the Code or by its AOI
and except such as are necessary or incidental
to the exercise of the powers so conferred.
When a corporation does an act or engages in
an activity which is outside of its express,
implied, or incidental powers set out in its AOI,
the act is deemed to be ultra vires.
b.
c.
Ratification
Can be ratified.
Cannot
parties.
bind
the
Acts that Do Not Comply With Formalities vs.
Unauthorized Acts
The Corporate Officers – When a corporate
officer enters into a contract on behalf of the
corporation without having been so expressly
or impliedly authorized by the Board of
Directors, even when the act or contract falls
within the corporation’s express, implied or
incidental power, then the unauthorized act of
the corporate officer is deemed to be ultra vires.
ACTS THAT DO NOT
COMPLY WITH
FORMALITIES
UNAUTHORIZED
ACTS
If certain procedures
or formalities are
prescribed in the AOI
or bylaws and the same
are not complied with,
the resulting act is not
an ultra vires act of the
corporation.
The act may be within
the powers of the
corporation but not
within the powers of
the particular officer.
The latter is sometimes
referred to as ultra
vires act of the officer.
The law on agency
applies.
Q: The board of directors of Lopez Realty, Inc.
passed a resolution providing gratuity pay for
its employees in a special meeting called for the
purpose. At the time, however, Asuncion (a
member of the board), was still out of the
country. Asuncion assailed the validity of the
said board resolution contending that the same
was ultra vires on the ground that she was not
duly notified of the special meeting in which it
was passed. Is the disputed board resolution
ultra vires as urged by Asuncion?
Ultra Vires Acts by Reason of Lack of Authority
vs. Ultra Vires Acts by Reason of Illegality (Illegal
Acts)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Binding Effect
Can bind the parties if
wholly
or
partly
executed.
The Board of Directors – When the Board
engages in an activity or enters into a contract
without the ratificatory vote of the stockholders
in those instances where the Corporation Code
so requires such ratificatory vote, such as when
the corporation is made to invest in another
corporation or engage in a business which is not
in pursuit of its primary purpose, the board
resolution not ratified by stockholders owning
or representing at least two-thirds (2/3) of the
outstanding capital stock would make the
transaction void, as being ultra vires.
ULTRA VIRES ACT
ILLEGAL ACTS
Lawfulness
Unlawful;
against
Not necessarily unlawful,
law, morals, public
but outside the powers of
policy, and public
the corporation.
order.
Enforceability
Merely voidable and may
be
enforced
by Void; cannot be
performance, ratification, validated.
or estoppel.
Cannot be ratified.
A: NO. The assailed resolution covers a subject
which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity
pay for its employees is one of the express powers
of the corporation under the Corporation Code,
hence, Asuncion cannot invoke the doctrine of ultra
vires to avoid any liability arising from the issuance
of the subject resolution. (Lopez Realty, Inc. v.
Fontecha, G.R. No. 76801, 11 Aug. 1995)
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Corporation Law
Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
of discretion in not renewing its contract for
stevedoring
services
for
coal-handling
operations at NPC's plant, and in taking over its
stevedoring services. NPC seeks to annul the
order of the RTC in issuing a writ of preliminary
injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
in its pier and directing it either to enter into a
contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does
NPC have the power to undertake stevedoring
and arrastre services in its pier?
Instances When the Acts of Officers Bind the
Corporation (P-R-A-D-A)
1.
2.
3.
4.
If it is Provided in the By-laws;
When the act was Ratified;
If Authorized by the board; or
Under the Doctrine of Apparent Authority
Doctrine of Apparent Authority (2015 BAR)
If a corporation knowingly permits one of its
officers or any other agent to act within the scope of
an apparent authority, it holds him out to the
public possessing the power to do those acts; and
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority.
Its existence may be ascertained through:
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
accomplish said purpose. If that 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. The rule is that a
corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. The stevedoring services
which involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the
operation of the plant. (NPC v. Vera, et al., G.R. No.
83558, 27 Feb. 1989)
1.
2.
The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it clothes
him; or
The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation. (Advance Paper Corp. v. Arma Traders
Corp., GR No. 176897, 11 Dec. 2013)
Apparent Authority is Determined by Acts of
Principal, Not by Acts of Agent
The Doctrine of Apparent Authority is determined
by the acts of the principal and not by the acts of the
agent." As applied to corporations, the doctrine of
apparent authority provides that “a corporation is
estopped from denying the officer's authority if it
knowingly permits such officer to act within the
scope of an apparent authority, and it holds him out
141
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
imposes liability not as a result of contractual
relationship but rather because of the actions of the
principal or an employer in somehow misleading
the public that the relationship or authority exists.
(Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
No. 170352, 01 June 2011)
to the public as possessing the power to do those
acts.” (Agro Food and Processing Corp. v. Vitarich
Corp., G.R. No. 217454, 11 Jan. 2021, J. Caguioa)
When Corporation is Estopped to Deny
Ratification of Acts Entered by Officers or Agents
Q: May the board of directors of a rural banking
corporation be compelled to confirm a deed of
absolute sale of real property owned by the
corporation whose deed of sale was executed by
the bank manager without prior authority of the
board of directors of the rural banking
corporation?
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, 14 Apr.
2004)
A: YES. A bank is liable to innocent third persons
where representation is made in the course of its
normal business by an agent like the bank manager,
even though such agent is abusing her
authority. Clearly, persons dealing with her could
not be blamed for believing that she was authorized
to transact business for and on behalf of the bank.
The bank is estopped from questioning the
authority of the bank manager to enter into the
contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent
out to the public as possessing the power to do those
acts; thus, the corporation will, as against anyone
who has in good faith dealt with it through such
agent, be estopped from denying the agent’s
authority. Unquestionably, the bank has authorized
its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the
board resolution sought by. Having authorized her
to sell the property, it behooves the bank to confirm
the Deed of Sale so that the buyers may enjoy its full
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No.
137686, 08 Feb. 2000)
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct.
1998)
Where the practice of the corporation has been to
allow its general manager to negotiate and execute
contracts in its copra trading activities for and on
behalf of the corporation without board approval,
the board itself, by its acts through acquiescence,
practically laid aside the by-law requirement of
prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
matter of general practice, custom, and policy, the
general manager may bind the company without
formal authorization from the board of directors.
(Board of Liquidators v. Heirs of Kalaw, et al., G.R. No.
L-18805, 14 Aug. 1967)
Q: Associated Bank (the Bank) purchased in a
foreclosure sale the real properties of Sps. Vaca
mortgaged in its favor. The Sps. Vaca, however,
prayed for the nullification of the mortgage and
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and
the Sps. Pronstroller offered to buy the same.
The offer was made through Atty. Soluta, the
Bank’s Vice-President, Corporate Secretary, and
A corporation cannot deny the authority of a lawyer
when they clothed him with apparent authority to
act in their behalf such as when he entered his
appearance accompanied by the corporation’s
general manager and the corporation never
questioned his acts and even took time and effort to
forward all the court’s documents to him. The
lawyer may not have been armed with a board
resolution, but the doctrine of apparent authority
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
142
Corporation Law
Banate, however, carried over the mortgage lien
in PCRB’s favor. PCRB refused to release the
property from the lien.
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer.
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a
final order from the Supreme Court in the Vaca
case and the delivery of the property to the Sps.
Pronstroller free from occupants.
Did the purported agreement between Banate
and Mondigo novate the mortgage contract over
the subject properties in a manner binding upon
PCRB?
A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
consider the power to undo or nullify solemn
agreements validly entered into as within the
doctrine’s ambit. Although a branch manager,
within his field and as to third persons, is the
general agent and is in general charge of the
corporation,
with
apparent
authority
commensurate with the ordinary business
entrusted him and the usual course and conduct
thereof, yet the power to modify or nullify corporate
contracts remains generally in the board of
directors.
The Bank was later on reorganized, and Atty.
Soluta was relieved from his duties. The Bank,
through its Assistant Vice-President, Atty.
Dayday, informed Sps. Pronstroller that their
request for extension was disapproved and, in
view of their breach of the contract, the Bank
was rescinding the same and forfeiting their
deposit. Is Associated Bank bound by the LetterAgreement signed by Atty. Soluta under the
doctrine of apparent authority?
A: YES. The authority of a corporate officer or agent
in dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and
to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution
expressly authorizing him; thus, it had clothed him
with apparent authority to modify the same via the
second letter-agreement. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation. (Associated Bank v. Spouses
Pronstroller, G.R. No. 148444, 14 July 2008)
Being a mere branch manager alone is insufficient
to support the conclusion that Mondigo has been
clothed with “apparent authority” to verbally alter
terms of written contracts, especially when viewed
against the telling circumstances of this case: the
unequivocal provision in the mortgage contract;
PCRB’s vigorous denial that any agreement to
release the mortgage was ever entered into by it;
and, the fact that the purported agreement was not
even reduced into writing considering its legal
effects on the parties’ interests. To put it simply, the
burden of proving the authority of Mondigo to alter
or novate the mortgage contract has not been
established. (Banate, et al., v. Philippine Countryside
Rural Bank, Inc., et al., G.R. No. 163825, 13 July 2010)
Q: Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB),
secured by a real estate mortgage over their
property, including the house constructed
thereon owned by the Sps. Cortel. Sps.
Magsalang and Sps. Cortel asked permission
from PCRB to sell the subject properties.
Mondigo, Branch Manager of PCRB, verbally
agreed to their request but first required full
payment of the loan. The subject properties
were later sold to Banate. The title issued to
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery
of fertilizers to her, payable from the proceeds
of the loan that UCPB extended to her. Layson
executed a document called “pagares,” written
on the dorsal side of a UCPB promissory note.
The pagares stated that Layson had an approved
loan with UCPB-Iloilo Branch. The second
portion of the pagares, signed by that branch’s
manager Gregory Grey, stated that the
143
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
assignment has been duly accepted and
payment duly guaranteed within 60 days from
PPI’s Invoice. But contrary to her undertakings,
Layson withdrew with branch manager Grey’s
connivance, the loan that UCPB granted her.
2.
On the strength of the three documents, PPI
delivered quantities of fertilizers to Layson.
When PPI presented the documents of the
financed transactions to UCPB for collection, the
bank denied the claim on the ground that it
neither authorized the transactions nor the
execution of the documents which were not part
of its usual banking transactions. UCPB claimed
that branch manager Grey exceeded his
authority in guaranteeing payment of Layson’s
purchases on credit. It contended that the
pagares were illegal and void since banking laws
prohibit bank officers from guaranteeing loans
of bank clients. Is UCPB bound by Grey’s
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment for the
fertilizers Layson bought?
3.
4.
A: NO. UCPB is not bound. A corporation like UCPB
is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to
perform acts within the scope of his general or
apparent authority, holding him out to the public as
possessing power to do those acts. But, here, it is
plain from the guarantee Grey executed that he was
acting for himself, not in representation of UCPB.
The latter cannot be bound by Grey’s above
undertaking since he appears to have made it in his
personal capacity. He signed it under his own name,
not in UCPB’s name or as its branch manager.
Indeed, the wordings of the undertaking do not at all
make any allusion to UCPB. (UCPB v. Planters
Products, Inc., et al., G.R. No. 179015, 13 June 2012)
Contracts, whether wholly executory or
executed on one side, apparently authorized,
but in fact, ultra vires because they are made
for a purpose not within the scope of the
business of the corporation, the ultra vires
purpose being unknown to the other party –
enforceable against the corporation. (Divina,
2020)
If the act is yet to be done, the remedy is one of
injunction to enjoin the performance or continued
performance of the ultra vires act.
If the act has already been performed, a stockholder
may file a derivative suit on behalf of the
corporation to set aside the ultra vires act. (Divina,
2020)
Q: X Corp., whose business purpose is to
manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a
resolution of its Board of Directors. The
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so,
what is the status of the investment? (2011 BAR)
These are the effects for the specific acts:
If the contract is executed on both sides – the
courts will not set aside or interfere to deprive
either party of what has been acquired under
them.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
If the contract is executed on one side, and
executory on the other – courts in some
jurisdictions, although not in all, will enforce in
favor of the party who has executed the same on
his part against the other party who has
received and retained the benefits on the
ground that equitable principles and
outweighing considerations of public policy
require that the latter should not be permitted,
while retaining the benefits of the contract, to
escape liability on the ground that it was ultra
vires.
Remedies in Case of Ultra Vires Acts
Consequences of Ultra Vires Acts
1.
If the contract is executory on both sides – it
will not be enforced at the suit of either party,
because their enforcement is not required by
any equitable principles and will be contrary to
public policy.
144
Corporation Law
A: YES. It is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders’
ratification.
estoppels, or on equitable especially if no creditors
are prejudiced thereby and no rights of the state or
the public are involved. (Fletcher, p.585; Republic v.
Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)
Q: Which of the following corporate acts is valid,
void, or voidable?
a.
b. TRUST FUND DOCTRINE
XL Foods Corporation, which is engaged in
the fast-food business, entered into a
contract with its President, Jose Cruz,
whereby the latter would supply the
corporation with its meat and poultry
requirements.
The trust fund doctrine provides that subscriptions
to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for
the satisfaction of their claims. (Ong v. Tiu, G.R. Nos.
144476 and 144629, 08 Apr 2003)
In a sense, they have to be unimpaired for the
protection of creditors. These cover the entire
consideration received for the issuance of no par
value shares or the aggregate amount for the par
value shares issued by the corporation. (Divina,
2020)
A: Voidable – A contract of the corporation with
one or more of its directors or trustees or officers is
voidable, at the option of such corporation (Sec. 31,
RCC). Such contract can be ratified by the vote of the
stockholders representing at least two-thirds of the
outstanding capital stock in a meeting called for the
purpose: Provided, that full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
Trust fund doctrine is not limited to the
stockholders’ subscriptions. The scope of the
doctrine when the corporation is insolvent
encompasses not only the capital stock, but also
other property and assets generally regarded in
equity as a trust fund for the payment of corporate
debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors
that were distributed or in the possession of the
stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in
satisfaction of its claim. (Halley v. Printwell, Inc., G.R.
No. 157549, 30 May 2011; 2015, 2019 BAR)
b. The Board of Directors of XL Foods
Corporation declared and paid cash
dividends without approval of the
stockholders.
A: Valid – Approval of the stockholders is not
required in declaring cash dividends.
c.
XL Foods Corporation guaranteed the loan
of its sister company XL Meat Products, Inc.
(2002 BAR)
Effects of the Trust Fund Doctrine
A: Voidable – This is an ultra vires act on part of XL
Foods Corporation and is not one of the powers
provided for in Sec. 35 of the RCC. It can be ratified
provided it is not illegal per se but merely beyond
the powers of the corporation by the approval of the
majority of the board and vote of the stockholders
representing at least two thirds of the outstanding
capital stock. Where the contract or act is not illegal
per se but merely beyond the power of the
corporation, the same is merely voidable and may
be enforced by performance, ratification, or
1.
Dividends must never impair the subscribed
capital stock; (NTC v. CA, G.R. No. 127937, 28 July
1999)
2.
Subscription commitments cannot be condoned
or remitted; (Ibid.)
3.
145
GR: The corporation cannot buy its own shares
using the subscribed capital as the
consideration therefor. (Ibid.)
XPNs:
a. Redeemable shares may be acquired even
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Nishino Leather Industries, Inc., G.R. No. 150283, 16
April 2008)
without surplus profit for as long as it will
not result to the insolvency of the
Corporation; (Republic Planters Bank v.
Hon. Agana, G.R. No. 51765, 03 March
1997)
4.
b.
In a close corporation, a stockholder may
demand the payment of the fair value of
shares regardless of existence of retained
earnings for as long as it will not result to
the insolvency of the corporation; (Sec.
104, RCC)
c.
In case of a close corporation, if the
directors or stockholders are so divided
on the management of the corporation’s
business and affairs that the votes
required for a corporate action cannot be
obtained, with the consequence that the
business and affairs of the corporation can
no longer be conducted to the advantage
of the stockholders generally, the SEC,
upon written petition by any stockholder,
may 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. (Sec. 103(d), RCC)
When Creditor is Allowed to Maintain an Action
Upon Unpaid Subscriptions
A corporate creditor cannot immediately invoke the
trust fund doctrine to proceed against unpaid
subscriptions of stockholders of the debtor
corporation except in these two (2) instances when
the creditor is allowed to maintain an action upon
any unpaid subscriptions based on the trust fund
doctrine:
1.
2.
Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation. (Ong v. Tiu, G.R.
No. 144476, 08 April 2003)
When negotiations ensued in the light of a planned
takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may
take the machineries he brought to the corporation
out with him for his own use and sale, the previous
stockholder cannot recover said machineries and
equipment because these properties remained part
of the capital property of the corporation. Under the
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets. (Yamamoto v.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
146
Where the debtor corporation released the
subscriber to its capital stock from the
obligation of paying for their shares, in whole
or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors; and
Where the debtor corporation is insolvent or
has been dissolved without providing for the
payment of its creditors. (Enano-Bote v.
Alvarez, G.R. No. 223572, 10 Nov. 2020, J.
Caguioa)
Corporation Law
of number, will have to delegate the power to
manage the corporation to the board. (Divina, 2020)
D. BOARD OF DIRECTORS AND TRUSTEES
XPNs to Doctrine of Centralized Management
Unless otherwise provided in the RCC, the board of
directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation. (Sec. 22, RCC)
The doctrine is not applicable to the following
instances:
1.
Stated otherwise, corporate acts must be approved
by the board of directors, otherwise, such acts are
generally not binding on the corporation. They do
not create rights nor impose obligations upon the
corporation. Thus, if a corporation will enter into
contracts, initiate legal action or perform any of the
corporate acts under the RCC, the same must be
supported by a resolution that the board has duly
adopted authorizing such acts and designating the
person who will carry them out on behalf of the
corporation. (Divina, 2020)
2.
3.
In case of delegation to the Executive
Committee duly authorized in the by-laws; (Sec.
34, RCC)
Authorization pursuant to a contracted
manager which may be an individual, a
partnership, or another corporation; and
In case of close corporations, the stockholders
may manage the business of the corporation
instead of a board of directors, if the articles of
incorporation so provide. (Sec. 96, RCC)
Rationale: The concentration in the board of the
powers of control of corporate business and of
appointment of corporate officers and managers is
necessary for efficiency in any large organization.
Stockholders are too numerous, scattered, and
unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of
corporate organization is for the stockholders to
choose the directors who shall control and
supervise the conduct of corporate business.
(Filipinas Port Services, Inc. v. Go, G.R. No. 161886, 16
Mar. 2007)
The general rule is that a corporation, through its
Board of Directors, should act in a manner and
within the formalities, if any, prescribed by its
charter or by the general law. Directors must act as
a body in a meeting called for the pursuant to the
law or the corporation’s by laws, otherwise, any
action taken therein may be questioned by any
objecting director or shareholder; but an action of
the Board of Directors during a meeting, which was
illegal for lack of notice, may be ratified expressly,
by the action of directors in a subsequent legal
meeting, or impliedly, by the corporation’s
subsequent course of conduct. (Lopez Realty, Inc., v.
Fontecha, et al., GR No. 76801, 11 August 1995)
Stockholders or members periodically elect the
board of directors or trustees, who are charged with
the management of the corporation. The board, in
turn, periodically elects officers to carry out
management functions on a day-to-day basis. As
owners though, the stockholders or members have
residual powers over fundamental and major
corporate changes. While stockholders and
members (in some instances) are entitled to receive
profits, the management and direction of the
corporation are lodged with their representatives
and agents -- the board of directors or trustees. In
other words, the acts of management pertain to the
board; and those of ownership, to the stockholders
or members. In the latter case, the board cannot act
alone, but must seek approval of the stockholders or
1. BASIC PRINCIPLES
a. DOCTRINE OF CENTRALIZED MANAGEMENT
The doctrine means that corporate powers are
vested in a body, called board of directors for a stock
corporation and board of trustees for a nonstock
corporation. Except in those instances where
stockholders’ or members’ approval is required for
certain acts under the RCC or the corporation’s
bylaws, it is the board which exercises corporate
powers. The stockholders or members, regardless
147
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
members. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
2006)
4.
5.
b. BUSINESS JUDGMENT RULE
Questions of policy or management are left solely to
the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the
board of directors. The board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts or the SEC. (Montelibano v. Bacolod-Murcia
Milling Co., G.R. No. L-15092, 18 May 1962; Phil. Stock
Exchange, Inc. v. CA, G.R. No. 125469, 27 Oct. 1997)
Similarly, under the same business judgment rule,
stockholders cannot interfere with the board in
conducting the business affairs of the corporation.
They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere
disagreement. If the stockholders are not satisfied
with the way the board exercises its powers or
manages the corporation, their remedies consist of
replacing the board members upon expiration of
their term or vote for their removal under Sec. 27 of
the RCC or file a derivative suit on behalf of the
corporation to set aside the board’s wrongful acts
but not to supplant the board’s business judgment
for their own.
Interference of Third Parties, Including the SEC,
in the Decrease of Capital Stock Without
Reasonable Ground Violates Business Judgment
Rule
The SEC only has the ministerial duty to approve
the decrease of a corporation’s authorized
capital stock. After a corporation faithfully
complies with the requirements laid down in Sec. 38
(now Sec. 37, RCC), the SEC has nothing more to do
other than approve the same. Pursuant to Sec. 38
(now Sec. 37, RCC), the scope of the SEC's
determination of the legality of the decrease in
authorized capital stock is confined only to the
determination of whether the corporation
submitted the requisite authentic documents to
support the diminution. Simply, the SEC's function
here is purely administrative in nature.
For third persons or parties outside the corporation
like the SEC to interfere to the decrease of the capital
stock without reasonable ground is a violation of the
"business judgment rule." (Metroplex Berhad v.
Sinophil Corp., G.R. No. 208281, 28 June 2021)
To repeat, save for the authority granted to them by
law and the bylaws, stockholders cannot exercise
corporate powers and have no management rights.
In the absence of gross negligence or bad faith, the
board may not even be held liable for mistakes or
errors in directing the affairs of the corporation.
(Divina, 2020)
Consequences of Business Judgment Rule
1.
XPNs: The doctrine cannot be invoked:
1.
2.
3.
When the act is unconscionable and oppressive
as to amount to wanton destruction to the
rights of the minority; (Ong v Tiu, ibid.)
When there is bad faith or gross negligence by
the directors; (Republic Communications Inc. v.
CA, G.R. No. 135074, 29 Jan. 1999)
To declare dividends when there is no surplus
profit or to declare dividends out of reappraisal surplus; (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
To pay compensation to directors, as the power
is lodged with the stockholders; (Ibid.)
To support a request for a new stock and
transfer book on the pretext that the original is
lost (when in fact it is not) and declare entries
in the supposed lost stock and transfer book as
invalid. (Ibid., citing Provident International
Resources v. Venus, G.R. No. 167041, 17 June
2008)
2.
3.
148
Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders;
Directors and officers acting within such
business judgment cannot be held personally
liable for such acts;
If the cause of the losses is merely error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable; (Filipinas Port Services v. Go, G.R. No.
161886, March 16, 2007)
Corporation Law
4.
5.
6.
rejected PALI’s application. The SEC reversed
the ruling of the PSE. Is the SEC correct?
The Board of Directors has the power to create
positions not provided for in the corporation's
by-laws since the board is the corporation’s
governing body, clearly upholding the power of
its board to exercise its prerogatives in
managing the business affairs of the
corporation; (Ibid.)
Directors and officers who purport to act for the
corporation, keep within the lawful scope of
their authority and act in good faith, do not
become liable, whether civilly or otherwise, for
the consequences of their acts, which are
properly attributed to the corporation alone;
(Benguet Electric Cooperative, Inc. v. NLRC, G.R.
No. 89070, 18 May 1992) and
The power to elect corporate officers was a
discretionary power that the law exclusively
vested in the Board of Directors and could not
be delegated to subordinate officers or agents.
(Matling
Industrial
and
Commercial
Corporation, et al. v. Coros, G.R. No. 157802, 13
Oct. 2010)
A: NO. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing.
(PSE v. CA, G.R. No. 125469, 27 Oct. 1997)
2. TENURE AND QUALIFICATIONS OF
DIRECTORS OR TRUSTEES
Term of Office
Directors shall be elected for a term of one (1) year
from among the holders of stocks registered in the
corporation’s books, while trustees shall be elected
for a term not exceeding three (3) years from among
the members of the corporation. (Sec. 22, RCC)
Requirements for Application of Business
Judgment Rule
1.
2.
3.
4.
5.
Presence of a business decision including
decisions on policy management and
administration;
The decision must be intra vires and must
comply with the procedural and substantive
requirements of law;
Good faith;
Due care in making the decision; and
The director must not have personal interest or
nor self-dealing or otherwise on breach of the
duty of loyalty. (Villanueva, 2018)
If no election is held, the directors and officers will
continue to occupy position even after the lapse of
one (1) year under a hold-over capacity until their
successors are elected and qualified.
Term, Tenure, and Holdover Period
Term – time during which the officer may claim to
hold the office as a matter of right, and fixes the
interval after which the several incumbents shall
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and
does not change simply because the office may have
become vacant, nor because the incumbent holds
office beyond his term when a successor has not
been elected.
Q: PALI sought to offer its shares to the public in
order to raise funds for development of
properties and pay its loans with several banks.
To facilitate the trading of its shares, PALI
applied for a listing in the Philippine Stock
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
of PALI are owned by Marcos. Consequently, PSE
149
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Disqualifications
Holdover Period – the time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor
is it a new term; the holdover period, however,
constitutes part of his tenure. (Valle Verde Country
Club v. Africa, G.R. No. 151969, 04 Sept. 2009)
On disqualification, the RCC expanded and qualified
the grounds such that a person shall be disqualified
from being a director, trustee or officer of any
corporation if, within five (5) years prior to the
election or appointment as such, the person was:
Common Qualifications of Directors and Trustee
a.
The directors and trustees must have all the
qualifications provided under Sec. 22, in relation to
Secs. 10, 13, and 91, of the RCC as well as those
provided under the bylaws, and none of the
disqualifications under Sec. 26 of the RCC and the
bylaws. (Divina, 2020)
b.
Below are the qualifications for directors or trustees
under the RCC:
1.
The director or trustee must be of legal age.
(Sec. 10, RCC)
2.
The director must own at least one (1) share of
stock of the corporation and the trustee must be
a member of the corporation, (Sec. 22, RCC),
except with respect to independent trustees of
nonstock corporations vested with public
interest. (Sec. 91, RCC)
c.
By a foreign court or equivalent foreign
regulatory authority for acts, violations, or
misconduct similar to those enumerated in
paragraphs (a) and (b) above.
Director Must Be Stockholder
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before
assuming the duties of his office. (SEC Opinions, 09
Nov. 1987 & 05 Apr. 1990)
Q: Is it necessary that the director be the owner
of the share of the corporation in his own right
to qualify as such director?
Trustees of educational institutions organized
as nonstock corporations or religious societies
shall not be less than five (5) nor more than
fifteen (15). However, with respect to
educational institutions, the number of trustees
shall only be in multiples of five (5). (Secs. 106
and 114, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Found administratively liable for any offense
involving fraudulent acts; and
The foregoing is without prejudice to qualifications
or other disqualifications, which the SEC, the
primary regulatory agency, or the Philippine
Competition Commission may impose in its
promotion of good corporate governance or as a
sanction in its administrative proceedings. (Sec. 26,
RCC)
NOTE: A provision in the bylaws which allots a
permanent seat in the board to a non-member
of the association is contrary to law. Similarly,
the fact that said permanent seat was held for
fifteen (15) years cannot give rise to a vested
right and estoppel cannot forestall a challenge
against an act that is contrary to law. (Grace
Christian High School v. CA, et al., G.R. No.
108905, 23 Oct. 1997),
3.
Convicted by final judgment:
i. Of an offense punishable by imprisonment
for a period exceeding six (6) years;
ii. For violating the RCC; and
iii. For violating R.A. No. 8799, otherwise
known as “The Securities Regulation Code”;
A: 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 v. CA, G.R. No. 93695, 04 Feb. 1992)
Similarly, when a director loses his legal title over
150
Corporation Law
stands in fiduciary relation to the corporation and
its stockholders. The disqualification of a
competitor from being elected to the board of
directors is a reasonable exercise of corporate
authority. Sound principles of corporate
management counsel against sharing sensitive
information with a director whose fiduciary duty to
loyalty may well require that he discloses this
information to a competitive rival. When a person
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a
majority of the stockholders. (Gokongwei v. SEC, et
al., G.R. No. L-45911, 11 Apr. 1979)
all his shares, he automatically forfeits his director
position. (Divina, 2020)
Additional Qualifications Provided by the
Revised Code of Corporate Governance (RCCG)
A director should have the following: (C-P-M-P)
1.
2.
3.
4.
College education or equivalent academic
degree;
Practical understanding of the business of the
corporation;
Membership in good standing in relevant
industry,
business,
or
professional
organizations; and
Previous business experience. (Art. 3[D], RCCG)
Disqualification of Foreigners
While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly
or partially nationalized business activities, they are
allowed representation in the BOD or governing
body of said entities in proportion to their
shareholding. (Sec. 2-A, Anti-Dummy Law; Sec. 11,
Art. XII, 1987 Constitution, Art. XII, Sec. 11)
Q: John Gokongwei Jr., as stockholder of San
Miguel Corporation, filed with SEC a petition for
declaration of nullity of amended by-laws
against the majority of the members of the
Board of Directors and San Miguel Corporation.
Gokongwei claimed that prior to the questioned
amendment, he had all the qualifications to be a
director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired
rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
election of directors, and that in amending the
by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
of his vested right as aforementioned, hence the
amended by-laws are null and void.
Q: Are directors or trustees required to be
residents of the Philippines?
A: The requirement of the OCC which provides that
“[a] majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines” was removed under
the RCC. As such, it is possible that a majority or
even all directors or trustees may be non-residents.
(Divina, 2020)
Is a provision on the by-laws disqualifying a
person for a position in the board of directors on
the ground that he is engaged in a business
which competes with that of the Corporation
valid?
Q: Are directors or trustees required to be
Filipino citizens?
A: Similar to the OCC, the RCC does not require
Filipino citizenship for the directors or trustees of a
corporation. However, if the corporation is engaged
in nationalized activities, citizenship becomes a
qualification. Foreigners cannot be appointed to the
board of corporations engaged in whollynationalized activities. For partly nationalized
activities, foreigners can be elected to the board of
directors in proportion to their foreign equity, as
allowed by law. (Divina, 2020)
A: YES. A corporation is authorized to prescribe the
qualifications of its directors. A provision in the bylaws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
board of directors if he is engaged in any business
which compete with that of the Corporation is valid;
provided, however, that before such nominee is
disqualified, he should be given due process to show
that he is covered by the disqualification. A director
151
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To
complement its furniture manufacturing
business, the corporation also engaged in the
logging business. With the additional logging
activity, can the Korean national still be a
member of the Board of Directors? Explain
(2005 BAR)
Requirement of Independent Directors
The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-B-O)
1.
A: YES. The Korean national can still be a member of
the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos and
there is at least 20% foreign ownership justifying
one (1) board seat for a foreigner. Corporations that
are sixty percent (60%) owned by Filipinos can
engage in the business of exploration, development,
and utilization of natural resources (Sec. 2, Art. XII,
1987 Constitution). The election of aliens as
members of the Board of Directors engaging in
partially nationalized activities is allowed in
proportion to their allowable participation or share
in the capital of such entities (Sec. 2-A, Anti-Dummy
Law). There is also nothing in the facts that shows
that more than forty percent (40%) of the Board of
Directors are foreigners.
a.
b.
c.
2.
Independent Directors
3.
An independent director is a person who apart from
shareholdings and fees received from the
corporation, is independent of management and
free from any business or other relationship which
could or could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director. (Sec. 22, RCC)
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors. Independent
directors shall be subject to rules and regulations
governing their qualifications, disqualifications,
voting requirements, duration of term and term
limit, the maximum number of board memberships,
and other requirements that the SEC will prescribe
to strengthen their independence and align with
international best practices. (Sec. 22, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Corporations covered by Sec. 17.2 of R.A. No.
8799, otherwise known as “The Securities
Regulation Code,” such as (Re-Li-Ass):
Corporations whose securities are
Registered with the Commission;
Corporations Listed with an exchange;
Public Companies; meaning, Corporations
with:
i. Assets of at least P50 million;
ii. Having 200 or more shareholders;
iii. Each shareholder holding at least 100
shares of a class of its equity shares.
Banks, quasi-banks, Preneed, Insurance and
trust companies, Nonstock savings and loan
associations,
Pawnshops,
corporations
Engaged in money service business and other
Financial intermediaries; (B-P-I-N-P-E-F) and
Other corporations engaged in business vested
with public interest similar to the above, as may
be determined by the Commission, after taking
into account relevant factors which are
germane to the objective and purpose of
requiring the election of independent director,
such as the extent of minority ownership, type
of financial products or securities issued or
offered to investors, public interest involved in
the nature of business operations, and other
analogous factors.
Q: Two years since it began to operate, a
corporation has amassed assets valued at over
Php 60,000,000.00. It also has 250 shareholders,
each holding at least 150 shares. Under the
Revised Corporation Code, is the corporation
required to have an independent director?
Explain briefly. (2020-21 BAR)
A: Under Sec. 23 of the RCC, corporations vested
with public interest are required to have
152
Corporation Law
independent directors in their Boards. Corporations
vested with public interest include public
companies as described under the Securities
Regulation Code.
2.
A public company is any corporation with class of
equity shares listed for trading on an exchange OR
with assets in excess of Php 50,000,000.00 and has
200 or more stockholders, at least 200 of which hold
at least 100 shares each. (Sec. 23, RCC)
3.
Based on the facts provided, the corporation has
assets of more than P50 million with 250
shareholders, each one holding more than 100
shares each. Thus, being a public company, the
corporation is required to have independent
directors.
4.
Q: May the composition of the board of directors
of the National Power Corporation be validly
reduced to three? (2008 BAR)
A: YES. NPC is a government owned and controlled
corporation created by a special charter. Its charter
allows composition of its board of directors to be
reduced. Since NPC is not governed by the
Corporation Code, the standard number of directors
is not required.
5.
3. ELECTION AND REMOVAL OF
DIRECTORS OR TRUSTEES
6.
ELECTION OF DIRECTORS OR TRUSTEES
Requirements and Limitations for the Election
of Directors or Trustees
1.
Presence of stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy;
The election must be by ballot, if requested by
any voting stockholder or member;
Stockholders entitled to vote shall have the
right to vote the number of shares of stock
standing in their own names in the stock books
of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the
time of the election;
The said stockholder may: (a) vote such number
of shares for as many persons as there are
directors to be elected; (b) cumulate said shares
and give one (1) candidate as many votes as the
number of directors to be elected multiplied by
the number of the shares owned; or (c)
distribute them on the same principle among as
many candidates as may be seen fit: Provided,
That the total number of votes cast by him must
not exceed the number of shares owned by him
as shown in the books of the corporation
multiplied by the whole number of directors to
be elected;
No delinquent stock shall vote or be voted for;
and
Except when the exclusive right is reserved for
holders of founders’ shares under Section 7 of
this Code, each stockholder or member shall
have the right to nominate any director or
trustee who possesses all of the qualifications
and none of the disqualifications set forth in this
Code. (Sec. 24, RCC)
Reportorial Requirement
Within thirty (30) days after the election of
directors, trustees and officers of the corporation,
the secretary, or any other officer of the corporation,
shall submit to the Commission the names,
nationality, shareholdings, and residence addresses
of the directors, trustees and officers elected. (Sec.
25, RCC)
NOTE: Sec. 23 of the RCC also provides for
voting through remote communication or in
absentia. When so authorized in the bylaws or by
a majority of the board of directors,
The right to vote through such modes (remote
communication or in absentia) may be
exercised in corporations vested with public
interest notwithstanding the absence of a
provision in the bylaws of such corporations
153
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
since he would have been elected as a director
had it not been for E’s nomination and election,
then he (F) should now be considered a director
as he had acquired all the shares of E. Decide
with reasons. (1984 BAR)
Jurisdiction Over Election Contests
As amended by R.A. 8799 (SRC), the jurisdiction of
the SEC under Sec. 5 P.D. No. 902‐A (SEC
Reorganization Act) is now transferred to courts of
general jurisdiction (RTC). Thus, RTC now has
jurisdiction over election contests.
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
transfer of all his shares to F in the books of the
corporation. Every director must own at least one
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least one share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s
claims are without merit since he was not duly
elected as a director at the stockholders’ meeting.
Only the candidates receiving the highest number of
votes shall be declared elected.
Q: In case where there are two (2) sets of
persons claiming to be the Board of Directors,
which one is controlling?
A: It is the Board of Directors as reported to the SEC
through the filing of a general information sheet.
By the express mandate of the Corporation Code
(Sec. 26) (now Sec. 25, RCC), all corporations duly
organized pursuant thereto are required to submit
within the period therein stated (30 days) to the SEC
the names, nationalities and residences of the
directors, trustees and officers elected. Evidently,
the objective sought to be achieved by Sec. 26 is to
give the public information, under sanction of oath
of responsible officers, of the nature of business,
financial condition and operational status of the
company together with information on its key
officers or managers so that those dealing with it
and those who intend to do business with it may
know or have the means of knowing facts
concerning the corporation’s financial resources
and business responsibility. (Premium Marble
Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996)
Methods of Voting
1.
2.
Straight voting – every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
Cumulative voting for one candidate – a
stockholder is allowed to concentrate his votes
and give one candidate, as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal.
Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit. (Sec. 23, RCC)
Q: At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G
were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed
elected. F received ten votes less than E.
3.
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation
Code provides that directors “shall hold office
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that
EXAMPLE: A owns 100 shares of stock in ABC Corp.
There are ten (10) directors to be elected. A has in
his power to cast 1,000 votes.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1.
2.
154
Straight voting: A may give 100 votes for each
candidate.
Cumulative voting for one candidate: A may
give 1,000 votes to one preferred candidate.
Corporation Law
3.
Cumulative voting by distribution: A may
give 500 votes each to two candidates.
The Commission shall have the power to issue
orders as may be appropriate, including orders:
Cumulative Voting in Stock vs. Non-stock
1.
2.
3.
Members of nonstock corporations may cast as
many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1)
candidate, unless otherwise provided in the AOI or
in the bylaws
Directing the issuance of a notice stating the
time and place of election;
The designated presiding officer; and
The record date or dates for the determination
of stockholders or members entitled to vote.
(Sec. 25, RCC)
NOTE: Notwithstanding any provision of the AOI or
bylaws to the contrary, the shares of stock or
membership represented at such meeting and
entitled to vote shall constitute a quorum for
purposes of conducting an election under this
section.
Cumulative voting is mandatory in stock
corporations to protect the rights of minority
stockholders. Through cumulative voting, the
minority stockholders are given an opportunity to
cumulate their shares to improve the chance of
getting a seat in the board of directors. (Divina,
2020)
Quorum
Non-Holding of Elections
Quorum Required in a Stock or Non-stock
corporation
Report
1.
2.
Unless otherwise provided in this Code or in the
bylaws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock or a majority of the members in the case of
nonstock corporations. (Sec. 51, RCC)
Within thirty (30) days from the date of the
scheduled election. The report shall specify
a new date for the election, which shall not
be later than sixty (60) days from the
scheduled date. (Sec. 25, RCC)
For stock corporations, the quorum is based on
the number of outstanding voting stocks while for
non-stock corporations, only those who are actual,
living members with voting rights shall be counted in
determining the existence of a quorum. To be clear,
the basis in determining the presence of quorum in
non-stock corporations is the numerical equivalent
of all members who are entitled to vote, unless some
other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any
of its members. (Mary Lim v. Moldex Land, Inc., G.R.
No. 206038, 25 Jan. 2017)
Should a director, trustee or officer die,
resign or in any manner cease to hold office,
the secretary, or the director, trustee or
officer of the corporation, shall, within
seven (7) days from knowledge thereof,
report in writing such fact to the
Commission.
Summary Order of Commission
If:
1.
2.
No new date has been designated, or
The rescheduled election is likewise not held –
AOI as Basis in Determining Quorum
The Commission, may, upon the application of the
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the
election, summarily order that an election be held.
When the stock and transfer book is inaccurate and
deficient, it cannot be the sole basis of determining
the shareholdings for purposes of quorum. The AOI
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
1.
may be used as basis in determining the
shareholdings.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the
issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the
owners and/or successors in interest of the said
shares. This case is one instance where resort to
documents other than the stock and transfer books
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as
compared to that listed in the stock and transfer
book. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28
Mar. 2005)
2.
3.
4.
REMOVAL OF DIRECTORS AND TRUSTEES
Power to Remove
The power to remove belongs to the stockholders
representing at least 2/3 of the OCS of a stock
corporation, or if a non-stock corporation, by a vote
of at least 2/3 of the members entitled to vote. (Sec.
27, RCC)
5.
GR: Removal may be with or without cause.
XPN: If the director was elected by the minority,
there must be cause for removal because the
minority may not be deprived of the right to
representation to which they may be entitled under
Sec. 23 of the Code. (Sec. 27, RCC)
The notice of the meeting must specify the
intention to propose the removal of a director.
NOTE: The RCC does not require that the name
of the director proposed to be removed be
specified. Thus, it is enough to include in the
agenda that there is such an intention to remove
a director.
The removal must be approved by stockholders
representing at least two-thirds (2/3) of the
OCS or by at least two-thirds (2/3) of the
members entitled to vote for non-stock
corporation.
The removal may be with or without just cause.
Provided, That removal without cause may not
be used to deprive minority stockholders or
members of the right of representation to which
they may be entitled under Sec. 23 of the RCC.
The vacancy brought about by the removal of
the director may be filled at the same
stockholders’ meeting where the removal was
effected as long as this fact is similarly stated in
the agenda and notice of the said meeting, or in
a separate meeting called for that purpose. (Sec.
28, RCC)
NOTE: Only a majority of the outstanding capital
stock of the corporation must be present to have a
quorum on the election to be held to fill the
aforesaid vacancy. (Divina, 2020)
NOTE: The right of representation referred to is the
right to cumulative voting for one candidate under
Sec. 23 of the Code.
The SEC may order the removal, after due notice and
hearing, of a director who has been elected despite
his disqualification, or whose disqualification arose
or is discovered subsequent to an election. (Sec. 28,
RCC)
Requisites for Removal of Directors or Trustees
The removal of a director or trustee by the
stockholders or members is subject to the following
requisites:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
There must be a previous notice of the meeting
to stockholders or members, and the
procedures prescribed by the RCC and bylaws
must be followed.
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Corporation Law
Amotion is the premature ousting of a director or
officer from his post in the corporation.
Remedy if there is Refusal to Call a Meeting to
Remove Director
FILLING OF VACANCIES
If there is:
1. No secretary; or
2. If the secretary, despite demand, fails or
refuses to call the special meeting or to give
notice thereof
Ways of Filling up Vacancies
1.
The stockholder or member signing the demand
may call for the meeting by directly addressing the
stockholders or members
Power of the SEC
The Commission shall, motu proprio or upon
verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected
despite the disqualification, or whose
disqualification arose or is discovered
subsequent to an election. The removal of a
disqualified director shall be without prejudice to
other sanctions that the Commission may impose on
the board of directors or trustees who, with
knowledge of the disqualification, failed to remove
such director or trustee. (Sec. 27, RCC)
2.
Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
of the directors want him removed and his
shares be sold at auction, so he can no longer
participate even in the stockholder’s meetings.
Henry approaches you for advice on whether he
can be removed as board of director and
stockholder without cause. What is your advice?
Explain “amotion” and the procedure in
removing a director. (2016 BAR)
Vacancies to be filled up by stockholders or
members: (E-R-O-R-I)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration
of term, where the remaining directors do
not constitute a quorum for the purpose of
filling the vacancy;
d. If the vacancy may be filled by the
remaining directors or trustees but the
board Refers the matter to stockholders or
members; or
e. Increase in the number of directors.
Vacancies filled up by members of the board:
Any vacancy occurring in the board of directors
or trustees other than by removal or by
expiration of term may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum. (Sec. 28,
RCC)
NOTE: The phrase “may be filled” in Sec. 28, RCC
indicates that the filling of vacancies in the board by
the remaining directors constituting a quorum is
merely permissive. Corporations may choose how
vacancies in their boards may be filled up, either by
the remaining directors or trustees constituting a
quorum or by the stockholders or members, unless
a specific mode if provided in the bylaws.
A: Henry cannot be removed by his fellow directors.
The power to remove belongs to the stockholders.
He can only be removed by the stockholders owning
at least 2/3 of the outstanding capital stock in a
meeting called for that purpose. The removal may
be with or without cause except that in this case, the
removal must be with cause because it is intended
to deprive the minority of the right of
representation.
Term of Replacement Director
A director elected to fill a vacancy shall serve the
unexpired term of the predecessor in office. (Sec. 28,
RCC)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Vacancy Caused by Resignation of Director in
Hold-Over Position
When Vacancy Should be Filled
WHEN VACANCY SHOULD BE FILLED
Term
Removal
Other cases
Expiration
May be on the
same day the
No later than meeting
Forty-five
the day of such authorizing the (45)
days
expiration at a removal;
from
the
meeting called provided
this time
the
for
the fact is stated in vacancy
purpose. (Sec. the agenda and arose. (Sec.
28, RCC)
notice of said 28, RCC)
meeting. (Sec.
28, RCC)
Q: Who should fill the vacancy due to the
resignation of a holdover director?
A: In the case of Valle Verde Country Club, Inc., et al.
vs. Africa (G.R. No. 151969, 04 Sept. 2009), the
Supreme Court ruled the resignation as a holdover
director will not change the nature of the cause of
the vacancy which is due to the expiration of
director's term. The term of a hold-over director has
expired. The holdover period is not part of his term.
So, the cause of the vacancy is not resignation but
the expiration of term. As such, the vacancy must be
filled by the stockholders in a regular or special
meeting called for the purpose pursuant to Sec. 29
of OCC (now Sec. 28, RCC). (Divina, 2020)
4. DUTIES, RESPONSIBILITIES, AND
LIABILITIES FOR UNLAWFUL ACTS
Emergency Board (Sec. 28, RCC)
DUTIES AND RESPONSIBILITIES
EMERGENCY BOARD
When to call for an Emergency Board
Fiduciary Nature of Obligation
When the vacancy prevents the remaining
directors from constituting a quorum and
emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the
corporation.
The directors’ character is that of a fiduciary insofar
as the corporation and the stockholders as a body
are concerned. As agents entrusted with the
management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust.
Who may fill the vacancy
It may be temporarily filled from among the
officers of the corporation.
The ordinary trust relationship of directors of a
corporation and stockholders springs from the fact
that directors have the control and guidance of
corporate affairs and property and hence of the
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only
beneficiaries thereof. (Gokongwei v. SEC, et al., G.R.
No. L-45911, 11 Apr. 1979)
Voting requirement
He will be elected by a UNANIMOUS vote of the
remaining directors or trustees.
Limitations and Cessation
It shall be limited to the emergency action
necessary and term shall cease within:
(a) Reasonable time from the termination of the
emergency action; or
(b) Upon election of the replacement director or
trustee,
whichever comes earlier.
Majority Rule Doctrine
Reportorial Requirement
The corporation must notify the SEC within three
(3) days from the creation of the emergency
board, stating therein the reason for its creation.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
158
The majority rule states that a director has a
fiduciary duty with respect to the corporation as an
entity, and not to the stockholders as individuals.
Consequently, he is subject to the duty to disclose all
material facts only to the corporation and not to the
stockholders. (American T. Co. v. California etc. Ins.
Corporation Law
Co., 15 Cal. 2d 42, 1940)
Sec. 30 vs. Sec. 33, RCC
Three-Fold Duties of Directors
LIABILITY OF
DIRECTORS,
TRUSTEES OR
OFFICERS
SEC. 30
DISLOYALTY OF A
DIRECTOR
SEC. 33
Applicable to directors,
trustees, and officers.
Applicable to directors
only.
In this jurisdiction, the members of the board of
directors have a three-fold duty:
1.
2.
3.
Duty of Obedience – shall direct the affairs of
the corporation only in accordance with the
purposes for which it was organized; (Basis: Sec.
24, RCC)
Covers stock and nonstock corporations.
Duty of Diligence – shall not willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad
faith or with gross negligence in directing the
affairs of the corporation; (Basis: Sec. 30, RCC)
and
Transaction cannot be
ratified.
Covers only
corporations.
stock
Transaction may be
ratified.
LIABILITIES
Liability For Official Acts
Duty of Loyalty – shall not acquire any personal
or pecuniary interest in conflict with their duty
as such directors or trustees. (Basis: Secs. 30 and
33, RCC) (Strategic Alliance Development
Corporation v. Radstock Securities Ltd., G.R. No.
178158, 04 Dec. 2009)
GR: The officers of a corporation are not personally
liable for their official acts.
XPNs: The officers may be held liable if it is shown
that they exceeded their authority.
Disloyalty of Directors
In the following instances, the directors/ trustees
may be held personally liable for damages:
GR: Where a director, by virtue of such office,
acquires a business opportunity which should
belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, the director
must account for and refund to the latter all such
profits.
1.
2.
XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least twothirds (2/3) of the OCS. (Sec. 33, RCC)
When they willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation;
When they are guilty of gross negligence or bad
faith in directing the affairs of the corporation;
NOTE: Bad faith or negligence is a question of
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known
duty through some motive or interest or ill-will;
it partakes of the nature of fraud. (Ford Phils.,
Inc., et al. v. CA, G.R. No. 99039, 03 Feb. 1997)
NOTE: This provision shall be applicable,
notwithstanding the fact that the director risked
one's own funds in the venture. (Ibid.)
3.
159
When they acquire any personal or pecuniary
interest in conflict with their duty as such
directors or trustees; (Sec. 30, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
4.
5.
6.
7.
failed to prove the existence of circumstances
that render Shangri-La and the other directors
solidarily liable. It ruled that Shangri-La’s Board
of Directors is not liable for the contractual
obligations of Shangri-La to BF Corporation.
When they consent to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto; (Sec, 64, RCC)
When they are made, by a specific provision of
law, to personally answer for their corporate
action; (Sec. 144, CC; Sec.13, P.D. 115; Uichico v.
NLRC, G.R. No. 121434, 02 June 1997)
Are Shangri-La’s directors liable for the
contractual obligations of Shangri-La to BF
Corporation?
A: NO. Indeed, as petitioners point out, their
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an
artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives
it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from
other persons including its stockholders, officers,
directors, representatives, and other juridical
entities. (Lanuza, Jr. v. BF Corporation, G.R. No.
174938, 01 Oct. 2014)
When they agree to hold themselves personally
and solidarily liable with the corporation;
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
07 Nov. 1994) or
When the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime. (Carag v. NLRC, GR No.
147590, 02 Apr. 2007)
NOTE: When the officers of the corporation
exceeded their authority, their actions are not
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them.
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, 18 Aug. 2006)
Participation in Arbitration
As a general rule, a corporation’s representative
who did not personally bind himself or herself to an
arbitration agreement cannot be forced to
participate in arbitration proceedings made
pursuant to an agreement entered into by the
corporation. He or she is generally not considered a
party to that agreement. However, there are
instances when the
distinction
between
personalities
of
directors,
officers,
and
representatives, and of the corporation, are
disregarded. We call this piercing the veil of
corporate fiction. Hence, when the directors, as in
this case, are impleaded in a case against a
corporation, alleging malice or bad faith on their
part in directing the affairs of the corporation,
complainants are effectively alleging that the
directors and the corporation are not acting as
separate entities. They are alleging that the acts or
omissions by the corporation that violated their
rights are also the directors' acts or omissions. They
are alleging that contracts executed by the
corporation are contracts executed by the directors.
Complainants effectively pray that the corporate
Q: BF Corporation, in a collection complaint filed
against Shangri-La and its Board of Directors,
alleged that Shangri-La induced BF Corporation
to continue with the construction of the
buildings using its own funds and credit despite
Shangri-La’s default. It claims that Shangri-La
misrepresented that it had funds to pay for its
obligations with BF Corporation. The latter
eventually completed the construction of the
buildings. Shangri-La took possession of the
same while still owing BF Corporation an
outstanding balance.
Shangri-La’s BoD based their defense on the
separate personality given to juridical persons
vis-à-vis their directors, officers, stockholders,
and agents. Since they did not sign the
arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of
the Arbitration Tribunal in accordance with the
arbitration agreement. The Arbitral Tribunal
rendered a decision, finding that BF Corporation
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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Corporation Law
into a service contract with Robinsons Land
Corporation. Halfway through the service
contract, Skillex asked the respondentsemployees Seva, et al. to execute individual
contracts which stipulated that their respective
employments shall end at the last day of the
year. Skillex and Robinsons no longer extended
their
contract
of
janitorial
services.
Consequently, Skillex dismissed Seva, et al. as
they were project employees whose duration of
employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
a complaint for illegal dismissal with the NLRC.
Should Rana and Burgos be held solidarily liable
with the corporation for respondentsemployees’ monetary claims against the
corporation?
veil be pierced because the cause of action between
the corporation and the directors is the same.
In that case, complainants have no choice but to
institute only one proceeding against the parties.
Under the Rules of Court, filing of multiple suits for
a single cause of action is prohibited. Institution of
more than one suit for the same cause of action
constitutes splitting the cause of action, which is a
ground for the dismissal of the others (Lanuza, Jr. v.
BF Corporation, supra)
NOTE: However, in ruling that petitioners may be
compelled to submit to the arbitration proceedings,
the Supreme Court is not overturning Heirs of
Augusto Salas Jr. v. Laperal Realty Corporation, et al.
(G.R. No. 135362, 13 Dec. 1999) wherein the court
affirmed the basic arbitration principle that only
parties to an arbitration agreement may be
compelled to submit to arbitration.
A: NO. Seva, et al. failed to show the existence of the
first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
knowingly assented to petitioner’s patently
unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that
Rana and Burgos had been guilty of gross negligence
or bad faith in directing the affairs of the
corporation.
Requisites for Holding Directors or Officers
Personally Liable:
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
1.
2.
The complainant must allege in the complaint
that the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
faith; and
To hold an officer personally liable for the debts of
the corporation, and thus pierce the veil of
corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed.
(FVR Skills and Services Exponents, Inc. [SKILLEX], et.
Al. v. Seva, et al., G.R. No. 200857, 22 Oct. 2014)
The complainant must clearly and convincingly
prove such unlawful acts, negligence, or bad
faith. (Heirs of Fe Tan Uy v. International
Exchange Bank, G.R. No. 166282, G.R. No. 166283,
13 Feb. 2013)
Q: LMN Corporation hired X as Assistant Stage
Manager under a four-month contract on board
a vessel. While on board, X started to feel back
pains after he moved several boxes. As the pain
persisted, X was sent to an orthopedic doctor
where he was initially assessed to have lumbar
disc
disorder.
The
company-designated
physician issued a medical report declaring X
partially and permanently disabled with Grade
8 Impediment. Unsatisfied, X consulted another
doctor who declared him as permanently and
totally disabled. Thereafter, X informed LMN
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the SC
resolution finding the corporation liable does not
prove bad faith on the part of the incorporator of the
corporation. (Polymer Rubber Corp. v. Ang
Salamuding, G.R. No. 185160, 24 July 2013)
Q: Rana and Burgos are the President and
General Manager of SKILLEX. The latter entered
161
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Labor Arbiter that he was dismissed by Genesis
on account of a discrepancy in the amount he
declared on bus ticket receipts. Genesis gave
him a Memorandum to explain within twentyfour (24) hours why he should not be sanctioned
for reporting and remitting the amount of
P198.00 instead of the admittedly correct
amount of P394 worth of bus ticket receipts.
Rivera responded that it was an honest mistake,
which he was unable to correct “because the bus
encountered mechanical problems.” Despite
Rivera’s explanations, his employment was
terminated through a written notice. Rivera
filed a complaint for illegal dismissal against
Genesis and Riza Moises, the General Manager
and President of Genesis. Should Riza Moises be
solidarily liable with Genesis?
Corporation of the findings of his doctor and
requested that his case be referred to a third
doctor. However, since LMN Corporation
ignored his request, X filed a complaint for
payment of total and permanent disability
benefits. LMN Corporation contended that only
those with Grade 1 disability assessment are
entitled to full disability compensation, thus X
was not entitled to the benefits under POEA
Standard employment contract.
Can a corporate officer who entered a contract
on behalf of a corporation be held solidarily
liable with the corporation?
A: YES. Generally, corporate directors, trustees, or
officers who entered into contracts on behalf of the
corporation cannot be personally held liable for the
liabilities of the latter. However, their personal
liability may validly attach when they are
specifically made by a particular provision of law.
A: NO. As a rule, corporate directors and officers are
not liable for the illegal termination of a
corporation’s employees. It is only when they acted
in bad faith or with malice that they became
solidarily liable with the corporation. Rivera, in this
case, has not produced proof to show that Moises
acted in bad faith or with malice as regards the
termination of his employment. Thus, she did not
incur any personal liability. (Rivera v. Genesis
Transport Service, Inc., G.R. No. 215568, 03 Aug.
2015)
Here, RA 8042 expressly provides for joint and
solidary liability of corporate directors and officers
with the recruitment/placement agency for all
money claims or damages that may be awarded to
OFWs.
Thus, the owner of LMN Corporation, is solidarily
liable with the latter for X’s partial and permanent
disability benefits. (United Philippines Lines, Inc. v.
Alkuino, Jr., G.R. No. 245960, 14 July 2021)
Without any evidence of bad faith or malice,
directors may not be held personally liable. Only
when the termination is done with malice or in bad
faith on the part of the director may the director be
held solidarily liable with the corporation.
(Equitable Banking Corporation vs. NLRC, G.R. No.
02467, 13 June 1997; Rolando DS Torres v. Rural
Bank of San Juan, Inc., et al., G.R. No. 184520, 13 Mar.
2013)
Q: Jacob and Fernandez are STI officers, the
former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
Member by STI College Makati, Inc., a whollyowned subsidiary of STI. Ico was subsequently
promoted as Dean of STI College-Parañaque
and, thereafter, as COO of STI-Makati. However,
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum
cancelling her COO assignment, citing the
management’s decision to undertake an
"organizational restructuring" in line with the
merger, and further ordering Ico to turn over
her work to one Victoria Luz, who shall function
as STI-Makati’s School Administrator.
Q: Rivera was employed by Genesis Transport
Service, Inc. (Genesis) as a bus conductor. He
acknowledged in his Position Paper before the
Based on a report, it was recommended that an
investigation committee be formed to
investigate Ico for grave abuse of authority,
Liability of
Employees
Director
for
Termination
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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Corporation Law
falsification, gross dishonesty, maligning and
causing intrigues, and other charges. The LA
found Ico to have been illegally, constructively
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the
ruling of the LA. CA affirmed the ruling of the
NLRC. Is Jacob, as the President and CEO of STI,
solidarily liable with STI?
difference between the value received at the
issuance of the stock and the par or issued value of
the same. (Sec. 64, RCC)
NOTE: The prohibition to issue “watered stock”
refers only to the original issue of stocks (primary
issuance) but not to a subsequent transfer of such
stocks by the corporation (secondary market or
transaction).
A: NO. The Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The
principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is
guilty of persecuting petitioner. His superior, Jacob,
may have been, for the most part, clueless of what
Fernandez was doing to petitioner. A corporation,
as a juridical entity, may act only through its
directors, officers, and employees. Obligations
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal
liability but the direct responsibility of the
corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal
termination of services of employees if they acted
with malice or bad faith. (Girly Ico v. STI, Inc., et al.,
G.R. No. 185100, 09 July 2014)
See also discussion on Watered Stocks – page 210.
Liability for Attempting to Acquire Adverse
Interest on Confidential Matters
When a director, trustee, or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
as a trustee for the corporation and must account
for the profits which otherwise would have accrued
to the corporation. (Sec. 30, RCC)
NOTE: Private or secret profits obtained must be
accounted for, even though the transaction on
which they are made is advantageous or is not
harmful to the corporation, or even though the
director/ trustee or officer acted without intent to
injure the corporation.
Liability of Directors for Issuance of Watered
Stocks
Watered Stock –is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (no par
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC)
NOTE: The members of the board of directors who
approved the payment of the cash dividends despite
the insolvency of the corporation and the
stockholders who received the payment should
make good the losses. (Steinberg v. Velasco, G.R. No.
L-30460, 12 March 1929)
A director or trustee who:
1. Consents to the issuance of stocks for a
consideration less than its par or issued value;
2. Consents to the issuance of stocks for a
consideration other than cash, valued in excess
of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written objection
with corporate secretary
Q: International Air Transport Association
(IATA) and Morning Star entered a Passenger
Sales Agency Agreement such that the latter
must report all air transport ticket sales to the
former and account all payments received
through the centralized system called Billing
and Settlement Plan. IATA obtained a Credit
Insurance policy from Pioneer to assure itself of
payments by accredited travel agents for tickets
Shall be liable to the corporation or its creditors,
solidarily with the stockholder concerned for the
163
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
sales and monies due to the airline companies
under the Billing and Settlement Plan.
circumstance would amount to fraud, warranting
personal and solidary liability of its corporate
officers.
The policy was made known to Morning Star,
through its President, Benny Wong, who was
among those that declared itself liable to
indemnify Pioneer for any and all claims under
the policy. Morning Star had an accrued billing
of P49,021,641.80 and US$325,865.35 for the
period from Dec. 16, 2002 to Dec. 31, 2002. It
failed to remit these amounts through the
Billing and Settlement Plan.
Piercing the corporate veil in order to hold
corporate officers personally liable for the
corporation’s debts requires that "the bad faith or
wrongdoing of the director must be established
clearly, and convincingly as bad faith is never
presumed. (Pioneer Insurance v. Morning Star Travel
and Tours, G.R. No. 198436, 08 July 2015)
Disloyalty
IATA demanded from Pioneer the sums of
P109,728,051.00
and
US$457,834.14
representing Morning Star’s overdue account as
of April 30, 2003. Pioneer investigated,
ascertained, and validated the claims, then paid
IATA the amounts of P100,479,171.59 and
US$457.834.14.
Consequently,
Pioneer
demanded these amounts from Morning Star
through a letter. IATA executed a Release of
Claim and Subrogation Receipt in favor of
Pioneer.
GR: The director must account for and refund to the
office all such profits, which such director, by virtue
of such office;
1.
2.
XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least twothirds (2/3) of the OCS. (Ibid.)
Pioneer filed a Complaint for Collection of Sum
of Money and Damages against Morning Star and
its shareholders and directors. Should the
shareholders and directors of Morning Star be
jointly and severally liable with Morning Star?
NOTE:
This
rule
shall
be
applicable,
notwithstanding the fact that the director risked
one’s own funds in the venture. (Ibid.)
A: NO. Under Sec. 31 of the Corporation Code (now
Sec. 30, RCC), Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons.
Doctrine of Corporate Opportunity
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the
prejudice of such corporation, is guilty of disloyalty
and should, therefore, account to the latter for all
such profits by refunding the same, notwithstanding
that he risked his funds in the venture. (Sec. 33, RCC)
A director shall refund to the corporation all the
profits he realizes on a business opportunity which:
The mere fact that Morning Star has been incurring
huge losses and that it has no assets at the time it
contracted large financial obligations to IATA,
cannot be considered that its officers, Estelita Co
Wong, Benny H. Wong, Arsenio Chua, Sonny Chua
and Wong Yan Tak, acted in bad faith or such
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Acquires a business opportunity which should
belong to the corporation;
Thereby obtaining profits to the prejudice of
such corporation. (Sec. 33, RCC)
1.
2.
164
The corporation is financially able to
undertake;
From its nature, is in line with corporation’s
business and is of practical advantage to it; and
Corporation Law
3.
The corporation has an interest or a reasonable
expectancy. (Ibid.)
the responsible officer is criminally liable, therefore.
The reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it
are liable. While the corporation may be fined for
such criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned.
(People v. Tan Boon Kong, G.R. No. L-35262, 15 Mar.
1930)
Q: Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation formed
to run the Patio Cafe, an al fresco coffee shop in
Makati City. In 2000, Patio Cafe began
experiencing financial reverses, consequently,
some of the checks it issued to its beverage
distributors and employees bounced.
However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable
because being a corporate officer by itself is not
enough to hold him criminally liable.
In October 2003, Schiera informed Malyn that
she found a location for a second cafe in Taguig
City. Malyn objected because of the dire financial
condition of the corporation.
Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and that its
development was undertaken by a new
corporation known as Fort Patio, Inc., where
both Schiera and Jaz are directors. Malyn also
found that Schiera and Jaz, on behalf of Patio
Investments, had obtained a loan of P500,000,
from PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by the
assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Liability of Officers Under Trust Receipts Law
The Trust Receipts Law (P.D. 115) recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons responsible
for the offense liable to suffer the penalty of
imprisonment. (Ong v. CA, G.R. No. 119858, 29 Apr.
2003)
Though the entrustee is a corporation, nevertheless,
the law specifically makes the officers, employees or
other persons responsible for the offense, without
prejudice to the civil liabilities of such corporation
and or board of directors, officers, or other officials
or employees responsible for the offense. The
rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law. (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, 06 Feb. 2006)
Malyn then filed a corporate derivative action
before the RTC of Makati City against Schiera
and Jaz, alleging that the two directors had
breached
their
fiduciary
duties
by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Did Schiera and Jaz violate the principle of
corporate opportunity? Explain. (2005 BAR)
A: YES. Schiera and Jaz violated the Doctrine of
Corporate Opportunity because they used Patio
Investments to obtain a loan, mortgaged its assets
and used the proceeds of the loan to acquire a coffee
shop through a corporation they formed.
A trust receipt transaction imposes upon the
entrustee the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not
sold, to return the same to the entruster. There are
two obligations in a trust receipt transaction: the
first, refers to money received under the obligation
involving the duty to turn it over to the owner of the
merchandise sold, while the second refers to
Responsibility for Crimes
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes an offense,
165
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
relief may be granted in appropriate instances.
(Strong v. Repide, supra)
merchandise received under the obligation to
"return" it to the owner. A violation of any of these
undertakings constitutes estafa defined under Art.
315 (1) (b) of the RPC, as provided by Sec. 13 of P.D.
115.
Inside Information
Any material non-public information about the
issuer of the securities (corporation) or the security
obtained by being an insider, which includes:
(I-D-Re-Go-L)
Although these pieces of evidence show that Choa
signed the Trust Receipt Agreements, they do not
show that he signed them in his personal capacity.
Without any evidence that respondent personally
bound himself to the debts of the company he
represented, this Court cannot hold him civilly liable
under the Trust Receipt Agreements. (BDO Unibank,
Inc. v. Choa, G.R. No. 237553, 10 July 2019)
1.
2.
3.
Special Fact Doctrine
The special fact doctrine is an exception to the
majority rule doctrine. It states that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises,
and concealment is fraud.
4.
See also discussion on Majority Rule Doctrine – page
158.
5.
Application of Special Fact Doctrine
Dealings of Directors, Trustees or Officers with
the Corporation
In foreign U.S. jurisprudence, the special fact
doctrine was applied in the following cases:
1.
Where a director actively participates in the
negotiations for a transfer of the corporate
property. (Strong v. Repide, 213 U.S. 419, 29 S.Ct.
521, 53 L.Ed. 853)
2.
Where a director undertakes to speak or
becomes active in inducing the sale, he must
speak fully, frankly, and honestly, and conceal
nothing to the disadvantage of the selling
stockholder. (Poole v. Camden, 79 W. Va. 310)
3.
A contract of the corporation with one or more of its
directors, trustees, officers, or their spouses and
relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of
the corporation unless all the following conditions
are present:
1.
Where a director personally seeks a
stockholder for the purpose of buying his
shares without making disclosure of material
facts within his peculiar knowledge and not
within reach of the stockholders, the
transaction will be closely scrutinized, and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The Issuer;
A Director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
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;
A Government employee, director, or officer of
an exchange, clearing agency and/or selfregulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
A person who Learns such information by a
communication from any forgoing insiders (Sec.
3.8, SRC)
166
In case of a director or trustee:
a. 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;
b. That the vote of such director or trustee
was not necessary for the approval of the
contract;
c. That the contract is fair and reasonable
under the circumstances;
Corporation Law
2.
A: “A” should account for and refund to the
corporation all the profits which he realized from
the transaction. He grabbed the business
opportunity from the corporation (Sec. 33, RCC).
NOTE: In case of corporations vested with
public interest, material contracts are
approved by at least 2/3 of the entire
membership of the board, with at least a
majority of the independent directors voting
to approve the material contract; and
Contracts
between
Interlocking Directors
In case of officer: That in the case of an officer,
the contract with the officer has been
previously authorized by the board of directors.
(Sec. 31, par. 1, RCC)
Corporations
with
A contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone. Provided that:
NOTE: Sec. 31 does not require that the corporation
suffers injury or damage as a result of the contract.
1.
2.
Ratification of Contract With Director, or
Trustee
3.
A contract of the corporation with one or more of its
directors or trustees may be ratified by the vote of
the stockholders representing at least 2/3 of the
OCS or 2/3 of the members in a meeting called for
the purpose where any of the first three (3)
conditions is absent.
Contract is not fraudulent;
Contract is fair and reasonable under the
circumstances; and
If the interest of the interlocking director in one
corporation or corporations is substantial and
the interest in the other corporation or
corporations is merely nominal, he shall be
subject to the provisions of Sec. 32 insofar as the
latter corporation or corporations are
concerned. (Sec. 32, RCC);
NOTE: Stockholdings exceeding 20% of the
outstanding capital stock shall be considered
substantial for purposes of interlocking
directors.
Provided: There is full disclosure of the adverse
interest of the directors or trustees involved is made
at the stockholders’ meeting called for the purpose;
and the contract is fair and reasonable under the
circumstances. (Sec. 31, par. 2, RCC)
When a mortgagee bank foreclosed the mortgage on
the real and personal property of the debtor and
thereafter assigned the properties to a corporation
it formed to manage the foreclosed assets, the
unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee
and the assignee have interlocking directors. There
is no bad faith on the part of DBP by its creation of
Nonoc Mining, Maricalum and Island Cement as the
creation of these three corporations was necessary
to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use
and lose their value. (DBP v. CA, G.R. No. 126200, 16
Aug. 2001)
Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall
be relieved from all liability for any contract
entered into by the corporation with any firm in
which the directors may be interested." Thus,
director A acquired claims which overlapped
with X's claims and were necessary for the
development and operation of X's mining
properties. Is the by-law provision valid? Why?
(2001 BAR)
A: NO. It is in violation of Sec. 31 of the RCC.
EXECUTIVE COMMITTEE
Q: What happens if director “A” is able to
consummate his mining claims over and above
that of the corporation’s claims? (2001 BAR)
Executive Committee
An executive committee is a body created by the bylaws and composed of not less than three (3)
167
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Committee to manage the affairs of the
corporation in between board meetings. The
Board of Directors appointed the following
members of the Executive Committee: the
President, Sarah L; the Vice-President, Jane L;
and a third member from the board, Juan Riles.
in December 1, 2013, the Executive Committee,
with Sarah L and Jane L present, met and
decided on the following matters:
members of the board which, subject to the
statutory limitations, has all the authority of the
board to the extent provided in the board resolution
or by-laws. The committee may act by a majority
vote of all of its members. (Sec. 34, RCC)
A Foreigner is Allowed to be a Member of the
Executive Committee
A foreigner can be allowed representation in the
executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
which functions as the board itself. Thus,
membership therein shall be governed by the same
law/ rules applicable to the BOD as provided in Sec.
35. (SEC Opinion, June 3, 1998)
1. Purchase of a delivery van for use in the
corporation’s retail business;
2. Declaration and approval of the 13th month
bonus;
3. Purchase of an office condominium unit at
the Fort; and
4. Declaration of P10.00 per share cash
dividend.
Limitations on the Powers of the Executive
Committee
Are the actions of the Executive Committee
valid? (2014 BAR)
The executive committee cannot act on the
following:
1.
2.
3.
4.
5.
A: NO. All the actions taken by the Executive
Committee in the problem are not valid. The
Executive Committee was not properly created and,
therefore, its acts are invalid. Sec. 35 of the
Corporation Code requires that at least three
members of an Executive Committee be directors of
the corporation. In the problem, only Member Sarah
L (who is a director as she is the president) and
Member Juan Riles (who is clearly identified in the
problem as a director) are directors of Soei
Corporation. Member Jane L is not identified as a
director. As the Executive Committee in the problem
was not properly created, it could not act at all as the
minimum quorum would be three. As stated earlier,
the Executive Committee lacks one qualified
member.
Matters needing stockholder approval;
Filling up of board vacancies;
Amendment, repeal, or adoption of by-laws;
Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
Cash dividend declaration (Sec. 34, RCC)
Creation of Special Committees
The Board of directors may create special
committees of temporary or permanent nature and
determine the members’ term, composition,
powers, and responsibilities. (Sec. 34, RCC)
Decisions of the Executive Committee are NOT
Subject to Appeal to the Board
If the Executive Committee were properly
organized and a quorum was present, all the actions
taken by the Executive Committee in the problem,
except the declaration of P10.00 per share cash
dividend, would have been valid. The distribution of
cash dividends to the shareholders may not be
delegated by the Board of Directors to the Executive
Committee pursuant to Sec. 34 of the RCC
Decisions of the executive committee are not subject
to appeal to the board. However, if the resolution of
the Executive Committee is invalid, i.e. not one of the
powers conferred to it, it may be ratified by the
board. (SEC Opinion, 29 July 1995)
Q: Pursuant to its By-Laws, Soei Corporation’s
Board of Directors created an Executive
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
168
Corporation Law
MEETINGS OF DIRECTORS OR TRUSTEES
REGULAR
be held estopped to set up the failure to observe
formalities. (Divina, 2020)
SPECIAL
Attendance, Voting by Proxy at Board Meetings
When
Monthly, unless the
bylaws
provide
otherwise.
At any time upon call
of the President or as
may be provided in
the bylaws.
Directors or trustees cannot attend or vote by proxy
at board meetings. (Sec. 52, par. 5, RCC)
The members of the BOD are required to exercise
their judgment and discretion in running the affairs
of the corporation and they cannot be substituted by
others. (SEC Opinion, 27 May 1970)
Notice Requirement
1. It must state the date, time and place of the
meeting;
2. It must be sent to every director or trustee
a. Within the period provided in the bylaws.
b. at least two (2) days prior to the
scheduled meeting, unless a longer
period is provided in the bylaws
Who Presides Meeting
The chairman or, in his absence, the president shall
preside at all meetings of the directors or trustees
as well as of the stockholders or members, unless
the bylaws provide otherwise (Sec. 53, RCC).
NOTE: A director or trustee may waive this
requirement, either expressly or impliedly. (Sec.
52, RCC)
Q: Under the articles of incorporation of Manila
Industrial Corp., its principal place of business
shall be in Pasig, Metro Manila. The principal
corporate offices are at Ortigas Center, Pasig,
Metro Manila, while factory processing leather
products is in Manila. The corporation holds its
annual stockholders’ meeting at the Manila
Hotel in Manila and its BOD meeting at a hotel in
Makati, Metro Manila. The by-laws are silent as
to the place of meeting of the stockholders and
directors.
Attendance in Meetings
Directors or trustees who cannot physically
attend or vote at board meetings can participate
and vote through remote communication such as
videoconferencing, teleconferencing, or other
alternative modes of communication that allow
them reasonable opportunities to participate.
Directors or trustees cannot attend or vote by
proxy at board meetings.
a.
Who shall preside at the meeting of the
directors?
b. Can Ting, a stockholder, who did not attend
the stockholders’ annual meeting in Manila,
question the validity of the corporate
resolutions passed at such meeting?
c. Can the same stockholder question the
validity of the resolutions adopted by the
BOD at the meeting held in Makati? (1993
BAR)
Venue
May be held anywhere in or outside of the
Philippines, unless the bylaws provide otherwise.
Consequence of Lack of Notice, Absence
A meeting held in the absence of some of the
directors and without any notice given to them is
illegal, and the action at such meeting although by a
majority of the directors, is invalid unless:
1.
2.
Subsequently ratified or waived, expressly or
impliedly, by the absent directors; or
Rights have been acquired by innocent third
persons, as against whom the corporation must
A:
a. Sec. 53 of the RCC provides that it is the
chairman or, in his absence, the president who
shall preside at all meetings, unless the bylaws
provide otherwise.
169
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
b.
c.
NO. Sec. 50 of the RCC provides that the
stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal
office of the corporation as set forth in the AOI,
or, if not practicable, in the city or municipality
where the principal office of the corporation is
located. Provided, That any city or municipality
in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of
this section, be considered a city or municipality
Since the principal office or business of MIC is
Pasig, Metro Manila, the holding of the annual
stockholders’ meeting in Manila, which is
within Metro Manila, is proper.
Three (3) out of five (5) directors of the board of
directors present in a special meeting do not
constitute a quorum to validly transact business
when its by-laws require at least four members to
constitute a quorum. Under Sec. 25 of the CC (now
Sec. 52, RCC), the articles of incorporation or bylaws may fix a greater number than the majority of
the number of directors to constitute a quorum. Any
number less than the number provided in the
articles or by-laws cannot constitute a quorum; any
act therein would not bind the corporation; all that
the attending directors could do is to adjourn (Pena
v. CA, G.R. No. 91478, 07 Feb. 1991)
Effect of Abstention
NO. Ting cannot question the validity of
corporate resolutions passed in the BOD
meeting because Sec. 52 of the RCC does not
require that the meeting must be held within
the city or municipality where the principal
office of the corporation is located. The
meetings of directors or trustees may be held
anywhere in or outside of the Philippines unless
the bylaws provide otherwise.
No inference can be drawn in a vote of abstention.
When a director or trustee abstains, it cannot be
said that he intended to acquiesce in the action
taken by those who voted affirmatively. Neither, for
that matter, can such inference be drawn from the
abstention that he was abstaining because he was
not then ready to make a decision. (Lopez v. Ercita,
G.R. No. L-32991, 29 June 1972)
Quorum in Board Meetings
When Director is Required to Abstain
GR: Majority of the number of directors or trustees
as stated in the articles of incorporation.
Whenever a director believes he/she has a conflict
of interest, the director should abstain from voting
on the issue and make sure his/her abstention is
noted in the minutes. (Robert's Rules, 10th ed.)
XPN: If AOI or the by-laws provide for a greater
number. (Sec. 52, RCC)
The other reason a director might abstain is that
he/she believes there was insufficient information
for making a decision. Otherwise, directors should
cast votes on all issues put before them. Failure to
do so could be deemed a breach of their fiduciary
duties.
NOTE: The quorum is the same even if there is
vacancy in the board.
Rule as to Vote Needed for a Decision
GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which
there is quorum shall be valid as a corporate act.
Example: To avoid insider trading, insiders are
obligated to abstain from trading the shares of his
corporation. This duty to abstain is based on two
factors:
XPNs:
1. The election of officers which shall require the
vote of a majority of all the members of the
board; or
2. Unless greater majority is required under the
RCC, AOI, or by-laws.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1.
170
The existence of a relationship giving access,
directly or indirectly, to information intended
to be available only for a corporate purpose and
not for the personal benefit of anyone; and
Corporation Law
2.
The inherent unfairness involved when a party
takes advantage of such information knowing it
is unavailable to those with whom he is dealing.
(SEC v. Interport Resources Corporation, G.R. No.
135808, 06 Oct. 2008)
E. STOCKHOLDERS AND MEMBERS
A person becomes a shareholder the moment he:
1.
2.
3.
Enters into a subscription contract with an
existing corporation (he is a stockholder upon
acceptance of the corporation of his offer to
subscribe whether the consideration is fully
paid or not);
Purchase treasury shares from the corporation;
or
Acquires shares from existing shareholders by
sale or any other contract or acquires shares by
operation of law like succession. (Sundiang Sr. &
Aquino, 2009)
1. RIGHTS AND OBLIGATIONS OF A
STOCKHOLDER AND MEMBER
Rights of a Stockholder and Member
1.
2.
171
Management Rights
a. To attend and vote in person or by proxy
at a stockholders’ meetings; (Sec. 49, 57,
RCC)
b. To elect and remove directors; (Sec. 23, 27,
RCC)
c. To approve certain corporate; (Sec. 57,
RCC)
d. To adopt and amend or repeal the by-laws
of adopt new by-laws; (Sec. 45, 47, RCC)
e. To compel the calling of the meetings; (Sec.
49, RCC)
f. To enter into a voting trust agreement;
(Sec. 58, RCC) and
g. To have the corporation voluntarily
dissolved. (Sec. 117, 118, RCC)
Proprietary Rights
a. To transfer stock in the corporate book;
(Sec. 62, RCC)
b. To receive dividends when declared; (Sec.
42, RCC)
c. To the issuance of certificate of stock or
other evidence of stock ownership; (Sec.
63, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
d.
e.
3.
While a stockholder has no personal liability for the
debts of the corporation beyond the amount of his
capital investment, he is personally liable for the
above obligations. In addition, he may become
personally liable for damages or otherwise for any
wrongful disposition of corporate assets, breaches
of fiduciary duties, fraud, gross negligence,
unauthorized acts, violations of law, or improper
use of the corporate form.
To participate in the distribution of
corporate assets upon dissolution; (Sec.
117, 118, RCC) and
To pre-emption in the issue of shares. (Sec.
38, RCC)
Remedial Rights
a. To inspect corporate books; (Sec. 73, RCC)
b. To recover stock unlawfully sold for
delinquent payment of subscription; (Sec.
68, RCC)
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation; (Sec. 73, 74, RCC)
d. To bring suits (derivative suit, individual
suit, and representative suit); and
e. To demand payment in the exercise of
appraisal right. (Sec. 40, 81, RCC)
a. DOCTRINE OF EQUALITY OF SHARES
Under the doctrine of equality of shares, all stocks
issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)
In considering the proposed dividend distribution
system, the entitlement of certain kind of stocks to
preferences and benefits must be clearly and
expressly stated in the articles of incorporation of
BFDC. (SEC Opinion No. 10-20)
Obligations of a Stockholder
The following are the obligations of the stockholder:
1.
2.
3.
4.
5.
6.
Liability to the corporation for unpaid
subscription; (Sec. 65-69, RCC)
Liability to the corporation for interest on
unpaid subscription if so required by the
subscription contract; (Sec. 65, RCC)
Liability to the creditors of the corporation for
unpaid subscription; (Sec. 59, RCC)
Liability for watered stock; (Sec. 64, RCC)
Liability for dividends unlawfully paid; (Sec. 42,
RCC) and
Liability for failure to create corporation.
(Sundiang Sr. & Aquino, 2014; Sec. 10, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
172
Corporation Law
STOCKHOLDERS’/MEMBERS’ MEETINGS
DATE AND PLACE
REQUIRED WRITTEN NOTICE
Regular Meeting
1.
2.
Annually on date fixed in the by-laws; or
If not so fixed, on any date after April 15
of every year as determined by the board
of directors or trustees. (Sec. 49, RCC)
Venue:
Stock Corporations: In the principal office of
the corporation as set forth in the articles of
incorporation, or, if not practicable, in the city
or municipality where the principal office of
the corporation is located. (Sec. 50, RCC)
NOTE: Any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
(Ibid.)
Non-stock Corporations: Any place even
outside the place where the principal office of
the corporation is located, as long as within
Philippine territory and proper notice is sent
to all members. (Sec. 92, RCC)
The notice of meetings shall be in writing, and the time and
place thereof stated therein.
NOTE: The written notice of regular meetings may be sent
through electronic mail or such other manner as the
commission shall allow under its guidelines. (Sec. 49, RCC)
The notice shall be sent to the stockholder or member:
1. At least twenty-one (21) days prior to the meeting;
2. Unless a different period is required in the bylaws, law,
or regulation (Sec. 49, RCC)
Notice may be waived, expressly or impliedly, by any
stockholder or member.
Each notice of meeting shall further be accompanied by the
following:
1.
2.
3.
4.
Agenda for the meeting;
Proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
member elects either option; and
When the meeting is for the election of directors or
trustees, the requirements and procedure for nomination
and election. (Sec. 50, RCC)
Special Meeting
1.
2.
Any time deemed necessary; or
As provided in the by-laws.
Venue: in the principal office of the
corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where
the principal office of the corporation is
located. (Sec. 50, RCC) In the city or
municipality where the principal office is
located, and if practicable in the principal
office of the corporation: Provided, that Metro
Manila shall be considered a city or
municipality.
The notice of meetings shall be in writing, and the time and
place thereof stated therein.
The notice shall be sent to the stockholder or member:
1. At least one (1) week prior to the meeting;
2. Unless a different period is provided in the bylaws, law
or regulation.
Notice may be waived, expressly or impliedly, by any
stockholder or member.
173
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
NOTE: Any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
(Sec. 50, Ibid.)
Requirements for a Valid Meeting
1.
2.
3.
a.
It must be held in the proper place;
It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter;
It must be called by the proper person.
b.
Rules Applicable to Certain Shares
1.
2.
3.
4.
5.
Delinquent shares – shall not be entitled to
vote. (Sec. 23, RCC)
However, the two-tiered test contemplates a
situation where the registered stockholders
were in control and had been dissipating
company assets and the PCGG wanted to vote
the sequestered shares to save the company.
This was not the situation in ETPI in 1997. It
was the PCGG elected board that remained in
control during that year and it apparently had
done well in the preceding years guarding
company assets. (Africa v. Sandiganbayan, G.R.
No. 172222, 174493 & 184636, 11 Nov. 2013)
Treasury shares – have no voting rights while
they remain in the treasury. (Sec. 56, RCC)
Fractional shares – shall not be entitled to
vote.
Escrow shares – shall not be entitled to vote
before the fulfillment of the condition imposed
thereon.
Unpaid shares – if not delinquent, are entitled
to all the rights of a stockholder including the
right to vote.
XPN to the XPN: The two-tiered test does not
apply in cases involving funds of public
character (public character exception). In such
cases, the government is granted the authority
to vote said shares, namely:
6. Sequestered shares
GR: The registered owner of the shares of a
corporation, even if they are sequestered by the
government through the PCGG, exercises the
right and the privilege of voting on them.
a.
As a mere conservator, the PCGG cannot, as a
rule, exercise acts of dominion by voting these
shares.
b.
XPN: Two-tiered test: The registered owner of
sequestered shares may only be deprived of
these voting rights, and the PCGG authorized to
exercise the same, only if it is able to establish
that:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
There is prima facie evidence showing
that the said shares are ill-gotten and thus
belong to the State; and
There is an imminent danger of
dissipation, thus necessitating the
continued sequestration of the shares and
authority to vote thereupon by the PCGG
while the main issue is pending before
the Sandiganbayan. (Trans Middle East
[Phils.] v. Sandiganbayan, G.R. No. 172556,
09 June 2006)
7.
174
Where the government shares are taken
over by private persons or entities who or
which registered them in their own
names; and
Where the capitalization of shares that
were acquired with public funds somehow
landed in private hands. (Republic v.
Sandiganbayan, G.R. No. 107789, 30 Apr.
2003)
Secured Creditors and Administrators – In
case a stockholder grants security interest in his
or her shares in stock corporations, the
Corporation Law
A: NO. The agenda for the meeting, which includes
the elections of the new board of directors and
ratification of acts of the incumbent board of
directors and management, was the standard order
of business in a regular annual meeting of
stockholders of a corporation. Thus, the March 15,
2002 annual stockholders' meeting was a regular
meeting. Hence, the requirement to state the object
and purpose in case of a special meeting as provided
for in Art. VIII (5) of the PSI’s by-laws does not apply
to the Notice for the March 15, 2002 annual
stockholders' meeting.
stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given
by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books.
8.
Executor, administrators, receivers, and other
legal representatives may attend and vote in
behalf of the stockholder or members without
need of any written proxy (Sec. 54, RCC). In
Gochan v. Young, G.R. No. 131889, 12 Mar. 2001,
it was held that heirs are not prohibited from
representing the deceased in a suit, especially
when no administrator has yet been appointed.
Regarding the time for serving notice of the meeting
to all the stockholders, Sec. 50 of B.P. No. 68 reads in
part:
Shares jointly owned – consent of all the coowners is necessary, unless there is a written
proxy signed by all the co-owners authorizing
one (1) or some of them or any other person to
vote such share or shares. If shares are owned
in an “and/or” capacity by the holders thereof,
any one of the joint owners can vote or appoint
a proxy thereof. (Sec. 55, RCC)
Sec. 50 [now Sec. 49, RCC]. Regular and Special
Meetings of Stockholders or Members. – Regular
meetings of stockholders or members shall be
held annually on a date fixed in the by-laws, or
if not so fixed, on any date in April of every year
as determined by the board of directors or
trustees: Provided, that written notice of regular
meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior
to the meeting, unless a different period is
required by the by-laws.
Q: On March 15, 2002, a general stockholders'
meeting was held wherein Lao, Ong, Henry Sy, Sy
Tian Tin, Sy Tian Tin, Jr. and Paul Chua were
elected as members of the board of directors,
with Chua Lian as chairman of the board.
Under PSI's by-laws, notice of every regular or
special meeting must be mailed or personally
delivered to each stockholder not less than five (5)
days prior to the date set for the meeting.
In this case, the PSI's by-laws providing only for a
five (5)-day prior notice must prevail over the two
(2)-week notice under the Corporation Code. By its
express terms, the Corporation Code allows "the
shortening (or lengthening) of the period within
which to send the notice to call a special (or regular)
meeting." Thus, the mailing of the Notice to
respondents on March 5, 2002 calling for the annual
stockholders' meeting to be held on March 15, 2002
is not irregular, since it complies with what was
stated in PSI's by-laws. (Lao v. Lim, G.R. No. 201306,
09 Aug. 2017)
Yao Bio Lim and King filed a Petition against the
newly elected board of directors. They sought,
among others, to annul: (1) "the elections held
on March 15, 2002 and all corporate acts of the
supposedly new board of directors and officers
of PSI. The CA affirmed the RTC Decision holding
that there were valid grounds to nullify the
March 15, 2002 stockholders' meeting. First, the
Notice of meeting did not state the purpose of
the stockholders' meeting as required by Art.
VIII (5) of PSI's by-laws. Additionally, it was not
sent to the stockholders at least two (2) weeks
prior to the meeting as required under Sec. 50 of
the Corporation Code.
Is the 2002 Meeting a special meeting, and thus
require the purpose to be specified? Does it need
to follow the 2-week notice requirement?
NOTE: Sec. 49 of the RCC provides that written
notice of regular meetings shall be sent at least
twenty-one (21) days prior to the meeting, unless a
175
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Quorum
different period is required in the bylaws, law, or
regulation.
GR: Quorum shall consist of the stockholders
representing at least majority of the outstanding
capital stock or a majority of the actual and living
members with voting rights, in the case of non-stock
corporation. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
2006).
Who Calls the Meeting
The “call” for a meeting is exercised by the person
who has the power to call the meeting. The
following persons may exercise the power to “call”
for a meeting:
1.
2.
XPN: A different quorum may be provided for in the
by-laws.
The person or persons designated in the bylaws to have the authority to call stockholders’/
members’ meeting;
Minutes of the Meeting
In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with
the management of the corporation unless
otherwise provided by law;
The minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/
members or directors/trustees, but also at a
meeting of an executive committee.
A stockholder/member may make the call on
order of the SEC whenever for any cause, there
is no person authorized to call a meeting (Sec.
49, RCC) or the officers authorized fail or refuse
to call a meeting; and
3.
The minutes are usually kept in a book especially
designed for that purpose, but they may also be kept
in the form of memoranda or in any other manner in
which they can be identified as minutes of a
meeting. (People v. Dumlao, GR 168918, 02 March
2009)
NOTE: SEC may compel the officers of any
corporation registered by it to call meetings of
stockholders/members thereof under its
supervision. (Sec. 6 [f], P.D. No. 902-A)
Probative Value of Meetings
The minutes of board meetings should be signed by
the corporate secretary. Without such signature,
neither probative value nor credibility could be
accorded such minutes. (Union of Supervisors [RB]NATU v. Sec. of Labor, G.R. No. L- 39889, 12 Nov.
1981)
Corporate Secretary on order of the president,
or upon written demand of the stockholders
representing or holding at least a majority of
the outstanding capital stock, or a majority of
the members entitled to vote for a special
meeting intended for the removal of directors
or trustees, provided:
a.
b.
Minutes of meetings without the signature of the
corporate secretary have no probative value, and
therefore cannot be demanded for inspection or
examination. (Villanueva, 2018)
There must be a previous notice;
There must be a quorum. (Sec. 27, RCC)
2. PARTICIPATION IN MANAGEMENT
NOTE: If there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special
meeting or to give notice thereof, the stockholder or
member of the corporation signing the demand may
call for the meeting by directly addressing the
stockholders or members (Sec. 27, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Under the RCC, stockholders or members
periodically elect the board of directors or trustees,
who are charged with the management of the
corporation. The board, in turn, periodically elects
officers to carry out management functions on a
day-to-day basis. As owners, though, the
176
Corporation Law
2.
stockholders or members have residual powers
over fundamental and major corporate changes.
While stockholders and members (in some
instances) are entitled to receive profits, the
management and direction of the corporation are
lodged with their representatives and agents -- the
board of directors or trustees. In other words, acts
of management pertain to the board; and those of
ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must
seek approval of the stockholders or members. (Tan
v. Sycip, G.R. No. 153468, 17 Aug. 2006)
3.
Who May Be a Proxy
Any person whom the stockholder or member sees
fit to represent him.
NOTE: By-laws restricting the stockholder’s or
member’s right in this respect are void.
a. PROXY
Further, same person may act as proxy for one or
several stockholders or members.
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or
members. (Sec. 57, RCC)
Duration of Proxy
1.
However, the right of members to vote by proxy
may be denied under the AOI or by-laws of a nonstock corporation. (Sec. 88, RCC)
2.
The term “proxy” designates the formal written
authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise
the voting rights of the former.
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders’ or
members’ meeting.
1.
Since a proxy acts for another, he may act as such
although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
because his stock has been declared delinquent may
vote the stocks of his principal which are not
delinquent.
2.
Purposes of Proxies
Assures the presence of a quorum in meetings
of stockholders of large corporations;
Specific proxy – authority granted to the proxy
holder to vote only for a particular meeting on a
specific date.
Continuing proxy – authority granted a proxy
to appear and vote for and on behalf of a
shareholder for a continuing period which
should not be more than five (5) years at any
one time. By-laws may provide for a shorter
duration of a continuing proxy.
Extent of Authority
NOTE: A proxy is a special form of agency. A proxy
holder is an agent and as such a fiduciary.
1.
Enables those who do not wish to attend a
stockholders’/ members’ meeting to protect
their interest by exercising their right to vote
through a representative; and
One of the devices in securing voting control or
management control in the corporation. (Ibid.)
177
General Proxy – A general discretionary power
to attend and vote at an annual meeting, with all
the powers the undersigned would possess if
personally present, to vote for directors and all
ordinary matters that may properly come
before a regular meeting.
NOTE: A holder of a general proxy has no
authority to vote for a fundamental change in
the corporate charter or other unusual
transactions such as merger or consolidation.
Limited Proxy – Restrict the authority to vote
to specified matters only and may direct the
manner in which the vote shall be cast. (Ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Requirements of a Valid Proxy
1.
2.
3.
4.
Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral
proxies are NOT valid;
The proxy shall be filed within a reasonable
time before the scheduled meeting with the
corporate secretary;
Unless otherwise provided (continuing in
nature) in the proxy, it shall be valid only for the
meeting for which it is intended. The authority
may be general or limited; and
No proxy shall be valid and effective for a period
longer than 5 years at any one time. (Sec. 57,
RCC)
5.
2.
3.
4.
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is voted. (SEC Opinion, 03 Dec.
1993, citing 5 Fletcher, Sec. 2053)
Election of the BOD/BOT; (Sec. 23, RCC)
NOTE: When proxies are solicited in relation to
the election of corporate directors, the resulting
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation,
should be properly seen as an election
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Sec.
5.2 of the SRC in relation to Sec. 5(c) of P.D. No.
902-A. From the language of Sec. 5(c) of P.D. No.
902-A, it is indubitable that controversies as to
the qualification of voting shares, or the validity
of votes cast in favor of a candidate for election
to the board of directors are properly
cognizable and adjudicable by the regular
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R.
No. 183905, 06 Apr. 2009)
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated
proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
proxy in case of non-attendance of the other
designated proxy. (De Leon, supra)
Revocation of Proxy
A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote may
revoke the same at any time.
XPN: If said proxy is coupled with interest, even if it
may appear by its terms to be revocable. (De Leon,
supra)
Voting in case of joint ownership of stock; (Sec.
55, RCC)
Voting by trustee under Voting Trust
Agreements; (Sec. 58, RCC) and
Voting by members in nonstock corporations.
(Sec. 88, RCC)
Last proxy given revokes all previous proxies. (SEC
Opinion, 14 Oct. 1991)
SEC may Pass Upon Validity of Issuance and Use
of Proxies
NOTE: In nonstock corporations the right to
vote by proxy, or even the right to vote may be
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
In considering other matters:
a. Pledge or mortgage of shares; (Sec. 54,
RCC)
b. In all other matters as may be provided in
the by-laws; and
c. In all meetings of stockholders or
members. (Sec. 57, RCC)
Power to Appoint a Proxy is a Purely Personal
Right
Instances when the Right to Vote by Proxy may
be Exercised
1.
denied to members in the AOI or the by-laws as
long as the denial is not discriminatory.
PD 902-A empowers the SEC, among others, “to pass
upon the validity of the issuance and use of proxies
178
Corporation Law
other specific rights) over such shares; and in
return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
and voting trust agreements for absent
stockholders or members.” (P.D. No. 902-A, Sec. 5[d])
Procedural Matters Relating to Proxies
Principal Purpose: To acquire control of the
corporation.
1. “Proxy Solicitation” involves the securing and
submission of proxies, while “Proxy Validation”
concerns the validation of such secured and
submitted proxies;
Other Purposes
1.
2. The SEC’s power to pass upon the validity of
proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its
abrogated jurisdictional powers and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of the
Securities Regulation Code;
2.
3.
3. However,
although
an
intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporation’s violations of SEC rules and
regulations, that motive alone should not be
sufficient to deprive the SEC of its investigatory
and regulatory powers, especially so since such
powers are exercisable on a motu proprio basis.
4.
5.
6.
7.
The fact that the jurisdiction of the regular courts
under Sec. 5(c) is confined to the voting on election
of officers, and not on all matters which may be
voted upon by stockholders, elucidates that the
power of the SEC to regulate proxies remains
extant and could very well be exercised when
stockholders vote on matters other than the
election of directors. (GSIS v. CA, G.R. No. 183905, 16
Apr. 2009)
8.
9.
Procedural Requirements and Limitations on
VTAs
NOTE: It must be noted however that directors or
trustees cannot vote by proxy at board meetings.
(Sec. 52, RCC)
1.
b. VOTING TRUST
2.
Voting Trust Agreement
A voting trust agreement (VTA) is an agreement
whereby one or more stockholders transfer their
shares of stocks to a trustee, who thereby acquires
for a period of time the voting rights (and/or any
To make possible a unified control of the affairs
of the corporation and a consistent policy by
binding stockholders to vote as a unit;
To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors;
To enable the owners of the majority of the
stock of the corporation to control the
corporation;
To vest and retain the management of the
corporation in the persons originally promoting
it;
To prevent a rival concern from acquiring
control of the corporation;
To carry out a proposed sale of the
corporation’s assets and to facilitate its
dissolution;
To enable two holding companies to operate
jointly a corporation controlled by them;
To effect a plan for reorganization of a
corporation in financial difficulty or in
bankruptcy proceedings;
To aid a financially embarrassed corporation to
obtain a loan and protect its creditors.
3.
179
The agreement must be in writing and
notarized and specify the terms and conditions
thereof;
A certified copy of such agreement shall be filed
with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable;
The certificate/s of stock covered by the VTA
shall be cancelled;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
4.
5.
6.
7.
8.
the right to receive dividends. (Lee v. CA, G.R. No.
93695, 04 Feb. 1992)
A new certificate shall be issued in the name of
the trustee/s stating that they are issued
pursuant to the VTA;
NOTE: The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder in the same manner as any other
corporate book or record. Both the transferor and
the trustee may exercise the right of inspection of all
corporate books and records. (Sec. 58, RCC)
The transfer shall be noted in the books of the
corporation, that it is made pursuant to said
VTA;
The trustee/s 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;
Trustor has the right to terminate a voting trust
agreement when the trustee has committed a
breach of trust. (Everett v. Asia Banking Corp., G.R.
No. L-25241, 03 Nov. 1926)
GR: No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every
voting trust);
XPN: In case of a voting trust specifically
requiring a longer period as a condition in a
loan agreement, the period may exceed 5 years
but shall automatically expire upon full
payment of the loan; and
No VTA shall be entered into for the purpose of
circumventing the laws against
anticompetitive agreements, abuse of dominant
position, anti-competitive mergers and
acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.
(Sec. 58, RCC)
NOTE: Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically
expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.
(Sec. 58, RCC)
Effects of Voting Trust Agreement With Respect
to Trustee
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
elected in the board of directors while the trustorstockholder has the beneficial title which includes
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
180
Corporation Law
Voting Trust Agreement vs. Proxy
VOTING TRUST
PROXY
Revocability
If validly executed, VTA is intended to be
irrevocable for a definite and limited period of
time.
A proxy, unless coupled with interest, is revocable at any
time.
Trustee acquires legal title to the shares of the
transferring stockholder.
Proxy has no legal title to the shares of the principal.
Right to vote as well as other rights may be given
except the right to receive dividends. The trustee
may vote in person or by proxy unless the
agreement provides otherwise.
Only the right to vote is given.
The agreement must be notarized.
Proxy need not be notarized.
Legal Title
Rights Included
Notarization Requirement
Limitations to Act
Trustee is not limited to act at any particular
meeting.
Proxy can only base on authority given.
The stock certificate shall be cancelled and a new
one in the name of the trustee shall be issued
stating that they are issued pursuant to a VTA.
No cancellation of the certificate shall be made.
A trustee can vote and exercise all the rights of the
stockholder even when the latter is present.
A proxy can only vote in the absence of the stockholder.
An agreement must not exceed 5 years at any one
time except when the same is made a condition of
a loan.
A proxy is usually of shorter duration although under
Sec. 58 it can be for a longer period not to exceed 5 years
at any one time.
Governed by the law on trust.
Governed by the law on agency.
Cancellation of Stock Certificate
Extent of Right
Term or Duration
Governing Law
Right to Inspect
A trustee has the right to inspect corporate books.
A proxy does not have a right of inspection of corporate
books.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
The three-year period having expired, the
company demanded the turn-over and transfer
of all its assets and properties, including the
management and operation of the company,
claiming that under the Voting Trust Agreement,
the bank was constituted as trustee of the
management and operations of the Company. Is
the company correct? (1992 BAR)
Pooling Agreement
Pooling or voting agreements are agreements by
which two or more stockholders agree that their
shares shall be voted as a unit. They are usually
concerned with the election of directors to gain
control of the management. The parties remain the
legal owners of their stocks with the right to vote
them. (De Leon, supra)
A: NO. The company’s demand does not tally with
the concept of VTA because such agreement merely
conveys to the trustee the right to vote the shares of
the grantor. The consequence of the foreclosure of
the mortgaged properties would not be in
consonance with the VTA and its effects.
NOTE: This does not involve a transfer of stocks but
is merely a private agreement. (Sec. 99, RCC)
Example: Shareholders A, B, C, D, and E hold 50% of
the outstanding capital stock, entered into a pooling
agreement to vote for F as a member of the board of
directors.
c. CASES WHEN STOCKHOLDERS’ ACTION
IS REQUIRED
Validity of Pooling Agreements
Under Sec. 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided
in the AOI or declared delinquent under Sec. 67 of
the Corporation Code (now Sec. 66, RCC). (Tan v.
Sycip, G.R. No. 153468, 17 Aug. 2006)
Pooling agreements are valid as long as they do not
limit the discretion of the BOD in the management
of corporate affairs or work any fraud against
stockholders not party to the contract.
The validity and legality of such pooling agreements
depend upon the objects sought to be attained and
the acts which are done under them, and the other
circumstances. There is some authority for holding
pooling agreements to be invalid if the
consideration for entering into the same gives a
private benefit to the stockholder.
Right to Vote
In a Pooling Agreement, the stockholders
themselves exercise their right to vote. On the other
hand, the trustees are the ones who exercise the
right to vote under the Voting Trust Agreement.
One of the rights of a stockholder is the right to
participate in the control and management of the
corporation that is exercised through his vote. The
right to vote is a right inherent in and incidental to
the ownership of corporate stock, and such is a
property right. The stockholder cannot be deprived
of the right to vote his stock nor may the right be
essentially impaired, either by the legislature or by
the corporation, without his consent, through
amending the charter, or the by-laws (Castillo v.
Balinghasay, G.R. No. 150976, 18 Oct. 2004)
The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other
corporate acts which require stockholders’
approval.
Pooling Agreement vs. Voting Trust Agreement
Nature of Right to Vote
Q: A distressed corporation executed a VTA for a
period of three years over 60% of its
outstanding paid-up shares in favor of a bank to
which it was indebted, naming the Bank as
trustee. The Company mortgaged all its
properties to the Bank. The Bank foreclosed the
mortgaged properties, and as the highest
bidder, acquired said properties and assets of
the Company.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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Corporation Law
Conditions for Issuance of Non-Voting Shares
b.
Non-voting shares may be issued provided the
following conditions under Sec. 6 of the RCC are
complied with:
1.
2.
3.
No share may be deprived of voting rights
except those classified and issued as
“preferred” or “redeemable” shares, unless
otherwise provided in this Code; and
There shall always be a class or series of shares
with complete voting rights; and
Holders of nonvoting shares shall nevertheless
be entitled to vote on certain matters provided
in the RCC.
Instances when Non-Voting Shares
nevertheless be Entitled to Vote
1.
2.
3.
4.
5.
6.
7.
8.
c.
Shares under joint ownership: The consent of
all the co-owners shall be necessary in voting
shares of stock owned jointly by two (2) or
more persons, unless there is a written proxy,
signed by all the co-owners, authorizing one (1)
or some of them or any other person to vote
such share or shares: Provided, That when the
shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor.
(Sec. 55, RCC)
d.
Treasury shares: Treasury shares shall have
no voting right as long as such shares remain in
the treasury. (Sec. 56, RCC)
shall
The non-voting shares may still vote in the following
matters: (A-A-S-I-I-M-I-D)
Amendment of the articles of incorporation;
Adoption and amendment of By-laws;
Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
Incurring, creating or increasing bonded
indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with
another corporation or other corporations;
Investment of corporate funds in another
corporation or business in accordance with the
corporation code; and
Dissolution of the corporation (Sec. 6, RCC)
Shares subject of a settlement of estate
proceeding
or
under
receivership:
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. 54, RCC)
i. BY A MAJORITY VOTE
Refer to the Vote Requirement table on page 184.
ii. BY A TWO-THIRDS VOTE
Refer to the Vote Requirement table on page 184.
Right to vote in the following cases:
a.
Shares under security interest: In case a
stockholder grants security interest in his or
her shares in stock corporations, the
stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given
by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books. (Sec. 54, RCC)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Corporate Powers Exercised Jointly by the BOD and Stockholders (I4-P-A2-G-E2-S-M-A-V)
VOTE REQUIREMENT
BOARD OF DIRECTORS
STOCKHOLDERS
Amendments, Repeal, or Adoption of New By-laws
GR: Majority vote of the outstanding capital stock.
XPN: If delegated by the stockholders to the board.
Majority vote of the BOD.
Entering into Management Contract
GR: Vote of the majority of the outstanding shares of
stock or members of both the managing and the
managed corporation.
XPN: The vote required for the managed corporation
is not merely majority but 2/3 of the outstanding
capital stock in cases where:
Majority of the quorum of the BOD.
1.
2.
A stockholder or stockholders representing the
same interest of both the managing and the
managed corporations own or control more than
one-third (1/3) of the total OCS entitled to vote of
the managing corporation; or
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.
Issuance of Stock Dividends
Majority of the quorum of the BOD.
Vote representing 2/3 of the OCS.
Majority vote of the BOD.
Vote representing 2/3 of the OCS.
Amendment to Articles of Incorporation
Approval of the Board.
Majority vote of the BOD.
Majority vote of the BOD.
Majority vote of the BOD.
Grant of Compensation to Directors
Majority vote of the OCS.
Extending or Shortening the Corporate Term
Vote representing 2/3 of the OCS.
Increase or Decrease of Capital Stock
Vote representing 2/3 of the OCS.
Incur, Create, or Increase Bonded Indebtedness
Vote representing 2/3 of the OCS.
Deny Pre-emptive Right
Majority vote of the BOD.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Vote representing 2/3 of the OCS.
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Corporation Law
Investment of Corporate Funds in Another Corporation or Business or
for Any Other Purpose other than the Primary Purpose
Majority vote of the BOD.
Vote representing 2/3 of the OCS.
Majority vote of the board.
Vote representing 2/3 of the OCS.
The Sale or Other Disposition of All or Substantially All of the Corporate Assets
Merger or Consolidation
Majority vote of the BOD
Vote representing 2/3 of the OCS.
Voluntary Dissolution
Majority vote of the BOD.
Vote representing 2/3 of the OCS.
Majority vote of the Trustees.
2/3 of the members having voting rights.
To Adopt a Plan of Distribution of Assets of a Non-stock Corporation
Corporate Powers Exercised Solely by the
Stockholders
To revoke the power delegated to the BOD to
amend or repeal the by-laws
or adopt new by laws
CORPORATE POWERS
Majority of the OCS or of the members.
Election of directors or trustees; Filling up of
vacancies by the stockholders due to the
expiration of term, removal from office or
increase in the number of board seats
To call a special meeting to
remove directors or trustees
Majority of the OCS or of the members entitled to
vote.
Candidates receiving the highest number of votes
from the outstanding capital stock or members
entitled to vote. (plurality, NOT majority)
Removal of directors
Vote representing 2/3 of the OCS or of members
entitled to vote.
To elect officers of the corporation
Plurality vote of the BOD listed in the AOI, not
merely those present constituting a quorum.
Delegation of the power to amend by-laws
to the board of directors
Fixing the issued price of no-par value shares
Vote representing 2/3 of the OCS.
Majority of the quorum of the BOD if authorized
by the AOI or in the absence of such authority, by
a majority of the outstanding capital stock.
Ratification of corporate contract
with a director
Declaration of cash and other dividends other
than stock dividends
Vote representing 2/3 of the OCS.
To delegate to the BOD the power to amend or
repeal the by-laws or adopt new by laws
Majority of the quorum of the board.
To adopt by-laws
2/3 of the OCS or of the members.
Majority of the OCS or of the members.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
and not on the amount paid for the shares. (SEC
Opinion, 10 Oct. 1992 and 16 July 1996)
iii. BY CUMULATIVE VOTING
Cumulative Voting
GR: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their
paid-in capital stock.
In stock corporations, stockholders entitled to vote
shall have the right to vote the number of shares of
stock standing in their own names in the stock
books of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the time of
the election.
XPNs:
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
The said stockholder may:
a. Vote such number of shares for as many
persons as there are directors to be elected;
b.
c.
2.
Cumulate said shares and give one (1)
candidate as many votes as the number of
directors to be elected multiplied by the
number of the shares owned; or
3.
Distribute them on the same principle among
as many candidates as may be seen fit.
GR: Members of nonstock corporations may cast as
many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1)
candidate.
GR: Those stockholders at the time of declaration
are entitled to dividends. (Sundiang Sr. & Aquino,
2009, citing SEC Opinion, 15 July 1994)
NOTE: Dividends declared before the transfer of
shares belongs to the transferor and those declared
after the transfer, belong to the transferee. (Ibid.)
3. PROPRIETARY RIGHTS
The following are the proprietary rights of the
stockholders:
XPN: In case a record date is provided for.
A record date is the date fixed in the resolution
declaring dividends, when the dividend shall be
payable to those who are stockholders of record on
a specified future date or as of the date of the
meeting declaring said dividend. (De Leon, supra)
Right to Dividends;
Right of Appraisal;
Right to Inspect;
Pre-emptive Right; and
Right of First Refusal.
Right of Holders of Non-Delinquent, But Not
Fully Paid Shares
a. RIGHT TO DIVIDENDS
It is the right of the stockholder to demand payment
of dividends after the board’s declaration.
Stockholders are entitled to dividends pro rata
based on the total number of shares that they own
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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. (Sec. 42, RCC)
Entitlement to Receive Dividends
XPN: Cumulative voting is allowed in the AOI or in
the bylaws.
1.
2.
3.
4.
5.
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
Holders of shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
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Corporation Law
GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at law to
recover his share of the accumulated profits
because such stockholder has no individual interest
in the profits of a corporation until a dividend has
been declared.
4.
XPN: An action at law may be maintained where it
is alleged that sufficient net profits have been
earned to obligate the corporation to pay, however,
there must be a prior application with the directors
for the relief sought. If it appears that the directors
have wantonly violated their duty, and such
application would be inefficacious, such application
need not be made.
5.
1.
Cash
Cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus cost and expenses.
Stock
Stock dividends are withheld from the delinquent
stockholder until his unpaid subscription is fully
paid.
2.
b. RIGHT OF APPRAISAL
3.
The right of a stockholder to dissent and demand
payment of the fair value of the shares in the certain
instances provided in the RCC. (Sec. 80, RCC)
4.
Requisites: (G-W-A-F-U)
3.
The corporation has sufficient Unrestricted
retained earnings to pay. The trust fund
doctrine backstops the
requirement of
unrestricted retained earnings to fund the
payment of the shares of stocks of the
withdrawing stockholders (Turner vs. Lorenzo
G.R. No. 157479, 24 Nov. 2010)
Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of
his shares in the following instances:
Applying Dividends to Delinquent Shares
2.
NOTE: In case of disagreement, the value will be
determined by appraisal of 3 disinterested
persons. (Sec. 81, RCC)
Instances of Exercise of Appraisal Right
No dividends can be declared out of capital, except
when liquidating dividends distributed at
dissolution. (Sec. 139, RCC)
1.
The price of the Fair Market Value of the shares
on the day before the date of voting;
In case any amendment to the AOI has the effect
of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class, or of extending
or shortening the term of corporate existence;
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;
In case of merger or consolidation; and
In case of investment of corporate funds for any
purpose other than the primary purpose of the
corporation; (Sec. 80, RCC)
NOTE: Any stockholder of a close corporation may,
for any reason, compel 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. (Sec. 104,
RCC)
Any of the Grounds for appraisal must be
present;
A Written demand on the corporation must be
made within 30 days after the date when the
vote was taken;
The dissenting stockholders Attend the meeting
of the stockholders and voted against the
proposed action;
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
187
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
shares; may the stockholder invoke his
appraisal rights and demand payment for his
shareholdings? (1999 BAR)
Disagreement As to Valuation of Shares
If within a period of 60 days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
A: NO. The stockholder may not invoke his appraisal
right because disagreement with the issuance of
new shares and its pricing do not fall under any of
the instances where the appraisal right is available.
Effects of Exercise
1.
a.
b.
c.
2.
3.
4.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within 30 days after such award is
made. (Sec. 81, RCC)
Once the dissenting stockholder demands
payment of the fair value of his shares:
All rights accruing to such shares including
voting and dividend rights shall be
suspended; and
Cost of Appraisal
He shall be entitled to receive payment of
the fair value of his shares as agreed upon
between him and the
corporation or as
determined by the appraisers chosen by
him;
The costs and expenses of appraisal shall be borne
as follows:
1.
GR: He is not allowed to withdraw his
demand for payment of his shares
XPN: Unless the corporation consents
thereto.
If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares (Sec. 82, RCC);
2.
NOTE: Even if his rights as stockholder are
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor
of the corporation (SEC Opinion, 11 Jan 1982);
Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not
merely suspended (Sec. 81, RCC); and
By the dissenting stockholder –
a. Where the price offered by the
corporation is approximately the same as
the fair value ascertained by the
appraisers;
b. Where the same action is filed by the
dissenting stockholder and his refusal to
accept payment is found by the court to be
unjustified. (Divina, 2020)
Q: In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
fair value of his shares, a three-member group
shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be
permanently restored. (Sec. 83, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
By the corporation –
a. Where the price which the corporation
offered to pay the dissenting stockholder
is lower than the fair value as determined
by the appraisers named by them;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
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Corporation Law
stockholder be named to the three member
group? (2011 BAR)
inspection of the corporate records. (Terelay v. Yulo,
G.R. No. 160924, 05 Aug. 2015)
A: NO. The wife of the withdrawing shareholder is
not a disinterested person.
Valid Purposes for Inspection
Q: When does the right to payment cease?
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as
a stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
on his shares shall be paid to him if:
1.
2.
3.
4.
5.
Demand for payment is withdrawn with the
consent of the corporation;
The proposed corporate action is abandoned by
the corporation;
The proposed corporate action is rescinded by
the corporation;
The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
The SEC determines that the dissenting
stockholder is not entitled to the appraisal right.
(Sec. 83, RCC)
1.
2.
3.
4.
5.
Books and Records Required to be Kept
The following are the books and records required to
be kept by private corporations:
1.
2.
NOTE: A dissenting stockholder who demands
payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
consents thereto.
3.
4.
5.
c. RIGHT TO INSPECT
The stockholder’s right of inspection of the
corporation’s book and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. (Puno v. Puno
Enterprises, Inc., G.R. No, 177066, 11 Sept. 2009)
6.
7.
The stockholder's right of inspection of the
corporation's books and records is based upon their
ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property. (Republic v.
Sandiganbayan, G.R. No. 88809, 10 July 1991)
The mere fact that the shareholding of a stockholder
is merely .001 per cent of the issued shares of stock
does not justify the denial of the request of
Ascertainment of financial condition of
corporation or propriety of dividends
Value of the shares of stock for sale or
investment.
Existence of mismanagement.
Obtainment of list of stockholders to solicit
proxies or influence voting.
Obtainment of information in aid of litigation
with the corporation or its officers regarding
corporate transactions.
8.
9.
The AOI and bylaws of the corporation and all
their amendments;
The current ownership structure and voting
rights of the corporation, including lists of
stockholders or members, group structures,
intra-group relations, ownership data, and
beneficial ownership;
The names and addresses of all the members of
the board of directors or trustees and the
executive officers;
A record of all business transaction;
A record of the resolutions of the board of
directors or trustees and of the stockholders or
members;
Copies of the latest reportorial requirements
submitted to the Commission;
The minutes of all meetings of stockholders or
members, or of the board of directors or
trustees;
Corporate records; and
Stock and transfer book, in case of stock
corporations. (Sec. 73, RCC)
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise
inspect the financial statements of the corporation.
(Sec. 73, RCC).
189
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
Place Where Books and Records Shall be Kept
GR: All the above books and records must be kept at
the principal office of the corporation.
Extent of Right
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by
the corporation. (Sec. 73, RCC)
The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
corporation. It would be more in accord with equity,
good faith and fair dealing to construe the statutory
right of the stockholder to inspect the books and
records of the corporation as extending to books
and records of its wholly-owned subsidiary which
are in the corporation’s possession and control.
(Gokongwei v. SEC, et al., G.R. No. L-45911, 11 Apr.
1979)
Requirements for the Exercise of the Right of
Inspection
1.
2.
3.
4.
5.
6.
7.
The right must be exercised during reasonable
hours on business days;
The person demanding the right has not
improperly used any information obtained
through any previous examination of the books
and records of the corporation;
The demand is made in writing and good faith
or for legitimate purpose germane to his
interest as a stockholder. (Sec. 73, RCC)
Persons Entitled to Right
The following are entitled to inspect the corporate
books:
1.
Good purposes may be:
a. To investigate acts of management;
b. To investigate financial conditions; fix
value of shares;
c. Mailing list for proxies; or
d. Information for litigation.
2.
It should follow the formalities that may be
required in the by-laws;
The right does not extend to trade secrets; and
The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws, such as the rules on trade
secrets or processes under R.A. No. 8293,
otherwise known as the “Intellectual Property
Code of the Philippines”, as amended, R.A. No.
10173, otherwise known as the “Data Privacy
Act of 2012”, R.A. No. 8799, otherwise known as
“The Securities Regulation Code”, and the Rules
of Court.
It is subject to limitations under special laws,
e.g. Secrecy of Bank Deposits and FCDA or the
Foreign Currency Deposits Act.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
3.
4.
Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (Sec. 73, RCC);
Voting trust certificate holder – The term
“stockholder”, as used in Sec. 73, RCC means not
only a stockholder of record; it includes a voting
trust certificate holder who has become merely
an equitable owner of the shares transferred
(Sec. 58, RCC);
Stockholder of a sequestered company
(Republic v. Sandiganbayan, supra); and
Beneficial owner of shares – pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established
by evidence.
Q: The deceased Carlos Puno, was an
incorporator of Puno Enterprises, Inc. (Puno,
Inc). Joselito Musni Puno, claiming to be an heir
of Carlos Puno, initiated a complaint for specific
performance against Puno, Inc. Joselito averred
that he is the son of the deceased with the
latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the
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Corporation Law
such corporation. (Yujuico v. Quiambao, G.R. No.
180416, 02 June 2014)
rights and privileges of his late father as
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its
corporate book, and be given an accounting and
all the profits pertaining to the shares of Puno.
Remedies for Enforcement
1.
2.
May an heir of a stockholder automatically
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased?
Action for mandamus or damages; and
Civil and criminal liability.
Q: PASARC filed an Amended Petition for
Injunction and Damages with prayer for
Preliminary Injunction and/or Temporary
Restraining Order seeking to restrain
respondents, who are stockholders of the
corporation, from demanding inspection of its
confidential and inexistent records. The RTC
issued an Order granting PASAR's prayer for a
writ of preliminary injunction. On appeal, the CA
held that there was no basis to issue an
injunctive writ. Will injunction lie to prevent the
respondents from invoking their right to
inspect?
A: NO. The stockholder’s right of inspection of the
corporation’s books and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. After all, a shareholder
has the right to be intelligently informed about
corporate affairs. Such right rests upon the
stockholder’s underlying ownership of the
corporation’s assets and property. Similarly, only
stockholders of record are entitled to receive
dividends declared by the corporation, a right
inherent in the ownership of the shares.
A: NO. An action for injunction filed by a corporation
generally does not lie to prevent the enforcement by
a stockholder of his or her right to inspection. This
is the case since the Corporation Code provides that
a stockholder has the right to inspect the records of
all business transactions of the corporation and the
minutes of any meeting at reasonable hours on
business days. However, this right is not absolute
and may be refused when the information is not
sought in good faith or is used to the detriment of
the corporation. But the "impropriety of purpose
such as will defeat enforcement must be set up the
corporation defensively if the Court is to take
cognizance of it as a qualification.
Upon the death of a shareholder, the heirs do not
automatically become stockholders of the
corporation and acquire the rights and privileges of
the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. During
such interim period, the heirs stand as the equitable
owners of the stocks, the executor or administrator
duly appointed by the court being vested with the
legal title to the stock. (Puno v. Puno Enterprises, Inc.,
G.R. No. 177066, 11 Sept. 2009)
Q: Who are the persons who may be held liable
under Sec. 73, RCC?
In other words, corporations may raise their
objections to the right of inspection through
affirmative defense in an ordinary civil action for
specific performance or damages, or through a
comment (if one is required) in a petition for
mandamus. In this case, the petitioner did not raise
such limitations as a matter of defense. (PASARC v.
Lim, G.R. No. 172948, 05 Oct. 2016)
A: It is clear that a criminal action based on the
violation of the second or fourth paragraphs of Sec.
74 (now Sec. 73) can only be maintained against
corporate officers or such other persons that are
acting on behalf of the corporation. Violations of the
second and fourth paragraphs of Sec. 74 (now Sec.
73) contemplates a situation wherein a corporation,
acting thru one of its officers or agents, denies the
right of any of its stockholders to inspect the
records, minutes and the stock and transfer book of
191
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Liability for Violation of Right
The Corporation Code has granted to all
stockholders the right to inspect the corporate
books and records, and in so doing has not required
any specific amount of interest for the exercise of
the to inspect. (Terelay Investment and Development
Corp. v. Yulo, G.R. No. 160924, 05 Aug. 2015)
The unjustified failure or refusal by the corporation,
or by those responsible for keeping and maintaining
corporate records, to comply with Secs. 45, 73, 92,
128, 177 and other pertinent rules and provisions of
this Code on inspection and reproduction of records
shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00), at the discretion of
the court, taking into consideration the seriousness
of the violation and its implications. When the
violation of this provision is injurious or
detrimental to the public, the penalty is a fine
ranging from Twenty thousand pesos (P20,000.00)
to Four hundred thousand pesos (P400,000.00).
(Sec. 161, RCC)
Defenses that can be set up against inspecting party:
1.
2.
3.
d. PREEMPTIVE RIGHT
Requisites for Existence of Probable Cause to
File a Criminal Case of Violation of a
Stockholder’s Right to Inspect Corporate Books
1.
2.
3.
4.
It is the right of shareholders 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 AOI or an amendment
thereto, and subject to certain exceptions. (Sec. 38,
RCC)
A director, trustee, stockholder or member has
made a prior demand in writing for a copy or
excerpts from the corporation’s records or
minutes;
NOTE: The preemptive right of stockholders in
close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services,
or in payment of corporate debts, unless the AOI
provide otherwise. (Sec.101, RCC)
Any officer or agent of the concerned
corporation shall refuse to allow the said
director, etc., to examine and copy said
excerpts;
If such refusal is made pursuant to a resolution
or order of the BOD’s the liability for such action
shall be imposed upon the directors or trustees
who voted such refusal; and
Purpose of Preemptive Right
To enable the shareholder to retain his
proportionate control in the corporation (nondilution) and to retain his equity in the surplus.
Where the officer or agent of the corporation
sets up the defense that the person demanding
to examine and copy excerpts from the records
and minutes has improperly used any
information secured through any prior
examination of the same or was not acting in
good faith or for a legitimate purpose in making
his demand, the contrary must be shown or
proved. (Ang-Abaya v. Ang, G.R. No. 178511, 04
Dec. 2008)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Improper use of the information obtained in the
past;
Not acting in good faith or legitimate purpose;
and
Is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor. (Sec. 73, RCC)
Exercise of Preemptive Right
Preemptive right must be exercised in accordance
with the AOI or the By-Laws. When the AOI and the
By-Laws are silent, the Board may fix a reasonable
time within which the stockholders may exercise
the right.
192
Corporation Law
may also be provided for in specified statutory
provisions, such as that provided for in Sec. 98 (now
Sec. 97) of the Code on close corporations. Unlike
preemptive right which pertains to stockholders by
common law and does not require any statutory
enabling provision, the right of first refusal, if not
provided for by law or by the AOI, does not exist at
all. (SEC-OGC Opinion No. 19-51, 11 Oct. 2019, citing
Villanueva 2001)
Stock transactions covered includes:
1.
2.
3.
The issuance of shares pursuant to an increase
in the authorized capital stock;
Opening for subscription the unissued portion
of existing authorized capital stock; and
Re-issuance of treasury shares.
Transferability of Preemptive Right
Preemptive right is transferable unless there is an
express restriction in the AOI.
See also discussion on Pre-emptive Right vs. Right of
First Refusal – page 131.
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
within the applicable period after being notified and
given an opportunity to avail of such right.
Actions Available to Stockholders or Members
Waiver of Preemptive Right by the Stockholder
4. REMEDIAL RIGHTS
1.
The stockholder must be given a reasonable time
within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder
who has not exercised such right is deemed to have
waived it. (Majority Stockholders of Ruby Industrial
Corp. v. Lim, G.R. Nos. 165887 & 165929, 06 June
2011)
2.
Denial of Preemptive Right
There is preemptive right, unless such right is
denied by the AOI or an amendment thereto.
3.
e. RIGHT OF FIRST REFUSAL
A right granting the existing stockholders or the
corporation the option to purchase the shares of the
transferring stockholder with such reasonable
terms, conditions or period stated. 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
their shares to any third person. (Sec. 97, RCC)
Right of First Refusal is a right that arises only by
virtue of contractual stipulations, in which case the
right is construed strictly against the right of
persons to dispose of or deal with their property. It
Derivative suit – one brought by one or more
stockholders or members in the name and on
behalf of the corporation to redress wrongs
committed against it or to protect or vindicate
corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be
sued or hold control of the corporation.
Individual suit – an action brought by a
stockholder against the corporation for direct
violation of his contractual rights as such
individual stockholder, such as the right to vote
and be voted for, the right to share in the
declared dividends, the right to inspect
corporate books and records, and others.
Representative suit – one brought by a person
on his own behalf and on behalf of all similarly
situated.
Where a stockholder or member is denied the right
of inspection, his suit would be individual because
the wrong is done to him personally and not to the
other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where
preferred stockholders' rights are violated, a class
or representative suit will be proper for the
protection of all stockholders belonging to the same
group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual
193
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
stockholder or member. (Legaspi Towers 300, Inc. v.
Muer, G.R. No. 170783, 18 June 2012)
controversy must not only be rooted in the
existence of an intra-corporate relationship but
must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the
Corporation Code and the internal and intracorporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental
to the controversy or if there will still be conflict
even if the relationship does not exist, then no intracorporate controversy exists. (Ibid.)
5. INTRA-CORPORATE DISPUTES
(INDIVIDUAL vs. REPRESENTATIVE vs.
DERIVATIVE SUITS)
To determine whether a case involves an intracorporate controversy, and is to be heard and
decided by the branches of the RTC specifically
designated by the court to try and decide such cases,
two (2) elements must concur:
1.
2.
Q: Santos, claiming to be a stockholder and coowner of Belo’s share in Belo Medical Group, Inc.
since such were acquired when they are
cohabitating as husband and wife, demanded for
inspection of the corporation’s book. However,
Belo claims that it is her who paid for the shares
and that there’s conflict of interest with respect
to the demand of Santos for inspection since the
latter owned 90% of The Obagi Skin Health Inc.
The status or relationship of the parties
(Relationship Test); and
The nature of the question that is the subject of
their controversy (Nature of the Controversy
Test). (Reyes v. Zenith Insurance Co., G.R. No.
165744, 11 Aug. 2008)
Belo Medical Group filed a complaint for
interpleader claiming the complaint was filed to
protect its interest and to compel Belo and
Santos to litigate their conflicting claims of
ownership. Belo argued that the proceedings
should not have been classified as intracorporate because it ceased to be that and
becomes a full-blown civil law question of
competing rights of ownership.
Relationship Test
Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the
intra-corporate relationship existing between or
among the parties. The types of relationships, as
declared in the case of Union Glass & Container Corp.
v. SEC (G.R. No. L-64013, 28 Nov. 1983), were as
follows:
1.
2.
3.
4.
Santos filed for the dismissal of the case claiming
that there’s no cause of action and it is merely an
afterthought for BMG to escape criminal liability
for not allowing him to inspect the records. The
RTC dismissed the case. Is the dispute intracorporate?
Between the corporation, partnership, or
association and the public;
Between the corporation, partnership, or
association and its stockholders, partners,
members, or officers;
Between the corporation, partnership, or
association and the State as far as its franchise,
permit or license to operate is concerned; and
Among the stockholders, partners, or associates
themselves. (Ibid.)
A. YES. The conflict is clearly intra-corporate.
Applying the relationship test, both Belo and Santos
are named shareholders in Belo Medical Group's
Articles of Incorporation and General Information
Sheet for 2007. The conflict is clearly intracorporate as it involves two (2) shareholders
although the ownership of stocks of one stockholder
is questioned. Applying the nature of the
controversy test, this is still an intra-­corporate
dispute. The Complaint for interpleader seeks a
determination of the true owner of the shares of
Nature of the Controversy Test
Under the nature of the controversy test,
the incidents of that relationship must also be
considered for the purpose of ascertaining whether
the controversy itself is intra-corporate. The
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
194
Corporation Law
stock registered in Santos' name. Ultimately,
however, the goal is to stop Santos from inspecting
corporate books. This goal is so apparent that, even
if Santos is declared the true owner of the shares of
stock upon completion of the interpleader case, Belo
Medical Group still seeks his disqualification from
inspecting the corporate books based on bad faith.
Therefore, the controversy shifts from a mere
question of ownership over movable property to the
exercise of a registered stockholder's proprietary
right to inspect corporate books. (Belo Medical
Group v. Santos, G.R. No. 185894, 30 Aug. 2017)
Villareal and Filart's right to a refund of the value of
their shares was based on SBGCCI and UIGDC's
alleged failure to abide by their representations in
their prospectus. Specifically, Villareal and Filart
alleged in their letter-complaint that the world-class
golf course that was promised to them when they
purchased shares did not materialize. This is an
intra-corporate matter that is under the designated
Regional Trial Court's jurisdiction. It involves the
determination of a shareholder's rights under the
Corporation Code or other intra-corporate rules
when the corporation or association fails to fulfill its
obligations. (SEC v. Subic Bay Golf and Country Club,
G.R. No. 179047, 11 Mar. 2015)
Q: Subic Bay Golf and Country Club, Inc. (SBGCCI)
and
Universal
International
Group
Development Corporation (UIGDC) entered into
a Development Agreement. UIGDC agreed to
"finance, construct and develop the golf course,
for and in consideration of the payment by
SBGCCI of its 1,530 (SBGCCI) shares of stock."
Upon SBGCCI's application, SBGCCI was issued a
Certificate of Permit to Offer Securities for Sale
to the Public of its 1,530 no par value
proprietary shares. SBGCCI would use the
proceeds of the sale of securities to pay UIGDC
for the development of the golf course.
Q: Arevalo set up Broadcom with Cosare, his
former employee, as an incorporator. Cosare
was later promoted to the position of Assistant
Vice-President for Sales and Head of the
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became
Cosare’s immediate superior. Later, Cosare sent
a confidential memo to Arevalo to inform him of
the anomalies which were allegedly being
committed by Abiog against the company.
Subsequently, Cosare was totally barred from
entering the company premises.
In the letter addressed to the Director of SEC's
Corporation Finance Department, complainants
Regina Filart and Margarita Villareal informed
the SEC that they had been asking UIGDC for the
refund of their payment for their SBGCCI shares
because they failed to deliver the promised
amenities. Should the issue of refund be litigated
in the RTC?
Cosare attempted to furnish the company with a
memo by which he addressed and denied the
accusations cited in Arevalo’s memo. Soon after,
Cosare filed a labor complaint, claiming that he
was constructively dismissed from employment
by Broadcom and Arevalo. CA ruled that the case
is an intra-corporate controversy and is under
the RTC’s jurisdiction. Is the CA correct?
A: YES. Jurisdiction over intra-corporate disputes
and all other cases enumerated in Sec. 5 of P.D. No.
902-A had already been transferred to designated
Regional Trial Courts. Hence, actions pertaining to
intra-corporate disputes should be filed directly
before designated Regional Trial Courts. Intracorporate disputes brought before other courts or
tribunals are dismissible for lack of jurisdiction.
This case also involves corporate rights and
obligations. The nature of the action — whether it
involves corporate rights and obligations — is
determined by the allegations and reliefs in the
complaint.
A: NO. The Court has determined that contrary to
the ruling of the CA, it is the LA, and not the regular
courts, which has the original jurisdiction over the
subject
controversy.
An
intra-corporate
controversy, which falls within the jurisdiction of
regular courts, has been regarded in its broad sense
to pertain to disputes that involve any of the
following relationships:
a.
195
between the corporation, partnership or
association and the public;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
b.
c.
d.
case involves an intra-corporate dispute, the motion
to dismiss is undeniably a prohibited pleading.
Moreover, the Court finds no justification for the
dismissal of the case based on the mere issuance of
a board resolution by the incumbent members of
the Board of Trustees of petitioner corporation
recommending its dismissal, especially considering
the various issues raised by the parties before the
court a quo. Hence, the RTC should not have
entertained, let alone have granted the subject
motion to dismiss. (Aldersgate College v. Gauuan,
G.R. No. 192951, 14 Nov. 2012)
between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned;
between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
among the stockholders, partners or associates,
themselves.
Settled jurisprudence, however, qualifies that when
the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
disputes and claims for damages arising from
employer-employee relations as provided in Art.
217 of the Labor Code. Consistent with this
jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time
the subject controversy developed failed to
necessarily make the case an intra-corporate
dispute.
Q: Jaka Investments bought 3 lots in Urdaneta
Village from Urdaneta Village Association,
subject to uniform restrictions annotated on the
transfer certificates of title covering the lots. On
March 15, 2007, the Association's Board of
Governors held a meeting, where it approved
the extension of the Association's corporate life
after its expiration on Aug. 13, 2008 and the
term of the Deed Restrictions from June 1, 2008,
both for another 25 years. The extensions were
approved by the members of the Association.
Jaka Investments filed before the RTC a Petition
for the cancellation of restrictions annotated in
the Transfer Certificate of Titles of the lots
bought.
In Matling Industrial and Commercial Corporation v.
Coros, the Court distinguished between a “regular
employee” and a “corporate officer” for purposes of
establishing the true nature of a dispute or
complaint for illegal dismissal and determining
which body has jurisdiction over it. Succinctly, it
was explained that “[t]he determination of whether
the dismissed officer was a regular employee or
corporate officer unravels the conundrum” of
whether a complaint for illegal dismissal is
cognizable by the LA or by the RTC. “In case of the
regular employee, the LA has jurisdiction;
otherwise, the RTC exercises the legal authority to
adjudicate.
The Association opposed the petition and
claimed that it was an intra-corporate dispute
on the validity of the uniform restrictions' term
extension. It argued that the HLURB, not the
trial court, had exclusive and original
jurisdiction over the case. Is the contention of
the Association correct?
A: YES. Pursuant to E.O. No. 535, the HIGC assumed
the regulatory and adjudicative functions of the SEC
over homeowners' associations. Moreover, by
virtue of this amendatory law, the HIGC also
assumed the SEC's original and exclusive
jurisdiction under Sec. 5 of P.D. No. 902-A to hear
and decide cases involving controversies arising out
of intra-corporate or partnership relations, between
and among stockholders, members, or associates;
between any and/or all of them and the corporation,
partnership or association of which they are
stockholders, members or associates, respectively;
Applying the foregoing to the present case, the LA
had the original jurisdiction over the complaint for
illegal dismissal because Cosare, although an officer
of Broadcom for being its AVP for Sales, was not a
“corporate officer” as the term is defined by law.
(Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298,
05 Feb. 2014)
Under Sec. 8, Rule 1 of the Interim Rules of
Procedure for Intra-Corporate Controversies, a
motion to dismiss is a prohibited pleading. As this
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
196
Corporation Law
and between such corporation, partnership or
association and the state insofar as it concerns their
individual franchise or right to exist as such entity.
Later on, the above-mentioned powers and
responsibilities, which had been vested in the HIGC
with respect to homeowners' associations, were
transferred to the HLURB pursuant to R.A. No. 8763,
entitled "Home Guaranty Corporation Act of 2000."
(JAKA Investments Corporation v. Urdaneta Village
Association Inc., G.R. Nos. 204187 and 206606, 01
Apr. 2019)
REPRESENTATIVE SUIT
Where the wrong is done to a group of stockholders,
as where preferred stockholders' rights are
violated, a class or representative suit will be proper
for the protection of all stockholders belonging to
the same group. (Legaspi Towers 300, Inc. v. Muer,
supra)
NOTE: Right of pre-emption is personal to each
stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that
he may not maintain a representative action on
behalf of other stockholders who are similarly
situated.
NOTE: HLURB is now the Human Settlements
Adjudication Commission pursuant to Republic Act
No. (RA) 11201 or the Department of Human
Settlements and Urban Development Act.
Award of Damages in Intra-Corporate Disputes
Remedies of Direct Action (Individual or
Representative Suit) and Derivative Suit are
Mutually Exclusive
As can be gleaned from the title of A.M. No. 01-2-04SC, the amendment of Sec. 4, Rule 1 of the Interim
Rules of Procedure Governing Intra-Corporate
Controversies was crafted precisely to clarify the
previous rule that decisions on intra-corporate
disputes are immediately executory, by specifically
providing for an exception. Thus, the prevailing rule
now categorically provides that awards for moral
damages, exemplary damages, and attorney’s fees in
intra-corporate controversies are not immediately
executory. (Heirs of Santiago Divinagracia, v. Ruiz,
G.R. No. 172508, 12 Jan. 2011)
A derivative suit, on one hand, and individual and
class suits, on the other, are mutually exclusive. The
two actions are mutually exclusive: i.e., the right of
action and recovery belongs to either the
shareholders (direct action) or the corporation
(derivative action). (Cua v. Tan, G.R. No. 182008, 04
Dec. 2009)
DERIVATIVE SUIT
Where the acts complained of constitute a wrong to
the corporation itself, the cause of action belongs to
the corporation and not to the individual
stockholder or member. (Legaspi, supra)
INDIVIDUAL SUIT
Where a stockholder or member is denied the right
of inspection, his suit would be individual because
the wrong is done to him personally and not to the
other stockholders or the corporation. (Legaspi
Towers 300, Inc. v. Muer, G.R. No. 170783, 18 June
2012)
A stockholder's right to institute a derivative suit is
not based on any express provision of the
Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for
damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
Hence, a stockholder may sue for mismanagement,
waste or dissipation of corporate assets because of
a special injury to him for which he is otherwise
without redress.
NOTE: Authorization from the board of directors of
the CMH in the case at bar was not necessary
inasmuch as private respondent was not acting on
behalf of the corporation but in his own personal
capacity; and precisely he was suing the corporation
itself (CMH) to preserve his successional rights.
(CMH Agricultural Corp. v. CA, G.R. No. 112625, 07
March 2002)
197
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
must be "in the name of [the] corporation or
association." (Divina, 2020, citing Reyes v. Hon. RTC
of Makati, Br. 142, G.R. No. 165744, 11 Aug. 2008)
In effect, the suit is an action for specific
performance of an obligation owed by the
corporation to the stockholders to assist its rights of
action when the corporation has been put in default
by the wrongful refusal of the directors or
management to make suitable measures for its
protection. The basis of a stockholder's suit is
always one in equity. However, it cannot prosper
without first complying with the legal requisites for
its institution. (Yu v. Yukayguan, G.R. No. 177549, 18
June 2009)
NOTE: This requirement has already been settled in
jurisprudence. Thus, in Western Institute of
Technology, Inc., et al v. Solas, et al, the Supreme
Court said that "among the basic requirements for a
derivative suit to prosper is that the minority
shareholder who is suing for and on 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
him. (Villamor v. Umale, G.R. No. 172843, 24 Sept.
2014)
A derivative suit is an exception to the general rule
that the corporation’s power to sue is exercised only
by the board of directors or trustees. (Divina, 2020)
Requisites for Derivative Suit
NOTE: Corporate cause of action: the cause of action
must devolve upon the corporation itself; the
wrongdoing or harm having been caused to the
corporation and not to the particular stockholder
bringing the suit. (Reyes v. Hon. RTC of Makati Br.
142, supra)
A stockholder or member may bring an action in the
name of a corporation or association, as the case
may be, provided, that:
1.
He was a stockholder or member at the time the
acts or transactions subject of the action
occurred and at the time the action was filed.
Representative Suit vs. Derivative Suit
NOTE: If the cause of action is continuing in
nature, the only requisite is that the party is a
stockholder at the time the action was filed
(Dean Divina’s Lecture, 29 Apr. 2015)
2.
3.
4.
DIRECT ACTION
Initiated
by
the
stockholder under his
own name or on behalf
of other stockholders.
He exerted all reasonable efforts, and alleges
the same with particularity in the complaint, to
exhaust all remedies available under the AOI,
by-laws, laws or rules governing the
corporation or partnership to obtain the relief
he desires;
Seeks vindication for
injury to his or her
interest
as
a
shareholder.
No appraisal rights are available for the act or
acts complained of; and
The suit is not a nuisance or harassment suit.
(Rule 8, Sec. 1, Interim Rules of Procedure for
Intra-Corporate Controversies (“Interim Rules”)
Deals with individual
stockholders or a class
of stockholder’s rights .
The fifth requisite for filing derivative suits, while
not included in the enumeration, is implied in the
first paragraph of Rule 8, Sec. 1 of the Interim Rules:
The action brought by the stockholder or member
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
198
DERIVATIVE SUIT
Initiated
by
the
stockholder on behalf
of the corporation.
Seeks to recover for the
benefit
of
the
corporation and its
whole
body
of
shareholders
when
injury is caused to the
corporation that may
not
otherwise
be
redressed because of
failure
of
the
corporation to act.
Deals with corporate
rights. (Ibid.)
Corporation Law
Q: Ranier Madrid, a shareholder, wrote the
Board of Directors of FHGCCI two demand
letters because of the delay in construction and
asked them to initiate legal actions against
FEGDI and FEDI. The Board of Directors,
however, failed and/or refused to act on the
demand letters. Madrid, in a derivative capacity
on behalf of petitioner FHGCCI, filed with the
RTC a Complaint for Specific Performance with
Damages.
Q: Royal Links Golf Club obtained a loan from a
bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The
bank informed the Board of Directors (Board)
that if the arrearages are not paid within thirty
(30) days, it will extra-judicially foreclose the
mortgage. The Board decided to offer to the
members 200 proprietary membership shares,
which are treasury shares, at the price of
P175,000.00 per share even when the current
market value is P200,000.00.
FEGDI argued that there is no cause of action and
it is not a proper derivative suit as Madrid on
behalf of FHGCCI failed to exhaust all remedies
available under the AOI and by-laws and failed
to implead its Board of Directors as
indispensable parties. Is there compliance with
requirements of derivative suit?
In behalf and for the benefit of the corporation,
Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of
trust for selling the shares at P25,000.00, lower
than its market value, and asked for the
nullification of the sales and the removal of the
board members. Peter claims the Club incurred
a loss of P5 million. The Board presented the
defense that in its honest belief any delay in the
payment of the arrearages will be prejudicial to
the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
best solution to the problem. Decide the suit and
explain. (2016 BAR)
A: NO. Madrid, as a shareholder of FHGCCI, failed to
allege with particularity in the Complaint, and even
in the Amended Complaint, that he exerted all
reasonable efforts to exhaust all remedies available
under the articles of incorporation, by-laws, or rules
governing the corporation; that no appraisal rights
are available for the acts or acts complained of; and
that the suit is not a nuisance or a harassment suit.
Although the Complaint alleged that demand letters
were sent to the Board of Directors of petitioner
FHGCCI and that these were unheeded, these
allegations will not suffice. (Forest Hills Golf and
Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
No. 206649, 20 July 2016)
A: The derivative suit will not prosper. There is no
indication in the Complaint that they had exerted all
reasonable efforts to exhaust all remedies available
under the AOI, by-laws, and laws or rules governing
the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of
any effort to avail of intra-corporate remedies.
Indeed, even if petitioners thought it was futile to
exhaust intra-corporate remedies, they should have
stated the same in the Complaint and specified the
reasons for such opinion. a derivative suit cannot
prosper without first complying with the legal
requisites for its institution. (Ching v. Subic Bay Golf
and Country Club, G.R. No. 174353, 10 Sept. 2014)
Q: MC Home Depot occupied a prime property
(Rockland area) in Pasig. The property was part
of the area owned by Mid-Pasig Development
Corporation (Mid-Pasig). PPC obtained an
option to lease portions of Mid-Pasig's property,
including the Rockland area. PPC's board of
directors issued a resolution waiving all its
rights, interests, and participation in the option
to lease contract in favor of the law firm of Atty.
Alfredo
Villamor,
Jr.
(Villamor).
PPC,
represented by Villamor, entered into a
memorandum of agreement (MOA) with MC
Home Depot. Under the MOA, MC Home Depot
would continue to occupy the area as PPC's
NOTE: Although the shareholdings of petitioners
are indeed only two out of the 409 alleged
outstanding shares or 0.24%, the Court has held that
it is enough that a member or a minority of
stockholders file a derivative suit for and in behalf
of a corporation. (Villamor v. Umale, supra)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
sublessee for four (4) years, renewable for
another four (4) years.
Respondent Balmores did not bring the action for
the benefit of the corporation. Instead, he was
alleging that the acts of PPC's directors, specifically
the waiver of rights in favor of Villamor's law firm
and their failure to take back the MC Home Depot
checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an
action, therefore, his intention was to vindicate his
individual interest and not PPC's or a group of
stockholders. (Villamor v. Umale, G.R. No. 172843, 24
Sept. 2014)
In compliance with the terms of the MOA, MC
Home Depot issued 20 post-dated checks
representing rental payments for one year and
the goodwill money. The checks were given to
Villamor who did not turn these or the
equivalent amount over to PPC, upon
encashment.
Hernando Balmores, a stockholder and director
of PPC, filed with the RTC an intra-corporate
controversy complaint. Balmores prayed that a
receiver be appointed from his list of nominees.
He also prayed for petitioners' prohibition from
selling, encumbering, transferring or disposing
in any manner any of PPC's properties, including
the MC Home Depot checks and/or their
proceeds. He further prayed for the accounting
and remittance to PPC of the MC Home Depot
checks or their proceeds and for the annulment
of the board's resolution waiving PPC's rights in
favor of Villamor's law firm. Is Balmores' action
a derivative suit?
Derivative Suit is a Remedy of Last Resort
As a general rule, corporate litigation must be
commenced by the corporation itself, with the
imprimatur of the board of directors, which,
pursuant to the law, wields the power to sue.
Therefore, since the derivative suit is a remedy of
last resort, it must be shown that the board, to the
detriment of the corporation and without a valid
business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be
instituted after such an omission. Simply put,
derivative suits take a back seat to boardsanctioned litigation whenever the corporation is
willing and able to sue in its own name. (Ago Realty
& Development Corp. v. Ago, G.R. Nos. 210906 &
211203, 16 Oct. 2019)
A: NO. A derivative suit is an action filed by
stockholders to enforce a corporate action. It is an
exception to the general rule that the corporation's
power to sue is exercised only by the board of
directors or trustees. Individual stockholders may
be allowed to sue on behalf of the corporation
whenever the directors or officers of the
corporation refuse to sue to vindicate the rights of
the corporation or are the ones to be sued and are in
control of the corporation. It is allowed when the
directors or officers are guilty of breach of trust, and
not of mere error of judgment.
Stockholder is NOT Real Party-in-Interest
The corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation,
is only a nominal party. (Hi-Yield Realty v. CA, G.R.
No. 168863, 23 June 2009)
Time When Person Must Be Stockholder to
Institute Derivative Suit
In derivative suits, the real party in interest is the
corporation, and the suing stockholder is a mere
nominal party. Moreover, it is important that the
corporation be made a party to the case. While it is
true that the basis for allowing stockholders to file
derivative suits on behalf of corporations is based
on equity, the legal requisites for its filing must
necessarily be complied with for its institution.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
He must be a stockholder at the time the cause of
action accrued. If the cause of action is general and
continuing, said person must be a stockholder at the
time of filing of the suit and at the time the cause of
action accrued.
The implicit argument - that a stockholder, to be
considered as qualified to bring a derivative suit,
must hold a substantial or significant block of stock
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Corporation Law
bringing the action in behalf of the corporation.
(SMC v. Khan, G.R. No. 85339, 11 Aug. 1989)
- finds no support whatever in the law. 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. (San Miguel Corporation v. Khan, G.R.
No. 85339, 11 Aug. 1989)
c.
NO. Watered shares are those sold by the
corporation for less than the par/book value. In
the instant case, it will depend upon the value of
services rendered in relation to the total par
value of the shares.
Allegation of Tort can Co-Exist With Derivative
Suit in Same Petition
Q: A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10, 1991,
when he was given one share by another
stockholder to qualify him as a director. A was
not re-elected director in the July 1, 1992 annual
meeting but he continued to be a registered
shareholder of PREC.
Personal injury suffered by a stockholder cannot
disqualify him from filing a derivative suit on behalf
of the corporation. It merely gives rise to an
additional cause of action for damages against the
erring directors. (Gochan v. Young, G.R. No. 131889,
12 Mar. 2001)
Jurisdiction
When he was still a director, A discovered that
on Jan 5, 1991, PREC issued free of charge
10,000 shares to X, a lawyer who assisted in a
court case involving PREC.
a.
A derivative suit is an intra-corporate controversy
hence under the jurisdiction of the RTC acting as a
special commercial court.
Can A now bring an action in the name of the
corporation to question the issuance of the
shares to X without receiving any payment?
Q: AA, a minority stockholder, filed a suit against
BB, CC, DD, and EE, the holders of majority
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
complaint averred, inter alia, that MOP
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the
Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
Corporation to withdraw the suit. Pursuant to
said resolution, the corporate counsel filed a
Motion to Dismiss in the name of the MOP
Corporation. Should the motion be granted or
denied? Reason briefly.
b. Can X question the right of A to sue him in
behalf of the corporation on the ground that
A has only one share in his name?
c.
Can the shares issued to X be considered as
watered stock? (1993 BAR)
A:
a. As a general rule, A cannot bring a derivative
suit in the name of the corporation concerning
an act that took place before he became a
stockholder. However, if the act complained of
is a continuing one, A may do so.
b.
A: The motion to dismiss should be denied. A
derivative suit has been the principal defense of the
minority shareholder against abuses by the
majority. It is a remedy designed by equity for those
situations where the management, through fraud,
neglect of duty, or other cause, declines to take the
proper and necessary steps to assert the
corporation’s rights.
NO. In a derivative suit, the action is instituted/
brought in the name of a corporation and reliefs
are prayed for therein for the corporation, by a
minority stockholder. The law does not
qualify the term “minority” in terms of the
number of shares owned by a stockholder
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Rodrigo, in filing the complaint, is enforcing his
rights as a co-heir and not as a stockholder of Zenith.
The injury he seeks to remedy is one suffered by an
heir (for the impairment of his successional rights)
and not by the corporation nor by Rodrigo as a
shareholder on record. (Oscar Reyes v. RTC of
Makati, Br. 142, supra)
Indeed, to grant to MOP the right of withdrawing or
dismissing the suit, at the instance of majority
stockholders and directors who themselves are the
persons alleged to have committed breaches of trust
against the interest of the corporation, would be to
emasculate the right of minority stockholders to
seek redress for the corporation. To consider the
Notice of Dismissal filed by MOP as quashing the
complaint filed by AA in favor of the corporation
would be to defeat the very nature and function of a
derivative suit and render the right to institute the
action illusory. (Commart (Phils.) Inc. v. SEC, G.R. No.
85318, 03 June 1991)
Q: Pursuant to the by-laws of Legaspi Towers
300, Inc. (Legaspi), petitioners Lilia Marquinez
Palanca, et al., the incumbent Board of Directors,
fixed the annual meeting of the members of the
condominium corporation and the election of
the new Board of Directors. Out of a total
number of 5,723 members who were entitled to
vote, 1,358 were supposed to vote through their
respective proxies and their votes were critical
in determining the existence of a quorum.
Q: Oscar and Rodrigo Reyes are two of the four
children of the spouses Pedro and Anastacia
Reyes. Pedro, Anastacia, Oscar, and Rodrigo
each owned shares of stock of Zenith Insurance
Corporation (Zenith), a domestic corporation
established by their family. Pedro and Anastacia
died. Thus, Pedro’s estate was judicially
partitioned among his heirs, however, no
similar settlement and partition appear to have
been made with Anastacia’s estate, which
included her shareholdings in Zenith.
The Committee on Elections of Legaspi,
however, found most of the proxy votes, at its
face value, irregular, thus, questionable; and for
lack of time to authenticate the same, Palanca, et
al., adjourned the meeting for lack of quorum.
Despite Palanca et al.'s insistence that no
quorum was obtained during the annual
meeting, Muer, et al., pushed through with the
scheduled election and were elected as the new
Board of Directors and officers of Legaspi.
Subsequently, they submitted a General
Information Sheet to the SEC with the new set of
officers. Palanca, et al., filed a complaint for the
declaration of nullity of elections against Muer,
et al., in a form of a derivative suit. Is the
derivative suit proper?
Zenith and Rodrigo filed a complaint with the
SEC against Oscar. The complaint stated that it is
a derivative suit initiated and filed by the
complainant Rodrigo to obtain an accounting of
the funds and assets of Zenith which are now or
formerly in the control, custody, and/or
possession of Oscar and to determine the shares
of stock of deceased spouses Pedro and
Anastacia Reyes that were arbitrarily and
fraudulently appropriated by Oscar. Oscar
denied the charge. Furthermore, Oscar claimed
that the suit is not a bona fide derivative suit
because the requisites therefor have not been
complied with. Is the complaint filed by Rodrigo
a derivative suit?
A: NO. Petitioners’ complaint seek to nullify the said
election, and to protect and enforce their individual
right to vote. Petitioners seek the nullification of the
election of the Board of Directors, composed of
herein respondents, who pushed through with the
election even if petitioners had adjourned the
meeting allegedly due to lack of quorum.
Petitioners are the injured party, whose rights to
vote and to be voted upon were directly affected by
the election of the new set of board of directors. The
party-in-interest
are
the
petitioners
as
stockholders, who wield such right to vote. The
cause of action devolves on petitioners, not the
A: NO. First, Rodrigo, in so far as the shares of
Anastacia is concerned, is not a shareholder; he only
stands as a transferee-heir whose rights to the share
are inchoate and unrecorded. In addition, the claims
tell the Court unequivocally that the present
controversy arose from the parties' relationship as
heirs of Anastacia and not as shareholders of Zenith.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
202
Corporation Law
condominium corporation, which did not have the
right to vote. Hence, the complaint for nullification
of the election is a direct action by petitioners, who
were the members of the Board of Directors of the
corporation
before
the
election,
against
respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative
suit filed by petitioners in behalf of the
condominium corporation in the Second Amended
Complaint is improper. (Legaspi Towers 300, Inc., et
al., v. Muer, et al., supra)
F. CAPITAL STRUCTURE
Number and the Qualifications of Incorporators
in a Stock Corporation
1.
2.
3.
4.
The RCC provides that any person, partnership,
association, or corporation, singly or jointly
with others.
NOTE: The word “singly” pertains to a One
Person Corporation, which may only be
incorporated by a natural person, trust, or
estate.
Incorporators must not be more than 15.
A natural person incorporator must be of legal
age
Each must own or subscribe to at least one (1)
share of the capital stock. (Sec. 10, RCC)
Q: Must all incorporators and directors be
residents of the Philippines? (2006 BAR)
A: NO. The RCC has removed the residency
requirement. Thus, incorporators and directors do
not need to be residents of the Philippines
Incorporator vs. Corporator
INCORPORATOR
CORPORATOR
Who are they
Those stockholders or members mentioned in the
AOI as originally forming and composing the
corporation and who are signatories thereof.
Those who compose a corporation, whether as
stockholders or as members.
A stockholder may or may not be a subscriber.
Subscribers are persons who have agreed to take and
pay for original, unissued shares of a corporation
formed or to be formed.
Signatory of the AOI
A signatory of the AOI.
May or may not be signatory of the AOI.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Effect upon the Sale of his Shares
Does not cease to be an incorporator upon sale of his
shares.
Ceases to be a corporator by sale of his shares in case
of stock corporation.
In case of non-stock corporation, the corporator
ceases to be a member.
Number of Incorporators/Corporators
GR: No limit.
XPN: Close corporations – not more than a specified
number of persons, not exceeding 20. (Sec. 95, RCC)
Not more than 15.
NOTE: There must only be one stockholder in a One
Person Corporation.
Filipino Citizenship
GR: Filipino citizenship is not a requirement.
XPN: When engaged in a business which is wholly or partly-nationalized. In the case of partly-nationalized,
the requisite percentage of Filipino stockholdings /membership must be attained, and the Board of Directors
/ Trustees must be to the same extent.
Capital Stock Requirements
Q: In order to comply with the 60% capital
requirement for ownership by Filipinos of
certain corporations, what does the term capital
refer to?
GR: Stock corporations shall not be required to have
a minimum capital stock. (Sec. 12, RCC)
XPN: As otherwise specifically provided by special
law.
A. The term “capital” refers to shares with voting
rights, and with full beneficial ownership, which
must be owned and held by citizens of the
Philippines. (Gamboa v. Teves, G.R. No. 176579, 28
June 2011)
1. SHARES OF STOCK
Share of stock is one of the units in which the capital
stock is divided. It represents the interest or right
which the owner has:
1.
2.
3.
Rationale: The right to vote in the election of
directors, coupled with full beneficial ownership of
stocks, translates to effective control of a
corporation.
In the management of the corporation in which
he takes part through his right to vote (if voting
rights are permitted for that class of stock by
the AOI);
In a portion of the corporate earnings, if and
when, segregated in the form of dividends; and
Upon its dissolution and winding up, in the
property and assets of the corporation
remaining after the payment of corporate debts
and liabilities to creditors. (De Leon, 2010, citing
11 Fletcher, 1971)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Legal Title Without Beneficial Title Insufficient
to Comply With Ownership Requirement
Mere legal title is insufficient to meet the 60%
Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60% of
the outstanding capital stock, coupled with 60%
of the voting rights, is required. The legal and
beneficial ownership of 60% of the outstanding
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Corporation Law
(a) total number of outstanding shares of stock
entitled to vote in the election of directors; AND
capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional
mandate. Otherwise, the corporation is “considered
as non-Philippine nationals. Full beneficial
ownership of the stocks, coupled with appropriate
voting rights, is essential.”
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors (Roy III v. Herbosa, G.R. No. 207246, 22
Nov. 2016)
NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to
voting control of the corporation but also to the
beneficial ownership of the corporation, it is
therefore imperative that such requirement apply
uniformly and across the board to all classes of
shares, regardless of nomenclature and category,
comprising the capital of a corporation.
a. NATURE OF SHARES OF STOCK
Shares of stock are units of capital stock. Once
issued, they are considered personal property of the
stockholder owning it. While shares of stock
constitute personal property, they do not represent
the property of the corporation. The corporation
has property of its own. A share of stock only
typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that
extent when distributed according to law and
equity.
Under the RCC, capital stock consists of all classes of
shares issued to stockholders, that is, common
shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated
in the articles of incorporation. The RCC allows
denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right
to vote in specific corporate matters. Thus, common
shares have the right to vote in the election of
directors, while preferred shares may be denied
such right. Nonetheless, preferred shares, even if
denied the right to vote in the election of directors,
are entitled to vote on certain corporate matters.
As personal property, shares of stock may be
transferred, either through sale, donation or
succession, or encumbered or otherwise be subject
to a security interest. (Divina, 2020)
Does Not Constitute Indebtedness
They are in the nature of choses in action but are not
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder
and are therefore, not credits as to make the
stockholder a creditor of the corporation. (De Leon,
2010)
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of
the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Sec. 11,
Art. XII of the Constitution must apply not only to
shares with voting rights but also to shares without
voting rights. (This is because when only preferred
shares without voting rights are issued, the
requirement of full beneficial ownership will be
used as the standard). Preferred shares denied the
right to vote in the election of directors are anyway
still entitled to vote on the eight specific corporate
matters under Sec. 6. (Heirs of Gamboa v. Teves, G.R.
No. 176579, 09 Oct. 2012)
BOD May Issue Additional Shares
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue shares of
stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
to consider it because additional issuances of shares
of stock do not need approval of the stockholders.
The Court upheld SEC-MC No. 8, s. 2013, which
requires percentage of Filipino ownership shall be
applied to BOTH:
205
The only requirement is the board resolution
approving the additional issuance of shares. The
corporation shall also file the necessary application
with the SEC to exempt these from the registration
requirements under the Revised Securities Act (now
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
the Securities Regulation Code). (Majority
Stockholders of Ruby Industrial Corp. v. Lim, G.R. No.
165887, 06 June 2011)
Amount of Consideration
Shares of stock shall not be issued for a
consideration less than the par or issued price
thereof, except treasury shares so long as the price
is reasonable.
b. CONSIDERATION FOR SHARES OF STOCK
Valid Considerations
Agreement
1.
2.
b.
c.
4.
5.
6.
7.
8.
a
Subscription
Persons Required to Pay in Full
1.
Actual cash paid to the corporation;
Property, tangible, or intangible (i.e. patents or
copyrights), provided:
a.
3.
in
The property is actually received by the
corporation
The property is necessary or convenient
for its use and lawful purposes
It must be subject to a fair valuation equal
to the par or issued value of the stock
issued
2.
In case of no‐par value shares, they are deemed
fully paid and non‐assessable. (Sec. 6, RCC)
NOTE: The issued price of no-par value shares may
be fixed in the AOI or by the BOD pursuant to
authority conferred upon it by the AOI or the bylaws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding
capital stock at a meeting duly called for the
purpose. (Sec. 61, RCC)
NOTE: The valuation thereof shall initially be
determined by the stockholders or directors
and subject to the approval of the SEC.
Labor performed for or services actually
rendered to the corporation.
Previously incurred indebtedness of the
corporation.
Amounts transferred from unrestricted
retained earnings to stated capital (in case of
declaration of stock dividends).
Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Shares of stock in another corporation; and/or
Other generally accepted form of consideration
(Sec. 61, RCC)
Doctrine of Individuality or Indivisibility of
Subscription
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorneyin-fact or any other person legally authorized to
make the transfer. No transfer, however, shall be
valid, except as between the parties, until the
transfer is recorded in the books of the corporation
showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate
or certificates and the number of shares transferred.
(Sec. 62, RCC)
NOTE: Promissory notes or future services are not
valid considerations.
In view of nos. 1 and 2 of Sec. 61, payment of shares
of stock must be actually received by the
corporation. Hence, receivables cannot be treated as
cash actually received. They may, however, be
considered as property payment subject to
verification by SEC and the condition that it be held
in escrow until actual payment of the amount.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Non‐resident foreign subscribers upon
incorporation must pay in full their
subscriptions unless their unpaid subscriptions
are guaranteed by a surety bond or by an
assumption by a resident stockholder through
an affidavit of liability.
No certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63, RCC)
The doctrine of indivisibility of subscription
contract implicitly set forth under Sec. 64 (now Sec.
206
Corporation Law
Here, the records show that the purported
transaction between Tee Ling Kiat and Dewey Dee
has never been recorded in VIP's corporate books.
Thus, the transfer, not having been recorded in the
corporate books in accordance with law, is not valid
or binding as to the corporation or as to third
persons. (Tee Ling Kiat v. Ayala Corporation, G.R. No.
192530, 07 Mar. 2018, J. Caguioa)
63) of the Code, that is, as subscription is one, entire
and indivisible contract. It cannot be divided into
portions so that the stockholder shall not be entitled
to a certificate of stock until he has remitted the full
payment of his subscription together with the
interest and expenses if any is due.
The purpose of the prohibition is to prevent the
partial disposition of a subscription which is not
fully paid, because if it is permitted, and the
subscriber subsequently becomes delinquent, in the
payment of his subscription, the corporation may
not be able to sell as many as his subscribed shares
as would be necessary to cover the total amount due
from his, which is authorized under Sec. 68 (now,
Sec. 67). (SEC OGC Opinion No. 16-05 dated March 31,
2016, citing previous SEC opinions)
Time When Balance of the Subscription Should
Be Paid
1.
2.
3.
Q: Ayala Corporation instituted a complaint for
sum of money with an application for a writ of
attachment against the Spouses Dee. The RTC
rendered a decision adverse to the Spouses Dee,
thus, a writ of execution was issued by the RTC.
Subsequently, a Notice of Levy on Execution was
issued addressed to the RD of Antipolo to levy on
the properties registered in the name of Vonnel
Industrial Park, Inc. (VIP).
4.
On the date specified in the subscription
contract, without need of demand or call;
If no date of payment has been specified, on the
date specified in the call made by the BOD; (Sec.
66, RCC)
If no date of payment has been specified in the
call made, within 30 days from the date of call;
and
When insolvency supervenes upon a
corporation and the court assumes jurisdiction
to wind it up, all unpaid subscriptions become
payable on demand, and are at once
recoverable, without necessity of any prior call.
Accrual of Interest
Dewey Dee was an incorporator of VIP. Tee Ling
Kiat filed a Third-Party Claim alleging that even
though Dewey Dee was an incorporator of VIP,
Dewey Dee was no longer a stockholder of VIP
by virtue of a sale of shares made by Dewey Dee
in favor of Tee Ling Kiat as evidenced by a
cancelled check issued by Dewey Dee in favor of
Tee Ling Kiat. The RTC and the CA ruled against
Tee Ling Kiat holding that Tee Ling Kiat was not
able to prove the alleged sale of shares. Is Tee
Ling Kiat a stockholder of VIP?
Unpaid balance will accrue interest if so required by
the subscription contract and at the rate of interest
fixed in the subscription contract. If no rate of
interest is fixed in the subscription contract, such
rate shall be deemed to be the legal rate. (Sec. 65,
RCC)
The above interest is different from the interest
contemplated by Sec. 66, the unpaid balance
involved in which, will only accrue interest, by way
of penalty, from the date specified in the contract of
subscription or from the date stated in the call made
by the board.
A: NO. Sec. 63 (now Sec. 62, RCC) of the Corporation
Code of the Philippines provides that: "No transfer,
x x x shall be valid, except as between the parties,
until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of
the certificate or certificates and the number of
shares transferred."
Effect of Failure to Pay
Failure to pay on such date (specified in the
subscription contract or specified in the call) shall
render the entire balance due and payable and shall
make the stockholder liable for interest at the legal
rate on such balance, unless a different interest rate
207
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
is provided in the subscription contract. (Sec. 66,
RCC)
Unpaid claim
The term "unpaid claim" under Sec. 63 (now Sec. 62,
RCC) refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the
corporation arising from any other transaction." In
the case at bar, the subscription for the share in
question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision
does not apply. (China Bank v. CA, G.R. No. 117604,
26 Mar. 1997)
Remedies to Enforce Payment
1.
2.
Extra-judicial sale at public auction (Sec. 66,
RCC); and
Judicial action (Sec. 69, RCC)
Call for Payment
A call is made in a form of board resolution that
unpaid subscriptions to the capital stock are due
and payable and the same or such percentage
thereof shall be collected, together with all accrued
interest, on a specified date and that if no payment
is made within 30 days from said date, all stocks
covered by said subscription shall thereupon
become delinquent and shall be subject to public
auction sale.
The term "unpaid claim" only refers to "any unpaid
claim arising from unpaid subscription. It does not
include any indebtedness which a subscriber or
stockholder may owe the corporation arising from
any other transaction. It does not, for instance,
include monthly dues imposed by the corporation
for the use of its facilities. (China Bank, supra.)
Stocks become delinquent when the unpaid
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified
in the subscription contract or in the call by the
board of directors.
Call Not Always Necessary to Effect Payment of
Unpaid Subscription
The due date for the payment of the balance is either
the stipulated date or in the absence of such
stipulation, the call or demand by the Board of
Directors.
There is no need of a formal declaration of the Board
for an unpaid subscription to become delinquent in
the event of failure to pay the unpaid subscription
within the prescribed 30 day period from the date
specified in the subscription contract or the date
stated in the call. Henceforth, the subscription
becomes automatically delinquent upon the lapse of
the 30 day period in the call, with the stockholder
failing to pay. (SEC OGC Opinion No. 16-05 dated
March 31, 2016 citing previous SEC opinions)
Demand is not necessary to put the subscriber in
default if the due date of payment is specified in the
contract of subscription based on Article 1169 of the
Civil Code that demand is not necessary to put the
debtor in default when the law so declares. (Divina,
2020)
When Shares become Delinquent
A call made upon some of the subscribers is void or
which requires some to pay a higher rate than the
others, pursuant to the rule that calls must operate
uniformly upon all stockholders. A call cannot be of
such character as to permit the directors to practice
favoritism or act oppressively. In like manner, if a
call cannot be made discriminatorily, so should the
removal of the delinquency status. (ibid)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
If no payment is made within thirty (30) days from
the date specified in the subscription contract or on
the date stated in the call made by the board, all
stocks covered by the subscription shall thereupon
become delinquent and shall be subject to sale,
unless the board of directors orders otherwise. (Sec.
66, RCC)
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Corporation Law
Effect of Delinquency
Procedure for Sale of Delinquent Stocks
1.
1.
2.
Render the entire balance due and payable and
shall make the stockholder liable for interest at
the legal rate on such balance, unless a different
interest rate is provided in the subscription
contract (Sec. 66, RCC)
2.
Disenfranchises the shares from any right that
inheres to a stockholder, except the right to
dividends (Sec. 70, RCC)
3.
NOTE: Any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholders until their unpaid subscription is fully
paid. (Sec. 42, RCC)
4.
Q: Ace Cruz subscribed to 100,000 shares of
stock of JP Development Corporation, which has
a par value of P 1 per share. He paid P25,000.00
and promised to pay the balance before
December
31,
2008.
JP
Development
Corporation declared cash dividends on October
15, 2008 payable on December 1, 2008.
a.
For how many shares is Ace Cruz entitled to
be paid cash dividends? Explain.
b. On December 1, 2008, can Ace Cruz compel
JP Development Corporation to issue to him
the stock certificate corresponding to the
P25,000 paid by him? (2008 BAR)
5.
6.
A:
a. Ace is entitled cash dividends pertaining to the
entire 100,000 shares. A contract of
subscription is an indivisible contract. Even if
only partial payment for the subscription was
made, the whole subscription remain eligible to
cash dividend.
b.
Resolution – the board shall issue a resolution
ordering the sale of delinquent stock.
Notice – notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail or through other means provided in the
bylaws.
Publication – the notice shall be published once
a week for two consecutive weeks in a
newspaper of general circulation in the
province or city where the principal office of the
corporation is located
Sale – the delinquent stock shall be sold at a
public auction to be held not less than 30 days
nor more than 60 days from the date the stocks
become delinquent to such bidder who shall
offer to pay the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a
share.
Transfer – the stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such stock
shall be issued in his favor.
Remaining Shares – the remaining shares, if
any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering the
same. (Sec. 67, RCC).
NOTE: Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with
accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of
shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be
credited as fully paid in the books of the
corporation.
NO. No certificate of stock shall be issued to a
subscriber until the full amount of subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
(Sec 63, RCC) Clearly, since Ace Cruz did not pay
the full subscription yet, he cannot compel the
corporation to issue the certificate of stock.
209
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Discontinuance or Cancellation of Delinquency
Sale
Reason Behind Prohibition from Issuance of
Watered Stock
Delinquency sale may be discontinued or cancelled
if the delinquent stockholder pays the unpaid
balance plus interest, costs, and expenses on or
before the date specified for the sale of the
delinquent stocks or when the BOD orders
otherwise. (Sec. 67, RCC)
The issuance of Watered Stocks violates the Trust
Fund Doctrine.
It is an established doctrine that subscriptions to the
capital stock of a corporation constitute a fund to
which creditors have a right to look for satisfaction
of their claims, and that the assignee in insolvency
can maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts (Halley v. Printwell, G.R. No.
157549, 30 May 2011)
NOTE: A call cannot be of such character as to
permit the directors to practice favoritism or act
oppressively. In like manner, if a call cannot be
made discriminatorily, so should the removal of the
delinquency status. (SEC Opinion, supra)
Treasury Shares NOT Covered
When Sale may be Questioned
Trust fund doctrine is not violated in case treasury
shares are reacquired and subsequently re-issued
for a lesser consideration by the corporation since
this does not involve original issuance or primary
issuance of shares. The only limitation for the
reissuance of treasury shares is that their price must
be reasonable.
An action to recover delinquent stock sold can be
sustained upon the ground of irregularity or defect
in the notice of sale, or in the sale itself of the
delinquent stock, PROVIDED:
1.
2.
Party seeking to maintain such action first pays
or tenders to the party holding the stock the
sum for which the same was sold, with interest
from the date of sale at the legal rate.
The complaint is filed within six (6) months
from the date of sale. (Sec. 68, RCC)
Treasury shares are not original issuances. They are
shares of stocks 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. (Sec. 9, RCC)
Since they do not lose their status as issued shares,
they cannot be treated as new issues when disposed
of or reissued.
c. WATERED STOCKS
A watered stock is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (no par
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC)
Issuance of Watered Stocks Not Ratifiable
It is not merely ultra vires but is illegal per se as it is
a violation of Sec. 61, RCC.
Watered Stocks include stocks:
1.
2.
3.
4.
Issued without consideration ;
Issued for a consideration other than cash, the
fair valuation of which is less than its par or
issued value;
Issued as stock dividend when there are no
sufficient retained earnings to justify it; and
Issued as fully paid when the corporation has
received a lesser sum of money than its par or
issued value.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Liability of Directors for Watered Stocks
Any director or officer of a corporation shall be
solidarily liable with stockholder concerned to the
corporation and its creditors for difference between
the value received at the time of the issuance of the
stock and the par or issued value of the same, if:
1.
210
He consents to the issuance of stocks for
consideration less than its par or issued value;
Corporation Law
2.
3.
Who may Classify Shares
He consents to the issuance of stocks for a
consideration in any form other than cash,
valued in excess of its fair value; or
Who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary. (Sec.
64, RCC)
1.
2.
NOTE: The solidary liability of the directors
emanates from the fiduciary character of the
position of director or corporate officer.
d. SITUS OF SHARES OF STOCK
Board of directors and stockholders – after
the corporation comes into existence,
classification of shares may be altered by the
board of directors and the stockholders by
amending the AOI pursuant to Sec. 15, RCC.
1. PAR VALUE SHARES
GR: The situs of shares of stock is the country where
the corporation is domiciled. (Wells Fargo Bank v.
CIR, G.R. No. L-46720, 28 June 1940)
Shares with a value fixed in the AOI and the
certificates of stock. The par value fixes the
minimum issue price of the shares.
The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI even though the
corporation has closed its office therein and
relocated to another place. (Hyatt Elevators and
Escalators Corp. v. Goldstar Elevator Phils., Inc., G.R.
No. 161026, 24 Oct. 2005)
2. NO PAR VALUE SHARES
These are shares having no stated par value in the
AOI.
Shares of capital stock issued without par value
shall be deemed fully paid and nonassessable and
the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto
(Sec. 6, RCC)
NOTE: For purposes of the estate tax, the gross
estate of a resident decedent, whether citizen or
alien, or a citizen decedent, whether resident or
nonresident, includes his intangible personal
property wherever situated.
Limitations on No Par Value Shares
1.
e. CLASSES OF SHARES OF STOCK
Kinds or Classifications of Shares
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Incorporators – the classes and number of
shares which a corporation shall issue are first
determined by the incorporators as stated in
the AOI filed with the SEC.
Par value shares;
No par value shares;
Common shares;
Preferred shares;
Redeemable shares;
Treasury shares;
Founder’s share;
Voting shares;
Non-voting shares;
Convertible shares;
2.
211
The issued price of no-par value shares may be
fixed in the AOI or by the board of directors
pursuant to authority conferred by the AOI or
the bylaws, or if not so fixed, by the
stockholders representing at least a majority of
the outstanding capital stock at a meeting duly
called for the purpose provided that the issued
price of no-par value shares shall not be less
than P5.00. (Sec. 6 in relation to Sec. 61, RCC)
The entire consideration received by the
corporation for its no-par value shares shall be
treated as capital and shall not be available for
distribution as dividends. (Sec. 6, RCC) Banks,
trust, insurance, and pre-need companies,
public utilities, building and loan associations,
and other corporations authorized to obtain or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
b.
access funds from the public, whether publicly
listed or not, shall not be permitted to issue nopar value shares of stock. (ibid.)
NOTE: Preferred shares of stock may be issued
only with a stated par value.
3.
As to Cumulation –
3. COMMON SHARES
a.
Common shares are the basic class of stock
ordinarily and usually issued without privileges or
advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share
in the profits of the corporation and in its assets
upon dissolution and liquidation, and in the
management of its affairs. (Divina, 2020)
b.
Preferred shares are par-value shares given
preference in the distribution of dividends and in
the distribution of corporate assets in case of
liquidation, or such other preferences. The board of
directors, where authorized in the AOI, may fix the
terms and conditions of preferred shares of stock or
any series thereof: Provided, further, That such
terms and conditions shall be effective upon filing of
a certificate thereof with the SEC. . (Sec. 6, RCC)
As to Preference –
b.
2.
Preferred shares as to assets – gives the
holder preference in the distribution of the
assets of the corporation in case of
liquidation.
Common vs. Preferred shares
COMMON SHARES
PREFERRED SHARES
Definition
Preferred shares as to dividends –
entitled to receive dividends on said share
to the extent agreed upon before any
dividends at all are paid to the holders of
common stock.
Stock which entitles
the owner to an equal
pro rata division of
profits.
As to Participation –
a.
Participating preferred shares – entitled
to participate with the common shares in
excess distribution.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Non-cumulative preferred shares – there
is no need to make up for undeclared
dividends.
Preferences granted to preferred stockholders do
not give them a lien upon the property of the
corporation nor make them creditors of the
corporation, the right of the former being always
subordinate to the latter. Dividends are thus
payable only when there are profits earned by the
corporation and as a general rule, even if there are
existing profits, the board of directors has the
discretion to determine whether or not dividends
are to be declared. Shareholders, both common and
preferred, are considered risk takers who invest
capital in the business and who can look only to
what is left after corporate debts and liabilities are
fully paid. (Republic Planters Bank v. Agana, Sr., G.R.
No. 51765, 03 Mar. 1997)
Kinds of Preferred Shares
a.
Cumulative preferred shares – if a
dividend is omitted in any year, it must be
made up in a later year before any dividend
may be paid on the common shares in the
later year.
Holders of Preferred Shares are Not Creditors of
the Corporation
4. PREFERRED SHARES
1.
Non-participating preferred shares – not
entitled to participate with the common
shares in excess distribution.
212
Stock which entitles
the holder to some
preference, either in
the dividends, or in
distribution of assets,
or both.
Value
Depends if it is a par or
Par value.
no-par value share.
Corporation Law
Voting Rights
Usually vested with the
exclusive right to vote.
May be deprived of
voting rights except in
the instances provided
by law. (Sec. 6, RCC)
No advantage, priority,
or preference over any
other stockholder in
the same class.
Has preference over
dividends/profits/
distribution of assets.
2.
3.
Preference upon liquidation
4.
5. REDEEMABLE SHARES
These are shares which may be purchased by the
corporation from the holders of such shares 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 stated in the AOI and the certificate
of stock representing the shares, subject to rules
and regulations issued by the Commission. (Sec. 8,
RCC)
2.
Redemption may not be made where the
corporation is Insolvent or if such redemption
will cause insolvency or inability of the
corporation to meet its debts as they mature.
(Republic Planters Bank v. Agana, Sr., G.R. No.
51765, 03 Mar. 1997)
A: NO. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Mandatory – the issuing corporation must
redeem the shares after the expiration of a
stated period or when demanded by the holder;
provided that the corporation has sufficient
assets to pay for the shares or the redemption
will not bring about the insolvency of the
corporation.
Optional – the issuing corporation may or may
not redeem the shares after a stated period.
Reissuance of Redeemed Shares
If the terms of the preferred shares are silent, the
redemption is at the option of the corporation.
(Divina, 2020)
In the case of redeemable shares reacquired, the
same shall be considered retired and no longer
issuable, unless otherwise provided in the Articles
of Incorporation. (SEC-OGC Opinion 19-20 dated 17
May 2019, citing 1982 SEC Rules Governing
Redeemable and Treasury Shares)
Limitations on Redeemable Shares (A-T-V-I)
1.
Redeemable shares may be deprived of Voting
rights in the AOI, unless otherwise provided in
the Code. (Sec. 6, RCC)
Q: Planters Bank issued preferred redeemable
shares with a feature that entitles them to be
preferred in the payment of dividends.
Subsequently, the bank experienced liquidity
problems. The Central Bank ruled that the bank
has a reserve deficiency. Despite the condition,
one of the stockholders holding the preferred
shares filed an action against the corporation to
redeem his shares and pay the dividends due.
Will the suit prosper?
Kinds of Redeemable Shares
1.
The Terms and conditions affecting said shares
must be stated both in the AOI and in the
certificates of stock.
The issuance of redeemable shares must be
expressly provided in the Articles of
incorporation.
213
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
6. TREASURY SHARES
cover the shares to be purchased or acquired. In
addition, in cases where the reason for reacquiring
the shares is because of the unpaid subscription,
the Corporation Code is likewise explicit that the
corporation must purchase the same during a
delinquency sale. (Salido, Jr. v. Aramaywan Metals
Development Corp., G.R. No. 233857, 18 Mar. 2021, J.
Caguioa)
Shares that have been earlier issued and fully paid
for, but have been reacquired by the corporation
through purchase, donation, redemption or through
some other lawful means. (Sec. 9, RCC)
NOTE: Treasury shares do not revert to the
unissued shares of the corporation but are regarded
as property acquired by the corporation which may
be reissued or sold by the corporation at a price to
be fixed by the Board of Directors. (SEC-OGC Opinion
19-20 dated 17 May 2019, citing 1982 SEC Rules
Governing Redeemable and Treasury Shares)
Treasury Shares Distributed via Dividends
They can be distributed only as property dividends.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or
surplus profits. The distribution of cash or stock
dividends out of treasury shares would be
converting the corporation into both a debtor and
creditor for the same amount at the same time or
requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property
dividend to be issued out of the retained earnings
previously used to support their acquisition
provided that the amount of the said retained
earnings has not been subsequently impaired by
losses. (SEC Opinion, 17 July 1984)
Legitimate Purpose to Acquire Own Share
1.
2.
3.
4.
5.
To collect or compromise unpaid indebtedness
to the corporation arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale;
To eliminate fractional shares arising out of
stock dividends;
To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code;
Redemption of Redeemable Shares; and
Purchase of Shares when ordered by the SEC
due to a deadlock in a Close corporation.
NOTE: Although a treasury share, not having been
retired by the corporation re-acquiring it, may be
re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor
in the meetings of the corporation as voting stock,
for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the
directors will be able to perpetuate their control of
the corporation, though it still represents a paid-for
interest in the property of the corporation(CIR v.
Manning, G.R. No. L-28398, 06 Aug. 1975)
Limitations on Treasury Shares
1.
2.
3.
4.
It may be re-issued or sold again as long as it is
for a reasonable price fixed by the BOD;
Cannot participate in dividends;
It has no voting right as long as such remains in
the Treasury, hence cannot participate in
meetings as voting stocks; and
The amount of unrestricted retained earnings
(URE) equivalent to the cost of treasury shares
being held shall be restricted from being
declared and issued as dividends.
Apart from reacquiring the shares through some
lawful means, the Corporation Code is also explicit
that while a corporation has the power to purchase
or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
214
Corporation Law
Treasury Shares vs. Redeemable Shares
8. VOTING SHARES
TREASURY SHARES REDEEMABLE SHARES
Description
Shares so acquired by
the
corporation
through
purchase,
donation, redemption,
or any other lawful
means.
Issued
by
the
corporation
when
expressly so provided in
the AOI.
Can only be acquired
in the presence of
unrestricted retained
earnings (URE).
Redeemable shares may
be
acquired
even
without URE for as long
as it will not result in the
insolvency
of
the
corporation.
Must comply with the
trust fund doctrine.
Is an exception to the
trust fund doctrine.
Are not redeemable;
they may be re-issued.
While redeemable, they
are not re-issued, unless
otherwise provided.
Shares with a right to vote on all corporate acts.
Usually refers to common shares, although the
corporation may also grant voting rights to
preferred shares under its AOI.
9. NON-VOTING SHARES
Shares without the right to vote. The law only
authorizes the denial of voting rights in the case of
redeemable shares and preferred shares, provided
that there shall always be a class or series of shares
which have complete voting rights (common
shares). (Sec. 6, RCC)
Manner of Acquisition
Instances when Holders of Non-voting Shares
are Still Entitled to Vote
These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental
matters: (A-A-S-I-I-M-I-D)
Applicability of the Trust Fund Doctrine
Effect of Redemption
1.
2.
3.
7. FOUNDERS' SHARES
4.
Shares classified as such in the AOI, and which may
be given certain rights and preferences not enjoyed
by the owner of other stocks. (Sec. 7, RCC)
5.
6.
7.
NOTE: 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 from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108,
otherwise known as the “Anti-Dummy Law”; R.A.
No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
(Sec. 7, RCC)
8.
Amendment of articles of incorporation;
Adoption and amendment of By-laws;
Sale, Lease, Exchange, Mortgage, Pledge or
Other disposition (Sa-Le-M-P-O) of all or
substantially all of the corporate property;
Incurring, creating, or increasing bonded
Indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with
another corporation or other corporations;
Investment of corporate funds in another
corporation or business in accordance with this
Code; and
Dissolution of the corporation. (Sec. 6, RCC)
NOTE: Except as provided in the foregoing eight (8)
instances, the vote required under the RCC to
approve a particular corporate act shall be deemed
to refer only to stocks with voting rights (Sec. 6, RCC)
10. CONVERTIBLE SHARES
A share that is changeable by the stockholder from
one class to another at a certain price and within a
certain period. (Divina, 2020)
215
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Other Kinds of Shares:
1.
2.
a. NATURE OF THE CERTIFICATE
Fractional Share – A fractional share is a share
of equity that is less than one full share.
The certificate of stock itself once issued is a
continuing affirmation or representation that the
stock described therein is valid and genuine and is
at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary.
However, this presumption may be rebutted.
(Bitong v. CA, G.R. No. 123553, 13 July 1998)
Shares in Escrow – A stock deposited with a
third person to be delivered to a stockholder or
his assign, after complying with certain
conditions, usually the full payment of
subscription or purchase price. (Divina, 2020)
Transfer of Partially Paid Shares
NOTE: The classification of shares, their
corresponding rights, privileges, or restrictions, and
their stated par value, if any, must be indicated in
the AOI. A corporation may further classify its
shares for the purpose of ensuring compliance with
constitutional or legal requirements. (Sec. 6, RCC)
The subscriber, as the owner of the shares, may
assign his right to the contract of subscription in
favor of the assignee. Partially paid shares are not
covered yet by a stock certificate, and as such, there
is no certificate which can be endorsed and
delivered to the transferee as required by Sec. 62,
RCC.
2. CERTIFICATE OF STOCK
A certificate of stock is the paper representative or
tangible evidence of the stock itself and of the
various interests therein. The certificate is not stock
in the corporation but is merely evidence of the
holder’s interest and status in the corporation, his
ownership of the share represented thereby, but is
not in law the equivalent of such ownership. It
expresses the contract between the corporation and
the stockholder, but it is not essential to the
existence of a share in stock or the creation of the
relation of shareholder to the corporation. (Tan v.
SEC, G.R. No. 95696, 03 March 1992)
The corporation may, however, refuse the transfer
of shares based on Sec. 62, RCC, which provides that
the corporation may refuse the transfer if it holds
unpaid claim over the shares. The term “unpaid
claim” means unpaid subscription.
Consent Required in the Sale of Unpaid Shares
1.
Shares of Stock vs. Certificates of Stock
SHARE OF STOCK
Unit of interest in a
corporation.
It is an incorporeal or
intangible property.
It may be recognized
by the corporation
even if the subscription
is not fully paid.
CERTIFICATE OF
STOCK
Evidence
of
the
holder’s ownership of
the stock and of his
right as a shareholder
and of his extent
specified therein.
It is concrete and
tangible.
2.
It may be issued only if
the subscription is fully
paid.
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If the subscription is fully paid, the
stockholder may sell or dispose of his shares
without having to secure the consent of the
corporation. In fact, the corporation cannot
require its consent for the transfer of the shares.
It will be contrary to law and public policy. To
be valid, the restriction on transfer cannot be
more onerous than the option granted to a
stockholder to purchase the shares of a
transferring stockholder on reasonable terms
and conditions, or simply, the right of first
refusal. Requiring the consent of the
corporation is certainly more onerous than the
right of first refusal.
If the subscription is not fully paid, the
consent of the corporation is necessary
before the subscriber may assign his right to
the contract of subscription. Assignment of
shares with unpaid subscription basically
amounts to novation as there will be a change of
Corporation Law
debtor from the subscriber to the assignee. The
obligation to pay the balance of the subscription
will be assumed by the assignee. To be valid,
novation requires consent of the creditor,
which in this case is the corporation. (Divina,
2020)
c. NEGOTIABILITY; REQUISITES FOR VALID
TRANSFER OF STOCKS
Stock Certificate is NOT Negotiable
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred by delivery, it is well-settled that the
instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel. (Republic v.
Sandiganbayan, G.R. No. 107789 & 147214, 30 Apr.
2003)
Alienation Despite Absence of Certificate of
Stock
A stockholder may alienate his shares even if there
is no certificate of stock issued by the corporation.
The absence of a certificate of stock does not
preclude the stockholder from alienating or
transferring his shares of stock.
Transfers Involving Fully Paid Subscriptions
Certificates of stock may be issued only to registered
owners of stock. The issuance of “bearer” stock
certificates is not allowed under the law. (SEC
Opinion No. 05-02, 31 Jan. 2005)
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
Requirements for Valid Transfer of Stocks
The following are the requirements for valid
transfer of stocks:
In case of subscription not fully paid, the
corporation may record such transfer, provided that
the transfer is approved by the board of directors
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
1.
If represented by a certificate, the following
must be strictly complied with:
a.
b.
b. UNCERTIFICATED SHARES
c.
The SEC may require corporations whose securities
are traded in trading markets, and which can
reasonably demonstrate their ability to do so, to
issue their securities or shares of stock in
uncertificated or in scripless form in accordance
with the rules imposed by SEC. (Sec. 62, RCC)
2.
217
Delivery of the certificate or certificates;
Indorsed by the owner, his attorney-in-fact,
or any other person legally authorized to
make the transfer;
No transfer, however, shall be valid, except
as between the parties, until the transfer is
recorded in the books of the corporation
showing the names of the parties to the
transaction, the date of the transfer, the
number of the certificate or certificates, and
the number of shares transferred. (Sec. 62,
RCC)
If NOT represented by a certificate (such as
when the certificate has not yet been issued or
where for some reason is not in the possession
of the stockholder):
a.
By means of deed of assignment; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
b.
did not happen in this case. (Africa
Sandiganbayan, G.R. Nos. 17222, 11 Nov. 2013)
Such is duly recorded in the books of the
corporation. (Divina, 2020)
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
Nicolas Jomouad, ex-officio sheriff. Said action
stemmed from an earlier case for collection of
sum of money, filed by the spouses Atinon
against Jaime Dico. In that case, the trial court
rendered judgment ordering Dico to pay the
spouses Atinon. After said judgment became
final and executory, the sheriff proceeded with
its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the
Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
auction.
Effect of Non-Payment of Documentary Stamp
Tax
No sale, exchange, transfer, or similar transaction
intended to convey ownership of, or title to any
share of stock shall be registered in the books of the
corporation unless the receipts of payment of the
tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation.
(Sec. 11, Revenue Regulations No. 6-2008)
Ministerial Duty of Corporate Secretary to
Register Transfer of Stocks
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try
to decide the question of ownership. If a corporation
refuses to make such transfer without good cause, it
may, in fact, even be compelled to do so by
mandamus. (Teng v. SEC, G.R. No. 184332, 17 Feb.,
2016)
Claiming ownership over the subject certificate,
Garcia filed the action for injunction to enjoin
the spouses Antinon from proceeding with the
auction. Garcia contends that the subject stock
of certificate, albeit in the name of Dico, cannot
be levied upon the execution to satisfy his
judgment debt because even prior to the
institution of the case for collection of sum of
money against him, the spouses Atinon had
knowledge that Dico already conveyed back the
ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
covering the subject certificate in favor of
Garcia.
Remedies When Corporation Refuses to Record
Transfer
If the corporation wrongfully refuses to issue a
certificate of stock, the assignee or transferee of
shares of stock may:
1.
2.
3.
File a suit for specific performance of an express
or implied contract;
File for an alternative relief by way of damages
where specific performance cannot be granted;
and
File a petition for mandamus to compel
issuance of a certificate. (SEC-OGC Opinion No.
21-06, Mar. 23, 2006, cited in Divina, 2020)
Is a bona fide transfer of the shares of a
corporation, not registered or noted in the
books of the corporation, valid as against a
subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had
actual notice of said transfer or not?
A: NO. A transfer of shares not registered in the
books of the corporation is not valid as against
subsequent attachment of the shares. All transfers
of shares not so entered in the books of the
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good
faith, and, indeed, as to all persons interested,
except the parties to such transfers. Hence, the
The fact that the corporate secretary asked for leave
to register the transfer five years after the sale did
not make the transfer irregular. This Court held in
Lee E. Won v. Wack Wack Golf & Country Club, Inc.,
that since the law does not prescribe a period for
such kind of registration, the action to enforce the
right to have it done does not begin to toll until a
demand for it had been made and was refused. This
UNIVERSITY OF SANTO TOMAS
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218
Corporation Law
the owner or his attorney-in-fact or other person
legally authorized to make the transfer.
transfer of the subject certificate made by Dico to
Garcia was not valid as to the spouses Atinon, the
judgment creditors, as the same still stood in the
name of Dico, the judgment debtor, at the time of the
levy on execution. (Nemesio Garcia v. Nicolas
Jomouad, et al., G.R. No. 133969, 26 Jan. 2000)
In this case, Vertex fully paid the purchase price by
Feb. 11, 1999 but the stock certificate was only
delivered on Jan. 23, 2002 after Vertex filed an
action for rescission against FEGDI.
Q: Fil-Estate Golf and Development, Inc. (FEGDI)
is a stock corporation whose primary business
is the development of golf courses. Fil-Estate
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development. FEGDI
was the developer of the Forest Hills Golf and
Country Club (Forest Hills) and, in consideration
for its financing support and construction
efforts, was issued several shares of stock of
Forest Hills.
Under these facts, considered in relation to the
governing law, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time from
the point the shares should have been delivered.
This was a substantial breach of their contract that
entitles Vertex the right to rescind the sale under
Art. 1191 of the Civil Code. It is not entirely correct
to say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot
suffice where the law, by its express terms, requires
a specific form to transfer ownership.
FEGDI sold on installment, to RS Asuncion
Construction Corporation (RSACC) one common
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to
Vertex Sales and Trading, Inc. (Vertex). RSACC
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex
as a shareholder. For this reason, Vertex
enjoyed membership privileges in Forest Hills.
Mutual restitution is required in cases involving
rescission under Art. 1191 of the Civil Code; such
restitution is necessary to bring back the parties to
their original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex. (FilEstate Golf and Development, Inc. and Fil-Estate
Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
202079, 10 June 2013)
Despite Vertex’s full payment on Feb. 11, 1999,
the share remained in the name of FEGDI. As the
demands to issue a certificate in its name went
unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment
against FEGDI, FELI and Forest Hills. It averred
that the petitioners defaulted in their obligation
as sellers when they failed and refused to issue
the stock certificate covering the subject share
despite repeated demands. Only thereafter that
the stock certificates were delivered (on Jan. 23,
2002).
Q: May Forest Hills appeal the CA decision which
ordered the recission of the sale?
A: NO. It was not a party to the sale even though the
subject of the sale was its share of stock. The
corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need
not be a party to the transaction, as may be inferred
from the terms of Sec. 63 (now Sec. 62, RCC) of the
Corporation Code. However, to bind the
corporation as well as third parties, it is necessary
that the transfer is recorded in the books of the
corporation. In the present case, the parties to the
sale of the share were FEGDI as the seller and
Vertex as the buyer (after it succeeded RSACC). As
party to the sale, FEGDI is the one who may appeal
Is the delay in the issuance of the stock
certificate a substantial breach of the sale which
entitles Vertex to the rescission thereof?
A: YES. Sec. 63 (now Sec 62, RCC) provides, among
others, that shares of stock may be transferred by
delivery of the certificate or certificates indorsed by
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
the ruling rescinding the sale.
4.
The remedy of appeal is available to a party who
has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in
the subject matter of the lawsuit, is injuriously
affected by the judgment, order or decree." The
rescission of the sale does not in any way prejudice
Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously
affected. (Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., G.R. No. 202205, 06 March
2013)
Such other entries as the by-laws may
prescribe. (Sec. 73, RCC)
Entries
It is the corporate secretary’s duty and obligation to
register valid transfers of stocks and if said
corporate officer refuses to comply, the transferorstockholder may rightfully bring suit to compel
performance. In other words, there are remedies
within the law that petitioners could have availed of,
instead of taking the law in their own hands, as the
cliche goes. (Torres, Jr. v. CA, G.R. No. 120138, 05 Sept.
1997)
Probative Value of Stock and Transfer Book
d. ISSUANCE
Similarly, books and records of a corporation which
include even the stock and transfer book are
generally admissible in evidence in favor of or
against the corporation and its members to prove
the corporate acts, its financial status and other
matters including one’s status as a stockholder.
They are ordinarily the best evidence of corporate
acts and proceedings.
Issuance of Certificate of Stock
No certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63, RCC)
Requisites for Issuance of Stock Certificates for
Fully-paid Shares
1.
2.
3.
4.
However, the books and records of a corporation
are not conclusive even against the corporation but
are prima facie evidence only. Parol evidence may
be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where
no records were kept, or in some cases where such
records were contradicted. The effect of entries in
the books of the corporation which purport to be
regular records of the proceedings of its board of
directors or stockholders can be destroyed by
testimony of a more conclusive character than mere
suspicion that there was an irregularity in the
manner in which the books were kept.
Signed by the president or vice president
Countersigned by the secretary or assistant
secretary; and
Sealed with the seal of the corporation
Issued in accordance with the bylaws. (Sec. 62,
RCC)
Stock and Transfer Book
Stock corporations must also keep a stock and
transfer book, which shall contain:
1.
2.
3.
The foregoing considerations are founded on the
basic principle that stock issued without authority
and in violation of law is void and confers no rights
on the person to whom it is issued and subjects him
to no liabilities. Where there is an inherent lack of
power in the corporation to issue the stock, neither
the corporation nor the person to whom the stock is
issued is estopped to question its validity since an
estoppel cannot operate to create stock which
A record of all stocks in the names of the
stockholders alphabetically arranged;
The installments paid and unpaid on all stocks
for which subscription has been made, and the
date of payment of any installment;
A statement of every alienation, sale or transfer
of stock made, the date thereof, by and to whom
made; and
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Corporation Law
under the law cannot have existence. (Bitong v. CA,
G.R. No. 123553, 13 July 1998)
3.
e. LOST OR DESTROYED CERTIFICATES
Procedure for Issuance of New Stock Certificate
in Lieu of Lost, Stolen or Destroyed Certificate
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.
b.
c.
2.
NOTE: if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen, or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate
of stock which has been lost, stolen, or destroyed.
If possible, the circumstances as to how the
certificate was lost, stolen or destroyed;
The number of shares represented by such
certificate;
The serial number of the certificate and the
name of the corporation which issued the
same.
A new certificate may be issued even before the
expiration of the one (1) year period provided the
registered owner files a bond or other security as
may be required, effective for a period of one (1)
year, for such amount and in such form and with
such sureties as may be satisfactory to the board of
directors. (Sec. 72, RCC)
He shall also submit such other information and
evidence which he may deem necessary.
After verifying the affidavit and other
information and evidence with the books of the
corporation, the latter shall publish a notice in a
newspaper of general circulation published in
the place where the corporation has its
principal office, once a week for three (3)
consecutive weeks at the expense of the
registered owner of the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock;
and
d. Number of shares represented by the
certificate of stock.
e. A statement that after the expiration of
one (1) year from the date of the last
publication, if no contest has been
presented to the corporation regarding
the certificate of stock, the right to make
such contest shall be barred and the
corporation shall cancel the lost,
destroyed or stolen certificate of stock in
its books
After the expiration of one (1) year from the
date of the last publication, if no contest has
been presented to said corporation regarding
said certificate of stock or if no action is pending
in court regarding the ownership of the
certificate of stock which has been lost, stolen
or destroyed, the 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.
Liability of Corporation for Issuance of New
Certificates in Lieu of Lost, Stolen or Destroyed
Ones
GR: No action may be brought against any
corporation which has issued a certificate of stock in
lieu of those lost, stolen, or destroyed pursuant to
the procedure under Sec. 72, RCC.
XPN: In case of fraud, bad faith, or negligence on the
part of the corporation and its officers. (Ibid.)
Q: A stockholder claimed that his stock
certificate was lost. After going through with the
procedure for the issuance of lost certificate,
and no contest was presented within one (1)
year from the last publication, the corporation
issued a new certificate of stock in lieu of the
supposed lost certificate. The stockholder
immediately sold his shares and endorsed the
replacement certificate to a buyer. It turned out
221
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
conflicting claims of Jose and Pedro. The BOD of
X Co. invited you to enlighten them on these
questions; viz:
that the original certificate was not lost but sold
and endorsed to another person.
a.
May the corporation be made liable by the
aggrieved party?
b. Who will have a better right over the shares,
the endorsee of the original certificate or the
endorsee of the replacement certificate?
a.
If a suit were to be initiated in order to
resolve the controversy between Pedro and
Jose, should the matter be submitted to the
SEC or to the regular courts?
b. Between Jose and Pedro, whom should the
corporation so recognize as the rightful
stockholder? How would you respond to the
above queries? (1997 BAR)
A:
a. NO. The corporation cannot be made liable,
unless there is fraud, bad faith or negligence.
Under Sec. 72 of the RCC, except in cases of
fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be
brought against any corporation which has
issued certificates of stock in lieu of those lost,
stolen, or destroyed pursuant to the procedure
prescribed therein.
b. The endorsee of the replacement certificate has
a better right to the shares. After the expiration
of one (1) year from the date of the last
publication, and no contest has been presented
to corporation regarding said certificate, the
right to make such contest is consequently
barred and said corporation is deemed to have
already canceled in its books the certificate
which have been lost, stolen, or destroyed and
issued in lieu thereof a new certificate.
A:
a. The jurisdiction of the matter belongs to the
regular courts. Under Sec. 5.2 of the SRC as
amended, the jurisdiction for intra-corporate
controversies was transferred from the SEC to
the regular courts.
b.
3. DISPOSITION AND ENCUMBRANCE
OF SHARES
Q: Juan was a stockholder of X Co. He owned a
total of 500 shares evidenced by Certificate of
Stock No. 1001. He sold the shares to Pedro.
After getting paid, Juan indorsed and delivered
said Certificate of Stock No. 1001 to Pedro. The
following day, Juan went to the office of the
corporation and claimed that his Certificate of
Stock No. 1001 was lost and that, despite diligent
efforts, the certificate could not be located. The
formalities prescribed by law for the
replacement of the lost certificate were
complied with.
a. SALE OF SHARES
Registration of Transfer in Case of Sale
No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to
the transaction, the date of the transfer, the number
of the certificate or certificates, and the number of
shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation. (Sec. 62, RCC)
Eventually X Co. issued in substitution of the lost
certificate, Certificate of Stock No. 2002. Juan
forthwith
transferred
for
valuable
consideration the new certificate to Jose who
knew nothing of the previous sale to Pedro. In
time, the corporation was confronted with the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The corporation should recognize both Pedro
and Jose as rightful stockholders if there is no
over-issuance of shares resulting from the two
transactions without prejudice to the right of
the corporation to claim against Juan for the
value of the shares sold to Jose.
222
Corporation Law
b. ALLOWABLE RESTRICTIONS ON THE SALE OF
SHARES
c. REQUISITES OF A VALID TRANSFER
See discussion under: c. NEGOTIABILITY;
REQUISITES FOR VALID TRANSFER OF STOCKS –
page 217.
Right of Corporation to Regulate Transfers of
Stock
Corporation can provide regulations to the
sale/transfer of the shares of stockholders, but the
authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict
the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to
the formalities and procedure to be followed in
effecting transfer. (Thomson v. CA, G.R. No. 116631,
28 Oct. 1998)
d. INVOLUNTARY DEALINGS
It refers to such writ, order or process issued by a
court of record affecting shares of stocks which by
law should be registered to be effective, and also to
such instruments which are not the willful acts of
the registered owner, and which may have been
executed even without his knowledge or against his
consent.
Requisites for Validity of Restriction
Examples of Involuntary Dealings
The corporation may impose restrictions on the
transfer of shares but subject to the following
requisites:
1.
2.
3.
1.
2.
3.
4.
Restrictions on the right to transfer shares must
appear in the AOI, in the bylaws, as well as in the
certificate of stock; otherwise, the same shall
not be binding on any purchaser in good faith.
Attachment;
Sale on execution of judgment or sales for taxes;
Adverse claims; or
Foreclosure of mortgage of stocks.
Involuntary Dealings Must be Registered
It is the act of registration which creates a
constructive notice to the whole world of such
instrument or court writ or process and is the
operative act that conveys ownership. (Aquino,
2007)
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated.
Upon the expiration of the said period, the
existing stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell their shares
to any third person. (Sec. 97, RCC)
While these restrictions appear in the chapter on
close corporations, there is no reason not to apply
the same to open or regular corporation. (Divina,
2020)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
the parties, and the questions involved pertain to
their rights and obligations under the Corporation
Code and matters relating to the regulation of the
corporation. The Court further holds that the nature
of the case as an intra-corporate dispute was not
affected by the subsequent dissolution of the
corporation. Sec. 145 (now Sec. 184 of the RCC)
preserves a corporate actor’s cause of action and
remedy against another corporate actor. In so doing,
the said section also preserves the nature of the
controversy between the parties as an intracorporate dispute.
G. DISSOLUTION AND LIQUIDATION
Dissolution
It is the extinguishment or cancellation of the
corporate franchise and the termination of its
corporate existence for business purposes. (Divina,
2020)
Effects of Dissolution of Corporation
1.
2.
The dissolution of the corporation simply prohibits
it from continuing its business. However, despite
such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution
does not automatically convert the parties into total
strangers or change their intra-corporate
relationships. Neither does it change or terminate
existing causes of action, which arose because of the
corporate ties between the parties. Thus, a cause of
action involving an intra-corporate controversy
remains and must be filed as an intra-corporate
dispute despite the subsequent dissolution of the
corporation. (Aguirre v. FQB+7 Inc., G.R. No. 170770,
09 Jan. 2013)
Corporation ceases as a body corporate to
continue the business for which it was
established.
The Corporation continues as a body corporate
for 3 years only for the purpose of prosecuting
and defending suits by or against it and
enabling it to settle and close its affairs, dispose
of, and convey its property, and distribute its
assets (winding up or liquidation). (Sec. 139,
RCC)
Q: Vitaliano Aguirre, II, one of the original
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel, et al.
upon learning that they have filed, as corporate
officers of FQB+7, a GIS which showed a different
set of Directors and Subscribers from that of the
AOI. In response, Nathaniel, et al. filed a petition
for certiorari with the CA for the annulment of
the proceedings in the RTC claiming that the SEC
had already revoked FQB+7’s certificate of
registration almost a year before Aguirre filed
his complaint with the RTC.
Q: Alabang Development Corporation (ADC),
developer of Alabang Hills Village, filed with the
RTC a complaint for injunction against Alabang
Hills Village Association, Inc. (AHVAI) and its
president, Rafael Tinio, alleging that AHVAI
started the construction of a multi-purpose hall
and a swimming pool on one of the parcels of
land still owned by ADC, without the latter’s
consent and approval.
AHVAI claimed that ADC had no legal capacity to
sue since its existence as a registered corporate
entity was revoked by the SEC on 26 May 2003.
Does the ADC have the capacity to file the
complaint?
The CA dismissed the complaint because the
corporation has lost its juridical personality. As
such the trial court does not have jurisdiction to
entertain an intra-corporate dispute when the
corporation is already dissolved. Is the case an
intra-corporate dispute and is thus under the
jurisdiction of the RTC?
A: YES. The Court finds and so holds that the case is
essentially an intra-corporate dispute. It obviously
arose from the intra-corporate relations between
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: NO. In the instant case, there is no dispute that
ADC's corporate registration was revoked on 26
May 2003. Based on Sec. 122 (no Sec. 139, RCC), it
had three years, or until May 26. 2006, to prosecute
or defend any suit by or against it. The subject
224
Corporation Law
corporation:
complaint, however, was filed only on Oct. 19, 2006,
more than three years after such revocation.
i. Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
ii. Committed or aided in the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices, and its stockholders knew
of the same; and
iii. Repeatedly and knowingly tolerated
the commission of graft and corrupt
practices or other fraudulent or illegal
acts by its directors, trustees, officers,
or employees. (Sec. 138, RCC)
In the present case, ADC filed its complaint not only
after its corporate existence was terminated but
also beyond the three-year period allowed by [now]
Sec. 139 of the RCC. Thus, it is clear that at the time
of the filing of the subject complaint ADC lacks the
capacity to sue as a corporation. To allow ADC to
initiate the subject complaint and pursue it until
final judgment, on the ground that such complaint
was filed for the sole purpose of liquidating its
assets, would be to circumvent the provisions of Sec.
139 of the RCC. (Alabang Development Corp. v.
Alabang Hills Village Association and Rafael Tinio,
G.R. No. 187456, 02 June 2014)
1. MODES OF DISSOLUTION
a. VOLUNTARY AND INVOLUNTARY
DISSOLUTION
VOLUNTARY DISSOLUTION
Dissolution Where No Creditors are Affected
The following are the modes of dissolution of the
corporation:
1.
2.
1.
Voluntary –
a. By a verified request for dissolution filed
with the SEC where no creditors are
affected; (Sec. 134, RCC)
b. By a petition for dissolution filed with t
SEC where creditors are affected; (Sec.
135, RCC)
c. By amending the AOI to shorten the
corporate term; (Sec. 136, RCC)
d. Merger or consolidation
e. Affidavit of dissolution by a corporation
sole
Involuntary –
a. Non-use of corporate charter as provided
under Sec. 21, RCC;
b. Continuous inoperation of a corporation
as provided under Sec. 21, RCC;
c. Upon receipt of a lawful court order
dissolving the corporation;
d. Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
e. Upon finding by final judgment that the
2.
Dissolution is approved by majority vote of the
board of directors or trustees;
A meeting of the Stockholders/Members must
be held upon the call of the directors or
trustees:
Notice of meeting must be given at least twenty
(20) days prior to the said meeting. to each
stockholder or member either by registered
mail or by personal delivery or by any means
authorized under its bylaws whether or not
entitled to vote at the meeting, in the manner
provided in Sec. 50 of the RCC.
a.
b.
225
Notice shall state that the purpose of the
meeting is to vote on the dissolution of the
corporation.
Notice of the time, place, and object of the
meeting shall be published once prior to the
date of the meeting in a newspaper
published in the place where the principal
office of said corporation is located, or if no
newspaper is published in such place, in a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
3.
4.
Dissolution Where Creditors are Affected
(A-PSIVECSO–CPUPOO-J)
A verified request for dissolution shall be filed
with the SEC, stating:
c.
d.
e.
1.
The reason for the dissolution
The form, manner, and time when the
notices were given;
Names of the stockholders and directors
or members and trustees who approved
the dissolution;
The date, place, and time of the meeting in
which the vote was made; and
The details of publication.
2.
b.
c.
Filing of Petition for dissolution with SEC. The
petition must be: (SiVeCS)
b.
c.
d.
A copy of the resolution authorizing the
dissolution, certified by the majority of the
BOD/BOT, and countersigned by the
secretary of the corporation;
e.
Proof of publication; and
Favorable recommendation from the
appropriate regulatory agency, when
necessary.
No application for dissolution of banks,
banking, and quasi-banking institutions,
preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial
intermediaries shall be approved by the
SEC unless accompanied by a favorable
recommendation of the appropriate
government agency.
3.
Within fifteen (15) days from receipt of the
verified request for dissolution, and in the
absence of any withdrawal within said period,
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Approval of the stockholders representing at
least 2/3 of the OCS or by at least two-thirds
(2/3) of the members at a meeting of its
stockholders or members called for that
purpose;
a.
The Corporation shall submit the following to
the SEC:
a.
6.
NOTE: The dissolution shall take effect only upon
the issuance by the SEC of a certificate of
dissolution. (Sec. 134, RCC)
A resolution must be adopted approving the
dissolution by the affirmative vote of the
stockholders owning at least majority of the
outstanding capital stock or majority of the
members in the meeting called for the said
purpose.
a.
b.
5.
the SEC shall approve the request and issue the
certificate of dissolution.
newspaper of general circulation in the
Philippines.
226
Signed by a majority of its board of
directors or trustees;
Verified by its president or secretary or one
of its directors or trustees;
Set forth all Claims and demands against it;
State that dissolution was resolved upon by
the affirmative vote of the Stockholders
representing at least two-thirds (2/3) of
the OCS or at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose ;
State: (a) the reason for the dissolution; (b)
the form, manner, and time when the
notices were given; and (c) the date, place,
and time of the meeting in which the vote
was made
The corporation shall submit to the SEC the
following: (1) a copy of the resolution
authorizing the dissolution, certified by a
majority of the board of directors or trustees
and countersigned by the secretary of the
corporation; and (2) a list of all its creditors.
If the petition is sufficient in form and
substance, the SEC shall, by an Order reciting
the purpose of the petition, fix a deadline for
filing objections to the petition which date shall
not be less than thirty (30) days nor more than
sixty (60) days after the entry of the order;
Corporation Law
4.
Before such date, Copy of the order shall be:
a.
b.
5.
6.
Published at least once a week for three (3)
consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and
3.
Posted for three (3) consecutive weeks in
three (3) public places in such municipality
or city;
INVOLUNTARY DISSOLUTION
If no objection is sufficient and the material
allegations of the petition are true, it shall
render Judgment dissolving the corporation
and directing such disposition of its assets as
justice requires and may appoint a receiver to
collect such assets and pay the debts of the
corporation.
Involuntary Dissolution
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
interested party, on the grounds provided under
Sec. 138 of the RCC.
NOTE: Dissolution takes effect upon the issuance of
a certificate of dissolution by the SEC. (Sec. 135, RCC)
1.
Non-Use of Charter or Continuous Inoperation
Shortening
To “formally organize” as used in reference to
corporations means:
Amending the AOI pursuant to Sec. 15:
a.
b.
2.
by
The amendments shall take effect upon their
Approval by the SEC Commission or from the
date of filing with the said Commission if not
acted upon within six (6) months from the date
of filing for a cause not attributable to the
corporation.
NOTE: In the case of expiration of corporate term,
dissolution shall automatically take effect on the day
following the last day of the corporate term stated
in the AOI, without the need for the issuance by the
SEC of a certificate of dissolution.
After expiration of the time to file objections
and upon prior 5-day notice to hear the
objections, the SEC shall proceed to hear the
petition and try any issue made by the
Objections file; and
Procedure for Dissolution
Corporate Term (A-S-A-F)
changes made, and a copy thereof duly certified
under oath by the corporate secretary and a
majority of the directors or trustees, with a
statement that the amendments have been duly
approved by the required vote of the
stockholders or members, shall be submitted to
the SEC;
1.
2.
Approved by majority vote of the board of
directors or by vote or written assent of
majority of the trustees
Vote or written assent of the stockholders
representing at least two-thirds (2/3) of
the OCS or of the members;
3.
4.
The original and amended articles together
shall contain all provisions required by law to
be set out in the AOI. Amendments to the
articles pertaining to the shortened term shall
be indicated by underscoring the change or
Election of officers,
Providing for the subscription and payment of
the capital stock;
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.
(Benguet Consolidated Mining Co. v. Pineda, G.R.
No. L-7231, 28 Mar. 1956)
Effects of Non-Use or Continuous Inoperation
If a corporation does not formally organize and
commence its business within five (5) years from
227
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
other fraudulent or illegal acts by its directors,
trustees, officers, or employees.
the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day
following the end of the five-year period.
NOTE: The SEC shall give reasonable notice to, and
coordinate with, the appropriate regulatory agency
prior to the involuntary dissolution of companies
under their special regulatory jurisdiction. (Sec. 138,
RCC)
If a corporation has commenced its business but
subsequently becomes inoperative for a period of at
least five (5) consecutive years, the Commission
may, after due notice and hearing, place the
corporation under delinquent status.
DISSOLUTION OF CORPORATION SOLE
A delinquent corporation shall have a period of two
(2) years to resume operations and comply with all
requirements that the Commission shall prescribe.
Upon compliance by the corporation, the
Commission shall issue an order lifting the
delinquent status. Failure to comply with the
requirements and resume operations within the
period given by the Commission shall cause the
revocation of the corporation’s certificate of
incorporation. (Sec. 21, RCC)
Procedure for Dissolution of Corporation Sole
In case of a corporation sole, by submitting to the
SEC for approval, a verified declaration of
dissolution which will set forth the following:
1.
2.
3.
Forfeiture in Favor of the National Government
4.
If the corporation is ordered dissolved by final
judgment pursuant to the following grounds, , its
assets, after payment of its liabilities, shall, upon
petition of the SEC with the appropriate court, be
forfeited in favor of the national government. Such
forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services
rendered, and to the application of other penalty or
sanction under the RCC or other laws:
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (Sec.
113, RCC)
DISSOLUTION BY MERGER OR CONSOLIDATION
Upon finding by final judgment that the corporation:
Dissolution by Merger or Consolidation
(1) Was created for the purpose of committing,
concealing or aiding the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices;
Upon issuance by the SEC of a Certificate of Merger
or Consolidation, the corporate existence of the
absorbed corporation and the constituent
corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
thereafter be conducted. (Sec. 79, RCC)
(2) Committed or aided in the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices, and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the
commission of graft and corrupt practices or
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The name of the corporation;
The reason for dissolution and winding up;
The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church; and
The names and addresses of the persons who
are to supervise the winding up of the affairs of
the corporation.
228
Corporation Law
Right to Appeal Not Extinguished
2. METHODS OF LIQUIDATION
Although the cancellation of a corporation's
certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code (now
Sec. 139, RCC), however provides that a corporation
whose corporate existence is terminated in any
manner continues to be a body corporate for three
(3) years after its dissolution for purposes of
prosecuting and defending suits by and against it
and to enable it to settle and close its affairs.
Moreover, the rights of a corporation, which is
dissolved pending litigation, are accorded
protection by law pursuant to Sec. 145 of the
Corporation Code (now Sec. 184, RCC) (Paramount
Insurance Corp. v. A.C. Ordonez Corp., G.R. No.
175109, 06 Aug. 2008)
Liquidation
Liquidation is the process of settling the affairs of
the corporation after its dissolution. This consists
of: (1) collection of all that is due the corporation,
(2) the settlement and adjustment of claims against
it, and (3) the payment of its debts and (4) the
distribution of the remaining assets, if any among
the stockholders thereof in accordance with their
contracts, or if there be no special contract, on the
basis of their respective interests. The manner of
liquidation or winding up may be provided for in the
corporate bylaws and this would prevail unless it is
inconsistent with law. (Divina, 2020)
Methods of Liquidation
1.
2.
3.
4.
Liquidation NOT Necessary in Dissolution by
Merger or Consolidation
By the corporation itself; (Sec. 139, RCC)
By the trustee appointed by the corporation;
(Sec. 139, RCC)
By the Receiver appointed by SEC; (Sec. 135,
RCC)
By liquidation after three years. (Sec. 25, FRIA)
In case of merger or consolidation, the surviving or
the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
all receivables due on whatever account, including
subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to,
or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving
or consolidated corporation without further act or
deed.
Approval of the SEC is NOT Required for
Liquidation and Distribution
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee. (SEC Opinion, July 23,
1996)
The separate existence of the constituent
corporations shall cease, except that of the surviving
or the consolidated corporation. (Sec. 79, RCC)
Suits Brought Against Corporation Within the
Three-Year Period But Remain Pending
Distribution of Assets Prior to Dissolution
Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
The creditors of the corporation who were not paid
within the 3-year period may follow the property of
the corporation that may have passed to its
stockholders unless barred by prescription or
laches or disposition of said property in favor of a
purchaser in good faith.
GR: No corporation shall distribute any of its assets
or property except upon lawful dissolution and after
payment of all its debts and liabilities. (Sec. 139,
RCC)
XPNs:
1. Decrease of capital stock; (Sec. 37, RCC)
2. Redemption of redeemable shares; (Sec. 8,
RCC)
229
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
3.
4.
5.
6.
NOTE: A corporation’s board of directors is not
rendered functus officio by its dissolution. Since Sec.
122 (now Sec. 139, RCC) allows a corporation to
continue its existence for a limited purpose,
necessarily there must be a board that will continue
acting for and on behalf of the dissolved corporation
for that purpose. In fact, Sec. 122 (now Sec. 139,
RCC) authorizes the dissolved corporation’s board
of directors to conduct its liquidation within three
years from its dissolution. Jurisprudence has even
recognized the board’s authority to act as trustee for
persons in interest beyond the said three-year
period. Thus, the determination of which group is
the bona fide or rightful board of the dissolved
corporation will still provide practical relief to the
parties involved. (Aguirre v. FQB+7 Inc., G.R. No.
170770, 09 Jan. 2013)
Acquisition of own shares, provided that the
corporation has unrestricted retained
earnings; (Sec. 41, RCC)
Declaration of dividends out of the
unrestricted retained earnings; (Sec. 42, RCC)
Purchase of shares of any stockholder upon
order of the SEC in case of deadlocks in a close
corporation; (Sec. 103, RCC) and
Withdrawal of a stockholder in a close
corporation. (Sec. 104, RCC)
Order of Distribution of Assets in Case of
Liquidation
The assets of the corporation shall be used to pay off
the claims of various creditors based on the law on
concurrence and preference of credit. The residual
assets shall then be distributed to the holders of the
preferred shares of stock, if any, then to the holders
of common shares based on their agreement, if any,
otherwise, in proportion to their respective
shareholdings in the corporation.
Liquidation by Conveyance to a Trustee Within a
Three-Year Period
At any time during the three-year period for
liquidation, said corporation is authorized and
empowered to convey all of its property to trustees
for the benefit of its stockholders, members,
creditors and other persons in interest.
NOTE: SEC approval is not required in the approval
of the distribution or liquidation of the assets of the
dissolved corporation. This falls within the
authority of the directors and stockholders or the
duly appointed trustee or receiver.
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. (Sec. 139(2), RCC)
Any asset distributable to the creditor or
stockholder or member who is unknown or cannot
be found shall be escheated in favor of the national
government. (Divina, 2020)
Liquidation by the Corporation Itself
Meaning of Trustee
Every corporation whose charter expires pursuant
to its AOI, is annulled by forfeiture, or whose
corporate existence is terminated in any other
manner, shall nevertheless remain as a body
corporate for three (3) years after the effective date
of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to
settle and close its affairs, dispose of and convey its
property, and distribute its assets, but not for the
purpose of continuing the business for which it
was established. The period of liquidation is three
(3) years. (Sec. 139, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The word “trustee” as used in the law must be
understood in its general concept which could
include the counsel to whom the prosecution of the
suit filed by the corporation was entrusted. The
purpose in the transfer of the assets of the
corporation to a trustee upon its dissolution is more
for the protection of its creditors and stockholders.
The appointment of said counsel can be considered
a substantial compliance. (Gelano v. CA, G.R. No. L39050, 24 Feb. 1981)
230
Corporation Law
Suits Brought By Corporation Within the ThreeYear Period But Remain Pending After Period
as a corporation. One of these rights, to be sure,
includes the UCC’s right to seek from the court the
execution of a valid and final judgment in Civil Case
No. 9165 – through its trustee/liquidator
Encarnacion Gonzales Wong – for the benefit of its
stockholders, creditors and any other person who
may have legal claims against it. To hold otherwise
would be to allow petitioners to unjustly enrich
themselves at the expense of UCC. (Knecht v. United
Cigarette Corp., G.R. No. 139370, 04 July 2002)
A corporation may, during the three-year term,
appoint a trustee or a receiver who may act beyond
that period. The termination of the life of a juridical
entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity
nor those of its owners and creditors. If the threeyear extended life has expired without a trustee or
receiver. having been expressly designated by the
corporation within that period, the board of
directors (or trustees) itself, following the rationale
of the Supreme Court's decision in Gelano vs. CA may
be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
Still in the absence of a board of directors or
trustees, those having any pecuniary interest in the
assets, including not only the shareholders but
likewise the creditors of the corporation, acting for
and in its behalf, might make proper
representations with the Securities and Exchange
commission, which has primary and sufficiently
broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate
concerns. (Clemente v. CA, G.R. No. 82407, 27 March
1995)
Q: The corporation, once dissolved, thereafter
continues to be a body corporate for three years
for purposes of prosecuting and defending suits
by and against it and of enabling it to settle and
close its affairs, culminating in the final
disposition and distribution of its remaining
assets. If the 3-year extended life expires
without a trustee or receiver being designated
by the corporation within that period and by
that time (expiry of the 3-year extended term),
the corporate liquidation is not yet over, how, if
at all, can a final settlement of the corporate
affairs be made? (1997 BAR)
A: The liquidation can continue with the winding up.
The members of the BOD can continue with the
winding of the corporate affairs until final
liquidation. They can act as trustees or receivers for
this purpose.
Suits Brought By Corporation Beyond ThreeYear Period Not Barred
Where no receiver or trustee has been designated
after dissolution:
The trustee (of a dissolved corporation) may
commence a suit which can proceed to final
judgment even beyond the three-year period (of
liquidation) x x x, no reason can be conceived
why a suit already commenced by the
corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the
legal personality of the dissolved corporation,
should not be accorded similar treatment – to
proceed to final judgment and execution
thereof.
1.
2.
3.
Indeed, the rights of a corporation (dissolved
pending litigation) are accorded protection by law.
This is clear from Sec. 145 of the Corporation Code
(now Sec. 184, RCC). The dissolution of UCC itself, or
the expiration of its three-year liquidation period,
should not be a bar to the enforcement of its rights
4.
231
The board of directors or trustees itself may be
permitted to so continue as “trustees” by legal
implication;
In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets,
stockholders, or creditors, may make a proper
representations with SEC for working out a final
settlement of the corporate concerns; (Clemente
v. CA, G.R. No. 82407, 27 Mar. 1995)
The only surviving stockholder or director;
(SEC Opinion No. 10-96, 29 Jan. 2010) or
The counsel who prosecuted and defended the
interest of the corporation. (Reburiano v. CA,
G.R. No. 102965, 21 Jan. 1999)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Liquidation by a Management Committee or
Rehabilitation Receiver
corporation now pertains to the appropriate
regional trial courts. This is the correct procedure
because the liquidation of a corporation requires
the settlement of claims for and against the
corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is
in the best position to convene all the creditors of
the corporation, ascertain their claims, and
determine their preferences.
In the case of a dissolution order where creditors
are affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation. (Sec.
135, RCC)
Appointment of Receiver for Going Corporation
It should be noted that the power of the SEC to
appoint a receiver existed even under the OCC and
retained under the RCC despite the ruling in BPI v.
Eduardo Hong. It is submitted that the receiver may
carry out the liquidation of the corporation if the
creditors and the corporation are able to agree
among themselves on how the creditors’ claims
shall be satisfied. Otherwise, the RTC should carry
out the liquidation process. (Divina, 2020)
The appointment of a receiver for a going
corporation is a last resort remedy and should not
be employed when another remedy is
available. Relief by receivership is an extraordinary
remedy and is never exercised if there is an
adequate remedy at law or if the harm can be
prevented by an injunction or a restraining
order. Bad judgment by directors, or even
unauthorized use and misapplication of the
company’s funds, will not justify the appointment of
a receiver for the corporation if appropriate relief
can otherwise be had. (Rev. Ao-As v. CA, G.R. No.
128464, 20 June 2006)
Prohibition Against Condonation
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership. The appointment of a
receiver operates to suspend the authority of a
corporation and of its directors and officers over its
property and effects, such authority being reposed
in the receiver. (Yam v. CA, G.R. No. 104726, 11 Feb.
1999)
Under Sec. 135 of the RCC, the SEC shall proceed to
hear the petition (filed by a corporation where
creditors are affected) and try any issue raised in
the objections filed; and if no such objection is
sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its
assets as justice requires and may appoint a receiver
to collect such assets and pay the debts of the
corporation.
Q: ASB Realty, being the owner of the property
by virtue of a Deed of Assignment, entered a
Contract of Lease with Leonardo Umale. Upon
expiration of the contract, Umale continued
occupying the premises. ASB Realty served
Umale a Notice of Termination of Lease and
Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
his arrears. Thus, ASB Realty filed an unlawful
detainer case againt Umale.
The receiver represents the SEC, as well as the
stockholders and creditors. The receiver is not
bound by the three-year liquidation period.
The appointment of a receiver operates to suspend
the authority of a corporation and its directors and
officers over its property and effects, such authority
being reposed in the receiver. Thus, a corporate
officer had no authority to condone a debt.
Umale admitted occupying the property but
challenged the personality of ASB Realty to sue
and recover the property. He claimed that ASB
Realty being placed under receivership, it is the
rehabilitation receiver that has the power to
take possession, control, and custody of the
assets under the Interim Rules of Procedure on
In BPI v. Eduardo Hong (G.R. No. 161771, 15 Feb.
2012), the Supreme Court held, however, that while
the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
232
Corporation Law
Corporate Rehabilitation. Can ASB Realty, a
corporation under rehabilitation, sue in its own
name and recover property unlawfully
withheld?
H. OTHER CORPORATIONS
1. CLOSE CORPORATION
A: YES. Being placed under corporate rehabilitation
and having a receiver appointed to carry out the
rehabilitation plan do not ipso facto deprive a
corporation and its corporate officers of the power
to recover its unlawfully detained property.
Rehabilitation is for effecting a feasible and viable
rehabilitation by preserving a floundering business
as a going concern. This concept of preserving the
corporation’s business as a going concern while it is
undergoing rehabilitation is called debtor-inpossession or debtor-in-place wherein the debtor
corporation remains in control of its business and
properties, subject only to the monitoring of the
appointed rehabilitation receiver. The receiver
does not take over the control and management of
the debtor corporation being tasked only to monitor
the successful implementation of the rehabilitation
plan. (Umale v. ASB Realty Corporation, G.R. No.
181126, 15 June 2011)
Characteristics of a Close Corporation
The principal characteristics of close corporations
are the following:
1.
2.
3.
4.
5.
6.
7.
8.
233
The business of the corporation may be
managed by the stockholders of the corporation
rather than by a board of directors.
If the corporation is classified as a close
corporation, a board resolution authorizing the
sale or mortgage of the corporate property is
not necessary to bind the corporation for the
action of its president.
Quorum may be greater than a mere majority.
Transfers of stocks to others which would
increase the number of stockholders to more
than the maximum are invalid.
Corporate actions may be binding even without
a formal board meeting, if the director had
knowledge or ratified the informal action of the
others, unless after having knowledge thereof,
the director promptly files his written objection
with the secretary of the corporation.
Pre-emptive right extends to all stocks issued,
including re-issuance of treasury shares,
whether for money or for property or personal
services, or in payment of corporate debts,
unless the AOI provide otherwise.
Deadlocks in the board may be settled by the
SEC, on written petition by any stockholder.
A stockholder may withdraw for any reason and
avail himself of his right of appraisal when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock. (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Validity of Restrictions on Transfer of Shares
3.
Restrictions on the right to transfer shares must:
1.
2.
Appear in:
a. The articles of incorporation;
b. In the by-laws; and
c. In the certificate of stock;
NOTE: Otherwise, the same shall not be binding
on any purchaser in good faith.
4.
Said restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated. 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 their shares to any third
person. (Sec. 97, RCC)
Effects of Issuance or Transfer of Stock in Breach
of Qualifying Conditions
2.
NOTE: “Transfer” is not limited to a transfer for
value.
If a stock of a close corporation is issued or
transferred to any person who is not eligible
thereof under any provision of the AOI, and if
the certificate for such stock conspicuously
shows the qualifications of the persons entitled
to be holders of record thereof, such person is
conclusively presumed to have notice of the fact
of the ineligibility to be a stockholder.
The provisions of Sec. 98 shall not impair any right
which the transferee may have to either rescind the
transfer or recover the stock under any express or
implied warranty. (Sec. 98, RCC)
Effects When Board Meeting is Unnecessary or
Improperly Held
If the AOI of a close corporation states the
number of persons, not exceeding twenty (20),
who are entitled to be stockholders of record,
and if the certificate for such stock
conspicuously states such number, and the
issuance or transfer of stock to any person
would cause the stock to be held by more than
such number of persons, the person to whom
such stock is issued or transferred is
conclusively presumed to have notice of this
fact.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Whenever a person to whom stock of a close
corporation has been issued or transferred has,
or is conclusively presumed under this section
to have notice of: (1) the person’s ineligibility to
be a stockholder of the corporation, or (2) that
the transfer of stock would cause the stock of
the corporation to be held by more than the
number of persons permitted under its AOI; or
(3) that the transfer violates a restriction on
transfer of stock, and the corporation may, at its
option, refuse to register the transfer in the
name of the transferee.
NOTE: The provisions under par. 4 shall not be
applicable if the transfer of stock, though contrary
to par. 1-3, has been consented to by all the
stockholders of the close corporation, or if the close
corporation has amended its AOI.
NOTE: The above describes a Right of First Refusal.
1.
If a stock certificate of a close corporation
conspicuously shows a restriction on transfer of
the corporation’s stock and the transferee
acquires the stock in violation of such
restriction, the transferee is conclusively
presumed to have notice of the fact that the
stock was acquired in violation of the
restriction.
Unless the by-laws provide otherwise, any action
taken by the directors of a close corporation without
a meeting called properly and with due notice shall
nevertheless be deemed valid if:
1.
2.
234
Before or after such action is taken, written
consent thereto is signed by all the directors;
All the stockholders have actual or implied
knowledge of the action and make no prompt
objection in writing;
Corporation Law
3.
4.
the power to arbitrate the dispute. (Sec. 103, RCC)
The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or
All the directors have express or implied
knowledge of the action in question and none of
them makes a prompt objection in writing. (Sec.
100, RCC)
Appropriate Orders of the SEC in case of
Deadlocks
In the exercise of its power to arbitrate in case of
deadlock, the SEC shall have authority to make
appropriate orders, such as:
NOTE: An action within the corporate powers taken
at a meeting held without proper call or notice, is
deemed ratified by a director who failed to attend,
unless after having knowledge thereof, the director
promptly files his written objection with the
secretary of the corporation. (Ibid.)
1.
2.
Pre-Emptive Right in Close Corporations
3.
The preemptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property, or personal services, or in
payment of corporate debts, unless the AOI provide
otherwise. (Sec. 101, RCC)
4.
Amendment of AOI
5.
6.
7.
Any amendment to the AOI which seeks to delete or
remove any provision required by this Title or to
reduce a quorum or voting requirement stated in
said AOI shall require the affirmative vote of at least
two-thirds (2/3) of the OCS, whether with or
without voting rights, or of such greater proportion
of shares as may be specifically provided in the AOI
for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the
purpose. (Sec. 102, RCC)
Cancelling or altering any provision contained
in the AOI, bylaws, or any stockholder’s
agreement;
Cancelling, altering, or enjoining a resolution
or act of the corporation or its board of
directors, stockholders, or officers;
Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons party
to the action;
Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or
by the other stockholders;
Appointing a provisional director;
Dissolving the corporation; or
Granting such other relief as the circumstances
may warrant. (Ibid.)
Provisional Director
A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates,
and whose further qualifications, if any, may be
determined by the Commission. (Ibid.)
Power to Arbitrate in case of a Deadlock
A provisional director is not a receiver of the
corporation and does not have the title and powers
of a custodian or receiver. (Ibid.)
Notwithstanding any contrary provision in the close
corporation’s AOI, bylaws, or stockholders’
agreement, if the directors or stockholders are so
divided on the management of the corporation’s
business and affairs that the votes required for a
corporate action cannot be obtained, with the
consequence that the business and affairs of the
corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC,
upon written petition by any stockholder, shall have
A provisional director shall have all the rights and
powers of a duly elected director, including the right
to be notified of and to vote at meetings of directors
until removed by order of the Commission or by all
the stockholders. (Ibid.)
235
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Compensation of Provisional Director
The compensation of the provisional director shall
be determined by agreement between such director
and the corporation, subject to approval of the
Commission, which may fix the compensation
absent an agreement or in the event of
disagreement between the provisional director and
the corporation. (Ibid.)
5.
6.
2. NON-STOCK CORPORATION
Non-Stock Corporation
One where no part of its income is distributable as
dividends to its members, trustees, or officers. Any
profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be
used in furtherance of the purpose or purposes for
which it was organized. (Sec. 86, RCC)
7.
Nonstock corporations may be formed or organized
for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination
thereof, subject to the special provisions of Title XI
of the RCC governing particular classes of nonstock
corporations. (Sec. 87, RCC)
2.
3.
4.
It does not have capital stock divided into
shares;
No part of its income during its existence is
distributable as dividends to its members,
trustees, or officers;
Any profit which it obtains incidental to its
operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which it was
organized, subject to the provisions of Title XII
of the RCC; (Sec. 86, RCC)
The provisions of specific provisions of the RCC
to the contrary notwithstanding, nonstock, or
special corporations may, through their AOI or
their bylaws, designate their governing boards
by any name other than as board of trustees;
(Sec. 174, RCC)
The bylaws may provide that the members of a
nonstock corporation may hold their regular or
special meetings at any place even outside the
place where the principal office of the
corporation is located: Provided, That proper
notice is sent to all members indicating the date,
time and place of the meeting: Provided,
further, That the place of meeting shall be
within Philippine territory; (Sec. 92, RCC)
In 2003, the Board voted to remove Barayuga as
president. This prompted Barayuga to file a
petition for injunction with damages against
AUP, contending among others, that the Board
relieved him of the presidency without valid
grounds despite his five-year term. The RTC
ruled in favor of Barayuga. The CA, on the other
hand, ruled in favor of AUP.
Membership in a nonstock corporation and all
rights arising therefrom are personal and nonUNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The right of the members of any class or classes
to vote may be limited, broadened, or denied to
the extent specified in the AOI or the bylaws.
Unless so limited, broadened, or denied, each
member, regardless of class, shall be entitled to
one; (Sec. 88, RCC)
Q: Adventist University of the Philippines (AUP)
is a non-stock, non-profit educational
institution. Petonillo Barayuga was appointed
by the AUP’s Board of Trustees as its President
in 2001. AUP subsequently amended its By-Laws
to state that members of the Board of Trustees
were to serve a term of office of only two years;
and the officers, who included the President,
were to be elected from among the members of
the Board of Trustees during their
organizational meeting, which was held during
the election of the Board of Trustees every two
years.
Characteristics of Non-Stock Corporation
1.
transferable, unless the AOI or the bylaws
otherwise provide. (Sec. 89, RCC)
236
Corporation Law
Can an officer-elect of a non-stock educational
corporation occupying a hold-over capacity be
removed without cause upon the appointment
of his or her successor?
A: YES. For institutions organized as stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.
The second paragraph of Sec. 108 (now Sec. 106,
RCC), although setting the term of the members of
the Board of Trustees at five years, contains a
proviso expressly subjecting the duration to what is
otherwise provided in the AOI or by-laws of the
educational corporation. That contrary provision
controls on the term of office.
In AUP's case, its amended By-Laws provided the
term of the members of the Board of Trustees, and
the period within which to elect the officers. In light
of foregoing, the members of the Board of Trustees
were to serve a term of office of only two years; and
the officers, who included the President, were to be
elected from among the members of the Board of
Trustees during their organizational meeting, which
was held during the election of the Board of
Trustees every two years. Naturally, the officers,
including the President, were to exercise the powers
vested by Section 2 of the amended By-Laws for a
term of only two years, not five years.
Ineluctably, the petitioner, could serve for only two
years. By the time of his removal for cause as
President, he was already occupying the office in a
hold-over capacity, and could be removed at any
time, without cause, upon the election or
appointment of his successor. His insistence on
holding on to the office was untenable, therefore,
and with more reason when one considers that his
removal was due to the loss of confidence on the
part of the Board of Trustees. (Barayuga v. Adventist
University of the Philippines, G.R. No. 168008, 17 Aug.
2011)
237
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Stock Corporation vs. Non-stock Corporation
STOCK CORPORATION
NON-STOCK CORPORATION
Existence of Capital Stock
No capital stock.
Has capital stock divided into shares. (Sec. 3, RCC)
Non-stock corporations only have contributions or
donations.
Purpose
Organized for profit.
Not organized for profit.
Distribution of Profit
Profits are distributed to the stockholders through
dividends. (Sec. 3, RCC)
Profits are not distributed to members. Any profit
earned by the non-stock corporation is used for the
furtherance of the purpose or purposes for which it
was organized. (Sec. 86, RCC)
Number of Directors or Trustees
May or may not be more than fifteen (15) (Sec. 91,
RCC)
One (1) in the case of OPC, two to fifteen (2-15) in the
case of Ordinary Stock Corporations. (Sec. 121, 13,
RCC)
XPN: Banks (in case of merger or consolidation)
which can have a maximum of 21 directors.
XPNs:
Non-stock educational institutions – not be less than
five (5) nor more than fifteen (15): Provided, That the
number of trustees shall be in multiples of five (5).
(Sec. 106, RCC)
Religious Societies – not less than five (5) nor more
than fifteen (15) (Sec. 114, RCC)
Term of Office of the Board of Directors / Trustees
Term of one year until their successors are elected
and qualified, subject to the provisions of AOI and Bylaws. (Sec. 22, RCC)
Shall hold office for not more than three (3) years
until their successors are elected and qualified. (Sec.
22 and 91, RCC)
Election of Officers
Officers are elected by the BOD .
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Unless otherwise provided in the AOI or the bylaws,
the members may directly elect officers of a nonstock
corporation. (Sec. 91, RCC)
238
Corporation Law
Place of Meeting
Stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal office
of the corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where the
principal office of the corporation is located. (Sec. 50,
RCC)
The bylaws may provide that the members of a
nonstock corporation may hold their regular or
special meetings at any place even outside the place
where the principal office of the corporation is
located: Provided, That proper notice is sent to all
members indicating the date, time and place of the
meeting: Provided, further, That the place of meeting
shall be within Philippine territory. (Sec. 92, RCC)
Right to Vote
Stockholders can resort to cumulative voting. (Sec. 23,
RCC)
Only preferred and redeemable shares can be denied
the right to vote, but will still be entitled to vote in the
8 instances provided in in Sec. 6.
Unless otherwise provided in the AOI or in the bylaws,
members of nonstock corporations may cast as many
votes as there are trustees to be elected but may not
cast more than one (1) vote for one (1) candidate.
(Sec. 23, RCC)
The right of the members of any class or classes to
vote may be limited, broadened, or denied to the
extent specified in the AOI or the bylaws. Unless so
limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.
(Sec. 88, RCC)
Transferability of Shares/ Membership
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney infact, or any other person legally authorized to make
the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is
recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates,
and the number of shares transferred. No shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
corporation. (Sec. 62, RCC)
Membership in a nonstock corporation and all rights
arising therefrom are personal and non-transferable,
unless the AOI or the bylaws otherwise provide. (Sec.
89, RCC)
239
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Right to Expel Members
Stockholders may be expelled only for grounds
provided by law.
Membership shall be terminated in the manner and
for the causes provided in the AOI or the bylaws.
Termination of membership shall extinguish all rights
of a member in the corporation or in its property,
unless otherwise provided in the AOI or the bylaws.
(Sec. 90, RCC)
Distribution of Assets in case of Dissolution
Assets of stock corporation shall be distributed in the
following order:
1.
2.
3.
Payment of claims of creditors who are not
stockholders (based on preference of credit);
Payment of claims of stockholders as creditors;
Residual balance is distributed proportionately
to preferred shares, if any, then to common
stock.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The assets of a nonstock corporation undergoing the
process of dissolution for reasons other than those set
forth in Sec. 139 of the RCC, shall be applied and
distributed as follows: (a) All liabilities and
obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made
therefor; (b) 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; (c)
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
(1) or more corporations, societies or organizations
engaged in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant
to the Chapter II, Title XI of the RCC,; (d) Assets other
than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the
provisions of the AOI or the bylaws, to the extent that
the AOI or the bylaws determine the distributive
rights of members, or any class or classes of members,
or provide for distribution; and (e) In any other case,
assets may be distributed to such persons, societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a plan of
distribution adopted pursuant to Chapter II, Title XI
of the RCC. (Sec. 93, RCC)
240
Corporation Law
Termination of Membership
Political Purpose Not Allowed
1.
Political purpose is not included on the purposes for
which a non-stock corporation may be established.
SEC may reject the AOI if the purpose of the
corporation is to engage in election campaign or
partisan political activity. (SEC Opinion, 10 Apr.
1985)
Membership shall be terminated in the manner
and for the causes provided in the AOI or the
bylaws. Termination of membership shall
extinguish all rights of a member in the
corporation or in its property, unless otherwise
provided in the AOI or the bylaws. (Sec. 90, RCC)
Example: Membership in a golf club where the
purchase of the share is a sine qua non. (Valley
Golf & Country Club Inc. v. Caram, G.R. No.
158805, 16 Apr. 2009)
2.
Rule on Offsetting Unused Contributions Against
Balance of Receivables
The unused contributions of members cannot be
offset against the balance of receivables because
this would amount to distribution of the capital of
the
corporation.
Members
of
non-stock
corporations are not entitled to distribution of
capital. They are only entitled to distribution of
capital upon dissolution when it is provided for in
the AOI or by-laws. (SEC Opinion, Nov. 27, 1985)
Non-payment of dues may be a ground for
termination or suspension of membership. The
AOI or the by-laws of a non-stock corporation
may provide that unpaid dues shall constitute a
lien on the member’s share. (Calatagan Golf
Club, Inc. v. Clemente, Jr., G.R. No. 165443, 16 Apr.
2009);
3. FOREIGN CORPORATIONS
NOTE: The procedure in Sec. 68 of the
Corporation Code (now Sec. 67, RCC) does not
apply if the membership shares are sold under
the provisions that provide for the constitution
of lien, as said section refers to delinquency sale
arising from unpaid subscription.
3.
A foreign corporation is:
1.
2.
For the termination of membership to be valid,
there should be reasonable notice to the
member concerned and he must be given a fair
opportunity to be heard in his defense;
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. (Sec. 140, RCC)
NOTE: The second requirement refers to Principle
of Reciprocity
Membership in and all rights arising from a
non-stock corporation are personal and nontransferable, unless the AOI or the by-laws of
the corporation provide otherwise. Deceased
members who are dropped from the
membership roster in the manner and for the
cause provided for in the by-laws are not to be
counted in determining the requisite vote in
corporate matters or the requisite quorum for
the annual member’s meeting. (Tan v. Sycip, G.R.
No. 153468, 17 Aug. 2006)
Jurisdiction over Foreign Corporation
241
IF THE FOREIGN
IF THE FOREIGN
CORPORATION IS
CORPORATION IS
THE PLAINTIFF
THE DEFENDANT
1. Voluntary
1. GR:
Voluntary
appearance before
appearance of the
the local courts by
corporation
by
the filing of an
interposing
a
action by a licensed
defense.
corporation.
XPN:
A
special
2. If
the
foreign
appearance to file a
corporation is a comotion to dismiss
plaintiff with a
based on lack of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
RCC and a certificate of authority from the
appropriate government agency. (Sec. 140, RCC)
domestic
jurisdiction.
corporation
and
latter later filed a 2. Service of summons
suit here in the
to
a
foreign
Philippines.
corporation which
has
transacted
business in the
Philippines whether
licensed
or
registered.
Bases of Jurisdiction
a. WHAT CONSTITUTES “DOING BUSINESS”
Q: When is a foreign corporation deemed to be
“doing business in the Philippines?” (1998, 2016
BAR)
A: Under the Foreign Investment Act of 1991 (R.A.
No. 7402),the phrase “doing business” shall include
soliciting orders, service contracts, opening offices,
whether called “liaison” offices or branches;
appointing
representatives
or
distributors
domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
totaling one hundred eighty (180) days or more;
participating in the management, supervision or
control of any domestic business, firm, entity or
corporation in the Philippines; and 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, and in
progressive prosecution of, commercial gain or of
the purpose and object of the business organization
3. Service of summons
to its resident agent
in
an
isolated
transaction.
The following are the two bases of authority
(jurisdiction) over foreign corporations:
1.
2.
A corporation may give actual consent to
judicial jurisdiction manifested normally by
compliance with the State’s foreign corporation
qualification
requirements
(licensing
requirements and other requisites to lawfully
transact business in the Philippines); and
Provided, however, That the phrase “doing business”
shall not be deemed to include mere investment as
a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests
in such corporation; nor appointing a
representative or distributor domiciled in the
Philippines which transacts business in its own
name and for its own account.
A corporation, even though not qualified (not
licensed), by engaging in sufficient activity
(doing business) within the State, established
judicial jurisdiction over the foreign
corporation. (Foreign Corporations: The
Interrelation of Jurisdiction and Qualification,
Indiana Law Journal, Art. 4, Vol. 33, Issue 3,
retrieved on 29 Apr. 2013)
Consent
Q: When is a foreign corporation deemed doing
business in the Philippines?
Through compliance with the Philippines’ legal
requirements to lawfully engage in business within
the country’s territory, the foreign corporation
gives its actual consent to be subjected to the
jurisdiction of the Philippines. (Ibid.)
A: The term “doing business” is not specifically
defined by the OCC and the RCC. There are certain
activities, however, which are deemed as doing
business under R.A. No. 7042, otherwise known as
the Foreign Investments Act of 1991 (“FIA”). Under
the FIA, doing business shall include:
Foreign Corporations shall have the right to transact
business in the Philippines after obtaining a
license for that purpose in accordance with the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
242
Corporation Law
a.
b.
c.
d.
e.
f.
constitute “minimum contacts” for jurisdictional
purposes.
Soliciting orders;
Service contracts;
Opening offices, whether called “liaison” offices
or branches;
Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period or
periods totaling 180 days or more;
Participating in the management, supervision
or control of any domestic business, firm, entity,
or corporation in the Philippines; and
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, and in
progressive prosecution of, commercial gain or
of the purpose and object of the business
organization.
The Sliding Scale Test is based on the premise that
“the likelihood that ‘personal jurisdiction’ can be
constitutionally exercised is directly proportionate
to the nature and quantity of commercial activity
that an entity conducts over the internet.”
At one end of the scale are “passive” websites, which
alone generally do not generate sufficient contacts
with a foreign state to establish personal
jurisdiction since they are only used to post
information therein.
At the other end of the scale are “active” websites,
which generate sufficient business over the internet
to establish personal jurisdiction.
“Interactive” websites fall in the center of the scale
since they are hybrid sites that contain elements of
both passive and active websites, and courts
determine whether to exercise personal jurisdiction
over the interactive website owner on a case-bycase basis. (Divina, 2020)
Twin Characterization Test
Under this test, a foreign corporation is considered
to be “doing business” in the Philippines when:
a.
b.
The foreign corporation is maintaining or
continuing in the Philippines 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.
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing
business in the Philippines? (2002 BAR)
A: The test is whether or not the unlicensed foreign
corporation has performed an 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, and in
progressive prosecution of, commercial gain or of
the purpose and object of the business corporation.
The foreign corporation is engaged in activities
which necessarily imply “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.” (Divina, 2020, citing
Mentholatum Co. Inc. v. Mangaliman, G.R. No. L47701, 27 June 1941)
Q: Steelcase is a foreign corporation existing
under the laws of Michigan, USA, and engaged in
the manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Sliding Scale Test
Currently, most courts in the United States apply a
Sliding Scale Test tailored to internet activities to
determine the level or types of activities that will
Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase
granted DISI the right to market, sell, distribute,
243
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
install, and service its products to end-user
customers within the Philippines. The business
relationship continued smoothly until it was
terminated after the agreement was breached
with neither party admitting any fault. Steelcase
filed a complaint for sum of money against DISI
alleging, among others, that DISI had an unpaid
account of US$600,000.00.
companies, acting in its own name and for its own
account. (Steel Case v. Design International
Selections, Inc., G.R. No. 171995, 18 Apr. 2012)
b. NECESSITY OF A LICENSE TO DO BUSINESS
It was never the intent of the legislature to bar court
access to a foreign corporation or entity which
happens to obtain an isolated order for business in
the Philippines. Neither, did it intend to shield
debtors from their legitimate liabilities or
obligations. But it cannot allow foreign corporations
or entities which conduct regular business any
access to courts without the fulfillment by such
corporations of the necessary requisites to be
subjected to our government’s regulation and
authority. By securing a license, the foreign entity
would be giving assurance that it will abide by the
decisions of our courts, even if adverse to it. By
securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the
foreign entity would be giving assurance that it will
abide by the decisions of our courts, even if adverse
to it. (Eriks PTE, Ltd. v. CA, GR 118843, 06 Feb. 1997)
DISI alleged that the complaint failed to state a
cause of action and to contain the required
allegations on Steelcase’s capacity to sue in
the Philippines despite the fact that Steelcase
was doing business in the Philippines without
the required license to do so. Consequently, it
posited that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to
sue in Philippine courts. Is Steelcase doing
business in the Philippines without the required
license?
A: NO. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing
business” unless it is under the full control of the
foreign corporation. If the distributor is an
independent entity which buys and distributes
products, other than those of the foreign
corporation, for its own name and its own account,
the latter cannot be considered to be doing business
in the Philippines. It should be kept in mind that the
determination of whether a foreign corporation is
doing business in the Philippines must be judged in
light of the attendant circumstances.
Corporation Engaged in Exporting Goods to the
Philippines NOT Required to Obtain License
To be doing or "transacting business in the
Philippines" for purposes of Sec. 133 of the
Corporation Code (now, Sec. 150, RCC), the foreign
corporation must actually transact business in the
Philippines, that is, perform specific business
transactions within the Philippine territory on a
continuing basis in its own name and for its own
account. Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign
corporation to secure a Philippine business license.
If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no
jurisdiction to require such foreign corporation to
secure a Philippine business license. (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R.
No. 147905, 28 May 2007)
It is undisputed that DISI was founded in 1979 and
is independently owned and managed by the
spouses Leandro and Josephine Bantug. In addition
to Steelcase products, DISI also distributed products
of other companies including carpet tiles,
relocatable walls, and theater settings. The
dealership agreement between Steelcase and DISI
had been described by the owner himself as a buyand-sell arrangement. This clearly belies DISI’s
assertion that it was a mere conduit through which
Steelcase conducted its business in the
country. From the preceding facts, the only
reasonable conclusion that can be reached is that
DISI was an independent contractor, distributing
various products of Steelcase and of other
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
244
Corporation Law
Q: Cargill is a corporation organized and existing
under the laws of the State of Delaware, United
States of America. Cargill and Northern
Mindanao Corporation (NMC) executed a
contract whereby NMC agreed to sell to Cargill
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended
contract required NMC to put up a performance
bond which represents the value of 10,500
metric tons of molasses. The performance bond
was intended to guarantee NMC’s performance
to deliver the molasses during the prescribed
shipment periods according to the terms of the
amended contract.
specific commercial act within the territory of the
importing country. Without jurisdiction over the
foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
business in the importing country.
In this case, the contract between Cargill and NMC
involved the purchase of molasses by petitioner
from NMC. It was NMC, the domestic corporation,
which derived income from the transaction and not
Cargill. To constitute "doing business," the activity
undertaken in the Philippines should involve profitmaking. Besides, under Sec. 3(d) of RA 7042,
"soliciting purchases" has been deleted from the
enumeration of acts or activities which constitute
"doing business."
In compliance with the terms of the third
amendment of the contract, respondent Intra
Strata Assurance Corporation (Intra Strata)
issued
a
performance
bond
to
guarantee NMC’s delivery of the 10,500 tons of
molasses, and a surety bond. NMC was only able
to deliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, Cargill sent
demand letters to NMC claiming payment under
the performance and surety bonds. When NMC
refused to pay, Cargill filed a complaint for sum
of money against NMC and Intra Strata. Does
Cargill, an unlicensed foreign corporation, have
legal capacity to sue before Philippine courts?
Other factors which support the finding that
petitioner is not doing business in the Philippines
are: (1) Cargill does not have an office in the
Philippines; (2) Cargill imports products from the
Philippines through its non-exclusive local broker,
whose authority to act on behalf of petitioner is
limited to soliciting purchases of products from
suppliers engaged in the sugar trade in the
Philippines; and (3) the local broker is an
independent contractor and not an agent of
petitioner.
In the present case, Cargill is a foreign company
merely importing molasses from a Philippine
exporter. A foreign company that merely imports
goods from a Philippine exporter, without opening
an office or appointing an agent in the Philippines, is
not doing business in the Philippines. (Cargill,
Inc., vs. Intra Strata Assurance Corp., G.R. No. 168266,
15 Mar. 2010)
A: YES. It has the capacity to sue. In this case, Cargill
and NMC amended their contract three times to give
a chance to NMC to deliver to Cargill the molasses,
considering that NMC already received the
minimum price of the contract. There is no showing
that the transactions between Cargill and NMC
signify the intent of Cargill to establish a continuous
business or extend its operations in the Philippines.
An exporter in one country may export its products
to many foreign importing countries without
performing in the importing countries specific
commercial acts that would constitute doing
business in the importing countries. The mere act of
exporting from one’s own country, without doing
any specific commercial act within the territory of
the importing country, cannot be deemed as doing
business in the importing country. The importing
country does not require jurisdiction over the
foreign exporter who has not yet performed any
c. REQUISITES FOR ISSUANCE OF LICENSE
The foreign corporation must submit to SEC the
following:
1.
245
Copy of its AOI and by-laws, certified in
accordance with law and their translation to an
official language of the Philippines, if necessary
(Sec. 142, RCC);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2.
3.
The application, which shall be under oath, and,
unless already stated in its AOI, shall specifically
set forth the following: (a) The date and term of
incorporation; (b) The address, including the
street number, of the principal office of the
corporation in the country or State of
incorporation; (c) The name and address of its
resident agent authorized to accept summons
and process in all legal proceedings and all
notices affecting the corporation, pending the
establishment of a local office; (d) The place in
the Philippines where the corporation intends
to operate; (e) The specific purpose or purposes
which the corporation intends to pursue in the
transaction of its business in the Philippines:
Provided, That said purpose or purposes are
those specifically stated in the certificate of
authority issued by the appropriate
government agency; (f) The names and
addresses of the present directors and officers
of the corporation; (g) A statement of its
authorized capital stock and the aggregate
number of shares which the corporation has
authority to issue, itemized by class, par value
of shares, shares without par value, and series,
if any; (h) A statement of its outstanding capital
stock and the aggregate number of shares
which the corporation has issued, itemized by
class, par value of shares, shares without par
value, and series, if any; (i) A statement of the
amount actually paid in; and (j) Such additional
information as may be necessary or appropriate
in order to enable the Commission to determine
whether such corporation is entitled to a license
to transact business in the Philippines, and to
determine and assess the fees payable. (Ibid.);
4.
b.
c.
b.
5.
6.
The laws of the country or state of the
applicant allow Filipino citizens and
corporations to do business therein.
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
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Statement under oath by the President or other
person authorized by the Corporation showing
to the satisfaction of the SEC and other
governmental agency in the proper cases that
the:
a.
Attached to the application for a 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:
a.
the translator shall be attached thereto;
Applicant is solvent and in sound financial
condition
The assets and liabilities of the corporation
as of the date not exceeding one (1) year
immediately prior to the filing of the
application;
A written power of attorney designating a
person who must be a resident of the
Philippines, on whom summons, and other legal
processes may be served in all actions or other
legal proceedings against such corporation, and
consenting that service upon such resident
agent shall be admitted and held as valid as if
served upon the duly authorized officers of the
foreign corporation at its home office (Sec. 145,
RCC); and
An agreement or stipulation, executed by the
proper authorities of said corporation, in form
and substance as follows: “The (name of foreign
corporation) hereby stipulates and agrees, in
consideration of being granted a license to
transact business in the Philippines, that if the
corporation shall cease to transact business in
the Philippines, or shall be without any resident
agent in the Philippines on whom any summons
or other legal processes may be served, then
service of any summons or other legal process
may be made upon the Commission in any
action or proceeding arising out of any business
or transaction which occurred in the
Philippines and such service shall have the
same force and effect as if made upon the duly
authorized officers of the corporation at its
home office.”
NOTE: 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
246
Corporation Law
(10%) of their actual market value at the time they
were deposited. The SEC may, at its discretion,
release part of the additional deposit if the gross
income of the licensee has decreased, or if the actual
market value of the total deposit has increased, by
more than ten percent (10%) of their actual market
value at the time they were deposited. The SEC may,
from time to time, allow the licensee to make
substitute deposits for those already on deposit as
long as the licensee is solvent. Such licensee shall be
entitled to collect the interest or dividends on such
deposits. In the event the licensee ceases to do
business in the Philippines, its deposits shall be
returned, upon the licensee’s application and upon
proof to the satisfaction of the Commission that the
licensee has no liability to Philippine residents,
including the Government of the Republic of the
Philippines. For purposes of computing the
securities deposit, the composition of gross income
and allowable deductions therefrom shall be in
accordance with the rules of the SEC. Deposit
securities for the benefit of present and future
creditors, within 60 days after the issuance of
license. (Ibid.)
other foreign corporations, no application for
license to transact business in the Philippines shall
be accepted by the Commission without previous
authority from the appropriate government agency,
whenever required by law. (Sec. 142, RCC)
Effectivity of 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. (Sec. 143, RCC)
NOTE: Within sixty (60) days after the issuance of
the license to transact business in the Philippines,
the licensee, except foreign banking or insurance
corporations, shall deposit with the SEC for the
benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to
the SEC, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines,
its political subdivisions and instrumentalities, or of
GOCCs and entities, shares of stock or debt
securities that are registered under R.A. No. 8799,
otherwise known as “The Securities Regulation
Code”, shares of stock in domestic corporations
listed in the stock exchange, shares of stock in
domestic insurance companies and banks, any
financial instrument determined suitable by the
SEC, or any combination thereof with an actual
market value of at least Five hundred thousand
pesos (P500,000.00) or such other amount that may
be set by the Commission:
Since the SEC will grant a license only when the
foreign corporation has complied with all the
requirements of law, it follows that when it decides
to issue such a license, it is satisfied that the
applicant's by-laws, among the other documents,
meet the legal requirements. This, in effect, is an
approval of the foreign corporation’s by-laws. It
may not have been made in express terms, still it is
clearly an approval. Therefore, petitioner bank's bylaws, though originating from a foreign jurisdiction,
are valid and effective in the Philippines. (Citibank
vs. Chua, G.R. No. 102300, 17 Mar. 1993)
Provided, however, That within six (6) months after
each fiscal year of the licensee, the SEC shall require
the licensee to deposit additional securities or
financial instruments equivalent in actual market
value to two percent (2%) of the amount by which
the licensee’s gross income for that fiscal year
exceeds Ten million pesos (P10,000,000.00). The
SEC shall also require the deposit of additional
securities or financial instruments if the actual
market value of the deposited securities or financial
instruments has decreased by at least ten percent
d. RESIDENT AGENT
A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in the
Philippines:
1.
247
An individual resident agent must be of
good moral character and of sound
financial standing;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2.
2.
In case of a domestic corporation who will
act as a resident agent, it must likewise be
of sound financial standing and must show
proof that it is in good standing as certified
by the Commission. (Sec 144, RCC)
NOTE: The appointment of a resident agent of a
foreign corporation is revocable at any time at the
instance of the corporation. (SEC Opinion, 4 Sept.
1990)
Purpose of Appointing Resident Agent
The appointment of a resident agent is required for
the purpose of accepting and receiving, on behalf of
the foreign corporation:
1.
2.
Duty of Resident Agent in Case of Change of
Address
Notice affecting the corporation pending the
establishment of its local office; and
Summons and other legal processes in all
proceedings for or against the corporation.
It shall be his or its duty to immediately notify in
writing the SEC of the new address. (Sec. 145, RCC)
Instances When Service of Summons Or Other
Legal Processes are Made Upon the SEC Instead
of a Resident Agent
Effect of Service of Summons and Notices to the
Resident Agent
1.
Service upon such resident agent shall be admitted
and held as valid as if served upon the duly
authorized officers of the foreign corporation at its
home office. (Sec. 145, RCC)
2.
Resident Agent Cannot Sign the Certificate of
Non-Forum Shopping
A foreign corporation shall be without any
resident agent in the Philippines on whom any
summons or other legal processes may be
served. (Sec. 145, RCC)
Such service made upon the SEC shall have the same
force and effect as if made upon the duly authorized
officers of the corporation at its home office. (Sec.
145, RCC)
Whenever such service shall be made upon the SEC,
the SEC must, within 10 days thereafter, transmit by
mail a copy of such summons or other legal process
to the corporation at its home or principal office.
The sending of such copy by the SEC shall be a
necessary part of and shall complete such service.
All expenses incurred by the Commission for such
service shall be paid in advance by the party at
whose instance the service is made. (Ibid.)
Requirements for Replacement of Resident
Agent
SEC requires the submission of:
A duly authenticated copy of board resolution
or a certification from the authorized officer of
the
company
formally
revoking
his
appointment as a resident agent of the
corporation; and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
If a foreign corporation, previously granted a
license, ceases to transact business in the
Philippines.
Effect of Service Made Upon SEC
While a resident agent may be aware of actions filed
against his principal (a foreign corporation doing
business in the Philippines), such resident may not
be aware of actions initiated by its principal,
whether in the Philippines against a domestic
corporation or private individual, or in the country
where such corporation was organized and
registered, against a Philippine registered
corporation or a Filipino citizen. (Expert Travel &
Tours Inc. vs. CA, G.R. No. 152392, 26 May 2005)
1.
Accompanied by a duly authenticated written
power of attorney designating the substitute or
the new resident agent.
248
Corporation Law
The obtainment of a license prescribed by the
Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact
business in the Philippines, as this phrase is
understood under the Corporation Code, unless it
shall have the license required by law, and until it
complies with the law in transacting business here,
it shall not be permitted to maintain any suit in local
courts. As thus interpreted, any foreign corporation
not doing business in the Philippines may maintain
an action in our courts upon any cause of action,
provided that the subject matter and the defendant
are within the jurisdiction of the court. It is not the
absence of the prescribed license but "doing
business" in the Philippines without such license
which debars the foreign corporation from access to
our courts. In other words, although a foreign
corporation is without license to transact business
in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not
necessary if it is not engaged in business in the
Philippines. (Columbia Pictures v. CA, G.R. No.
110318, 28 Aug. 1996)
e. PERSONALITY TO SUE AND SUABILITY
Personality to Sue
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (Sec. 150, RCC)
XPN: Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence. (Steel Case v. Design
International Selections, Inc., G.R. No. 171995, 18 Apr.
2012)
Without doubt, the Corporation Code is the general
law providing for the formation, organization, and
regulation of private corporations. On the other
hand, RA 6657 is the special law on agrarian reform.
As between a general and special law, the latter shall
prevail — generalia specialibus non derogant.
Q: Is a foreign corporation which not licensed to
do business in the Philippines absolutely
incapacitated from filing a suit in local courts?
A: NO. Only when that foreign corporation is
“transacting” or “doing business” in the country will
a license be necessary before it can institute suits. It
may, however, bring suits on isolated business
transactions, which is not prohibited under
Philippine law.
Following the same principle, the Alternative
Dispute Resolution Act of 2004 shall apply in this
case as the Act, as its title – An Act to Institutionalize
the Use of an Alternative Dispute Resolution System
in the Philippines and to Establish the Office for
Alternative Dispute Resolution, and for Other
Purposes – would suggest, is a law especially
enacted “to actively promote party autonomy in the
resolution of disputes or the freedom of the party to
make their own arrangements to resolve their
disputes.” It specifically provides exclusive grounds
available to the party opposing an application for
recognition and enforcement of the arbitral award.
Thus, a foreign insurance company may sue in
Philippine courts upon the marine insurance
policies issued by it abroad to cover internationalbound cargoes shipped by a Philippine carrier, even
if it has no license to do business in this country. It
is the act of engaging in business without the
prescribed license and not the lack of license per se
which bars a foreign corporation from access to our
courts. (Aboitiz Shipping Corp. v. Insurance Co. of NA,
G.R. No. 168402, 6 Aug. 2008)
Now, does a foreign corporation not licensed to do
business in the Philippines have legal capacity to sue
249
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
under the provisions of the Alternative Dispute
Resolution Act of 2004? We answer in the
affirmative. Indeed, it is in the best interest of
justice that in the enforcement of a foreign arbitral
award, we deny availment by the losing party of
the rule that bars foreign corporations not licensed
to do business in the Philippines from maintaining
a suit in our courts.
it desires to sue in Philippine courts under the
"isolated transaction rule" because without such
disclosure, the court may choose to deny it the right
to sue.
The right and capacity to sue, being, to a great
extent, matters of pleading and procedure, depend
upon the sufficiency of the allegations in the
complaint. Thus, as to a foreign corporation, the
qualifying circumstance that if it is doing business in
the Philippines, it is duly licensed or if it is not, it is
suing upon a singular and isolated transaction, is an
essential part of the element of the plaintiffs
capacity to sue and must be affirmatively pleaded.
When a party enters into a contract containing a
foreign arbitration clause and, as in this case, in
fact submits itself to arbitration, it becomes bound
by the contract, by the arbitration and by the result
of arbitration, conceding thereby the capacity of
the other party to enter into the contract,
participate in the arbitration and cause the
implementation of the result. A foreign corporation,
although not licensed to do business in the
Philippines, may seek recognition and enforcement
of the foreign arbitral award in accordance with the
provisions of the Alternative Dispute Resolution Act
of 2004. (Tuna Processing Inc., v. Philippine Kingford
Inc., G.R. No. 185582, 29 Feb. 2012)
In either case, compliance with the requirement of
license, or the fact that the suing corporation is
exempt therefrom, as the case may be, cannot be
inferred from the mere fact that the party suing is a
foreign corporation. The qualifying circumstance
being an essential part of the plaintiff’s capacity to
sue must be affirmatively pleaded. Hence, the
ultimate fact that a foreign corporation is not
doing business in the Philippines must first be
disclosed for it to be allowed to sue in Philippine
courts under the isolated transaction rule.
Failing in his requirement, the complaint filed by
plaintiff with the trial court, it must be said, fails to
show its legal capacity to sue. (Llorente v. Star City
Pty. Ltd., G.R. No. 212050, 15 Jan. 2020, J. Caguioa)
Foreign Corporation Not Doing Business in the
Philippines Must Disclose Such Fact to Sue in
Philippine Courts
A foreign corporation that is not doing business in
the Philippines must disclose such fact if it desires
to sue in Philippine courts under the "isolated
transaction rule" because without such disclosure,
the court may choose to deny it the right to sue.
Suability of Foreign Corporations
A foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules, and
regulations applicable to domestic corporations of
the same class, except those which provide for the
creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other
or to the corporation.(Sec. 146, RCC)
While the law (presently the RCC or its predecessor,
the Corporation Code) grants to foreign
corporations with Philippine license the right to sue
in the Philippines, the Court, however, in a long line
of cases under the regime of the Corporation Code
has held that a foreign corporation not engaged in
business in the Philippines may not be denied the
right to file an action in the Philippine courts for an
isolated transaction. The issue on whether a foreign
corporation which does not have license to engage
in business in the Philippines can seek redress in
Philippine courts depends on whether it is doing
business or it merely entered into an isolated
transaction. A foreign corporation that is not doing
business in the Philippines must disclose such fact if
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A Foreign Corporation Doing Business in the
Philippines Without License may be Sued in the
Country
At this juncture it must be emphasized that a foreign
corporation doing business in the Philippines with
250
Corporation Law
and Sons, G.R. No. 147724, 08 June 2004)
or without license is subject to process and
jurisdiction of the local courts. If such corporation is
properly licensed, well and good. But it shall not be
allowed, under any circumstances, to invoke its lack
of license to impugn the jurisdiction of our courts.
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
28 Sept. 1990)
Q: Star City PTY Limited (SCPL) is an Australian
corporation which operates the Star City Casino
in Sydney, New South Wales, Australia. Claiming
that it is not doing business in the Philippines
and is suing for an isolated transaction, it filed a
complaint for collection of sum of money with
prayer for preliminary attachment against
Quintin Artacho Llorente (Llorente), who was a
patron of its Star City casino and Equitable PCI
Bank (EPCIB).
Isolated Transaction
The execution of the policy is a single act, an isolated
transaction. This Court has not construed the term
“isolated transaction” to literally mean “one” or a
mere single act. In Eriks Pte. Ltd. vs. CA, this Court
held that:
Llorente is one of the numerous patrons of its
casino in Sydney, Australia. As such, he
maintained therein a Patron Account. Llorente
negotiated two EPCIB drafts in order to play in
the Premium Programme of the casino. SCPL
deposited the subject drafts, but it received an
advice of Bank of New York about the "Stop
Payment Order" prompting it to make several
demands upon Llorente to make good his
obligation. However, the latter refused to pay. It
likewise asked EPCIB for a settlement which the
latter denied on the ground that it was Llorente
who requested the Stop Payment Order and no
notice of dishonor was given. Does SCPL have the
legal personality to sue?
. . . What is determinative of "doing business" is not
really the number or the quantity of the
transactions, but more importantly, the intention of
an entity to continue the body of its business in the
country. The number and quantity are merely
evidence of such intention. The phrase "isolated
transaction" has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from
the common business of a foreign enterprise in the
sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the
business organization. Whether a foreign
corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but
more upon the nature and character of the
transactions.
A: YES. In the case at bar, SCPL alleged in its
complaint that "it is a foreign corporation which
operates its business at the Star City Casino in
Sydney, New South Wales, Australia; that it is not
doing business in the Philippines; and that it is suing
upon a singular and isolated transaction". (Llorente
v. Star City PTY Ltd., supra, J. Caguioa)
In the case of Gonzales v. Raquiza, et al., three
contracts, hence three transactions were challenged
as void on the ground that the three American
corporations which are parties to the contracts are
not licensed to do business in the Philippines. This
Court held that “one single or isolated business
transaction does not constitute doing business
within the meaning of the law. Transactions which
are occasional, incidental, and casual — not of a
character to indicate a purpose to engage in
business — do not constitute the doing or engaging
in business as contemplated by law. Where the
three transactions indicate no intent by the foreign
corporation to engage in a continuity of
transactions, they do not constitute doing business
in the Philippines.” (Lorenzo Shipping Corp., v. Chubb
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a
country which is a party to any convention,
treaty, or agreement relating to intellectual
property rights or the repression of unfair
competition, to which the Philippines is also a
party or extend reciprocal rights sue in
trademark or service mark enforcement action?
A: YES. The foreign corporation mentioned above
may sue in trademark or service mark enforcement
action. This is in accordance with Section 160, in
251
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
relation to Section 3 of R.A. No. 8393, The
Intellectual Property Code. (Sehwani Inc. v. In-n-Out
Burger, G.R. No. 171053, 15 Oct. 2007)
The exception to this rule is the doctrine of estoppel.
Global is estopped from challenging Surecomp's
capacity to sue.
Q: Surecomp, a foreign corporation duly
organized and existing under the laws of the
Netherlands, entered into a software license
agreement with ABC, a domestic corporation, for
the use of its IMEX Software System (System) in
the bank’s computer system for a period of
twenty (20) years. ABC merged with Global
Business Holdings, Inc. (Global), with Global as
the surviving corporation.
A foreign corporation doing business in the
Philippines without license may sue in Philippine
courts a Filipino citizen or a Philippine entity that
had contracted with and benefited from it. A party is
estopped from challenging the personality of a
corporation after having acknowledged the same by
entering into a contract with it. The principle is
applied to prevent a person contracting with a
foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the
contract. (Global Business Holdings, Inc., v. Surecomp
Software, B.V., G.R. No. 173463, 13 Oct. 2010)
When Global took over the operations of ABC, it
found the System unworkable for its operations
and informed Surecomp of its decision to
discontinue the agreement and to stop further
payments thereon. Consequently, for failure of
Global to pay its obligations under the
agreement despite demands, Surecomp filed a
complaint for breach of contract with damages
before the RTC.
Grounds for Revocation of License
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
grounds:
In its complaint, Surecomp alleged that it is a
foreign corporation not doing business in
the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it
installed the System in ABC’s computers for a
consideration of US$298,000.00 as license fee.
Global filed a motion to dismiss on the ground
that Surecomp had no capacity to sue because it
was doing business in the Philippines without a
license. Is Global estopped from questioning
Surecomp’s capacity to sue?
1.
2.
3.
4.
A: YES, Global is estopped. A corporation has a legal
status only within the state or territory in which it
was organized. For this reason, a corporation
organized in another country has no personality to
file suits in the Philippines. In order to subject a
foreign corporation doing business in the country to
the jurisdiction of our courts, it must acquire a
license from the Securities and Exchange
Commission and appoint an agent for service of
process. Without such license, it cannot institute a
suit in the Philippines.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
5.
6.
7.
252
Failure to file its annual report or pay any fees
as required by the Code;
Failure to appoint and maintain a resident
agent in the Philippines;
Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change;
Failure to submit to the SEC an authenticated
copy of any amendment to its AOI or by-laws or
of any articles of merger or consolidation within
the time prescribed by the Corporation Code;
A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
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;
Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
Corporation Law
8.
9.
natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws. (Ibid.)
Transacting business in the Philippines as agent
of or acting for and on behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
Any other ground as would render it unfit to
transact business in the Philippines. (Sec. 151,
RCC)
Q: A single parent started a plant-based/vegan
meal delivery service during the COVID-19
pandemic using only the resources available in
the kitchen and in a nearby market. After just six
months, the single parent needed to expand by
hiring cooks, kitchen staff, and finance and
administrative personnel. A bank told the single
parent that it was ready to fund the small
business but the parent needed to be registered
with the proper government regulatory
agencies.
Upon the revocation of the license to transact
business in the Philippines, a certificate of
revocation shall be issued by the SEC. A copy thereof
shall be furnished to the appropriate government
agency in the proper cases. The SEC shall also mail
to the corporation at its registered office in the
Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation. (Sec. 152,
RCC)
Friends advised the single parent that
registering as a single proprietorship would
make their personal assets vulnerable in case
the business takes a downturn. The single
parent now comes to you for legal advice,
wanting to have the limited liability of a
corporation but is unwilling to take in partners
in the business that would stiffly their culinary
creativity.
Withdrawal of License
Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the
Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued
by the Commission unless all the following
requirements are met:
1.
2.
3.
Under the Revised Corporation Code, is it legally
possible for the single parent to register as a
corporation with only the single parent as
stockholder? Explain briefly. (2020-21 BAR)
All claims which have accrued in the Philippines
have been paid, compromised, or settled;
All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions
have been paid; and
The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in
the Philippines. (Sec. 152, RCC)
A: The Revised Corporation Code eliminated the
minimum number of incorporators for corporations
(Sec. 10, RCC). It also allows natural persons, trust
and estate to organize a corporation with a single
stockholder (Sec. 116, RCC). The law makes no
distinction as to the civil status of natural persons
who can organize a one person corporation. Thus, a
single parent may register as a corporation with
only himself/herself as stockholder.
4. ONE-PERSON CORPORATIONS
A corporation with a single stockholder: Provided,
that only a natural person, trust, or an estate may
form a One Person Corporation. (Sec. 116, RCC)
Banks and quasi-banks, pre-need, trust, insurance,
public and publicly listed companies, and nonchartered GOCCs may not incorporate as One
Person Corporations: Provided, further, That a
Minimum Capital Stock NOT Required
A One Person Corporation shall not be required to
have a minimum authorized capital stock except as
otherwise provided by special law. (Sec. 117, RCC)
253
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Contents of the AOI
The single stockholder may not be appointed as
corporate secretary. A single stockholder who is
likewise the self-appointed treasurer of the
corporation shall give a bond to the Commission in
such a sum as may be required. The bond shall be
renewed every two (2) years or as often as may be
required.
A One Person Corporation shall file AOI in
accordance with the requirements under Sec. 14 of
the RCC. It shall likewise substantially contain the
following:
1.
2.
If the single stockholder is a trust or an estate,
the name, nationality, and residence of the
trustee, administrator, executor, guardian,
conservator, custodian, or other person
exercising fiduciary duties together with the
proof of such authority to act on behalf of the
trust or estate; and
Provided, That, the said stockholder/treasurer shall
undertake in writing to faithfully administer the
One Person Corporation’s funds to be received as
treasurer, and to disburse and invest the same
according to the AOI as approved by the
Commission. (Ibid.)
Special Functions of the Corporate Secretary
Name, nationality, residence of the nominee
and alternate nominee, and the extent,
coverage, and limitation of the authority. (Sec.
118, RCC)
In addition to the functions designated by the One
Person Corporation, the corporate secretary shall:
By-Laws
1.
The One Person Corporation is not required to
submit and file corporate bylaws. (Sec. 119, RCC)
2.
Display of Corporate Name
A One Person Corporation shall indicate the letters
“OPC” either below or at the end of its corporate
name. (Sec. 120, RCC)
3.
Single Stockholder as Director, President
The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121,
RCC)
4.
Treasurer, Corporate Secretary, and Other
Officers
Within fifteen (15) days from the issuance of its
certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate
secretary, and other officers as it may deem
necessary, and notify the Commission thereof
within five (5) days from appointment. (Sec. 122,
RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Be responsible for maintaining the minutes
book and/or records of the corporation;
Notify the nominee or alternate nominee of the
death or incapacity of the single stockholder,
which notice shall be given no later than five (5)
days from such occurrence;
Notify the Commission of the death of the single
stockholder within five (5) days from such
occurrence and stating in such notice the
names, residence addresses, and contact details
of all known legal heirs; and
Call the nominee or alternate nominee and the
known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the
election of a new director, amendment of the
AOI, and other ancillary and/or consequential
matters. (Sec. 123, RCC)
Nominee and Alternate Nominee
The single stockholder shall designate a nominee
and an alternate nominee who shall, in the event of
the single stockholder’s death or incapacity, take the
place of the single stockholder as director and shall
manage the corporation’s affairs.
254
Corporation Law
Minutes Book
The AOI shall state the names, residence addresses
and contact details of the nominee and alternate
nominee, as well as the extent and limitations of
their authority in managing the affairs of the One
Person Corporation.
A One Person Corporation shall maintain a minutes
book which shall contain all actions, decisions, and
resolutions taken by the One Person Corporation.
(Sec. 127, RCC)
The written consent of the nominee and alternate
nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in
writing any time before the death or incapacity of
the single stockholder. (Sec. 124, RCC)
Records in Lieu of Meetings
When action is needed on any matter, it shall be
sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in
the minutes book of the One Person Corporation.
The date of recording in the minutes book shall be
deemed to be the date of the meeting for all
purposes under this Code. (Sec. 128, RCC)
Term of Nominee and Alternate Nominee
1.
2.
When the incapacity of the single stockholder
is temporary – the nominee shall sit as director
and manage the affairs of the One Person
Corporation until the stockholder, by selfdetermination, regains the capacity to assume
such duties.
Reportorial Requirements
The One Person Corporation shall submit the
following within such period as the Commission
may prescribe:
In case of death or permanent incapacity of
the single stockholder – the nominee shall sit
as director and manage the affairs of the One
Person Corporation until the legal heirs of the
single stockholder have been lawfully
determined, and the heirs have designated one
of them or have agreed that the estate shall be
the single stockholder of the One Person
Corporation.
1.
The alternate nominee shall sit as director and
manage the One Person Corporation in case of the
nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of
the corporation, and only for the same term and
under the same conditions applicable to the
nominee. (Sec. 125, RCC)
2.
3.
Annual financial statements audited by an
independent certified public accountant:
Provided, That if the total assets or total
liabilities of the corporation are less than Six
Hundred Thousand Pesos (P600,000.00), the
financial statements shall be certified under
oath by the corporation’s treasurer and
president.
A report containing explanations or comments
by the president on every qualification,
reservation, or adverse remark or disclaimer
made by the auditor in the latter’s report;
A disclosure of all self-dealings and related
party transactions entered into between One
Person Corporation and the single stockholder;
and
Other reports as the Commission may require.
(Sec. 129, RCC)
Change of Nominee or Alternate Nominee
4.
The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to
the Commission the names of the new nominees and
their corresponding written consent. For this
purpose, the AOI need not be amended. (Sec. 126,
RCC)
For purposes of this provision, the fiscal year of a
One Person Corporation shall be that set forth in its
AOI or, in the absence thereof, the calendar year.
The Commission may place the corporation under
delinquent status should the corporation fail to
submit the reportorial requirements three (3)
255
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
the conversion into an ordinary stock corporation.
If all requirements have been complied with, the
Commission shall issue an amended certificate of
incorporation reflecting the conversion. (Sec. 132,
RCC)
times, consecutively or intermittently, within a
period of five (5) years. (Ibid.)
Liability of Single Shareholder
A sole shareholder claiming limited liability has the
burden of affirmatively showing that the
corporation was adequately financed.
In case of death of the single stockholder, the
nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate
within seven (7) days from receipt of either an
affidavit of heirship or self-adjudication executed by
a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify
the Commission of the transfer. Within sixty (60)
days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to
either wind up and dissolve the One Person
Corporation or convert it into an ordinary stock
corporation. (Ibid.)
Where the single stockholder cannot prove that the
property of the One Person Corporation is
independent of the stockholder’s personal property,
the stockholder shall be jointly and severally liable
for the debts and other liabilities of the One Person
Corporation.
The principle of piercing the corporate veil applies
with equal force to One Person Corporations as with
other corporations. (Sec. 130, RCC)
Conversion from an Ordinary Corporation to a
One Person Corporation
The ordinary stock corporation converted from a
One Person Corporation shall succeed the latter and
be legally responsible for all the latter’s outstanding
liabilities as of the date of conversion. (Ibid.)
When a single stockholder acquires all the stocks of
an ordinary stock corporation, the latter may apply
for conversion into a One Person Corporation,
subject to the submission of such documents as the
Commission may require. If the application for
conversion is approved, the Commission shall issue
a certificate of filing of amended AOI reflecting the
conversion.
The One Person Corporation converted from an
ordinary stock corporation shall succeed the latter
and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.
(Sec. 131, RCC)
Conversion from a One Person Corporation to an
Ordinary Stock Corporation
A One Person Corporation may be converted into an
ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances
leading to the conversion, and after compliance with
all other requirements for stock corporations under
this Code and applicable rules. Such notice shall be
filed with the Commission within sixty (60) days
from the occurrence of the circumstances leading to
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
256
Corporation Law
Merger vs. De Facto Merger
I. MERGERS AND CONSOLIDATIONS
1. CONCEPT
Common Forms of Corporate Combinations
1.
2.
3.
4.
5.
Sale of Assets – One corporation sells all or
substantially all of its assets to another. Such
sale, usually, though not necessarily made in the
course of the dissolution of the vendor
corporation.
Lease of Assets – A corporation, without being
dissolved, leases its property to another
corporation for which the lessor merely
receives rental paid by the lessee. This is similar
to the sale of assets, except that under a lease,
nothing passes, except the right to use the
property leased.
Sale of Stock – The purpose of a holding
corporation is to acquire a sufficient amount of
the stock of another corporation for the
purpose of acquiring control. The acquiring
corporation is called the parent/ holding
company. The corporation whose stocks were
acquired is the subsidiary.
Merger – Two (2) or more corporations may
merge into a single corporation which shall be
one of the constituent corporations (Sec. 75,
RCC)
Consolidation – Two (2) or more corporations
may consolidate into a new single corporation
which shall be the consolidated corporation.
MERGER
DE FACTO MERGER
(2016 BAR)
Merger
is
a
reorganization of two or
more corporations that
results
in
their
consolidating
into
a
single corporation, which
is one of the constituent
corporations,
one
disappearing
or
dissolving and the other
surviving.
To put it
another way, merger is
the absorption of one or
more corporations by
another
existing
corporation,
which
retains its identity and
takes over the rights,
privileges,
franchises,
properties,
claims,
liabilities and obligations
of
the
absorbed
corporation(s).
The
absorbing
corporation
continues its existence
while the life or lives of
the other corporation(s)
is or are terminated.
(Bank of Commerce v.
Radio
Philippines
Network, Inc., et al., G.R.
No. 195615, 21 Apr. 2014)
Can be pursued by
one
corporation
acquiring all or
substantially all of
the properties of
another corporation
in
exchange
of
shares of stock of the
acquiring
corporation.
The
acquiring
corporation would
end up with the
business enterprise
of
the
target
corporation;
whereas, the target
corporation would
end
up
with
basically its only
remaining
assets
being the shares of
stock
of
the
acquiring
corporation.
(Ibid.)
Asset Sale vs. Stock Sale
ASSET SALE
The corporate entity
sells all or substantially
all of its assets to
another entity.
257
The seller in good faith
is
authorized
to
dismiss the affected
STOCK SALE
The individual
or
corporate
shareholders sell a
controlling block of
stock to new or
existing shareholders.
Notwithstanding the
stock
sale,
the
corporation continues
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
employees but is liable
for the payment of
separation pay under
the law. The buyer in
good faith, on the other
hand, is not obliged to
absorb the employees
affected by the sale, nor
is it liable for the
payment
of
their
claims. The most that it
may do, for reasons of
public policy and social
justice, is to give
preference
to
the
qualified
separated
personnel of the selling
firm. (SME Bank, Inc., et
al., v. Gaspar, et al., G.R.
Nos. 184517 & 186641,
8 Oct. 2013)
Was there a transfer of business such that
Samson, being an innocent transferee, has no
obligation to retain the employment of Gaspar,
et al.?
to be the employer of
its
people
and
continues to be liable
for the payment of
their
just
claims.
Furthermore,
the
corporation or its new
majority shareholders
are not entitled to
lawfully
dismiss
corporate employees
absent a just or
authorized
cause.
(Ibid.)
A: NO. There was no transfer of the business
establishment to speak of, but merely a change in
the new majority shareholders of the corporation.
There are two types of corporate acquisitions: asset
sales and stock sales. In contrast with asset sales,
in which the assets of the selling corporation are
transferred to another entity, the transaction in
stock sales takes place at the shareholder level.
Because the corporation possesses a personality
separate and distinct from that of its shareholders,
a shift in the composition of its shareholders will not
affect its existence and continuity. Thus,
notwithstanding the stock sale, the corporation
continues to be the employer of its people and
continues to be liable for the payment of their just
claims. Furthermore, the corporation or its new
majority shareholders are not entitled to lawfully
dismiss corporate employees absent a just or
authorized cause.
Q: One of the stipulations in the sale of SME Bank
to Abelardo Samson was that Agustin and De
Guzman, the majority stockholders, and
corporate
directors
of
SME,
shall
terminate/retire its employees. At the behest of
Samson’s wife, SME’s general manager urged its
employees, respondents Gaspar, et al., to tender
their resignations on the promise that they will
be rehired. The majority shares of SME were
then sold to the Sps. Samson, and SME did not
rehire De Guzman, et al.
In the case at bar, the Letter Agreements show that
their main object is the acquisition by the Samson
Group of 86.365% of the shares of stock of SME
Bank. Hence, this case involves a stock sale,
whereby the transferee acquires the controlling
shares of stock of the corporation. Thus, following
the rule in stock sales, respondent employees may
not be dismissed except for just or authorized
causes under the Labor Code.
Gaspar, et al. filed a complaint for illegal
dismissal against SME, Samson, Agustin and De
Guzman. The LA ruled that the labor buyer of an
enterprise is not bound to absorb its employees,
unless there is an express stipulation to the
contrary. The NLRC found that there was only a
mere transfer of shares – and therefore, a mere
change of management – from Agustin and De
Guzman to the Samson Group. As the change of
management was not a valid ground to
terminate respondent bank employees, the
NLRC ruled that they had indeed been illegally
dismissed.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The transfer only involved a change in the equity
composition of the corporation. To reiterate, the
employees are not transferred to a new employer,
but remain with the original corporate employer,
notwithstanding an equity shift in its majority
shareholders. This being so, the employment status
of the employees should not have been affected by
the stock sale. A change in the equity composition of
the corporate shareholders should not result in the
automatic termination of the employment of the
corporation’s employees. Neither should it give the
new majority shareholders the right to legally
258
Corporation Law
deleting the phrase that the P & A agreement
was a farce or a mere tool to effectuate a merger
or consolidation between TRB and BOC. The CA
limited the execution to TRB’s properties found
in BOC’s possession.
dismiss the corporation’s employees, absent a just
or authorized cause.
It is thus erroneous on the part of the corporation to
consider the employees as terminated from their
employment when the sole reason for so doing is a
change of management by reason of the stock sale.
The conformity of the employees to the
corporation’s act of considering them as terminated
and their subsequent acceptance of separation pay
does not remove the taint of illegal dismissal.
Acceptance of separation pay does not bar the
employees from subsequently contesting the
legality of their dismissal, nor does it estop them
from challenging the legality of their separation
from the service. (SME Bank, Inc., et al., v. Gaspar, et
al., supra)
The RTC issued an alias writ of execution against
BOC, and BOC sought reconsideration of the
same considering that the CA declared that no
merger existed between BOC and TRB. The RTC
denied BOC’s motion.
a. Was there a merger between BOC and TRB?
b. Should BOC be considered as RPN, et al.’s
judgment debtor?
A:
a. NO. What happened is that TRB sold, and BOC
purchased identified recorded assets of TRB in
consideration of BOC’s assumption of identified
recorded liabilities of TRB including booked
contingent accounts. There is no law that
prohibits this kind of transaction especially
when it is done openly and with appropriate
government approval. In a strict sense, no
merger or consolidation took place as the
records do not show any plan or articles of
merger or consolidation.
Q: Petitioner Bank of Commerce (BOC) and
Traders Royal Bank (TRB) executed a Purchase
and Assumption agreement, where the former
acquired the latter’s specified assets and
liabilities, excluding liabilities arising from
judicial actions which were covered by a BSPmandated escrow fund of P50 million. Shortly
after, the Supreme Court, in TRB v. RPN, ordered
TRB to pay respondents Radio Philippines
Network,
Intercontinental
Broadcasting
Corporation, and Banahaw Broadcasting
Corporation (RPN, et al.) actual damages with
legal interest. RPN, et al. filed a motion for
execution against TRB before the RTC. But
rather than pursue a levy in execution of the
corresponding amounts on escrow, RPN, et al.
filed a Supplemental Motion for Execution
where they described TRB as “now BOC” based
on the assumption that TRB had been merged
into BOC.
No de facto merger took place in the present
case simply because the TRB owners did not get
an equivalent value in BOC shares of stock in
exchange for the bank’s assets and liabilities.
BOC and TRB agreed with BSP’s approval to
exclude from the sale the TRB’s contingent
judicial liabilities, including those owing to RPN,
et al.
BOC opposed RPN, et al.’s motion and denied
that there was a merger between itself and TRB.
The RTC granted the writ of execution to cover
all assets of TRB, including those subject of the P
& A agreement. The RTC held that the P & A
agreement was a mere tool to effectuate merger.
BOC appealed to the CA, which affirmed with
modification the RTC decision, by declaring that
no merger existed between BOC and TRB and
b.
259
The Bureau of Internal Revenue (BIR) treated
the transaction between the two banks purely
as a sale of specified assets and liabilities when
it rendered its opinion on the tax consequences
of the transaction given that there is a
difference in tax treatment between a sale and
a merger or consolidation.
NO. First, BOC agreed to assume those liabilities
of TRB that are specified in their P & A
Agreement. That agreement specifically
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
Merger vs. Consolidation
excluded TRB’s contingent liabilities that the
latter might have arising from pending
litigations in court, including the claims of RPN,
et al.
MERGER
Second, as already pointed out above, the sale
did not amount to merger or de facto merger of
Bancommerce and TRB since the elements
required of both were not present.
Third, the evidence in this case fails to show that
BOC was a mere continuation of TRB. TRB
retained its separate and distinct identity after
the purchase. Although it subsequently changed
its name to Traders Royal Holding’s, Inc. such
change did not result in its dissolution.
One
where
a
corporation absorbs
another corporation
and
remains
in
existence while others
are dissolved. (Sec. 75,
RCC)
One where a new
corporation is created
and
consolidating
corporations
are
extinguished. (Ibid.)
All of the constituent
corporations involved
are dissolved except
one.
All
consolidated
corporations
are
dissolved
without
exception.
No new corporation is
created.
A new
emerges.
The
surviving
corporation acquires
all
the
assets,
liabilities, and capital
stock of all constituent
corporations.
All assets, liabilities,
and capital stock of all
consolidated
corporations
are
transferred to the new
corporation.
Consequent Dissolution of a
Corporation or Corporations
Fourth, to protect contingent claims, the BSP
directed BOC and TRB to put up P50 million in
escrow with another bank. It was the BSP, not
BOC that fixed the amount of the escrow.
Consequently, it cannot be said that the latter
bank acted in bad faith with respect to the
excluded liabilities. They did not enter into the
P & A Agreement to enable TRB to escape from
its liability to creditors with pending court
cases.
Consequent Creation of a New Corporation
corporation
Acquisition of Assets, Liabilities,
Capital Stock
Since there had been no merger, BOC cannot be
considered as TRB’s successor-in-interest and
against which the Court’s Decision in TRB v. RPN
may be enforced. BOC did not hold the former
TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s
liabilities to RPN, et al. BOC bought and
acquired those assets and thus, became their
absolute owner.
Q: Where one corporation sells or otherwise
transfers all of its assets to another corporation,
is the latter liable for the debts and liabilities of
the transferor?
The enforcement, therefore, of the decision in
the main case should not include the assets and
properties that BOC acquired from TRB. These
have ceased to be assets and properties of TRB
under the terms of the BSP-approved P & A
Agreement between them. They are not TRB
assets and properties in the possession of BOC.
(Bank of Commerce v. Radio Philippines
Network, Inc., et al., supra)
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2022 GOLDEN NOTES
CONSOLIDATION
Definition
A: GR: NO.
260
XPNs:
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 to escape liability for such debts.
Corporation Law
(Nell Co. vs. Pacific Farms, Inc., G.R. No. L-20850,
29 Nov. 1965)
corporation and does not depend on any deceit
committed by the transferee corporation, then
fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
corporation may inherit the liabilities of the
transferor despite the lack of fraud due to the
continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, 08 Sept. 2015)
NOTE: The Nell Doctrine states the general rule
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. If any of the above-cited
exceptions are present, then the transferee
corporation shall assume the liabilities of the
transferor. (2017 BAR)
Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co. tried
to collect the amount due it but found out that E
Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
of E Co. Will the suit prosper? (1996 BAR)
See also discussion on the Nell Doctrine – page 132.
Business-Enterprise Transfer
The transferee corporation’s interest goes beyond
the assets of the transferor’s assets and its desires
to acquire the latter’s business enterprise, including
its goodwill.
A: NO. The suit will not prosper. The sale by E Co. of
its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption
therefore by, the former. The facts given do not
indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
sale of the shares of stock of the corporation
belonging to its stockholders. There is therefore no
merger or consolidation that took place. E Co.
continues to exist and remains liable to the creditor.
Sec. 40 (now Sec. 39, RCC) suitably reflects the
business-enterprise transfer under the exception of
the Nell Doctrine because the purchasing or
transferee corporation necessarily continued the
business of the selling or transferor corporation.
Given that the transferee corporation acquired not
only the assets but also the business of the
transferor corporation, then the liabilities of the
latter are inevitably assigned to the former. Sec. 39
refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets,
including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all
corporate assets; the transfer must be of such
degree that the transferor corporation is rendered
incapable of continuing its business or its corporate
purpose.
Contents of a Plan of Merger or Consolidation
The BOD/BOT of each corporation party to the
merger or consolidation shall approve a plan of
merger or consolidation which set forth the
following:
1.
The purpose of the business-enterprise transfer is
to protect the creditors of the business by allowing
them a remedy against the new owner of the assets
and business enterprise. Otherwise, creditors
would be left “holding the bag,” because they may
not be able to recover from the transferor who has
“disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
good faith and for value. Based on the foregoing, as
the exception of the Nell doctrine relates to the
protection of the creditors of the transferor
2.
3.
261
The names of the corporations proposing to
merge or consolidate, hereinafter referred to as
the constituent corporations;
The terms of the merger or consolidation and
the mode of carrying the same into effect;
A statement of the changes, if any, in the AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI
for corporations organized under the RCC; and
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FACULTY OF CIVIL LAW
Commercial Law
4.
this Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
extinguished. (Sec. 76, RCC)
Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (Sec. 75, RCC)
Approval of the Plan of Merger or Consolidation
Articles of Merger or Consolidation
The plan of merger or consolidation must be
approved by:
1.
2.
3.
4.
After the approval by the stockholders or members
as required by Sec. 76, articles of merger or articles
of consolidation shall be executed by each of the
constituent corporations, to be signed by the
president or vice president and certified by the
secretary or assistant secretary of each corporation
setting forth:
Majority vote of each of the BOD/ BOT of the
constituent corporations; and
Submitted for approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for the
purpose.
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations in the same manner as giving
notice of regular or special meetings under
Section 49 of the RCC The notice shall state the
purpose of the meeting and include a copy or a
summary of the plan of merger or
consolidation.
The affirmative vote of the stockholders
representing at least 2/3 of the OCS of each
corporation in the case of stock corporations or
at least 2/3 of the members in the case of nonstock corporations, shall be necessary for the
approval of such plan. (Sec. 76, RCC)
a.
b.
c.
d.
e.
f.
Amendment of a Plan of Merger or Consolidation
g.
Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD/BOT of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the OCS or
2/3 of the members of each of the constituent
corporations. (Sec. 76, RCC)
The articles of merger or of consolidation, signed
and certified as required by the RCC, shall be
submitted to the SEC for its approval. (Sec. 78, RCC)
NOTE: In the case of merger or consolidation of
banks or banking institutions, loan associations,
trust companies, insurance companies, public
utilities, educational institutions, and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained (Ibid.)
NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
consolidation.
Appraisal Right is Available to a Dissenting
Stockholder to a Plan of Merger or Consolidation
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The plan of the merger or the plan of
consolidation;
As to stock corporations, the number of shares
outstanding, or in the case of nonstock
corporations, the number of members;
As to each corporation, the number of shares or
members voting for or against such plan,
respectively;
The carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
The method to be used in the merger or
consolidation of accounts of the companies;
The provisional or pro-forma values, as merged
or consolidated, using the accounting method;
and
Such other information as may be prescribed by
the Commission. (Sec. 77, RCC)
262
Corporation Law
A: NO. The merger was not valid. Merger does not
become effective upon the mere agreement of the
constituent corporations. Since a merger or
consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of
law authorizing them.
When Hearing is Set
If, upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of
the RCC or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be
heard. Written notice of the date, time, and place of
hearing shall be given to each constituent
corporation at least two (2) weeks before said
hearing. The SEC shall thereafter proceed as
provided in the RCC. (Ibid.)
The merger shall only be effective upon the issuance
of a certificate of merger by the SEC, subject to its
prior determination that the merger is not
inconsistent with the Corporation Code or existing
laws.
Effectivity
In this case, it is undisputed that the articles of
merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Such merger is still incomplete without
the certification.
If the SEC is satisfied that the merger or
consolidation of the corporations concerned is
consistent with the provisions of the RCC and
existing laws, it shall issue a certificate approving
the articles and plan of merger or of consolidation,
at which time the merger or consolidation shall be
effective. (Ibid.)
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles
of merger were not registered with the SEC due
to incomplete documentation. DSLAI changed its
corporate name to MSLAI. The business of
MSLAI, however, failed. Prior to the closure of
MSLAI, Remedios Uy filed an action for
collection of sum of money against FISLAI. The
RTC ruled in favor of Uy and hence, six (6)
parcels of land owned by FISLAI were sold to
Willkom, the highest bidder.
The issuance of the certificate of merger is crucial
because not only does it bear out SEC’s approval but
it also marks the moment when the consequences of
a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation
ceases to exist but its rights and properties, as well
as liabilities, shall be taken and deemed transferred
to and vested in the surviving corporation.
(Mindanao Savings and Loan Association, Inc., et al.,
v. Willkom, et al., G.R. No. 178618, 11 Oct. 2010)
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI
had no cause of action against them or the right
to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI.
They further contended that the “unofficial
merger” between FISLAI and DSLAI (now MSLAI)
did not take effect considering that the merging
companies did not comply with the formalities
and procedure for merger or consolidation as
prescribed by the Corporation Code of
the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
2. EFFECTS AND LIMITATIONS
1.
The constituent corporations shall become a
single corporation which:
a.
b.
263
In case of merger, shall be the surviving
corporation designated in the plan of
merger.
In case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Commercial Law
2.
3.
4.
Citytrust was dissolved, no winding up of its affairs
or liquidation of assets, privileges, powers, and
liabilities took place. As the surviving corporation,
BPI simply continued the combined businesses of
the two banks and absorbed all the rights,
privileges, assets, liabilities, and obligations of City
Trust, including the latter’s obligation over the
garnished deposits of the defendants.
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, and powers and shall be subject to
all the duties and liabilities of a corporation
organized under the RCC;
The surviving or the consolidated corporation
shall thereupon and thereafter possess:
a.
b.
c.
5.
Garnishment Upon the Surviving Corporation
for the Liabilities of the Absorbed Corporation
The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby
acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of
the court.
All the rights, privileges, immunities, and
franchises of each of the constituent
corporations;
All property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and other
choses in action,
Every other interest of, 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
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became
a “virtual party” to or “forced intervenor” in the civil
case. As such, it became bound by the orders and
processes issued by the trial court despite not
having been properly impleaded therein.
Consequently, by virtue of its merger with BPI, the
latter, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case. (BPI v. Lee, G.R. No. 190144, 01 Aug. 2012)
The surviving or consolidated corporation
shall:
a.
b.
c.
Be responsible and liable for all the
liabilities and obligations of each of the
constituent corporations in the same
manner as if such surviving or consolidated
corporation had itself incurred such
liabilities or obligations;
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. (Sec. 79, RCC)
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2022 GOLDEN NOTES
Transfer of Employees
Taking a second look on this point, we have come to
agree with Justice Brion's view that it is more in
keeping with the dictates of social justice and the
State policy of according full protection to labor to
deem employment contracts as automatically
assumed by the surviving corporation in a merger,
even in the absence of an express stipulation in the
articles of merger or the merger plan. In his
dissenting opinion, Justice Brion reasoned that:
To my mind, due consideration of Sec. 80 of the
Corporation Code (now Sec. 79, RCC), the
constitutionally declared policies on work, labor
and employment, and the specific FEBTC-BPI
situation -- i.e., a merger with complete "body and
264
Corporation Law
soul" transfer of all that FEBTC embodied and
possessed and where both participating banks were
willing (albeit by deed, not by their written
agreement) to provide for the affected human
resources by recognizing continuity of employment
-- should point this Court to a declaration that in a
complete merger situation where there is total
takeover by one corporation over another and there
is silence in the merger agreement on what the fate
of the human resource complement shall be, the
latter should not be left in legal limbo and should be
properly provided for, by compelling the surviving
entity to absorb these employees. This is what Sec.
80 of the Corporation Code (now, Sec. 79, RCC)
commands, as the surviving corporation has the
legal obligation to assume all the obligations and
liabilities of the merged constituent corporation.
absorbed employees for a lawful or authorized
cause or the right of such an employee to resign,
retire or otherwise sever his employment, whether
before or after the merger, subject to existing
contractual obligations. In this manner, Justice
Brion's theory of automatic assumption may be
reconciled with the majority's concerns with the
successor employer's prerogative to choose its
employees and the prohibition against involuntary
servitude. (BPI v. BPI Employees Union – Davao
Chapter, G.R. No. 164301, 19 Oct. 2011)
Q: Associated Banking Corporation and Citizens
Bank and Trust Company (CBTC) merged to
form just one banking corporation known as
Associated Citizens Bank, the surviving
bank. The Associated Citizens Bank changed its
corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation.
Not to be forgotten is that the affected employees
managed, operated, and worked on the transferred
assets and properties as their means of livelihood;
they constituted a basic component of their
corporation during its existence. In a merger and
consolidation situation, they cannot be treated
without
consideration
of
the
applicable
constitutional declarations and directives, or,
worse, be simply disregarded. If they are so treated,
it is up to this Court to read and interpret the law so
that they are treated in accordance with the legal
requirements of mergers and consolidation, read in
light of the social justice, economic and social
provisions of our Constitution. Hence, there is a
need for the surviving corporation to take
responsibility for the affected employees and to
absorb them into its workforce where no
appropriate provision for the merged corporation's
human resources component is made in the Merger
Plan.
Lorenzo Sarmiento executed in favor of CBTC a
promissory note. Upon maturity and despite
repeated demands Sarmiento failed to pay the
amount due. Associated Bank filed a collection
suit against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in
interest because the promissory note was
executed in favor of Associated Citizens Bank.
The trial court ordered Sarmiento to pay. The
CA, however, held that the Associated Bank had
no cause of action against Lorenzo Sarmiento Jr.,
since the said bank was not privy to the
promissory note executed by Sarmiento in favor
of Citizens Bank and Trust Company
(CBTC). The court ruled that the earlier merger
between the two banks could not have vested
Associated Bank with any interest arising from
the promissory note executed in favor of
CBTC after such merger.
By upholding the automatic assumption of the nonsurviving corporation's existing employment
contracts by the surviving corporation in a merger,
the Court strengthens judicial protection of the right
to security of tenure of employees affected by a
merger and avoids confusion regarding the status of
their various benefits which were among the chief
objections of our dissenting colleagues. However,
nothing in this Resolution shall impair the right of
an employer to terminate the employment of the
May Associated Bank, the surviving corporation,
enforce the promissory note made by Sarmiento
in favor of CBTC, the absorbed company, after
the merger agreement had been signed?
A: YES. Associated Bank may enforce the
promissory note. Ordinarily, in the merger of two or
more existing corporations, one of the combining
265
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FACULTY OF CIVIL LAW
Commercial Law
corporations survives and continues the combined
business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their
assets, because the surviving corporation
automatically acquires all their rights, privileges,
and powers, as well as their liabilities. All contracts
of the absorbed corporations, regardless of the date
of execution shall pertain to the surviving
corporation. (Associated Bank v. CA, G.R. No. 123793,
29 June 1998)
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2022 GOLDEN NOTES
266