HLP2009-3B Page 1

CORPORATION LAW
FINALS 09
A. By-laws
1. Definitin f by-laws
These are regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance. By laws define the rights and
obligations of various officers, persons or groups within the corporate structure and
provide rules for routine matters such as calling meetings.
Every corporation under this code shall have the power and capacity: (! to adopt by"
laws not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this code (#ec $%!
!. W"en t a#$t %y-laws &Se'tin ()*
Every corporation formed under this code must within & month after receipt of official
notice of the issuance of its certificate of incorporation by the #E' adopt a code of
by"laws for its government not inconsistent with this code. (#ec (%!
)ay be adopted and filed prior to incorporation, in such case, shall be approved and
signed by all incorporators submitted to #E' together with A* (#ec (%!
+oyola ,rand -illas .omeowners Ass v. 'A
The #upreme 'ourt held that although the 'orporation 'ode re/uires the filing of by"
laws within one month after the issuance of the 'ertificate of *ncorporation, it does
not e0pressly provide for the conse/uences of non"filing within the said period.
*t should be noted, however, that under #ection % of 12 345"A, the #E' can revoke
the certificate of registration of corporations for failure to file the by"laws within the
re/uired period but only after proper notice or hearing.
There is no automatic dissolution for failure to file by"laws within the re/uired period.
6leischer v. Botica 7olasco
The by"laws of the 'orporation which effectively gives the corporation preferential
right of the shares in /uestion is in direct conflict with the 'orporation +aw. The owner of
the shares, which are personal property, has the uncontrollable right to alienate them
which attaches to the ownership of any other species of property.
The right to impose restrictions on transfer of shares must be conferred upon the
corporation by a governing statute or by the A8*. *t cannot be done by a by"law without
statutory or charter authority.
,ov9t of 1hils. -. El .ogar
The by"laws provision which empowers the board to cancel shares and return to the
owner the balance resulting from the li/uidation by a vote of absolute ma:ority of the
members is an AB#8+;TE 7;++*T<. This is in direct conflict with the 'orporation +aw
HLP2009-3B Page 2
which declares that the board shall not have the powers to force the surrender and
withdrawal of unmatured stock e0cept in case of li/uidation or forfeiture of stock.
The practice of the directorate filling"up the vacancies by the action of the directors
themselves is valid.
The 'orporation +aw does not undertake to prescribe the rate of compensation for
the directors of the corporation. The power to fi0 compensation is left to the corporation
itself to be determined in the by"laws. .ence, the distribution to directors of El .ogar of
= net profit in proportion to their attendance at board meetings is valid.
*f a mistake has been made or the rule adopted in the by"laws has been found to
work harmful results, the remedy is in the hands of the #.s who have the power at any
lawful meeting to change the rule.
The provisions in the by"laws which re/uire that the persons elected to the board be
holders of shares with paid"up value of 1> and that directors who loan from the
association waive their rights as #.s are -A+*2. The 'ode specifically gives the power
to the corporation to provide in its by"laws for the /ualifications of directors, and the
re/uirement of security from them for the proper discharge of the duties of their office is
highly prudent and in conformity with good practice. The 'ode also has safeguards on
directors from making loans to themselves, designed to prevent the possibility of looting
of the corporation.
+. ,w file#
)ust be approved by the affirmative vote of the #tockholders representing the
ma:ority of the outstanding capital stock or ma:ority of members (#ec (%!
)ust be signed by the stockholders or members voting for it (#ec (%!
)ust be filed with the #E' certified by the ma:ority of directors?trustees and
countersigned by the secretary of the corporation which shall be attached to original
A* (#ec (%!
(. W"e-e .e$t
)ust be kept in the principal office of the corporation@ sub:ect to inspection of
stockholder or member during office hours (#ec (%!
/. 0ffe'ti1ity f %y-laws
Effective only from the issuance of #E' of certification that bylaw are not inconsistent
with the 'ode (#ec (%!
'annot bind stockholders ? corporation pending approval
By laws, like A* are contracts of adhesion. They will bind the corporation and
stockholders including those who vote against as well as those who became
members after approval
'ontracts entered into without strict compliance with by"laws may be binding on the
corporation due to long ac/uiescence and usage
By laws are mere internal rules among stockholders and cannot affect or pre:udice $
rd
persons who deal with the corporation unless they have knowledge of the same
HLP2009-3B Page 3
). Cntents &Se'tin (2*
#ub:ect to the provisions of the 'onstitution, this 'ode, other special laws, and the
articles of incorporation, a private corporation may provide in its by"laws for:
a! The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees@
b! The time and manner of calling and conducting regular or special meetings of the
stockholders or members@
c! The re/uired /uorum in meetings of stockholders or members and the manner of
voting therein@
d! The form for pro0ies of stockholders and members and the manner of voting
them@
e! The /ualifications, duties and compensation of directors or trustees, officers and
employees@
f! The time for holding the annual election of directors of trustees and the mode or
manner of giving notice thereof@
g! The manner of election or appointment and the term of office of all officers other
than directors or trustees@
h! The penalties for violation of the by"laws@
i! *n the case of stock corporations, the manner of issuing stock certificates@ and
:! #uch other matters as may be necessary for the proper or convenient transaction
of its corporate business and affairs.
2. P-'e#3-e f- a4en#4ent f %y-laws &Se'tin (5*
-oting Ae/uirement: board of directors or trustees by a ma:ority vote and the
owners of at least a ma:ority of the outstanding capital stock, or ma:ority of the
members of a non"stock corporation, at a regular or special meeting duly called for
the purpose, may amend or repeal any by"laws or adopt new by"laws
2elegation of power to amend to the B82: The owners of two"thirds (5?$! of the
outstanding capital stock or two"thirds (5?$! of the members in a non"stock
corporation may delegate to the board of directors or trustees the power to amend or
repeal any by"laws or adopt new by"laws
Aevocation of the delegation of power to amend: Any power delegated to the board
of directors or trustees to amend or repeal any by"laws or adopt new by"laws shall be
considered as revoked whenever stockholders owning or representing a ma:ority of
the outstanding capital stock or a ma:ority of the members in non"stock corporations,
shall so vote at a regular or special meeting
Bhenever any amendment or new by"laws are adopted, such amendment or new by"
laws shall be attached to the original by"laws in the office of the corporation, and a
copy thereof, duly certified under oath by the corporate secretary and a ma:ority of
the directors or trustees, shall be filed with the #ecurities and E0change 'ommission
the same to be attached to the original articles of incorporation and original by"laws.
HLP2009-3B Page 4
The amended or new by"laws shall only be effective upon the issuance by the
#ecurities and E0change 'ommission of a certification that the same are not
inconsistent with this 'ode.
B. Nn-3se f C"a-te- 6 Cntin33s In$e-atin
&. 7on"user for 5 years (non"use of charter!" when the corporation does not formally
organiCe and commence the transaction of its business or the construction of its
works within 5 years from the date of its incorporation. *ts corporate powers cease
and the corporation shall be deemed dissolved (automatic!
6ormal organiCation D 7ot only means adoption of by"laws but also the organiCation
of the Board. This may consist in the election of new board of directors or trustees
and corporate officer
The A8* names the initial members of the Board who are to act until the &
st
set of
directors are duly elected and /ualified. This interim board can perform the functions
of a regular board until the date of the election of directors. 8nce elected, the
directors must complete the organiCation of the corporation by electing the officers.
'ommencement of business D This is after the approval of the by"laws and the
election of directors and officers elected. This may take the form of contracting for
lease or sale of properties to be used as business site of the corporation and other
preparatory acts geared towards fulfillment of the purpose for which the corporation
was established
5. 7on"user for years (continuous inoperation!" when the corporation has commenced
the transaction of its business but subse/uently becomes continuously inoperative for
a period of at least years. The same shall be a ground for the suspension or
revocation of its corporate franchise or 'ertificate of *ncorporation (not automatic!.
7otice and hearing is re/uired.
$. E0ception: cause or non"use or operation was due to causes beyond the control of
the corporation as determined by #E' (e0. )ineral lands to be developed by the
corporation as per its purpose are the ob:ect of court litigation and a court in:unction
against the corporate activities has been issued!
POW0RS OF CORPORATIONS
P-i4a-y R3le7 All corporate powers shall be e0ercised and all corporate businesses shall be
conducted by the board of directors of the corporation (#ec. 5$!
08'e$tin7 #pecific instances when the 'ode re/uires the consent and ratification of the #.s,
particularly where the underlying contractual relationship between the parties: The corporation,
the #.s?members, and the #tate is being amended or alterd
How is consent expressed by the parties?
Corporation: Through the Board
State: Through act of the regulatory body (SEC)
SHs: Through a!ority or "#$ %ote where applicable (&ote: 'issenting SHs in
certain instances are gi%en the option to withdraw fro the relationship through the
exercise of appraisal right)
HLP2009-3B Page 5
A. In 9ene-al (#ection $%!
&. To sue and be sued in its corporate name@
5. #uccession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation@
$. To adopt and use a corporate seal@
(. To amend its articles of incorporation in accordance with the provisions of this 'ode@
. To adopt by"laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this 'ode@
%. *n case of stock corporations, to issue or sell stocks to subscribers and to sell stocks
to subscribers and to sell treasury stocks in accordance with the provisions of this
'ode@ and to admit members to the corporation if it be a non"stock corporation@
E. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily re/uire, sub:ect to the limitations prescribed by law and
the 'onstitution@
F. To enter into merger or consolidation with other corporations as provided in this
'ode@
3. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: 1rovided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity@
&4. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees@ and
&&. To e0ercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. (in the purpose
clause!
#ources of power
o #ection $%
o 1urpose clause (#ec. FF"7on stock 'orporations!: charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes like trade, industry, agriculture and like chambers or
any combination thereof. GAecreationalH is omitted.
#ec $F par && grants such power as are essential or necessary to carry out its
purpose or purposes as stated in the A*. A corporation is presumed to act within its
powers and when a contract is not on its face necessarily beyond its authority, it will
in the absence of proof to the contrary presumed valid
5 general restrictions on the power of the corporation to ac/uire and hold properties:
o that the property must be reasonably and necessarily re/uired by the
transactions of its lawful business
o that the power shall be sub:ect to the limitations prescribed by other special laws
and the constitution (corporation may not ac/uire more than $4= of voting stocks
of a bank@ corporations are restricted from ac/uiring public lands e0cept by lease
of not more than &444 hectares!
HLP2009-3B Page 6
B. S$e'ifi' Pwe-s
E0tend or shorten the corporate term
*ncrease or decrease capital stock
*ncur, create or increase bonded indebtedness
2eny preemptive right
#ell or otherwise dispose of substantially all its assets
Ac/uire its own shares
*nvest in another corporation or business
2eclare dividends
Enter into management contracts
'. T e8ten# - s"-ten '-$-ate te-4 (#ection $E!
&. Approval and -oting and 7otice Ae/uirement:
a! Approved by a ma:ority vote of the board of directors or trustees and
b! Aatified at a meeting by the stockholders representing at least two"thirds (5?$! of
the outstanding capital stock or by at least two"thirds (5?$! of the members in
case of non"stock corporations.
c! Britten notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
5. Appraisal right D *n case of e0tension of corporate term, any dissenting stockholder
may e0ercise his appraisal right under the conditions provided in this code.
2. T in'-ease - #e'-ease 'a$ital st'.: T in'3-; '-eate; in'-ease; %n#e#
in#e%te#ness (#ection $F!
&. Approval and -oting and 7otice Ae/uirement:
a! Approved by a ma:ority vote of the board of directors
b! Two"thirds (5?$! of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness in a meeting duly called for the purpose
c! Britten notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and
place of the stockholderIs meeting at which the proposed increase or diminution
of the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally
5. 'ertificate of 6iling: A certificate in duplicate must be signed by a ma:ority of the
directors of the corporation and countersigned by the chairman and the secretary of
the stockholdersI meeting, setting forth:
a! That the re/uirements of this section have been complied with@
b! The amount of the increase or diminution of the capital stock@
HLP2009-3B Page 7
c! *f an increase of the capital stock, the amount of capital stock or number of
shares of no"par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of
no"par stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or number of
shares of no"par stock allotted to each stock"holder if such increase is for the
purpose of making effective stock dividend therefor authoriCed@
d! Any bonded indebtedness to be incurred, created or increased@
e! The actual indebtedness of the corporation on the day of the meeting@
f! The amount of stock represented at the meeting@ and
g! The vote authoriCing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
$. Approval of #E': Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall re/uire prior approval of the
#ecurities and E0change 'ommission.
8ne of the duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the #ecurities and E0change 'ommission and
attached to the original articles of incorporation.
(. Effectivity: 6rom and after approval by the #ecurities and E0change 'ommission
and the issuance by the 'ommission of its certificate of filing, the capital stock shall
stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authoriCed, as the certificate of filing may declare
. Treasurer Affidavit: 1rovided, That the #ecurities and E0change 'ommission shall
not accept for filing any certificate of increase of capital stock unless accompanied by
the sworn statement of the treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least twenty"five (5=! percent of
such increased capital stock has been subscribed and that at least twenty"five (5=!
percent of the amount subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the corporation property the
valuation of which is e/ual to twenty"five (5=! percent of the subscription
2ecrease of capital stock: 7o decrease of the capital stock shall be approved by the
'ommission if its effect shall pre:udice the rights of corporate creditors
7on"stock corporations: )ay incur or create bonded indebtedness, or increase the
same, with the approval by a ma:ority vote of the board of trustees and of at least
two"thirds (5?$! of the members in a meeting duly called for the purpose.
Aegistration of bonds" Bonds issued by a corporation shall be registered with the
#ecurities and E0change 'ommission, which shall have the authority to determine
the sufficiency of the terms thereof.
7o appraisal right here, a dissenting #. can simply sell his shares. A grant of
appraisal right would defeat the purpose which is to raise funds.
HLP2009-3B Page 8
E. T #eny $-e-e4$ti1e -i9"ts (#ection $3!
&. 2efinition of pre(epti%e rights D All stockholders of a stock corporation shall en:oy
pre"emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto
This is to prevent dilution in shareholding
*f you increase common stock and some of the stockholders do not want to
subscribe, get from them a waiver of pre"emptive right (There are authorities saying
that the right is applicable when there is reduction of shares!
Basis of right@ common law rule
1reemptive right: option privilege of an e0isting #. to subscribe to a proportionate
part of shares subse/uently issued by the corporation before the same can be
disposed in favor of others
'ommon"law right granted to #.s of a corporation to be granted the first option to
subscribe to any opening of the unissued capital stock, or to any increase from the
authoriCed capital stock
JEconomic aspect: right to invest capitalJthe right becomes valuable when the
enterprise has demonstrated that it will earn a higher rate of return on the capital than
the #. could get were he to invest it in the open market
J+imited to shares issued in pursuance of an increase in the authoriCed capital
stock@ does not apply to additional issues of originally authoriCed shares forming part
of the e0isting capital stock
JAn original subscriber is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authoriCed shares
JBhen unsubscribed shares are later reoffered, the #. cannot claim that his
interest would be diluted
J1reemptive rights are not statutory rights, but common law rights
J1reemptive rights are personal rights of the #.
7eed not be stipulated in the A8* or by"laws
)ay be removed, denied, or altered only through specific provisions in the A8* or
amendment thereto
#E': vote by ma:ority of #.s to waive the right is 7;++ and -8*2@ such waiver must
be given individually by the #.s concerned
But unanimous vote of all will bind them
)n close corporations: Balance of power in close corporations may be disturbed by an
indiscriminate issuance of new shares without regard to preemptive right of #.s. *n a
close corp, e0ceptions in #ec $3 are not applicable
5. +imitation to e0ercise of pre"emptive right:
a! #uch pre"emptive right shall not e0tend to shares to be issued in compliance with
laws re/uiring stock offerings or minimum stock ownership by the public@
b! 7ot e0tend to shares to be issued in good faith with the approval of the
stockholders representing two"thirds (5?$! of the outstanding capital stock, in
HLP2009-3B Page 9
e0change for property needed for corporate purposes or in payment of a
previously contracted debt
c! #hall not take effect if denied in the Articles of *ncorporation or an amendment
thereto.
1reemptive right D option privilege of an e0isting stockholder to subscribe to a
proportionate part of shares subse/uently issued by the corp before same can be
disposed of in favor of the others@ includes all issues and disposition of shares of any
class
*ncludes not only new shares in pursuance of an increase of capital stock but would
cover the issue of previously unissued shares which form part of the e0isting capital
stock as well as treasury shares (#ec. 3 used the phrase, Gdisposition of shares of
any classH, furthermore since the funds used in reac/uiring T?# come from surplus
profits which could have been declared instead as dividends, it is desirable policy to
recogniCe the pre"emptive rights of #.s!
Bhere the shares are issued in e0change for property needed for corporate purposes
or for debt previously granted, #. cannot demand his pre"emptive right for right may
pre:udice corporate interest
*n :oint ventures, you can e0pand pre"emptive rights even in instances under #ec $3
$. Aemedies in case of unwarranted denial:
a! *n:unction
b! )andamus
in any case, the suit should be individual and not derivative because the wrong done
is to the stockholders individually
Aight of 6irst Aefusal refers to the offering of the shares first to the other stockholders
before it is sold?transferred to outsiders. As distinguished to A*,.T 86 6*A#T
AE6;#A+, the latter is contractual, while 1AE"E)1T*-E A*,.T e0ists even if not
stated in A8*, that9s why there is a need to e0pressly deny it. 6urthermore, the right
must be e0ercised within $4 days, hence not indefinite. Bhile e0ercise of pre"emptive
right is usually fi0ed by a resolution.
6. T sell - #is$se f '-$-ate assets (#ection (4!
&. Aestrictions: #ub:ect to the provisions of e0isting laws on illegal combinations and
monopolies
5. #cope of power: To sell, lease, e0change, mortgage, pledge or otherwise dispose of
all or substantially all of its property and assets, including its goodwill, upon such
terms and conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem e0pedient
)eaning of disposition of substantially all of the corporate property and assets" if
thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
HLP2009-3B Page 10
$. Approval, voting and notice re/uirement:
a! )a:ority vote of its board of directors or trustees,
b! AuthoriCed by the vote of the stockholders representing at least two"thirds (5?$!
of the outstanding capital stock, or in case of non"stock corporation, by the vote
of at least to two"thirds (5?$! of the members, in a stockholderIs or memberIs
meeting duly called for the purpose.
c! Britten 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
Bhen #. approval not necessary " *f disposition is necessary in the usual and regular course of
business of said corporation or if the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining business.
*n non"stock corporations where there are no members with voting rights " the vote
of at least a ma:ority of the trustees in office will be sufficient authoriCation for the
corporation to enter into any transaction authoriCed by this section.
(. Appraisal right: That any dissenting stockholder may e0ercise his appraisal right
under the conditions provided in this 'ode
. Abandonment of the sale, leaseK " After such authoriCation or approval by the
stockholders or members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, e0change, mortgage, pledge or other
disposition of property and assets, sub:ect to the rights of third parties under any
contract relating thereto, without further action or approval by the stockholders or
members.
,. T a'<3i-e wn s"a-es (#ection (&!
A stock corporation shall have the power to purchase or ac/uire its own shares for a
legitimate corporate purpose or purposes (treasury shares! provided, that the
corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or ac/uired
Trust *und doctrine D the re/uirement of unrestricted retained earnings is because
subscription to the capital of a corporation constitute a fund to which creditors have a
right to look for the satisfaction of their claims
+egitimate purpose includes:
a! To eliminate fractional shares arising out of stock dividends@
b! To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delin/uency sale, and to purchase delin/uent shares
sold during said sale@ and
c! To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this 'ode.
HLP2009-3B Page 11
A corporation must have unrestricted retained earnings in ac/uiring own shares
e0cept:
a! shares are ac/uired in the redemption of redeemable shares
b! shares are re"ac/uired to effect a decrease in capital stock approved by the #E'
c! shares are reac/uired by a close corporation pursuant to the order of the #E'
acting to arbitrate a deadlock
.. T in1est '-$-ate f3n#s in ant"e- '-$-atin - %3siness (#ection (5!
&. #ub:ect to the provisions of this 'ode, a private corporation may invest its funds in
any other corporation or business or for any purpose other than the primary purpose
for which it was organiCed
5. Approval, voting and notice re/uirement
a! )a:ority of the board of directors or trustees and
b! ratified by the stockholders representing at least two"thirds (5?$! of the
outstanding capital stock, or by at least two thirds (5?$! of the members in the
case of non"stock corporations, at a stockholderIs or memberIs meeting duly
called for the purpose.
c! Britten notice of the proposed investment and the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally
$. Appraisal right " any dissenting stockholder shall have appraisal right as provided in
this 'ode
(. Bhen #. approval not necessary" where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation
To avoid #. approval, include other business undertakings in the secondary
purpose
. Aules in case a corporation will invest its funds in another corporation
a! *f it is the same purpose or incidental or related to its primary purpose, the board
can invest the corporate fund without the consent of the stockholders. Bhat is
re/uired is only the vote of the ma:ority of the B82. 7o appraisal right
b! *f the investment is in another corporation of different business or purpose, the
affirmative vote of ma:ority of the board consented by 5?$ 8# capital stock is
re/uired
T %3y t"e s"a-es f ant"e- '-$-atin &+)* $-1i#e#7
a. Aeasonably necessary for its lawful business
b. The other corporation must be engaged in an allied business or not alien to the
purposes of the purchasing corporation ((5!
This means a corporation can enter into a :oint venture with another person,
partnership or another corporation
HLP2009-3B Page 12
But a corporation cannot enter into a partnership contract
Pwe- t ente- int a $a-tne-s"i$
,A: corporation cannot enter into partnerships with other corporations or with
individuals
E0ception: e0pressly allowed by statute or charter
o Loint ventures
o +imited partnerships (;# +aw!
*. T #e'la-e #i1i#en#s (#ection ($!
The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them.
Any cash dividends due on delin/uent stock shall first be applied to the unpaid
balance on the subscription plus costs and e0penses, while stock dividends shall be
withheld from the delin/uent stockholder until his unpaid subscription is fully paid
Approval M voting re/uirement:
a! Approval of B82
b! *n case of stock dividend: *t shall be not be issued without the approval of
stockholders representing not less than two"thirds (5?$! of the outstanding capital
stock at a regular or special meeting duly called for the purpose.
+imitation on retention of surplus profits" #tock corporations are prohibited from
retaining surplus profits in e0cess of one hundred (&44=! percent of their paid"in
capital stock, e0cept:
a! when :ustified by definite corporate e0pansion pro:ects or programs approved by
the board of directors@ or
b! when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without
its?his consent, and such consent has not yet been secured@ or
c! when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
Stoc+ di%idends: distribution to stockholders of company9s own stock. 'orporate
profits or earnings are transferred to capital stock and shares of stock representing
the increase in capitaliCation are distributed. )ay be issued out of premium surplus.
o +imitation on the issue of stock dividends:
there must be unissued shares of the corporation
there must be unrestricted retained earnings
cannot be issued to non"stockholders even for services rendered
Bhether or not there should be a distribution of dividends in whatever form, such
matters are always sub:ect to the business :udgment of the B82 and the courts
will not interfere with the former9s discretion e0cept:
o when tainted with bad faith
o when tainted with fraud
o when tainted with gross negligence
HLP2009-3B Page 13
o when profits accumulated are in e0cess of &44= of the corporations paid"in
capital stock unless e0empted
Bhen right to 2ividends -ests:
o ,eneral rule: as soon as the same have been lawfully declared by the B82,
becomes a debt owing to the #.. 7o revocation can be made
o Exceptions:
not yet announced or communicated to the public, revocable before
announcement to shareholders
when stock dividends are declared since these are not distributions but
merely represent changes in the capital structure, may be revoked prior to
actual issuance
Aights of transferee to dividends D Aight to dividends vests upon declaration so
whoever owns the stock at time or stockholders of record also owns the dividend.
#ubse/uent transfer of stock would not carry with it right to dividends
Aecord date D The date on which a stockholder must be registered on a corporation9s
stock and transfer book in order to be entitled to a dividend or voting rights.
L. T ente- int 4ana9e4ent 'nt-a't (#ection ((!
Approval and -oting Ae/uirement:
o Approval by the board of directors, and
o Approval by stockholders owning at least the ma:ority of the outstanding capital
stock, or by at least a ma:ority of the members of both the managing and the
managed corporation
7ote: if managing other corporations is the primary purpose, ratificatory vote is
not re/uired
o 5?$ vote re/uired when: (#1E'*A+ A;+E!
a. where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one"third
(&?$! of the total outstanding capital stock entitled to vote of the managing
corporation@ or
b. where a ma:ority of the members of the board of directors of the managing
corporation also constitute a ma:ority of the members of the board of directors of
the managed corporation
-ationale for special rule: entering into a anageent contract is a de%iation
fro the ,eneral -ule that the board anages the corporation and that the board of
the anaging copany should de%ote its affairs to its own corporation
Term of management contract: 7o management contract shall be entered into for a
period longer than five years for any one term.
These provisions shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or
otherwise
#ervice contracts or operating agreements which relate to the e0ploration,
development, e0ploitation or utiliCation of natural resources may be entered into for
such periods as may be provided by the pertinent laws or regulations.
HLP2009-3B Page 14
)anagement contract D any contract whereby a corporation undertake to manage or
operate all or substantially all of the business of another corporation
*f managing a partnership or individual not a corporation, not covered
>. =lt-a1i-es a'ts (#ection (!
2efinition of ultra%ires acts D These are acts which a corporation is not empowered to
do or perform because they are not based on the powers conferred by its A8* or by
the 'orporation 'ode on corporations in general, or because they are not necessary
or incidental to the e0ercise of the powers so conferred.
Aule on ;ltravires acts of corporations D 7o 'orporation under this 'ode shall
possess or e0ercise any corporate powers e0cept those conferred by this 'ode or by
its articles of incorporation and e0cept such as are necessary or incidental to the
e0ercise of the powers so conferred.
J Based on two (5! principles:
&. 'orporation is a creature of law and has only such powers and privileges as are
granted by the #tate
&
5. The doctrine upholds the duty of trust and obedience owed by the corporation9s
directors and officers to the #.s
a. 2efense of ultra vires rests on the violation of trust or duty towards #.s, and
should not be entertained where its allowance will do greater wrong to innocent $rd
parties
There are $ types of ;+TAA"-*AE# acts:
a. Acts beyond the powers of the corporation as stipulated in law or A8*
b. Acts or contracts entered in behalf of the corporation by persons w?o corporate
authority
,A: *n the absence of an authority from the board, no person , not even the
officers can validly bind the corporation
E0ception: 2octrine of apparent Authority@ *n dealing with corporations, the public
at large is bound to rely upon outward appearances, and relying on such, if it be
found that the directors permitted the agent to hold himself out as having
1
Corporations are now more of a product of the agreement of the incorporating parties
rather than a mere creature of the State:
Sec 10 allows 5 or more persons to form a private corporation for any lawful
purpose/s
Sec 3 par 11 allows every corporation the power to e!ercise such other powers
as may "e essential or necessary to carry out the purpose/s in the #$%
&he corporation's powers depends on its purpose in the #$%
Since parties are entirely free to insert any num"er of purposes in its #$%(
it follows that the e!tent of the corporation's powers depends largely on
their agreement( and not merely on a direct grant from the State( unless of
course the purposes are illegal)
%nstances where an act can or cannot "e reasona"ly implied from the purposes
due to poor draftsmanship or lac* of foresight of the drafters( the purpose
clause may "e reasona"ly stretched to accommodate the new and une!pected
situations( otherwise( a proper amendment of the #$% would "e necessary)
HLP2009-3B Page 15
authority to bind or ac/uiesced in the contract and accepted the benefits
therefrom, the corporation will be bound. (AamireC v. 8rientalist!
c. Acts or contracts which are per se illegal.
i. This cannot be gi%en legal effect and are %oid
B;T in .arden v. Benguet, #' upheld a patently void contract as between
the contracting parties. #' said that public policy is controlling in the grant of
mining rights. The violation of the prohibition against mining corporations
from owning stock of another corporation though illegal did not in any way
affect the contract. This violation can only be proceeded upon by way of a
criminal prosecution or by /uo warranto which can be maintained only by the
#tate. *nsofar as the parties are concerned, no civil wrong had been
committed between them, and if public wrong had been committed, then the
directors of both Balatoc and .arden were the active inducers of that wrong.
Thus, since the contract has been performed on both sides and there is no
possibility of undoing what has been done, and though the corporate
contracts are illegal per se, when only the public or government policy or
interests are at stake and no private wrong is committed, the courts will leave
the parties as they are, in accordance with their original contractual
stipulations.
ii. /ltra( 0ires 1cts which are not per se illegal are erely %oidable hence can be
ratified by SHs. (2iro%ano case)
*n the case of 1irovano v. 2ela Aama, which involves the issue of
whether or not the donation by the corporation of the proceeds of the
insurance is an ultra"vires act, #' held that such donation is not ultra"vires.
#' said that it comes within the broad power under the A8* that the
'orporation may invest and GdealH with moneys of the company not
immediately re/uired. The word GdealH is broad enough to include any
manner of disposition.
6urthermore, assuming that it was ultra"vires, there was ratification by
the #.s. 6inally, the donation was already consummated. The defense of
ultra"vires cannot be set"up against completed or consummated transactions.
6orm of Aatification:
a. E0press act of #.(if act is by the Board! or Board(if act is by the
officers!
b. *mplied through acceptance of benefits
c. Through estoppel on the part of Board or the officers
Effect?s of Aatification:
'ures the infirmity and makes it perfectly valid and enforceable,
1A8-*2E2 that it pre:udices no creditors and if it has been partially
e0ecuted and not merely e0ecutory
HLP2009-3B Page 16
Atrium v. 'A
Atrium )anagement 'orporation filed with AT' action for collection of the (
postdated checks issued by the .i"cement 'orporation, though its signatories de
+eon, treasurer, and de las Alas, chairman of the corporation to a certain ET .enry
and 'o which the latter endorsed to Atrium for rediscounting.
The act of issuing was well within the ambit of a valid corporate act, for it was for
securing a loan to finance the activities of the corporation, hence, not an ultravires
act.
An ultravires act is distinguished from illegal act, the former being voidable which
may be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated. #' however, held de +eon negligent.
Aepublic of the 1hilippines vs. Aco:e )ining 'o.
The company is estopped from denying liability on the ground that the board
resolution is ultravires. Assuming arguendo that the resolution is an ultra vires act,
the same is not void for it was approved not in contravention of law, customs, public
order and public policy. N*n this case, even if the setting up of a post office in the
mining camp is outside the e0press powers, it is necessary to promote the interest
and welfare of the corporationO
The term ultravires should be distinguished from an illegal act for the former is merely
voidable which may be enforced while the latter is void and cannot be validated.
,eneral conse/uences of ultravires acts are as follows:
a! 'orporation may be dissolved under a /uo warranto proceeding but in most
cases, the court merely en:oins the corporation from commission of the ultra
vires acts
b! 'ertificate of Aegistration may be suspended or revoked by #E'
c! 1arties to the ultravires contract if e0ecutory on both sides neither party can ask
for specific performance. Bill be left as they are if the contract has been fully
e0ecuted on both sides. *f one party has performed his part, the contract will be
enforced provided it is not illegal
d! 'ontract proceeding from an ultra"vires act is voidable
e! Any stockholder may bring either an individual or derivative suit to en:oin a
threatened ultravires act or contract. *f act or contract has already been
performed, a derivative suit for damages may be filed against the directors, but
their liability will depend on whether they acted in good faith and with reasonable
diligence in entering into contracts. Bhen based on tort, cannot set"up the
defense of ultravires against in:ured party who had no knowledge that such was
ultravires
f! )ay become binding by the ratification of all stockholders unless third parties are
pre:udice thereby or unless the acts is illegal
Le9al Cnse<3en'es f =lt-a->i-es A'ts &Classifie#*
&. 8n the 'orporation
*f the act is *++E,A+, involuntary dissolution under a /uo warranto proceeding
by the #ol,en
HLP2009-3B Page 17
Aevocation or suspension of the certificate of registration by #E'
5. 8n the parties to the ultra"vires contract
1arties are left as they are and no rescission would lie
Bhere there has been partial performance by one party and the other has not,
the latter having benefited from the performance, is estopped from claiming ultra"
vires
$. 8n the rights of #tockholders
A #. can file an individual or derivative suit to en:oin a threatened ultra vires
act or contract or a derivative suit for damages if the contract has been
performed
+iability would depend on whether the contracting parties acted in ,6 and with
reasonable diligence@ an honest mistake would not give rise to liability
*f action is based on tort, the #.s cannot set up the defense of ultra vires
against the in:ured party who had no knowledge that the corporation was
engaging in an act not included e0pressly or impliedly in its purpose clause
7apocor v. -era
The issue in this case is whether or not the act of 71' in taking over #ea
+ion9s stevedoring services is an ultra"vires act.
#' held that it is not ultra"vires. 71' is empowered by its charter to undertake
such services, it being reasonably necessary to the operation and maintenance
of the power plant. The ruling in Aco:e )ining was upheld, where the company is
not restricted by its e0press powers as long as the act will promote the interests
and welfare of the corporation.
,overnment of 1.*. v. El .ogar
1. B?7 el .ogar is illegally owning and holding a business lot in e0cess of the reasonable
re/uirements and in contravention of the 'orpo law that every corporation has the power
to purchase hold lease real property as reasonable and necessary re/uired for the
transaction of the lawful business
.: The law e0pressly declares that corporations may ac/uire such real estate as is
reasonably necessary to enable them to carry out the purposes for which they were
created@ and we are of the opinion that the owning of a business lot upon which to
construct and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was ac/uired. A
different ruling on this point would compel important enterprises to conduct their business
e0clusively in leased offices J a result which could serve no useful end but would retard
industrial growth and be inimical to the best interests of society. Be are furthermore of
the opinion that, inasmuch as the lot referred to was lawfully ac/uired by the respondent,
it is entitled to the full beneficial use thereof. 7o legitimate principle can discovered which
would deny to one owner the right to en:oy his (or its! property to the same e0tent that is
conceded to any other owner.
!. B?7 el .ogar has engaged in activities foreign to the purposes for which the
corporation was created and not reasonably necessary to its legitimate ends, specifically:
(&! the administration of the offices in the El .ogar building not used by the respondent
itself and the renting of such offices to the public@ (5! the administration and management
of properties belonging to delin/uent shareholders of the association@ ($! the
management of some parcels of improved real estate situated in )anila not under
mortgage to it, but owned by shareholders, and has held itself out by advertisement as
prepared to do so
.: (&! The activities here criticiCed clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the second cause of action.
This matter will therefore no longer detain us. *f the respondent had the power to ac/uire
HLP2009-3B Page 18
the lot, construct the edifice and hold it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let to others must necessarily be
lawful.
(5! The case for the government supposes that the only remedy which the respondent
has in case of default on the part of its shareholders is to proceed to enforce collection of
the whole loan in the manner contemplated in section &F of the 'orporation +aw. *t will
be noted, however, that, according to said section, the association may treat the whole
indebtedness as due, Pat the option of the board of directors,P and this remedy is not
made e0clusive. Be see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the security for the
delin/uent debt and to manage it with a view to the satisfaction of the obligations due to
the debtor than the immediate enforcement of the entire obligation, and the validity of the
clause allowing this course to be taken appears to us to be not open to doubt.
($! The practice described in the passage above /uoted from the agreed facts is in our
opinion unauthoriCed by law. The administration of property in the manner described is
more befitting to the business of a real estate agent or trust company than to the
business of a building and loan association. The practice to which this criticism is directed
relates of course solely to the management and administration of properties which are
not mortgaged to the association. The circumstance that the owner of the property may
have been re/uired to subscribe to one or more shares of the association with a view to
/ualifying him to receive this service is of no significance. *t is a general rule of law that
corporations possess only such e0press powers. The management and administration of
the property of the shareholders of the corporation is not e0pressly authoriCed by law,
and we are unable to see that, upon any fair construction of the law, these activities are
necessary to the e0ercise of any of the granted powers. The corporation, upon the point
now under the criticism, has clearly e0tended itself beyond the legitimate range of its
powers. But it does not result that the dissolution of the corporation is in order, and it will
merely be en:oined from further activities of this sort.
+. B?7 the royalty paid to the founder of el .ogar, Antonio )elian, as compensation for
his services rendered by him during the early stages of the organiCation of the
corporation, is unconscionable, e0cessive, and thus necessitates dissolution
.: 7o possible doubt e0ists as to the power of a corporation to contract for services
rendered and to be rendered by a promoter in connection with organiCing and
maintaining the corporation. *t is true that contracts with promoters must be characteriCed
by good faith@ but could it be said with certainty, in the light of facts e0isting at the time
this contract was made, that the compensation therein provided was e0cessiveQ *f the
amount of the compensation now appears to be a sub:ect of legitimate criticism, this must
be due to the e0traordinary development of the association in recent years. *f the )elian
contract had been clearly ultra vires J which is not charged and is certainly untrue J its
continued performance might conceivably be en:oined in such a proceeding as this@ but if
the defect from which it suffers is mere matter for an action because )elian is not a party.
*t is rudimentary in law that an action to annul a contract cannot be maintained without
:oining both the contracting parties as defendants. )oreover, the proper party to bring
such an action is either the corporation itself, or some shareholder who has an interest to
protect.
(. B?7 el .ogar had abused its franchise in issuing special shares, which is alleged to be
illegal and inconsistent with the plan and purposes of building and loan associations,and
that these are held by well"to"do people purely for investment purposes and not by wage"
earners for savings
.: The ground for supposing the issuance of the PspecialP shares to be unlawful is that
special shares are not mentioned in the 'orporation +aw as one of the forms of security
which may be issued by the association. ;pon e0amination of the nature of the special
shares in the light of American usage, it will be found that said shares are precisely the
same kind of shares that, in some American :urisdictions, are generally known as
HLP2009-3B Page 19
advance payment shares@ in if close attention be paid to the language used in the last
sentence of section &EF of the 'orporation +aw, it will be found that special shares where
evidently created for the purpose of meeting the condition cause by the prepayment of
dues that is there permitted. The language of this provision is as follow Ppayment of dues
or interest may be made in advance, but the corporation shall not allow interest on such
advance payment at a greater rate than si0 per centum per annum nor for a longer period
than one year.P *n one sort of special shares the dues are prepaid to the e0tent of 1&%4
per share@ in the other sort prepayment is made in the amount of 1&4 per share, and the
subscribers assume the obligation to pay 1&4 monthly until 1&%4 shall have been paid.
*t will escape notice that the provision /uoted say that interest shall not be allowed on the
advance payments at a greater rate than si0 per centum per annum nor for a longer
period than one year. The word Pinterest P as there used must be taken in its true sense
of compensation for the used of money loaned, and it not must not be confused with the
dues upon which it is contemplated that the interest may be paid. 7ow, in the absence of
any showing to the contrary, we infer that no interest is ever paid by the association in
any amount for the advance payments made on these shares@ and the reason is to be
found in the fact that the participation of the special shares in the earnings of the
corporation, in accordance with section &FF of the 'orporation +aw, sufficiently
compensates the shareholder for the advance payments made by him@ and no other
incentive is necessary to induce inventors to purchase the stock.
*t will be observed that the final 54 per centum of the par value of each special share is
not paid for by the shareholder with funds out of the pocket. The amount is satisfied by
applying a portion of the shareholderIs participation in the annual earnings. But as the
right of every shareholder to such participation in the earnings is undeniable, the portion
thus annually applied is as much the property of the shareholder as if it were in fact taken
out of his pocket. *t follows that the mission of the special shares does not involve any
violation of the principle that the shares must be sold at par.
6rom what has been said it will be seen that there is e0press authority, even in the very
letter of the law, for the emission of advance"payment or PspecialP shares, and the
argument that these shares are invalid is seen to be baseless. *n addition to this it is
satisfactorily demonstrated in #everino vs. El .ogar 6ilipino, supra, that even assuming
that the statute has not e0pressly authoriCed such shares, yet the association has implied
authority to issue them. The complaint conse/uently fails also as regards the stated in
the ninth cause of action.
/. B?n El .ogar is pursuing illegally a policy of depreciating, at an e0cessive rate at the
discretion of its Board, the value of real properties ac/uired by it at its sales, thereby
frustrating the right of #.s to participate annually and e/ually in the earnings.
.: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to
what a court may do in determining the internal policy of a business corporation. *f the
criticism contained in the brief of the Attorney",eneral upon the practice of the
respondent association with respect to depreciation be well founded, the +egislature
should supply the remedy by defining the e0tent to which depreciation may be allowed by
building and loan associations. 'ertainly this court cannot undertake to control the
discretion of the board of directors of the association about an administrative matter as to
which they have legitimate power of action. The tenth cause of action is therefore not well
founded.
). B?n el .ogar9s charter should be revoked because it illegally maintains e0cessive
reserve funds and because it pursues a policy, allegedly unlawful, of paying a straight
annual dividend of &4= regardless of losses suffered and profits made by the corporation
and in violation of the re/uirement s of the corpo code.
HLP2009-3B Page 20
.: *t is insisted in the brief of the Attorney",eneral that the maintenance of reserve funds
is unnecessary in the case of building and loan associations, and at any rate the keeping
of reserves is inconsistent with section &FF of the 'orporation +aw. ;pon careful
consideration of the /uestions involved we find no reason to doubt the right of the
respondent to maintain these reserves. *t is true that the corporation law does not
e0pressly grant this power, but we think it is to be implied. *t is a fact of common
observation that all commercial enterprises encounter periods when earnings fall below
the average, and the prudent manager makes provision for such contingencies. To
regard all surplus as profit is to neglect one of the primary canons of good business
practice. Building and loan associations, though among the most solid of financial
institutions, are nevertheless sub:ect to vicissitudes. 6luctuations in the dividend rate are
highly detrimental to any fiscal institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of public confidence.
)oreover, it is said that the practice of the association in declaring regularly a &4 per cent
dividend is in effect a guaranty by the association of a fi0ed dividend which is contrary to
the intention of the statute. The government insists upon an interpretation of section &FF
of the 'orporation +aw that is altogether too strict and literal. 6rom the fact that the
statute provides that profits and losses shall be annually apportioned among the
shareholders it is argued that all earnings should be distributed without carrying anything
to the reserve. But it will be noted that it is provided in the same section that the profits
and losses shall be determined by the board of directors: and this means that they shall
e0ercise the usual discretion of good businessmen in allocating a portion of the annual
profits to purposes needful to the welfare of the association. The law contemplates the
distribution of earnings and losses after other legitimate obligations have been met. 8ur
conclusion is that the respondent has the power to maintain the reserves criticiCed in the
eleventh and twelfth counts of the complaint@ and at any rate, if it be supposed that the
reserves referred to have become e0cessive, the remedy is in the hands of the
+egislature. *t is no proper function of the court to arrogate to itself the control of
administrative matters which have been confided to the discretion of the board of
directors. The causes of action under discussion must be pronounced to be without merit.
2. B?n el .ogar illegally departed from its charter because it has made loans which were
intended to be used by the borrowers for other purposes than the building of homes.
There is no statute here e0pressly declaring that loans may be made by these
associations solely for the purpose of building homes. 8n the contrary, the building of
homes is mentioned in section &E& of the 'orporation +aw as only one among several
ends which building and loan associations are designed to promote. 6urthermore, section
&F& of the 'orporation +aw e0pressly authorities the Board of directors of the association
from time to time to fi0 the premium to be charged. *n the brief of the plaintiff a number of
e0cerpts from te0tbooks and decisions have been collated in which the idea is developed
that the primary design of building and loan associations should be to help poor people to
procure homes of their own. This beneficent end is undoubtedly served by these
associations, and it is not to be denied that they have been generally fostered with this
end in view. But in this :urisdiction at least the lawmaker has taken care not to limit the
activities of building and loan associations in an e0clusive manner, and the e0ercise of
the broader powers must in the end approve itself to the business community.
5. B?n the el .ogar charter may be revoked because various loans now outstanding
have been made by the respondent to corporations and partnerships, and that these
entities have in some instances subscribed to shares in the respondent for the sole
purpose of obtaining such loans, and that some of these :uridical entities became
shareholders merely for the purpose of /ualifying themselves to take loans from the
association.
.: the 'orporation +aw declares that Pany personP may become a stockholder in building
and loan associations. The word PpersonP appears to be here used in its general sense,
HLP2009-3B Page 21
and there is nothing in the conte0t to indicate that the e0pression is used in the restricted
sense of both natural and artificial persons, as indicated in section 5 of the Administrative
'ode. Be would not say that the word PpersonP or persons,P is to be taken in this broad
sense in every part of the 'orporation +aw. 6or instance, it would seem reasonable to
say that the incorporators of a corporation ought to be natural persons, although in
section % it is said that five or more PpersonsP, although in section % it is said that five or
more Ppersons,P not e0ceeding fifteen, may form a private corporation. But the conte0t
there, as well as the common sense of the situation, suggests that natural persons are
meant. Bhen it is said, however, in section &E$, that Pany personP may become a
stockholder in a building and loan association, no reason is seen why the phrase may not
be taken in its proper broad sense of either a natural or artificial person. At any rate the
/uestion whether these loans and the attendant subscriptions were properly made
involves a consideration of the power of the subscribing corporations and partnerships to
own the stock and take the loans@ and it is not alleged in the complaint that they were
without power in the premises. 8f course the mere motive with which subscriptions are
made, whether to /ualify the stockholders to take a loan or for some other reason, is of
no moment in determining whether the subscribers were competent to make the
contracts. The result is that we find nothing in the allegations of the si0teenth cause of
action, or in the facts developed in connection therewith, that would :ustify us in granting
the relief.
9. B?n el .ogar, in disposing of real estate purchased in the collection of defaulted loans,
on credit at first and then sold and mortgaged to el .ogar to secure payment of the
purchase price, had incurred several outstanding loans, and that that the persons and
entities to which said properties are sold under the condition charged are not members or
shareholders nor are they made members or shareholders of the defendant.
.: This part of the complaint is based upon a mere technicality of bookkeeping. The
central idea involved in the discussion is the provision of the 'orporation +aw re/uiring
loans to be stockholders only and on the security of real estate and shares in the
corporation, or of shares alone. *t seems to be supposed that, when the respondent sells
property ac/uired at its own foreclosure sales and takes a mortgage to secure the
deferred payments, the obligation of the purchaser is a true loan, and hence prohibited.
But in re/uiring the respondent to sell real estate which it ac/uires in connection with the
collection of its loans within five years after receiving title to the same, the law does not
prescribe that the property must be sold for cash or that the purchaser shall be a
shareholder in the corporation. #uch sales can of course be made upon terms and
conditions approved by the parties@ and when the association takes a mortgage to secure
the deferred payments, the obligation of the purchaser cannot be fairly described as
arising out of a loan. 7or does the fact that it is carried as a loan on the books of the
respondent make it a loan on the books of the respondent make it a loan in law. The
contention of the ,overnment under this head is untenable.
I4$lie# - Ne'essa-y Pwe-s
,A: all acts other than those specified in #ec $%"(( and in other special provisions would be ultra
vires
08'e$tin: those which are:
necessary or in'i#ental to the e8e-'ise f t"e $we-s so conferred ((!, or
essential or ne'essa-y to carry out its $3-$se or $3-$ses as stated in the A8*.
($F!
1resumption that a corporation can act within its powers and when a contract is not on its face
necessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to be
valid.
HLP2009-3B Page 22
#ec $%(&&!: corporations have the power and capacity to e0ercise such other powers
as may be essential or necessary to carry out its purpose(s! as provided for in the
A8*
o Aestated: the management of a corporation has discretionary authority, in the
absence of e0plicit restrictions, to enter into contracts or transactions deemed
reasonably necessary or incidental to its business purposes.
In'i#ental6In"e-ent Pwe-s
#ec 5: powers, attributes, and properties e0pressly authoriCed by law or in'i#ent
t its e8isten'e
*ncidental powers: those that attach to a corporation at the moment of its creation
without regard to its e0press powers or particular primary purpose, and is
inherent in it as a legal entity
E0amples:
i. To sue and be sued
ii. To grant and receive in the corporate name
iii. To purchase hold and convey real and personal property for its purposes
iv. To have a corporate seal
v. To adopt and amend by"laws for its government
vi. To disenfranchise or remove members
1owers that go into the very nature and e0tent of a corporation9s :uridical entity
cannot be presumed to be incidental or inherent powers
CONTROL AND ?ANA@0?0NT
T"-ee le1els f 'nt-l7
(&! board of directors or trusteesR formulate the corporate policies
(5! corporate officersR e0ecute the policies
($! stockholders or membersR have residual powers over fundamental corporate changes
Ratinale f 'ent-aliAe# 4ana9e4ent
one of the advantageous features of the corporationJacting through centraliCed
management
the congruence of authority and responsibility in the same person, committee, or board
always promote efficiency
W" e8e-'ises '-$-ate $we-sB
1. %a-# f #i-e't-s (for stock corporations! or t-3stees (for non"stock corporations!
governing body
sole authority to determine the policy and conduct the ordinary business of the corporation
within the scope of the charter
so long as the board acts honestly, in ,6, and not in defraud of creditors or abusive of the
rights of minority #.s
,A: 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
E0ception: with respect to $
rd
persons, actions of the corporation even without formal board
approval may still bindS (e0. 1roof of usage, ac/uiescence of the board despite knowledge of
the act, receipt of benefits, implied ratification, estoppel
P-i4a-y %Ce'ti1e f t"e Ba-#
HLP2009-3B Page 23
primary obligation of directors is to seek the ma0imum amount of profits for the corporation,
and characteriCed the position as a position of trust
o in case director9s interest conflict with those of the corporation, he cannot sacrifice the
latter to his own advantage and benefit
o fiduciary or trust relationship is not a matter of statutory or technical law, but springs from
the control and guidance of corporate affairs and property and hence the property interest
of the #.s
BOARD OF DIR0CTORS
A. A3t"-ity: Re$sit-y f '-$-ate $we-s (#ection 5$!
The board of directors or trustees are responsible for corporate policies and general
management of the business affairs of the corporation
;nless otherwise provided in the 'orporation 'ode, the Board of 2irectors control
and e0ercise:
o the corporate powers of corporation
o all business conducted,
o all property of such corporation
The board e0ercises almost all corporate powers, lays down all business policies and
is responsible for the efficiency of management. The stockholders have no right to
interfere with the board9s e0ercise of its powers and functions e0cept where the law
e0pressly gives them the final say, like in cases of removal of a director, amendment
of articles of incorporation, and other ma:or changes. Their resolutions on matters
other than the e0ceptions are legally not effective nor binding and may be treated as
merely advisory or may be totally disregarded.
G;nless 8therwise 1rovidedH D may pertain to instances where a management
contract is entered hence corporate posers are e0ercised by the managing company
and not the board
The directors or trustees shall not act individually nor separately but as a body in a
lawful meeting. 'ontracts entered into without a formal board resolution does not
bind the corporation e0cept when ma:ority of the board has knowledge of the contract
and the contract benefited the corporation.
2irectors owe their duties to corporation as a whole rather than to individual
shareholders of classes of shareholders
Ra4i-eA 1 O-ientalist C D Fe-nan#eA
8rientalist 'o engaged in the theater business, desired to be the e0clusive agent of AamireC,
who is based in 1aris, for two film outfitsJTclair 6ilms and )ilano films. Through the active
involvement and negotiations of Aamon GEl 1residenteH 6ernandeC, a director of 8rientalist and
also its treasurer, with AamireC, 8rientalist was able to secure an offer, the terms of which were
acceptable to the Board as well as to the stockholders. *t appears that this acceptance of the
terms of the offer was decided during an informal meeting of the board, and conveyed to AamireC
in two letters signed only by 6ernandeC, both in his individual and his capacity as treasurer of
HLP2009-3B Page 24
8rientalist. *t turns out that the company was not financially capable to comply with the
obligations set forth in the agency contract, and about this time films had already been delivered
to the company. Two stockholders meetings were organiCed, the first adopted a resolution
approving the action of the board on the offer, the second raising the contingency of the lack of
funds and the proviso that the four officers involved, including 6ernandeC would continue
importing the films using their own funds. AamireC sues 8rientalist and 6ernandeC for what is due
on the contract. T' ruled 8riental as the principal debtor while 6ernandeC is subsidiarily liable.
.: (&! it was incumbent upon the corporation if it desired to /uestion the authority of 6ernandeC to
bind it, to deny the due e0ecution of the contract made by him. *n pleading lack of authority of an
officer of a corporation to bind the latter through a contract e0ecuted by the former is a special
defense which should be specially pleaded and the answer setting up this defense must be
verified under oath. The denial shall be specific, and a mere attack on the instrument in general
terms is insufficient, even though under oath. *n dealing with corporations the public at large is
bound to rely to a large e0tent upon outward appearances. *f a man is found acting for a
corporation with the e0ternal indicia of authority, any person not having notice of want of
authority, may usually rely upon those appearances, and if it be found that the directors had
permitted the agent to e0ercise that authority and thereby held him out as a competent person to
bind the corporation, or had ac/uiesced in a contract and retained the benefit supposed to have
conferred by it, the corporation will be bound, notwithstanding the actual authority may never
have been granted. The public is not supposed nor re/uired to know the transactions which
happen around the table where the corporate board of directors or the stockholders are from time
to time convoked. *t is therefore reasonable, in a case where an officer of a corporation has made
a contract in its name, that the corporation should be re/uired, is it denies his authority, to state
such defense in his answer. This failure of 8rientalist to make any issue in its answer with regard
to the authority of Aamon 6ernandeC to bind it and its failure to deny specifically under oath the
genuineness of the due e0ecution of the contracts sued upon, have the effect of eliminating the
/uestion of his authority from the case.
(5! 6ernandeC had no authority to bind the corporation. 'orporate powers is e0ercised by the
board of directors, and is recogniCed in the bylaws of 8rientalist. The fact that the power to make
contracts is thus vested in the borad does not always signify that a formal vote of the board must
always be taken before contractual liability can be fi0ed@ the board can create liability, like an
individual, by other means than by formal e0pression of its will. *t may be established without
reference to official records of the proceedings of the board, by proof of the usage to which the
company had permitted to grow up in the business, and of the ac/uiescence of the board
charged with the duty of supervising and controlling the company9s business. 6ernandeC was the
most active in the effort to secure the films. The negotiations were conducted by him with the
knowledge and consent of the other members of the board. The board, before the financial
inability of the corporation was revealed, had already recogniCed the contracts as being in
e0istence and had proceeded to take the steps necessary to utiliCe the films, particularly the
publication of announcements in the papers. *n light of this, the contracts in /uestion were thus
inferentially approved by the board and that the company is bound unless the subse/uent failure
of the stockholders to approve the same had the effect of abrogating the liability created.

HLP2009-3B Page 25
($! the action of the stockholders, whatever its character, must be ignored. #tockholders or
members resolutions dealing with matters other than the e0ceptions are not legally effective nor
binding on the board, and may be treated as merely advisory or may even be completely
disregarded. The functions of the stockholders of a corporation are, of a limited nature. The
theory is that the stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives or agents, called the directors, making by"
laws, and e0ercising special powers defined by law. Thus contracts between a corporation and
third persons must be made by the directors and not by the stockholders. The corporation is
represented by the directors and not the stockholders. Third persons can have little or no
information as to what occurs in corporate meetings, and must necessarily rely on e0ternal
manifestations of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fi0ed upon in by its agents in
accordance with law. *f a corporation knowingly permits one of its officers or any other person to
do acts within the scope of an apparent authority, and thus hold him out to the public as
possessing the power to do these acts, the corporation will be estopped from denying such
authority as against anyone who has dealt with the corporation in ,6.
08$e-t-a1el D T3-s 1 CA an# E-ean Ai-lines.
6: >orean Airlines, through Atty. Aguinaldo, filed a 'omplaint against E0pertravel with the AT'
for the collection of the principal amount of 15%4,&4.44, plus attorney9s fees and e0emplary
damages. The verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal counsel of >A+ and
had caused the preparation of the complaint. E0pertravel filed a motion to dismiss the complaint
on the ground that Atty. Aguinaldo was not authoriCed to e0ecute the verification and certificate of
non"forum shopping as re/uired by the Aules of 'ourt. >A+ opposed the motion, contending that
Atty. Aguinaldo was its resident agent and was registered as such with the #ecurities and
E0change 'ommission (#E'! as re/uired by the 'orpo'ode, and was further alleged that Atty.
Aguinaldo was also the corporate secretary of >A+. Atty. Aguinaldo also claimed that he had
been authoriCed to file the complaint through a resolution of the >A+ Board of 2irectors approved
during a special meeting held on Lune 5, &333, wherein the board of directors conducted a
special teleconference on Lune 5, &333, which he and Atty. Aguinaldo attended. *t was also
averred that in that same teleconference, the board of directors approved a resolution authoriCing
Atty. Aguinaldo to e0ecute the certificate of non"forum shopping and to file the complaint. #uk
>yoo >im also alleged, however, that the corporation had no written copy of the aforesaid
resolution. T' denies )T2, 'A affirms.
.: *t is settled that the re/uirement to file a certificate of non"forum shopping is mandatory and
that the failure to comply with this re/uirement cannot be e0cused. The certification is a peculiar
and personal responsibility of the party, an assurance given to the court or other tribunal that
there are no other pending cases involving basically the same parties, issues and causes of
action. .ence, the certification must be accomplished by the party himself because he has actual
knowledge of whether or not he has initiated similar actions or proceedings in different courts or
tribunals. Even his counsel may be unaware of such facts. .ence, the re/uisite certification
e0ecuted by the plaintiff9s counsel will not suffice.
*n a case where the plaintiff is a private corporation, the certification may be signed, for and on
behalf of the said corporation, by a specifically authoriCed person, including its retained counsel,
who has personal knowledge of the facts re/uired to be established by the documents. The
corporation, such as the petitioner, has no powers e0cept those e0pressly conferred on it by the
'orporation 'ode and those that are implied by or are incidental to its e0istence. *n turn, a
corporation e0ercises said powers through its board of directors and?or its duly"authoriCed officers
and agents. 1hysical acts, like the signing of documents, can be performed only by natural
HLP2009-3B Page 26
persons duly"authoriCed for the purpose by corporate by"laws or by specific act of the board of
directors.
The respondent9s allegation that its board of directors conducted a teleconference on Lune 5,
&333 and approved the said resolution (with Atty. Aguinaldo in attendance! is incredible, given the
additional fact that no such allegation was made in the complaint. *f the resolution had indeed
been approved on Lune 5, &333, long before the complaint was filed, the respondent should
have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed
to do so. *t was only on Lanuary 5F, 5444 that the respondent claimed, for the first time, that
there was such a meeting of the Board of 2irectors held on Lune 5, &333@ it even represented to
the 'ourt that a copy of its resolution was with its main office in >orea, only to allege later that no
written copy e0isted. *t was only on )arch %, 5444 that the respondent alleged, for the first time,
that the meeting of the Board of 2irectors where the resolution was approved was held %ia
teleconference.
Borse still, it appears that as early as 3anuary 456 4777, Atty. Aguinaldo had signed a
#ecretary9s?Aesident Agent9s 'ertificate alleging that the board of directors held a teleconference
on 3une "86 4777. 7o such certificate was appended to the complaint, which was filed on
#eptember %, &333. )ore importantly, the respondent did not e0plain why the said certificate was
signed by Atty. Aguinaldo as early as Lanuary 3, &333, and yet was notariCed one year later (on
Lanuary &4, 5444!@ it also did not e0plain its failure to append the said certificate to the complaint,
as well as to its 'ompliance dated )arch %, 5444. *t was only on Lanuary 5%, 544& when the
respondent filed its comment in the 'A that it submitted the #ecretary9s?Aesident Agent9s
'ertificateN$4O dated Lanuary &4, 5444.
The 'ourt is, thus, more inclined to believe that the alleged teleconference on Lune 5, &333
never took place, and that the resolution allegedly approved by the respondent9s Board of
2irectors during the said teleconference was a mere concoction purposefully foisted on the AT',
the 'A and this 'ourt, to avert the dismissal of its complaint against the petitioner.
Citi%an. NA 1 C"3a.
-eleC deposited his unfunded personal checks with his current account with the petitioner. But
prior to depositing said checks, he would present his personal checks to a bank officer asking the
latter to have his personal checks immediately credited as if it were a cash deposit and at the
same time assuring the bank officer that his personal checks were fully funded. .aving already
gained the trust and confidence of the officers of the bank because of his past transactions, the
bankIs officer would always accommodate his re/uest. After his re/uests are granted which is
done by way of the bank officer affi0ing his signature on the personal checks, private respondent
'resencio -eleC would then deposit his priorly approved personal checks to his current account
and at the same time withdraw sums of money from said current account by way of petitioner
bankIs managerIs check. 1rivate respondent would then deposit petitioner bankIs managerIs
check to his various current accounts in other commercial banks to cover his previously deposited
unfunded personal checks with petitioner bank. 7aturally, petitioner bank and its officers never
discovered that his personal check deposits were unfunded. 8n the contrary, it gave the
petitioner bank the false impression that private respondentIs construction business was doing
very well and that he was one big client who could be trusted. This deceptive and criminal
scheme he did every banking day without fail from #eptember (, &3F up to )arch &&, &3F%. The
amounts that he was depositing and withdrawing during this period (#eptember (, &3F to )arch
&&, &3F%! progressively became bigger. *t started at 1(%,444.44 on #eptember (, &3F and on
)arch &&, &3F% the amount of deposit and withdrawal already reached over 1$,444,444.44. At
this point in time ()arch &&, &3F%!, the private respondent 'resencio -eleC presumably already
feeling that sooner or later he would be caught and that he already wanted to cash in on his evil
scheme, decided to run away with petitionerIs money. 8n )arch &&, &3F%, he deposited various
unfunded personal checks totaling 1$,43,444.44 and re/uested a bank officer that the same be
credited as cash and after securing the approval of said bank officer, deposited his various
personal checks in the amount of 1$,43,444.44 with his current account and at the same time
withdrew the sum of 1$,5((,444.44 in the form of petitionerIs managerIs check. *nstead of using
HLP2009-3B Page 27
the proceeds of his withdrawals to cover his unfunded personal checks, he ran away with
petitioner bankIs money. Thus, private respondent 'resencio -eleCIs personal checks deposited
with petitioner bank on )arch &&, &3F% in the total aggregate amount of 1$,43,444.44 bounced.
The checks bounced after said personal checks were made the substantial basis of his
withdrawing the sum of 1$,5((,444.44 from his current account with petitioner bank. 'itibank
sues on the grounds of violation of B1 55. Before pre"trial conference, and in pursuance of the
authority granted to him by petitioner bankIs by"laws, its E0ecuting 8fficer appointed Billiam B.
6erguson, a resident alien, as its Attorney"in"6act empowering the latter, among other things, to
represent 'itibank in court cases such as the present case. *n turn, Billiam B. 6erguson
e0ecuted a power of attorney in favor of L.1. ,arcia M Associates (petitioner bankIs counsel! to
represent petitioner bank in the pre"trial conference before the lower court.
*: There are thus two issues in this case. 6irst, whether a resolution of the board of directors of a
corporation is always necessary for granting authority to an agent to represent the corporation in
court cases.
.: *n the corporate hierarchy, there are three levels of control: (&! the board of directors, which is
responsible for corporate policies and the general management of the business affairs of the
corporation@ (5! the officers, who in theory e0ecute the policies laid down by the board, but in
practice often have wide latitude in determining the course of business operations@ and ($! the
stockholders who have the residual power over fundamental corporate changes, like
amendments of the articles of incorporation. .owever, :ust as a natural person may authoriCe
another to do certain acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by it.
*t is clear that corporate powers may be directly conferred upon corporate officers or agents by
statute, the articles of incorporation, the by"laws or by resolution or other act of the board of
directors. *n addition, an officer who is not a director may also appoint other agents when so
authoriCed by the by"laws or by the board of directors. #uch are referred to as e0press powers.
There are also powers incidental to e0press powers conferred. *t is a fundamental principle in the
law of agency that every delegation of authority, whether general or special, carries with it, unless
the contrary be e0press, implied authority to do all of those acts, naturally and ordinarily done in
such cases, which are reasonably necessary and proper to be done in order to carry into effect
the main authority conferred.
#ince the by"laws are a source of authority for corporate officers and agents of the corporation, a
resolution of the Board of 2irectors of 'itibank appointing an attorney in fact to represent and
bind it during the pre"trial conference of the case at bar is not necessary because its by"laws
allow its officers, the E0ecuting 8fficer and the #ecretary 1ro"Tem, F to e0ecute a power of
attorney to a designated bank officer, Billiam B. 6erguson in this case, clothing him with
authority to direct and manage corporate affairs.
#ince paragraph UU* (of the by"laws! specifically allows 6erguson to delegate his powers in
whole or in part, there can be no doubt that the special power of attorney in favor, first, of L.1.
,arcia M Associates and later, of the bankIs employees, constitutes a valid delegation of
6ergusonIs e0press power (under paragraph U-** above! to represent petitioner bank in the pre"
trial conference in the lower court.
*: The second issue is whether the by"laws of the petitioner foreign corporation which has
previously been granted a license to do business in the 1hilippines, are effective in this
:urisdiction. *f the by"laws are valid and a board resolution is not necessary as petitioner bank
claims, then the declaration of default would have no basis.
.: A careful reading of the #ec (% of 'orpo 'ode would show that a corporation can submit its
by"laws, prior to incorporation, or within one month after receipt of official notice of the issuance
of its certificate of incorporation by the #E'. Bhen the third paragraph of the above provision
mentions Pin all casesP, it can only refer to these two options@ i.e., whether adopted prior to
HLP2009-3B Page 28
incorporation or within one month after incorporation, the by"laws shall be effective only upon the
approval of the #E'. But even more important, said provision starts with the phrase PEvery
corporation formed under this 'odeP, which can only refer to corporations incorporated in the
1hilippines. .ence, #ection (%, in so far as it refers to the effectivity of corporate by"laws, applies
only to domestic corporations and not to foreign corporations. 8n the other hand, #ection &5 of
the same 'ode re/uires that a foreign corporation applying for a license to transact business in
the 1hilippines must submit, among other documents, to the #E', a copy of its articles of
incorporation and by(laws, certified in accordance with law. ;nless these documents are
submitted, the application cannot be acted upon by the #E'. #ince under #ec &5% of 'orpo 'ode
the #E' will grant a license only when the foreign corporation has complied with all the
re/uirements of law, it follows that when it decides to issue such license, it is satisfied that the
applicantIs by"laws, among the other documents, meet the legal re/uirements. This, in effect, is
an approval of the foreign corporationIs by"laws. *t may not have been made in e0press terms,
still it is clearly an approval. Therefore, petitioner bankIs by"laws, though originating from a foreign
:urisdiction, are valid and effective in the 1hilippines.
Bye--R8as 1 CA. (.idden -alley Apocalypse 7ow case!.
The corporation, .eirs of Eugenia Ao0as *nc, was established to engage in agriculture to develop
the properties inherited from Eugenia Ao0as and Eufroncio Ao0as, which includes the land upon
which the .idden -alley #prings Aesort was put up, including various improvements thereon,
using corporate funds (used as site for filming Apocalypse 7ow!. The A8* of .eirs *nc was
amended for this purpose. .eirs *nc claims that Boyer"Ao0as and ,uillermo Ao0as had been in
possession of the various properties and improvements in the resort and only upon the tolerance
of the corporation. *t was alleged that they committed acts that impeded the corporation9s
e0pansion and normal operation of the resort. They also did not comply with court and regulatory
orders, and thus the corporation adopted a resolution authoriCing the e:ectment of the
defendants. T' grants. 'A affirms. Boyer and Ao0as contend that, being #.s, their possession of
the properties of the corporation must be respected in view of their ownership of an ali/uot
portion of all properties of the corporation.
.: Aegarding properties owned by the corporation, the #. of ,uanCon case says that Gproperties
registered in the name of the corporation are owned by it as an entity separate and distinct from
its members. Bhile shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an ali/uot part of the corporation9s property, or the
right to share in its proceeds to that e0tent when distributed according to law and e/uity, but its
holder is not the owner of any part of the capital of the corporation, nor is he entitled to the
possession of any definite portion of its property or assets. The #. is not a co"owner or tenant in
common of the corporate property.
The corporation has a personality distinct and separate from its members and transacts business
only through its officers or agents. Bhatever authority these officers or agents may have derived
from the board or other governing body, unless conferred by the charter of the corporation itself.
*n this case the elder Ao0as who then controlled the management of the corporation, being the
ma:ority #., consented to the petitioner9s use and stay within the properties. The Board did not
ob:ect and were allowed to stay until it adopted a resolution to the effect of authoriCing moves to
e:ect them. #ince their stay was merely by tolerance, in deference to the wishes of the ma:ority
#. who controlled the corporation, when Ao0as died his actions cannot bind the company
forever. There is no provision in the by"laws or any other resolution authoriCing their continued
stay.
Pe'3lia- A9en'y Rle f t"e %a-#
HLP2009-3B Page 29
in a manner of speaking, the board acts as an agent of the corporation, and is bound by the
rules applying to agency relationship
o although the board is an agent of the corporation, since the principal is a mere :uridical
concept, it realistically is not in a position to countermand the decisions of its agent
o unlike in an ordinary principal"agent relationship, the corporate principal does not really
have its own mind to allow it to decide matters for itself
o the board stands both as an agent of the corporation, and the very personification of the
corporation in the commercial and legal world
board has sole power to decide whether a corporation could sue, purchase or sell property,
enter into a contract, or perform any other act
#. resolutions on matters other than the e0ceptionsR not legally effective nor binding on the
board@ may be treated as merely advisory (AamireC case!
,A: to the #. go the profits, to the board goes the management
for educational institutions:
B. Re<3i-e4ents
Vualifying share (#ection 5$!" 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.
Lee 1 CA
#ummons was served upon +ee and +acdao, president and vice president of A+6A
The two, however contended that they are no longer corporate officers of the
corporation because of the voting trust agreement e0ecuted to 2B1 hence not
authoriCed to receive summons. #ummons must be served upon 2B1
2B1 however refused to receive the alias summons claiming it was not authoriCed
because it has not yet taken over A+6A
)otion for 2eclaration of proper service of summons filed by #acoba
-oting trust results from the separation of voting rights of a stockholder from his other
rights such as rights to receive dividends or inspect books of corporation
'riteria for a valid voting trust:
o -oting rights of the stock separate from other attributes of ownership
o -oting rights granted are intended to be irrevocable for a definite period of time
o 1rincipal purpose is to ac/uire voting control of the corporation
E0ecution of a voting trust creates a dichotomy between e/uitable or
beneficial ownership of the corporate shares of a stock holder and legal title
thereto
The change from the old code to the new code with respect to /ualifying shares of
directors is the omission of the phrase Gin his own rightH pertaining to beneficial
ownership of shares.
*n the new corpo code, persons may be directors if they are stockholders although
not Gin their own rightH hence includes trustees
HLP2009-3B Page 30
There is clear indication that to be a director, what is material is legal title and not
beneficial ownership
Bith the e0ecution of the voting trust agreement, +ee and +acdao were divested of
their legal title to their shares hence can no longer be directors and are no longer
corporate officers.
Because of this, they are not authoriCed to receive summons
Ae/uirements?2is/ualifications:
o Aesidence (#ection 5$! " a ma:ority of the directors or trustees of all corporations
organiCed under this 'ode must be residents of the 1hilippines
o 7ationality no re/uirement for citiCenship of a director or trustee so even an alien
may be elected as such e0cepts in business activities totally closed to aliens
o 2is/ualification of directors, trustees or officers (#ection 5E!:
'onvicted by final :udgment of an offense punishable by imprisonment for a
period e0ceeding si0 (%! years, or
-iolation of this 'ode committed within five (! years prior to the date of his
election or appointment
By laws may provide for additional /ualifications?dis/ualifications as long as
such additional /ualifications?dis/ualifications shall not modify re/uirements
as prescribed in the corporation code or be in conflict with such prescribed
re/uirements
Term:
o 2irectors D shall hold office for & year. .owever, incumbent directors shall
continue to be directors?trustees as long as their successors have not been
elected and /ualified (#ection 5$!
C. ,w ele'te# (#ection 5(!
)anner of election:
o There must be present in person or by representative ma:ority of the outstanding
capital stock ? member
o *n any form@ or must be by ballot when re/uested by any voting stock holder or
member
o -oting may be in person or by pro0y
At all elections of directors or trustees, there must be present owners of a ma:ority of
the outstanding capital stock, or if there be no capital stock, a ma:ority of the
members entitled to vote.
Every stockholder entitled to vote shall have the right to vote the number of shares of
stock standing, at the time fi0ed in the by"laws, in his own name on the stock books
of the corporation, or where the by"laws are silent, at the time of the election
Time to determine voting right
o As per share standing in one9s name at the time fi0ed by the By"+aws
o Bhere By"laws silent, at time of election
HLP2009-3B Page 31
'umulative voting D A system of voting designed to increase he voting power of
minority stockholders in the election of corporate directors when more than one
director is to be elected.
o A stockholder shall have as many votes as he has number of shares times the number of
directors up for election
o 'umulative voting is allowed for election of members of the Board in a stock corporation.
)embers of the Board in a 7on"stock 'orporation shall not be voted cumulatively unless
specifically provided for in the By"laws.
o The total number of votes cast by a stockholder shall not e0ceed 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
o ,ives the minority an opportunity to elect a representative to the board of
directors. 'annot itself give the minority control of corporate affairs but may
affect and limit the e0tent of ma:ority9s control
o By"laws cannot provide against cumulative voting since this right is mandated in
#ec 5(
o 7o delin/uent stock shall be voted
7on"stock corporation:
o ;nless otherwise provided in the articles of incorporation or in the by"laws,
members of corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote for one
candidate.
o 'andidates receiving the highest number of votes shall be declared elected.
o Any meeting of the stockholders or members called for an election may ad:ourn
from day to day or from time to time but not sine die or indefinitely if:
6or any reason, no election is held, or
*f there not present or represented by pro0y, at the meeting, the owners of a
ma:ority of the outstanding capital stock, or if there be no capital stock, a
ma:ority of the member entitled to vote.
o #ince the provision re/uires presence, meeting of stockholders is re/uired
D. ,w -e41e# (#ection 5F!
Any director or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing 5?$ of the outstanding capital stock, or if the
corporation be a 7on"stock 'orporation, by a vote of 5?$ of the members entitled to
vote (with or without cause!.
7ote: #uch removal shall take place either at a regular meeting or at a special
meeting call for the purpose of removal of 2irectors or Trustees, with previous notice
of the time and place of such meeting, as well as the intention to propose such
removal. *f the officers refuse to call a meeting to consider the removal of the
2irector, it may be called at the instance of any stockholder or member, but with due
notice.
A director elected because of the vote of minority stockholders who united in
cumulative voting cannot be removed without cause
HLP2009-3B Page 32
The board cannot remove a director or trustee as member of the board
0. ,w 1a'an'y fille# (#ection 53!
Any vacancy occurring in the Board of 2irectors or Trustees other than by removal by
the stockholders or members or by e0piration of terms may be filled:
o *f still constituting /uorum, by the vote of at least a ma:ority of the remaining
directors or trustees
o 8therwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the une0pired term of his predecessor in office.
F. Re$-t f ele'tin f #i-e't-s; t-3stees; D ffi'e-s (#ection 5%!
Bithin $4 days after the election of the directors, trustees, and officers of the
corporation@ the #ecretary or any other officer of the corporation shall submit to the
#E', the names, nationalities, and residences of the directors, trustees, and officers
elected.
#hould a director, trustee, or officer die, resign, or in any manner cease to hold office,
his heirs in case of his death, the secretary or any other officer of the corporation, or
the director, trustee, or officer himself, shall immediately report such fact to the #E'.
@. ,w '4$ensate# (#ection $4!
*n the absence of any provision in the By"laws fi0ing their compensation, the directors
shall not receive any compensation, e0cept for reasonable per diems.
Any such compensation (other than per diems! may be granted to the directors by
the vote of the stockholders representing at least a ma:ority of the outstanding capital
stock at a regular or special stockholder9s meeting.
+imit: *n no case shall the total yearly compensation of directors, as such directors,
e0ceed &4= of the net income before income ta0 of the corporation during the
preceding year.

Ba--ett 1 La P-e1is-a Fili$ina. 6: #uit by the resigned directors of a building and loan
association to recover &= of the profits to each complainant in accordance with
an amendment to the by"laws, which stipulate that they are entitled to a lifetime
annuity from the profits of the corporation.
.: The amended by"laws does create any obligation to pay to the persons name therein such a
life gratuity or pension out of the profits. A by"law of this nature must be clearly
regarded as beyond the lawful powers of a mutual building and loan association
and is thus ultra vires. As it were, the by"law cannot be held to establish a
contractual relation between the parties.
HLP2009-3B Page 33
The authority conferred upon corporations in the code refers to providing compensation for future
services of directors, officers, and employees after the adoption of the by"law and
cannot in any sense be held to authoriCe the giving of continuous compensation
to particular directors after their employment has terminated for past services
rendered gratuitously by the them to the corporation. To permit the transaction
would be to create an obligation unknown to the law, and to countenance a
misapplication of funds of the building and loan association to the pre:udice of
#.s.
'ontracts between a corporation and third persons must be made by or under authority of its
board and not by the #.s. The action of the #.s is only advisory and is not
binding on the corporation.
Weste-n Instit3te f Te'"nl9y 1 Salas
*n a meeting of the Board of Trustees of Bestern *nstitute of Technology, Aesolution
was passed granting monthly compensation to officers respondents who are
members of the Board D validQ
Aespondents are entitled to compensation because they are not :ust directors but
officers as well. The prohibition under #ec $4 does not apply to them
,. ?atte-s -e<3i-in9 Ba-# f Di-e't-sG a'tin (vote by ma:ority of the board!
&. Amendment of A*
5. E0tending and #hortening 'orporate Term
$. *ncreasing ? 2ecreasing capital stock ? bonded indebtedness
(. #ale or disposition of all, substantially all of corporate assets
. *nvestment of corporate funds in another corporation or for a purpose other than main
purpose
%. *ssuance of stock dividends
E. 'orporate mergers or consolidation
F. -oluntary dissolution of the corporation whether or not creditors are pre:udiced
3. Approval of management contract
&4. Amendment to by"laws, repeal of by"laws, adoption of new by"laws
&&. 2eclare cash dividends
I. Lia%ility f Ba-# f Di-e't-s
&. *n ,eneral (#ection $&!
2irectors or trustees shall be liable solidarily for all damages resulting therefrom
suffered by the corporation, its stockholders, or members and other persons when:
o They 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.
o They ac/uire any personal or pecuniary interest in conflict with their duty as such
directors or trustees.
HLP2009-3B Page 34
Three fold duty of directors to the corporation:
o 2iligence
o +oyalty
o 8bedience
Bhat are re/uired and e0pected of directors:
o To posses at least ordinary knowledge and skill to enable them to make sound
business decision
o To attend directors meetings with reasonable regularity
o To e0ercise reasonable care in the management of the corporation
o To keep themselves sufficiently informed about the general condition of the
business
'auses of director9s liability:
o >nowing authoriCation of wrongful acts
o 7egligence
o 'onflict of interest
E0tent of +iability: All damages resulting from knowing authoriCation of wrongful acts,
negligence and conflict of interest suffered by the corporation, its stockholders, and
other persons
The degree of care and diligence re/uired is usually that which men prompted by
self"interest, generally e0ercise in their own affairs. *n determining whether
reasonable diligence has been e0ercised, the particular circumstances of each case
must be considered. The nature of the business is an important factor.
5. Business !udgent rule
Board of 2irectors has authority to modify the proposed terms of the contracts of the
corporation for the purpose of making the terms more acceptable to the other
contracting partiesKThe test to be applied is whether the act in /uestion is the direct
and immediate furtherance of the corporation9s business, fairly incidental to the
e0press powers and reasonably necessary to their e0ercise. *f so, the corporation
has the power to do it@ otherwise not. N)ontelibano v. Bacolod )urcia )illing 'o.O
$. #elf"dealing director (#ection $5!

A contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are
present:
o That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a /uorum for such
meeting@
o That the vote of such director or trustee was nor necessary for the approval of
the contract@
o That the contract is fair and reasonable under the circumstances@ and
HLP2009-3B Page 35
o That in case of an officer, the contract has been previously authoriCed by the
board of directors.
Bhere any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two"thirds (5?$! of the outstanding
capital stock or of at least two"thirds (5?$! of the members in a meeting called for the
purpose
6ull disclosure of the adverse interest of the directors or trustees involved must be
made at such meeting
The contract is voidable whether the corporation suffered damages or not
The burden of proving fairness is on the director
P-i4e W"ite Ce4ent 1 IAC.
1rime Bhite 'ement entered into a dealership agreement with one of its directors, Ale:andro Te,
for the latter to be the e0clusive distributor of 54,444 bags of 1rime Bhite cement per month W
13.E4 per bag for the entire )indanao area for years, and that a letter of credit be opened to
secure payment. Te advertised his dealership and was able to obtain possible clients, and
entered into agreements with several hardware stores for the purchase of the cement. Te then
informed 1rime Bhite of the orders, but the latter imposed additional conditions, which effectively
delayed the delivery of the cement, lowered the number of bags to be delivered, and increased
the price per bag. *t also made the prices sub:ect to change unilaterally and additional conditions
on the manner of payment. Te refused to comply and 1rime Bhite cancelled the dealership
agreement. Te sued for specific performance and damages. T' ruled ifo Te.
*: B?7 the dealership agreement is a valid and enforceable contract binding on the 'orporation.
.: 7o. it is not valid and enforceable. All corporate powers are e0ercised by the Board. *t may
also delegate specific powers to its 1resident or other officers. *n the absence of e0press
delegation, a contract entered into by the 1resident in behalf of the corporation, may still bind the
latter if the board should ratify e0pressly or impliedly. *n the absence of e0press or implied
ratification, the 1resident may as a general rule bind the corporation through a contract in the
ordinary course of business, provided the same is reasonable under the circumstances. These
rules are applicable where the 1resident or other officer acting for the corporation is dealing with
a third person.
The situation is different where a director or officer is dealing with his own corporation. Te was not
an ordinary stockholder@ he was a member of the Board and Auditor of the corporation. .e is
what is often called a Gself"dealingH director. As a director, he holds a position of trust and owes a
duty of loyalty to his corporation. *n case his interests conflict with those of the corporation, he
cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from
the control and guidance of the corporate affairs and property interests of the stockholders. A
director9s contract with his corporation is not in all instances void or voidable. *f the contract is fair
and reasonable under the circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made. The contract in this case is neither fair nor reasonable.
At the time of the contract, the corporation had not yet even started producing the cement. 1rices
of cement, :ust like any other commodity, are not stable and e0pected to rise. Bithin a period of
si0 years from the date of dealership agreement the prices were certain to rise, and yet the
contract pegged the rate to 13.E4 per bag. This according to the 'ourt was not fair and
reasonable at all, and unduly pre:udiced the corporation. The contracts he entered into after the
dealership agreement were such as to completely shield him from any increase in the price of
cement. The contracts were only for two years at a time, even if the dealership was good for .
.e was attempting to enrich himself at the e0pense of the corporation. There is no showing that
the stockholders ratified the dealership agreement. Thus the same was not valid and he cannot
be allowed to reap the fruits of his disloyalty.
HLP2009-3B Page 36
(. 'ontracts between the corporations with interlocking directors (#ection $$!
A contract between two or more corporations having interlocking directors shall not
be invalidated on that ground alone, e0cept cases of fraud.
The contract is fair and reasonable under the circumstances.
*f the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be sub:ect
to the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.
#tockholdings e0ceeding twenty (54=! percent of the outstanding capital stock shall
be considered substantial for purposes of interlocking directors.
Ae/uisites of a valid contract between the corporation and one or more of its
directors, trustees or officers:
o That the presence of such director or trustee in the Board meeting in which the
contract was approved was not necessary to constitute a /uorum for such
meeting
o That the vote of such director or trustee was not necessary for the approval of the
contract
o That the contract is fair and reasonable under the circumstances
o That in case of an officer, the contract with the officer has been previously
authoriCed by the Board of 2irectors
. 2isloyalty (#ection $(!
Bhere a director, by virtue of his office, ac/uires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the pre:udice of
such corporation, he must account to the latter for all such profits by refunding the
same
;7+E## his act has been ratified by a vote of the stockholders owning or representing
at least two"thirds (5?$! of the outstanding capital stock.
This provision shall be applicable, notwithstanding the fact that the director risked his
own funds in the venture.
2octrine of corporate opportunity " Bhen a director, trustee or officer attempts to
ac/uire or ac/uires, 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
e/uity imposes a liability 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.
The last paragraph of #ection $& and #ection $( contain the doctrine of corporate
opportunity. *n case of such conflict of interests, and the director acts against the
good of the corporation, he shall be accountable for the profits he obtained, even if
he had risked his own funds.
%. ;se of inside information
HLP2009-3B Page 37
The fiduciary position of insiders, directors, and officers prohibits them from using
confidential information relating to the business of the corporation to benefit
themselves or any competitor corporation in which they may have a mere substantial
interest.
The liability of a director or officer guilty of using inside information is to the
corporation and not to any individual stockholder
#ince loss and pre:udice to the corporation is not a re/uirement for liability, the
corporation has a cause of action as long as there is unfair use of inside information
*t is inside information if it is not generally available to others and is ac/uired because
of the close relationship of the director or officer of the corporation
,eneral rule: ()a:ority view! 2irectors owe no fiduciary duty to stockholders but they
may deal with them at arm9s length. 7o duty to disclose facts known to the director
or officer
#pecial facts doctrine D 'onceding the absence of a fiduciary relationship in the
ordinary case, courts nevertheless hold that where special circumstances or facts are
present which make it ine/uitable for the director to withhold information from the
stockholder, the duty to disclose arises and concealment is fraud.
@.n9wei 1 S0C .
This involves two actions in the #E' filed by Lohn ,okongwei, a #an )iguel 'orporation
stockholder by himself and through the ;A' and '6', who sued the ma:ority of the #)' Bo2
(#oriano, Xobel, Ao0as, 8rtigas, 1rieto et al! and #)' itself to declare null and void the amended
by"laws and a cancellation of the certificate of filing the amended by"laws. .e alleges the
following:
#)'B82 acted without authority in amending the by"laws without the prescribed 5?$
vote of stockholders holding subscribed and paid"up capital stock
#ome members of the #)'B82 amended the by"laws which state that in
determining whether or not a person is engaged in competitive business, the Board
may look into factors such as competitive business and family relationship, thus
purposely providing for ,okongwei9s dis/ualification as director, and effectively
dis/ualified him from being elected as director
,okongwei also files an action in the #E' to compel #)' to allow him to inspect the records of
the corporation, including the minutes of the last stockholders meeting, copy of the management
contract with A7#'8A, latest financial statements among others, including the authority of the
stockholders to invest corporate funds in #an )iguel *nternational *nc.
The #orianos counter by alleging that ,okongwei as president and ma:ority stockholder of ;A'
and '6', conducted bad publicity against the #)' to generate support from the stockholders in
his effort to secure a seat in the board. They add the fact ,okongwei was re:ected by the
stockholders because he was engaged in competitive business and securing a seat would have
sub:ected #)' to grave disadvantages. #E' grants ,okongwei motion but denies the motion to
inspect the financial statements and records of #an )iguel *nternational as he is not a
stockholder thereof. #E' also allowed him to run as director but cannot sit as long as the validity
of the by"laws has been settled. )eanwhile the #)'B82 submitted the amended by"laws to the
stockholders, who ratified the same.
*: were the aended by(laws %alid and reasonable
HLP2009-3B Page 38
.: *n the case at bar, there are facts which cannot be denied, viC.: that the amended by"laws
were adopted by the Board of 2irectors of the #an )iguel 'orporation in the e0ercise of the
power delegated by the stockholders ostensibly pursuant to section 55 of the 'orporation +aw@
that in a special meeting on 6ebruary &4, &3EE held specially for that purpose, the amended by"
laws were ratified by more than F4= of the stockholders of record@ that the foreign investment in
the .ongkong Brewery and 2istellery, a beer manufacturing company in .ongkong, was made by
the #an )iguel 'orporation in &3(F@ and that in the stockholdersI annual meeting held in &3E5
and &3EE, all foreign investments and operations of #an )iguel 'orporation were ratified by the
stockholders.
*: 9hether or not the aended by(laws of S:C of dis;ualifying a copetitor fro noination or
election to the Board of 'irectors of S:C are %alid and reasonable
.: ,okongwei claims that the amended by"laws are invalid and unreasonable because they were
tailored to suppress the minority and prevent them from having representation in the Board, at the
same time depriving petitioner of his Pvested rightP to be voted for and to vote for a person of his
choice as director. ;pon the other hand, respondents Andres ). #oriano, Lr., Lose ). #oriano
and #an )iguel 'orporation content that the e0clusion of a competitor from the Board is
legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an
unselfish and undivided +oyalty to the corporation@ that it is essentially a preventive measure to
assure stockholders of #an )iguel 'orporation of reasonable protective from the unrestrained
self"interest of those charged with the promotion of the corporate enterprise.
;nder ;# corporate law, corporations have the power to make by"laws declaring a person
employed in the service of a rival company to be ineligible for the corporationIs Board of
2irectors. ... NAOn amendment which renders ineligible, or if elected, sub:ects to removal, a
director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid.P This is based upon the principle that where the
director is so employed in the service of a rival company, he cannot serve both, but must betray
one or the other. #uch an amendment Padvances the benefit of the corporation and is good.P *n
the 1hilippines, section 5& of the 'orporation +aw e0pressly provides that a corporation may
make by"laws for the /ualifications of directors. Thus, it has been held that an officer of a
corporation cannot engage in a business in direct competition with that of the corporation where
he is a director by utiliCing information he has received as such officer, under Pthe established law
that a director or officer of a corporation may not enter into a competing enterprise which cripples
or in:ures the business of the corporation of which he is an officer or director.H
*t is also well established that corporate officers Pare not permitted to use their position of trust
and confidence to further their private interests.P *n a case where directors of a corporation
cancelled a contract of the corporation for e0clusive sale of a foreign firmIs products, and after
establishing a rival business, the directors entered into a new contract themselves with the
foreign firm for e0clusive sale of its products, the court held that e/uity would regard the new
contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a
Pfaultless fiduciary may not reap the fruits of his misconduct to the e0clusion of his principal.H
*: 9#& ,o+ongwei6 as SH of S:C6 has a %ested right to be %oted as director in the corporation.
.: *t is further argued by #)' that there is no %ested right of any stoc+holder under 2hilippine
<aw to be %oted as director of a corporation. 1ursuant to section &F of the 'orporation +aw, any
corporation ay aend its articles of incorporation by a %ote or written assent of the stoc+holders
representing at least two(thirds of the subscribed capital stoc+ of the corporation )f the
aendent changes6 diinishes or restricts the rights of the existing shareholders then the
dissenting inority has only one right6 %i=.: Pto ob:ect thereto in writing and demand payment for
his share.P ;nder section 55 of the same law, the owners of the ma:ority of the subscribed capital
stock may amend or repeal any by"law or adopt new by"laws. *t cannot be said, therefore, that
petitioner has a vested right to be elected director, in the face of the fact that the law at the time
HLP2009-3B Page 39
such right as stockholder was ac/uired contained the prescription that the corporate charter and
the by"law shall be sub:ect to amendment, alteration and modification.
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their 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, Pthey occupy a
fiduciary relation, and in this sense the relation is one of trust.P GThe ordinary trust relationship of
directors of a corporation and stockholdersP, according to 1shaan %. :iller6P is not a matter of
statutory or technical law. *t 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. E/uity
recogniCes that stockholders are the proprietors of the corporate interests and are ultimately the
only beneficiaries thereof.
*: 9hether or not respondent San :iguel Corporation could6 as a easure of self( protection6
dis;ualify a copetitor fro noination and election to its Board of 'irectors.
.: *t is alleged that petitioner, as of )ay %, &3EF, has e0ercised, personally or thru two
corporations owned or controlled by him, control over the following shareholdings in #an )iguel
'orporation. According to respondent #)', in &3E%, the areas of competition affecting #)'
involved product sales of over 1(44 million or more than 54= of the 15 billion total product sales
of #)'. The '6'"Aobina group was in direct competition on product lines which, for #)',
represented sales amounting to more than 1(EF million.
*n this :urisdiction, under section 5& of the 'orporation +aw, a corporation may prescribe in its by"
laws Pthe /ualifications, duties and compensation of directors, officers and employees ... P This
must necessarily refer to a /ualification in addition to that specified by section $4 of the
'orporation +aw, which provides that Pevery director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... P Any person Pwho buys stock
in a corporation does so with the knowledge that its affairs are doinated by a a!ority of the
stockholders and that he ipliedly contracts that the will of the ma:ority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by"laws and not forbidden by law.P
To this e0tent, therefore, the stockholder may be considered to have Pparted with his personal
right or privilege to regulate the disposition of his property which he has invested in the capital
stock of the corporation, and surrendered it to the will of the ma:ority of his fellow incorporators. ...
*t cannot therefore be :ustly said that the contract, e0press or implied, between the corporation
and the stockholders is infringed ... by any act of the former which is authoriCed by a ma:ority...P
*t is not denied that a member of the Board of 2irectors of the #an )iguel 'orporation has access
to sensitive and highly confidential information, such as: (a! marketing strategies and pricing
structure@ (b! budget for e0pansion and diversification@ (c! research and development@ and (d!
sources of funding, availability of personnel, proposals of mergers or tie"ups with other firms.
*t is obviously to prevent the creation of an opportunity for an officer or director of #an )iguel
'orporation, who is also the officer or owner of a competing corporation, from taking advantage
of the information which he ac/uires as director to promote his individual or corporate interests to
the pre:udice of #an )iguel 'orporation and its stockholders, that the /uestioned amendment of
the by"laws was made. 'ertainly, where two corporations are competitive in a substantial sense,
it would seem improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his corporation
duties above his personal concerns.
#ound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well re/uire that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such
as the petitioner is a controlling stockholder of two of the competing corporations. *t would seem
HLP2009-3B Page 40
manifest that in such situations, the director has an economic incentive to appropriate for the
benefit of his own corporation the corporate plans and policies of the corporation where he sits as
director.
*ndeed, access by a competitor to confidential information regarding marketing strategies and
pricing policies of #an )iguel 'orporation would sub:ect the latter to a competitive disadvantage
and un:ustly enrich the competitor, for advance knowledge by the competitor of the strategies for
the development of e0isting or new markets of e0isting or new products could enable said
competitor to utiliCe such knowledge to his advantage.
@l%e Wlen C 1 =ti'a @as D 0le't-i'. 6: ,lobe Boolen needed electric power to run its
mills. *ts president and ma:ority #., )aynard, was able to get a contract with the electric
company ;tica ,as which was ratified by the e0ecutive committee of ,lobe9s board. )aynard
was a nominal #. in the electric company also, and did not vote in the meeting. ,lobe desires to
enforce the contract.
.: 'ontracts are voidable at the instance of ;tica ,as. ,lobe argues that by refusing to vote,
)aynard shifted responsibility to his associates, and may reap a profit from their errors. 8ne does
not divest oneself so readily of one9s duties as trustee. The refusal to vote, has indeed this
importance: it gives to the transaction the form and presumption of propriety, and re/uires one
who would invalidate it to prove beneath the surface. The trustee or director holds a duty of
constant and un/ualified fidelity. .e cannot rid himself of the duty to warn and to denounce, if
there is improvidence or oppression, either apparent on the surface, or lurking beneath it.
There was an influence in this case which was e0erted by )r )aynard the president of ,lobe
Boolen. 6rom beginning to end he dealt with a subordinate, who was alert to serve at his
pleasure. The unfairness in the contract is startling and the conse/uences could be disastrous.
7o matter how large the business, or how great the increase in prices of labor or fuel, or there be
e0tensions to the plant, the electric company had pledged that for &4 years there will be saving of
Y%44?month, Y$44 for each mill, YE544?year. As a result of that pledge it has supplied the plaintiff
with electric current for practically nothing, and even owes it some money thereafter. )r )aynard
knew the unfairness of the contract, and he cannot have failed to know that he held a one"sided
contract which left the defendant at his mercy. Thus his refusal to vote does not nullify, as of
course an influence and predominance e0erted without a vote. A constant duty rests on a trustee
to seek no harsh advantage to the detriment of his trust, but rather to protect and renounce he
gains what is unfair.
D3ty f DILI@0NC0 CAS0S
Ben93et 0le't-i' C$e-ati1e 1 NLRC. 'osalan, ,) of the Benguet Electric 'ooperative, was
informed by '8A that cash advances received by officers and employees of Benguet Electric had
been virtually written off the books, that per diems and allowances showed substantial
inconsistencies with the directives of the 7ational Electricifcation Administration, and that several
irregularities in the utiliCation of funds released by 7EA to Benguet. 'osalan then implemented
the remedial measures recommended by '8A. Board members of Benguet responded by
abolishing the housing allowance of 'osalan, reduced his salary, representation and other
allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out
as principal signatory of Benguet Electric. The Board adopted another series of resolutions which
resulted in te ouster of 'osalan as ,). 'osalan nonetheless continued to work as ,),
contending that only the 7EA can suspend and remove him. The Board then refused to act on
'osalan re/uest to release compensation due him. 'osalan files a complaint with the 7+A'
against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the
individual members of the board in their official and private capacities. +abor Arbitrer rules ifo
'osalan, holding both the company and the board solidarily liable to 'osalan. 7+A' modifies
award to 'osalan by declaring Bengeut alone, and not the Board members, was liable to
'osalan. Benguet appeals.
HLP2009-3B Page 41
.: the Board members and officers of a corporation who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting, and act in ,6, do no
become liable, civilly or otherwise, for the conse/uences of their acts. Those acts are properly
attributed to the corporation alone and no personal liability is incurred. *n this case, the board
members obviously wanted to get rid of 'osalan and acted with indecent haste in removing him
from his ,) position. This shows strong indications that the members of the board had illegally
suspended and dismissed him precisely because he was trying the rectify the financial
irregularities.
The Board members are also liable for damages under #ec $& of the 'orpo 'ode, which by
virtue of #ec ( thereof, makes it applicable in a supplementary manner to all corporations,
including those with special or individual charters so long as these are not inconsistent therewith.
The Board members are also guilty of gross negligence and B6 in directing the affairs of the
corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their
authority.
Otis D C. 1 Pennsyl1ania Rail-a# C. 6: 8tis M 'o is a #. in and among the wholly"owned
subsidiaries of the 1ennsylvania Aailroad 'o (1AA!, which included 1ennsylvania 8hio E 2etroit
Aailroads (182!. 8ne of its subsidiaries had an outstanding bond issuance of Y5F.(). The
parent then negotiated with a third party, >uhn, +oeb and 'o, to refinance the bonds. The
directors of 182 approved a resolution authoriCing the sale of the new #eries 2 bonds at a best
obtainable price. Bonds were then sold to >uhn and +oeb. Another buyer was willing to purchase
the bonds at a better price but the directors declined. The *nterstate 'ommerce 'ommission
found that the corporation was not able to get the best price for the sale and that other options
were not e0plored, that negotiations were only with one investment house and were at Garms"
length dealingH, and that it was possible to have greater savings.
*: B?7 the directors are liable for failing to e0ercise ordinary care and :udgment in the issuance
and sale of Y5F) in bonds, which resulted in alleged losses suffered by the corporation.
.: Business :udgment rule: courts will not interfere in matters of business :udgment, in which it is
presumed that :udgmentJreasonable diligenceJhas in fact been e0ercised. A director cannot
close his eyes to what is going on about him in the conduct of business :udgment. 'ourts have
given directors wide latitude in the management of the affairs of the corporation provided that the
:udgment is unbiased, honest and reasonably e0ercised. 7egligence must be determined as of
the time of transaction. )istakes or errors in the e0ercise of honest business :udgment do not
sub:ect the officers and directors to liability for negligence in the discharge of their appointed
duties. 2irectors are entrusted with the management of the affairs of the corporation. *f in the
course of management they arrive at a decision for which there is a reasonable basis, and they
acted in ,6 as the result of their independent :udgment, and uninfluenced by any other
consideration than what they honestly felt was in the best interests of the corporation. *n the
present case, the #' found that the officers and directors of the corporations acted honestly in
,6 and sought to e0ercise their best :udgment for the best interests of their corporation. 7o fraud
was present, but only a faint suggestion of B6. The directors had the right to negotiate privately
with >uhn and +oeb. *n contracting with the latter, the directors were not contracting with another
firm in which they were interested, nor did the directorship or officership positions interlock. There
is no contention that fraud e0isted and fraudulent acts will not be presumed.
?nteli%an et al 1. Ba'l#-?3-'ia ?illin9 C In'. )ontelibano et al are sugar planters
adhered to the )illing 'ompany9s sugar central mill under identical contracts. The contracts
would be in force for $4 years and provide that the resulting product should be divided in the ratio
of (= for the mill and = for the planters. *t was proposed to e0ecute the milling contracts,
increasing the planter9s shares to %4= of the manufactured sugar and molasses and e0tending
HLP2009-3B Page 42
the period from $4 to ( years. The Board of the )illing company then adopted a resolution
granting further concessions to the planters over and above the amended contract. &E years later,
)ontelibano sues the )illing company, contending that the $ sugar centrals with a total annual
production e0ceeding &?$ of the production of all sugar millis in 7egros, had already granted
%5.= participation to their planters, and in accordance with 1ara 3 of the resolution, it had
become obligated to grant similar concessions to them.
.: Bhen a resolution is passed in ,6 by the board, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the court has no authority to review them.
Vuestions of policy or management are left solely to the honest decision of officers and directors
of a corporation, and the court is without authority to substitute its :udgment for that of the board@
the board is the business manager of the corporation and so long as it acts in ,6 its orders are
not reviewable by the courts
Litwin 1 Allen et al. .: The officers are liable for the transaction because the entire arrangement
was so improvident, risky, and unusual and contrary to fundamental concepts of prudent banking
practice. A bank director when appointed takes oath that he will diligently and honestly administer
the affairs of the bank or trust company. .onesty alone would not suffice@ there must be more
than honestyJthere must be diligence, and that means care and prudence as well. Bhat sound
reason is there for a bank, desiring to make an investment, to buy securities under an
arrangement whereby any appreciation will insure to the benefit of the seller and any loss will be
borne by the bank. There is here more than a /uestion of business :udgment. The directors
plainly failed to bestow the care which the situation demanded.
A director, however, is not liable for loss or damage other than what was pro0imately caused by
his own acts or omissions in breach of his duty. The directors in this case are liable only for the
loss attributable to the improper transaction itself, and not after the option on the improper
transaction had e0pired.
Wal.e- 1 ?an et al. 6?.: 'orporation was engaged in real estate and advanced a loan to a third
person taking as security his 17. The loan was not authoriCed by the board and was not for the
benefit of the corporation nor was it in aid of its business. 7o effort was done to collect on the
loan, which became due and demandable. The corporation went bankrupt, and the receiver sues
the directors to collect on the amount due the insolvent corporation and for damages. 'ourt held
that the director was negligent.
Stein%e-9 1 >elas'. 6: The board of the corporation authoriCed the purchase of $$4 shares of
capital stock of the corporation and the declaration of dividends at a time when the corporation
was indebted and in such a bad financial condition. The directors relied on the face value on the
books of its A?A, which had little or no value. 6urthermore it appears that two of the directors were
permitted to resign so that they could sell their stock to the corporation. The corporation became
insolvent, and the receiver #teinberg sues the directors.
.: The corporation did not have a bona fide surplus with which dividends could be declared and
paid out. The directors did not act in ,6 and were grossly ignorant of their duties. 2irectors were
held personally liable for causing the corporation to purchase their own shares and declaring
dividends, which because of such failure to take into consideration of worthless receivables,
worked to the detriment of the creditors. The directors did not act with diligence in taking the word
of their chairman and not making an informed decision based on the facts then available to them
and on not relying on other documents available to them.
'reditors have the right to assume that so long as there are outstanding debts and liabilities, the
board will not use the corporate assets to purchase its own stock, and that it will not declare
dividends to #.s when the corporation is insolvent
Ba-nes 1 An#-ews. 6: 'orporation manufactures starters for 6ord motor vehicles and airplanes.
HLP2009-3B Page 43
2irector Andrews, the largest #., who was induced by the 1resident to become director, held
only 5 board meetings. 2uring his term, the company business was mismanaged. Barnes was
then appointed receiver after the corporation had gone under, and was found that the company
had no funds. .e alleged that Andrews failed to give ade/uate attention to the affairs of the
company, which had been conducted incompetently and without regard to the wastage in
salaries. Bork had languished from incompetence and e0travagance and /uarrels between the
factory manager and the other personnel affected production.
.: 6irst liability must rest upon the director9s general inattention to his duties. .e cannot be
charged with neglect in attending director meetings, since there had been only 5. But his liability
must depend upon his failure in general to keep advised of the conduct of the corporate affairs.
Bhile directors are collectively managers of the company, they are not e0pected to interfere
individually in the actual conduct of its affairs. To do so would disturb the authority of the officers
and destroy their individual responsibility, without which no proper discipline is possible. .aving
accepted a post of confidence, Andrews was charged with an active duty to learn whether the
company was moving to production, and why it was not, and to consider what could be done to
avoid the conflicts among personnel or correct their incompetence, which was slowly bleeding the
business to death. .e must go further to show that he should have been more active, as the
cause of action against him by the receiver rests upon a tort of omission as though it had rested
on a positive act on his part.
Bhen a business fails from general mismanagement or business incapacity, could the blame be
placed upon a single director and could he have saved the company if he had triedQ A director
could have least fulfilled his duties to the company and to the #.s to have made the company
prosper, or at least to show that he had done his duty enough to have broken the fall of the
company. This Andrews failed to do. 0
True, Andrews was not well"suited by e0perience for the :ob he had undertaken. 2irectors are not
specialists, but they must have good sense, and must have ac/uainted themselves with the
corporate affairs, but they need not have any technical talent. They are the general advisers of
the business, and if they faithfully give such ability as they have, it would not be lawful to hold
them liable. )ust a director guarantee that his :udgment is goodQ 'an #.s call him to account for
deficiencies which their votes assured him did not dis/ualify him for officeQ
Bates 1 D-esse-. 6: Bank employee was able to embeCCle cash from the branch operations for a
considerable period of time, unbeknown to the bank officers, who relied to heavily and trusted the
employee. .e was able to swindle money by concealing his withdrawals through entries in the
records of the bank, and matched it with the correct statements which were relied upon by the
cashier.
.: ;nder the circumstances of this case, the directors did not neglect their duty in accepting the
statement of the cashier and failing to inspect the depositor9s ledger. They should not be held
answerable for taking the cashier9s statement to be as correct as the statement of assets always
was. The statement of assets were always correct. A committee was appointed to e0amine the
operations of the bank. The bank itself was in sound financial condition. Their confidence seemed
warranted by the semi"annual e0aminations by the government e0aminer and they were
encouraged in their belief that all was well by the president. They were not bound by virtue of the
office gratuitously assumed by them to call in the passbooks and compare them with the ledger,
and until the event showed the possibility they hardly could have seen that their failure to look at
the ledger opened a way to fraud.
The position of the president, however, is different. 1ractically he was the master of the situation.
.e was at the bank daily for hours, had the ledger in his hands at time. .e had hints and
warnings of the une0plained shortages and rapid decline in deposits. .e knew the errant
employee had been living at a fast pace and had been dabbling in stocks. .e had been put on his
guard, and had they been heeded by the 1resident, it would have led to an e0amination of the
HLP2009-3B Page 44
ledger9s and would have prevented future thefts. *n accepting the presidency 2resser must be
taken to have contemplated responsibility for losses to the bank.
S0IHIN@ CORPORAT0 OPPORT=NITI CAS0S
Sin9e- et al 1 Ca-lisle. 6: #inger et al are #.s of the ;nited 'orporation which owns all capital
stock of its subsidiary, 7< ;nited 'orp, both of which are engaged in the business of underwriting
securities. 'arlisle et al are directors of the two corporations. 8ther defendants are investment
houses L1 )organ, 2re0el M 'o, and )organ #tanley. ;nited 'orp ac/uired substantial voting
stock of various holding and operating companies?utilities, which were all publicly listed and
obtained their funds through the public sale of their securities. L1 )organ et al were able to
obtain large profits from the underwriting of such securities to the e0clusion of ;nited and 7<
;nited. 1laintiff #inger charge that the defendant bankers and investment houses and the
directors of the two corporations fraudulently caused the latter corporations to use their influence
and control over the subsidiaries in order to induce them to award the underwriting business to
the defendant bankers. .aving eliminated ;nited 'orp and 7< ;nited as their competitors for the
underwriting business of the subsidiaries, the defendants allegedly proceeded to utiliCe their
control and influence to obtain the business for themselves. #inger et al also claimed that the
directors of the corporation, as fiduciaries, eliminated their cestui as a competitor in the
underwriting profits.
.: ;nited and 7< ;nited were also engaged in underwriting as do the defendant banks. *t was
the duty of their directors and officers to make every effort consonant with good, honest :udgment
to obtain for those corporations as much of the underwriting business as possible, and to make
this business as profitable as possible. This does not mean, however, that the directors and
controlling #.s of ;nited and 7< ;nited were re/uired to do anything detrimental to the affairs of
other corporations of which they were officers and directors, and to the affairs of ;nited and 7<
;nited. 8ne in control of a ma:ority of the stock and of the board of a corporation occupies a
fiduciary relation towards the minority, and is charged with the duty of e0ercising a high degree of
,6, care, and diligence for the protection of the same. Every act in its own interest to the
detriment of the minority interests becomes a breach of duty and of trust, and entitled them to
plenary relied. #o strict is the rule of undivided loyalty to the beneficiary that the mere fact that a
trustee has an interest inconsistent with the interest of his cestui, casts upon him that burden of
:ustification. Bhere this duty e0ists, the duty of the trustee is to manage the property and affairs of
the corporation with an eye single to the advantage of the corporation itself. *t is not proper for the
fiduciary to take those opportunities unto itself, while at the same time it stayed the processes of
its subsidiary directed towards the same business ends. *t is not only a case of a fiduciary seiCing
business opportunities of the cestui. The trustee at the same time kept its dominant hand over the
cestui, suppressing any attempt by the cestui to go out and compete with the trustee.
Bhere a fiduciary is engaged in a business in competition with his corporation, he cannot actively
use his position and power over his corporation so as to prevent the corporation from seeking
certain businesses in competition with himself. *t is charged that the directors here not only failed
and refused any attempt to obtain certain business for their own corporation, but that they
affirmatively prevent the corporation from competing with them for that business. This they may
not do. 2irectorship in two competing corporation does not in and of itself constitute a wrong. *t is
only when a business opportunity arises which places the director in a position of serving two
masters, and when dominated by one, he neglects his duty to the other, that a wrong has been
done.
I-1in9 T-3st C 1 De3ts'" et al. 6: *rving is the trustee of the insolvent company #onora
Acoustic. Acoustic desired the patents of the 2e 6orest company and wanted gain at least
minority stake to have a voice in the management of its patents and products, which goes to
Acoustic9s corporate purpose. Aeynolds M 'o, receiver of the insolvent 2e 6orest, offered to give
HLP2009-3B Page 45
Acoustic &?$ participation in the purchase of %44,444 shares of 2e 6orest stock. *t also stipulated
that Acoustic9s nominees should hold ( of 3 seats in the board and that it should have the right to
enter into a contract to handle the managing and selling of 2e 6orest products. This offer was
presented to the board of Acoustic and a resolution was passed authoriCing its president,
2eutsch, to obtain sufficient funds to enable Acoustic to carry out its obligations in case it accepts
the offer. 7o funds were obtained but Biddle and 2eutsch et al, agreed to put up the money and
accept the certificates of 2e 6orest stock issued when date of payment came under the offer.
Aeynolds agreed and issued the certificates. The deal was consummated on the purchase of 2e
6orest stock. *t was then traded in the e0change and Biddle, 2eutsch et al were able to reap huge
profits in selling their shares. Acoustic declares bankruptcy and sues the Biddle group, three of
whom were directors of 2e 6orest, appropriated to themselves Acoustic9s right under its contract,
when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden
to take position where personal interest would conflict with the interest of their principal.
.: The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty
of the cestui, even though he risked his own funds in the venture, and that any one who assists in
the fiduciary9s dereliction is likewise liable to account for the profit so made. *t is clear that there is
no contract between Acoustic and Aeynolds because the offer did not run to Acoustic but to the
Biddle group as individuals. The management contract, once entered into, would enable access
to the patents, stock ownership in 2e 6orest as a going concern after receivership was lifted, and
were all concededly legitimate corporate purposes. Thus the proposed purchase is not ultra
vires.
The facts of the present case militate strongly against the directors since in this case, they
absolutely bound Acoustic by contract to make payments to Aeynolds and e0posing it to risk of a
suit for damages for nonperformance, without committing themselves to it to relieve it of this
obligation if necessary when time for payment arrives. 2irectors of a solvent corporation are
forbidden to take over for their own profit a corporate contract on the plea of the corporation9s
financial inability to perform. *f the directors are uncertain whether the corporation can make the
necessary outlays, they need not embark upon the venture. *f they do, they cannot substitute
themselves for the corporation any place along the line and divert possible benefits into their own
pockets.
Litwin 1 Allen et al. 6: L1 )organ, in disposing of &,54,444 shares of '# of Alleghany
corporation, offered 44,444 to ,uaranty 'orporation to be sold on a commission at Y5(?share.
Before the public offering, )organ also offered the other E4,444 to friends at Y54. Among those
receiving the shares were some directors of ,uaranty 'orp, who received (4,444 shares. The
market opened at a premium and the directors were able to dispose of their stock at a substantial
profit.
.: A director of a corporation is in a position of fiduciary. .e will not be permitted to improperly
profit at the e0pense of the corporation. ;ndivided loyalty will ever be insisted upon. 1ersonal
gain will be denied to a director when it comes because he has taken a position adverse to or in
conflict with the best interests of the corporation. The fiduciary relationship imposes a duty to act
in accordance with the highest standard. There is thus no basis for holding that in ac/uiring stock
through L1 )organ at Y54, any of the defendants were guilty of a breach of fiduciary duty. The
'# purchased did not represent in any case a business opportunity for the ,uaranty 'orporation.
.aving fulfilled their duty to the corporation in accordance to their best :udgment, the directors
were not precluded from a transaction for their own account and risk.
*n order to constitute a corporate opportunity that was deprived by the directors, it was necessary
to prove the ff:
The shares purchase were in contemplation of e/uity offered to the cestui
That the cestui had some legitimate right or e0pectancy in these shares
HLP2009-3B Page 46
The /uestion to ask is, have the directors profited at the e0pense of their corporation@ have they
gained because of disloyalty to its interest and welfareQ *n this case, the GopportunityH was a
routine piece of business wholly lacking in the uni/ue and special /uality which distinguished
other corporate opportunity cases. The interest of the directors in the stock was purely
speculative, and they even incurred a definite risk which at the time was totally eliminated from
the cestui9s position in the same stock. *n other words, the profit of the cestui was assured@ that of
the directors were still at haCard.
D3ty f Cnt-llin9 Inte-ests
Ins3-ans"a-es C-$-atin 1 N-t"e-n Fis'al C-$. 6: The )anagement group (composed of
1hiladelphia banks! transferred control over the *nsuranshares 'orporation, an investment trust
specialiCing in shares of small life insurance companies, to the Boston ,roup, none of whom ever
had any interest of any in it. Bith the control went plenary power under the by"laws to sell or
transfer all the securities in the company9s portfolio. #uch ac/uisition of control was the first step
of a grand scheme, planned by the Boston ,roup with the connivance of brokers, to strip the
corporation of its valuable assets, leaving a mere shell to the remaining #.s.
.: This case involves more than :ust a /uestion of liability in the sale of corporate stock: it is the
sale of control by a minorityJbut controllingJinterest.
Those who control a corporation either by the ma:ority or minority stock ownership owe some
duty to the corporation in respect of the transfer of the control to outsiders. 8wners of control in a
corporation are under a duty not to transfer ownership to outsiders if the circumstances
surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his
guard. *n this case the evidence shows that the Boston group were ac/uiring control over the
corporation by improper means and for an improper purpose.
E. *ssuance of watered stock (#ection %!
+iability of directors for watered stocks: #hall be solidarily liable with the stockholder
concerned to the corporation and its creditors for the difference between the fair
value received at the time of issuance of the stock and the par or issued value of the
same.
F. #eiCing corporate opportunity
A director has a duty to refrain from usurping a business opportunity rightly belonging
to the corporation. *n case of breach of this obligation, he has a duty to account to
the corporation all profits received by him (#ection $(!
;7+E##, his act has been ratified by a vote of the stockholders owning or
representing at least 5?$ of the outstanding capital stock
8fficers can be held liable under (#ection $&!
J. Re4e#ies in 'ase f 4is4ana9e4ent
Aeceivership
*n:unction if the act has not been done
2issolution if the abuse amounts to a ground for /uo warranto but the #olicitor
,eneral refuses to act
2erivative suit a complaint filed with the #E'
;ichico, et al. vs. 7+A':
HLP2009-3B Page 47
The petitioners, who are officers and directors of 'rispa, *nc., assailed the decision of
the 7+A' holding them solidarily liable with 'rispa for the payment of separation pay
and backwages to the private respondents. *t was the contention of the petitioners
that the award of separation pay and backwages is a corporate obligation and must
therefore be assumed by 'rispa alone.
Bhile the general rule is that obligations incurred by a corporation, acting through its
directors, officers and employees, are its sole liabilities, there are times when solidary
liabilities may be incurred such as in this case where it is undisputed that petitioners
had a direct hand in the illegal dismissal of respondent employees. They were the
ones, who as high"ranking officers and directors of 'rispa, signed he Board
resolution retrenching the private respondents on the feigned ground of serious
business losses that had no basis apart from an unsigned and unaudited profit and
loss statement which had no evidentiary value whatsoever. This is indicative of bad
faith on the part of petitioners for which they can be held :ointly and severally liable
with 'rispa for all the money claims of the illegally terminated respondent employees.
Tramat )ercantile, *nc. vs. 'A:
1ersonal liability of a corporate director, trustee or officer along (although not
necessarily! with the corporation may so validly attach, as a rule, only when:
.e assents (a! to a patently unlawful act of the corporation, or (b! for bad faith or
gross negligence in directing its affairs, or (c! for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons@
.e consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written ob:ection thereto@
.e agrees to hold himself personally and soidarily liable with the corporation@ or
.e is made, by a specific provision of law, to personally answer for his corporate
action.
E. 08e'3ti1e '44ittee (#ection $!
The by"laws of a corporation may create an e0ecutive committee, composed of not
less than three members of the board, to be appointed by the board.
#aid committee may act, by ma:ority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by"laws or on a
ma:ority vote of the board, e0cept with respect to:
o approval of any action for which shareholdersI approval is also re/uired@
o the filing of vacancies in the board@
o the amendment or repeal of by"laws or the adoption of new by"laws@
o the amendment or repeal of any resolution of the board which by its e0press
terms is not so amendable or repealable@ and
o a distribution of cash dividends to the shareholders.
'annot go as far as to render the bond powerless and free from all responsibilities
imposed on it by law
)ust be provided in the by laws, composed of not less than $ members of the board
Essential the e0ecutive committee acts by ma:ority vote of all the members
HLP2009-3B Page 48
OFFIC0RS
A. C-$-ate ffi'e-s
The officers e0ecute the polices laid down by the board but in practice have wide
latitude in determining the course of business operations
&. )inimum set of officers and Vualification (#ection 5!
*mmediately after their election, the directors of a corporation must formally organiCe
the election of:
a. A president, who shall be a director
b. A treasurer who may or may not be a director
c. A secretary who shall be a resident and citiCen of the 1hilippines, and
d. #uch other officers as may be provided for in the By"laws
Any two (5! or more positions may be held concurrently by the same person, e0cept
that no one shall act as president and secretary or as president and treasurer at the
same time.
5. 2is/ualifications (#ection 5E!
7o person convicted by final :udgment of an offense punishable by imprisonment for
a period e0ceeding si0 (%! years, or a violation of this 'ode committed within five (!
years prior to the date of his election or appointment, shall /ualify as a director,
trustee or officer of any corporation.
$. +iability in general (#ection $&!
Bhen a director, trustee or officer attempts to ac/uire or ac/uires, 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 e/uity 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.
(. 2ealings with corporation (#ection $5!
A contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are
present:
o That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a /uorum for such
meeting@
o That the vote of such director or trustee was nor necessary for the approval of
the contract@
o That the contract is fair and reasonable under the circumstances@ and
HLP2009-3B Page 49
o That in case of an officer, the contract has been previously authoriCed by the
board of directors.
Bhere any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two"thirds (5?$! of the outstanding
capital stock or of at least two"thirds (5?$! of the members in a meeting called for the
purpose
1rovided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: 1rovided, however, That the contract is fair and
reasonable under the circumstances.
B. C1e-a9e f '-$-ate ffi'e-
8ngkingco v. 7+A' " Gwhere the By"laws of the condominium corporation specifically
includes the position of G#uperintendent?AdministratorH in a roster of corporate
officers, then such position is clearly a corporate officer position and issues of
reinstatement would be within the :urisdiction of the #E' and not the 7+A'.H
Tabaug v. 7+A' " GBhen the By"laws of the corporation provide that one of the
powers of the BoTrustees is Gto appoint a )edical 2irector,
'omptroller?Administration, 'hief of #ervices, and such other officers as it may deem
necessary and prescribe their powers and dutiesH then such specifically designated
positions should be considered Gcorporate officersH positionsK.H
C. A3t"-ity f '-$-ate ffi'e-s
The authority of corporate officers to bind the corporation is usually not considered
inherent in their office but is derived from law, the corporate by"laws or by delegation
from the board either e0pressly or impliedly by habit, custom, or ac/uiescence in the
general course of business
,en rule: A person dealing with a corporate officer is put on in/uiry as to the scope of
the latter9s authority but an innocent person cannot be pre:udiced if he had the right
to presume under the circumstances the authority of the acting officers.
1resident D no inherent powers by virtue of his office but acts done in the ordinary
course of business is presumably within the scope of his authority unless the contrary
is proven. *n many instances, he is impliedly vested with corporate powers through
long ac/uiescence. .is acts may be subse/uently ratified and the corporation may
be bound. .e cannot be secretary and treasurer at the same time
-ice 1resident D no inherent power. Takes over when the president is absent
#ecretary D duties are ministerial. 'annot bind the corporation unless authoriCed or
named manager
Treasurer D entrusted with authority to receive and keep funds and to disburse them
as he may be authoriCed. 1owers are limited@ cannot bind the corporation unless
authoriCed.
,eneral manager D takes care of the day to day affairs of the corporation. 1owers
are limited to implementing the policies laid down by the board and perform such
acts and enter into such contracts which are within the usual course of business
HLP2009-3B Page 50
unless the board has given a broader authority. Even if act is not within the usual
course of business, if the board hd ac/uiesced in the past to similar acts, his
subse/uent acts must be deemed within his implied authority. A third person has the
right to presume that ,) had authority to perform acts in ordinary course of business
8ther agent D the corporation may employ such other persons as may be necessary
to carry on the business
I3 C"3'. 1 En9 Li P. >ong +i 1o is a corporation engaged in the publication of a 'hinese
newspaper. *ts A8* provide for a president who shall sign all contracts and other instruments of
writing, but does not provide for a business or general manager. '' 'hen or T' 'hen was
appointed general business manager of the paper. .e then entered into an agreement with <u
'huck for the printing of the newspaper for 1F4 per month. <u 'huck worked for a year until
they were discharged by the new manager Tan Tian .ong because '' 'hen had left for 'hina.
<u 'huck sues the paper, claiming the the contract was for a period of $ years, and that
discharge without :ust cause before the e0piration of this term entitles them to receive full pay for
the remainder of the term. >ong +i 1o counters that '' 'hen was not authoriCed to enter into the
contract with <u 'huck. T' ruled ifo of <u 'huck, concluding that the contract had been impliedly
ratified by >ong +i 1o and that although he had no e0press authority to enter into the contract,
since he was general business manager in charge of the printing of the paper and thus had
implied authority to employ the petitioners
*: B?7 '' 'hen had the power to bind the corporation through the contract mentioned.
.: ,A: The power to bind a corporation by contract lies with its board of directors or trustees, but
this power may either be e0pressly or impliedly delegated to other officers or agents of the
corporation. EU'E1T*87: An officer or agent who has general control and management of the
corporation9s business or a specific part thereof, may bind the corporation by the employment of
such agents and employees as are usual and necessary in the conduct of such business.
E0ception to e0ception: Bhere the authority is vested e0pressly in the B82.
As to the term of employment, a manager has authority to hire an employee for such a period as
is customary or proper under the circumstances, but unless he is e0pressly authoriCed or held out
to have such authority, he cannot make a contract of employment for a long future period, such
as for $ years. There can be no doubt that '' 'hen as general manager of the >ong +i 1o, had
implied authority to bind the defendant corporation by a reasonable and usual contract of
employment with the plaintiffs. But the term of employment is unusually long, and the conditions
are otherwise so onerous to the defendant corporation that the possibility of the corporation being
thrown into insolvency thereby is e0pressly contemplated in the same contract.
The corporation also did not impliedly ratify the contract, :ust because the president of >ong +i 1o
saw the plaintiffs work as printers in the office one day. Before a contract can be ratified,
knowledge of its e0istence must, of course, be brought home to the parties who have authority to
ratify it or circumstances must be shown from which such knowledge may be presumed. 7o such
knowledge or circumstances indicating knowledge is shown or proven in the case. )oreover, a
ratification by him would have been to no avail@ in order to validate a contract, a ratification by the
B82 was necessary. The fact that the president was authoriCed by the by"laws to sign
documents evidencing contracts doesn9t mean that he had power to make the contracts.
W#'"il# ,l#in9s In' 1 R8as 0le't-i' an# Cnst-3'tin C. The respondent posits that
Ao0as was not so authoriCed under the )ay &E, &33& Aesolution of its Board of 2irectors to
impose a burden or to grant a right of way in favor of the petitioner on +ot 7o. (3&"A"$"B"&, much
less convey a portion thereof to the petitioner. .ence, the respondent was not bound by such
provisions contained in the deed of absolute sale.
.: ,enerally, the acts of the corporate officers within the scope of their authority are binding on
the corporation. .owever, under Article &3&4 of the 7ew 'ivil 'ode, acts done by such officers
HLP2009-3B Page 51
beyond the scope of their authority cannot bind the corporation unless it has ratified such acts
e0pressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate
officers beyond the scope of authority are unenforceable against the corporation unless ratified by
the corporation.
Evidently, Ao0as was not specifically authoriCed under the said resolution to grant a right of way
in favor of the petitioner on a portion of +ot 7o. (3&"A"$"B"& or to agree to sell to the petitioner a
portion thereof. The authority of Ao0as, under the resolution, to sell +ot 7o. (3&"A"$"B"5 covered
by T'T 7o. EF4F% did not include the authority to sell a portion of the ad:acent lot, +ot 7o. (3&"A"
$"B"&, or to create or convey real rights thereon. 7either may such authority be implied from the
authority granted to Ao0as to sell +ot 7o. (3&"A"$"B"5 to the petitioner Gon such terms and
conditions which he deems most reasonable and advantageous.H The general rule is that the
power of attorney must be pursued within legal strictures, and the agent can neither go beyond it@
nor beside it. The act done must be legally identical with that authoriCed to be done. *n sum,
then, the consent of the respondent to the assailed provisions in the deed of absolute sale was
not obtained@ hence, the assailed provisions are not binding on it.
*t bears stressing that apparent authority is based on estoppel and can arise from two instances:
first, the principal may knowingly permit the agent to so hold himself out as having such authority,
and in this way, the principal becomes estopped to claim that the agent does not have such
authority@ second, the principal may so clothe the agent with the indicia of authority as to lead a
reasonably prudent person to believe that he actually has such authority. There can be no
apparent authority of an agent without acts or conduct on the part of the principal and such acts
or conduct of the principal must have been known and relied upon in good faith and as a result of
the e0ercise of reasonable prudence by a third person as claimant and such must have produced
a change of position to its detriment. The apparent power of an agent is to be determined by the
acts of the principal and not by the acts of the agent.

*t bears stressing that the respondent sold +ot 7o. (3&"A"$"B"5 to the petitioner, and the latter
had taken possession of the property. As such, the respondent had the right to retain the
1,444,444, the purchase price of the property it had sold to the petitioner. 6or an act of the
principal to be considered as an implied ratification of an unauthoriCed act of an agent, such act
must be inconsistent with any other hypothesis than that he approved and intended to adopt what
had been done in his name. Aatification is based on waiver D the intentional relin/uishment of a
known right. Aatification cannot be inferred from acts that a principal has a right to do
independently of the unauthoriCed act of the agent. )oreover, if a writing is re/uired to grant an
authority to do a particular act, ratification of that act must also be in writing. #ince the respondent
had not ratified the unauthoriCed acts of Ao0as, the same are unenforceable. .ence, by the
respondent9s retention of the amount, it cannot thereby be implied that it had ratified the
unauthoriCed acts of its agent, Aoberto Ao0as.
Ba-# f Li<3i#at-s 1 Ealaw. )a0imo >alaw is chairman of the board and general manager of
the 7ational 'oconut 'orporation (7A'8'8!, a non"profit ,8'' empowered by its charter to
buy sell barter e0port andK deal in coconut, copra, and dessicated coconut. Bocar, ,arcia and
)oll were directors. *t entered into contracts for the trading and delivery of copra. 7ature
intervenedJ( typhoons devastated agriculture and copra production. 7A'8'8 was on the verge
of sustaining losses and could not be able to make good on the contracts. #ensing this, >alaw
submitted the contracts to the board for approval and made a full disclosure of the situation. 7o
action was taken, and no vote was taken on the matter. 8n 54 Lan &3(E the board met again with
>alaw, Bocar, ,arcia, and )oll in attendance, and approved the contracts. 7A'8'8 however
only partially performed the contracts. 8ne of the contracts concerns the +ouis 2rayfus M 'o.,
which sued 7A'8'8. 7A'8'8 settled out"of"court and paid 2rayfus 1%E,45(.5 representing
E4= of total claims. The total settlements sum up to 1&.$). 7A'8'8 sues >alaw, and his
directors Bocar, )oll and ,arcia to recover this sum, alleging negligence and B6 and breach of
trust in approving the contracts, by not having them approved by the board. T' dismisses
complaint. 7A'8'8 claims that the by"laws provide that prior Board approval is re/uired before
HLP2009-3B Page 52
the ,) can perform or e0ecute in behalf of 7A'8'8 all contracts necessary to accomplish its
purpose.
*: B?7 the >alaw contracts are valid despite its lack of prior board approval as re/uired by the
7A'8'8 by"laws
.: The contracts in /uestion are Gforward salesH contractsJa sales agreement entered into, even
though the goods are not yet in the hands of the seller. ,iven the peculiar nature of copra trading,
ie copra must be disposed of asap else it would lose weight and would decrease its value, it
necessitates a /uick turnover and e0ecution of the contract on short notice (w?in 5( hours!. *t
would be difficult if not impractical to call a formal meeting of the board each time a contract is to
be e0ecuted.
7A'8'8 board met the difficulties attendant to forward sales by leaving the adoption of the
means to the sound discretion of >alaw. +ong before the contracts came into being, >alaw
already contract by himself alone some %4 such contracts, and 7A'8'8 reaped a gross profit.
These contracts were contracted without prior authority from the Board and were known to all the
members, but nothing was said by them. Also contracts entered into by >alaw had been
submitted to the board after e0ecution, not before as re/uired by the by"laws. The Board has
knowledge of this and did not ob:ect to the same. Thus the practice of the corporation has been to
allow its ,) to negotiate and e0ecute contracts in behalf of 7A'8'8 without prior Board
approval, and by its acts and through ac/uiescence practically laid aside the re/uirement in the
by"law. The contracts are therefore valid.
Aatification by a corporation of an unauthoriCed act or contract by its officers relates back to the
time of the act or contract ratified and is e/uivalent to original authority. The theory of corporate
ratfication is predicated upon the right of a corporation to contract, and any ratification or adoption
is e/uivalent to a grant of prior authority. Aatification Gcleanses the contract from all its defects
from the moment it was constituted. By corporate confirmation of the contracts in dispute on 54
Lan, the >alaw contracts are thus purged of whatever vice or defects they may have. Thus even
in the face of an e0press by"law re/uirement of prior approval, the law on corporations is not to
be held so rigid and infle0ible as to fail to recogniCe e/uitable considerations.
There was no B6 or breach of trust on the part of >alaw. The board knew, and >alaw had so
informed it, that the contracts would cause heavy losses. The 'ourt found no trace of any
dishonest purpose or moral obli/uity or ill will that partakes of the nature of fraud which would
consitute B6 on the part of >alaw. The Board did not eventhink of raising their voice in protest
against past contracts which brought enormous profits to 7A'8'8. The ratification was an act of
simple :ustice and fairness to the ,) and to the best interest of the corporation whose prestige
would have been seriously impaired by a re:ection of the board of those contracts which proved
disadvantageous.
?00TIN@S OF STOCE,OLD0RS AND DIR0CTORS
A. Ein#s (#ection (3!
)eetings of directors, trustees, stockholders, or members may be
o regular
o special
HLP2009-3B Page 53
B. W"en an# w"e-e "el#B (#ections 4, &, and $!
)eetings of #tockholders (#ection 4!
o #tockholders action is needed in ma:or changes in the corporation which would
affect their contract with the corporation and although such action is usually
initiated by the board, it is not sufficient to give them effect. #tockholders or
members approval e0pressed in a meeting duly called and held for the purpose
is still necessary. E0ceptions:
#ec &% any corporation may amend its A* by ma:ority vote of B82 or written
assent of 5?$ of the stockholders
'orporations may be bound by unanimous agreement of its stockholders
although e0pressed elsewhere than at a meeting
o Aegular meetings of stockholders or members shall be held annually on a date
fi0ed in the by"laws, or if not so fi0ed, on any date in April of every year as
determined by the board of directors or trustees
o Bhen there is no person authoriCed to call a meeting, the #ecretaries and
E0change 'ommission, upon petition of a stockholder or member on a showing
of good cause therefor, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by giving proper notice
re/uired by this 'ode or by the by"laws.
o The petitioning stockholder or member shall preside thereat until at least a
ma:ority of the stockholders or members present have been chosen one of their
number as presiding officer.
o 1lace and time of meetings of stockholders of members " #tockholderIs or
memberIs meetings, whether regular or special, shall be held in the city or
municipality where the principal office of the corporation is located, and if
practicable in the principal office of the corporation: 1rovided, That )etro )anila
shall, for purposes of this section, be considered a city or municipality.
o )embers of non"stock corporations may provide in by"laws that meetings may be
held any place even outside the place where the principal office is located
provided proper notice is sent and that it is within the 1hilippines
o All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly represented at
the meeting. (#ec &!
)eetings of 2irectors or trustees (#ection &!
o Aegular meetings of directors or trustees shall be held monthly, unless the by"
laws provide otherwise.
o #pecial meetings of the board of directors or trustees may be held at any time
upon the call of the president or as provided in the by"laws.
o )eetings of directors or trustees of corporations may be held anywhere in or
outside of the 1hilippines, unless the by"laws provide otherwise.
o Ae/uisites of board meetings
)eeting of the Board duly assembled
HLP2009-3B Page 54
E0istence of /uorum (ma:ority of the board members! and
2ecision of the ma:ority of the /uorum duly assembled
o 7ote: 2irectors in Board meetings cannot be represented or voted by pro0ies.
C. Nti'e# -e<3i-e# (#ection 4 and $!
)eetings of #tockholders?)embers
o Britten notice of regular meetings shall be sent to all stockholders or members of
record at least two (5! weeks prior to the meeting, unless a different period is
re/uired by the by"laws
o Britten notice of special meetings shall be sent at least one (&! week prior to the
meeting, unless otherwise provided in the by"laws.
o 7otice of any meeting may be waived, e0pressly or impliedly, by any stockholder
or member
o 6ailure to give notice would render a meeting voidable.
o Attendance to a meeting despite want of notice will be deemed implied waiver
)eetings of 2irectors or trustees (#ection &!
o 7otice of regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least one (&! day prior to the
scheduled meeting, unless otherwise provided by the by"laws.
o A director or trustee may waive this re/uirement, either e0pressly or impliedly
D. K3-34 -e<3i-e# (#ection 5 and 5!
)eeting of directors or trustees and officers (#ection 5!
o ;nless the articles of incorporation or the by"laws provide for a greater ma:ority,
a ma:ority of the number of directors or trustees as fi0ed in the articles of
incorporation shall constitute a /uorum for the transaction of corporate business,
and every decision of at least a ma:ority of the directors or trustees present at a
meeting at which there is a /uorum shall be valid as a corporate act, e0cept for
the election of officers which shall re/uire the vote of a ma:ority of all the
members of the board.
)eeting of stockholders (#ection 5!
o ;nless otherwise provided for in this 'ode or in the by"laws, a /uorum shall
consist of the stockholders representing a ma:ority of the outstanding capital
stock or a ma:ority of the members in the case of non"stock corporations.
o Bylaws may provide for a greater or lesser /uorum
o Bhere /uorum is present at the start of a lawful meeting, stockholders present
cannot without :ustifiable cause break the /uorum by walking out from said
meeting so as to defeat the validity of any act proposed and approved by the
ma:ority
0. W" $-esi#es (#ection (!
HLP2009-3B Page 55
The president shall preside at all meetings of the directors or trustee as well as of the
stockholders or members, unless the by"laws provide otherwise.
Bhen there is no person authoriCed to call a meeting, the #ecretaries and E0change
'ommission, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning stockholder or member directing him to
call a meeting of the corporation by giving proper notice re/uired by this 'ode or by
the by"laws.
The petitioning stockholder or member shall preside thereat until at least a ma:ority of
the stockholders or members present have been chosen one of their number as
presiding officer.
F. W" '3l# atten# an# 1teB (#ection 5 and F!
#tockholder in person
1ro0ies:
o #tockholders and members may vote in person or by pro0y in all meetings of
stockholders or members.
o 1ro0ies shall in writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. ;nless otherwise provided in
the pro0y, it shall be valid only for the meeting for which it is intended. 7o pro0y
shall be valid and effective for a period longer than five (! years at any one time.
o 2irectors or trustees cannot attend or vote by pro0y at board meetings.
@. Re<3i-e# atten#an'e at 4eetin9 f- ele'tin
#tock corporation " ma:ority of outstanding capital stock
7on"stock corporation " ma:ority of members entitled to vote
J"nstn 1 J"nstn. +ogan, *rene, and 6elisa Lohnston, and +ouis and Aosario Lohnston, and
EliCabeth Araneta are the ma:ority shareholders of a family stock corporation known as Lohnston
+umber 'o *nc. A stockholders meeting was scheduled to elect a new set of directors who would
in turn choose the new officers of the corporation. +ogan presented a pro0y by his mother, 6elisa,
and another pro0y by his wife, *rene, which all"in"all represented &,5(5 of the 5,(%5 shares of the
corporation. .e also re/uested that the duly endorsed shares of LB #olis be listed in the books
for voting purposes. )inority #. +ouis Lohnston, as 'hairman of the board, denied the re/uest.
+ogan /uickly sent for the original owners so that they could vote in his favor. +ouis also
disallowed +ogan from voting the $4E shares of the elder Lohnston which he had been voting in
his capacity as administrator of the estate because the estate proceedings were already
terminated. Thereafter, and before the e0istence of a /uorum could be declared, +ogan et al
walked out of the #. meeting and refused to recogniCe the validity of the meeting. +ouis9 group,
the minority carried on and elected themselves directors and officers. Another #. meeting was
called by +ouis at the instance of +ogan, which will cover matters not taken up or not finished
during the regular #. meeting. 2uring the meeting +ogan moved for the election of a new board,
claiming that there was no /uorum in the last meeting and thus was not validly held. +ouis denied
the motion. +ogan, who represented ma:ority of the stocks, then nominated his own set of
directors, and his group cast their votes in favor of the nominees, which were elected the new
members of the board. This action was overruled again by +ouis as 'hair. +ogan *rene and 6elisa
filed a /uo warranto suit alleging that they were the duly elected members of the B82 of
Lohnston +umber 'o, and were also elected as the corporate officers thereof and praying for the
ouster of +ouis, Araneta and Aosario Lohnston.
HLP2009-3B Page 56
*: (&! Bhich of the two factions, the +ogan group or the +ouis group, was validly elected as
directors and officers of the corporation
.: The #.s who remained after the group representing the ma:ority walked out without a /uorum
being declared represented the minority and did no constitute a /uorum, and it is clear that they
could not have validly transacted further business much less have elected a new set of directors.
*t follows that if the election of the directors after the withdrawal of +ogan was null and void, then
the subse/uent meeting of the board at which the +ouis group was elected was likewise null and
void.
*f the purpose in bolting the meeting was to deliberately defeat the e0istence of a /uorum, the
absence of a /uorum, then it would produce the effect of nullifying the proceedings that follows. *t
is to be noted that a #. can, for :ustifiable reasons, break the /uorum by w?drawing from the
meeting. +ogan walked out because +ouis persistently and with reason overruled +ogan on his
re/uests to vote the shares of the #ilos family, which he validly purchased. That +ogan did
everything possible to register the stocks in order to vote them was substantial compliance with
the charter and the by"laws. The denial by +ouis to vote the shares of the minor children of Albert
Lohnston was likewise unreasonable. The withdrawal of +ogan, although it actually defeated the
e0istence of a /uorum, was neither unreasonable nor un:ustifiable.
The second meeting of #. was properly convened. All parties were present. The roll was called
and a /uorum was declared. The contention of +ouis that the 5nd meeting did not amount to an
election cannot be sustained. *t must be remembered that the +ogan group held the ma:ority of
stocks when they cast their votes ifo the nominees. The inaction of the +ouis faction, did not have
the effect of defeating or invalidating the election. *t is the essence of all elections that the will of
the ma:ority, properly e0pressed, shall govern. A ma:ority of votes cast will decide, although some
#.s who are present may refuse to vote, and thus the ma:ority of the votes cast may be less than
a ma:ority of the persons or stocks present or represented.
7either may the second election be assailed on the ground that notice did not specifically include
the election of the new board on the agenda. The notice provided that matters not taken up or
finished during the first meeting will be part of the agenda, therefore the #.s knew that +ogan
would press for the new board and they were prepared for it, having attended the first meeting.
6urthermore, all #.s were present either in person or by pro0y during the &st meeting and
whatever defect in the notice was cured b their presence and ac/uiescence.
D0>IC0S AFF0CTIN@ CONTROL
1. P-8ies
two meanings of pro0y:
o person duly authoriCed by the stockholder to vote in his behalf at a stockholder9s meeting
is actually an agent for a special purpose
rules on agency apply to the relationship
o the actual document evidencing this authority
types of pro0y:
o general pro0yJgives the power to vote for directors and on all ordinary matters which
may be properly be taken in an #. meeting
does not include the power to vote for an amendment to the A8* or other unusual
transactions
o limited pro0yJrestricts the authority to vote to specified matters only and may direct the
vote to be case in a certain way
7ature of pro0y: a special form of agency governed by the laws on agency
o #trictly fiduciary relation, and therefore as a ,A, revocable in nature despite contrary
stipulations
HLP2009-3B Page 57
o E0ception: coupled with an interest
*ncludes where the pro0y has parted with the value or incurred liability at the #.s
re/uestK
K which would mean to it is 78T the giving of onerous consideration that makes
a pro0y one that is coupled with an interest, but that the pro0y is an integral part
of the security by which a loan is to be paid
re/uisites for valid pro0y (F!
o in writing
o signed by #. or member
o filed before the scheduled meeting
term of pro0y:
o pro0y may fi0 the period it may be used, but cannot e0ceed years, renewable for not
more than years per renewal
o no period specified: e0pires after the meeting for which it was given and cannot be used
for another meeting unless it is renewed
who may be appointed pro0yQ
o #tock: no limitation, and B+ restrictions on #. right to appoint a pro0y will be -8*2
o 7on"stock: F3: A8* or B+ may restrict right to appoint pro0y
revocability:
o ,A revocable even before the period has e0pired and even if it e0pressly provides for
irrevocability
o E0ception: coupled with an interest
*rrevocable for the period fi0ed
;pon e0piry, pro0y automatically ceases to be effective unless renewed
Bhat constitutes sufficient interestQ 2epends from case to case
1rocedure?practice:
o management usually sends a pro0y form with notice of the annual stockholders meeting
o persons suggested as pro0ies have been selected by the incumbent directors and are
sometimes referred to as the pro0y committee
o the e0isting management who may own only a small portion of the corporation9s shares
can retain its control over corporate affairs for as long as they can obtain the necessary
number of pro0ies from absentee stockholders
o pro0ies may not be appointed orally and the written pro0y should be filed with the
corporate secretary before the meeting
failure to comply will render the pro0y void and ineffective
vote or presence counted on the basis of a void pro0y may result in the
invalidation of any action, unless the number of shares re/uired for /uorum or
voting is present
o when a group of #. feel dissatisfied with management, they may seek control to correct
such mismanagement by soliciting pro0ies for the ne0t election of directors
o each block of #. will seek pro0ies of absentee #.s
o since management has the right to defend its present policies, it can as a rule, use
corporate funds and facilities in solicitation, as long as:
it acts in ,6,
the e0penses are reasonable under the circumstances and
the pro0y war is not a personal one
,A: when the right to vote by pro0y is given by statute, a stockholder cannot be deprived of it
by any by"law
E0ception: non"stock corpsJ'ode allows for a waiver of the right provided this is made in the
A8* or by"laws
By"laws may also impose reasonable conditions as to the form and manner of voting by pro0y
In -e @iant P-tlan# Ce4ent. .: #tock transferred on the books of the corporation within 54 days prior to a
stockholders meeting, for the election of directors, is temporarily disenfranchised, and cannot be voted either
by the transferor or by the transferee. The persons on whose pro0ies the #. meeting were the #. of record
within the provision of the statute, although they were not real beneficial or e/uitable owners of the stock.
The right to vote shares of corporate stock, having voting powers, has always been incident to its legal
ownership. Bhatever the rights of the mere unrecorded assignee of the stock certificate might be in the
absence of a by"law or other contract provision re/uiring all transfers of shares to be recorded on the books
of the corporation, it is not contended that such a provision is not authoriCed or is not binding as between
HLP2009-3B Page 58
#.s and the corporation. As between the transferor and the unrecorded transferee to the stock certificate,
the legal title passes to the latter. A very different rule applies between the corporation and the mere
unrecorded assignee of the certificate of stock. That is because limited contract restrictions relating to stock
transfers, are for the benefit of the corporation, and to enable it to ascertain from its records who its
members of #.s are. #o far as the corporation is concerned, until such a by"law is complied with, the
record owner must therefore be regarded as the real owner of the stock, with the conse/uent general right to
vote it by pro0y or otherwise. Bhen considered from a legal standpoint, there is no privity of contract
between the mere holder of the certificate and the corporation, and he is not a real member of that
organiCation until the transfer is recorded. ;ntil that time, the possible legal rights of the holder of the
certificate are of an inchoate nature. *n other words, a real novation, whereby a new contract between the
mere holder of the certificate and the corporation is substituted for the prior contract of the record owner, can
only be brought about by complying with the corporate regulation relating to transfers of stock. The record
owner may, therefore, be the mere nominal owner, or technically a trustee for the holder of the certificate,
but legally he is still a stockholder in the corporation, and so far as the corporation is concerned, like the
usual trustee, ordinarily has the right to vote the stock standing in his name. *n cases of this nature, when
nothing more than a mere dry trust is involved the owners of the certificates can usually protect their rights
by recording the transfers and having the new certificates issued@ but even though that could not be done in
this case because the corporate transfer books were closed at the time of the assignments, they could have
compelled the record owners to give them pro0ies to vote the stock standing in their names. A mere nominal
owner naturally owes some duties to the real beneficial owner or e/uitable owner of the stock, and even if
the right to demand a pro0y is not e0ercised, if the vendor e0ercises his legal right to vote in such a manner
as to materially and in:uriously affect the rights of the vendee, he is perhaps answerable in damages in
some cases. *t can hardly be contended that the actual consent of the holder of the certificate is ordinarily
essential to the right of the record owners to vote stock standing in their names.
Bhen the right and power of a mere record owner to vote is /uestioned, some ultra vires, negligent, or
improper willful act or omission on the part of the corporation or its agents is relied upon and must appear. *n
some cases the court may also re:ect votes cast by the record owners, which are regarded as improper,
solely because of some peculiar ine/uitable circumstances affecting the relation between such apparent
owners and the transferee of the certificates. 'onceding that as between a transferor who has parted will all
the beneficial interest in stock and his transferee, the board e/uities are all in favor of the latter in the matter
of its voting.
State e8 -el 01e-ett T-3st 1 Pa'ifi' Wa8. *: B?7 the pro0y to vote the stock owned by 1aine")itchell and
Lordan was revocable
.: The rules against perpetuities is usually stated as prohibiting the creation of future interest or estates,
which by possibility may not become vested within a life or lives in being and 5& yearsK the rule however
applies only to the vesting of future estates and does not apply to vested estates. The option agreement did
not create a future estate or interest to become vested at some future time. *t was a promise by an owner of
stock in a corporation that if at any time during the ne0t 54 years he desired to sell his stock he would give
the promissee the first opportunity for a period of & days to purchase it a such price and upon such terms
and conditions as the promisor offered. *t was in effect a promise to give an option in the even the promisor
desired to sell his stock.
,A: a pro0y given by a #. to vote his corporate stock at a meeting of the #.s of a corporation is revocable
by him even though the pro0y by its terms is e0pressly made irrevocable.
E0ceptions:
(&! where authority or power is coupled with an interestJa power coupled with an interest is a power or
authority to do an act, accompanied by or connected with an interest in the sub:ect or thing itself upon which
the power is to be e0ercised, the power and interest being united in the same person. The interest is not
limited to the thing itself upon which the power is to be e0ercised, but is also included the sub:ect upon
which the power is to be e0ercised. *t is however sufficient that the pro0y holder have an interest in the
sub:ect matter upon which the power is to be e0ercised. The Gthing itselfH may refer to tangible shares or
certificates of stock, but the sub:ect matter may refer to the intangible voting right and the incidental control
of the corporation.
(5! where authority is given as part of a security or is necessary to effectuate a securityJin such a case the
interest of an agent is something more than an interest in being permitted to e0ercise the power, yet
something less than an estate in the sub:ect matter or thing upon which the power is to be e0ercised.
*t is clear from the pro0y agreement that the parties agreed that 1aine )itchell stock should be used in
con:unction with the stock owned by Engle so that the policies of the respondent should be thus controlled.
*n this situation Engle was more than a mere agent. *n voting stock he served purposes of his own in
HLP2009-3B Page 59
maintaining control of the corporation by his choice of directors and the determination of policies and
business affairs of the corporation. This voting of the stock for these purposes was the sub:ect matter of the
agency. Engle ac/uired an interest in the sub:ect matter of the power given to him and this interest was
coupled with such power. The power to vote the stock was necessary in order to make Engle9s control of the
corporation secure. The mutual agreement as a whole created something like a community of interest in the
stockholdings of the parties having for its purpose the use of their stock as a unit and the effect of which was
to give both parties an interest in the voting of the stock, although the power to vote was to be e0ercised by
Engle after the death of Lordan or by 1aine")itchell after the death of Engle. This power was couple with an
interest and by the entire agreement between the parties the power was intended to be and became a
security to effectuate the main purpose of the agency. The parties did no more than promise to give each
other an option to purchase in the even either had a proposal to buy his or its stock@ but the option
agreement must be considered with the pro0y agreement in determining the intention of the parties and
whether Engle had an irrevocable pro0y. The conclusion is that Engle had a power coupled with an interest
and that the authority was given to him as part of a security and was necessary to effectuate such security
and therefore the pro0y was not revocable by the appellant.
1 proxy in fa%or of the pledgee of the shares sub!ect of the proxy is sufficient interest to render the proxy
irre%ocable
!. 1tin9 t-3st a9-ee4ent
2ef9n: a trust agreement whereby a stockholder transfers his shares to a trustee who will e0ercise
his voting rights. ;nder this arrangement, the stockholder remains the beneficial or e/uitable owner
of the shares, but legal ownership is transferred to the trustee.
Essence of voting trust: real ownership is separated from the voting rights
*nvolves the complete surrender by the #. of his voting rights to a trustee or trustees
-oting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of
voting upon stocks that he does not own
Transferring #. ceases to become #. of record but retains the right of inspection of corporate
books
2uring the period of the agreement, it is irrevocable for as long as the trustee has not violated the
trust by his misconduct or fraud.
'onditions for the use of voting trustsJ#ec 3:
Ae/uisites of a valid voting trust: (3!
o *n writing and notariCed
o 'ertified copy filed with the corporation and the #E'
o 1eriod not longer than years, but renewable each time for not more than years
E0ception: where the voting trust is a condition of a loan agreement, in which case it may
be for a longer period but not beyond the time when the loan is fully paid
o 'ertificates of stock is to be cancelled, and new ones issued to the trustee stating that it is issued in
pursuance of a voting trust agreement
o Transfer must be entered in the corporate books
o Trustee should issue voting trust certificates in favor of transferring #.s
o 7ot for an illegal purpose, or for the benefit only of the trustee without any obligation to perform any
useful service for the protection of the stockholders or creditors of the corporation
it must have a legitimate business purpose to promote the best interest of the corporation
or even to protect the legitimate interests of others in the corporation
creation of voting trust:
o transferring #.s receive transferable voting trust certificates as evidence of their rights
rights other than voting rights may also be transferred to the trustee
o but the #. ceases to be a #. and his rights are now against the trustee in accordance with the
agreement
o #. has the e0press right to inspect corporate books and records
o Trustee is also /ualified to become a director, since he is the registered owner of the shares and
fulfills the /ualifications of the 'ode that at least one share is owned to become /ualified as director
o 7o voting trust agreement may be kept secret among the parties thereto@ it must be open to
e0amination
HLP2009-3B Page 60
o 7o voting trust agreement may be e0clusive, since the law gives a #. the right to transfer his
shares to the trustee upon the same terms and conditions in the agreement
01e-ett 1 Asia Ban.in9. Teal M 'ompany is indebted to .B 1eabody M 'o. for 1$44> for tractors, plows,
and parts delivered, of which it has paid 1&4>. Asia Banking 'orp held drafts accepted by Teal under the
.B 1eabody9s guarantee. Tractors were returned to .B 1eabody due to its being unsellable due to
financial and agricultural depression in the A1. Teal ordered another lot of tractors from #mith >irkpatrick,
but shipment was delayed until the rescission of the credit of Teal with Asia Bank. <et #mith still delivered
the order, and Teal at the re/uest and advice of the Bank accepted the drafts and stored the same. Asia
bank persuaded Teal, 1eabody, and #mith >irkpatrick to enter into a Gcreditors agreementH wherein it was
mutually agreed that neither of the parties should take action to collect its debts from Teal for 5 years. Teal
soon became indebted to Asia Bank for 1E4,444, secured by mortgage. The Bank then suggested that, for
the mutual protection of Teal and itself, it was advisable that the Bank should temporarily obtain control of
the management and affairs of the company. To this end, it was necessary for the #.s to place their shares
in a voting trust to be held by the Bank, then the Bank would finance Teal under its own supervision. The
Teal #.s were thus induced to enter into the -oting Trust Agreement, with the purpose that the agreement
will be intended for the protection of all parties from outside creditors. #hortly after the e0ecution and
delivery of the voting trust and the )8A, )ullen as ,) of the Bank, caused the displacement and removal
#. representatives in the Board and the substitution in their place of the Bank9s employees or
representatives. The new Board, who have not purchased any share of stock of Teal, proceeded to remove
the 'orp #ecretary, discharge all the old managers and displace them with creatures of their own choosing
whose interest consisted wholly in pleasing themselves and the Bank, and who were wholly foreign to the
stockholders.
Aight of transferring #.s to set aside the trust agreement when their rights are trampled upon by the
trustee. 'orpo 'ode now provides that no -TA will be used for purposes of fraud.
?a'.in 1 Ni'llete ,tel. 2i0on was the owner of a leasehold interest in a tract of land in )inneapolis upon
which stood what was known as the 7icollet .otel. 7icollet .otel *nc was organiCed for the purpose of
adding to the hotel accommodation of that city. Arrangements were made to have 2i0on take 544 shares
for his lease and to erect an new 7icollet .otel upon this property. 'ost was Y$), to be raised by the sale of
Y&) mortgage bonds and Y&.5) of preferred stock. The )innesota +oan and Trust 'o approved the loan
application of 7icollet for Y&.F) secured by the said mortgaged bond. The loan agreement stipulates that a
voting trust agreement is entered covering the common stock of 7icollet. The #tate #ecurities 'ommission
approved 7icollet9s application for the license to sell its preferred stock, provided that the common stock is to
be trusted with three trustees for &4 years for the protection of preferred #.s. Thereafter a voting trust
agreement was entered with 2i0on et al as voting trustees. )ackin is the owner of a trust certificate
representing F4 shares of common stock, alleging that the voting trust is void and that the trustees and
directors appointed have mismanaged the company and have caused large losses. The agreement also
allegedly denied them the right to inspect the books, and they ask the court to declare the same null and
void and appoint a receiver until the beneficial owners can elect a new set of directors.
*: B?7 the voting trust is valid
.: -oting trusts are not illegal per se. *n the instances where the voting trust has been held void, there
e0isted invalidating circumstances such as want of consideration, voting power not coupled with an interest,
fraud, illegal purpose, and so on. *n this case there was no charge of illegality or fraud, nor of any
invalidating circumstance. The voting power of the three trustees is coupled with an interest because of one
of the trustees is a substantial owner of the common stock, and all are charged with the duty of protecting
and conserving property for the benefit of those who became purchasers of preferred stock and bonds. The
whole purpose of the agreement is legitimate and wholesome. *t was a matter of civic pride and to make this
possible, it involved the invitation of combinations of capital in substantial amounts, which could only be
secured by having those who invested their money assured of the fact that there would be a continuity of
management during a period of years until such time that the new enterprise would have an opportunity to
:ustify a successful financial future. *t would be a manifest in:ustice to the large number of holders of bonds
and preferred stocks, not to the parties to the suit, to ad:udge and hold illegal a trust agreement upon the
strength of which they had invested their money in the enterprise. *t also appears that )ackin purchase the
certificates of trust after the creation of the trust agreement and are presumed to have full knowledge of the
limitation of their rights.
NIDC 1 A<3in. Bat:ak, a manufacturer of coco oil and copra cake for e0port, is on the brink of bankruptcy.
*t entered in to a 6inancial Agreement with 17B for additional operating capital for its $ processing mills and
to pay its other debts to other banks. ;nder the agreement with 17B, 7*2', a wholly"owned subsidiary of
HLP2009-3B Page 61
17B, would invest 1%.E) worth of preferred shares convertible within years into common stock to pay off
the other debts and the balance to pay off its own due with 17B. 17B also granted various credit
accommodations. Bat:ak as part of the deal, mortgaged all its properties in the province. A "year voting
trust agreement was e0ecuted ifo 7*2' by the #.s representing %4= outstanding stock of Bat:ak. <ears
later, 17B instituted foreclosure proceedings against the mortgaged properties due to Bat:ak9s insolvency,
and soon became owner of the properties. Bat:ak failed to e0ercise its right to redeem within the period
allowed and 17B transferred ownership of the 5 oil mills to 7*2'. $ years later, Bat:ak represented by
ma:ority #.s, in/uired with 7*2' if it was still interested in negotiating the renewal of the voting trust
agreement. 7*2' replied that its was no longer interested and re/uested turn"over of all Bat:ak assets and
properties. Bat:ak demanded an accounting of all assets and properties and operations but 7*2' refused to
comply. Bat:ak then filed an action for mandamus. '6* Ludge A/uino issued a TA8 prohibiting 7*2' from
removing any record, report, or document or disposing all of the properties of Bat:ak, and allowed Bat:ak to
inspect the same. Bat:ak then moved for the appointment of a receiver. 7*2' and 17B opposes, but
overruled by '6*. )As denied.
.: Bat:ak premises its right to possession through the receivership of the $ oil mills in the voting trust
agreement, claiming that under said agreement, 7*2' was constituted as trustee of the assets,
management, and operations of Bat:ak, and that due to e0piration of the agreement, 7*2' should turn over
the assets to Bat:ak. Bhat was assigned to 7*2' was the power to vote the shares of stock representing
%4= of #.s, who are signatories to the agreement. 7owhere in the agreement is mention made of any
transfer or assignment to 7*2' of Bat:ak9s assets operations and management. 7*2' was constituted as
trustee only of the voting rights of %4= of outstanding shares. Bhat was to be returned by 7*2' as trustee
to Bat:ak9s #.s upon termination of the agreement, was the certificates of stock, not the properties or assets
which were never delivered to 7*2' in the first place. The ac/uisition of 17B and 7*2' of the properties
was not in its capacity as trustee but as a creditor in accordance with the financing agreement.
#' failed to appreciate the fact that the voting trust was obtained from the #.s of the borrowing
corporation precisely to allow 17B"7*2' to have management and undertake control in the operations
of the borrowing corporation
*n this case, the -TA was part and parcel of the loan arrangement, and should have been considered
by the 'ourt as a means by which the lending institution obtains control over the management or
operation of the borrowing corporation, and not merely as a transfer only of voting or other rights
pertaining to the shares
>TA as $a-t f Lan A9-ee4ent
-TA as part of loan agreement can e0ceed years as an e0ception to the rule that -TAs cannot be for
more than years
-TA as part of loan agreement ensures that the lending institution would have a controlling interest in
corporate votes
'onstitutes further security to the lending institution
*n reality, the lending institution would have very little interest in the operations of the corporation as to
re/uire a voting trust
+. $lin9 an# 1tin9 a9-ee4ents
2efinition: an agreement between two or more #.s to vote their shares the same way.
Through this kind of agreement, #.s who individually own only a minority of the shares but
together represent the ma:ority, can obtain control of the management of the corporation.
;sually relates to the election of directors, which may either specify the name of the nominees to
be voted for, or the number shares to be voted as a unit
*n case of disagreement: arbitration
#ince pooling agreements personal obligations to do, then although valid it cannot be enforced by
action for specific performance
These agreements have been upheld as valid provided they do not limit the discretion of the board
or work fraud against the other #.s
o E0. An agreement that directors once elected must vote for certain persons as officers would
be void, since the choice of officers is vested in law in the board
-oting agreement vs. voting trust: -A does not involve a transfer of stocks but is merely a private
agreement between and among #.s to vote the same way. Breach would therefore give rise to
liability for damages.
*n close corporations: #ec &44:
HLP2009-3B Page 62
(. '343lati1e 1tin9
the system of cumulative voting gives the minority an opportunity to elect a representative to the
board
it is vital to both the ma:ority and the minority to cumulate their votes so that they can get as many
seats as possible
/. 'lassifi'atin f s"a-es &Sec 6)
device of classification of shares can be used to achieve the allocation of control desired by the
parties
if shares are classified into common voting and preferred non"voting shares, the management of
corporate affairs will be controlled by whoever owns the ma:ority of the common voting, even
though it may only be a minority of the total number of shares (voting and non"voting!
control would depend not on the amount of investment, but on the number of voting shares
ac/uired
if non"voting shares are non"redeemable, the prospect that the investor may get back his
investment at some future time before dissolution would be a compensating factor
#E': to prevent abuses, it re/uires where no dividends are declared for $ consecutive years
despite available profits, that preferred stocks be given the right to vote for directors until dividends
are declared
*n a close corporation, it is allowed to classify its directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock
). -est-i'tin n t-ansfe- f s"a-es (#ec. 3F!
common e0ample: a restriction which gives a first option to other #.s and?or the corporation to ac/uire
the shares of a #. who wishes to sell
o peculiar to close corps
2. $-es'-i%in9 <3alifi'atins f- #i-e't-s: &Se'. (2 $a-./* f3n#e-sG s"a-es &Se'. 2*
definition of the /ualifications of directors or trustees may be provided in the by"laws
e0amples:
o a by"law provision that only #.s with a stated minimum number of shares fully paid up may be
elected as directors is valid (,ovt v El .ogar!
o a by"law that dis/ualify a #. who is competing with the corporation, as the corporation has the right
to protect itself from persons who may use inside information to its pre:udice (,okongwei v #E'!
o a by"law that only holders of Gfounders sharesH may /ualify for directorship (#ec E!
e0ception to #ec % that non"voting shares shall be limited to preferred and redeemable
shares
year period non"e0tendible
#E' approval

5. 4ana9e4ent 'nt-a'ts &Se'. ((*

B82 may decide to enter into mgt contracts with another corporation
The managing corporation will then perform all the managerial functions usually pertaining to a ,)
B82 must still retain control of the basic corporate policies and power to recall the contract where the
corporation9s interest would greatly suffer from its continuance
7ot an e0ception to #ec 5$ which lays down the fundamental principle that all corporate powers shall be
e0ercised by the B82
B82 cannot abdicate its responsibility to act as a governing body by giving absolute powers to offices
or others by way of management contracts
The management contract is therefore a mere contract to manage the day"to"day affairs of the
corporation :ust like a ,)
*t is one for lease of services and is not of agency
S"e-4an D 0llis 1 In#iana ?3t3al Cas3alty C.
HLP2009-3B Page 63
6: *ndiana )utual 'asualty 'o was organiCed to take over the business of an unincorporated association
engaged in writing policies covering risks created by the *ndiana Borkmen9s 'ompensation +aw. *t ratified
an agreement with #herman M Ellis by which the management of the casualty company was conferred upon
#herman Ellis for 54 years. *ndiana )utual terminated its contract after some difficulties arose between
#herman Ellis and the *ndiana state department in which the latter tried to appoint a receiver for *ndiana
)utual. #herman sues for specific performance to enforce the contract.
.: the contract provides that the underwriting and e0ecutive management for *ndiana )utual will be
performed by Ellis, president of #herman Ellis, and may appoint another officer to be the chief e0ecutive
head and underwriting manager of the company. *t also provides that the managing company (#herman
Ellis! shall have general supervision and charge of underwriting affairs and shall be entitled to &4= of the
net earned premiums collected from all policyholders. The grant of corporate power by a state is upon the
hypothesis that these powers shall be e0ercised by the corporation9s officers, annually elected by the #.s
and not by the officers of another corporation. Although generally corporations may for a limited period
delegate to a stranger certain duties performed by the officers, there are duties the performance of which
may not be delegated to outsiders. *n this case the period of control of the managing corporation is 54 years.
7othing of importance was left for the B82 but the mere ministerial duties. The agreement contemplated the
substitution of #herman Ells for the officers of *ndiana )utual. The principal business of *ndiana was write
casualty insurance, which is now solely e0ercised by #herman Ellis. 7o other conclusion can be drawn other
than that *ndiana )utual was to be an instrumentality through which #herman Ellis was to conduct a
casualty business in the state of *ndiana.
9. 3n3s3al 1tin9 an# <3-34 -e<3i-e4ents &Se'. 92*
a device which in effect increases the veto power of the minority
usually involves the formation of a corporation which has clearly efined ma:ority and minority blocks.
o *n e0change for the numerical ma:ority in the board, the minority might bargain for a provision in the
A8* giving them strong veto power in m:or corporate decisions
*n close corps, a re/uirement in the A8* that unanimous vote of all #.s is necessary would only have
the effect of maintaining the status /uo.
Beninten#i 1 Eentn ,tel. 5 men owned in e/ual amounts all the stock of a domestic business
corporation, made an agreement to vote for and adopt the by"laws of the corporation, providing that no
action should be taken by the #.s e0cept by unanimous vote of the #. present in person or by pro0y should
be sufficient, that the directors of the corporation should be the $ person receiving the unanimous vote of all
#.s, that no action shall be taken by the directors e0cept by unanimous vote of all directors. The minority
#.s sued to have the by"laws ad:udged valid and to en:oin the ma:ority from doing anything inconsistent
therewith.
.: the device is intrinsically unlawful because it contravenes an essential part of #tate policy. But a
re/uirement, that there shall be no election of directors unless every single vote be cast for the same
nominees is in direct opposition to the rule that the receipt of plurality of votes entitles a nominee to election.
The by"law which re/uires unanimous action of #.s to pass any resolution or take action of any kind, is
e/ually obno0ious to the statutory scheme of stock corporation management. The whole concept of a
representative government in a corporation, with voting conducted conformably to statute, and with the
power of decision lodged in certain fractions of the stock, is destroyed when the #.s by agreement or by"
law or A8* provision as to unanimous action, give the minority interest an absolute, permanent and all"
inclusive power of veto.
The last by"law makes it impossible for the directors to act on any matter e0cept by unanimous vote of all of
them. #uch a by"law is almost unworkable and unenforceable because, prima facie in all acts done by a
corporation, the ma:or number must bind the lesser, or else differences could never be determined. Every
corporation is given the privilege of enacting a by"law fi0ing its own /uorum re/uirement at a fraction not
less than that mandated by law. But the very idea of a /uorum is that when that re/uired number of persons
goes into session as a body, the votes of a ma:ority thereof are sufficient of binding action.
2issent: Bhile the 5 by"laws are indeed invalid because it is violative of the statutes, the courts should
nonetheless enforce against either #. the agreement made by both of them which finds e0pression in those
by"laws.
De1i'es affe'tin9 'nt-lL'44n #en4inat- is t"e 'nt-a't3al %li9atin
#.s 78T of record: 'A778T vote, 'A778T be vote for
HLP2009-3B Page 64
8nce voting rights are e0ercised by another, voting rights of the owner of shares are already impaired
1ro0ies: pro0y holder is an agent
o 2oes it affect ownership rightsQ 7o. Aegistration of sharesQ 7o
o Bhy do * need themQ
7o distinct and clear ma:ority to collate enough votes to form ma:ority
Biggest #.s@ #hares are so widely held?dispersed
o "year term of pro0ies only applies to revocable pro0ies
o voting trusts and pro0ies coupled with an interest (security for obligations!
o GdeemedH to have sufficient interest
pledgor"pledgee: interest of pledgee in ensuring that the value of stock used as security
may not be impaired, and may be sold at a premium to $
rd
parties at public auction in case
obligors?debtors defaultK
-oting trust: beneficial owner is #.@ legal ownership is trustee
o Aegistration with #E' and corporation of stock certificate (effect is constructive notice to $
rd
parties!
o All stock certificates issued in name of participating #.s are presented for cancellation and
issuance of new ones@ voting trust certificates are issued by the trustee
o 8rig #.s are delisted@ replaced by trustees with notation that it holds stocks of orig #.s
o The corp has no concern with the relation of #. and trustee
o #. still has naked title@ he can still sell the shares by selling the -T'. But trustee is now #. of
recordS
o Total divorce of voting rights
-oting rights: trustee@ Economic rights: #.
o -TA is binding on participants even if there is disposition of the -T'
'an trustee sell sharesQ 78S it holds it in trust
'an transferee of -T' vote the sharesQ 78S only the trustee
o 8nly binding arrangement would be the fiduciary arrangement
*n pro0ies without an interest and pooing agreements, 78 fiduciary natureS
o >ey to determining w?n -TAs e0ist:
trustee e0ercises 2*#'AET*87 as to the vote, but it may also be consensual, i.e. trustees
can agree among themselves who to vote
There is also delegation of authority@ *t is not the corporation constituting the -TA, it is the
#.sS
1ooling agreements: reciprocal arrangement of those who reach a consensus to e0ercise right to vote
separately, but shares remain with #.s
'onsideration for voting devices
o sufficient consideration: *n 'lark, *1A, services, Gsecret formulaH@ *n .arkert, loan?investment@ *n
Aingling, A6A@ in Avalon, 1# with econ rights
o #o long as consideration is in place, obligation satisfactorily performed, voting agreement is
:ustified, enforceability should be thereS
)anagement contracts: *s the manager?managing corp a trusteeQ 78K covered by contract
Effect of higher /uorum or voting re/uirements
o 'ontrolling interest of the corporation can be vetoed by the minority
o Bould affect disposition of corporate assets
o 'ontrolling interest has the authority to formulate the policies
o Anarchy?tyranny of the ma:ority
S,AR0S OF STOCES
#tockholders: owners of shares in a corporation which has a capital stock
)embers: 'orporators of a corporation which has no capital stock
#tockholders or members have residual power over fundamental corporate changes
like amendment of the articles of incorporation
A. S3%s'-i$tin t S"a-es
HLP2009-3B Page 65
&. Subscription Contract
Any contract for the ac/uisition of unissued stock in an e0isting or a corporation still
to be formed shall be deemed a subscription contract, notwithstanding the fact that
the parties may refer to it as a purchase or some other contract. (sec %4!
Transfer for consideration of treasury shares is a sale by the corporation (not
subscription!. A transfer of fully paid shares by a stockholder to a third person is a
sale. But it seems that assignment by a subscriber of his unpaid subscription would
re/uire that the re/uisites for valid release from subscription must be complied with
#hareholders are not creditors of the corporation with respect to their shareholdings
thereto and the principle of compensation or set"off has no application
7ot necessarily re/uired to be in writing
5. 2re(incorporation subscription (#ection %&!
1re"incorporation subscription is a subscription for shares of stock of a corporation
still to be formed.
*t shall be irrevocable for a period of at least si0 (%! months from the date of
subscription.
*t can only be revoked, when:
o when all of the other subscribers consent to the revocation, or
o when the incorporation of the corporation fails to materialiCe within si0 (%! months
or within a longer period as my be stipulated in the contract of subscription.
After the submission of the articles of incorporation to the #E', no pre"incorporation
subscription may be revoked.
F3a C3n 1 S344e-s. 6: 'hua #oco subscribed for 44 shares (1&44 par! of 'hina Banking 'orporation,
paying Z and leaving a balance of 15,444.
.e issued a 17 ifo 6ua 'un for the balance, securing the note with a ') on the shares of stock, and
endorsing the receipt of the stock purchase!. 'hua #oco was also indebted to 'hina Bank (1$E,E$&.%F!,
and upon default his interest in the 44 shareas was attached and the receipt seiCed by the sheriff. The
attachment was levied after the bank knew of the fact that the receipt had been endorsed to 6ua 'un.
6ua 'un then sued, contending that by virtue of payment of Z the subscription price of the shares, 'hua
#oco in effect became the owner of 54 shares and sought to have his lien on the shares be declared to
hold priority over the claim of the bank. 'hina Bank argued that the interest of 'hua #oco was merely an
e/uity which cannot be made the sub:ect of a '). T' ruled ifo 6ua 'un.
.: T' erred in holding that 'hua #oco became owner of 54 shares. 6ua 'un9s rights consist in an e/uity of
44 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate
for 44 shares in his favor.
As to the '), the ') would not prevail over liens of third persons without notice@ an e/uity in shares is of
such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged
in the same manner that the recording of the same will furnish constructive notice to third parties.
There can be no doubt that an e/uity in shares of stock may be assigned and that the assignment is valid as
between the parties and as to person to whom notice is brought home. #uch an assignment e0ists here,
though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien
unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the
assignment of 'hua #oco9s interest to fua 'un and was therefore sub:ect to the rights of the latter.
BaltaAa- 1 Lin9ayen @3lf 0le't-i'. 6: BaltaCar and Aose were incorporators of the +ingayen ,ulf Electric
1ower 'o. and subscribed to:
BaltaCar R %44 shares (paid $ shares D after transfers, owned $(& shares w? cert. plus % shares w?o
certificate!
Aose R (44 shares (paid $E shares w? certs!
HLP2009-3B Page 66
leaving unpaid a certain portion thereof. *t is the company practice to issue certificates of stock to its
individual subscribers for unpaid shares of stock. 2efendants ;ngson et al are small #.s ( [&44 shares! of
the corporation, and are the ma:ority of the board. 'o"defendant Acena is the largest single #. with %44
shares and was responsible for election to the board of two of the ( ma:ority board members (;ngson
,roup!. BaltaCar was responsible for the election of the other 5 (BaltaCar ,roup!.
;ngson ,roup which controlled the corporation passed $ resolutions which threatened to e0pel the plaintiffs
and prevent them from e0ercising their voting rights: (&! declaring watered stocks issued to Acena, BaltaCar,
Aose and Lubenville of no value and cancelled the same@ (5! all unpaid subscriptions to bear interest, and all
payments to be credited to interest first, capital debt second, and @ ($! all stock declared delin/uent on the
accrued interest are incapacitated to avail of voting power.
BaltaCar and Aose sought to allow them to vote their fully paid"up shares and to declare the resolutions
invalid. A compromise deal was e0ecuted, but enforcement by the T' was en:oined by the ;ngon ,roup
and asked for amendment. T' amended but was opposed by BaltaCar. The 'ourt then reversed the
amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares
are entitled to vote in all meetings.
BaltaCar claims that once a #. has subscribed to a certain number of shares, although he has made partial
payments, but is issued a certificate for the paid"up shares, he is entitled to vote the whole number of shares
subscribed, whether paid or not. The corporation counters that under the doctrine in the 6ua 'un case, a
partial payment of a subscription does not entitle the #. to a certificate for the total number of shares
subscribed by him, and his right consists only in e/uity to a certificate of the total number of shares
subscribed for, upon payment of the remaining portion of the subscription price.
*: B?7 a #. with a balance of unpaid shares subscribed is entitled to vote the latter
.: <E#\ The present case does not come under the principle in 6ua 'un because it was the practice of
the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power
to stocks fully paid. The present law re/uires as a condition before a #. can vote that his full subscription be
paid in the case of no par value shares, and with respect to par value shares, the #. can vote the shares full
paid, irrespective of the unpaid delin/uent shares. A corporation may now, in the absence of provisions in
their by"laws to the contrary, apply payments made by subscribers either as full payment for the
corresponding number of stock or as payment pro"rata to each and all the entire number of shares
subscribed. *n this case, corporation chose to apply payments by the #.s to definite shares of stock and
had full paid"up shares certificates for the payments. *ts call for payments of unpaid subscription and its
declaration of delin/uency only affecting the remaining number of shares.
.ere the corporation applied the payments made to the full par value of shares subscribed, instead of the
accrued interest. This being the case, the application of payments must be deemed to have been agreed
upon by the corporation and the #.s and cannot now be changed without the consent of the #.s
concerned. *t would therefore result that a corporation may, upon the re/uest of an interested #., apply
payments by them to the full par value of subscribed capital stock.
#ince it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may
not take away the right to vote granted by the certificate
#tock certificates may be issued for less than the number of shares subscribed for
o 1rovided the par value of each represented by the certificate has been paid
o And it is not prohibited by the by"laws
Na1a 1 Pee-s ?a-.etin9 C-$. 6: ""1o was an incorporator of 1eers )arketing and subscribed to F4
shares (1&44 p.v.! paying 5= of the amount of subscription. 7o certificate of stock was issued.
""1o sold to 7ava 54 of the shares. *n the deed of sale 1o represented that he was the absolute and
registered owner of the 54 shares sold.
"" 7ava re/uested the corporation to register the sale, but was denied because 1o had not fully paid the
amount of subscription. (was informed that 1o was delin/uent in payment of his subscription and that corp
had the claim to his entire subscription of F4 shares!. 7ava filed a mandamus action to compel the
corporation to register the shares in the books. T' dismissed petition.
""7ava contends the ruling in 6ua 'un is not applicable in affirming corporation9s refusal to register in the
books the sale to him of 54 shares. 7ava relies on the ruling in BaltaCar v +ingayen ,ulf Electric, which held
that the corpo law re/uires as a condition before a #. can vote his shares that his full subscription be paid
in the case of no par stock@ but in par value stocks, the #. can vote his shares fully paid by him, only,
irrespective of the unpaid delin/uent shares.
*: B?7 the corporation can be compelled to enter in its books the sale made by 1o to 7ava of 54 shares
HLP2009-3B Page 67
.: 78\\ The 7ava transfer is not the alienation sale or transfer of stock contemplated in the old +aw. As a
rule, shares which may be alienated are those which are covered by certificates of stock.
As prescribed in the corpo law, shares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. .owever, that cannot be followed in the instant case because the 54 shares
are not covered by any stock certificate in 1o9s name. )oreover, a corporation has a claim on the said
shares for the unpaid balance of the subscription.
A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as
much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to
demand payment is no less contestable. A corporation cannot release an original subscriber from paying for
his shares without valuable consideration, without the unanimous consent of the #.s.
There is no clear duty here on the part of the officers of 1eers to register the 54 shares in 7ava9s name. The
court also ruled that there is no parallelism between 7ava and the BaltaCar case. *n the latter, the #."
incorporator was the holder of a stock certificate, and the issue was whether the said shares had voting
rights although the incorporator had not fully paid the subscription, which is not the issue in this case. There
is no stock certificate issued to 1o, and without itJwhich is the evidence of ownership of the stockJthe
assignment of corporate shares is effective only between the parties to the transaction. The delivery of the
stock certificate is essential for the protection of both the corporation and its #.s.
6ua 'un, +ingayen ,ulf and 7ava cases were all decided before the 'ode
6ua 'un: a contract of subscription is *72*-*#*B+E, unless the contrary is provided
o 1artial payment 28E# 78T entitle the #. to the issuance of a certificate covering shares
corresponding to the amount paid
o 1ayment is in effect 1A8"AATE2 among all the shares, so that no one share is fully paid
+ingayen ,ulf: shares may be deemed fully paid for the amount paid that corresponds thereto
o *t was the practice of the corporation in +ingayen to issue certificates for stocks it considered to be
fully paid, although the subscription has not been paid
#E': in interpreting the two cases, a corporation has two (5! alternatives in applying payment for
subscriptions:
o Either apply the amount paid as full payment for the corresponding shares, (+ingayen! orK
'ertificate of stock would then be issued
o K as payment pro"rata on each of the entire number of shares subscribed for (6ua 'un and 7ava!
no certificate of stock may be issued until the subscription is full paid
%(: no corporation can issue a certificate of stock until the subscriber has paid his subscription in full
o applies to par and no"par shares
o +ingayen gulf case no longer applies
o #peaks of only of subscription
B. Cnsi#e-atin f- st'.s (#ec %5!
#tocks shall not be issued for a consideration less than the par or issued price
thereof.
'onsideration for the issuance of stock may be any or a combination of any two or
more of the following:
a! Actual cash paid to the corporation@
b! 1roperty, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation e/ual
to the par or issued value of the stock issued
o -aluation of consideration other than actual cash, or consists of intangible
property such as patents of copyrights" initially be determined by the
incorporators or the board of directors, sub:ect to approval by the #ecurities and
E0change 'ommission.
c! +abor performed for or services actually rendered to the corporation@
HLP2009-3B Page 68
d! 1reviously incurred indebtedness of the corporation@
e! Amounts transferred from unrestricted retained earnings to stated capital@ and
f! 8utstanding shares e0changed for stocks in the event of reclassification or
conversion.
6air valuation is appraisal made in good faith
1rohibited consideration: #hares of stock shall not be issued in e0change for
promissory notes or future service
#ame consideration applies for the issuance of bonds by the corporation.
6i0ing of issued price of no"par value shares: The issued price of no"par value
shares may be fi0ed:
a! in the articles of incorporation or
b! by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by"laws, or
c! in the absence thereof, by the stockholders representing at least a ma:ority of the
outstanding capital stock at a meeting duly called for the purpose.
The value of the consideration received must be e/ual to the issue price of the
shares of stocks which in no case shall be less than par
Batered stock D shares issued as fully paid"up when in fact the consideration agreed
to and accepted by the directors of the corporation was something known to be much
less than the par value or issued value of the shares.
Bater in stock refers to the difference between the fair market value at the time of the
issuance and the par or issued value of said stock. #ubse/uent increase in the value
of the property used in paying the stock does not do away with the water in the stock.
The e0istence of such water is determined at the time of issuance of the stock.
'. Lia%ility f- wate-e# st'.s (#ec %!
Any director or officer of a corporation consenting to the issuance of stocks
o for a consideration less than its par or issued value or
o for a consideration in any form other than cash, valued in e0cess of its fair value,
o or who, having knowledge thereof, does not forthwith express his objection in writing
and file the same with the corporate secretary,
shall be solidarily liable with the stockholder concerned to the corporation and its
creditors for the difference between the fair value received at the time of issuance of
the stock and the par or issued value of the same.
D. Ce-tifi'ate f St'. an# t-ansfe- f s"a-es
&. *ssuance of stock certificates
2efinition Certificate of stoc+: *t is the document issued to stockholders evidence of
their ownership of such number of shares in the corporation that issued the
certificate.
7o certificate of stock shall be issued to a subscriber until the full amount of his
subscription, together with the interest and e0penses (in case of delin/uent shares! if
any is due, has been paid. (#ec %(!
HLP2009-3B Page 69
.ow issued: The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by"laws. (#ec %$!
#hares are personal property D #hares of stock so issued are personal property and
may be transferred (#ec %$!
5. Transfer of shares
#hares of stock may be transferred as follows (#ec %$!:
a! indorsed by the owner or his attorney"in"fact or other person legally authoriCed to
make the transfer
b! delivery of the certificate or certificates
c! To be binding against third persons, transfer of shares should be recorded in the
books of the corporation showing therein the ff.:
names of the parties to the transaction,
the date of the transfer,
the number of the certificate or certificates and
the number of shares transferred.
7o shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation (#ec %$!.
Transfer of shares not tainted with any irregularity shall be valid as between the
parties.
1urpose of registration
a! enable the transferee to e0ercise all the rights of a stockholder
b! to inform the corporation of any change in share ownership so that it can
ascertain the persons (a! entitled to the rights (b! sub:ect to the liabilities of a #.
c! until registration is accomplished, the transfer, though valid between the parties,
cannot be effective against the corporation
Effect of lack of registration:
a! transferee cannot vote
b! transferee cannot be voted for
c! an outsider
d! cannot prevail over rights of a subse/uent attaching creditor
e! not entitled to dividends
f! stockholder on record has the right to participate in meetings.
;nauthoriCed transfers:
a! certificates indorsed in blank D where the stockholder indorses his certificate in
blank in such a manner as to clothe whoever may be in possession of it with
apparent authority to deal with the shares as the latter9s own, he will be estopped
from claiming the shares as against a bonafide purchaser. This is called the
theory of /uasi"negotiability
b! forged transfers D if the corporation should issue a new certificate pursuant to a
forged transfer, it incurs no liability to the person in whose favor it issued it and
may demand its return for cancellation. *t is the duty of the purchaser to
determine that the indorsement was genuine. But with respect to a subse/uent
purchaser in good faith and for value, the corporation is estopped from denying
HLP2009-3B Page 70
the validity of the newly issued certificate because by issuing such, it has
represented that the person named therein is a stockholder of the corporation.
E0cept where recognition of the original and new subscriber will result to an
overissue of shares. The new #. would now have right to damages against the
corporation and the latter against those who made false representations.
A capital gains ta0 return must be presented ? doc stamps paid to corporate secretary
before transfer is effected in the books of the corporation.
Bitong v. CA
A certificate of stock cannot be considered issued in contemplation of law unless
signed by the president or vice president and countersigned by the secretary or
assistant secretary.
The rule is that the endorsement of the certificate of the stock by the owner or his
attorney D in D fact or any other person legally authoriCed to make the transfer shall
be sufficient to effect the transfer of shares only if the same is coupled with delivery.
The delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the new transferee. Thus, for a valid
transfer of stocks, the re/uirements are as follows:
a! There must be delivery of the stock certificate@
b! The certificate must be endorsed by the owner or his attorney"in"fact or other
person legally authoriCed to make the transfer@ and
c! To be valid against third parties, the transfer must be recorded in the books of
the corporation.
Sunset View Condominium Corp v Campos
#unset -iew 'ondominium corporation filed suit against Aguilar"Bernares Aealty and
+im #iu +eng for collection of assessments levied on their respective condominium
units which they bought on installments and had not yet fully paid
Aespondents not shareholders of condominium corporation because they are not yet
fully paid
a! #ec 'ondominium Act D shareholding in a condominium corporation will be
conveyed only in a proper case
b! #ec ( of 'ondominium Act leaves to )aster 2eed the determination of when
shareholding will be transferred to purchaser of a unit
c! )aster 2eed provides that only owner of unit is a shareholder and that ownership
of unit is ac/uired by purchaser sub:ect to conditions and terms of the instrument
conveying the unit to such purchaser.
d! 2eed of 'onveyance provide that ownership is conveyed only upon full payment
of purchase price
e! #ec &4 'ondominium Act D )embership in 'ondominium corporation shall not
be transferable separately from condominium unit of which it is an appurtenance
Rivera v Florendo
HLP2009-3B Page 71
Akasako, allegedly the real owner of the shares of stock in the name of Aivera sold
shares to Tsuchiya
8ther stockholders sold shares to them as well
Thereafter, Aivera refused to make indorsement
'orporation refused to register the stock certificates
Action for mandamus to cause registration of stock certificates
This is not intra"corporate, Tsuchiya is an outsider and not yet owner of shares
unless and until registered
2ispute cannot be the sub:ect of mandamus. 'orporate #ecretary cannot be
compelled to register the transfer
a! #hares of stock in /uestion (Aivera shares! are not even indorsed by registered
owner. Tsuchiya and Lureidini has no clear legal right.
b! Even the shares of stock purchased from other incorporators cannot be sub:ect
of mandamus on the strength of mere indorsement of supposed owners without
e0press instructions from them.
c! These issues will have to be threshed out in an ordinary action
Abejo v dela Cruz
Teletronics purchased shares of 1ocketbell from the Abe:o spouses and -irginia
Braga, the latter being indorsed in blank
'orporate secretary refused to register the transfer due to alleged failure to respect
pre"emtive rights
Action for mandamus by Abe:o and Teletronics to compel corporate secretary to
register the transfer
This is an intra"corporate dispute
a! *ssue on pre"emptive right is between stockholders, *.e., Braga9s pre"emptive
right and Abe:o9s right to transfer
b! -irginia9s street certificate is within special competence and :urisdiction of the
#E' dealing with free transferability of corporate shares
c! There is no re/uirement that stockholder must be registered in order that #E'
may take cogniCance
d! )andamus is proper
e! Aegistration of the valid transfer of shares of stock involves a ministerial duty on
the part of the corporate secretary
f! The issue is not the ownership of shares but the non"performance of the
'orporate #ecretary of a ministerial duty
Tan v SEC
Alfonso Tan is owner of (44 shares in -isayan Educational #upply 'orp evidenced
by certificate 7o. 5
Alfonso transferred 4 shares to Angel
'ertificate 7o. 5 was cancelled and 'ertificate 7o. % was issued to Angel and
'ertificate 7o. F was issued to Alfonso. .owever, Alfonso did not make the proper
endorsement and did not make delivery of cerificate no. 5
HLP2009-3B Page 72
+ater on, Alfonso Tan elected to withdraw from the corporation. *n e0change for his
shares, he received stocks in trade
'ertificate 7o. F was later on cancelled due to above
After several years, Alfonso Tan filed a case with 'ebu #E' /uestioning the
cancellation of his stock certificates despite non"endorsement and lack of delivery
2elivery and endorsement under # %$ of the corporation code is not mandatory
because of the use of the word may
2elivery is not essential where it appears that the persons sought to be held as
stockholders are officers of the corporation and have custody of the stock book as in
this case
To hold that cancellation of certificate of stock of Alfonso is null and void because of
lack of delivery and endorsement of mother certificate of stock no. 5 which was
deliberately withheld is to prescribe restrictions on the transfer of stock in violation of
corporation law
Razon v IAC
'hudian was issued &,44 shares at E AaCon *nc with the corresponding stock
certificate no $
#aid stock certificates was delivered to Enri/ue AaCon allegedly because it was the
latter who paid for all the subscription on the shares of stock in defendant corporation
with the understanding that has was the owner of said shares of stock and was to
have possession until such time as he was paid by other nominal
incorporators?stockholders
+ater on, parties delivered it for deposit with bank under the :oint custody of the
parties
Administrator of the estate of 'hudian filed a complaint against Enri/ue AaCon et al
praying that the said stock certificates be delivered to estate of 'hudian along with all
cash and stock dividends and pre"emptive rights accruing thereto.
'hudian is still owner
a! #hares of stock is transferred by delivery and endorsement of the stock
certificate
b! #uch mode of transfer is not complied with in this case
c! *n the books of the corporation, 'hudian is still the owner of the stocks. .e was
even elected member of the board which proves that he is a stockholder
d! 8ne who claims ownership should show that the same was trasferred to him in
accord with the valid mode of transfer. This petitioner failed to show
e! Endorsement is a mandatory re/uirement of law for an effective transfer
Rural Bank of Salinas v CA
,uerrero, 1resident of Aural Bank of #alinas and owner of shares in said corporation
e0ecuted a #pecial 1ower of Attorney to his wife )elania giving her full power to sell
or otherwise dispose of shares of stock of the Bank
Before death of 'lemente, )elania, pursuant to said #1A, e0ecuted deed of
Assignment of former9s shares
HLP2009-3B Page 73
After death of 'lemente, )elania presented to bank deed of assignment for
registration which the bank refused
)andamus filed by )elania to compel bank to register the transfer
Transfer before death valid, stock not yet part of estate
#hares of stock are personal property and may be transferred by delivery.
Aegistration in corporate books is not necessary
The transfer effected in this case is valid
The corporation may not impose any restriction on such transfer
The right of transferee?assignee to have stocks transferred to his name is inherent
right, duty of the corporation to register the transfer is ministerial
Batangas aguna Ta!abas Bus Co" v Bitanga
2olores, )a0, )ercedelin 1otenciano, 2elfin <oro and )aya industries entered into
#ale and 1urchase Agreement of their shares at Batangas +aguna Tayabas Bus
'ompany with B)B 1roperty .oldings represented by Bitanga.
A month after, Bitanga and +im were elected board of directors
#tockholders meeting on 7ov 5F, &33E elected Bitanga as 'hairman of the Board
and +im as 'E8
The ne0t stockholder9s meeting was set on )ay &3, &33F. )a:ority stockholders
attended hence meeting continued despite a postponement notice. The 1otencianos
were re"elected
The Bitangas, however, refused to relin/uish management contending the
stockholder9s meeting was void because it was )ichael 1otenciano himself who
re/uested postponement and there was no /uorum because B)B .oldings
representing 4.5%= of B+TB shares were not present
)eeting and Election valid
Transfer of shares is not valid unless recorded in the books of the corporation
The transfer of shares from the 1otenciano group to the Bitanga group has not yet
been recorded in the books of the corporation
*t is the 1otenciano group, in whose name the shares still stand were the ones
entitled to attend and vote at the stockholders meeting
;ntil registration is accomplished, the transfer, though valid between the parties
cannot be effective against the corporation.
The unrecorded transferee cannot vote nor be voted for
Rural Bank of ipa v CA
-illanueva e0ecuted a 2eed of Assignment of his shares in Aural Bank of +ipa in
favor of stockholders of the Bank represented by its directors Bautista, custodio and
>atigbak
#ometime thereafter, he e0ecuted an Agreement recogniCing indebtedness to said
Bank, assured the board that they will pay the debt otherwise Bank would be entitled
to li/uidate their shareholdings
-illanueva failed to settle obligation. Bank converted their shares to treasury stocks
#tockholders of Bank met, -illanuevas were not notified
HLP2009-3B Page 74
-illanueva filed a petition for annulment of stockholder9s meeting and election of
directors and officers
)eeting *nvalid
'orporation 'ode specifically provides under #ec %$that to effect a valid transfer,
there should be delivery of stock certificate endorsed by the owner
a! Assignment of the shares in the case at bar was not coupled with delivery, this is
a fatal defect
b! Title may be vested in the transferee only by delivery of duly endorsed certificate
of stock
c! There must be strict compliance with mode of transfer prescribed by law
d! 2eed of 'onveyance provide that ownership is conveyed only upon full payment
of purchase price
Transfer could be valid between the parties but this does not necessarily make
transfer effective
1etitioners as mere assignees cannot en:oy the status of stockholders
E. Ple#9e f s"a-es f st'.
im Ta! v CA
#y ,uiok and #y +im pledged their shares in ,o 6ay and 'o to +im Tay. They
endorsed their respective share in blank and delivered the same to +im Tay
#y ,uiok and #y +im failed to pay hence +im Tay went to the corporate secretary to
ask the registration of the shares in his name.
'orporate secretary refused
+im Tay instituted an action for mandamus at #E' to compel corporate secretary to
register
'orporate9s secretary cannot be compelled to record transfer
The duty of a corporate secretary to record transfers of stocks is ministerial
o .owever, he cannot be compelled to do so when the transferees title to said
shares has no prima facie validity or is uncertain
)andamus will not issue to establish a right but only to enforce one already
established. +im Tay failed to establish a legal right to have the shares registered in
his name.
o +im Tay failed to establish a legal right. .e is not owner of the shares without
foreclosure and purchase at auction. .e is merely a pledgee.
6. Atta'"4ent f s"a-es
#ar$ia v %omouad
*n a case for a collection of a sum of money, spouses Atinon obtained a :udgement
against 2ico.
Bhen :udgement became final and e0ecutory, sheriff Lomouad proceeded with the
e0ecution and attached shares of 2ico in 'ebu 'ountry 'lub.
#aid shares was levied and public auction thereof scheduled
HLP2009-3B Page 75
,arcia filed action for in:uction on the following grounds:
a! that ,arcia is the actual owner of the shares and merely lent the shares to 2ico
as manager of his auto supply to assist him in entertaining clients
b! when 2ico resigned, he returned to ,arcia the stock certificate.
c! 2ico e0ecuted a deed of Transfer covering said stock certificate but this was not
recorded
d! 2ico resigned as proprietary member of the club and such was accepted by the
B82 of the club
The attachment prevails over the unrecorded transfer (from 2ico to ,arcia!
;nrecorded transfers are valid only as between parties to such transfer.
All transfer of shares not so entered are invalid as to attaching or e0ecution creditors
of the assignors as well as to the corporation and to subse/uent purchasers in good
faith regardless of whether the attaching creditor had knowledge of the transfer or not
@. =n$ai# S3%s'-i$tins
&. Effects:
;npaid:
a! .olders of subscribed shares not fully paid which are not delin/uent shall have
all the rights of a stockholder. (#ec E5!
b! 7o certificate of stock shall be issued to a subscriber until the full amount of his
subscription, together with the interest and e0penses (in case of delin/uent
shares! if any is due, has been paid. (#ec %(!
c! 7o shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation (#ec %$!.
d! 7o registration?transfer of unpaid shares D does not necessarily mean that there
is a previous call. As long as a portion of the subscription price remains unpaid,
shares are not transferable on the books of the corporation
2elin/uent
a! Any cash dividends due on delin/uent stock shall first be applied to the unpaid
balance on the subscription plus costs and e0penses, while stock dividends shall
be withheld from the delin/uent stockholder until his unpaid subscription is fully
paid. (#ec ($!
b! 7o delin/uent stock shall be:
o voted for or
o be entitled to vote or to
o representation at any stockholderIs meeting, nor shall the holder thereof be
entitled
o to any of the rights of a stockholder
HLP2009-3B Page 76
c! E0cept the right to dividends in accordance with the provisions of this 'ode, until
and unless he pays the amount due on his subscription with accrued interest,
and the costs and e0penses of advertisement, if any. (#ec E&!
d! 7ote that the provision on dividends pertain to delin/uent stock hence a call must
have been made
e! #tock dividends on delin/uent shares are not applied but are included in
delin/uency sale wherein it is li/uidated
5. *nterest on unpaid subscriptions
#ubscribers for stock shall pay to the corporation interest on all unpaid subscriptions
from the date of subscription, if so re/uired by, and at the rate of interest fi0ed in the
by"laws. *f no rate of interest is fi0ed in the by"laws, such rate shall be deemed to be
the legal rate. (#ec %%!
$. .ow to collect unpaid subscriptions (#ection %E and E4!
Bhen call is necessary: board of directors of any stock corporation may at any time
declare due and payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary. (#ec %E!
'ourt action to recover unpaid subscription: 7othing in this 'ode shall prevent the
corporation from collecting by action in a court of proper :urisdiction the amount due
on any unpaid subscription, with accrued interest, costs and e0penses. (#ec E4!
(. .ow do shares become delin/uent (#ection %E!
1ayment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board.
6ailure to pay on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance, unless a
different rate of interest is provided in the by"laws, computed from such date until full
payment.
*f within thirty ($4! days from the said date no payment is made, all stocks covered by
said subscription shall thereupon become delin/uent and shall be sub:ect to sale as
hereinafter provided, unless the board of directors orders otherwise.
2espite the fact that the subscription is partially paid, the entire subscription becomes
delin/uent
. 1rocedure for delin/uency sale (#ection %F!
a! The Board of 2irectors must make a call by resolution demanding the payment of
the balance of the subscription. This is called the Pnotice of call.P
b! The notice of call shall be served on each stockholder either personally or by
registered mail. At this point, there is no need for publication.
HLP2009-3B Page 77
c! *f the stockholder does not pay the amount on the date designated in the notice,
the Board shall issue, by resolution, a Pnotice of delin/uency.P
d! 7otice of delin/uency shall be served on the non"paying subscriber either
personally or by registered mail, 1+;# publication in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located, once a week for two (5! consecutive weeks. The notice shall state the
amount due on each subscription plus accrued interest, and the date, time and
place of the sale which shall not be less than $4 days nor more than %4 days
from the date the stocks become delin/uent.
e! The amount due in the notice must include all e0penses: publication, legal, etc.
o 7ote: the notices are :urisdictional.
f! *n the public auction, the highest bidder is one who is willing to pay the balance
of the subscription for the least number of shares. The corporation will give the
highest bidder the certificate of stock in the number of his bid@ the remaining
number will be issued a certificate of stock in favor of the subscriber as fully paid.
*f there are no bidders, the corporation must bid for the whole number of shares
regardless of how much the stockholder has paid. #uch stocks will pertain to the
corporation as fully paid treasury stocks.
%. Bhen sale may be /uestioned (#ection %3!
7o action to recover delin/uent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of the delin/uent stock,
unless the party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest from the date of
sale at the legal rate@ and
7o such action shall be maintained unless it is commenced by the filing of a
complaint within si0 (%! months from the date of sale.
*ssuance of 'ertificate D 8nce full payment for the stocks have been tendered to the
corporation in any of the valid forms of consideration for the issuance of stocks, the
purchaser or the subscribers entitled to be issued the corresponding certificate of
stock which evidences their ownership of shares in a particular corporation
Apo$ada v &RC
Apocada was employed in *ntans 1hil wherein he subscribed to &44 shares
.e subse/uently resigned and instituted a complaint with 7+A' against corporation
for payment of unpaid wages, cola, balance of gasoline and representation
e0penses, bonus
'orporation applied what is due to Apocada the balance of his unpaid subscription
#et"off is not proper
o unpaid subscriptions are not yet due and payable. They become due and payable when a
call is made by the corporation. There is no such call yet
o set-off against wages not valid under labor code
HLP2009-3B Page 78
,. Lst - #est-ye# 'e-tifi'ates (#ection E$!
rocedure for re-issuance in case of loss, stolen or destroyed certificates
&. The registered owner of certificates of stock or his legal representative shall file with
the corporation an affidavit setting forth, if possible:
a! the circumstances as to how the certificates were lost, stolen or destroyed@
b! the number of shares represented by each certificate, the serial numbers of the
certificates@
c! the name of the corporation which issued the same@
d! such other information and evidence which he may deem necessary.
5. The corporation shall publish a notice in a newspaper of general circulation published
in the place where the corporation has its principal office, once a week for $
consecutive weeks at the e0pense of the owner.
$. After the e0piration of one (&! year from the date of the last publication and if no
contest has been presented, the corporation cancel in its books the certificate of
stock and issue in lieu thereof new certificates of stock. The right to make such
contest shall be barred after the e0piration of the one"year period.
(. Even before the one year period e0pires, the new certificates may be issued if the
registered owner files a bond or other security, running for a period of one (&! year for
a sum and in such form and with such sureties as may be satisfactory to the Board of
2irectors. 1rovided, that if there is a pending contest regarding the ownership of said
certificates, the issuance of new certificates shall be suspended until the final
decision of the court.
o 7ote: E0cept in cases of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against the corporation
which shall have issued certificates of stock in lieu of those lost, stolen or
destroyed pursuant to the above procedure.
STOCE,OLD0RS
A. F3n#a4ental Ri9"ts f a St'."l#e- in a C-$-atin
&. To have an evidence of ownership of stock issued to him
5. To vote at meetings of stockholders in a corporation
$. To receive profits (dividends! from the corporation
(. To participate in the distribution of corporate assets upon dissolution
. *n certain cases, appraisal right
%. To transfer his shares of stock
HLP2009-3B Page 79
B. ?atte-s -e<3i-in9 1te f St'."l#e-s
&. 5?$ of 8utstanding #tock along with ma:ority of the board:
a! Amendment of A*
b! E0tending and #hortening 'orporate Term
c! *ncreasing ? 2ecreasing capital stock ? bonded indebtedness
d! #ale or disposition of all, substantially all of corporate assets
e! *nvestment of corporate funds in another corporation or for a purpose other than
main purpose
f! *ssuance of stock dividends
g! 'orporate mergers or consolidation
h! -oluntary dissolution of the corporation whether or not creditors are pre:udiced
5. 5?$ of outstanding stocks
a! Aemoval of directors
b! Aatification of contract with director or officer where first two re/uisites of sec $5
are lacking
c! Bhere stockholders of managed corporation own more than &?$ of outstanding
capital stock entitled to vote of the managing corporation are also the ma:ority of
the board of managed corporation, such 5?$ vote is re/uired to approve
management contract
d! 2elegation to the board to amend, repeal by"laws or adopt new by"laws
$. )a:ority of 8utstanding stocks with ma:ority of the board
a! Approval of management contract
b! Amendment to by"laws, repeal of by"laws, adoption of new by"laws
(. )a:ority of outstanding stock
a! 6or /uorum in electing members of the board by cumulative voting
b! ,rant of compensation to members of the board
c! Adoption of original by"laws
d! Aevocation of delegated authority to the board of directors to amend or repeal or
adopt new by"laws
. The right to vote of non"voting stockholders may be limited or broadened to the
e0tent specified in the A* or by"laws, however, they may still vote in instances
specified in the code.
C. >tin9
The right to vote is significant because it is the only way that a stockholder can have
a voice in the management of corporate affairs
&. 1ledgors, mortagors, e0ecutors, receivers and administrators (#ection !
*n case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders
;7+E##, the pledgee or mortgagee is e0pressly given by the pledgor or mortgagor
such right in writing which is recorded on the appropriate corporate books.
HLP2009-3B Page 80
E0ecutors, 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 pro0y.
5. Loint owner of stocks (#ection %!
The consent of all the co"owners shall be necessary in order to vote, ;7+E## there is
a written pro0y, signed by all the co"owners, authoriCing one or some of them or any
other person to vote such share or shares 1A8-*2E2, That when the shares are
owned in an Pand?orP capacity by the holders thereof, any one of the :oint owners can
vote said shares or appoint a pro0y therefor.
$. Treasury shares (#ection 3 and #ection E!
These are shares of stock which have been issued and fully paid for but
subse/uently re"ac/uired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. #uch shares may again be disposed
of for a reasonable price fi0ed by the B82.
Treasury shares shall have no voting right as long as such shares remain in the
Treasury.
(. 1ro0ies (#ection F!
#tockholders and members may vote in person or by pro0y in all meetings of
stockholders or members.
Ae/uirements of pro0ies:
a! in writing (oral pro0ies are not valid!
b! signed by the stockholder or member
c! filed before the scheduled meeting with the corporate secretary
;nless otherwise provided in the pro0y, it shall be valid only for the meeting for which
it is intended. 7o pro0y shall be valid and effective for a period longer than five (!
years at any one time (continuing pro0y!.
)eaning of proxy:
a! 1erson duly authoriCed by stockholder or member to vote in his behalf in a
stockholders or members meeting. 1ro0y is an agent for a special purpose thus
the general rules of agency would normally apply to the relationship created by
pro0y
b! 6ormal authority given by the holder of the stock who has the right to vote it to
another to e0ercise the voting rights of the former
c! *nstrument or document which evidences the authority of the agent
6ailure to comply with re/uirements will render pro0y void and ineffective.
1ro0y is revocable even when it is e0pressly provided to be irrevocable unless it is
coupled with an interest
Aevocation may be made orally, in writing or implied:
a! appearance of the stockholder at the meeting will terminate the pro0y
b! death of the stockholder will also terminate the pro0y
. 0oting trust (#ection 3!
HLP2009-3B Page 81
2efinition: An arrangement created by one or more stockholders for the purpose of
conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a period not e0ceeding five (! years at any time. The arrangement is
embodied in a document called a voting trust agreement (-TA!
A voting trust which is specifically re/uired as a condition in a loan agreement may
be for a period e0ceeding five (! years but shall automatically e0pire upon full
payment of the loan.
Ae/uirements of a -TA:
a! in writing
b! notariCed
c! shall specify the terms and conditions thereof
d! certified copy of such agreement shall be filed with the corporation and with the
#E'
o 8T.EAB*#E, said agreement is ineffective and unenforceable
1rocedure:
a! The certificate or certificates of stock covered by the voting trust agreement shall
be cancelled and new ones shall be issued in the name of the trustee or trustees
stating that they are issued pursuant to said agreement.
b! *n the books of the corporation, it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said voting trust agreement.
c! The trustee or trustees shall e0ecute 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.
Aight to inspect -TA: The voting trust agreement filed with the corporation shall be
sub:ect to e0amination by any stockholder in the same manner as any other
corporate book or record. The transferor and the trustee or trustees may e0ercise the
right of inspection of all corporate books and records in accordance with the
provisions of this 'ode.
Any other stockholder may transfer his shares to the same trustee or trustees upon
the terms and conditions stated in the voting trust agreement, and thereupon shall be
bound by all the provisions of said agreement.
Aestriction: 7o voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of
trade or used for purposes of fraud.
Automatic e0piration of rights under the -TA: ;nless e0pressly renewed, all rights
granted in a voting trust agreement shall automatically e0pire at the end of the
agreed period. 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 transferors.
The voting trustee or trustees may vote by pro0y unless the agreement provides
otherwise.
1urpose D to make possible a unified control of the affairs of the corporation and
consistent policy@ to make possible for a ma:ority group of shareholders to dispose of
a beneficial interest in a large proportion of their shares and still retain control of the
corporation through the voting trustee
Ae/uirements for a valid voting trust agreement:
HLP2009-3B Page 82
a! in writing and notariCed
b! certified copy must be filed with the corporation as well as with #E'
c! must not be for a period longer than years although may be renewed each time
for not more than years
d! certificates of stock must be cancelled, new ones issued to trustee stating therein
that they were issued pursuance of the voting trust agreement
e! entered on the corporate books with a similar statement
f! should not be for an illegal purpose
#tatus of transferee and transferor:
a! voting trustee is only a share owner vested with apparent legal title for the sole
purpose of voting upon stocks that he does not own
b! transferring stockholder retains the right of inspection of corporate books which
he can e0ercise concurrently with the voting trustee
1owers and rights of voting trustees:
a! right to vote and other rights pertaining to the shares in their names sub:ect to
terms and conditions of and for the period specified in the agreement
b! vote in person or by pro0y unless agreement provides otherwise
c! rights of inspection of corporate books and records
d! legal title holder D /ualified to be a director
+imitations on voting trust agreements:
a! should not e0ceed years e0cept if a condition in a loan agreement, shall
automatically e0pire upon full payment of the loan
b! must not be for purposes of circumventing the law against monopolies and illegal
combinations in restraint of trade
c! must not be used for purposes of fraud
d! must be in writing, notariCed, specify the terms and conditions thereof
e! certified copy must be filed with corporation and #E' otherwise unenforceable
f! agreement is sub:ect to e0amination by stockholder
g! shall automatically e0pire at the end of the agreed period
h! vote in person or by pro0y unless agreement provides otherwise
i! rights of inspection of corporate books and records
2istinction between pro0y and voting trust
1ro0y -TA
+egal title 7o legal title Ac/uires legal title
Aevocability Aevocable unless coupled
with interest
*rrevocable if validly e0ecuted
E0tent of power 'an only act at a specified
stockholder9s or member9s
meeting
7ot limited to any particular
meeting
Bhen to vote Absence of the owner Even when owner is present
2uration ;sually shorter but cant
e0ceed years
;sually longer but cant e0ceed
years e0cept in loan
agreements
HLP2009-3B Page 83
%. 2ooling agreeent (#ection &44!
Agreement between 5 or more stockholders to vote their shares in the same way
;sually relate to election of directors
1arties often provide for arbitration in case of disagreement
-alid as long as they do not limit the discretion of the B82 in the management of
corporate affairs or work any fraud against stockholders not party to the contract
2oes not involve a transfer of stocks but is merely a private agreement
Agreements by stockholders (#ec &44!:
o Agreements by and among stockholders e0ecuted before the formation and
organiCation of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the e0tent that
such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, e0cept
those re/uired by this Title to be embodied in said articles of incorporation.
o An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in e0ercising any voting rights, the shares held
by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
o 7o provision in any written agreement signed by the stockholders, relating to any
phase of the corporate affairs, shall be invalidated as between the parties on the
ground that its effect is to make them partners among themselves.
o A written agreement among some or all of the stockholders in a close corporation
shall not be invalidated on the ground that it so relates to the conduct of the
business and affairs of the corporation as to restrict or interfere with the
discretion or powers of the board of directors: 1rovided, That such agreement
shall impose on the stockholders who are parties thereto the liabilities for
managerial acts imposed by this 'ode on directors.
o To the e0tent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other and among themselves. #aid
stockholders shall be personally liable for corporate torts unless the corporation
has obtained reasonably ade/uate liability insurance.
E. 7on"voting shares (#ection % !
7o other shares may be deprived the right to vote e0cept preferred or redeemable
shares
#ec usually re/uires preferred stocks to be given the right to vote if dividends were
not declared for $ consecutive years
#hares which has, generally, no voting rights@ e0cept in the following circumstances:
a! Amendment of the A8*
b! Adoption and amendment of by"laws
c! #ale, lease, e0change, other disposition of all or substantially all of the corporate
property
d! *ncurring, creating or increasing bonded indebtedness
e! *ncrease or decrease of capital stock
HLP2009-3B Page 84
f! )erger and consolidation
g! *nvestment of corporate funds in another corporation or business
h! 2issolution of the corporation
F. *T6 shares D Gin trust forH
3. And?or shares (#ection %!
That when the shares are owned in an Pand?orP capacity by the holders thereof, any
one of the :oint owners can vote said shares or appoint a pro0y therefor.
D. A$$-aisal -i9"t
&. 2efinition (#ection F&!
This is a remedy available to a stockholder who dissented and voted against certain
e0traordinary matters to withdraw or get out of the corporation by demanding
payment of the value of his shares
5. *nstances of appraisal right (#ection F&!
a! *n case any amendment to the articles of incorporation which has the effect of:
b! changing or restricting the rights of any stockholder or class of shares, or
c! authoriCing preferences in any respect superior to those of outstanding shares of
any class, or
d! e0tending or shortening the term of corporate e0istence
e! *n case of sale, lease, e0change, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in the
'ode@ and
f! *n case of merger or consolidation
g! E0tension or shortening of the term of the corporation (#ection $E!
h! *n case of investment of corporate funds in another corporation or business or for
any other purpose (#ection (5!

$. Bhat are the re/uirements for the successful e0ercise of appraisal rightQ (#ection F5
and F%!
By making a written demand on the corporation within thirty ($4! days after the date
on which the vote was taken for payment of the fair value of his shares
o 6ailure to make the demand within such period shall be deemed a waiver of the
appraisal right.
By surrendering the certificate or certificates of stock, the corporation shall pay the
fair value thereof as of the day prior to the date on which the vote was taken,
e0cluding any appreciation or depreciation in anticipation of such corporate action.
!f within a period of sixty "#$% 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 "&% disinterested persons
HLP2009-3B Page 85
o 8ne of whom shall be named by the stockholder, another by the corporation, and
the third by the two thus chosen
The findings of the ma:ority of the appraisers shall be final
The award shall be paid by the corporation within thirty ($4! days after such award is
made
7o payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment
;pon payment by the corporation of the agreed or awarded price, the stockholder
shall forthwith transfer his shares to the corporation.
(. Effect of demand and termination of right (#ection F$!
6rom the time of demand for payment of the fair value of a stockholderIs shares until
either the abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended, EU'E1T the right of such stockholder to receive
payment of the fair value thereof, 1A8-*2E2, if the dissenting stockholder is not paid
the value of his shares within $4 days after the award, his voting and dividend rights
shall immediately be restored.
. Bhen right to payment ceases (#ection F(!
7o demand for payment may be withdrawn unless the corporation consents thereto.
*nstances when right to payment ceases:
a! *f such demand for payment is withdrawn with the consent of the corporation
b! *f the proposed corporate action is abandoned or rescinded by the corporation
c! *f the proposed corporate action disapproved by the #E' where such approval is
necessary,
d! *f the #E' determines that such stockholder is not entitled to the appraisal right
*n such instances, 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.
%. Bho bears costs of appraisal (#ection F!
,enerally, it shall be borne by the corporation
E0ception: by the stockholder, when the fair value ascertained by the appraisers is
appro0imately the same as the price which the corporation may have offered to pay
the stockholder,
*n the case of an action to recover such fair value, all costs and e0penses shall be
assessed against the corporation, unless the refusal of the stockholder to receive
payment was un:ustified.
E. 7otation on certificates@ rights of transferee (#ection F%!
HLP2009-3B Page 86
Bithin ten (&4! days after demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock representing his shares to the
corporation for notation thereon that such shares are dissenting shares.
.is failure to do so shall, at the option of the corporation, terminate his rights.
Effect of transfer:
a! The rights of the transferor as a dissenting stockholder shall cease@
b! The transferee shall have all the rights of a regular stockholder@ and
c! All dividend distributions which would have accrued on such shares shall be paid
to the transferee.
0. D3ty f 'nt-llin9 inte-est
A ma:ority stockholder is sub:ect to the duty of good faith when he acts by voting at a
stockholders9 meeting with respect to a matter in which he has a personal interest
'ontrolling stockholders may dispose of their shares at any time and at such price as
they choose provided they do not pervert these prerogatives by transferring office to
persons who are known as intending to raid the corporate treasury or otherwise
improperly benefit themselves.
*t is fraudulent for a stockholder to buy from another stockholder without disclosing
his identity
1rincipal stockholders are likewise prohibited from using inside information in the
purchase and sale of e/uity security
F. De-i1ati1e s3its
derivative suit D suits of stockholders based on wrongful or fraudulent acts of
directors or other persons
7ature and basis?distinguish from other suits:
a! individual suit if wrong done is personal to #.
b! class suit if wrong done is to a group of #.
c! derivative suit if wrong done is to the corporation itself
*n a derivative suit, the cause of action belongs to the corporation and not the
stockholders but since the directors who are charged with mismanagement are the
once who will decide who will sue then the corporation is left without redress hence
#. is given the right to sue on behalf of the corporation
Ae/uirements:
a! The stockholder or member bringing the suit must have e0hausted his remedies
within the corporation
b! The stockholder or member must have been one at the time the transaction or
act complained of took place, or in the case of a stockholder, the shares must
have devolved upon him since by operation of law, unless such transaction or act
continues and is in:urious to the stockholder
c! Any benefit recovered by the stockholder or member as a result of bringing the
suit, whether by final :udgment, by :udicial compromise or by e0tra":udicial
settlement, must be accounted for to the corporation, who is the real party in
interest
HLP2009-3B Page 87
d! *f the suit is successful, the plaintiff is entitled to reimbursement from the
corporation for the reasonable e0penses of litigation, including attorney9s fees
01an9elista 1 Sants
The in:ury complained of is thus primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders
But while it is to the corporation that the action should pertain in cases of this nature,
however, if the officers of the corporation, who are the ones called upon to protect
their rights, refuse to sue, or where a demand upon them to file the necessary suit
would be futile because they are the very ones to be sued or because they hold the
controlling interest in the corporation, then in that case any of the stockholders is
allowed to bring suit. But in that case, the corporation is the real party in interest.
Bitong v CA
Bitong, allegedly for the benefit of )r. M )s. 'o., *nc., filed a derivative suit to hold
Eugenia and Lose Apostol liable for fraud, misrepresentation, disloyalty, evident bad
faith, conflict of interest, and mismanagement of the corporation committed from
&3F$ to &3FE
Bitong alleged that she had been Treasurer and )ember of Board of 2irectors, and
owner of &444 shares of stock of the corporation, presenting the stock and transfer
book reflecting that LA>A shares were transferred to her in &3F$ and 'ertificate 7o.
44F in her name
Bitong cannot file derivative suit. #he is not the owner of the shares of stock during
the time when the acts sub:ect of the suit were committed (&3F$"&3FE! because
'ertificate no 44F, proof of said ownership, was signed by the president only in &3F3
a! 'ertificate of stock can be issued only upon compliance with certain re/uisites:
(&! must be signed by president or vice, countersigned by secretary or assistant
secretary, sealed with seal of corporation, (5! there must be delivery and
indorsement, ($! must be fully paid, ((! original certificate must be surrendered
b! A formal certificate of stock cannot be considered issued unless signed by
president or vice"president and countersigned by secretary or assistant secretary
The re/uirement under #ec %$ of the 'orporation code must be mandatorily
complied with. 1resumption of regularity cannot apply.
a! regularity and validity of transfer must be proved. There must be a valid delivery,
endorsement, recording in the corporation9s books.
b! Aecords are unclear on how Bitong ac/uired the shares of stock
c! Even the records on the stock and transfer book is highly doubtful, it being in the
possession of Bitong, the original being lost, and a possibility that even the
original was not registered at all with the #E'.
Gilda Lim v Patricia Lim-Yu
HLP2009-3B Page 88
The Board of +*)1A7 approved a resolution making a partial payment to ,ilda +im
for the latter9s legal services to be paid in shares of stock of the corporation. ,ilda
ended up owning %5.= of the corporation9s shares of stock
1atricia +im"<u filed an alleged derivative suit against the Board for the latter9s
alleged violation of her pre"emptive right to the shares
,ilda et al opposed on the ground of 1atricia9s lack of capacity to file a derivative suit
by reason of the ff:
a! a petition for guardianship filed by ,ilda praying for the issuance of letters of
guardianship over 1atricia
b! in said action, a Temporary Aestraining 8rder was issued by the court en:oining
1atricia from entering into actions, contracts or documents representing her
family or the corporation, particularly +*)1A7 *nvestments
c! because of said TA8, ,ilda contend that 1atricia cant file a derivative suit
because a derivative suit is being filed in behalf of the corporation and such
action can9t be done by 1atricia
1atricia may validly file derivative suit
An action to enforce a pre"emptive right is being enforced on behalf and for the
benefit of the shareholder and not the corporation hence is not a derivative suit
a! 1atricia was merely praying that she be allowed to subscribe to additional shares
of stock in proportion to her share holdings. #he was therefore not acting for the
corporation but only in her own behalf out of the desire to protect and preserve
her preemptive right.
b! A TA8 en:oining her to file any action for the corporation does not affect the
present action which is only for and in her behalf
Re$3%li' Ban. 1 C3a#e-n. 6: A derivative suit was brought against the officers and the board. 'omplaint
alleged that the directors approved a resolution granting e0cessive compensation to the corporate officers.
#uit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said
officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in
behalf of the corporation.
.: #uch a suit need not be authoriCed by the corporation where its ob:ective is to nullify the action taken by
its manager and the board, in which case any demand for intra"corporate remedy would be futile, and thus
necessitating the court to intervene by granting the petition for a derivative suit.
A #. in a banking corporation has a right to maintain a suit for an in behalf of the corporation, but the e0tent
of such right depends upon when and for what purpose he ac/uired the shares of stock of which he is the
owner.
8n the issue that the relators controverted the right to /uestion the appointment and selection of 'uaderno
and 2iCon, which they contend to be the resilt of corporate acts with which the plaintiff as #., cannot
intervere, the #' held that an individual #. is permitted to institute a derivative suit in behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the official of
the corporation refuses to sue, or are to ones to be sued.
San ?i93el C-$-atin 1 Ea"n. .: Ae/uisites for a proper derivative suit:
(a! party bringing suit should be a #. as of the time of the act or transaction complained of and at the
time of filing of the suit. 7umber of shareholdings immaterial. A bona fide ownership by a #. in his
own right suffices to invest him with standing to bring a derivative action in behalf of the corporation
(b! party has tried to e0hausted intra"corporate remedies (made demand on the board to sue in behalf
of the corporation, but the latter failed or refused!
HLP2009-3B Page 89
(c! cause of action actually devolves on the corporation, the wrongdoing or harm having been or being
caused to the corporation itself and not to the suing #.
BOOES AND R0CORDS
A. W"at %.s an# -e'-#s 43st a '-$-atin .ee$B (#ection E(!
Every corporation shall keep and carefully preserve at its principal office:
o Aecord of all business transactions
o )inutes of all meetings of stockholders or members, or of the board of directors
or trustees which state the:
Time and place of holding the meeting
.ow authoriCed
7otice given
Bhether the meeting was regular or special, if special its ob:ect,
Those present and absent
Every act done or ordered done at the meeting
Time when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes@
<eas and nays must be taken on any motion or proposition
1rotest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand
o #tock and transfer book
7ames of the stockholders alphabetically arranged
*nstallments paid and unpaid on all stock for which subscription has been
made
2ate of payment of any installment
#tatement of every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made
#uch other entries as the by"laws may prescribe
o Aecord of all business transactions include:
book of inventories
:ournal
ledger
book for copies of letters and telegrams
fianancial statements
*TA9s
vouchers M receipts
contracts
-TAs
B. C3st#y f B.s an# -e'-#s
Torres et al v CA
HLP2009-3B Page 90
Ludge Torres, ma:ority stockholder of Tomil, assigned one share each to Tobias,
Locson, Lurisprudencia, ACura and 1abalan. These assigned shares were in the
nature of /ualifying shares so the latter would be eligible to be directors of the
'orporation
At the back of the stock certificates, it is stated that@ Gthe present certificate,
conformably to the purpose and intention of the deed of assignment is not held by me
under any claim of ownership and * acknowledge that * hold the same as mere
Trustee of Ludge Torres and for the sole purpose of /ualifying me as directorH
The five were elected directors of the corporation
Aespondents complained with #E' praying that election of petitioners be annulled
because they are not legitimate owners of shares of stock and transfer to them
violated minority stockholders right of pre"emption and it was not registered by the
corporate secretary
1etitioners claim that transfer is valid because Ludge Torres himself recorded such
in the stock and transfer book of the corporation
Aecording in stock and transfer book not valid
'orporate #ecretary is the custodian of corporate records, keeps the stock and
transfer book and make entries therein.
#tock and transfer book of Tormil, however, was not kept by 'orporate #ecretary but
by respondent Ludge Torres
#tock Transfer book was not kept at principal office but at the residence of Ludge
Torres in contravention with provisions
Because of the above, entries made by Ludge Torres are not valid. 1abalan and 'o.
cannot be considered stockholders
C. Ri9"t f Ins$e'tin (#ection E(!
Basis f -i9"t
*nherent in ownership of stocks
#.s do not directly participate in the management of the business and have little
knowledge, if at all, of how the corporate affairs are being run by the directors and
officers
As beneficial owners, #.s have the right to know only the financial condition but also
how the corporate affairs are being run by their elected directors and the appointed
officers
+aw grants them the right to inspect the records of the corporation to obtain
information they need
#ignificant for minority #.s
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member
of the corporation
o At reasonable hours on business days
o .e may demand, writing, for a copy of e0cerpts from said records or minutes, at
his e0pense
HLP2009-3B Page 91
The stock and transfer book shall be kept in the principal office of the corporation or
in the office of its stock transfer agent and shall be open for inspection by any director
or stockholder of the corporation at reasonable hours on business days.
Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to e0amine and copy e0cerpts from its
records or minutes, in accordance with the provisions of this 'ode, shall be liable to
such director, trustee, stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under #ection &(( of this 'ode
(1enalties for violation of the 'ode!.
*f such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal
*t shall be a defense to any action that the person demanding to e0amine and copy
has improperly used any information secured through any prior e0amination of the
records, or is not acting in good faith or for a legitimate purpose in making his
demand
*nspection should be made in a manner so as not to impede the efficient operations
of a corporation. #. cannot demand that he be allowed to take corporate books out
of the corporation9s principal office of inspection.
#tockholder9s purpose for inspecting the books is material:
o .is purpose is presumed to be a proper one
o The burden of proving that the purpose is improper or illegal is thus on the
corporation and its officers
o A legitimate purpose is described as one which is germane to the in interests of
the stockholder as such and is not contrary to the interests of the corporation
o 1urpose must not be inimical to corporation9s interest and the info is desired for
the purpose of crippling the corporation for the benefit of a business rival, must
be denied
Aemedies:
o )andamus
o *n:unction
o Action for damages
o 6ile an action to impose a penal offense by fine and?or imprisonment
The right to inspection is preventive as well as remedial:
o 1reventive because it may to a limited e0tent serve as deterrent to an ill"
intentioned management
o Aemedial because a dissatisfied stockholder may resort to right of inspection as
a preliminary step to seeking more direct remedies against abuses committed by
management
D. W" is a st'. t-ansfe- a9ent (#ection E(!
7o stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
1hilippines unless he secures a license from the #E' and pays a fee as may be fi0ed
by the 'ommission, which shall be renewable annually
HLP2009-3B Page 92
1rovided, That a stock corporation is not precluded from performing or making
transfer of its own stocks, in which case all the rules and regulations imposed on
stock transfer agents, e0cept the payment of a license fee herein provided, shall be
applicable.
0. Ri9"t t finan'ial state4ents
Bithin ten (&4! days from receipt of a written re/uest of any stockholder or member,
the corporation shall furnish to him its most recent financial statement, which shall
include a balance sheet as of the end of the last ta0able year and a profit or loss
statement for said ta0able year, showing in reasonable detail its assets and liabilities
and the result of its operations
At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of
the corporation for the preceding year, which shall include financial statements, duly
signed and certified by an independent certified public accountant. .owever, if the
paid"up capital of the corporation is less than 14,444.44, the financial statements
may be certified under oath by the treasurer or any responsible officer of the
corporation.
F. W" 4ay e8e-'ise -i9"tB
2irector, trustee, stockholder, member, personally or through an agent
#tockholders of a parent corporation with respect to subsidiary:
o *f two are legally separate and independent entity, no right of inspection
o *f they are practically one and the same in so far as management and control and
inspection is demanded because of gross management of subsidiary by the
parent9s directors who are also directors of subsidiary, there can be inspection
Pa-# 1 ,e-'3les L34%e-. 6: 'orporate secretary of .ercules +umber refused to permit 1ardo, a #., or
his agent to inspect the records and business transactions of the company at the times desired by 1ardo.
Basis of the refusal was the provision in the company9s by"laws which stipulated that every #. may e0amine
the books of the company and other documents upon the days which the board annually fi0es.
.: The resolution of the board limiting the rights of #.s to inspect its records to a period of &4 days prior to
the annual #. meeting is an unreasonable restriction in accordance with the 'orpo 'ode, which provides
that the right to inspect can be e0ercised at reasonable hours. The right of inspection was interpreted to
mean that the right may be e0ercised at reasonable hours on business days throughout the year, and not
merely during an arbitrary period of a few days chosen by the directors.
@nAales 1 PNB. .: The 'ode has prescribed limitations to the right of inspection, re/uiring as a condition
for e0amination that the person re/uesting must not have been guilty of using improperly any information
secured through a prior e0amination, and that the person asking for such must be acting in ,6 and for a
legitimate purpose. *t is the #. seeking to e0ercise the right of inspection to set forth the reasons and
purposes for which he desires such inspection. #' held that the purpose of ,onCales, which was to arm
himself with evidence which he can use against the bank for acts done by the latter when he was still a total
stranger (i.e. not a #.!, were not deemed proper motives and his re/uest was denied.
>e-a93t" 1 Isa%ela S39a- C. 6: 2irectors have the un/ualified right to inspect the books and records of a
corporation at all reasonable times. 1rete0ts may not be put forward by the officers to keep a director or #.
from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the
HLP2009-3B Page 93
grounds that the director or #.s are on unfriendly terms with the officers. A director or #. has no absolute
right to secure certified copies of the minutes until these minutes have been written up and approved by the
directors.
@.n9wei 1. S0C. 6: ,okongwei, a ma:or #. of #an )iguel 'orporation, sought to e0ercise his right to
inspect the books and records of #)' *nt9l, a foreign subsidiary wholly"owned and controlled by #)'. #ince
he was not a #. of the subsidiary, #)' denied his re/uest to inspect its books.
.: Bhere the right to inspect is granted by statute to the #., it is given to him as such and must be
e0ercised by him with respect to his interest as a #. and for some purpose germane thereto or in the
interest of the corporation. The inspection has to be germane to the petitioner9s interest as a #. and has to
be proper and lawful in character and not inimical to the interest of the corporation.
The #.9s right to inspect is based on his ownership of the assets and property of the corporation. *t is
therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an
e/uitable ownership, beneficial ownership, or /uasi"ownership, and is predicated upon the necessity of self"
protection.
8n application for mandamus to enforce the right, it is proper for the court to in/uire into and consider the
#.9s ,6 and his purpose and motives in seeking inspection. But the impropriety of purpose such as will
defeat enforcement must be set up by the corporation defensively if the 'ourt is to take cogniCance of it as a
/ualification. *n other words, the specific provisions take from the #. the burden of showing the propriety of
purpose and place upon the corporation the burden of showing impropriety of purpose or motive.
The foreign subsidiary is wholly"owned by #)' and therefore under its control, and would be more in
accord with e/uity, ,6, and fair dealing to construe the statutory right of ,okongwei as #. to inspect the
books of the parent as e0tending to the books of the subsidiary in its control.
?0R@0RS AND CONSOLIDATION
A. W"at is a M'nstit3ent '-$-atinNB A M'nsli#ate# '-$-atinNB (#ection E%!
Two or more corporations may merge into a single corporation which shall be one of
the constituent corporations or may consolidate into a new single corporation which
shall be the consolidated corporation.
B. W"at is a 4e-9e- 6 'nsli#atinB
Merger
o 8ne of the constituent corporations remains as an e0isting :uridical person,
whereas the other corporation shall cease to e0ist. )erger is the disappearance
of one of the corporations with the other corporation ac/uiring all the assets,
rights of action, and assuming all the liabilities of the disappearing corporation.
o 8f course, there is an arrangement as to the shares of stocks that will be issued
to the former stockholders of the two (5! corporations which were merged. #aid
stockholders are now stockholders of the corporation which survives. The
proportion between the two (5! corporations will be the basis of the shares of
stocks that will be issued to the stockholders under the surviving corporation.
Consolidation
o *f there is consolidation, there will be disappearance of both the constituent
corporations with the emergence of a new corporate entity which shall obtain all
HLP2009-3B Page 94
the assets of the disappearing corporations, and likewise shall assume all their
liabilities.
o Also, the number of shares that will be issued to each of the stockholders under
the new corporation is determined by the ration between the assets of the two (5!
corporations.
C. W"at '-$-ate a$$-1als a-e -e<3i-e#B (#ec. EE!
&. Approval by ma:ority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation.
5. Approval by the stockholders or members of each of such corporations. The
affirmative vote of stockholders representing at least two"thirds (5?$! of the
outstanding capital stock of each corporation in the case of stock corporations or at
least two"thirds (5?$! of the members in the case of non"stock corporations shall be
necessary for the approval of such plan
$. 7otice of such meetings shall be given to all stockholders or members of the
respective corporations, at least two (5! weeks prior to the date of the meeting, either
personally or by registered mail. #aid notice shall state the purpose of the meeting
and shall include a copy or a summary of the plan of merger or consolidation.
(. Any dissenting stockholder in stock corporations may e0ercise his appraisal right in
accordance with the 'ode. 1rovided, that if after the approval by the stockholders of
such plan, the board of directors decides to abandon the plan, the appraisal right
shall be e0tinguished.
. Amendment to the plan of merger or consolidation may be made by approved of the
ma:ority vote of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders representing at least
two"thirds (5?$! of the outstanding capital stock or of two"thirds (5?$! of the members
of each of the constituent corporations. #uch plan, together with any amendment,
shall be considered as the agreement of merger or consolidation.
D. W"at is a $lan f 4e-9e- - 'nsli#atinB (#ec. E%!.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
&. The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations@
5. 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 articles of incorporation of the surviving
corporation in case of merger@ and, with respect to the consolidated corporation in
case of consolidation, all the statements re/uired to be set forth in the articles of
incorporation for corporations organiCed under this 'ode@ and
(. #uch other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.
HLP2009-3B Page 95
0. W"at a-e a-ti'les f 4e-9e- - 'nsli#atinB (#ec. EF!
After the approval by the stockholders or members, articles of merger or articles of
consolidation shall be e0ecuted by each of the constituent corporations:
&. to be signed by the president or vice"president and
5. certified by the secretary or assistant secretary of each corporation
The articles of merger or consolidation shall set forth:
&. The plan of the merger or the plan of consolidation@
5. As to stock corporations, the number of shares outstanding, or in the case of non"
stock corporations, the number of members@ and
$. As to each corporation, the number of shares or members voting for and against
such plan, respectively.
F. W"en is t"e effe'ti1ity f 4e-9e- - 'nsli#atinB
Effectivity: ;pon issuance by the #E' of the certificate of merger and consolidation
The articles of merger or of consolidation shall be submitted to the #ecurities and
E0change 'ommission in /uadruplicate for its approval.
*n the case of merger or consolidation of banks or banking institutions, building and
loan associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be obtained.
*f the 'ommission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this 'ode and e0isting laws, it
shall issue a certificate of merger or of consolidation, at which time the merger or
consolidation shall be effective.
*f, upon investigation, the #ecurities and E0change 'ommission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent with
the provisions of this 'ode or e0isting laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Britten notice of the date, time
and place of hearing shall be given to each constituent corporation at least two (5!
weeks before said hearing. The 'ommission shall thereafter proceed as provided in
this 'ode.
@. W"at a-e t"e effe'ts f a 4e-9e- - 'nsli#atinB (#ec. F4!
&. The constituent corporations shall become a single corporation which:
*n case of merger, shall be the surviving corporation designated in the plan of
merger@ and
*n case of consolidation, shall be the consolidated corporation designated in the plan
of consolidation@
5. The separate e0istence of the
constituent corporations shall cease, e0cept that of the surviving or the consolidated
corporation@
HLP2009-3B Page 96
$. The surviving or the consolidated
corporation shall possess all the rights, privileges, immunities and powers and shall
be sub:ect to all the duties and liabilities of a corporation organiCed under this 'ode@
(. 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
these shall be deemed transferred to and vested in such surviving or consolidated
corporation without further act or deed@ and
. The surviving or consolidated
corporation shall:
be responsible and liable for all the liabilities and obligations of each of the
constituent corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations@ and
any pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving or
consolidated corporation.
The rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or consolidation
,. P-'e#3-e f- ?e-9e- - Cnsli#atin
&. Board of each corporation shall draw up a plan of merger or consolidation, setting
forth:
names of corporations involved (constituent corporations!
terms and mode of carrying it out
statement of changes, if any, in the present articles of surviving corporation@ or the
articles of the new corporation to be formed in case of consolidation.
5. 1lan for merger or consolidation shall be approved by ma:ority vote of each board of
the concerned corporations at separate meetings.
$. The same shall be submitted for approval by the stockholders or members of each
such corporation at separate corporate meetings duly called for the purpose. 7otice
should be given to all stockholders or members at least two (5! weeks prior to date of
meeting, either personally or by registered mail.
(. Affirmative vote of 5?$ of the outstanding capital stock in case of stock corporations,
or 5?$ of the members of a non"stock corporation shall be re/uired.
. 2issenting stockholders may e0ercise the right of appraisal. But if Board abandons
the plan to merge or consolidate, such right is e0tinguished.
%. Any amendment to the plan must be approved by the same votes of the board
members of trustees and stockholders or members re/uired for the original plan.
E. After such approval, Articles of )erger or Articles of 'onsolidation shall be e0ecuted
by each of the constituent corporations, signed by president or -1 and certified by
secretary or assistant secretary, setting forth:
HLP2009-3B Page 97
plan of merger or consolidation
in stock corporation, the number of shares outstanding@ in non"stock, the number of
members
as to each corporation, number of shares or members voting for and against such
plan, respectively
F. 6our copies of the Articles of )erger or 'onsolidation shall be submitted to the #E'
for approval. #pecial corporations like banks, insurance companies, building and
loan associations, etc., need the prior approval of the respective government agency
concerned.
3. *f #E' is satisfied that the merger or consolidation is legal, it shall issue the
'ertificate of )erger or the 'ertificate of *ncorporation, as the case may be.
&4. *f the #E' is not satisfied, it shall set a hearing, giving due notice to all the
corporations concerned. N#ecs. E%"E3, 'orporation 'odeO
I. Li4itatin n t"e -i9"t t 4e-9e 6 'nsli#ate
&. #hould not create monopolies
5. #hould not eliminate free and healhty competition
$. Act $&F #ec 54 inhibits illegal combinations
Reyes 1. Bl3se et al. 6: )inority #.s of the +aguna Tayabas Bus 'o file an action to en:oin Blouse et al
from e0ecuting its resolution approved by 33 Z= of #.s to consolidate the properties and franchises of
+aguna Tayabas with Batangas Transport. Blouse believes it is merely an e0change of properties and not a
consolidation.
*: B?n the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out
under the old 'orpo +aw.
.: The /uestioned resolution charges the board of +aguna to consolidate properties and franchises thereof
with that of Batangas Transport. Both corporations have passed similar resolutions to take steps to effect the
consolidation. *t is apparent that the purpose of the resolution is not to dissolve but to merely transfer its
assets to a new corporation in e0change for its shares. This comes within the purview of the old corporation
law, which provides that a corporation may sell, e0change, lease or otherwise dispose of all its property and
assets when authoriCed by affirmative vote of 5?$ of #.s. The phrase Gotherwise dispose ofH covers mergers
and consolidations. The transaction in this case cannot be considered, strictly speaking, as a merger or
consolidation because a merger implies the termination or cessation of the merged corporations and not
merely a merger of assets and properties. The two companies will not lose their corporate e0istence but will
continue to e0ist after consolidation. Bhat is intended to be managed and operated by a new corporation,
and not a merger.
The court added that the merger?consolidation (if any! would still be carried out under the 1ublic #ervice
+aw. *t does not impose any /ualification other that it shall be done with the approval of the 1#'.
0#wa-# Nell C4$any 1 Pa'ifi' Fa-4s In'. 6: The Edward 7ell 'o secured a :udgment representing the
unpaid balance of the price of a pump sold to *nsular 6arms. 1acific 6arms then purchased all or
substantially all of shares of stock as well as real and personal property of *nsular, selling the shares to
certain individuals who reorganiCed *nsular. The board of the reorganiCed *nsular then sold its assets to be
sold to 1acific for 1&4444. The writ of e0ecution was returned, stating that *nsular had no leviable property.
7ell 'o sued 1acific 6arms, on the ground as a result of the purchase of all or substantially all assets of
*nsular, 1acific became the alter ego of *nsular 6arms.
.: ,A: where the corporation sells or otherwise transfers all of its assets to another corporation, the latter is
not liable for the debts and liabilities of the former.
E0ception: (&! purchaser e0pressly or impliedly assumes such debts@ (5! transaction amounts to a
consolidation or merger@ ($! purchasing corporation is merely a continuation of the selling corp@ ((! there is
fraud to escape liability for the debts
HLP2009-3B Page 98
*n the present case, no proof was submitted that 1acific e0pressly agreed to assume the debts of *nsular or
that it is a continuation of *nsular, or that the transaction was tainted in fraud of creditors, or that the two
parties merged or consolidated. *n fact, the sales took place, not only over % months before :udgment, but
also over a month before the filing of the case. 1acific also purchased the shares as the highest bidder at an
auction sale held at the instance of a bank to which shares have been pledged as security by *nsular. 7ell
'o9s theory that 1acific is the alter ego of *nsular negates the fact of consolidation?merger, because a
corporation cannot be its own alter ego.
As to the allegation that the selling price of the assets of 1&4> was grossly inade/uate and thus tainted with
fraud, the #' held that the sale was approved by the #E' and that it should be presumed that the price was
fair and reasonable, and should be a matter litigated in another venue.
#': since there is neither proof nor allegation that the transferee"corporation e0pressly or impliedly agreed
to assume the debt of the corporation, or that the sale of either the shares or the assets to the appellee has
been entered into fraudulently, in order to escape liability for the debt of the sub:ect corporation, there was
no basis to hold the transferee liable for the debts and liabilities of the sub:ect corporation
NON-STOCE CORPORATIONS
A. Distin93is" nn-st'. '-$-atins f-4 st'. '-$-atins
787"#T8'> '8A18AAT*87# #T8'> '8A18AAT*87#
&. 2efinition
A non"stock corporation is one where
no part of its income is distributable as
dividends to its members, trustees, or
officers, sub:ect to the provisions of this
'ode on dissolution.
5. 1urposes (#ec. FF!
7on"stock corporations may be formed
or organiCed 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, sub:ect to
the special provisions of this Title
governing particular classes of non"
stock corporations.
$. 2istribution of income (#ec. FE!
8ne which has a capital stock divided into
shares and is authoriCed to distribute to the
holders of such shares dividends or
allotments of the surplus profits (i.e., retained
earnings on the basis of the shares held
(#ec. $!. *t is organiCed for profit.
6ormation of corporation must be for
+AB6;+ purpose
)ust not include those which contradict or
change its nature
HLP2009-3B Page 99
Any profit shall be used for the
furtherance of the purpose or purposes
for which the corporation was organiCed
(. #cope of right to vote (#ec. F3!
Each member regardless of class shall
be entitled to 87E vote unless limited,
broadened, or denied to the e0tent
specified in the articles of incorporation
or the by"laws.
. -oting by pro0y (#ec. F3!
A member may vote by pro0y in
accordance with the provisions of this
'ode unless otherwise provided in the
Articles of *ncorporation or By"laws
%. -oting by mail (#ec. F3!
-oting by mail or other similar means
may be authoriCed by the by"laws of
non"stock corporations with the
approval of, and under such conditions
which may be prescribed by, the #E'
E. Transferability of interest or
membership (#ec. 34!
)embership in a non"stock corporation
and all rights arising therefrom are
personal and non"transferable, unless
the articles of incorporation or the by"
laws otherwise provide.
F. Termination of membership
1rofits are distributed as dividends to the
stockholders in proportion to their
shareholdings
7o share may be deprived of voting rights,
e0cept: 1referred or Aedeemable shares,
unless otherwise provided by the 'ode
1A8-*2E2, there shall always be a
class?series of shares which have a
'8)1+ETE -8T*7, A*,.T#
Each share of stock has one vote
#tockholders and members may vote in
person or by pro0y in all meetings of
stockholders or members provided the
re/uisites are complied with (in writing,
signed, etc.!
This right cannot be denied
7o such provision for stock corporations,
cannot be allowed
Transferable
#hares of stock may be transferred by:
&. Endorsement by the owner or his attorney"in"
fact or other person legally authoriCed to
make the transfer
5. 2elivery of the certificate or certificates
$. To be binding against third persons, transfer
of shares should be recorded in the books of
the corporation.
HLP2009-3B Page 100
)embership shall be terminated in the
manner and for the causes provided in
the articles of incorporation or the by"
laws.
Termination of membership shall have
the effect of e0tinguishing all rights of a
member in the corporation or in its
property, unless otherwise provided in
the articles of incorporation or the by"
laws.
3. ,overning board (#ec. 35!
Board of Trustees
(i! number

;nless otherwise provided in the A8* or
the by"laws, the B8T may be more than
fifteen (&! in number as may be fi0ed
in their articles of incorporation or by"
laws

(ii! term
The term of office of one"third (&?$! of
their number shall e0pire every year@
and subse/uent elections of trustees
comprising one"third (&?$! of the board
of trustees shall be held annually and
trustees so elected shall have a term of
three ($! years.
Trustees thereafter elected to fill
vacancies occurring before the
e0piration of a particular term shall hold
office only for the une0pired period.
&4. election of officers (#ec. 35!
7o person shall be elected as trustee
Transfer of shares
E0ercise of appraisal right
Board of 2irectors
7ot less than but not more than &
Board of 2irectors or Trustees are elected
from among the holders of stocks, or where
there is no stock, from among the members
of the corporation who shall hold office for &
year and until their successors are elected
and /ualified.
*mmediately after their election, the directors
HLP2009-3B Page 101
unless he is a member of the
corporation.
;nless otherwise provided in the
articles of incorporation or the by"laws,
officers of a non"stock corporation may
be directly elected by the members.
8fficers elected by members
&&. place of meetings (#ec. 3$!
The by"laws may provide that the
members of a non"stock corporation
may hold their regular or special
meetings at any place even outside the
place where the principal office of the
corporation is located
That the place of meeting shall be
within the 1hilippines
of a corporation must formally organiCe the
election of: a president, who shall be a
director@ a treasurer who may or may not be
a director@ a secretary who shall be a
resident and citiCen of the 1hilippines, and
such other officers as may be provided for in
the By"laws
8fficers elected by board
)eetings of directors or trustees of
corporations may be held anywhere in or
outside of the 1hilippines, unless the by"laws
provide otherwise.
)eetings of stockholders shall be held at the
city or municipality where the principal office
of the corporation is located, and if
practicable in the principal office of the
corporation
B. Dist-i%3tin f assets in 'ase f #issl3tin (#ec. 3(!
All debts of the corporation must be paid, or ade/uately provided for.
All assets held under condition of being returned in case of dissolution should be
returned.
All assets held sub:ect to specific use (e.g., for charitable, charitable, educational,
scientific, etc.! must be transferred to other corporations, societies, or organiCations
having the same purpose as the corporation dissolved.
All other assets not included in the above, if any, shall be distributed to the members
in accordance with the stipulations in the articles of incorporation or the by"laws.
Any other remaining assets may then be distributed to such persons, societies,
organiCations or corporation, profit or non"profit, as may be specified in the plan of
distribution.
C. Plan f #ist-i%3tin f assets (#ection 3!
A plan providing for the distribution of assets, not inconsistent with the provisions of
this Title, may be adopted by a non"stock corporation in the process of dissolution in
the following manner:
HLP2009-3B Page 102
o The board of trustees shall, by ma:ority vote, adopt a resolution recommending a
plan of distribution and directing the submission thereof to a vote at a regular or
special meeting of members having voting rights.
o Britten notice setting forth the proposed plan of distribution or a summary thereof
and the date, time and place of such meeting shall be given to each member
entitled to vote, within the time and in the manner provided in this 'ode for the
giving of notice of meetings to members.
o #uch plan of distribution shall be adopted upon approval of at least two"thirds
(5?$! of the members having voting rights present or represented by pro0y at
such meeting.
CLOS0 CORPORATIONS
A. W"at a-e t"e -e<3i-e4ents f- t"e f-4atin f t"e 'lse '-$-atinsB (#ec. 3%!
A close corporation is one whose articles of incorporation provide that:
o All the corporationIs issued stock of all classes, e0clusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
e0ceeding twenty (54!@
o All the issued stock of all classes shall be sub:ect to one or more specified
restrictions on transfer permitted by this Title@ and
o The corporation shall not list in any stock e0change or make any public offering
of any of its stock of any class.
A corporation shall not be deemed a close corporation when at least two"thirds (5?$!
of its voting stock or voting rights is owned or controlled by another corporation which
is not a close corporation.
The provisions of this 'ode shall apply e0cept insofar as this Title otherwise
provides.
San 3uan Structural and Steel *abricatiors %s. C1
)otorich entered into agreement with #an Luan for the transfer of a parcel of +and to
latter.
#an Luan already paid downpayment
Bhen #an Luan was ready to pay the balance, )otorich refused to sell
)otorich contend that 7enita ,ruenberg9s, treasurer of )otorich, signature is not
sufficient to bind )otorich, and that the signature of Aeynaldo ,ruenberg, president
of )otorich is re/uired
7enita ,ruenberg is the spouse of Aeynaldo ,ruenberg and both owns 33.F%%= of
the shares of stock of the corporation
)otorich is not a close corporation
HLP2009-3B Page 103
o The mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding their separate personalities
o A narrow distribution of ownership does not of itself make a close corporation
o There are e0ceptional cases where an action by a director who is singly is the
controlling stockholder may be considered as a binding corporate act and a
board action is a mere formality. .owever, 7enita is not the sole controlling
stockholder.
B. W"at entities 4ay nt %e -9aniAe# as 'lse# '-$-atinsB (#ec. 3%!
Any corporation may be incorporated as a close corporation, e0cept:
o )ining
o 8il companies
o #tock e0changes
o Banks
o *nsurance companies
o 1ublic utilities
o Educational institutions
o 'orporations declared to be vested with public interest in accordance with the
provisions of this 'ode.
C. Distin93is" 'lse '-$-atins f-4 -e93la- '-$-atins
'+8#E '8A18AAT*87# #T8'> '8A18AAT*87#
&. )anagement ? Board Authority
There can be classification of directors
into one or more classes, each of whom
may be voted for and elected solely by a
particular class of stock@ and
The articles of incorporation of a close
corporation may provide that the
business of the corporation shall be
managed by the stockholders of the
corporation rather than by a board of
directors. #o long as this provision
continues in effect:
&. 7o meeting of stockholders need be
called to elect directors
5. ;nless the conte0t clearly re/uires
otherwise, the stockholders of the
corporation shall be deemed to be
There are no classification of board of
directors
'orporate 1owers devolved upon board of
directors whose powers are e0ecuted by
officers. 'annot provide that it be managed
by stockholders
Board of directors must be elected in a
stockholders meeting
#tockholders of a corporation are separate
and distinct from directors
HLP2009-3B Page 104
directors for the purpose of applying
the provisions of this 'ode
$. The stockholders of the corporation
shall be sub:ect to all liabilities of
directors.
The articles of incorporation may
likewise provide that all officers or
employees or that specified officers or
employees shall be elected or appointed
by the stockholders, instead of by the
board of directors.
5. )eetings
;nless the by"laws provide otherwise,
any action by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if:
&. Before or after such action is taken,
written consent thereto is signed by
all the directors@ or
5. All the stockholders have actual or
implied knowledge of the action and
make no prompt ob:ection thereto in
writing@ or
$. The directors are accustomed to
take informal action with the e0press
or implied ac/uiescence of all the
stockholders@ or
(. All the directors have e0press or
implied knowledge of the action in
/uestion and none of them makes
prompt ob:ection thereto in writing.
*f a directorIs meeting is held without
proper call or notice, an action taken
therein within the corporate powers is
deemed ratified by a director who failed
to attend, unless he promptly files his
written ob:ection with the secretary of the
corporation after having knowledge
8fficers must be elected by the Board of
2irectors
The directors or trustees shall not act
individually nor separately but as a body in a
lawful meeting. They will act only after
discussion and deliberation of matters before
them. 'ontracts entered into without a
formal board resolution does not bind the
corporation e0cept when ratified or when
ma:ority of the board has knowledge of the
contract and the contract benefited the
corporation.
Absence of a prompt ob:ection in writing
does not ratify acts done by directors without
a valid meeting. There must be e0press or
implied ratification.
E0press ratification may consist of a Board
Aesolution to that effect
*mplied ratification may consist of acceptance
of benefits from said unauthoriCed act while
having knowledge of said act
6ailure to give notice would render a meeting
voidable.
Attendance to a meeting despite want of
notice will be deemed implied waiver
All proceedings had and any business
transacted at any meeting of the
HLP2009-3B Page 105
thereof.
$. -oting ? Vuorum
The A8* may provide for a classification
of directors into one or more classes,
each of which may be voted for and
elected solely by a particular class of
stock.
The A8* may provide for a greater
/uorum or voting re/uirements in
meetings of stockholders or directors
than those provided in this 'ode.
(. 1re"emptive Aight
The pre"emptive right of stockholders in
close corporations shall e0tend to all
stock to be issued, including reissuance
of treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide
otherwise.
stockholders or members, if within the
powers or authority of the corporation, shall
be valid even if the meeting be improperly
held or called, provided all the stockholders
or members of the corporation are present or
duly represented at the meeting. (#ec &!
7o share may be deprived of voting rights,
e0cept 1referred or Aedeemable shares,
unless otherwise provided by the 'ode
There shall always be a class?series of
shares which have a '8)1+ETE -8T*7,
A*,.T#
EA'. #.AAE #.A++ BE EV;A+ *7 A++
AE#1E'T# T8 E-EA< 8T.EA #.AAE,
e0cept as otherwise provided in the A8*
6or Board of directors, the by"laws or A8*
can provide for a greater ma:ority in /uorum
6or stockholders, the A8* can provide for a
different percentage in /uorum
+imitations on the e0ercise of pre"emptive
right:
a. #uch pre"emptive right shall not e0tend to
shares to be issued in compliance with laws
re/uiring stock offerings or minimum stock
ownership by the public@
b. 7ot e0tend to shares to be issued in good
faith with the approval of the stockholders
HLP2009-3B Page 106
. Buy"back of #hares
Aestrictions on transfer of shares shall
not be more onerous than granting the
e0isting stockholders or the corporation
the option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated therein. *f upon the e0piration of
said period, the e0isting stockholders or
the corporation fails to e0ercise this
option to purchase, the transferring
stockholder may sell his shares to any
person
representing two"thirds (5?$! of the
outstanding capital stock, in e0change for
property needed for corporate purposes or
in payment of a previously contracted debt
c. #hall not take effect if denied in the Articles
of *ncorporation or an amendement thereto.
#tockholders may re/uire the corporation to
buy"back their shares under the following
circumstances only (Appraisal right!:
a. *n case any amendment to the articles of
incorporation which has the effect of:
changing or restricting the rights of any
stockholder or class of shares, or
authoriCing preferences in any respect
superior to those of outstanding shares
of any class, or
e0tending or shortening the term of
corporate e0istence
b. *n case of sale, lease, e0change, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the 'ode@ and
c. *n case of merger or consolidation
d. E0tension or shortening of the term of the
corporation (#ection $E!
e. 2iversion of funds of corporation from
primary purpose to secondary purpose
(#ection (&! 7ote: this is not in #ec. F&.
The corporation may buy"back shares of
stockholders sub:ect to the following
limitations (Treasury shares!:
a. There must be unrestricted retained
earnings
b. )ust be for a legitimate purpose
HLP2009-3B Page 107
%. Transferability
Aestrictions on the right to transfer
shares must appear in the A* and in the
by"laws as well as in the certificate of
stock otherwise the same shall not be
binding on any purchaser thereof in good
faith
E. Bithdrawal Aight
Any stockholder of a close corporation
may, for any reason, compel the said
corporation to purchase his shares at
their fair value, which shall not be less
than their par or issued value, when the
corporation has sufficient assets in its
books to cover its debts and liabilities
e0clusive of capital stock
Any stockholder of a close corporation
may, by written petition to the #E',
compel the dissolution of such
corporation whenever:
&. Any of acts of the directors, officers
or those in control of the corporation
is illegal, or fraudulent, or dishonest,
or oppressive or unfairly pre:udicial
to the corporation or any
stockholder, or
5. 'orporate assets are being
misapplied or wasted.
Aestrictions on the right to transfer not
allowed
#tockholders may re/uire the corporation to
buy"back their shares at fair value when the
'orporation has unrestricted Aetained
Earnings:
a. *n case any amendment to the articles of
incorporation which has the effect of:
changing or restricting the rights of any
stockholder or class of shares, or
authoriCing preferences in any respect
superior to those of outstanding shares
of any class, or
e0tending or shortening the term of
corporate e0istence
b. *n case of sale, lease, e0change, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the 'ode@ and
c. *n case of merger or consolidation
d. E0tension or shortening of the term of the
corporation (#ection $E!
e. 2iversion of funds of corporation from
primary purpose to secondary purpose
(#ection (&! 7ote: this is not in #ec. F&.
D. Dea#l'.s
&. 'eadloc+s, 2efined:
HLP2009-3B Page 108
The directors or stockholders are so divided respecting the management of the
corporationIs business and affairs
The votes re/uired for any corporate action cannot be obtained
The conse/uence is that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally
5. Aesolution of deadlocks
The #E', upon written petition by any stockholder, shall have the power to arbitrate
the dispute.
*n the e0ercise of such power, the 'ommission shall have authority to make such
order as it deems appropriate, including an order:
o 'ancelling or altering any provision contained in the articles of incorporation, by"
laws, or any stockholderIs agreement@
o 'ancelling, altering or en:oining any resolution or act of the corporation or its
board of directors, stockholders, or officers@
o 2irecting or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons part to the action@
o Ae/uiring 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@
o Appointing a provisional director@
o 2issolving the corporation@ or
o ,ranting such other relief as the circumstances may warrant.
$. 1rovisional 2irector
An impartial person who is neither a stockholder nor a creditor of the corporation or of
any subsidiary or affiliate of the corporation, and whose further /ualifications, if any,
may be determined by the 'ommission.
A provisional director is not a receiver of the corporation and does not have the title
and powers of a custodian or receiver.
A provisional director shall have all the rights and powers of a duly elected director of
the corporation, including the right to notice of and to vote at meetings of directors,
until such time as he shall be removed by order of the 'ommission or by all the
stockholders.
.is compensation shall be determined by agreement between him and the
corporation sub:ect to approval of the 'ommission, which may fi0 his compensation
in the absence of agreement or in the event of disagreement between the provisional
director and the corporation.
0. >ali#ity f -est-i'tins n t-ansfe- f s"a-es (#ection 3F!
Aestrictions on the right to transfer shares must appear in the:
o Articles of incorporation
o By"laws
HLP2009-3B Page 109
o 'ertificate of stock
8T.EAB*#E, the same shall not be binding on any purchaser in good faith.
#aid restrictions shall not be more onerous than granting the e0isting stockholders or
the corporation the option to purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated therein.
*f upon the e0piration of said period, the e0isting stockholders or the corporation fails
to e0ercise the option to purchase, the transferring stockholder may sell his shares to
any third person.
F. 0ffe'ts f iss3an'e - t-ansfe- f st'. in %-ea'" f <3alifyin9 'n#itins (#ection
33!
A person is conclusively presumed to have notice of the fact of ineligibility to be a
stockholder:
o *f stock of a close corporation is issued or transferred to any person who is not
entitled under any provision of the articles of incorporation to be a holder of
record of its stock, and
o *f the certificate for such stock conspicuously shows the /ualifications of the
persons entitled to be holders of record thereof
A person to whom stock is issued or transferred is conclusively presumed to have
notice of these facts:
o *f the articles of incorporation of a close corporation states the number of
persons, not e0ceeding twenty (54!, who are entitled to be holders of record of its
stock, and
o *f the certificate for such stock conspicuously states such number, and
o *f the issuance or transfer of stock to any person would cause the stock to be
held by more than such number of persons.
*f a stock certificate of any close corporation conspicuously shows a restriction on
transfer of stock of the corporation, the transferee of the stock is conclusively
presumed to have notice of the fact that he has ac/uired stock in violation of the
restriction, if such ac/uisition violates the restriction.
Bhenever any person to whom stock of a close corporation has been issued or
transferred has, or is conclusively presumed under this section to have, notice either
o That he is a person not eligible to be a holder of stock of the corporation, or
o That transfer of stock to him would cause the stock of the corporation to be held
by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or
o That the transfer of stock is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of stock in the name
of the transferee.
The provisions of subsection ((! shall not be applicable if the transfer of stock, though
contrary to subsections (&!, (5! or ($!, has been consented to by all the stockholders
of the close corporation, or if the close corporation has amended its articles of
incorporation in accordance with this Title.
The term PtransferP, as used in this section, is not limited to a transfer for value.
HLP2009-3B Page 110
The provisions of this section shall not impair any right which the transferee may
have to rescind the transfer or to recover under any applicable warranty, e0press or
implied.
@. A9-ee4ents %y st'."l#e-s (#ection &44!
&. Agreements by and among stockholders:
E0ecuted before the formation and organiCation of a close corporation,
#igned by all stockholders
#hall survive the incorporation of such corporation and shall continue to be valid and
binding between and among such stockholders, if such be their intent,
To the e0tent that such agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such agreements are contained,
e0cept those re/uired by this Title to be embodied in said articles of incorporation.
5. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in e0ercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
$. 7o provision in any written agreement signed by the stockholders, relating to any
phase of the corporate affairs, shall be invalidated as between the parties on the
ground that its effect is to make them partners among themselves.
(. A written agreement among some or all of the stockholders in a close corporation
shall not be invalidated on the ground that it so relates to the conduct of the business
and affairs of the corporation as to restrict or interfere with the discretion or powers of
the board of directors:
1rovided, That such agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this 'ode on directors.
. To the e0tent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. #aid stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably ade/uate liability insurance.
,. A4en#4ent f a-ti'les f in'-$-atin (#ection &4$!
Any amendment to the articles of incorporation which seeks to delete or remove any
provision re/uired by this Title to be contained in the articles of incorporation or to
reduce a /uorum or voting re/uirement stated in said articles of incorporation shall
not be valid or effective unless approved by the affirmative vote of at least two"thirds
(5?$! of the outstanding capital stock, whether with or without voting rights, or of such
greater proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.
DISSOL=TION
HLP2009-3B Page 111
A. W"at a-e t"e 1a-i3s 4et"#s f #issl1in9 '-$-atinsB (#ection &&E!
&. -oluntary
Ae/uirements where no creditors are affected (#ec. &&F!
o 2issolution may be effected by ma:ority vote of the board of directors or trustees,
and by a resolution duly adopted by the affirmative vote of the stockholders
owning at least two"thirds (5?$! of the outstanding capital stock or of at least two"
thirds (5?$! of the members.
o )eeting to be held upon call of the directors or trustees after publication of the
notice of time, place and ob:ect of the meeting for three ($! consecutive weeks in
a newspaper published in the place where the principal office of said corporation
is located@ and if no newspaper is published in such place, then in a newspaper
of general circulation in the 1hilippines, after sending such notice to each
stockholder or member either by registered mail or by personal delivery at least
thirty ($4! days prior to said meeting.
o A copy of the resolution authoriCing the dissolution shall be certified by a ma:ority
of the board of directors or trustees and countersigned by the secretary of the
corporation. The #ecurities and E0change 'ommission shall thereupon issue the
certificate of dissolution.
Ae/uirements where 'reditors are affected (#ec. &&3!
o 1etition for dissolution shall be filed with the #ecurities and E0change
'ommission.
o The petition shall be signed by a ma:ority of its board of directors or trustees or
other officers having the management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set forth all claims and
demands against it, and that its dissolution was resolved upon by the affirmative
vote of the stockholders representing at least two"thirds (5?$! of the outstanding
capital stock or by at least two"thirds (5?$! of the members at a meeting of its
stockholders or members called for that purpose.
o *f the petition is sufficient in form and substance, the 'ommission shall, by an
order reciting the purpose of the petition, fi0 a date on or before which ob:ections
thereto may be filed by any person, which date shall not be less than thirty ($4!
days nor more than si0ty (%4! days after the entry of the order. Before such date,
a copy of the order shall be published at least once a week for three ($!
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
1hilippines, and a similar copy shall be posted for three ($! consecutive weeks in
three ($! public places in such municipality or city.
o ;pon five (! dayIs notice, given after the date on which the right to file ob:ections
as fi0ed in the order has e0pired, the 'ommission shall proceed to hear the
petition and try any issue made by the ob:ections filed@ and if no such ob:ection is
sufficient, and the material allegations of the petition are true, it shall render
HLP2009-3B Page 112
:udgment dissolving the corporation and directing such disposition of its assets
as :ustice re/uires, and may appoint a receiver to collect such assets and pay the
debts of the corporation
5. *nvoluntary
#ec. 5 12 345"A
o 6raud in procuring its certificate of registration
o #erious misrepresentation as to what the corporation can or is doing to the great
pre:udice of or damage to the general public
o Aefusal to comply or defiance of any lawful order of the 'ommission restraining
commission of acts which would amount to a grave violation of its franchise
o 'ontinuous inoperation for a period of at least five years
o 6ailure to file by"laws within the re/uired period
o 6ailure to file re/uired reports in appropriate forms as determined by the
'ommission within the prescribed period
#ec. &(( B1 &%F
o -iolation by the corporation of any provision of the 'orporation 'ode
#ec. &4( B1 &%F
o *n case of a deadlock in a close corporation, and the #E' deems it proper to
order the dissolution of the corporation as the only practical solution to the
dispute
Vuo warranto proceedings, #ec. 5, Aule %% A8'
o Bhen it has offended against a provision of an Act for its creation and renewal
o Bhen it has forfeited its privileges and franchises by nonuser
o Bhen it has committed or omitted an act which amounts to a surrender of its
corporate rights, privileges or franchise
o Bhen it has misused a right, privilege, or franchise conferred upon it by law or
when it has e0ercised a right, privilege or franchise in contravention of law
$. 6ailure to organiCe and commence business within two years from incorporation
6ailure to formally organiCe and commence the transaction of its business or
construction of its works within two years
o Transacting business D implies a continuity of acts or dealings in the
accomplishment of the purpose for which the corporation was formed
o 6ormally organiCe includes not only the adoption of the by"laws but also the
establishment of the body which will administer the affairs of the corporation and
e0ercise its powers
'ommenced transaction of its business but subse/uently becomes continuously
inoperative for a period of at least fie years
(. E0piration of the term
#horten corporate term " by vote of 5?$ of the outstanding shares or 5?$ of the
members, the articles may be amended to shorten the term of the corporation
HLP2009-3B Page 113
Natinal A%a'a 1 P-e. 6: 7ational Abaca 'orp sued Apolonia 1ore to recover money advanced for the
purchase of hemp for the account of the corporation for which she failed to account therefor. 1ore in
defense, contends that she made an accounting of the advances received by her. T' held her accountable
and ordered to her to pay the corporation.
1ore moved to dismiss on the ground that the corporation had no legal capacity to sue, it having been
abolished by E8 $E5. 'orporation contends that the E8 also stipulates that it shall continue as a body
corporate for $ years from date of effectivity of the E8, for the purpose of defending and prosecuting suits
and enabling the Board of +i/uidators to settle and close all its affairs.
T' ordered corporation to amend the complaint by including the Board of +i/uidators as co"party plaintiff,
otherwise case shall be dismissed. The corporation fails to submit amended complaint, and the T'
dismisses case. 'orporation in seeking reconsideration, said that it was not able to submit the amended
complaint on time because of the negligence of the filing clerk, )s 8campo, and that it was lost despite
diligent efforts to look for it. T' denies motion.
*: B?n an action, commenced within $ years after the abolition of the corporation, may be continued by the
same after e0piration of the period. 78
B?m the T' was correct in dismissing motion. 78. should have granted the motionK

.: ,A: pending actions by or against a corporation are abated upon the e0piration of the period allowed by
law for li/uidation. The old corpo law contains no provision authoriCing a corporation after $ years from
e0piration of its lifetime, to continue in its corporate name actions instituted by it within a period of $ years. *t
provides that it will continue as a body corporate for $ years after the time when it would have been
dissolved, for purposes of prosecuting and defending suit by or against it. 2uring the time which the
corporation, through its officers, may conduct the li/uidation of assets and sue and be sued as a corporation
is limited to $ years from the time period of dissolution commences, but that there is no time limit within
which trustees must complete a li/uidation placed in their hands. The conveyance to the trustees must be
made within the $ year period. *t may be found impossible to complete the work of li/uidation within the $
year period or to reduce dispute claims to :udgment. #uits by or against a corporate abate when it ceased to
be an entity capable of suing or being sued@ but trustees to whom the corporate assets have been conveyed
pursuant to the authority of the code may sue and be sued as such in all matters connected with the
li/uidation. The effect of conveyance is to make the trustees legal owners of the property conveyed, sub:ect
to the beneficial interest therein of creditors and #.s. The complete loss of Abaca9s corporate e0istence
after the e0piration of $ year period is what impelled the creation of the Board of +i/uidators, to continue the
management of pending matters.
B. Li<3i#atin (#ec. &55!
The winding up and turning assets of corporation into cash for distribution
A li/uidation proceeding is a proceeding in rem so that all other interested persons
whether known to the parties or not may be bound by such proceedings
6or how long may the li/uidation of a corporation be undertakenQ
o Every corporation whose charter e0pires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate e0istence for other purposes is
terminated in any other manner, shall nevertheless be continued as a body
corporate for three ($! years after the time when it would have been so dissolved
o .owever, in case the corporate assets are conveyed to a trustee or a receiver
appointed by the #E', the three year limitation will not apply
o Although the three year period may have e0pired, it does not necessarily follow
that a creditor who was unable to collect his claim before three years would lose
is rights. *t is still possible for him to sue the trustee, if there be one, or if the
HLP2009-3B Page 114
circumstances so warrant, to follow the assets in the hands of the stockholders
who nay have received the same as li/uidating dividends
Bhat could and should be done during the period of li/uidationQ
o 6or the purpose of prosecuting and defending suits by or against it and enabling
it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which
it was established.
o E0cept by decrease of capital stock and as otherwise allowed by this 'ode, no
corporation shall distribute any of its assets or property e0cept upon lawful
dissolution and after payment of all its debts and liabilities.
Bhat happens if an asset cannot be distributed to the person entitled to itQ
o ;pon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Bho may undertake the li/uidation of a corporateQ
o At any time during said three ($! years, the corporation is authoriCed and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. 6rom 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.
C. ?et"#s f li<3i#atin:
by the corpo itself through the board of directors D the board of directors serve as
trustees
conveyance of all corporate assets to trustees who will take charge of the li/uidation
li/uidation by a receiver who may have been appointed by the #E' upon its
decreeing the dissolution of the corporation. $"year period does not apply because
the corporation is substituted by the receiver. .owever, the mere appointment of a
receiver, without anything more does not result in the dissolution of the corporation
nor bar it from the e0istence of its corporate rights
C"ina Ban.in9 C-$-atin 1. ?i'"elin D C. 6: ,eorge 896arrel M 'ie *nc is a domestic corporation
acting as agent and representative of the ) )ichelin M 'ie, a foreign corporation engaged in the sale and
distribution of )ichelin tires. )ichelin decided to discontinue their business relations, and it was discovered
that 8 6arrel failed to account for an amount representing the price of tires sold by the latter. )ichelin claims
the money was disposed by 8 6arrel for its own use and benefit and without the authority or consent of
)ichelin. ,aston 896arrel (the person! and #ancheC e0ecuted a mortgage on the house of 896arrel and
shares owned by both to guarantee payment of the amount to the )ichelin, but left a balance which the
latter seeks to recover. The board of 896arrel filed a petition for its dissolution and sought the appointment of
,aston as receiver and li/uidator, which was granted by T'. )ichelin filed its claim against 896arrel 'orp
with a prayer that its claim be allowed as a preferred one against the latter. T' grants motion of )ichelin.
7obody e0cept )ichelin and ,aston was notified of the order. 'hina Bank intervened and moved that
)ichelin9s claim be allowed as an ordinary one under the *nsolvency +aw and sought the nullification of the
T' orders.
.: 'laims against a corporation in the hands of a receiver should not be approved and paid without some
formal and regular proceeding after a reasonable opportunity is given to all parties in interest.
HLP2009-3B Page 115
The #' held that the provisions of the *nsolvency +aw should operate. There is no reason for the
corporation to resort to the court for a decree of voluntary dissolution. *f the corporation was under such a
financial condition as alleged, and did not desire to continue doing business, there is no necessity for :udicial
intervention in the winding up of affairs coupled with the appointment for a receiver to deal with creditors as
though they were creditors of an insolvent corporation. ;nder the old corpo law, with respect to decrees of
dissolution upon voluntary application, the court may appoint receivers to collect and take charge of the
assets. *t is permissive and not mandatory, because in cases of voluntary dissolution there is no occasion
for the appointment of a receiver e0cept under special circumstances. #uch discretion on the part of the
court to appoint must be e0ercised with caution. *T does not empower the court to hear and pass upon the
claims of creditors of the corporation at first hand. *n such cases, the receiver does not act as a receiver of
an insolvent corporation. #ince li/uidation consists of collecting all that is due the corporation, all claims
must be presented for allowance to the receiver or trustees during winding up, within $ years as provided in
'orpo +aw. The rulings of the receiver are sub:ect to :udicial review by the court which appointed him.
The normal method is for directors?officers to have charge of the winding up, though there is the alternative
method of assigning property of the corporation to trustees. The law authoriCing voluntary dissolutions are
generally held to apply only to dissolutions brought about by the #.s themselves.
'hina Bank9s motion was filed &$ months after the decree of dissolution was entered, thus the motion was
flied on time to have its claim reviewed by the court. The appointment of ,aston as the receiver, who was
also the principal promoter of the corporation and at one time the ma:ority #., president, and ,), lends
itself to serious suspicion. .is administration of the business left much to be desired and that he alone ought
to be blamed for the shortage claimed by )ichelin, but to save himself he made the corporation shoulder the
burden of obligations in e0change for a simulated conveyance of his house and shares to the corporation.
8nce delin/uent, ,aston resorted to a :udicial proceeding of voluntary dissolution in an attempt to settle
)ichelin9 claim and to free himself from any liability, and allowed the claim to be a preferred claim without
informing or notifying interested parties, such as 'hina Bank, which also had a claim.
)ichelin9s claim cannot be allowed as a preferred claim, because the merchandise was no longer in the
corporation9s possession. The rubber tires consigned were to be sold on order, and the claim for the
advance seems to be in the nature of a current account between the two companies more than anything
else.

Re$3%li' 1 ?a-s4an De1t C. 6: )arsman is a lumber company. An investigation was conducted and
certain ta0es due from logs produced from its timber concession granted by the government. '*A demanded
payment representing three assessments made on forest charges, deficiency sales ta0 and other
surcharges and penalties. 'ounsel for the corporation re/uested for reinvestigation, but was denied unless
the legal re/uirements for such a re/uest were complied with and payment of Z of total assessments were
made, and to furnish a bond to guarantee payment of the balance. The corporation repeated failed to
comply with the conditions set by the '*A, which was constrained to make e0tra:udicial demand for the ta0
liabilities. )arsman was then e0tra:udicially dissolved. B*A files a complaint for its demands after more than
$ years following the corporation9s dissolution, and the T' sentenced the corporation to pay the amount
demanded by '*A.
.: T' did not err in holding that the period to /uestion the ta0 assessments had already e0pired. By its own
omission, the corporation made it possible for the B*A to act on its own )A. )ere filing of a motion does not
suspend the running of the period for collection of the ta0, which implies that any assessment made by the
B*A is supposed to be final and e0ecutory as to the ta0payer concerned.
*: w?n present action is barred by prescription, in light of the fact that the corporation law allows corporations
to continue only for $ years after its dissolution, for the purpose of presenting or defending suits by or
against it, and to settle its affairs. no
.: #tress given by )arsman on the e0tinction of corporate personality by virtue of its e0tra":udicial
dissolution is misplaced. The assessments against the corporation were made before its dissolution and not
later than % months after dissolution. Thus the government became the creditor of the corporation before the
completion of its dissolution. Burgess the li/uidator became in law the trustee of all its assets for the benefit
of all person interested, including the government. *t is immaterial that the present action was filed after
e0piration of the $ year period, because the assessment definitely established the government as a creditor
of the corporation for whom the li/uidator is supposed to hold corporate assets.
'ode provides for a $"year period for continuation of the corporate e0istence for purposes of li/uidation
But there is nothing in the provision which bars an action for recovery of debts of the corporation against
the li/uidator himself, after the lapse of the $"year period
HLP2009-3B Page 116
Tan Tin9 Bi 1 CIR. 6: Tan Tiong Bio et al are incorporators and directors (some are officersJ1resident
and treasurer! of the 'entral #yndicate. The company realiCed a net profit of close to 1$44>, and sale of
goods was the only transaction undertaken by it. B*A sues the Tan Tiong et al for deficiency sales ta0es and
surcharges on surplus goods purchased by the corporation from the 6oreign +i/uidation 'ommission.
'orporation was dissolved, and Tan Tiong and company substituted themselves as parties, thereby
becoming successors"in"interests in the corporate assets after li/uidation. T' rules ifo B*A, and Tan Tiong
et al appeals, claiming that they cannot be held liable for ta0 liability there being no law authoriCing the
government to proceed against #.s of a defunct corporation as transferees of the corporate assets upon
li/uidation. *f they were liable, it is only to the e0tent of the benefits derived by them, and that the action is
barred by prescription due to the $"year limit in the corpo +aw.
*: B?n the sales ta0 can be enforced against the corporation9s successors"in"interest, even if corporation has
been dissolved by e0piration of corporate e0istence.
""<E#

.: Tan Tiong, as substitute parties"in"interest, cannot now be heard to complain that they were being held
liable for the ta0 due from the corporation whose representation they assumed and whose assets are
distributed to them.
The creditor of a dissolved corporation may follow its assets once they passed into the hands of a #.. The
dissolution of a corporation does not e0tinguish debts due or owing to it. A creditor of a dissolved corporation
may follow its assets, as in the nature of a trust fund, into the hands of the #.s. The hands of government
cannot collect ta0es from a defunct corporation, it loses thereby none of its rights to assess ta0es due, and
to collect the ta0es due from the corporation from persons who by reason of transactions with the
corporation, hold property against which the te0 may be enforced. 'ourt ruled that the net profit remained
intact and was distributed among the #.s immediately after sale of surplus. Tan Tiong et al are thus the
beneficiaries of the defunct corporation and should be held liable to pay the ta0es, but only in proportion to
their respective shares in the distribution of assets.
Even after the $ year period of li/uidation, corporate creditors can still pursue their claims against
corporate assets against the officers or #.s who have taken over the properties of the corporation
#' held that the #tate cannot insist on making ta0 assessments against a corporation that no longer
e0ists and then turn around and oppose the appeal /uestioning the legality of the assessment precisely
on the same ground that the corporation is non"e0istent
The remedy of corporate creditors after the $"year period is to race where the corporate assets have
gone, wherever they rested, be he a #. or a non"#.. 'ause of action is to file an action against that
person who has control over the corporate assets.
D. 0ffe'ts f Dissl3tin; win#in9 3$ an# li<3i#atin:
loss of :uridical personality
o corporation loses its :uridical personality and can no longer lawfully continue its
business e0cept for the purpose of winding up
o cannot even be a de facto corporation, hence sub:ect to collateral attack
o cannot enter into new contracts which would have the effect of continuing the
business
e0ecutory contracts
o 7o right or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subse/uent dissolution of said corporation or
by any subse/uent amendment or repeal of this 'ode or of any part thereof. (#ec
&(!
HLP2009-3B Page 117
o The prevailing view is that e0ecutory contracts are not e0tinguished. .owever,
some authorities make an e0ception of contracts for personal services such as
employment contracts of officers and employees where the dissolution is
involuntary or the result of merger or consolidation in which case the contracts
are deemed terminated.
distribution of assets after payment of debts
o A corporation cannot distribute any of its assets or property e0cept upon lawful
dissolution and only after payment of all its debts and liabilities, after which the
remaining assets must be distributed to the stockholders in proportion to their
interest in the corporation.
o E0ceptions:
decrease in c?s resulting in a surplus which can then be distributed to
stockholders provided no creditors are pre:udiced
as otherwise allowed by the code:
Appraisal right
2eadlock in a close corporation
#. of a close corporation may compel corporation to buy his shares at fair
value
'orporation repurchases shares for any legitimate corporate purpose
'orporation validly distributes dividend
+i/uidating dividends D share of #. in assets upon li/uidation
Cleente %s. C1
1laintiffs sought to be declared owners of a parcel of land owned by #ociedad
1opular 'alambena, a #ociedad Anonima. 1laintiffs are stockholders of the latter
corporation
.owever, there was no proof that ta0es were paid by the #ociedad and neither were
there efforts e0erted by the latter to consolidate title over the property. 7o
e0planation was offered as to how and when the property came into the possession
of the defendants
1laintiffs were not able to come up with any evidence to substantiate their claim of
ownership of the assets.
*f #ociedad has long been defunct, plaintiffs should have taken appropriate measures
in a proper forum for a peremptory settlement of its affairs
The termination of the life of a :uridical entity does not by itself cause the e0tinction or
diminution of the right and liabilities of such entity nor those of its owners and
creditors.
*f the three year e0tended life has e0pired without a trustee or receiver having been
e0pressly designated by he corporation itself within that period, the board of directors
or trustees itself may be permitted to so continue as GTrusteesH by legal implication to
compete the corporate li/uidation.
#till 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
HLP2009-3B Page 118
the #E', which has primary and sufficiently broad :urisdiction in matters of this
nature, for working out a final settlement of the corporate concerns.
Reburiano v CA and Pepsi cola Bottling Company
Aeburiano was ordered to pay 1epsi a sum of money
1ursuant to said :udgment, a writ of e0ecution was issued by Trial 'ourt
1rior to the promulgation of the decision, 1epsi amended its Articles of *ncorporation
shortening the term of its e0istence
Bhen the trial was conducted, decision rendered, and writ of e0ecution issued, 1epsi
was no longer in e0istence
A dissolved and non"e0isting corporation could still be represented by a lawyer
o # &55 'orpo code D GEvery corporation whose charter e0pires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate e0istence
for other purposes is terminated in any other manner shall nevertheless be
continued as a body corporate for $ years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to dispose of and convey its
property, and to distribute its assets, but not for the purpose of continuing the
business for which it was established.H
o At any time during the $ years, corpo is empowered to convey its properties to
trustees
o Trustees may commence a suit which can proceed to final :udgment even
beyond the three"year period. 7o reason can be conceived why a suit already
commenced by the corporation itself during its e0istence, not by a mere trustee
who, by fiction, merely continues the legal personality of the dissolved
corporation should not be accorded similar treatment allowed D to proceed to
final :udgment and e0ecution thereof
FOR0I@N CORPORATION
A. F-ei9n '-$-atin (#ection &5$!
6oreign corporation is one formed, organiCed or e0isting under any laws other than
those of the 1hilippines and whose laws allow 6ilipino citiCens and corporations to do
business in its own country or state.
B. Ne'essity f %tainin9 a li'ense t # %3siness:
The reason for the license is to sub:ect the foreign corporation doing business in the
1hilippines to the :urisdiction of the courts, otherwise a foreign corporation illegally
doing business here may successfully though unfairly plead such neglect or illegal
act so as to avoid service and thereby impugn the :urisdiction of the local courts.
HLP2009-3B Page 119
C. MDin9 %3sinessN (#ec. $(d! AA E4(5!
#oliciting orders
#ervice contracts
8pening offices, whether called liason offices or branches
Appointing representatives or distributors domiciled in the 1hilippines or who in any
calendar year stay in the country for a period or periods totaling &F4 days or more
1articipating in the management, supervision or control of any domestic business,
firm, entity or corporation in the 1hilippines
Any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that e0tent, performance normally incident to , and in progressive
prosecution of, commercial gain or of the purpose and ob:ect of the business
organiCation
*t shall not include:
o )ere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business and?or the e0ercise of such rights as such investor
o .aving a nominee director or officer to represent its interests in such
corporations
o Appointing a representative or distributor domiciled in the 1hilippines which
transacts business in its own name and for its own account
2. Re<3i-e4ents f- t"e iss3an'e f a li'ense
&. 2ocumentary re/uirements (#ec. &5!
A foreign corporation applying for a license to transact business in the 1hilippines
shall submit to the #E':
o 'opy of its articles of incorporation and by"laws, certified in accordance with law
o Their translation to an official language of the 1hilippines, if necessary.
The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
o The date and term of incorporation@
o The address, including the street number, of the principal office of the corporation
in the country or state of incorporation@
o The name and address of its resident agent authoriCed to accept summons and
process in all legal proceedings and, pending the establishment of a local office,
all notices affecting the corporation@
o The place in the 1hilippines where the corporation intends to operate@
o The specific purpose or purposes which the corporation intends to pursue in the
transaction of its business in the 1hilippines: 1rovided, That said purpose or
purposes are those specifically stated in the certificate of authority issued by the
appropriate government agency@
o The names and addresses of the present directors and officers of the
corporation@
HLP2009-3B Page 120
o A statement of its authoriCed capital stock and the aggregate number of shares
which the corporation has authority to issue, itemiCed by classes, par value of
shares, shares without par value, and series, if any@
o A statement of its outstanding capital stock and the aggregate number of shares
which the corporation has issued, itemiCed by classes, par value of shares,
shares without par value, and series, if any@
o A statement of the amount actually paid in@ and
o #uch additional information as may be necessary or appropriate in order to
enable the #ecurities and E0change 'ommission to determine whether such
corporation is entitled to a license to transact business in the 1hilippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a duly e0ecuted certificate under oath
by the authoriCed official or officials of the :urisdiction of its incorporation, attesting to
the fact that:
o The laws of the country or state of the applicant allow 6ilipino citiCens and
corporations to do business therein
o The applicant is an e0isting corporation in good standing.
*f such certificate is in a foreign language, a translation thereof in English under oath
of the translator shall be attached thereto.
The application shall likewise be accompanied by a statement under oath of the
president or any other person authoriCed by the corporation, showing to the
satisfaction of the #E' and other governmental agency in the proper cases that the:
o Applicant is solvent and in sound financial condition, and
o #etting forth the assets and liabilities of the corporation as of the date not
e0ceeding one (&! year immediately prior to the filing of the application.
6oreign banking, financial and insurance corporations shall, in addition to the above
re/uirements, comply with the provisions of e0isting laws applicable to them.
*n the case of all other foreign corporations, no application for license to transact
business in the 1hilippines shall be accepted by the #E' without previous authority
from the appropriate government agency, whenever re/uired by law.
5. 2eposit re/uirements (#ec. &5%!
;pon issuance of the license, such foreign corporation may commence to transact
business in the 1hilippines 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 'ode or other special laws.
Bithin si0ty (%4! days after the issuance of the license to transact business in the
1hilippines, the license, e0cept foreign banking or insurance corporation, shall
deposit with the #E' for the benefit of present and future creditors of the licensee in
the 1hilippines, securities satisfactory to the #E', consisting of :
o Bonds or other evidence of indebtedness of the ,overnment of the 1hilippines,
its political subdivisions and instrumentalities, or of government"owned or
controlled corporations and entities,
HLP2009-3B Page 121
o #hares of stock in Pregistered enterprisesP as this term is defined in Aepublic Act
7o. &F%,
o #hares of stock in domestic corporations registered in the stock e0change, or
o #hares of stock in domestic insurance companies and banks, or
o Any combination of these kinds of securities,
Bith an actual market value of at least one hundred thousand (1&44,444.! pesos@
1rovided, however, That within si0 (%! months after each fiscal year of the licensee,
the #E' shall re/uire the licensee to deposit additional securities e/uivalent in actual
market value to two (5=! percent of the amount by which the licenseeIs gross income
for that fiscal year e0ceeds five million (1,444,444.44! pesos.
The #E' shall also re/uire deposit of additional securities if the actual market value
of the securities on deposit has decreased by at least ten (&4=! percent of their
actual market value at the time they were deposited.
The #E' may at its discretion release part of the additional securities deposited with
it if the gross income of the licensee has decreased, or if the actual market value of
the total securities on deposit has increased, by more than ten (&4=! percent of the
actual market value of the securities at the time they were deposited.
The #E' may, from time to time, allow the licensee to substitute other securities for
those already on deposit as long as the licensee is solvent. #uch licensee shall be
entitled to collect the interest or dividends on the securities deposited.
*n the event the licensee ceases to do business in the 1hilippines, the securities
deposited as aforesaid shall be returned, upon the licenseeIs application therefor and
upon proof to the satisfaction of the #E' that the licensee has no liability to 1hilippine
residents, including the ,overnment of the Aepublic of the 1hilippines.

$. Appointment of resident agent (#ec. &5F!
A resident agent may be either an:
o *ndividual residing in the 1hilippines of good moral character and of sound
financial standing
o 2omestic corporation lawfully transacting business in the 1hilippines:
The #E' shall re/uire as a condition precedent to the issuance of the license to
transact business in the 1hilippines by any foreign corporation that such corporation
file with the #E' a written power of attorney:
o 2esignating some person who must be a resident of the 1hilippines, on whom
any summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and
o 'onsenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authoriCed officers of the foreign corporation at its
home office.
Any such foreign corporation shall likewise e0ecute and file with the #E' an
agreement or stipulation, e0ecuted by the proper authorities of said corporation, in
form and substance as follows:
o PThe (name of foreign corporation! does hereby stipulate and agree, in
consideration of its being granted by the #ecurities and E0change 'ommission a
license to transact business in the 1hilippines, that if at any time said corporation
HLP2009-3B Page 122
shall cease to transact business in the 1hilippines, or shall be without any
resident agent in the 1hilippines on whom any summons or other legal processes
may be served, then in any action or proceeding arising out of any business or
transaction which occurred in the 1hilippines, service of any summons or other
legal process may be made upon the #E' and that such service shall have the
same force and effect as if made upon the duly"authoriCed officers of the
corporation at its home office.P
Bhenever such service of summons or other process shall be made upon the #E',
the 'ommission shall, within ten (&4! 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 'ommission shall be necessary part of and shall
complete such service. All e0penses incurred by the 'ommission for such service
shall be paid in advance by the party at whose instance the service is made.
*n case of a change of address of the resident agent, it shall be his or its duty to
immediately notify in writing the #E' of the new address.
(. #ummary: Ae/uisites for the *ssuance of +icense
The #E' will issue a license to the foreign corporation to do business in the
1hilippines, provided the following conditions are met:
o Appointment of a Aesident Agent:
Either a 6ilipino or domestic corporation@ and
1ower of Attorney to #E' to receive process
o )ust prove that the foreign corporationIs country grants reciprocal rights to
6ilipinos and 1hilippine corporation.
o Establish an office in the 1hilippines
o Bring in its assets
o ;ndertaking that 6ilipino creditors will be preferred in the event of insolvency
o 7otice of si0 (%! months should there be desire to terminate operations
o 6ranchise and patents must remain in the 1hilippine, if this is possible
o )ust file a bond of 1&44,444 which may be in the following form:
surety bond
government securities
securities of political subdivisions
shares of stock of registered enterprises with the #E'
shares of stock of any corporation being sold at the stock e0change
o 1rovided, that within si0 (%! months after each fiscal year, the #E' shall re/uire
the deposit of additional securities e/uivalent to 5= of the amount in e0cess of
144,444 of the gross income. N#ec. &5, &5%, 'orporation 'odeO
HLP2009-3B Page 123
0. W"at laws a-e a$$li'a%le t f-ei9n '-$-atins li'ense# t t-ansa't %3siness in
t"e P"ili$$inesB ( #ec. &53!
Any foreign corporation lawfully doing business in the 1hilippines shall be bound by
all laws, rules and regulations applicable to domestic corporations of the same class,
EU'E1T such only as provide for the:
o 'reation, formation, organiCation or dissolution of corporations
o Those which fi0 the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation.
F. W"at a-e t"e 'nse<3en'e f #in9 %3siness in t"e P"ili$$ines wit"3t a li'enseB
(#ec. &$$!
7o foreign corporation transacting business in the 1hilippines 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 1hilippines@
#uch corporation may be sued or proceeded against before 1hilippine courts or
administrative tribunals on any valid cause of action recogniCed under 1hilippine
laws.
#hall not be permitted to maintain or intervene in any action, suit or proceeding in any
court or administrative agency in the 1hilippines@ but such corporation may be sued
or proceeded against before 1hilippine courts or administrative tribunals.
*n addition, #ec. &$( makes it a ground for revocation of license when a foreign
corporation transacts business in the 1hilippines as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do business in the
1hilippines.
#tatus of 'ontracts entered into without the re/uisite license
o The failure to obtain a license by a foreign corporation doing business in the
1hilippines does not affect the validity of contracts entered into by such foreign
corporation, but merely removes its legal standing to sue in local tribunals.
.owever, the defect may be cured by subse/uent registration by the foreign
corporation to obtain the necessary license to do business in the 1hilippines.
N.ome *nsurance 'o. v. Eastern #hipping +ines, &5$ #'AA (5( (&3F$!O
o Although the law does not declare as void or invalid the contracts entered into by
a foreign corporation with a local corporation without the former first securing a
license or certificate to do business in the 1hilippines, the parties in this case
cannot obtain relief on the contracts entered into because they are charged with
the knowledge of the e0isting law at the time they entered into such contract and
at the time it is to be operative. NTop"Beld )fg. v. E'E2, #.A., &$F #'AA &&F
(&3F!O
o .owever, in the case of )errill +ynch 6utures, *nc. v. 'A, 5&& #'AA F5( (&335!,
the #' held that although the foreign corporation has engaged in business in the
1hilippines without a license, the dismissal of the suit would not be proper on the
ground that if the local investors knew that the foreign corporation had no license
to do business, then they are estopped from using the lack of license to avoid
their obligations.
HLP2009-3B Page 124
+egal standing of foreign corporations to sue on their corporate names, trade names,
and trademarks
o A foreign corporation although not doing business in the 1hilippines has a
personality to sue to oppose the registration of a trademark when it is shown that
its products using such trademark are being imported and sold in the 1hilippines,
pursuant to the terms of AA &%%. N,eneral ,arments v. 2irector of 1atents, (&
#'AA 4 (&3E&!O
o A foreign corporation has a right to maintain an action in 1hilippine courts even if
it is not licensed to do business and is not actually doing business on its own
therein to protect its corporate and trade names, since it is a property right in
rem, which it may assert to protect against all the world, in any of the courts of
the world""even in :urisdiction where it does not transact business"":ust the same
as it may protect its tangible property, against trespass or conversion.
o This is consonance with the 'onvention of the ;nion of 1aris for the 1rotection of
*ndustrial 1roperty to which the 1hils. is a party. Article F thereof provides, PA
trade name shall be protected in all the countries of the ;nion without the
obligation of filing or registration, whether or not it forms part of the trademark.P
The mandate is contained in AA &%%, or the Trademark +aw. N'onverse Aubber
'orp. v. ;niversal Aubber 1roducts, &(E #'AA &( (&3FE!O
@. A$$li'atin t e8istin9 f-ei9n '-$-atins (#ection &53!
Every foreign corporation which on the date of the effectivity of this 'ode is
authoriCed to do business in the 1hilippines under a license issued to it, shall
continue to have such authority under the terms and condition of its license, sub:ect
to the provisions of this 'ode and other special laws.
,. A4en#4ents t a-ti'les f in'-$-atin - %y-laws f f-ei9n '-$-atins
(#ection &$4!
Bithin si0ty (%4! days after the amendment becomes effective, file with the #E', and
in the proper cases with the appropriate government agency, a duly authenticated
copy of the articles of incorporation or by"laws, as amended, indicating clearly in
capital letters or by underscoring the change or changes made, duly certified by the
authoriCed official or officials of the country or state of incorporation.
The filing thereof shall not of itself enlarge or alter the purpose or purposes for which
such corporation is authoriCed to transact business in the 1hilippines.
I. A4en#e# li'ense (#ection &$&!
A foreign corporation authoriCed to transact business in the 1hilippines shall obtain
an amended license in the event it :
o 'hanges its corporate name, or
o 2esires to pursue in the 1hilippines other or additional purposes
By submitting an application therefor to the #E', favorably endorsed by the
appropriate government agency in the proper cases.
HLP2009-3B Page 125
J. ?e-9e- - 'nsli#atin in1l1in9 a f-ei9n '-$-atin li'ense# in t"e P"ili$$ines (#ection &$5!
8ne or more foreign corporations authoriCed to transact business in the 1hilippines
may merge or consolidate with any domestic corporation or corporations if :
o #uch is permitted under 1hilippine laws and by the law of its incorporation
o The re/uirements on merger or consolidation as provided in this 'ode are
followed
Bhenever a foreign corporation authoriCed to transact business in the 1hilippines
shall be a party to a merger or consolidation in its home country or state as permitted
by the law of its incorporation, such foreign corporation shall, within si0ty (%4! days
after such merger or consolidation becomes effective, file with the #E', and in proper
cases with the appropriate government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or officials of the country or
state under the laws of which merger or consolidation was effected
1rovided, however, that if the absorbed corporation is the foreign corporation doing
business in the 1hilippines, the latter shall at the same time file a petition for
withdrawal of its license.
E. Re1'atin f li'ense (#ection &$(!
Bithout pre:udice to other grounds provided by special laws, the license of a foreign
corporation to transact business in the 1hilippines may be revoked or suspended by
the #E' upon any of the following grounds:
o 6ailure to file its annual report or pay any fees as re/uired by this 'ode@
o 6ailure to appoint and maintain a resident agent in the 1hilippines as re/uired by
this Title@
o 6ailure, after change of its resident agent or of his address, to submit to the
#ecurities and E0change 'ommission a statement of such change as re/uired
by this Title@
o 6ailure to submit to the #ecurities and E0change 'ommission an authenticated
copy of any amendment to its articles of incorporation or by"laws or of any
articles of merger or consolidation within the time prescribed by this Title@
o A misrepresentation of any material matter in any application, report, affidavit or
other document submitted by such corporation pursuant to this Title@
o 6ailure to pay any and all ta0es, imposts, assessments or penalties, if any,
lawfully due to the 1hilippine ,overnment or any of its agencies or political
subdivisions@
o Transacting business in the 1hilippines outside of the purpose or purposes for
which such corporation is authoriCed under its license@
o Transacting business in the 1hilippines as agent of or acting for and in behalf of
any foreign corporation or entity not duly licensed to do business in the
1hilippines@ or
o Any other ground as would render it unfit to transact business in the 1hilippines.
(n!
HLP2009-3B Page 126
L. Iss3an'e f 'e-tifi'ate f -e1'atin (#ection &$!
;pon the revocation of any such license to transact business in the 1hilippines, the
#ecurities and E0change 'ommission shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate government agency in the
proper cases.
The #ecurities and E0change 'ommission shall also mail to the corporation at its
registered office in the 1hilippines a notice of such revocation accompanied by a
copy of the certificate of revocation.
?. Wit"#-awal %y a f-ei9n '-$-atin (#ection &$%!
*f a foreign corporation duly licensed to do business desires to withdraw, it must file a
petition for withdrawal, and must meet the following re/uirements:
o All claims accrued in the 1hilippines must be settled
o All ta0es must be paid
1etition must be published once a week for three ($! consecutive weeks. N#ec. &$%,
'orporation 'odeO
Le C"e4ise La'ste 1 Fe-nan#eA. 6: +a 'hemise +acoste is a 6rench corporation and not doing business
in the A1, and is also the actual owner of the trademarks +acoste and 'rocodile 2evice. .emandas M 'o
secured a registration of the trademarks in its name from the 1hil 1atent 8ffice of the trademarks owned by
+e 'hemise. .emandas then assigned all its rights title and interest in the trademark to ,obindram
.emandas. +e 'hemise filed its own application for registration of the trademarks 'rocodile 2evice and
+acoste, and the 1atent 8ffice approved the former was but re:ected the latter. +e 'hemise then filed a
letter"complaint with the 7B* alleging acts of unfair competition committed by .emandas and re/uesting
their apprehension and prosecution. The 7B* secured search warrants, but .emandas files a )TV the
warrant alleging that his trademarks is different from +e 'hemise. #earch warrants were recalled and items
seiCed returned to .emandas. +e 'hemise /uestions the /uashal.
*: B?n petitioner has no legal capacity to sue because it is not doing business in the 1hilippines and is not
licensed to do so, and that it failed to allege certain facts in its petition relative to its capacity to sue.
.: *n +eviton case, which is relied on by .emandas, it was ruled that it is not enough for a foreign
corporation to merely allege that it is a foreign corporation. 'ompliance with the re/uirements under the law
or statute from which it seeks relief and upon which the grounds of the illegal act are alleged, is necessary. *t
is therefore necessary for the foreign corporation to comply with these re/uirements or aver why it should be
e0empted from them. The foreign corporation may have the right to sue before A1 courts, but our rules on
pleadings re/uire that the /ualifying circumstances necessary for the assertion of that right be affirmatively
pleaded. #ince the present case involves a criminal offense, the +eviton case is inapplicable. +e
'hemise may still sue even if it failed to allege material facts. A foreign corporation not doing business
needs no license to sue before A1 courts for infringement of trademark and unfair competition. A foreign
corporation favorable known in the 1hils through the use of its products bearing its corporate name has a
legal right to maintain action in the 1hilippines to restrain the formation in B6 of a corporation bearing the
same name as the foreign corporation@ the sole purpose of its suit is to protect its reputation, corporate
name, goodwill whenever the same has established themselves. A corporate and trade name are property
rights, rights in rem, which the owner may assert and protect against the whole world, in any courts of the
worldJeven in :urisdictions where it does not transact business. #ince it is the trademark and not the mark
that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or states or
nations, but e0tends to every market where the trader9s goods have become known and identified.
The letter"complaint that preceded the petition was filed with the 7B*. *f prosecution would follow after the 1*
then the information shall be in the name of the 1eople of the A1 and no longer the petitioner which is only
an aggrieved party, since a criminal act is an act against the #tate. +e 'hemise capacity to sue, would then
be of no significance. The )entholatum case relied upon by .emandas is also not on all fours with the
present case. The foreign corporation in )entholatum is in fact doingbusiness in the A1 but without the
HLP2009-3B Page 127
re/uisite license. *n the present case, +e 'hemise is a foreign corporation not doing business in the A1. *t
has an e0clusive distributor, Austans 'ommercial, which is an independent entity which buys and sells the
products of +e 'hemise, and is in other words not a mere agent or conduit of +e 'hemise. B8* rules also
support a finding that +e 'hemise is not doing business. Austans is a middleman acting and transacting
business in its own name and account.
*n upholding the rights of +e 'hemise, #' held that we are recogniCing our duties and rights of foreign
states to which the 1hilippines and 6rance are parties. Be are simply interpreting and enforcing a solemn
international commitment of the 1hilippines embodied in a multilateral treaty, the 1aris 'onvention for the
1rotection of *ndustrial 1roperty to which we are a party. The convention has e0traterritorial application, and
is essentially a compact between the member countries to accord to member"countries9 citiCens the same
rights comparable to those accorded their own citiCens by domestic law. The underlying principle is that
foreign nationals should be given the same treatment in each of the member"countries as that country
makes available to its own citiCens. *t is not premised upon the idea that the trademark and related laws
shall be given e0tra"territorial application, but on e0actly the converse that each nation9s law shall have only
territorial application. A treaty or convention is not a mere moral obligation to be enforced but creates a
legally binding obligation on the parties founded on the generally accepted principles of international law of
pacta sunt servanda, which has been adopted as the law of the law.
A9ilent Te'"nl9ies Sin9a$-e 1. Inte9-ate# Sili'n Te'"nl9y P"ils. 6: 1etitioner Agilent
Technologies #ingapore (1te.!, +td. (GAgilentH! is a foreign corporation, which, by its own admission, is not
licensed to do business in the 1hilippines. Aespondent *ntegrated #ilicon Technology 1hilippines
'orporation (G*ntegrated #iliconH! is a private domestic corporation, &44= foreign owned, which is engaged
in the business of manufacturing and assembling electronics components. A "year -alue Added Assembly
#ervices Agreement (G-AA#AH!, was entered into on April 5, &33% between *ntegrated #ilicon and the
.ewlett"1ackard #ingapore (1te.! +td., #ingapore 'omponents 8peration (G.1"#ingaporeH!. ;nder the
terms of the -AA#A, *ntegrated #ilicon was to locally manufacture and assemble fiber optics for e0port to
.1"#ingapore. .1"#ingapore, for its part, was to consign raw materials to *ntegrated #ilicon@ transport
machinery to the plant of *ntegrated #ilicon@ and pay *ntegrated #ilicon the purchase price of the finished
products. .1"#ingapore assigned all its rights and obligations in the -AA#A to Agilent. *ntegrated #ilicon
sues Agilent and its officers for specific performance, alleging that Agilent breached the parties9 oral
agreement to e0tend the -AA#A. *ntegrated #ilicon thus prayed that defendant be ordered to e0ecute a
written e0tension of the -AA#A for a period of five years as earlier assured and promised. Agilent then filed
a separate complaint for specific performance against *ntegrated #ilicon, Teoh >ang #eng, Teoh >iang
,ong, Anthony 'hoo, Loanne >ate ). dela 'ruC, Lean >ay ). dela 'ruC and Aolando T. 7acilla, and
prayed for the immediate return and delivery to plaintiff its e/uipment, machineries and the materials to be
used for fiberoptic components which were left in the plant of *ntegrated #ilicon. T' denied )T2 of #ilicon.
'A reverses. *ntegrated #ilicon et al argue that since
Agilent is an unlicensed foreign corporation doing business in the 1hilippines, it lacks the legal capacity to
file suit, assailing various acts of Agilent, purportedly in the nature of Gdoing businessH in the 1hilippines.
.: A foreign corporation without a license is not ipso facto incapacitated from bringing an action in 1hilippine
courts. A license is necessary only if a foreign corporation is GtransactingH or Gdoing businessH in the country.
The 'orporation 'ode provides: #ec. &$$. 2oing business without a license. J 7o foreign corporation
transacting business in the 1hilippines 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
1hilippines@ but such corporation may be sued or proceeded against before 1hilippine courts or
administrative tribunals on any valid cause of action recogniCed under 1hilippine laws.
The aforementioned provision prevents an unlicensed foreign corporation Gdoing businessH in the 1hilippines
from accessing our courts. *n a number of cases, however, we have held that an unlicensed foreign
corporation doing business in the 1hilippines may bring suit in 1hilippine courts against a 1hilippine citiCen
or entity who had contracted with and benefited from said corporation. #uch a suit is premised on the
doctrine of estoppel. A party is estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. This doctrine of estoppel to deny corporate
e0istence and capacity applies to foreign as well as domestic corporations. The application of this principle
prevents 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.
The principles regarding the right of a foreign corporation to bring suit in 1hilippine courts may thus be
condensed in four statements:
HLP2009-3B Page 128
(&! if a foreign corporation does business in the 1hilippines without a license, it cannot sue before the
1hilippine courts@
(5! if a foreign corporation is not doing business in the 1hilippines, it needs no license to sue before
1hilippine courts on an isolated transaction or on a cause of action entirely independent of any business
transaction@
($! if a foreign corporation does business in the 1hilippines without a license, a 1hilippine citiCen or entity
which has contracted with said corporation may be estopped from challenging the foreign corporation9s
corporate personality in a suit brought before 1hilippine courts@ and
((! if a foreign corporation does business in the 1hilippines with the re/uired license, it can sue before
1hilippine courts on any transaction.
*n )entholatum, the 'ourt discoursed on the two general tests to determine whether or not a foreign
corporation can be considered as Gdoing businessH in the 1hilippines. The first of these is the substance
test, thus: The true test [for doing business], however, seems to be whether the foreign
corporation is continuing the body of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus: The term [doing business] implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and
in the progressive prosecution of, the purpose and obect of its organization.
!lthough each case must be udged in light of its attendant circumstances, urisprudence has
evolved several guiding principles for the application of these tests. "or instance, considering
that it transacted with its #hilippine counterpart for seven years, engaging in futures contracts,
this $ourt concluded that the foreign corporation in Merrill Lynch Futures, Inc. v. Court of
Appeals and Spouses Lara, was doing business in the #hilippines. %n Top- Weld Manufacturing
v. C!, I"TI, et al. both involved the &icense and Technical !greement and 'istributor
!greement of foreign corporations with their respective local counterparts that were the
primary bases for the $ourt(s ruling that the foreign corporations were doing business in the
#hilippines. %n particular, the $ourt cited the highly restrictive nature of certain provisions in
the agreements involved, such that) the #hilippine entity is reduced to a mere extension or
instrument of the foreign corporation.
The case law definition has evolved into a statutory definition, having been adopted with some
*ualifications in various pieces of legislation. The "oreign %nvestments !ct of +,,+ -the ."%!/0
1epublic !ct 2o. 3456, as
amended7, 8ec 9 -d7 defines .doing business/ as those which .include soliciting orders, service
contracts, opening offices, whether called .liaison/ offices or branches0 appointing
representatives or distributors domiciled in the #hilippines or who in any calendar year stay in
the country for a period or periods totaling one hundred eighty -+:47 days or more0
participating in the management, supervision or control of any domestic business, firm, entity,
or corporation in the #hilippines0 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 the progressive prosecution of, commercial gain or of the purpose and obect of the
business organization./
!n analysis of the relevant case law, in conunction with 8ection + of the %mplementing 1ules
and 1egulations of the "%! -as amended by 1epublic !ct 2o. :+3,7, would demonstrate that
the acts enumerated in the ;!!8! do not constitute .doing business/ in the #hilippines.
The %11 of the "%! -as amended by 1epublic !ct 2o. :+3,7 provides that the following shall not
be deemed .doing business/:
a. <ere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and=or the exercise of rights as such investor0
b. >aving a nominee director or officer to represent its interest in such corporation0
c. !ppointing a representative or distributor domiciled in the #hilippines which transacts
business in the representative(s or distributor(s own name and account0
d. The publication of a general advertisement through any print or broadcast media0
HLP2009-3B Page 129
e. <aintaining a stock of goods in the #hilippines solely for the purpose of having the same
processed by another entity in the #hilippines0
f. $onsignment by a foreign entity of e*uipment with a local company to be used in the
processing of products for export0
g. $ollecting information in the #hilippines0 and
h. #erforming services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the #hilippines machinery it has manufactured or
exported to the #hilippines, servicing the same, training domestic workers to operate it, and
similar incidental services.
?y and large, to constitute .doing business/, the activity to be undertaken in the #hilippines is
one that is for profit@making. ?y the clear terms of the ;!!8!, !gilent(s activities in the
#hilippines were confined to -+7 maintaining a stock of goods in the #hilippines solely for the
purpose of having the same processed by %ntegrated 8ilicon0 and -67 consignment of
e*uipment with %ntegrated 8ilicon to be used in the processing of products for export. !s such,
we hold that, based on the evidence presented thus far, !gilent cannot be deemed to be
.doing business/ in the #hilippines. 1espondents( contention that !gilent lacks the legal
capacity to file suit is therefore devoid of merit. !s a foreign corporation not doing business in
the #hilippines, it needed no license before it can sue before our courts.
Merrill Lynch Futures v CA. ": <errill &ynch "utures, %nc. a non@resident foreign corporation
not doing business in the #hilippines, sued the 8pouses #edro <. &ara and Alisa B. &ara for the
recovery of a debt and interest thereon. <errill &ynch is a Cfutures commission merchantC duly
licensed to act as such in the futures markets and exchanges in the Dnited 8tates, and
essentially functioning as a broker) -executing7
orders to buy and sell futures contracts received from its customers on ;.#. futures e0changes. *t also
defined a Pfutures contractP as a Pcontractual commitment to buy and sell a standardiCed /uantity of a
particular item at a specified future settlement date and at a price agreed upon, with the purchase or sale
being e0ecuted on a regulated futures e0change.P *t entered into a 6utures 'ustomer Agreement with the
defendant spouses, in virtue of which it agreed to act as the latterIs broker for the purchase and sale of
futures contracts in the ;.#. and that pursuant to the contract, orders to buy and sell futures contracts were
transmitted to )+ 6;T;AE# by the +ara #pouses Pthrough the facilities of )errill +ynch 1hilippines, *nc., a
1hilippine corporation and a company servicing plaintiffs customers. +ater, the +aras would reaffirm their
lack of awareness that )errill +ynch 1hilippines, *nc. (formerly registered as )errill +ynch, 1ierce, 6enner M
#mith 1hilippines, *nc.! did not have a license, claiming that they learned of this only from in/uiries with the
#ecurities and E0change 'ommission which elicited the information that it had denied said corporationIs
application to operate as a commodity futures trading advisor. +ara #pouses actively traded in futures
contracts, including Pstock inde0 futuresP for four years or so, i.e., from &3F$ to 8ctober, &3FE. A loss
amounting to ;#Y&%4,E(3.%3 was incurred in respect of three ($! transactions involving Pinde0 futures,P and
after setting this off against an amount of ;#YE,3&$.(5 then owing by )+ 6;T;AE# to the +ara #pouses,
said spouses became indebted to )+ 6;T;AE# for the ensuing balance of ;#YF(,F$%.5E. +ara #pouses
however refused to pay this balance, Palleging that the transactions were null and void because )errill
+ynch 1hilippines, *nc., the 1hilippine company servicing accounts of plaintiffK had no license to operate as
a Icommodity and?or financial futures broker. +ara files a )T2, and T' sustains the motion. 'A affirms,
holding that the Trial 'ourt had seen Pthrough the charade in the representation of )+1* and the plaintiff that
)+1* is only a trading advisor and in fact it is a conduit in the plaintiffIs business transactions in the
1hilippines,H citing the ruling in: ?ent"lat34 1 ?an9ali4an. *: B?n (a! )+ 6;T;AE# is prohibited from
suing in 1hilippine 'ourts because doing business in the country without a license, and that (b! it is not a
real party in interest since the +ara #pouses had not been doing business with it, but with another
corporation, )errill +ynch, 1ierce, 6enner M #mith, *nc.
.: The ground that the plaintiff has no legal capacity to sue J may be understood in two senses: one, that
the plaintiff is prohibited or otherwise incapacitated by law to institute suit in 1hilippine 'ourts@ or two,
although not otherwise incapacitated in the sense :ust stated, that it is not a real party in interest. 7ow, the
+ara #pouses contend that )+ 6utures has no capacity to sue them because the transactions sub:ect of the
complaint were had by them, not with the plaintiff )+ 6;T;AE#, but with )errill +ynch 1ierce 6enner M
#mith, *nc.
The facts on record ade/uately establish that )+ 6;T;AE#, operating in the ;nited #tates, had indeed
done business with the +ara #pouses in the 1hilippines over several years, had done so at all times through
)errill
+ynch 1hilippines, *nc. ()+1*!, a corporation organiCed in this country, and had e0ecuted all these
transactions without )+ 6;T;AE# being licensed to so transact business here, and without )+1* being
HLP2009-3B Page 130
authoriCed to operate as a commodity futures trading advisor. The +aras did transact business with )+
6;T;AE# through its agent corporation organiCed in the 1hilippines, it being unnecessary to determine
whether this domestic firm was )+1* ()errill +ynch 1hilippines, *nc.! or )errill +ynch 1ierce 6enner M #mith
()+1*Is alleged predecessor!. The fact is that )+ 6;T;AE# did deal with futures contracts in e0changes in
the ;nited #tates in behalf and for the account of the +ara #pouses, and that on several occasions the latter
received account documents and money in connection with those transactions.
*: B?7 )+ 6;T;AE# may sue in 1hilippine 'ourts to establish and enforce its rights against said spouses,
in light of the undeniable fact that it had transacted business in this country without being licensed to do so.
B?7 the +ara #pouses are now estopped to impugn )+ 6;T;AE#I capacity to sue them in the courts of the
forum.
.: The rule is that a party is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the Pdoctrine of estoppelH to deny corporate
e0istence applies to foreign as well as to domestic corporations@ Pone who has dealt with a corporation of
foreign origin as a corporate entity is estopped to deny its corporate e0istence and capacity.P The principle
Pwill be applied to prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits of the
contract where such person has acted as agent for the corporation and has violated his fiduciary obligations
as such, and where the statute does not provide that the contract shall be void, but merely fi0es a special
penalty for violation of the statuteK P There would seem to be no /uestion that the +aras received benefits
generated by their business relations with )+ 6;T;AE#. Those business relations, according to the +aras
themselves, spanned a period of seven (E! years@ and they evidently found those relations to be of such
profitability as warranted their maintaining them for that not insignificant period of time@ otherwise, it is
reasonably certain that they would have terminated their dealings with )+ 6;T;AE# much, much earlier. *n
fact, even as regards their last transaction, in which the +aras allegedly suffered a loss in the sum of
;#Y&%4,E(3.%3, the +aras nonetheless still received some monetary advantage, for )+ 6;T;AE# credited
them with the amount of ;#YE,3&$.(5 then due to them, thus reducing their debt to ;#YF(,F$%.5E. ,iven
these facts, and assuming that the +ara #pouses were aware from the outset that )+ 6;T;AE# had no
license to do business in this country and )+1*, no authority to act as broker for it, it would appear /uite
ine/uitable for the +aras to evade payment of an otherwise legitimate indebtedness due and owing to )+
6;T;AE# upon the plea that it should not have done business in this country in the first place, or that its
agent in this country, )+1*, had no license either to operate as a Pcommodity and?or financial futures
broker.P
J Estoppel doctrine: if local parties knew that the foreign entity does not have a license, yet it is doing
business, and they still transacted with themJestopped from invoking lack of licenseS
J -illanueva: )errill +ynch lacks an element of estoppelJ action?representation by the local which induces
the foreign to believe that he would be entitled to reliefK the simple act of entering into a contract with a
foreign entity does not of itself give rise to estoppel.